| NARA BANCORP INC Item 1A RISK FACTORS Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed |
| In that event, the market price for our common stock will likely decline |
| We face risks related to recent regulatory actions |
| On July 29, 2005, we entered into a Memorandum of Understanding with the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions, which imposes additional obligations on us and restricts our ability to take certain actions |
| On July 8, 2005, the Federal Reserve Bank of San Francisco notified us that it had designated the Company and Nara Bank to be in a “troubled condition” for purposes of Section 914 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 |
| The impact of the Memorandum of Understanding or the designation by the Federal Reserve Bank of San Francisco may have a material adverse effect on our business or financial condition |
| We may also be asked to enter into regulatory orders or consent decrees with other regulatory agencies |
| The defense and outcome of any such claims or proceedings against us and any agreement with regulators may divert management’s attention and resources, and we may be required to pay damages if such claims or proceedings are not resolved in our favor |
| Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses |
| We may not be able to effectuate our current business strategy and our future business activities may be limited |
| Moreover, we may be the subject of negative publicity focusing on the financial statement inaccuracies and resulting restatements and negative reactions from our stockholders, creditors or others with whom we do business |
| The occurrence of any of the foregoing could harm our business and reputation, require us to incur significant expenses to resolve any claims and cause the price of our securities to decline or remain at current levels |
| If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud |
| Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company |
| If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed |
| We have in the past discovered, and may in the future discover, areas of our disclosure and internal controls that need improvement |
| Any failure to develop or maintain effective controls or difficulties encountered in their implementation or other ineffective improvement of our internal and disclosure controls could harm our operating results or cause us to fail to meet our reporting obligations |
| Deterioration of economic conditions in California, New York or South Korea could adversely affect our loan portfolio and reduce the demand for our services |
| We focus our business primarily in Korean communities in California and in the greater New York City metropolitan area |
| Deterioration in economic conditions in our market areas could have a material adverse impact on the quality of our business |
| An economic slowdown in California, New York, or South Korea could have the following consequences, any of which could reduce our net income: • loan delinquencies may increase; • problem assets and foreclosures may increase; • claims and lawsuits may increase; • demand for our products and services may decline; and • collateral for loans may decline in value below the principal amount owed by the borrower |
| 22 ______________________________________________________________________ [60]Table of Contents Our allowance for loan losses may not cover actual loan losses |
| If our actual loan losses exceed the amount we have allocated for probable losses, it will hurt our business |
| We try to limit the risk that borrowers will fail to repay loans by carefully underwriting the loans |
| Losses nevertheless occur |
| We create allowance allocations for estimated loan losses in our accounting records |
| We base these allowances on estimates of the following: • historical experience with our loans; • evaluation of current economic conditions; • regular reviews of the quality, mix and size of the overall loan portfolio; • regular reviews of delinquencies; • the quality of the collateral underlying our loans |
| If these allocations were inadequate, our results of financial condition could be materially and adversely affected |
| A downturn in the real estate market could seriously impair our loan portfolio |
| As of December 31, 2005, approximately 71prca of our loan portfolio consisted of loans secured by various types of real estate, including commercial loans that are secured by real estate in a form of second position |
| If real estate values decline significantly, especially in California or New York, higher vacancies and other factors could harm the financial condition of our borrowers, the collateral for our loans will provide less security, and we would be more likely to suffer losses on defaulted loans |
| Changes in interest rates affect our profitability |
| We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities |
| When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate |
| This can cause decreases in our spread and can greatly affect our income |
| In addition, interest rate fluctuations can affect how much money we may be able to lend |
| For example, when interest rates rise, loan originations tend to decrease |
| If we lose key employees, our business may suffer |
| If we lose key employees temporarily or permanently, it could hurt our business |
| We could be particularly hurt if our key employees went to work for competitors |
| Our future success depends on the continued contributions of existing senior management personnel |
| On February 15, 2006, Mr |
| Ho Yang submitted his resignation as a member of the Board of Directors and as President and Chief Executive Officer of Nara Bancorp and its subsidiary Nara Bank, effective as of March 15, 2006 |
| On March 13, 2006 Nara Bancorp announced a series of management and board changes to ensure a smooth transition to permanent President and CEO, and to bring further banking and corporate management expertise to Nara Bancorp and Nara Bank’s board of directors |
