City Bank approves Central Pacific offer

By Deborah Adamson
Advertiser Staff Writer

After a year-long fight against a hostile takeover bid, the parent of City Bank changed course and said today it has agreed to be bought by Central Pacific Financial Corp. for $420 million.

City Bank's parent CB Bancshares agreed to the purchase after Central Pacific raised its offer to $91.83 a share in cash and stock, a 26 percent premium over yesterday's closing price.

City Bank — which earlier argued the buyout would limit competition and harm employees, customers and borrowers — organized sign-waving campaigns and ran advertisements opposing the deal. City Bank managers accused Central Pacific of aggressive business tactics not in keeping with "local style." City Bank was still fighting Central Pacific's offer as recently as last month, when it asked the state to reconsider its approval of the proposed deal.

Ron Migita, president and chief executive of CB Bancshares, explained the change in attitude during a conference call with bank industry analysts this morning.

"Frankly after the revised offer, (Central Pacific CEO) Clint (Arnoldus) and I had a number of conversations and I think during that period of time our mutual comfort level between each other and our trust had gotten to the point that we felt we could both proceed on and see if this combination made a lot of sense," said Migita. "In addition to that, in terms of the value that it brings not only to our shareholders but to the employees, customers and community, it only made more sense as we continued to talk."

"We met several times," said Arnoldus on the same conference call. "Ron was very receptive to hearing our side of things and very open minded and really was instrumental in this thing finally coming together. We can thank Ron for extending that olive branch."

The deal, which is subject to shareholder approval, is expected to close in the third quarter.

The offer that City Bank's board accepted would give its shareholders $20 in cash and 2.6752 shares of Central Pacific for each share they own.

The acquisition will create Hawai‘i's fourth largest financial institution with combined assets of $4 billion with 45 branches on four islands and about 1,000 employees. It will command a 14 percent market share in deposits.

The new parent company would be called Central Pacific Financial and its bank, Central Pacific Bank. The name City Bank will disappear, after a half-century in Hawai‘i. City Bank was founded by Japanese-Americans to serve their community.

Arnoldus will keep his title at the combined company. Migita will become a non-executive chairman of the board. Neal Kanda, Central Pacific's chief financial officer, will become the new president and chief operating officer while his counterpart at CB Bancshares, Dean Hirata, will assume the chief financial officer position at the new company.

"We're specially pleased to have reached this friendly merger agreement. What we're creating is a much stronger and much more versatile bank," said Arnoldus.

Migita said in a statement that "the substantial improvement in Central Pacific's merger offer represents an attractive premium for CB Bancshares, Inc. shareholders and reflects our record performance as well as the future value of the company's franchise."

Arnoldus said the new company will be going after market share growth, expand its offering of products and services and provide greater convenience to customers with a larger banking network.

Arnoldus repeated his commitment to no layoffs as a result of the merger. The company also pledged to open a new branch for any location that's closed because of overlap "subject to securing adequate locations." In addition, Central Pacific said it still plans to set aside $1 million for special community needs, which it did not immediately define.

Central Pacific shares fell by 7 percent to close at $25.15. City Bank shares rose 17 percent to $85.40.

"I was surprised they went from not liking each other to trying to do the deal," said Brett Rabatin, a banking analyst at Midwest Research in Nashville. "It's a good deal for CB Bancshares. It represents a relatively large home run for Central Pacific. Fortunately for them, it turned out friendly at the end."

Rabatin expressed reservations about how the two banks can achieve the projected cost savings without layoffs or branch closings. Central Pacific had set a goal of $19.5 million in annual savings. When companies merge, they can save money by consolidating departments -- such as the two human resources departments -- and laying off workers. Salaries usually represent one of the biggest portions of administrative expenses.

"It's not abundantly clear how they will get their savings," Rabatin said. But "Central Pacific historically has been highly efficient and I'm sure they will find ways to save."

The analyst characterized the buyout offer as "fair to all parties involved," but noted that since it's a big acquisition for Central Pacific there could be some risks related to integrating the two companies. The $420 million deal is just a tad over the market value of Central Pacific itself.
Central Pacific spent $10 million in the past year pursuing City Bank, and City Bank spent about $7 million defending itself from the unwelcomed offer.

Also today, Central Pacific reported its first quarter earnings, saying it had a 7.7 percent decrease in net income to $7.9 million, or 48 cents a share. The bank said operating costs rose and margins were squeezed by the low interest rate environment. Revenue, however, rose by 2.1 percent to $26.6 million.

Central Pacific said the acquisition should "significantly" add to earnings in the first full year of combined operations.

"I'm very pleased for both companies, that they realized that one and one equals three," said Bruce Sherman, chief executive of Naples, Fla.-based Private Capital Management, which owns about 10 percent of each bank. "I'm pleased that the people who had such strong convictions against the deal were able to do the right thing for the Hawai‘i economy and the right thing for shareholders. At the end of the day, cooler heads prevailed."

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.