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Cathay's acquisition of SinoPac Bancorp well-priced, low risk, analysts say

The analyst community believes that Cathay General Bancorp's acquisition of Los Angeles-based SinoPac Bancorp is a low-risk deal at a good price.

Cathay announced July 8 that it has agreed to SinoPac, a unit of Taipei, Taiwan-basedBank SinoPac Co. Ltd.,for $340 million in a 90%-cash-and-10%-stock transaction.SinoPac is the holding company of FarEast National Bank.

The company expects60% cost savings from the transaction, with minimal tangible book value dilution.In addition, Cathay believes that the transaction will be 4% to 5% accretive toearnings.

Following deal announcement, Lana Chan, a BMO Capital Marketsanalyst, noted "There have not been many well-received deals in the bankingindustry in recent times. We believe that this will be one of them."

Chan added that Cathay has been exploring ways to deploy excesscapital, including three dividend hikes in the past year and repurchase of over$70 million in common stock, and she believes that this acquisition is a very effectiveuse of that capital.

D.A. Davidson analyst Gary Tenner said in an interview that thedeal is an attractive financial transaction as Cathay will be able to generate alot of cost savings. "I think at this point, it's more of a clear financialstory versus a strategic story," he said. "Although over the longer term,the kind of referral relationship that they will have with a Taiwan bank that'sgot U.S. customers could be positive as well," he added.

Sandler O'Neill & Partners analyst Aaron Deer also thinksthat the deal price is very reasonable at 1.26x tangible book value, and will beeven more favorable with certain accounting adjustments.

"In our view, the deal is an effective deployment of Cathay'sexcess capital (leverage ratio was 12% at March 31) that strengthens its Californiafootprint in a low-risk transaction with a culturally similar franchise," Deerwrote in a research note. However he added that while the deal is relatively smalland leaves Cathay with strong pro forma capital ratios, the company might not beable to look into any additional acquisitions until this transaction is integrated.

Cathay plans to retain $100 million of the purchase price andrelease it after the merger of Far East National and Cathay Bank, and plans to pay 10% of the purchase price overa period of three years. Deer said that because of the regulatory process, as SinoPachas a foreign ownership, there might be a three-to-four-month delay between closingthe transaction and consolidating the subsidiaries, so the payment structure istied to the fact that SinoPac has a foreign owner.

Piper Jaffray analyst Matthew Clark agreed and said the dealstructure is prudent and will be beneficial for Cathay. He believes that the structuremakes a lot of sense as the company is dealing with a U.S. subsidiary of a foreignbank, so it might take longer to close the deal and get all necessary approvals.

Clark also believes that the deal is well-priced and low-risk.However, he pointed out that Cathay is suspending its buyback plan as a result ofthe transaction. In addition, Cathay will not be able to realize the 4% to 5% EPSaccretion until 2018. "So, you are kind of trading share buyback for an acquisition,albeit a low-risk acquisition, but one that really isn't going to benefit the numbersfor a while," he added.

He highlighted that the deal will increase the company's commercialreal estate concentration to more than the 300% threshold that the market tendsto focus on. However, the regulators have approved the increased concentration limitfor the company, so he does not expect any constraints regarding the company's growth.Cathay's internal commercial real estate to total capital ratio is 400%.

Cathay closed up nearly 5% Friday following deal announcement.Tenner noted that investors reacted favorably as the transaction has a very lowmultiple and does not impair the company's tangible book value. "Generally,you'll see investors penalize the buyer at times for tangible book value dilutionwhich we didn't have in this case," he added.

"I guess I am a little surprised that the stock was as strongcoming off the conference call as it was, with them kind of admitting the buybacksare on hold. But right now the market doesn't seem to care," said Clark.

Cathay closed up 1.46% to $29.12 on Monday, July 11.