NEW YORK (TheStreet) -- Hanmi Financial (HAFC) - Get Report is in a sweet spot, with plenty of upside for investors over the next 12 months, according to KBW analyst Julianna Balicka.

The analyst prior to the bank's earnings announcement on Monday upgraded the shares to an "outperform" rating from "market perform," while raising her price target for the shares to $25.00.

The bank is headquartered in Los Angeles, had $3.056 billion in total assets as of Dec. 31, with 27 branches, along with loan offices in Dallas and Seattle. Hanmi Financial announced in December a deal to acquire for $50 million in cash Central Bancorp of Garland Texas, which will include $1.6 billion in total assets and branches in Texas, California, Illinois, New York, New Jersey, Virginia and Georgia.

The merger is expected to be completed during the second half of 2014, and will result in the second-largest Korean-American bank, with BBCN Bancorp (BBCN) , which is also based on Los Angeles, in first place with total assets of $6.5 billion as of Dec. 31.

Shares of Hanmi Financial rose over 6% on Monday to $22.46, after the company reported fourth-quarter earnings of $10.0 million, or 31 cents a share, declining from $10.3 million, or 32 cents a share, during the third quarter and $14.0 million, or 44 cents a share, during the fourth quarter of 2012. The results for the fourth quarter of 2012 included a $5.5 billion from the recapture of a deferred tax asset (DTA) valuation allowance.

The bank's average gross loans were up 1% sequentially and 10% year-over-year to $2.199 billion during the fourth quarter. Average deposits grew 4% quarter-over-quarter and 5% from a year earlier to $2.474 billion.

Net interest income for the fourth quarter was $27.6 million, down from $28.5 million the previous quarter, but up from $26.4 million a year earlier. Net interest income for the third quarter was boosted by an interest reversal of nonaccrual loans totaling 490,000. A is placed in nonaccrual status if a lender thinks it is not likely to be paid back, and any payments coming in cannot be reflected in interest income. If the loan returns to performing, or accruing status, a recovery is recorded.

Hanmi's net interest margin for the fourth quarter was 3.98%, narrowing from 4.28% in the third quarter (which reflected the nonaccrual interest recovery), but widening from 3.86% during the fourth quarter of 2012, bucking the industry trend.

Noninterest income rose 3.5% sequentially and 1.5% year-over-year, to $7.584 million.

Noninterest expense rose to $20.2 million in the fourth quarter from $19.0 million in the third quarter and $19.5 million a year earlier, "mainly reflecting additional professional services required for several strategic transactions pursued during the year," the company said.

The company's fourth-quarter return on average assets (ROA) was 1.37%, which is a good number, and its return on average equity was 9.88%. That second number may look a bit low, however, it reflects a strong level of capital. Hanmi reported a tangible common equity ratio of 13.10% as of Dec. 31.

Balicka believes that following the completion of the Central Bancorp deal, Hanmi's return on tangible common equity will be close to 14%, in part because of the deployment of excess capital.

In a note to clients on Monday, the analyst wrote that the merger's expansion of Hanmi's market footprint will be "an important contributor to growth."

"Organically, we expect the recently hired senior lenders to begin contributing to loan growth, opening up opportunity for market share gains in the KorAm banking space," she added, also saying she expects the bank to show a compounded annual growth rate of 17% in "the out years of our model, after 2014."

KBW's earnings model for Hanmi Financial assumes a Sept. 30 closing for the Central Bancorp deal. "This is a longer lead time because CBI is a troubled bank, so the regulatory approval process is more complicated and the deal execution risk is higher. In particular, the successful close and pricing requires CBI to materially work down their outstanding classified loans by $300mm," she wrote.

Balicka made no change to her 2014 earnings estimate of $1.35 a share for Hanmi, but raised her 2015 EPS estimate to $1.90 from $1.65. She expects a "material" EPS benefit from the merger of 30 cents for 2015, minus 5 cents a share from the Federal Reserve "shifting the rise" in the federal funds rate to the second half of 2015 from the first half of 2015.

Most banks will need to see a rise in the short-term federal funds rate for a significant improvement in their net interest margins. The rate has been locked in a range of zero to 0.25% since late 2008.

Hanmi's shares were down a nickel to $22.41 in early afternoon trading on Tuesday.

The following chart shows the performance of Hanmi Financial's stock against the

NASDAQ Bank Index


since the end of 2012:

data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.