| Business—Recent Developments” for further information |
| Environmental laws could force us to pay for environmental problems |
| The cost of cleaning up or paying damages and penalties associated with environmental problems could increase our operating expenses |
| When a borrower defaults on a loan secured by real property, we often purchase the property in foreclosure or accept a deed to the property surrendered by the borrower |
| We may also take over the management of commercial properties whose owners have defaulted on loans |
| We also lease premises where our branches and other facilities are located and where environmental problems may exist |
| Although we have lending, foreclosure and facilities guidelines intended to exclude properties with an unreasonable risk of contamination, hazardous substances may exist on some of the properties that we own, lease, manage or occupy |
| We may face the risk that environmental laws could force us to clean up the properties at our expense |
| We could also be liable for pollution generated by a borrower’s operations if we take a role in managing those operations after a default |
| We may find it difficult or impossible to sell contaminated properties |
| 23 ______________________________________________________________________ [61]Table of Contents We are exposed to the risks of natural disasters |
| A significant portion of our operations is concentrated in Southern California |
| California is in an earthquake-prone region |
| A major earthquake could result in material loss to us |
| A significant percentage of our loans are and will be secured by real estate |
| Many of our borrowers could suffer uninsured property damage, experience interruption of their businesses or lose their jobs after an earthquake |
| Those borrowers might not be able to repay their loans, and the collateral for such loans could decline significantly in value |
| Unlike a bank with operations that are more geographically diversified, we are vulnerable to greater losses if an earthquake, fire, flood or other natural catastrophe occurs in Southern California |
| An increase in non-performing assets would reduce our income and increase our expenses |
| If the level of non-performing assets rises in the future, it could adversely affect our operating results |
| Non-performing assets are mainly loans on which the borrowers are not making their required payments |
| Non-performing assets also include loans that have been restructured to permit the borrower to have smaller payments and real estate that has been acquired through foreclosure of unpaid loans |
| To the extent that assets are non-performing, we have less cash available for lending and other activities |
| Changes in governmental regulation may impair our operations or restrict our growth |
| We are subject to significant governmental supervision and regulation |
| These regulations are intended primarily for the protection of depositors |
| Statutes and regulations affecting our business may be changed at any time, and the interpretation of these statutes and regulations by examining authorities may also change |
| Within the last several years Congress and the President have passed and enacted significant changes to these statutes and regulations |
| There can be no assurance that such changes to the statutes and regulations or in their interpretation will not adversely affect our business |
| Nara Bank is subject to regulation and examination by the DFI and the Federal Reserve Board |
| In addition to governmental supervision and regulation, Nara Bank is subject to changes in other federal and state laws, including changes in tax laws, which could materially affect the banking industry |
| Nara Bancorp is subject to the rules and regulations of the Federal Reserve Board |
| If we fail to comply with federal and state bank regulations, the regulators may limit our activities or growth, fine us or ultimately put us out of business |
| Banking laws and regulations change from time to time |
| Bank regulations can hinder our ability to compete with financial services companies that are not regulated or are less regulated |
| Federal and state bank regulatory agencies regulate many aspects of our operations |
| These areas include: • the capital that must be maintained; • the kinds of activities that can be engaged in; • the kinds and amounts of investments that can be made; • the locations of offices; • how much interest can be paid on demand deposits; • insurance of deposits and the premiums that must be paid for this insurance; and • how much cash must be set aside as reserves for deposits |
| Our stock price may be volatile, which could result in substantial losses for our stockholders |
| The market price of our common stock could be subject to wide fluctuations in response to a number of factors, including: • issuing new equity securities; • the amount of our common stock outstanding and the trading volume of our stock; • actual or anticipated changes in our future financial performance; • changes in financial performance estimates of us by securities analysts; 24 ______________________________________________________________________ [62]Table of Contents • competitive developments, including announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; • the operating and stock performance of our competitors; • changes in interest rates; and • addition or departures of key personnel |
| Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common stock |
| In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock |
| Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock |
| Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both |
| If we issue preferred stock, we would have a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock |
| Because a decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings |
| Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock or diluting their stock holdings in us |