Center Financial Corp. of Los Angeles will merge into one of its Koreatown rivals, Nara Bancorp Inc., creating by far the largest Korean American bank in the nation and continuing consolidation in a banking niche hit hard by losses on commercial real estate loans.
The combined company, which will be renamed, will have more than 40 branches in California, New York, New Jersey, Seattle and Chicago, the banks said in a joint announcement Thursday.
With $5.3 billion in assets and $4 billion in deposits, it will have the largest share of deposits among Korean American banks in Southern California and Northern California, the second largest in the New York/New Jersey area, and a strong
presence in Seattle and Chicago.
Nara Chief Executive Alvin Kang will take on that role at the holding company of the new bank, with J.W. Yoo, Center's president and CEO, becoming president. The board of directors will have seven representatives from each bank, with Ki Suh Park, Nara's current board chairman, becoming chairman of the combined bank holding company.
Center stockholders will receive 0.78 of a share of Nara stock for each of their Center shares, or $6.77 a share at Thursday's closing stock prices, valuing the transaction at about $270 million and resulting in current Nara shareholders owning about 55% of the new company.
Center's shares have soared 40% since Oct. 25. They slipped 1 cent to $6.64 on Thursday in heavy trading, ahead of the news.
Center's third-quarter earnings were the strongest since before the financial crash and may have helped the stock over the last month.
Nara shares fell 50 cents, or 5.4%, to $8.67 before the announcement, also in active trading.
Analyst Joe Gladue of B. Riley & Co. said he was surprised by the deal but thought it could result in a bank with "very strong talent" if key executives from both sides can be retained. He also said it could contribute to a "more rational" competition in the crowded Korean American banking business.
"Both Center and Nara had made good progress addressing their problem loans," Gladue said. "However, loan growth is likely to be challenging for most banks over the next year or two, and there was probably some excess capacity in the Korean American banking space."
Sandler O'Neill analyst Aaron Deer agreed.
"I think this is a terrific deal, not just for shareholders, but for customers too," Deer said. "In many respects, the Korean American banking niche is in need of consolidation. This deal will give the combined bank some additional scale and help improve its overall operating efficiency.
"It will also provide customers with access to more branches and possibly a broader array of products and services. I expect the deal will be welcomed by shareholders of both companies. And, I expect regulators will support the deal too."
During a conference call with analysts, Yoo noted that there have been 12 Korean American banks competing in Southern California — too many, he said, especially given the stress created by the economic downturn of the last three years.
"Everybody has been talking about consolidation," he said, adding that Nara and Center had discussed a combination for years but got serious this time because of increased economic and regulatory pressures.
Until now, the consolidation in the Korean American niche has come through acquisitions of failed banks: Mirae in Los Angeles was acquired by Wilshire Bancorp of Los Angeles, currently the largest Korean American bank, and Innovative Bank in Oakland was taken over by Center.
With another large Koreatown bank, Hanmi Corp., "in the penalty box" because of losses, the merged bank will be in a powerful position to acquire second-tier Korean American banks in all its markets, said analyst Chris Stulpin of Howe Barnes Hoefer & Arnett.
The banks said the merger would reduce operating costs about 10%, with an unspecified number of layoffs expected because of branch closures and elimination of duplicate back-office functions. Kang, the CEO, said shareholders should enjoy increased earnings stemming from "our improved ability to generate profitable growth and higher returns going forward."
"The customers should benefit from the convenience of additional branches and the increased investment we can make in our products and services capabilities," he said in a statement. "And the employees of both companies should benefit from being part of the most profitable and strongest bank in the Korean American community."
Center has 22 branches and Nara 23. Yoo said that six or seven of the branches probably will be closed because they are close together.
Customers of each bank will benefit by having operations in new areas. Center was not previously in New York and New Jersey and Nara was not in Seattle and Chicago, Yoo said.
"Nara and Center Bank are generally regarded as the healthiest banks in the Korean community," Yoo said, describing the lending
policies of each as conservative.
Yoo noted that his bank was especially strong in Small Business Administration lending, while Nara's portfolio of traditional commercial and industrial loans was growing despite the sluggish economy — an example of how the combined bank would be stronger than the individual banks. He called the deal "transformational" for the Korean American niche.
"We have had a number of conversations over the years about a combination, and I am very pleased we are finally able to make it work," he said. "The two banks complement each other so well."
The two banks operate from headquarters on Wilshire Boulevard, only a few blocks from each other.
Nara was the second-largest Korean American bank in the U.S. as of Sept. 30, and Center was the fourth-largest as ranked by assets.