UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number: 000-50245

NARA BANCORP, INC.

(213) 639-1700

     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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   X   No       

     As of April 30, 2004, there were 11,585,089 outstanding shares of the issuer’s Common Stock, $0.001 par value.

Table of Contents

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

ASSETS

(Continued)

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NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes to consolidated financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2004 and 2003
(Unaudited)

See accompanying notes to consolidated financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2004 and 2003

(Unaudited)

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See accompanying notes to consolidated financial statements

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NARA BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2004 and 2003, unaudited

1. Nara Bancorp, Inc.

     Nara Bancorp, Inc. (“Nara Bancorp”, on a parent-only basis, and “we” or “our” on a condensed 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”) with branches in California and New York as well as Loan Production Offices in Seattle, Chicago, New Jersey, Atlanta, Virginia, and Denver.

2. Basis of Presentation

     Our condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations.

     The condensed consolidated financial statements include the accounts of Nara Bancorp and its wholly owned subsidiaries, principally Nara Bank, N. A. (the “Bank”). All intercompany transactions and balances have been eliminated in consolidation.

     Nara Bancorp also has five special-purpose subsidiaries that were formed for capital-raising transactions: Nara Capital Trust I, Nara Statutory Trust II, Nara Capital Trust III, Nara Statutory Trust IV, and Nara Statutory Trust V. With the adoption of FIN No. 46, Nara Bancorp deconsolidated the five grantor trusts as of December 31, 2003. As a result, the junior subordinated debentures issued by Bancorp to the grantor trusts, totaling $39.3 million, are reflected in our consolidated balance sheet in the liabilities section at March 31, 2004 and December 31, 2003, under the caption as “junior subordinated debentures.” We record interest expense on the corresponding junior subordinated debentures in the consolidated statement of income. We also recorded $2.0 million in other assets in the consolidated statement of financial condition at March 31, 2004 and December 31, 2003 for the common capital securities issued by the issuer trusts.

     We also believe that we have made all adjustments necessary to fairly present our financial position and the results of our operations for the interim period ended March 31, 2004. Certain reclassifications have been made to prior period figures in order to conform to the March 31, 2004 presentation. The results of operations for the interim period are not necessarily indicative of results for the full year.

     These condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in our 2003 Annual Report on Form 10-K/A.

3. Dividends

     On March 11, 2004, we declared a $0.05 per share cash dividend paid on April 12, 2004 to stockholders of record at the close of business March 31, 2004.

4. Earnings Per Share (“EPS”)

     Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company.

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5. Stock-Based Compensation

     Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. We have elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of our stock at the date of grant over the grant price.

     We have adopted the disclosure only provisions of SFAS No. 123. Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts as follows:

     The weighted-average fair value of options granted during the first quarter of 2004 was $12.46. The fair value of options granted under our stock option plans during the first quarter of 2004 was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used: 0.67% dividend yield, volatility of 38.68%, risk-free interest rate of 3.5% and expected lives of six years. We did not grant any options for the quarters ended March 31, 2003.

6. SBA

     Certain Small Business Administration (“SBA”) loans that we have the intent to sell prior to maturity have been designated as held for sale at origination and are recorded at the lower of cost or market value, on an aggregate basis. A valuation allowance is established if the aggregate market value of such loans is lower than their cost, and operations are charged or credited for valuation adjustments. A portion of the premium on sale of

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SBA loans is recognized as gain on sale of loans at the time of the sale. The remaining portion of the premium (relating to the portion of the loan retained) is deferred and amortized over the remaining life of the loan as an adjustment to yield. Servicing assets are recognized when loans are sold with servicing retained. Servicing assets are recorded based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate, plus 1 to 2%. Servicing assets are amortized in proportion to and over the period of estimated future net servicing income.

     We periodically evaluate servicing assets for impairment. At March 31, 2004, the fair value of servicing assets was determined using a weighted-average discount rate of 6.9% and a prepayment speed of 11.6%. At December 31, 2003, the fair value of servicing assets was determined using a weighted-average discount rate of 6.9% and a prepayment speed of 11.4%. For purposes of measuring impairment, servicing assets are stratified by loan type. An impairment is recognized if the carrying value of servicing assets exceeds the fair value of the stratum. The fair values of servicing assets exceed the carrying amount, and were approximately $3,406,000 and $3,376,000 at March 31, 2004 and December 31, 2003, respectively.

