Hope Bancorp (HOPE) 10-Q 2005 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005 or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

Commission File Number: 000-50245

NARA BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4849715
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

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

(213) 639-1700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     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. Yeso Noþ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

     As of May 30, 2005, there were 23,654,596 outstanding shares of the issuer’s Common Stock, $0.001 par value.

Table of Contents

		Page
PART I FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Statements of Financial Condition - March 31, 2005 (unaudited) and December 31, 2004		3
	Condensed Consolidated Statements of Income - Three Months Ended March 31, 2005 and 2004 (unaudited)		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2005 and 2004 (unaudited)		6
	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2005 and 2004 (unaudited)		7
	Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		32
Item 4.	CONTROLS AND PROCEDURES		35
PART II OTHER INFORMATION
Item 1.	Legal Proceeding		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.	Defaults Upon Senior Securities		38
Item 4.	Submission of Matters to a Vote of Securities Holders		38
Item 5.	Other Information		38
Item 6.	Exhibits		38
	Signature		39
	Index to Exhibits		40
	Certifications
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements
NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

ASSETS	(Unaudited)
	March 31,		December 31,
	2005		2004
Cash and cash equivalents:
Cash and due from banks	$	28,308,301	$	27,712,221
Federal funds sold		20,500,000		47,500,000
Term federal funds sold		12,000,000		12,000,000
Total cash and cash equivalents		60,808,301		87,212,221
Interest bearing deposits with other financial institutions		95,000		—
Securities available for sale, at fair value		134,282,710		133,385,948
Securities held to maturity, at amortized cost (fair value:
March 31, 2005 - $2,069,658; December 31, 2004- $2,087,717)		2,000,966		2,001,071
Interest-only strips, at fair value		676,928		714,046
Loans held for sale, at the lower of cost or market		7,083,797		4,729,911
Loans receivable, net of allowance for loan losses (March 31, 2005 - $15,715,230; December 31, 2004 - $14,626,760)		1,310,143,738		1,207,107,713
Federal Reserve Bank stock , at cost		1,803,300		1,803,300
Federal Home Loan Bank (FHLB) Stock, at cost		5,193,500		4,801,800
Premises and equipment, net		6,845,891		6,869,553
Accrued interest receivable		6,157,151		5,124,017
Servicing assets		3,688,509		3,668,461
Deferred income taxes		15,477,830		14,073,602
Customers’ liabilities on acceptances		6,834,193		7,447,983
Cash surrender value of life insurance		14,321,650		14,226,314
Goodwill		1,909,150		1,909,150
Intangible assets, net		4,118,347		4,305,450
Other assets		8,791,718		8,284,227
Total assets	$	1,590,232,679	$	1,507,664,767

(Continued)

3

NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:	(Unaudited)
	March 31,			December 31,
	2005			2004
Deposits:
Noninterest bearing	$	363,614,231		$	328,325,741
Interest bearing:
Money market and other		270,703,090			323,477,365
Savings deposits		111,673,686			118,856,820
Time deposits of $100,000 or more		527,767,763			407,100,231
Other time deposits		83,504,544			78,214,767
Total deposits		1,357,263,314			1,255,974,924
Borrowings from Federal Home Loan Bank		63,500,000			90,000,000
Accrued interest payable		4,345,029			3,411,609
Acceptances outstanding		6,834,193			7,447,983
Interest rate swaps — at fair value		2,321,887			149,349
Subordinated debentures		39,268,000			39,268,000
Other liabilities		12,617,830			10,158,345
Total liabilities		1,486,150,253			1,406,410,210
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; authorized, 40,000,000 shares at March 31, 2005 and December 31, 2004 issued and outstanding, 23,366,660 and 23,333,338 shares at March 31, 2005 and December 31, 2004, respectively		23,367			23,333
Capital surplus		45,071,723			44,902,604
Deferred compensation		—			(2,556	)
Retained earnings		61,610,738			56,848,237
Accumulated other comprehensive income (loss), net:		(2,623,402	)		(517,061	)
Total stockholders’ equity		104,082,426			101,254,557
Total liabilities and stockholders’ equity	$	1,590,232,679		$	1,507,664,767

