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As filed with the Securities and Exchange Commission on April 1, 2002.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

NARA BANCORP, INC.
(Exact name of Registrant as specified in its charter)

3701 Wilshire Boulevard
Suite 220
Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (213) 639-1700

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

The aggregate market value of the Common Stock held by non-affiliates of the Registrant based upon the closing sale price of the Common Stock on March 22, 2002, as reported on the Nasdaq National Market, was approximately $35,596,668. Shares of Common Stock held by each executive officer and director and each person owning more than 5% of the outstanding Common Stock of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares outstanding of the Registrant’s Common Stock, as of March 22, 2002: 5,575,087

Portions of the Definitive Proxy Statement that will be filed in connection with the registrants Annual Meeting of Shareholders to be held on May 29, 2002 are incorporated by reference into Part III of this Form 10-K.

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PART I

Forward-Looking Information

     Certain matters discussed in this Annual Report on Form 10-K may constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Forward-looking statements include, but are not limited to, statements preceded by, followed by or that include the word “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in such forward-looking statements. For a detailed discussion of the factors that might cause such a difference, see Item 1. “ Factors That May Impact Our Business or the Value of Our Stock.”

     Factors that might affect forward-looking statements include, among other things:

	•		our ability to remain in compliance with our written consent agreement with the OCC;
	•		the demand for our products;
	•		actions taken by ours competitors;
	•		changes in the FDIC insurance premium;
	•		tax rate changes, new tax laws and revised tax law interpretations;
	•		adverse changes occurring in the securities markets;
	•		inflation and changes in prevailing interest rates that reduce our margins or the fair market value of the financial instruments that we hold;
	•		economic or business conditions, either nationally or in our market areas, that are worse than we anticipated;
	•		legislative or regulatory changes that adversely affect our business;
	•		the timing, impact and other uncertainties of our asset sales or securitizations;
	•		technology changes that are more difficult or expensive than we expect;
	•		increases in delinquencies and defaults by our borrowers and other loan delinquencies;
	•		increases to our provision for losses on loans and leases due to loan quality/performance deterioration;
	•		our inability to sustain or improve the performance of our subsidiaries;
	•		our inability to achieve our financial goals and strategic plans, including any financial goals related both to contemplated and consummated assets sales or acquisitions;
	•		the outcome of lawsuits or regulatory disputes; and
	•		credit and other risks of lending, leasing and investment activities.

     As a result of the above, we cannot assure you that our future results of operations or financial conditions or any other matters will be consistent with those presented in any forward-looking statements. Accordingly, we caution you not to rely on these forward-looking statements. We do not undertake, and specifically disclaim any obligation, to update these forward-looking statements, which speak only as of the date made.

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Item 1. BUSINESS

General

     Nara Bancorp, Inc. (“Nara Bancorp,” on a parent-only basis, and “we” or “our” on a consolidated basis), incorporated under the laws of the State of Delaware in 2000, is a bank holding company, headquartered in Los Angeles, California, offering a full range of commercial banking and consumer financial services through its wholly owned subsidiary, Nara Bank, N.A., a national bank (“Nara Bank”). During the first quarter of 2001, Nara Bancorp became a bank holding company regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) as part of the reorganization of Nara Bank into a holding company formation.

Recent Developments

     On March 8, 2002, we announced that our Board of Directors authorized the repurchase of up to 10% of the 5.57 million shares of our common stock outstanding on that date. The repurchases may be made at any time and from time to time over the next 12 months. We intend to repurchase the shares in open market transactions, including block purchases. The timing and amount of shares, if any, actually repurchased during the authorized period will be determined based on management’s discretion and will depend on market conditions. As of March 29, 2002, we had not yet repurchased any shares under the program.

     On March 12, 2002, we announced that our Board of Directors declared a dividend of $0.10 per common share for the first quarter of 2002, which is payable on April 11, 2002 to stockholders of record on March 31, 2002.

     On March 26, 2002, we completed a private offering of $8 million of trust preferred securities, issued as part of a pooled offering with several other financial institutions through a newly formed wholly-owned subsidiary, Nara Statutory Trust II (“Nara Trust II”), a Connecticut statutory business trust.