     An interest-only strip is recorded based on the present value of the excess of the total future income from serviced loans over the contractually specified servicing fee, calculated using the same assumptions as used to value the related servicing assets. Such interest-only strip is accounted for at estimated fair value, with unrealized gain or loss, net of tax, recorded as a component of accumulated other comprehensive income (loss).

7. Goodwill and Intangible Assets

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001 and also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill and those acquired intangible assets that are required to be included in goodwill. SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. Additionally, SFAS No. 142 requires recognized intangible assets to be amortized over their respective estimated useful lives and reviewed for impairment. We adopted SFAS No. 142 on January 1, 2002.

     We tested goodwill for impairment as of December 31, 2003, noting no impairment in recorded goodwill of $1.9 million. No conditions indicated any further impairment as of March 31, 2004. There was no change in goodwill for the three months ended March 31, 2004 and 2003.

     We also tested intangible assets for impairment as of December 31, 2003, noting no impairment. We will continue to amortize intangible assets, representing core deposit intangibles, over their original estimated useful lives of seven years. There were no additions to core deposits intangibles during the three months ended March 31, 2004 and 2003.

     As of March 31, 2004, intangible assets subject to amortization include core deposit intangibles of $4,647,263 (net of $1,165,635 accumulated amortization) and servicing assets of $2,773,086 (net of $1,130,191 accumulated amortization). Amortization expense for such intangible asset was $326,585 for the three months ended March 31, 2004. Estimated amortization expense for intangible assets for the remainder of 2004 and the five succeeding fiscal years follows:

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8. Recent Accounting Pronouncements

     The FASB issued Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others, in November 2002. FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation did not have a material impact on our results of operations, financial position or cash flows.

     In January 2003, the FASB issued Interpretation No. 46 — “Consolidation of Variable Interest Entities” (“FIN 46”). In December 2003, the FASB revised FIN 46 and codified certain FASB Staff Positions previously issued for FIN 46 (“FIN 46R). The objective of FIN 46 as originally issued, and as revised by FIN 46R, was to improve financial reporting by companies involved with variable interest entities. Prior to the effectiveness of FIN 46, we generally included another entity in its consolidated financial statements only if we controlled the entity through voting interests. FIN 46 changed that standard by requiring a variable interest entity to be consolidated if we were subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to older entities in the first fiscal year or interim period beginning after June 15, 2003. The provisions of FIN 46R are required to be adopted prior to the first reporting period that ends after March 15, 2004. The adoption of FIN 46 and FIN46R did not have a significant impact on our financial position, results of operations, or cash flows.

     In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Although we anticipate that the implementation of SOP 03-3 will require significant loan system and operational changes to track credit related losses on loans purchased starting in 2005, we do not expect to have a significant effect on the consolidated financial statements.

9. Commitments and Contingencies

     We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Our exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for extending loan facilities to customers. We evaluate each customer’s creditworthiness on a case-by-case

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basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing properties.

Commitments at March 31, 2004 are summarized as follows:

     In the normal course of business, we are involved in various legal claims. We have reviewed all legal claims against us with counsel and have taken into consideration the views of such counsel as to the outcome of the claims. In our opinion, the final disposition of all such claims will not have a material adverse effect on our financial position and results of operations.

10. Derivative Financial Instruments and Hedging Activities

     As part of our asset and liability management strategy, we may engage in derivative financial instruments, such as interest rate swaps, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. During the second and fourth quarters of 2002, we entered into various interest rate swap agreements as summarized in the table below. Our objective for the interest rate swaps is to manage asset and liability positions in connection with our overall strategy of minimizing the impact of interest rate fluctuations on our interest rate margin. As part of our overall risk management, our Asset Liability Committee, which meets monthly, monitors and measures the interest rate risk and the sensitivity of our assets and liabilities to interest rate changes, including the impact of the interest rate swaps.