See accompanying notes to condensed consolidated financial statements (unaudited)

4

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2005 and 2004
(Unaudited)

	Three Months Ended March 31,
	2005			2004
				(Restated)
INTEREST INCOME:
Interest and fees on loans	$	22,038,324		$	14,880,016
Interest on securities		1,400,203			1,340,526
Interest on interest rate swaps		416,888			904,944
Interest on federal funds sold and other investments		238,505			120,547
Total interest income		24,093,920			17,246,033
INTEREST EXPENSE:
Interest on deposits		5,458,135			3,082,960
Interest on subordinated debentures		656,672			558,692
Interest on other borrowings		647,023			292,303
Total interest expense		6,761,830			3,933,955
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		17,332,090			13,312,078
PROVISION FOR LOAN LOSSES		1,650,000			1,500,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		15,682,090			11,812,078
NON-INTEREST INCOME:
Service charges on deposit accounts		1,577,880			2,027,331
Other income and fees		1,878,630			1,926,050
Net gains on sales of SBA loans		749,097			840,879
Net gains on sales of securities available-for sale		15,158			304,976
Net gains (losses) on sales of premises and equipment		(5,879	)		(217	)
Net gains (losses) on interest rate swaps		(35,326	)		719,735
Other than temporary impairment on securities		—			(1,633,166	)
Total non-interest income		4,179,560			4,185,588
NON-INTEREST EXPENSES:
Salaries and employee benefits		5,262,665			5,818,327
Occupancy		1,596,233			1,460,469
Furniture and equipment		510,034			419,195
Advertising and marketing		390,118			306,540
Communications		186,248			161,420
Data processing		609,507			572,601
Professional fees		756,470			329,801
Office supplies and forms		97,422			98,627
Other		1,291,797			1,100,241
Total non-interest expenses		10,700,494			10,267,221
INCOME BEFORE INCOME TAX PROVISION		9,161,156			5,730,445
INCOME TAX PROVISION		3,756,074			2,189,974
NET INCOME	$	5,405,082		$	3,540,471
EARNINGS PER SHARE
Basic	$	0.23		$	0.15
Diluted		0.22			0.14

See accompanying notes to condensed consolidated financial statements (unaudited)

5

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2005 and 2004

(Unaudited)

																	Accumulated
																	Other
	Number of																Comprehensive
	Shares				Common			Capital			Deferred			Retained			Income			Comprehensive
	Outstanding				Stock			Surplus			Compensation			Earnings			(loss) , net			Income
BALANCE, JANUARY 1, 2005		23,333,338			$	23,333		$	44,902,604		$	(2,556	)	$	56,848,237		$	(517,061	)
Stock options exercised		34,656				35			176,784
Amortization of restricted stock		(1,334	)			(1	)		(7,665	)		639
Forfeiture of restricted stock												1,917
Cash dividends declared ($0.0275 per share)															(642,581	)
Comprehensive income:
Net income															5,405,082					$	5,405,082
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available for sale and interest-only-strips , net of tax																		(824,013	)		(824,013	)
Change in unrealized gain (loss) on interest rate swaps — net of tax																		(1,282,328	)		(1,282,328	)
				��
Total comprehensive income																				$	3,298,741
BALANCE, MARCH 31, 2005		23,366,660			$	23,367		$	45,071,723		$	—		$	61,610,738		$	(2,623,402	)
BALANCE, JANUARY 1, 2004 (restated)		23,120,178			$	23,120		$	43,046,200		$	(10,222	)	$	39,566,995		$	(54,571	)
Stock options exercised		50,000				50			233,850
Tax benefit from stock options exercised									200,176
Amortization of restricted stock												1,916
Cash dividends declared ($0.0275 per share)															(579,932	)
Comprehensive income:
Net income (restated)															3,540,471					$	3,540,471
Other comprehensive income:
Change in unrealized gain (loss) on securities available for sale and interest-only- strips, net of tax																		1,701,238			1,701,238
Change in unrealized gain (loss) on interest rate swaps — net of tax																		974,578			974,578
Total comprehensive income																				$	6,216,287
BALANCE, MARCH 31, 2004 (restated)		23,170,178			$	23,170		$	43,480,226		$	(8,306	)	$	42,527,534		$	2,621,245

