OREANDA-NEWS. Fitch Ratings has upgraded Central Pacific Financial Corp's (CPF) Long-Term Issuer Default Rating (IDR) and Viability Rating (VR) to 'BBB-/bbb-' from 'BB+/bb+' following the review of its Community Bank Peer Group. The Rating Outlook has been revised to Stable from Positive. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS

IDRS AND VR

Today's upgrade reflects CPF's demonstration of its revised risk appetite and risk management framework post-crisis that is in line with investment-grade rated peers. The bank has successfully resolved most of its nonperforming assets (NPAs) while incurring a low level of net charge-offs (NCOs). Management has also demonstrated some success in improving CPF's core earnings profile through loan growth, improved efficiency, and other revenue initiatives. The Stable Outlook reflects Fitch's view that the improvements in asset quality and risk management will be sustained in line with similarly rated banks.

While Fitch has noted a degree of improved earnings performance, CPF's core earnings, as measured by pre-provision net revenue, remain weak compared to its peer group and other investment-grade rated banks. CPF continues to benefit from reserve releases. In 12 of the last 14 quarters (since beginning of 2013), management has taken negative provisions to augment earnings performance. Over the last five quarters, reserve releases have accounted for 13% of pre-tax income and have resulted in returns on assets (ROA) in-line with higher rated peers.

Fitch views this relatively lower level of core earnings as having constrained CPF's ratings. Today's action encompasses Fitch's belief that the company will achieve some additional incremental improvement in core earnings.

Fitch believes management has instituted risk management practices that are supportive of the upgrade. The company has made a substantial investment in systems over recent years which have been an important tool for management, as the bank has reduced problem assets, grown its loan portfolio, and established new risk underwriting standards. We view the bank's establishment of new risk standards and controls as to concentrations and loan products, along with its renewed focus on its core Hawaii market, favorably

CPF's improved risk management framework is particularly important given the bank's significant loan growth, and this higher than peer level of growth is viewed cautiously given the very competitive environment banks currently face. Still, Fitch recognizes that growth has primarily been derived from loan originations within CPF's operating footprint while being opportunistic with loan purchases and participations from mainland banks. Fitch's expectation that growth will level off at the mid-single-digits and continue to primarily be derived from on-island opportunities is reflected in today's rating action.

Fitch calculates CPF's NPAs at 1% as of the second quarter of 2016 (2Q16), an improvement of about 70bps year-over-year. This improvement has brought CPF's asset quality in line with peer group averages. Over the same time period, the dollar volume of NPAs has been reduced by 33% as management has remained successful in resolving problem loans, particularly those classified as non-accrual. We note that the reduction in NPAs has not come at the cost of higher credit costs, as evidenced by a cumulative net recovery over the past five quarters.

Over one-half of CPF's remaining NPAs are accruing troubled debt restructurings (TDRs), the vast majority of which are residential real estate-related. While residential-related TDRs have produced higher than average losses at mainland banks, Fitch expects CPF's to result in fairly nominal losses. Fitch expects relatively low re-default rates due to strong housing prices and economic trends in Hawaii where the vast majority of the TDRs are located. Fitch's expectation that these accruing TDRs will continue to perform well and that asset quality improvement relative to peers will be sustained both support today's rating action and are reflected in the Stable Outlook.

CPF's capital and liquidity profiles remain stable and support the ratings at their new level. Fitch expects loan growth to outpace capital generation over the next year as the bank rotates the balance sheet into loans from securities. Nevertheless, given the bank's solid 12.5% Common Equity Tier 1 Ratio under Basel III and its low loan to deposit ratio of 77.5%, both as of June 30, 2016, a moderate deterioration in risk-based capital and liquidity would be viewed as manageable at CPF's rating level.

Fitch also expects CPF to be able to take advantage of a rising rate environment relatively more than some higher-rated peers given its unique operating market. During the last rate-tightening period between 2004 and 2007, CPF, along with other Hawaii-based banks, was able to substantially lag deposit pricing compared to mainland banks. While the ultimate behavior of depositors is not expected to directly mirror past tightening cycles, Fitch expects CPF's depositor base to behave very similarly given the rational competition in Hawaii and the lack of banking alternatives.

SUPPORT RATING AND SUPPORT RATING FLOOR

CPF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CPF is not systemically important and, therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

CPF's trust preferred stock rating has been upgraded to 'BB' from 'BB-' and remains two notches below CPF's VR of 'BBB-' in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles.

HOLDING COMPANY

CPF IDR and VR are equalized with its operating company, Central Pacific Bank, reflecting its role as the bank holding company, which is mandated in the U. S. to act as a source of strength for its bank subsidiaries.

LONG - AND SHORT-TERM DEPOSIT RATINGS

CPF's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U. S. uninsured deposits benefit from depositor preference. U. S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

RATING SENSITIVITIES

IDRS AND VR

Following the upgrade, Fitch envisions limited upward ratings momentum within the Outlook time horizon. The rating action incorporates Fitch's view that CPF will improve its earnings performance over the medium term and assumes that asset quality will remain solid and that capital will be maintained at an appropriate level, with a moderate level of deterioration expected. If asset quality and capital remain within expectations and CPF's core earnings performance shows consistency at a level displayed by higher-rated peers, there could be further upside to CPF's ratings over a long-term time horizon.

While not anticipated based on today's action, negative rating action could occur if asset quality metrics deteriorate below peer averages. Additionally, ratings would be sensitive should management seek to bring the bank's mainland credit exposure back to the levels leading up to the financial crisis. Furthermore, more aggressive capital management practices that lead to risk-based capital metrics falling by more than 150bps below current levels could result in a negative rating action.

SUPPORT RATING AND SUPPORT RATING FLOOR

CPF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to the bank's capacity to procure extraordinary support in case of need.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Hybrid capital issued by CPF and its subsidiaries are all notched down from the VRs of CPF in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs of CPF.

LONG - AND SHORT-TERM DEPOSIT RATINGS

The ratings of long - and short-term deposits issued by CPF and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a Long-Term IDR be downgraded, deposit ratings could be similarly affected.

SUBSIDIARY AND AFFILIATED COMPANIES

If CPF became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR down from the ratings of the operating companies.

The rating actions are as follows:

Central Pacific Financial Corp.

--Long-Term IDR upgraded to 'BBB-' from 'BB+'; Outlook Stable;

--Viability Rating upgraded to 'bbb-' from 'bb+';

--Short-Term IDR upgraded to 'F3' from 'B';

--Support affirmed at '5';

--Support Rating affirmed at 'NF'.

Central Pacific Bank

--Long-Term IDR upgraded to 'BBB-' from 'BB+'; Outlook Stable;

--Viability Rating upgraded to 'bbb-' from 'bb+';

--Short-Term IDR upgraded to 'F3' from 'B';

--Long-Term Deposits upgraded to 'BBB' from 'BBB-';

--Short-Term Deposits upgraded to 'F2' from 'F3';

--Support affirmed at '5';

--Support Rating affirmed at 'NF'.

CPB Capital Trust I, II & IV

CPB Statutory Trust III & V

--Trust preferred securities affirmed at 'BB-'.