OREANDA-NEWS. Fitch Ratings affirmed Central Pacific Financial Corp's (CPF) long-term Issuer Default Rating (LT IDR) and Viability Rating (VR) at 'BB+/bb+' today following the review of its Community Bank Peer Group. The company's short-term IDR was affirmed at 'B'. The Rating Outlook was revised to Positive. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

IDRS and VR
Today's affirmation reflects Fitch's view that CPF's performance has been steady and in-line with Fitch's expectations. The Positive Outlook reflects Fitch's expectation that the newly appointed executive management team will continue to execute on its strategies to improve CPF's financial condition over the rating time horizon. Fitch expects earnings to marginally improve along with asset quality while the bank maintains a solid risk appetite and a risk management framework in line with higher rated peers. CPF's ratings remain relatively low as compared to its peer group and Fitch's rated universe. However, the agency believes that CPF has rating upside over time as reflected in the revision to a Positive Outlook.

Fitch views CPF's weak core earnings performance and its relatively high level of nonperforming assets (NPAs) as key rating constraints in the near term. However, asset quality has improved since Fitch's last rating action and is expected to remain on a positive trajectory going forward while the company maintains reasonable capital levels.

Fitch calculates CPF's nonperforming assets (NPAs) at 1.7% at second quarter 2015 (2Q15), an improvement of over 90bps year-over-year but still above those levels of higher-rated banks. Over the same time period, the dollar volume of NPAs has been reduced by 30% as management has remained successful in working out problem loans. Fitch notes that the reduction in NPAs has not come at the cost of significantly higher credit costs, as is evidenced by average net charge-offs (NCOs) of just 3bps over the last five quarters.

Fitch notes that over one-third of CPF's remaining NPAs are accruing troubled debt restructurings (TDRs), of which the vast majority 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 redefault rates due to strong housing prices and economic trends in Hawaii where the vast majority of them are located. Fitch's expectation that these accruing TDRs will continue to perform well and that general asset quality will continue over the rating time horizon both support today's rating affirmation and Outlook revision.

CPF continues to benefit from reserve releases. In 17 of the last 18 quarters (since the end of 2010), management has taken negative provisions augmenting earnings performance. Over the last five quarters, reserve releases have accounted for 17% of pre-tax income on average and have resulted in ROA in-line with higher rated peers.

However, Fitch expects CPF's core earnings, as measured by pre-provision net revenue, to remain below industry and peer averages as well as those long-term historical returns of investment grade banks over the next four to six quarters. Fitch views this relatively lower level of core earnings as a constraint on CPF's current ratings.

Also reflected in today's Outlook revision is Fitch's view that CPF's risk management practices are in-line with higher rated peers but need continued seasoning before upward rating movement is warranted. Fitch recognizes the level of investment in risk management systems the company has made over recent years as it has been rehabilitated. These systems are an integral part of management's ability to execute on its strategic plan of reducing problem assets, managing capital, maintaining CPF's franchise, and underwriting new loans as the company ,seeks to grow its loan portfolio after a long period of shrinking it.

In fact, CPF's loan growth has outstripped many banks' in Fitch's rated universe as management has sought to optimize the company's balance sheet. Fitch views the level of growth somewhat cautiously given the very competitive environments banks are currently operating in. 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 Outlook revision.

While steadily improving asset quality should aid in this, along with continued realized efficiencies, 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 at 'BB-' is two notches below CPF's Viability Rating (VR) of 'BB+ in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles.

HOLDING COMPANY
CPF's 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
Fitch has upgraded Central Pacific Bank's short-term deposit IDR from 'B' to 'F3'. 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, VR

Fitch believes there is upside to CPF's current ratings as reflected by the Positive Outlook. As noted above, Fitch expects the newly appointed executive management team to execute on its strategies to improve CPF's financial condition over the rating time horizon such that financial results fall in line with higher rated peers. To the extent that Fitch observes strategic initiatives gaining traction, demonstrated by better efficiency, improved revenue diversity, steady, organic loan growth, and improved core earnings performance, Fitch would likely take positive rating action.

While Fitch views more upside to CPF's rating than downside over the rating time horizon, the Rating Outlook could be revised to Stable or even Negative 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 capital falling materially below current levels could result in an revision Outlook as well.

SUPPORT RATING AND SUPPORT RATING FLOOR
CPF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to 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.

HOLDING COMPANY
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.

Fitch has affirmed the following ratings:

Central Pacific Financial Corp.
--Long-Term IDR at BB+'; Outlook Positive;
--Viability Rating at 'bb+';
--Short-Term IDR at 'B'
--Support at '5';
--Support Rating at 'NF'.

Central Pacific Bank
--Long-Term IDR at 'BB+'; Outlook Positive;
--Viability Rating at 'bb+';
--Short-Term IDR at 'B'
--Long-Term Deposits at 'BBB-';
--Support at '5';
--Support Rating at 'NF'.

CPB Capital Trust I, II & IV
CPB Statutory Trust III & V
--Trust preferred securities at 'BB-'.

Fitch has upgraded the following rating:

Central Pacific Bank
--Short-Term Deposits to 'F3' from 'B';