     Under the swap agreements, we receive a fixed rate and pay a variable rate based on H.15 Prime. The swaps qualify as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, and are designated as hedges of the variability of cash flows we receive from certain of our Prime-indexed loans. In accordance with SFAS No. 133, these interest rate swap agreements are measured at fair value and reported as assets or liabilities on the consolidated statement of financial condition. The portion of the change in the fair value of the interest rate swaps that is deemed effective in hedging the cash flows of the designated assets are recorded in accumulated other comprehensive income (“OCI”), net of tax and reclassified into interest income when such cash flows occur in the future. Any ineffectiveness resulting from the hedges is recorded as a gain or loss in the consolidated statement of income as a part of non-interest income. As of March 31, 2004, the amounts in accumulated OCI associated with these cash flows totaled $1,755,109 (net of tax of $1,170,072), of which $304,533 is expected to be reclassified into interest income within the next 12 months. As of March 31, 2004, the maximum length of time over which we are hedging our exposure to the variability of future cash flow is approximately 8.5 years.

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Interest rate swap information at March 31, 2004 is summarized as follows:

  1. Gain included in the consolidated statement of earnings for the three months ended March 31, 2004, representing hedge ineffectiveness.

  2. Prime rate is based on Federal Reserve statistical release H.15.

     During the first quarter of 2004 and 2003, interest income received from swap counterparties were $904,944 and $833,000, respectively. At March 31, 2004 and 2003, we pledged as collateral to the interest rate swap counterparty agency securities with a book value of $2.0 million and real estate loans of $2.1 million.

11. Business Segments

     Our management utilizes an internal reporting system to measure the performance of our various operating segments. We have identified three principal operating segments for purposes of management reporting: banking operation, trade finance (“TFS”), and small business administration (“SBA”). Information related to our remaining centralized functions and eliminations of intersegment amounts have been aggregated and included in banking operation. Although all three operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. The banking operation segment focuses primarily on commercial and consumer lending and deposit operations throughout our branch network. The TFS segment allows our import/export customers to handle their international transactions. Trade finance products include the issuance and collection of letters of credit, international collection, and import/export financing. The SBA segment provides our customers with the U.S. SBA guaranteed lending program.

     Operating segment results are based on our internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. We allocate indirect costs, including overhead expense, to the various segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. We allocate the provision for loan losses based on new loan originations for the period. We evaluate overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Future changes in our management structure or reporting methodologies may result in changes in the measurement of operating segment results.

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     The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2004 and 2003.

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12. Other Comprehensive Income

The following table shows the reclassification of other comprehensive income for the three months ended March 31, 2004 and 2003.

DISCLOSURE OF RECLASSIFICATION AMOUNT:

13. Other Than Temporary Impairment

     In March 2004, we recorded pretax impairment charge of $1.6 million on floating rate agency preferred stocks as a result of decline in market value due to the interest rate environment.

14. Business Combination

     On March 9, 2004, we signed a Purchase and Assumption Agreement with Interchange Bank, a New Jersey chartered bank, for the purchase of the Hackensack branch of Interchange. Upon closing of this transaction, we will assume the current lease as well as approximately $1.5 million in deposits and no loans. The transaction is expected to close during the second quarter of 2004 and is subject to normal closing conditions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following is management’s discussion and analysis of the major factors that influenced our consolidated results of operations and financial condition for the quarter ended March 31, 2004. This analysis should be read in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2003 and with the unaudited consolidated financial statements and notes as set forth in this report.

GENERAL

Selected Financial Data

     The following table sets forth certain selected financial data concerning the periods indicated:

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Forward-Looking Information

     Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because our business involves inherent risks and uncertainties. Risks and uncertainties include possible future deteriorating economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available for sale securities declining significantly in value as interest rates rise; and regulatory risks associated with the variety of current and future regulations which we are subject to. For additional information concerning these factors, see “Item 1. Business - Factors That May Affect Business or the Value of Our Stock” contained in our Form 10-K/A for the year ended December 31, 2003.

Critical Accounting Policies

     The preparation of the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances as of March 31, 2004.

     Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified six accounting policies that, due to judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the classification and valuation of investment securities, the methodologies that determine our allowance for loan losses, the treatment of non-accrual loans, the valuation of properties acquired through foreclosure, the valuation of retained interests and mortgage servicing assets related to the sales of Small Business Administration loans, and the valuation of

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derivative instruments. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.

