Nara Bancorp Upgraded at FBR Capital

FBR Capital Markets upgraded its rating on shares of Nara Bancorp, Inc. (NASDAQ: NARA) to "outperform" from "market perform" ahead of near-term catalysts and recent pullback, with a price target of $10.

"We are upgrading our investment rating on shares of Nara Bancorp in light of the recent pullback and ahead of its upcoming merger of equals (MOE) with Center Financial Corp. (NASDAQ: CLFC). The merger, scheduled to close in second half of 2011, will nearly double the float and the company's market capitalization and will likely pave the way for improved visibility among FIG investors," said Ram Shankar, an analyst at FBR Capital Markets.

As noted before, Shankar believes that management's assumptions for cost synergies from the MOE are fairly conservative, which, coupled with revenue enhancement opportunities (from complementary businesses such as SBA lending or international trade finance), provides additional upside for outperformance.

"With credit improvement and benefits of capital actions largely behind us, we believe that NARA is an attractive investment given specific catalysts in the near term. The upcoming merger of equals with Center Financial will nearly double the shares' float and market value and should enhance its visibility among institutional investors," said Shankar.

Shankar said the MOE also increases his normalized EPS expectation from $0.90 for the stand-alone franchise to $1.00, driven largely by expense synergies. The potential for revenue enhancements and upside from current conservative cost-save assumptions could drive earnings and valuation higher, in his view.

Shankar said Center Financial filed, on May 19, its application with the FDIC and California DFI requesting merger approval. A separate application will be filed later to the Federal Reserve.

NARA expects that the all-stock merger will close in second half of 2011; at closing, CLFC shareholders will each receive 0.7804 NARA shares (fixed exchange ratio) for each CLFC share held. As part of its branch consolidation strategy, the companies expect that it will consolidate three overlapping Southern California branches.

Shankar said the merger analysis assumed expense cost saves of $11.2 million or 10 percent of the combined expense base, a conservative assumption for an in-market merger, in his opinion. Today, 12 of NARA's 23 branches are within a mile of 14 CLFC branches, which could drive additional branch consolidations and synergies.

Shankar said complementary businesses such as CLFC's SBA lending franchise and Nara's international trade finance improve Nara's competitive positioning in the Korean American banking landscape and will likely yield revenue enhancement opportunities.

The brokerage increased its 2012 EPS estimate for Nara Bancorp to $0.90 from $0.85, while maintaining its 2011 estimate of $0.60.

"We are adjusting our model to reflect a fourth quarter of 2011 close (prior model assumed third quarter of 2011 close). We are maintaining our 2011 EPS estimate and increasing our FY12 estimate to reflect a 13-basis-point jump in CLFC's net interest margin in first quarter of 201. Our $10 price target equals 10 times of our pro forma normalized EPS estimate and 1.2 times of projected tangible book value of $8.31," said Shankar.

Nara Bancorp stock closed Friday's regular trading down 0.75 percent at $8.55 on the NASDAQ Stock Market.