     For the period beginning on March 26, 2002 to June 25, 2002, the trust preferred securities bear the interest rate of 5.59% per annum. For each successive period beginning on (and including) June 26, 2002, and each succeeding Interest Payment Date (March 26, June 26, September 26, and December 26 during the 30-year term), and ending on (but excluding) the next succeeding Interest Payment Date, interest rate will adjust to 3-Month LIBOR plus 3.60%. However, prior to March 26, 2007, the interest rate can not exceed 11.00%.

     Nara Trust II used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of Nara Bancorp. Bancorp intends to use the proceeds for general corporate purposes. Under applicable regulatory guidelines, we expect that the trust preferred securities will qualify as Tier I Capital.

Business Overview

     Nara Bancorp succeeded to the business and operations of Nara Bank upon consummation of reorganization of Nara Bank into a holding company structure, effective as of February 2, 2001. Upon consummation of the reorganization, Nara Bancorp had 5,467,942 shares of common stock outstanding, all of which were authorized for quotation on the Nasdaq National Market. Prior to the completion of the reorganization, Nara Bancorp had no material operations or assets. Nara Bancorp’s principal business is to serve as a holding company for Nara Bank and other bank or bank-related subsidiaries, which Nara Bancorp may establish or acquire. As of December 31, 2001, Nara Bancorp had 5,572,837 shares of common stock outstanding.

     On March 28, 2001, Nara Bancorp, through a newly formed and wholly-owned subsidiary, Nara Bancorp Capital Trust I (“Nara Capital”), a Delaware statutory business trust, completed a private placement of $10 million of trust preferred securities, issued as part of a pooled offering with several other financial institutions.

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     Our principal business activities are conducted through Nara Bank by earning interest on loans, leases and investment securities that are funded by customer deposits and other borrowings. The difference between interest received and interest paid comprises the majority of our operating earnings.

     We conduct our operations through 14 branch offices and 4 loan production offices. Our headquarters is located at 3701 Wilshire Boulevard, Suite 220, Los Angeles, California 90010. Our telephone number is (213) 639-1700. In September of 2001, we opened our fourteenth office in Cerritos, California and we established our fourth loan production office in Atlanta, Georgia. The FDIC insures our deposits up to the maximum legal limits, and we are a member of the Federal Reserve System.

     We offer a full range of commercial banking and consumer financial services for our customers, who typically are individuals and small- to medium-sized businesses in our market areas. We accept deposits and originate a variety of loans including commercial loans, trade finance, Small Business Administration (SBA) loans, automobile and various consumer loans. To better meet our customers’ needs, our mini-market branches generally offer extended hours from 9 a.m. to 6 p.m. Each of our branches, except for the Wilshire and Downtown Offices, operates 24-hour automated teller machines. We provide courier services to qualifying clients and have personal banking officers for our key customers to better support their banking needs. We honor merchant drafts for both VISA and MasterCard and provide debit cards services to our customers. In addition, most of our branches offer travelers’ checks, safe deposit boxes, notary public and other customary bank services. We also offer 24-hour banking by telephone. Our website at www.narabank.com features both English and Korean applications and internet banking services.

     A significant amount of our operating income and net income depends on the difference between interest revenue received from interest-earning assets and interest expense paid on interest-bearing liabilities. However, interest rates are highly sensitive to many factors that are beyond our control, such as general economic conditions and the policies of various governmental and regulatory authorities, in particular those of the Federal Reserve Board. Although our business may vary with local and national economic conditions, such variations do not appear to be seasonal in nature.

Lending Activities

     Our lending activity is conducted exclusively through Nara Bank. Our net loans, including loans held for sale, totaled approximately $502.1 million as of December 31, 2001, accounting for 81.6% of our total interest-earning assets of $615.5 million. At December 31, 2001, total loans consisted of: commercial loans, including lease and trade financing, of approximately $211.2 million; real estate and construction loans of approximately $251.7 million; consumer loans of approximately $46.6 million; less deferred loan fees of $650,000 and allowance for loan losses of $6.7 million. Loans are carried at face amount, less payments collected, net of deferred loan origination fees, and the allowance for loan losses. Interest on all loans is accrued daily on a simple interest basis. Loans are placed on a non-accrual basis when principal and interest on a loan is past due 90 days or more, unless a loan is both well secured and in process of collection. Once a loan is placed on non-accrual status, accrual of interest is discontinued and previously accrued interest is reversed.