     Our significant accounting principles are described in greater detail in our 2003 Annual Report on Form 10-K/A in the “Critical Accounting Policies” section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements — “Significant Accounting Policies” which are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. There has been no material modification to these policies during the quarter ended March 31, 2004

RESULTS OF OPERATIONS

Net income

     Our net income for the three months ended March 31, 2004 was $4.1 million or $0.35 per diluted share compared to $3.2 million or $0.29 per diluted share for the same quarter of 2003, which represented an increase of approximately $0.9 million or 28.1%. The increase resulted primarily from an increase in net interest income and noninterest income, resulting primarily from a growth in loans and investments as well as the sale of loans we originated, which was partially offset by higher noninterest expense.

     The annualized return on average assets was 1.31 % for the first quarter of 2004 compared to 1.32% for the same period of 2003. The annualized return on average equity was 18.66% for the first quarter of 2004 compared to 19.32% for the same period of 2003. The resulting efficiency ratios were 56.71% for the three months ended March 31, 2004 compared with 56.13% for the corresponding period of the preceding year. Excluding the other than temporary impairment on investment securities of $1.6 million, the efficiency ratio was 48.52% for the three months ended March 31, 2004.

Net Interest Income and Net Interest Margin

     Net Interest Income

     The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments, also referred to as interest-earning assets, and the interest paid on deposits and borrowed funds, also referred to as interest-bearing liabilities. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing deposits and borrowed funds. The net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities as well as by changes in yield earned on interest-earning assets and rates paid on interest-bearing liabilities.

     Net interest income before provision for loan losses was $13.3 million for the first quarter of 2004, which represented an increase of $3.4 million, or 34.3% from net interest income of $9.9 million for the same quarter of 2003. This increase was primarily due to an increase in average earning assets, mostly in loans. Average earning assets increased $261.0 million or 28.7% to $1,171.1 million for the first quarter of 2004, from $910.1 million for the same quarter of 2003.

     Interest income for the first quarter of 2004 was $17.2 million, which represented an increase of $3.3 million or 23.7% over interest income of $13.9 million for the same quarter of 2003. The increase was the net result of a $4.5 million increase in average interest-earning assets (volume change) off-set by a $1.2 million decrease in the yield earned on those average interest-earning assets (rate change).

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     Net Interest Margin

     The yield on average interest-earning assets decreased to 5.89% for the three months ended March 31, 2004, from a yield of 6.13% for the three months ended March 31, 2003. This decrease is mainly due to an additional 25 basis point decrease in prime rate by the Federal Reserve Board (“FRB”) between these periods.

     Interest expense for the first quarter of 2004 was $3.9 million, which represented a decrease of $0.2 million or 4.9% over interest expense of $4.1 million for the same quarter of 2003. The decrease was the net result of a $987,000 increase in average interest-bearing liabilities (volume change) off-set by a $1.1 million decrease in the cost of those interest-bearing liabilities (rate change).

     The average cost of interest-bearing liabilities decreased to 1.87% for the three months ended March 31, 2004 from 2.44% for the three months ended March 31, 2003. This decrease is mainly due to decreases in market rates.

     The net interest margin was 4.55% for the three months ended March 31, 2004, up from 4.34% for the same quarter of 2003. The increase in the net interest margin resulted primarily from a decrease in cost of interest bearing liabilities

     The following table presents our condensed average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the three-month periods indicated:

     The following table illustrates the changes in our interest income, interest expense, amount attributable to variations in interest rates, and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the changes due to volume and the changes due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

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Provision for Loan Losses

     The provision for loan losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties and regulators of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in our market area. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that, in our judgment, is adequate to absorb losses inherent in our loan portfolio. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary from current estimates.

     We recorded $1.5 million in provision for loan losses in the first quarter of 2004 compared to $1.3 million in the same quarter of 2003. The increase in the provision for loan losses for the quarter ended March 31, 2004, compared to the same period ended March 31, 2003 was due to several factors including the growth experienced in our loan portfolio and our levels of nonperforming assets. We believe that the allowance is sufficient for the known and inherent losses at March 31, 2004. Refer to Allowance and Provision for Loan Losses section for further discussion.

Non-interest Income

     Non-interest income includes revenues earned from sources other than interest income. It is primarily comprised of service charges and fees on deposits accounts, fees received from letter of credit operations, and gains on sale of SBA loans and investment securities.

