While everyone's busy predicting doom and gloom for banks if the Fed starts slashing rates, one quiet Hawaiian institution might just be sitting on a secret weapon. Central Pacific Financial Corp. (CPF), known for its conservative credit culture and focus on the resilient Hawaiian market, appears surprisingly well-positioned to not just weather a rate-cutting storm, but potentially thrive in its wake.

The key lies in a subtle shift in CPF's deposit base, a shift that appears to have gone unnoticed by most analysts. For much of 2023, CPF saw a significant outflow of funds from non-interest bearing demand deposit accounts (DDA) into higher-yielding certificates of deposit (CDs). This migration was understandable in a rising rate environment, as customers sought better returns on their cash. However, a deeper dive into the quarterly average balances reveals a fascinating trend.

Early in 2023, CPF was witnessing sequential quarter declines of $80 to $90 million from its DDA accounts. However, this outflow dramatically slowed to $55 million in the third quarter and then a mere $30 million in the fourth quarter. These figures suggest that the mass exodus from DDA accounts is losing steam. This is further corroborated by the fact that DDA deposits currently represent 28% of CPF's total deposit base, a level mirroring its pre-pandemic position in late 2019.

This subtle shift hints at a potential deposit base that is becoming less rate-sensitive. If the Fed does start cutting rates, CPF might not need to aggressively reprice its deposit products downwards to retain customers. The initial surge into CDs, driven by the allure of higher yields, could stabilize as those CD rates fall in tandem with the Fed's actions.

Furthermore, CPF's strategic implementation of a product segmentation strategy further bolsters this hypothesis. By offering higher-yielding products to customers seeking those returns, CPF has essentially segregated its most rate-sensitive depositors. This allows them to manage the cost of these specific deposits more effectively in a declining rate environment while potentially shielding their core DDA base from significant repricing pressure.

Projected Quarterly Savings from Fed Rate Cuts

Assuming three 25 basis point cuts by the Fed and a conservative 50% beta on CPF's entire deposit base.

Now, let's add some numbers to the mix. CPF's current cost of deposits sits at 1.22%. Assuming the Fed implements three 25 basis point cuts in the latter half of 2024, and their high-beta accounts reprice downwards with a 100% beta, CPF could see a reduction in their cost of funds. Even if we conservatively assume a 50% beta for their entire deposit base, this could translate into a quarterly savings of approximately $3.06 million.

Moreover, CPF has another ace up its sleeve - a forward starting interest rate swap, going live on April 1st, 2024. CPF is paying fixed at 2.10% and receiving Fed funds floating on $115 million. Currently, with Fed funds nearing 5.50%, they're a whopping 340 basis points in the money. Even with three rate cuts, this swap could generate an additional $1.8 million in net interest income for 2024, further boosting profitability.

This combination of a potentially less rate-sensitive core deposit base, strategic product segmentation, and a well-timed interest rate swap creates a powerful financial cocktail for CPF in a declining rate environment. While other institutions might scramble to retain deposits and adjust to shrinking margins, CPF could experience the opposite - expanding margins fueled by a stable funding base and boosted by swap income.

"Fun Fact: Central Pacific Bank, CPF's subsidiary, was founded in 1954 by a group of World War II Nisei veterans. Their mission? To serve the underserved communities of Hawaii. Seventy years later, that spirit of resilience and community focus continues to underpin their financial strategies. It's this deep connection to their local market and their commitment to prudent financial management that might just give CPF the edge in a shifting economic tide."