     The rates of interest charged on variable rate loans are set at specified increments in relation to our prime lending rate and, accordingly, vary as our prime lending rate varies. A majority of our loans (approximately 81.0% at December 31, 2001) are variable- rate loans. Although most of our variable-rate loans are secured loans, we are permitted with certain exceptions, under applicable law, to make unsecured loans to individual borrowers in aggregate amounts of up to 15% of the sum of our total capital and the allowance for loan losses, as defined for regulatory purposes. As of December 31, 2001, our lending limits were approximately $9.5 million for unsecured loans. For the purpose of lending limits, a secured loan is defined as a loan secured by readily marketable collateral having a current market value of at least 100% of the amount of the loan or extension of credit at all times. In addition to unsecured loans, we are permitted to make collateral-secured loans secured by collaterals in an additional amount up to 10% of our total capital and the allowance for loan losses.

     The following table shows the composition of our loan portfolio by type of loan on the dates indicated:

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     Commercial Loans

     Commercial loans are made primarily for the purposes of providing working capital or financing the purchase of inventory and equipment and for other business purposes. Short term business loans (due within one year), generally are used to finance current transactions and typically provide for periodic interest payments, with principal being payable at maturity. Term loans (5 to 7 years) normally provide for monthly payments of both principal and interest. We review the credit-worthiness of our commercial borrowers on a periodic basis, and most commercial loans are collateralized by inventory, equipment and/or real estate.

     We include trade financings within our commercial loan portfolio. We have established a trade finance department to serve international trade customers. This department issues and advises letters of credit for export and import businesses. It also purchases bills from export businesses at discounts and makes loans to international traders. These loans usually are collateralized with inventories and accounts receivables. As of December 31, 2001, outstanding letters of credit, including domestic letters of credit totaled $26 million.

     Real Estate Loans

     Our real estate loans consist primarily of loans secured by deeds of trust on commercial properties and are normally extended for short durations. It is our policy to restrict real estate loans to 70% of Nara Bank’s appraised value of the property. We offer both fixed and floating rate loans. The maturities on such loans generally are restricted to seven years (on amortizations of up to 25 years with balloon payments due at maturity).

     Small Business Administration Loans

     Our Small Business Administration (SBA) loans typically are made for the purpose of providing working capital, financing the purchase of equipment or inventory, financing the purchase of a business, debt refinancing, or financing the purchase or construction of owner occupied commercial property. SBA loans typically are term loans with maturities ranging from 7 to 10 years. SBA real estate loans generally are 25 years term loans with full amortization. SBA loans normally provide for floating interest rates, with monthly payments of both principal and interest.

     Our SBA lending represents an important segment of our loan portfolio because of our ability to sell the guaranteed portion in the secondary market at a premium, while earning servicing fees on the sold portion over the remaining life of the loan. Thus, in addition to the yield earned on the portion of the SBA loans that we retained, we recognize income from the gains on the sales and from loan servicing on the SBA loans sold into the secondary market.

     We established a separate SBA loan department to expedite our services related to SBA loans. The SBA loan department is staffed by loan officers who provide assistance to qualified individuals and existing businesses. We attained SBA Preferred Lenders status in the Los Angeles and Santa Ana districts on January 16, 1997. SBA Preferred Lender status is the highest designation awarded by the SBA and generally facilitates the marketing and approval process for new SBA loans. On February 24, 1999, we attained Preferred Lender status in the New York,

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Chicago, San Francisco, Seattle, and Spokane districts. On April 20, 2001, we also received Preferred Lender status in New Jersey, Baltimore, Washington D.C., and Atlanta.