     Non-interest income for the first quarter of 2004 was $5.9 million compared to $4.8 million for the same quarter of 2003, which represented an increase of $1.1 million, or 21.6%, primarily as a result of increase in service charges on deposits, gain on sale of investment securities, and gain on interest rate swaps. Service charges on deposits increased $303,000 or 17.6% to $2.0 million for the first quarter of 2004 from $1.7 million for the same quarter of 2003. This increase is mainly due to increase in the balance of average demand deposits. Average demand deposits balance increased $83.3 million or 35.8% to $316.1 million for the first quarter of 2004 from $232.7 million for the same quarter of 2003. Gain in sale of investment securities increased $146,000 or 91.8% to $305,000 for the first quarter of 2004 from $159,000 for the same quarter of 2003. We

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also recognized a gain of $720,000 for the first quarter of 2004 from the interest rate swap transactions, which was the ineffective portion of the swaps that related to cash flow hedge, compared to $148,000 for the same quarter of 2003. This increase represented an increase of $572,000 or 386.5%.

     The summary of our non-interest income by category is illustrated below:

Non-interest Expense

     Non-interest expense for the first quarter of 2004 was $10.9 million compared to $8.3 million for the same quarter of 2003, which represented an increase of $2.6 million or 31.8%, primarily due to the recognition of other than temporary impairment charge of $1.6 million in U.S. Agency Preferred Stock and an increase in expenses related to personnel and occupancy. In March 2004, we recorded pretax impairment charge of $1.6 million on floating rate agency preferred stocks as a result of decline in market value due to the interest rate environment. Excluding this impairment charge, non-interest expense for the first quarter of 2004 was $9.3 million, which represented an increase of $1.0 million or 12.0% from the corresponding same quarter of 2003. Salary and benefit expense increased $321,000 or 7.0% to $4.9 million for the first quarter of 2004 from $4.6 million for the same quarter of 2003 primarily due to an increase in staff from the acquisition of Asiana Bank, opening of our Wilshire and Diamond Bar branches and loan production offices. Occupancy expenses increased $236,000 or 22.9% to $1.3 million for the first quarter of 2004 from $1.0 million for the same quarter of 2003. This increase was also due to the acquisition and opening of new branches and loan production offices in addition to the general increases to the existing building leases.

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     The summary of our non-interest expenses is illustrated below:

Provision for Income Taxes

     The provision for income taxes was $2.7 million and $1.9 million on income before taxes of $6.8 million and $5.2 million for the three months ended March 31, 2004 and 2003, respectively. The effective tax rate for the quarter ended March 31, 2004 was 39.2%, compared with 37.2% for the quarter ended March 31, 2003.

Financial Condition

     At March 31, 2004, our total assets were $1,278.0 million, an increase of $18.0 million or 1.4% from $1,260.0 million at December 31, 2003. The growth resulted primarily from increases in our loans funded by growth in deposits.

Investment Securities Portfolio

     We classify our securities as held-to-maturity or available-for-sale under SFAS No. 115. Those 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”. We did not own any trading securities at March 31, 2004 and 2003. Securities that are held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities that are available for sale are stated at fair value. The securities we currently hold are government-sponsored agency bonds, corporate bonds, collateralized mortgage obligations, U.S. government agency preferred stocks, and municipal bonds.

     As of March 31, 2004, we had $2.0 million of held-to-maturity securities and $125.4 million of available-for-sale securities, compared to $2.0 million and $126.4 million at December 31, 2003. The total net unrealized gain on the available-for sale securities at March 31, 2004 was $1.3 million, compared to net unrealized loss of $1.5 million at December 31, 2003. During the first quarter of 2004, we purchased a total of $17.4 million in available-for-sale securities and sold $6.0 million and recognized total gross gains of $304,976.

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The unrealized losses were created due to temporary condition, mainly fluctuations in interest rates and do not reflect a deterioration of credit quality of the issuer. As of March 31, 2004, the market value of securities which have unrealized losses in 12 months or more totaled $8.2 million with unrealized losses of $25,000. In March 2004, as a result of an other than temporary decline in market value due to interest rates a $1.6 million charge was taken for floating rate agency preferred stocks.

     Securities with an amortized cost of $5.4 million were pledged to secure public deposits and for other purposes as required or permitted by law at March 31, 2004. Securities with an amortized cost of $30.6 million and $63.4 million were pledged to FHLB of San Francisco and State of California Treasurer’s Office, respectively, at March 31, 2004.

     The following table summarizes the book value, market value and distribution of our investment securities portfolio as of dates indicated:

Investment Portfolio