Fierce Loyalty

Central Pacific Bank showed it in its dogged pursuit of a merger with City Bank, but exposed a cultural rift. Now they have to bring both sides together.

August, 2004

Central Pacific Bank’s slogan may have been “fiercely loyal banking,” but it was City Bank’s customers who showed what that meant when they turned out en masse to oppose Central Pacific Financial Corp.’s (NYSE:CPF) proposal to merge the two banks more than a year ago. Taking their cue from City Bank’s tag line, some former CPB customers testified that, yes, it was “worth it to switch” to the other bank and they were not eager to switch back. In the end, a 31 percent increase in the price per share offered by CPB, from $70 per share to $91.83 per share, sealed the deal. Most observers expect the merger to pass both regulatory and shareholder approvals by the end of this quarter. The next step: combining two corporate cultures after a contentious courtship.

Since the merger approvals were still pending by mid-June, neither of the two banks’ chief executive officers, Clint Arnoldus of Central Pacific Bank and Ron Migita of CB Bancshares Inc. (Nasdaq:CBBI), the holding company for City Bank, agreed to be interviewed for this story. However, their public statements after announcing the merger agreement clearly expressed a desire to move past the conflict. Arnoldus was quoted as saying he was “extremely pleased that we have reached this friendly, negotiated merger agreement.” Migita, whose anticipated new role as nonexecutive chairman will include mending fences, said the merger proposal reflected the “true value” of the company. City Bank board member Eddie Hayashi says that all is forgiven: “For the amount that they offered [per share of CB stock], it was hard for the people involved to turn it down. Now that they’re combining, I think it will be a stronger bank. I think the Japanese community will stay with the bank.”

On this year’s Top 250 listing, both banks reported nearly identical 2003 gross sales. City Bank (No. 56) edged out CPB (No. 57) slightly with $126.3 million in sales, while CPB reported $126 million. Combined sales would have placed the merged bank in the Top 25. The banks are also similar by ownership: institutional investors own 45.24 percent of stocks in CB Bancshares, compared to 41.34 percent at Central Pacific Bank Corp. (see sidebar). However, according to Yahoo! Finance, on a “trailing 12-month” basis as of March 31, 2004, CPB has the edge on cash flow with a positive of $29.72 million, while CB has a negative cash flow of $94.18 million. The merger is expected to create a bank with $4.2 billion in assets, $2.8 billion in loans and $3.1 billion in deposits, with a 14 percent share of Hawaii’s market. Customers are promised a continued tradition of personalized “high-touch” service, a broader menu of products and services, a larger lending capacity and a $1-million community investment fund. This would create the largest public institution ever headed by Arnoldus, who came from a $1.3 billion California bank before heading the $1.8 billion CPB.

Asked whether he thought Arnoldus was ready to head up a bank that will be nearly twice its original size, Richard Dole, chief executive of Dole Capital LLC, says, “I don’t see a problem. I think that from the very beginning he wanted to merge the two institutions.” Indeed, Arnoldus told shareholders in April “this was a deal that should have happened decades ago.” Although he was criticized for his aggressive pursuit, he said, “It was worth it, the deal never would have happened without it, the community needs it to keep Hawaii’s economic recovery going strong.” While pursuing City Bank, Arnoldus warned that bank consolidations would gobble up local institutions unless they banded together to form a stronger bank. According to the Federal Deposit Insurance Corp., the number of commercial banks has decreased by 20 percent nationwide – from 10,944 institutions in 1993 to 7,752 in 2003. In Hawaii, the number dropped from 17 in 1993 to only six in 2003, a 65 percent decrease.

Not apparent in financial statements are the nuances between the corporate cultures of the two banks. To justify the merger, both banks tout their common backgrounds as banks established to serve the Japanese-American community in the 1950s. A closer look reveals more differences between the two than meet the eye.


The most glaring sign of a difference between the two corporate cultures was the handling of the merger negotiations. While Arnoldus took the merger offer public and went straight to City Bank’s shareholders, Migita bristled at being forced to defend the management team’s actions in public, insisting this was “not the way we do business in Hawaii.” The episode underscored lingering perceptions among investors that CB management was too insular, while CPB’s had more of an outsider’s perspective.