     Consumer Loans

     Most of our consumer loan portfolio consists of automobile loans. Nara Bank began originating automobile loans in early 1995. Referrals from automobile dealers comprise the majority of originations of such loans. We also offer fixed-rate loans to buyers of new and previously owned automobiles who are not qualified for automobile dealers’ most preferential loan rates. During 2001, these loans increased to $35.3 million from $33.9 million at December 31, 2000 and $25.9 million at December 31, 1999.

     Lines of Credit

     We extend lines of credit to business customers usually on an annual review basis. Our undisbursed commercial loan commitments at December 31, 2001, 2000 and 1999 were $146.2 million, $87.9 million and $56.3 million, respectively. The following table shows our loan commitments and letters of credit outstanding at the dates indicated:

     Concentrations

     Loan concentrations are considered to exist when there are significant amounts of loans to a multiple number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. The following table describes the industry concentrations in Nara Bank’s loan portfolio, which exceeded 10% of Nara Bank’s total gross loans, including loans held for sale, as of the dates indicated:

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     Other Real Estate Owned

     Assets classified as other real estate owned (“OREO”) include foreclosed real estate owned by us . We had no OREO as of December 31, 2001. We owned other real estate, taken through foreclosure, in the aggregate amount of approximately $300,000 and $57,000 at December 31, 2000, and 1999, respectively. We reserved $37,000 and $13,000 at December 31, 2000 and 1999, respectively, as a valuation allowance. We incurred no OREO expense through OREO transaction in 2001. We incurred expenses of $90,748 and $16,628 and earned income of $2,893 and $906 from these properties in 2001 and 1999, respectively. The following table summarizes our OREO at the dates indicated:

     Investing Activities

     The main objectives of our investment strategy are to support a sufficient level of liquidity while providing a means to manage our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investment in various types of securities, certificates of deposits and federal funds sold in compliance with various restrictions in the policy. Securities are classified as held-to-maturity or available-for-sale. The securities that we have the ability and intent to hold to maturity are classified as held-to-maturity securities. All other securities are classified as available-for-sale. There were no trading securities at December 31, 2001 or 2000. As of December 31, 2001, held-to-maturity securities totaled $4.3 million, compared to $15.7 million at December 31, 2000, and available-for-sale securities totaled $65.1 million at December 31, 2001, compared to $54.9 million at December 31, 2000. The decrease in held-to-maturity securities is primarily due to called agency bonds during 2001 as a result of decreases in interest rates. During 2001, a total of $36.7 million in agency securities were called and a total of $51.8 million in securities available-for-sale were purchased. From the investment portfolio, securities with amortized cost of approximately $2.5 million and $4.2 million were pledged to Federal Reserve Board as required or permitted by law at December 31, 2001 and 2000, respectively. The investment portfolio consists of government sponsored agency bonds, mortgage backed securities, bank-qualified California municipals, and corporate bonds. This investment portfolio composition reflects our investment strategy.

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     The following table summarizes the maturity of securities and their pertinent weighted average yield ratios at the dates and for the periods indicated:

     Deposit Activities

     We attract both short-term and long-term deposits from the general public by offering a wide range of deposit products and services. Through our branch network, we provide our banking customers with money market accounts, savings and checking accounts, certificate of deposit, individual retirement accounts, business checking accounts, 24-hour automated teller machines, and internet banking and bill-pay services.

     Our primary source of funds is FDIC-insured deposits. We try to match our interest-bearing liabilities with our interest-earning assets. We cover all volatile funds with liquid assets as a method to ensure adequate liquidity. Thus, we analyze our deposits’ maturities and interest rates to monitor and control the cost of funds and review the stability of the supply of funds. We believe our deposits are a stable and reliable funding source.

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     When we have more funds than required for our reserve requirements or short-term liquidity needs, we sell federal funds to other financial institutions. Conversely, when we have less funds than required, we may borrow funds from both our corresponding banks and the Federal Reserve Bank, also known as the FRB. The maximum amount that we currently are authorized to borrow from our correspondent banks is $13 million on an overnight basis. The maximum amount that we may borrow from the FRB discount window is 97% of the market value of the pledged security with the FRB, which amount was $1.0 million at December 31, 2001.

