Cathay General Bancorp may be close to clinching its hard-fought deal for Great Eastern Bank in New York City.
Despite the distraction of that hostile deal, Cathay signaled this week that it is also closing in on buying a larger stake in Broadway Financial Corp. in its hometown of Los Angeles.
The Federal Reserve Bank of San Francisco disclosed Friday that the $6 billion-asset Cathay had filed an application to acquire up to 14.9% of Broadway, the parent of the $300 million-asset Broadway Federal Bank, which serves a number of minority groups, including blacks and Asian-Americans.
"It's unusual for an Asian-American bank to make an investment in an African-American company. I'm not aware of it happening before," said William Michael Cooper, a Minneapolis consultant who focuses on African-American banks.
The transaction would complete a stock purchase agreement that Cathay and Broadway signed in March 2004. Cathay already has a 4.7% stake in Broadway, bought under that agreement, but needed Fed approval to acquire the remaining shares. Cathay withdrew an earlier application for approval "after discussion with its banking regulators," according to filings made by Broadway with the Securities and Exchange Commission.
As a small thrift, Broadway Federal has been hit hard by the slowdown in the housing market and by margin compression, Mr. Cooper said, and may have sought a minority ownership partner to build up its capital. Executives at Broadway were not available for comment, and Cathay did not return phone calls.
But the two companies have had a long-standing relationship. In 2003 they swapped loans to satisfy each other's Community Reinvestment Act requirements.
At the time, Cathay was trying to close a deal for the Chinese-American banking company GBC Bancorp of Los Angeles. To get regulatory approval, Cathay needed more single-family mortgages to blacks and Hispanics on its books, Paul C. Hudson, the president and CEO of Broadway, told American Banker in October 2003.
Under the loan-swap deal Cathay got $50 million of mortgages to minorities from Broadway, and Broadway diversified its portfolio by getting $100 million of commercial loans from Cathay.
With Great Eastern, Cathay had until Jan. 4 to submit a definitive offer for the $310 million-asset bank. Cathay had made a preliminary offer of $112 million in October, but Great Eastern rejected it in favor of a lower bid from the $7.3 billion-asset UCBH Holdings Inc. in San Francisco.
Neither company is talking, but analysts say that Cathay submitted a formal bid for Great Eastern last week, that the two companies are hashing out final details, and that an announcement will be made in the next few weeks.
"The scale is definitely skewed toward Cathay winning Great Eastern now," said Lana Chan, an analyst at Bank of Montreal's Harris Nesbitt.
Less than two weeks ago Great Eastern seemed determined to sell itself to UCBH, one of Cathay's archrivals. However, late last month Great Eastern abruptly changed course, after Cathay continued to insist that it had intended to exercise its options and acquire 41% of Great Eastern's outstanding stock - not enough to control the company, but more than enough to doom a deal with UCBH.
New York law requires a company to obtain the votes of two-thirds of its shares in order for a sale to go forward.
"It would be fruitless for UCBH to pursue" its deal with Great Eastern "at this point, because Cathay could block it," said Scott Carmel, an analyst for Moors & Cabot Inc. in Boston.
The $7.3 billion-asset UCBH admitted as much in a Jan. 4 filing with the Securities and Exchange Commission. The company said that late last month it had waived a "non-solicitation obligation" in its merger agreement with Great Eastern, allowing the New York bank to solicit a formal offer from Cathay.
If Great Eastern's board breaks its deal with UCBH in favor of a deal with Cathay, Great Eastern would have to pay UCBH a $5 million breakup fee. If Great Eastern sticks with UCBH's deal and its shareholders reject it, Great Eastern would have to pay UCBH $4.5 million.
Mr. Carmel expects Great Eastern to opt for the first option. Its board may not think saving the extra $500,000 is worth the time and trouble, particularly since scheduling and processing a shareholder vote would cost money, too.
The battle began in September, when Cathay announced that it had a deal to buy a 41% stake in Great Eastern. It also said that it intended to negotiate directly with shareholders to try to acquire the remaining 59%.
Great Eastern's management viewed the plan as hostile and began soliciting other buyers. On Oct. 13 it said it had agreed to sell itself to UCBH for $103.6 million. (The figure was reduced to $97.4 million to reflect a lower estimate of the value of Great Eastern's facilities.)
Days later Cathay offered to buy the entire bank for $112 million, though it later said it would probably trim its offer after conducting due diligence.
