FIRST HAWAIIAN: THE START OF BANK MERGER MANIA?

Edited by Douglas Harbrecht

The consolidation wave in banking and financial services has swept to the shores of Hawaii. In a move that could be just the first of a slew of buy-outs and mergers among Hawaii's banks, First Hawaiian Bank announced on May 29 a merger with French-owned Bank of the West.

In this deal, Hawaii's second-largest financial institution (assets of $8.15 billion) will merge with California's fifth-largest bank (assets of $5.8 billion). The new superregional financial institution will be called BancWest and will serve 800,000 customers through 218 branches in Hawaii, Idaho, Oregon, Washington, and California as well as in Guam and Saipan. First Hawaiian's Pacific One subsidiary operating in the Pacific Northwest will become part of Bank of the West.

The new company will be headed by CEO Walter A. Dods Jr., of First Hawaii. He says the merger will reduce the two banks' combined operating expenses by 9%, or $41 million, by the millennia. Some 400 positions are also expected to be eliminated through attrition, about 8% of the banks' total workforce. First Hawaiian branches will retain their names, and the company will retain a good amount of operational autonomy.

The deal involves a tax-free stock swap with more than $1 billion in First Hawaiian stock going to Bank of the West's parent company, Banque National of Paris (BNP), in exchange for a 45% stake in the new combined company. First Hawaiian shareholders will receive 55% ownership in BancWest as well as 11 of the 20 corporate board seats. The combined company will be based in Honolulu. As part of the deal, BNP agreed to a four-year standstill period during which it will not attempt to acquire a larger stake in the new company. BNP is the second-largest banking group in France, with assets of $300 billion.

The diversification of Hawaii's banks has become more urgent of late with the state's economy mired in an eight-year slump. Hawaii bank earnings have lagged far behind national benchmarks because of problem loans left over from Japan's real estate bubble and the double whammy of exposure in Asia. Tourism from Asia tourism has also dropped significantly.

Hawaii's banks are considered too small to compete in the global marketplace and are unable to maintain the levels of technology that will be required for 21st century banking. The struggling Hawaii economy, however, could slow merger mania in the short term.

Analysts have long predicted that Hawaii's large banks would need to diversify further outside of the state or risk being swallowed by larger regional or national banks. The state's largest bank, Pacific Century Corp. (parent company of Bank of Hawaii), also has extensive operations on the West Coast and around the Pacific Rim, but the bulk of its business remains in Hawaii.

So far, however, Hawaiian consumers have been loath to accept outside banks: Bank of America sold its Hawaii retail banking operations last year to locally based American Savings Bank after BofA failed to make significant headway in the Hawaiian market.

The market response to the merger was lukewarm, with First Hawaiian stock moving up only 1/8 in very heavy trading. The company's p-e ratio of 14 likewise reflects the market's general indifference to First Hawaiian in this era of white-hot bank stocks.

By Alex Salkever in Honolulu