     The following table sets forth information for the periods indicated regarding the balances of our deposits by category.

Borrowing Activities

     On September 31, 1999, we issued five-year subordinated capital notes in the aggregate amount of $4.3 million with a stated interest rate of 9 percent, maturing on September 30, 2004. Interest on the notes is payable quarterly and no scheduled payments of principal are due prior to maturity. We may redeem the notes prior to their maturity as of, or after, September 30, 2002. The notes qualify as Tier 2 risk-based capital under the Office of the Comptroller of the Currency guidelines for assessing regulatory capital. For the total risk-based capital ratio, the amount of notes that qualify as capital is reduced as those notes approach maturity. At December 31, 2001, $1.7 million, which represents 40% of the total outstanding amount of the notes, qualified as risk-based capital.

     During 2000, we established a lending line with the FHLB of San Francisco. Advances may be obtained from the FHLB of San Francisco to supplement our supply of lendable funds. Advances from the FHLB of San Francisco typically are secured by a pledge of mortgage loans and/or qualified securities, with a market value at least equal to outstanding advances. At December 31, 2001, we had a $5.0 million advance outstanding, collateralized with securities pledged by Nara Bank. The borrowing has a seven-year, fixed-rate term.

     On March 28, 2001, through our subsidiary, Nara Capital Trust I, we completed a private placement of $10 million of trust preferred securities, issued as part of a pooled offering with several other financial institutions.

     The trust preferred securities bear a 10.18% fixed rate of interest payable semi-annually and maturing June 8, 2031. Nara Capital used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures issued by Nara Bancorp. The net proceeds from the trust preferred securities will be used to accommodate stock repurchase program that was approved by the Board of Directors as described in “Recent Developments” section of this report. Pending deployment of the funds for the repurchase program, we have invested the proceeds in federal fund overnight accounts. Under applicable regulatory guidelines, the trust preferred securities qualify as Tier I Capital.

Competition

     The banking and financial services industry generally, and in our market areas specifically, including California and New York City, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. We compete for loans, deposits, and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to

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capital markets and offer a broader range of financial services than we do. In addition, recent federal legislation may have the effect of further increasing the pace of consolidation within the financial services industry. See “Item 1. Business — Supervision and Regulation — Financial Services Modernization Legislation.”

Economic Conditions, Government Policies and Legislation

     Our profitability, like most financial institutions, primarily depends on interest rate differentials. In general, the difference between the interest rates paid on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment. The impact that future changes in domestic and foreign economic conditions might have on our performance cannot be predicted.

     Our business also is influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the “FRB”). The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on Nara Bancorp and Nara Bank any of our future changes in monetary and fiscal policies cannot be predicted.

     From time to time, legislation, as well as regulations, is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. This legislation may change banking statutes and the operating environment of Nara Bancorp and its subsidiaries in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations of us or any of our subsidiaries. See “Item 1. Business - Supervision and Regulation.”

     Supervision and Regulation

     General

     Bank holding companies and banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of our stockholders. Set forth below is a summary description of the material laws and regulations, which relate to our operations. The description is qualified in its entirety by reference to the applicable laws and regulations.

     Nara Bancorp

     As a registered bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”). We are required to file with the FRB periodic reports and such additional information as the FRB may require pursuant to the BHCA. The FRB may conduct examinations of our subsidiaries and us.

     The FRB may require that we terminate an activity or terminate control of or liquidate or divest ourselves of certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate

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constitutes a significant risk to the financial safety, soundness or stability of any of our banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, we must file written notice and obtain approval from the FRB prior to purchasing or redeeming our equity securities.

     Further, we are required by the FRB to maintain certain levels of capital. See “Capital Standards.”

     We are required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the FRB is also required if we merge or consolidate with another bank holding company. We are prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to our subsidiaries. However, subject to the prior approval of the FRB, we may engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident there to.

     Under FRB regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s regulations or both.

     We are also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, we and our subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions.

     Our securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Exchange Act.

     Nara Bank, N.A.

