CPB sets April 25
deadline on deal

Central Pacific says it will
then take its offer directly
to City Bank's shareholders

Regulators to weigh in
Bank mergers common here
CPB earnings up 14%

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By Dave Segal
dsegal@starbulletin.com

Central Pacific Bank, rebuffed in its repeated attempts to talk to City Bank about merging, is on the verge of turning hostile.

Banks at a glance CPB Inc. >> Subsidiary: Central Pacific Bank >> Chief executive: Clinton Arnoldus >> Assets: $2 billion >> Employees: 485 >> Branches: 24 >> Market capitalization: $386.2 million >> Stock price: $24.13 >> Year-to-date change: -12.1% >> Stock exchange: New York Stock Exchange CBBI Inc. >> Subsidiaries: City Bank, Datatronix Financial Services, ORE Inc. >> Chief executive: Ronald Migita >> Assets: $1.7 billion >> Employees: 512 >> Branches: 21 >> Market capitalization: $260.9 million >> Stock price: $66.86 >> Year-to-date change: +57.2% >> Stock exchange: Nasdaq Stock Market

Clint Arnoldus, chairman, president and chief executive officer of parent company CPB Inc., said yesterday that Central Pacific Bank has given the management of CB Bancshares Inc., City Bank's parent, until April 25 to respond to an initial $285 million cash-and-stock offer or it will take the deal directly to City Bank's shareholders.

Arnoldus, expressing his puzzlement that CB Bancshares management has been "unresponsive" since receiving the offer a month ago, said the transaction that would combine the state's fourth- and fifth-largest banks is compelling for shareholders.

The merger proposal sent shares of CB Bancshares soaring 44.1 percent, or $20.48, to an all-time high of $66.86 today on heavy volume of 148,454 shares on the Nasdaq Stock Market. CPB's stock fell 4.6 percent, or $1.17, to $24.13 as 118,000 shares exchanged hands on the New York Stock Exchange.

"We tracked our stock during the investor conference call (this morning) and it traded up at regular intervals during that hour (from its opening price of $24.35)," Arnoldus said. "The trend we saw in our stock during that conference call is affirmation of the attractiveness of the transaction and the investor interest and support."

Arnoldus also pointed out that the closer that CB Bancshares' stock trades to $70, which was the original stock valuation of the offer, the more it indicates that the market supports the deal. The movement in the two banks' stock prices now values the deal at $271.8 million, or $66.74 a share.

Under terms of the offer, CB Bancshares shareholders would get 70 percent of CPB stock and 30 percent in cash for all outstanding shares. The original $70 share price offer represented a 54 percent premium based on the stock's closing price Monday of $45.60. The offer translates into $21 in cash and 1.8956 shares of CPB stock for each CB Bancshares share. CB Bancshares shareholders also will receive a 290 percent dividend increase.

"I think City Bank shareholders will love this deal," Arnoldus said. "I think they'll want this accepted. This is very, very compelling for every constituency in the state. It's good for this state, good for the shareholders of both banks, good for the customers and good for the employees."

However, CB Bancshares, which two years ago along with Island Insurance attempted to buy CPB, so far has given its rival the cold shoulder.

Besides failing to respond to CPB's offer, it declined yesterday to publicly discuss the matter.

"Due to the legal considerations at this time, the board and management of CB Bancshares Inc. isn't confirming or denying our position on the offer made by CPB Inc.," CB Bancshares spokesman Wayne Miyao said.

Miyao said that CB Bancshares will comment on the offer later this afternoon.

In addition, CB Bancshares' board is expected to discuss the offer at its board meeting Wednesday and the topic is likely to come up at the company's annual shareholders meeting a week from today. CPB's deadline for a CB Bancshares reply is the following day.

Arnoldus acknowledged yesterday that the deal would result in consolidation of the two banks and would result in the elimination of some employees and branches. Currently, each bank employs roughly 500 people. Central Pacific has 24 branches and City Bank 21 branches. However, Arnoldus said that until CPB can sit down and talk with CB Bancshares management, there's no way of knowing how many employees and branches will be affected.

"We've very similar banks, share very similar values and very similar history," Arnoldus said. "We were both founded by nisei war veterans and served the Japanese American community for decades and have both expanded to include the broader community in Hawaii. We focus on the same markets. We feel very strongly that collectively our two banks can accomplish much more than either bank could do individually."

Joe Morford, who covers CPB for San Francisco-based RBC Capital Markets, said he likes the deal from CPB's perspective.

"I think strategically, on paper, the deal makes a lot of sense," he said. "For CPB, it's really their best opportunity to really grow in the local market. And, all else being equal, they would become a much more viable competitor to the two big banks (Bank of Hawaii and First Hawaiian), being able to provide much greater distribution for the customer as well as a wider array of products and services."

CB Bancshares isn't covered by any Wall Street analysts.

CPB, which a year ago made an offer for CB Bancshares, renewed its bid March 17 when it attempted to hand deliver a letter to CB Bancshares' management. That letter was rejected, according to Arnoldus, who said CPB mailed that letter to CB Bancshares March 21. Since that time, the two sides have had just one face-to-face meeting, on April 2, which only resulted in CB Bancshares inquiring about CPB's business model. CPB resent another copy of its letter on April 7 and then sent CB Bancshares another letter yesterday.

"They just don't seem to be in any hurry and aren't showing any particular interest level," Arnoldus said.

"We want to be able to sit down and get this deal closed," he added. "We're certainly ready to exercise our options to get it done, but I wouldn't classify it as a hostile offer at this point."

The merger would create a company with combined assets of $3.7 billion, deposits of $2.8 billion, loans of $2.4 billion and a market capitalization of $600 million. After a merger, CPB would remain Hawaii's fourth-largest bank in terms of total assets.

Jiro Shirai, director of TON Finance B.V., CB Bancshares' largest shareholder, is supporting the deal. He and another entity close to TON own roughly 14 percent of the company's shares. CPB owns 2.25 percent of CB Bancshares stock.

"TON Finance believes the offer is an extremely attractive proposition for CB's shareholders, and that the merger of these two Hawaii banks is a logical step forward and should create a much stronger institution," Shirai said.

Michael O'Neill, chairman and CEO of Bank of Hawaii, and Walter Dods, chairman and CEO of First Hawaiian Bank, both declined to comment.

Constance Lau, president and CEO of American Savings Bank, the state's third-largest bank, said it's too early to tell what the impact will be in the market.

"Anytime there's a merger, acquisition or other major event involving one of our competitors, it creates opportunities," she said. "Five years ago, American Savings Bank acquired the Hawaii operations of Bank of America and that made us a much stronger competitor. But ... every merger or acquisition is different"

Allan Kitagawa, chairman and CEO of Territorial Savings Bank, the sixth-largest financial institution, said the announcement caught him by surprise. He said, though, that Territorial should benefit because its bank caters to smaller depositors and the CPB-CB Bancshares merger will improve Territorial's market niche.

"It's going to be very interesting and I still have got to digest it," he said. "At $70 a share, that looks pretty reasonable."

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Central Pacific Bank
City Bank