Case in point: CPB’s former parent company, Sumitomo Bank, required its management trainees to be systematically rotated between America and Japan. In 1989, then-new CPB president Joichi Saito told Hawaii Business that Hawaii bank customers “demand more personalized services.” Commenting on the large number of teller windows at Bank of Hawaii, he said, “On the Mainland, we purposely close the windows, which inconveniences the customers but forces them to use less costly ATMs.” Saito described his predecessor, then-chairman and chief executive officer Yoshiharu Satoh, as “a generous man with a soft touch,” whereas he described himself as “more impatient, always asking why we are making certain reports or sending printouts to the head office. People say it’s because that’s the way it’s always been done, but I keep asking if maybe there isn’t a better way.” In contrast, City Bank had always been Hawaii-owned and -managed, with a solid local perspective. James Morita, CB’s chief executive at the time, had been a co-founder of the bank, and spent four decades there, before retiring in 1997.

Compared to Saito’s mindset of challenging “the way it’s always been done,” some investors viewed City Bank’s management style as lethargic. For most of the 1990s, CB’s earnings were at a virtual standstill, hindered not just by the delayed integration, but also by infighting among executives and conflicts with shareholders. Shareholders complained about programs that “serve to entrench management” and provide “golden parachutes” for bank officers, including change-of-control agreements that would be triggered by a merger. These were accusations that resurfaced this year when CB management refused to meet with CPB over its merger offer. In addition, analysts faulted the bank for not growing market share or developing new products. All of these events conspired to create lingering perceptions that CB was not making full use of its resources and that its management team was concerned with preserving their own jobs at the expense of greater potential returns.

In 1999, as Sumitomo scaled back its U.S. operations and began selling stock back to CPB, CB initiated informal merger talks with CPB, according to Bank Director magazine. Nothing ever came of that proposal. SEC filings show, at that time, the banks were roughly the same size, each with $1.6 billion in assets. That same year, Saito announced a reorganization plan that resulted in CPB being ranked as the nation’s fourth best performing mid-sized bank in 2002 based on return on average equity of 19.34 percent.

The results coincided with Arnoldus’ hiring in 2002. That year, the tables turned as CPB approached CB with a merger proposal. CB’s board reportedly rejected the idea after a brief review, but Arnoldus was determined to make it happen. As the first non-Japanese CEO of CPB, Arnoldus was a personable, media-friendly executive who insisted that people call him by his first name. In a 2002 interview with Hawaii Business, he said that leaders are most effective when they “make the hard decisions” with compassion. “The more heart you have in your job, the more effect you’ll have,” he said. Behind the scenes, Arnoldus put his heart into an aggressive merger strategy. Bank Director magazine says CPB bought up CB shares in February 2003, before offering a proposal to merge at $70-per-share. By going public with the proposal, Bank Director says, CPB touched off “what quickly became the industry’s nastiest unsolicited takeover skirmish in two years.”

Some point to Arnoldus’ willingness to “go hostile” and his short tenure at other banks – CEO at four banks in the past 10 years, including CPB – as a red flag, a sign that he would “take the money and run,” making his next career move soon after the merger is completed. That would be a departure indeed for a bank whose last two CEOs worked for the bank until they retired. However, others say that Arnoldus has been misjudged, and that too many people are willing to paint him with a broad brush as an outsider. While he insisted that his aggressive approach was the only way to get the deal done, when he told shareholders in April about possible future acquisitions, he conceded, “I think it’s safe to say we’ve satisfied our appetite for hostile [takeovers],” to subdued chuckles from the audience.


Barring any big surprises, most observers agree that the CPB-CB merger is all but inevitable. The question remains, what type of corporate culture will emerge from the addition of six directors from CB Bancshares? Investment banker Dole says that, generally, the board of directors sets the direction for an organization, which will then be implemented by the CEO. “Unless that particular individual is removed, I would expect [the management style at the new organization] to be closer to what his plans are. Right now, there doesn’t seem to be any conflict between him and the board.”

With one year to go before the actual transfer is complete, CPB could emerge as the dominant culture or choose the more energy- and time-consuming route of integrating two cultures. This means an inward look at elements that are often so integrated that they are taken for granted, such as how each organization tackles problems and questions, organizational values, taboos and rituals. According to a roundtable of merger and acquisition (M&A) executives hosted by PriceWaterhouse Coopers, the people aspect of M&A is the most difficult, because understanding that cultural problems exist is not the same as being able to solve them. In the meantime, the interim becomes a vulnerable time for its employees and customers.