     Nara Bank, as a national banking association, is subject to primary supervision, examination, and regulation by the Office of the Comptroller of the Currency. To a lesser extent, Nara Bank is also subject to regulations of the Federal Deposit Insurance Corporation as administrator of the Bank Insurance Fund and the FRB. If, as a result of an examination of Nara Bank, the Office of the Comptroller of the Currency should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of Nara Bank’s operations are unsatisfactory or that Nara Bank or its management is violating or has violated any law or regulation, various remedies are available to the Office of the Comptroller of the Currency. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of Nara Bank, to assess civil monetary penalties, and to remove officers and directors. The Federal Deposit Insurance Corporation has similar enforcement authority, in addition to its authority to terminate Nara Bank’s deposit insurance in the absence of action by the Office of the Comptroller of the Currency and upon a finding that Nara Bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.

     Various requirements and restrictions under the laws of the United States and the State of California affect the operations of Nara Bank. Federal and California statutes and regulations relate to many aspects of Nara Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and new products

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and services. Further, Nara Bank is also required to maintain certain minimum levels of capital. See “Capital Standards.”

     During 2001, Nara Bank and its board of directors negotiated and on, February 20, 2002,they signed a Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”) with the Office of the Comptroller of the Currency (the “OCC”) pursuant to 12 U.S.C. 1818. Nara Bank, without admitting to any allegations, entered into the Consent Order in connection with alleged deficiencies relating to the lack of sufficient internal controls, procedures and inadequate compliance with the Bank Secrecy Act. Management is taking all necessary steps to comply with the Consent Order and the Bank Secrecy Act, including, but not limited to, the implementation of new IT systems and the expansion of the employee training program.

The Consent Order requires, among other matters, that Nara Bank:

	•		implement specified internal procedures, including the implementation of a new IT system, to ensure compliance with the Bank Secrecy Act;
	•		develop, implement and ensure adherence to a written program of policies and internal procedures to ensure compliance with the Bank Secrecy Act and the rules and regulations of the OFAC;
	•		appoint a Board Compliance Committee;
	•		develop and implement an audit program to test the adequacy of internal controls to comply with the provisions of the Bank Secrecy Act; and
	•		develop, implement and ensure adherence to a comprehensive training program for personnel to ensure their awareness of, and compliance with the requirements of the Bank Secrecy Act and the OFAC.

If we fail to comply with the terms of the Consent Order, the OCC could:

	•		assess civil money penalties upon us;
	•		place restrictions on the source of our deposits or,
	•		in certain circumstances, appoint a conservator or receiver to oversee our operations.

In addition, if we violate the Consent Order, the FDIC may initiate a termination of insurance proceeding against us. If any of these penalties or actions were to occur, they would materially and adversely affect our business and operations.

     USA Patriot Act of 2001

     On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the “Patriot Act”). Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including:

	•		due diligence requirements for financial institutions that administer, maintain, or manage private banks accounts or correspondent accounts for non-U.S. persons;
	•		standards for verifying customer identification at account opening;

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	•		rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;
	•		reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and
	•		filing of suspicious activities reports securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

     We are not able to predict the impact such law will have on our financial condition or results of operations at this time.

     Financial Services Modernization Legislation

     General. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 also referred to as the FSMA. The FSMA repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the FSMA also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a financial holding company.

     The law also:

	•		broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
	•		provides an enhanced framework for protecting the privacy of consumer information;
	•		adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;
	•		modifies the laws governing the implementation of the Community Reinvestment Act; and
	•		addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

     We do not believe that the FSMA will have a material adverse effect on operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The FSMA is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that we face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than we do.

     Financial Holding Companies. Bank holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. “Financial in nature” activities include:

	•		securities underwriting,
	•		dealing and market making,

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	•		sponsoring mutual funds and investment companies,
	•		insurance underwriting and agency,
	•		merchant banking, and
	•		activities that the FRB, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

     Prior to filing a declaration of its election to become a financial holding company, all of the bank holding company’s depository institution subsidiaries must be well capitalized, well managed, and, except in limited circumstances, in compliance with the Community Reinvestment Act.

