After one of the bitterest hostile takeovers in community banking, observers are questioning whether Central Pacific Financial Corp. of Honolulu can keep its promises and still achieve earnings projections for 2005.
Central Pacific is projecting earnings of $2.50 to $2.60 a share next year, including a 22-cent boost from $7.8 million of after-tax cost savings from the takeover of CB Bancshares, also of Honolulu.
"We're really focusing right now on operating at full throttle in the execution phase," said Clint Arnoldus, Central Pacific's chief executive, on an Oct. 26 third-quarter earnings conference call with analysts.
But at least two analysts remain skeptical.
Joseph K. Morford of Royal Bank of Canada's RBC Capital Markets in San Francisco wrote on Oct. 27, "Given the concessions they made to make the merger happen, we're choosing to be more conservative." He said he expects the merger will add just 5 cents to 2005 earnings, which he forecasts at about $2.40 a share.
To appease the CB Bancshares board, Central Pacific pledged last winter to open a branch for every one it closed and promised to avoid layoffs. Those concessions, along with a higher offer price, worked. After a year of rejecting Central Pacific, CB's board finally said yes in April, and a $420 million deal was struck. The sale price was nearly 50% higher than Central Pacific's original bid in March 2003.
When the merger was completed in September, the $4.6 billion-asset Central Pacific announced that it would close nine overlapping branches early next year and that it was negotiating or conducting feasibility studies on properties where it could open nine new ones. A tenth new branch, on Maui, is to open next quarter.
The company also said in September that it had offered a voluntary severance package to an undisclosed number of employees and that it expected many of them to take it. It said it hoped to complete the nine branch openings within the next five years. (Executives of the company declined to be interviewed for this article.)
Though Central Pacific technically is not laying anyone off, it has identified employees it deems expendable through the voluntary severance packages.
"I think they're interpreting their promises very liberally," said Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp. in Nashville. He first expressed skepticism about projected earnings accretion in a research note in April, shortly after the deal was announced.
Both analysts drew a comparison with the situation after Bank of America Corp. bought FleetBoston Financial Corp. in April. In its merger agreement, Bank of America had promised to maintain employment levels in New England. Then it fired 800 employees at former Fleet branches in August, enflaming public officials in Massachusetts and Connecticut. Last week B of A said it would open a consumer call center in East Providence, R.I., in mid-2005 that will employ 700 to 900 people.
"Once again, it's a matter of how you interpret the commitments that Bank of America made to make their merger happen," Mr. Morford said. "They promised to maintain employment levels, but now they're doing that over a longer period of time" than some thought. "And the makeup of the jobs is different."
Mr. Rabatin expects the merger's accretion to 2005 earnings to be about half of Central Pacific's projection. But he said it could still come close to its 2005 earnings projection for other reasons. Central Pacific Bank could safely lower loan-loss reserves, which are set fairly high; and net interest margin could further expand, because the bank has a lot of higher-yielding assets on its books.
Central Pacific's margin rose 23 basis points in the third quarter, to 4.54%, as the bank raised rates on loans but not on deposits.
Because of $7.6 million in merger-related expenses caused Central Pacific's third-quarter net income fell 7.2%, to $7.6 million. Its stock price continues to inch upward; it was trading at $30.86 midday Tuesday, about where it was before the initial bid for CB.