Sherri Aoyama, American Savings Bank’s executive vice president of Workforce Excellence and Support, has weathered many conversions in her 28 years at American Savings Bank, which took over Bank of America’s business in 1997. While strong leadership is essential, Aoyama says that blending two cultures is also critical in the merger’s success. “When you think of conversions, many people think of changing systems and processes, but you need all of your employees to make all of this happen. We need to take care of our employees, who take care of our customers.”

Institutional muscle

Pushing the two sides to negotiate a merger were institutional investors, who owned 45.24 percent of CB Bancshares’s stocks and 41.34 percent of Central Pacific Financial Corp., according to March 31, 2004 portfolios. The table below shows that three of the top five institutional investors own shares in both corporations.

CB Bancshares Inc. % of shares owned
Private Capital Management 10.38
Wellington Management 7.65
Barclays Global Investors International 5.18
Neuberger Berman 3.15
State Street Global Advisors 1.82
Central Pacific Financial Corp. % of shares owned
Private Capital Management 9.37
Wellington Management 7.53
Barclays Global Investors International 4.63
Banc Funds Co. 4.14
Tontine Management LLC 3.37
Source: Portfolio date 3/31/04,

Since neither was a party to negotiations, both customers and employees feel vulnerable during a transition. According to industry journal Business Finance, “Systems conversions and changes in services and prices are the issues that make mergers difficult, but usually it is the breakdown in human communication that makes people shout, swear and slam phones.” A nationwide poll by Maritz Research showed that more than half of all U.S. households have been through a bank merger within the past five years, and one in four has had this experience within the past year. Of those who were going through a merger at the time of the poll, 51 percent said they would stay with their bank, and 35 percent would wait and see what happens. Dole, the investment banker, agrees with those findings: “People don’t normally switch accounts over [a planned merger]. It’s so much trouble to do it. Most would probably wait and see how well it fits.”

Aoyama says responsiveness will be the key: “One thing that I think is very important is having a good pulse on what’s happening in the branches and departments, listening to what people are saying, and to react swiftly to address any concerns or issues that may come up.”

Local Realtor Lloyd Sodetani says this level of responsiveness is the reason he chose City Bank over a larger bank: “It comes down to the people there. People at City Bank go out of their way to help. When I call them, I don’t get a recording, unless it’s after hours.” Colleen Harada, office manager of Maui Beverage, says her company had worked with CPB for 30 years before switching to City Bank two years ago: “You know that thing about loyalty? It’s not true, because when we needed something, all we heard was, ‘[the home office] said no.'” In contrast, she says, City Bank employees readily stepped in to help the company. She says that although she had reservations about the merger, “We would stay with [the merged bank] if our branch is open, and if our officer stays in the branch. If she moves [to another bank], we’ll follow her.”

That’s why it’s critical to keep employees in the loop as much as possible, according to Business Finance, “For your customer service rep, keeping [customers] happy might take a back seat to activating old career networks and getting some resumes circulating.” First Hawaiian Bank consultant and bank industry veteran Leroy Laney says that’s not unreasonable: “Any time you have a cross-town merger, especially in an industry like banking, you’ve got an awful lot of duplication of jobs. If you think about how savings are generally realized in a merger, the euphemism ‘economies of scale’ is usually done via payroll.” Aoyama says this concern can be mitigated by communicating as much as possible: “I think a great deal of mistrust or concern from employees comes about because they don’t know the whole story. So if you just communicate with them, be very up front, they’ll trust you in return, and feel better about it. Sometimes you have to explain that you don’t have the information available to share at this time, but say, ‘As soon as we’re able to, we will.'”

In the end, Aoyama says, successfully merging two cultures after tense negotiations will take patience: “Just blending of cultures alone takes a long time and a lot of planning, but it’s really communicating, cooperating and collaborating. And time heals. It’s really a concerted effort to heal any hard feelings; it takes time.” Arnoldus and Migita are trying to start the healing process by issuing joint newsletters addressing employees’ concerns, as well as deploying transition teams. Aoyama says this type of collaboration is critical: “It’s not a one-time deal. It’s a continual effort.” While the two banks’ merger agreement makes the case for expected shareholder value, integrating the best features between the two corporate cultures will play a key role in unlocking that value. n

Editor’s Note: Duane Kurisu, chairman and chief executive officer of the AIO Group, the holding company for Hawaii Business and PacificBasin Communications, is a director of CB Bancshares Inc.

Related Stories

On Newsstands Now

October 2017

HB October 2017


Maria Torres-Kitamura