     Failure to comply with the financial holding company requirements could lead to divestiture of subsidiary banks or require all activities of such company to conform to those permissible for a bank holding company. No FRB approval is required for a financial holding company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB:

	•		lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities;
	•		providing any devise or other instrumentality for transferring money or other financial assets; or
	•		arranging, effecting or facilitating financial transactions for the account of third parties.

     A bank holding company that is not also a financial holding company can only engage in banking and such other activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

     We are not currently a Financial Holding Company. Management has not determined at this time whether it will seek an election to become a Financial Holding Company.

     Merchant Banking Restrictions. While the BHCA generally prohibits bank holding companies from owning more than 5 percent of the voting stock of non-financial companies, with limited exceptions, the FSMA authorizes merchant banking activities. Permissible merchant banking investments are defined as investments that meet two important requirements:

	•		the investment may only be held for a period of time to enable the resale of the investment (generally current regulations allow for a 10-year holding period for direct investments and a 15-year holding period for investments in private equity funds), and
	•		while the investment is held by the financial holding company, the investing financial holding company may not routinely manage or operate the commercial firm except as necessary or required to obtain a reasonable return on the investment on resale (regulation presumes that officer or director interlocks involve routine management).

     In addition, there are limits on bank funding of portfolio companies owned by the bank’s parent holding company, transactions between the bank and portfolio companies and on cross-marketing activities between banks and portfolio companies owned by the same financial holding company. However, current rules do not prevent a depository institution from marketing the shares of private equity funds controlled by an affiliated financial holding company, and does not apply to situations in which the financial holding company owns less than 5 percent of the voting shares of the portfolio company.

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     Furthermore, in December 2001, federal regulators adopted new capital requirements for merchant banking activities. The rule employs a sliding scale based on each banking organization’s aggregate equity investments in non-financial entities and Tier 1 capital, requiring banks or holding companies to hold regulatory capital equal to:

	•		8 cents for every $1 of equity investments up to 15% of Tier 1 capital;
	•		12 cents for every $1 of investments for the next 10% of Tier 1 capital; and
	•		25 cents for every $1 exceeding 25% of Tier 1 capital.

     The first 15% of investments that banking companies make through small-business investment companies, also known as SBICs, is exempt, however, the sliding scale applies for any such investments over 15%.

     Expanded Bank Activities. The FSMA also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a financial holding company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation.

     A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be “well-capitalized,” “well-managed” and in compliance with the Community Reinvestment Act. The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank’s total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank’s assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.

     Privacy. Under the FSMA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, effective July 1, 2001, financial institutions must provide:

	•		initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates;
	•		annual notices of their privacy policies to current customers; and
	•		a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

     These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. It is not possible at this time to assess the impact of the privacy provisions on our financial condition or results of operations.

     Dividends and Other Transfers of Funds

     Dividends from Nara Bank constitute the principal source of income to Nara Bancorp. Nara Bancorp is a legal entity separate and distinct from Nara Bank. Nara Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to Nara Bancorp. Under such restrictions, the amount available for payment of dividends to Nara Bancorp by Nara Bank totaled $12 million at December 31, 2001. In addition, the California Department of Financial Institutions and the FRB have the authority to prohibit Nara Bank from paying dividends, depending upon Nara Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.

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     Transactions with Affiliates

     Nara Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Nara Bancorp or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of Nara Bancorp or other affiliates. Such restrictions prevent Nara Bancorp and such other affiliates from borrowing from Nara Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by Nara Bank to or in Nara Bancorp or to or in any other affiliate are limited, individually, to 10.0% of Nara Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of Nara Bank’s capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving Nara Bancorp and other controlling persons of Nara Bank. Additional restrictions on transactions with affiliates may be imposed on Nara Bank under the prompt corrective action provisions of federal law. See “Item 1. Business — Supervision and Regulation — Prompt Corrective Action and Other Enforcement Mechanisms.”

     Capital Standards

     The federal banking agencies have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk federal banking agencies, to 100% for assets with relatively high credit risk.

     The guidelines require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 4%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.