See accompanying notes to condensed consolidated financial statements (unaudited)

6

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)

	2005			2004
				(Restated)
CASH FLOW FROM OPERATING ACTIVITIES
Net income	$	5,405,082		$	3,540,471
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation, amortization, and accretion		799,588			746,396
Other than temporary impairment on investment securities		—			1,633,166
Provision for loan losses		1,650,000			1,500,000
Proceeds from sales of loans		14,108,352			11,208,392
Originations of loans held for sale		(15,713,141	)		(11,844,203	)
Net gains on sales of loans		(749,097	)		(840,879	)
Net gains on sales of securities available for sale		(15,158	)		(304,976	)
Net change in cash surrender value of life insurance		(95,336	)		(127,995	)
Net losses on sales of premises and equipment		5,879			217
Net losses (gains) on interest rate swaps		35,326			(719,735	)
Change in accrued interest receivable		(1,033,134	)		380,231
Deferred income taxes		—			(2,172	)
FHLB stock dividends		—			(48,500	)
Change in other assets		(663,027	)		(837,335	)
Change in accrued interest payable		933,420			121,891
Change in interest-only strips		3,955			(63,093	)
Change in other liabilites		2,459,485			1,375,225
Net cash from operating activities		7,132,194			5,717,101
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable		(104,686,025	)		(51,717,177	)
Purchase of premises and equipment		(409,074	)		(184,125	)
Purchase of securities available for sale		(14,854,998	)		(17,400,790	)
Net change in interest-bearing deposits with other financial institutions		(95,000	)		—
Purchase of FHLB stock		(391,700	)		(396,100	)
Proceeds from sales of premises and equipment		—			508
Proceeds from sales of securities available for sale		7,416,970			6,290,803
Proceeds from matured or called securities available for sale		5,160,131			13,586,399
Proceeds from redemption of FHLB stock		—			1,091,500
Net cash from investing activities		(107,859,696	)		(48,728,982	)

(Continued)

7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)

	2005			2004
				(Restated)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		101,288,390			19,240,025
Payments of cash dividends		(641,627	)		(577,685	)
Payments for FHLB borrowings		(65,000,000	)		(50,000,000	)
Proceeds from FHLB borrowings		38,500,000			42,000,000
Proceeds from exercise of stock options		176,819			233,900
Net cash from financing activities		74,323,582			10,896,240
NET CHANGE IN CASH AND CASH EQUIVALENTS		(26,403,920	)		(32,115,641	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		87,212,221			76,438,497
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	60,808,301		$	44,322,856
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	5,828,410		$	3,812,064
Income taxes paid	$	320,000		$	1,672,500

See accompanying notes to condensed consolidated financial statements (unaudited)

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Nara Bancorp, Inc.

     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 (“Nara Bank”), which was organized in 1989 as a national bank and converted to a California state-chartered bank on January 3, 2005, with branches in California and New York as well as Loan Production Offices in California, Washington, Colorado, Georgia, Illinois, New Jersey, Virginia and Texas.

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 (the “Bank”). All intercompany transactions and balances have been eliminated in consolidation.

     We 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, 2005. Certain reclassifications have been made to prior period amounts to conform to the March 31, 2005 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 2004 Annual Report on Form 10-K.

3. Restatement

The financial information as of and for the three months ended March 31, 2004 is labeled “restated” as it has been revised from the information previously reported and filed for the quarter ended March 31, 2004 on Form 10-Q. The restatement is further discussed in Note 2 to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K.

4. 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 employees 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:

9

	For the three months ended
	March 31,
	2005			2004
				(Restated)
Net income—as reported	$	5,405,082		$	3,540,471
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards—net of related tax effects		(278,746	)		(239,038	)
Pro forma net income	$	5,126,336		$	3,301,433
EPS:
Basic—as reported	$	0.23		$	0.15
Basic—pro forma		0.22			0.14
Diluted—as reported	$	0.22		$	0.14
Diluted—pro forma		0.21			0.14

     The fair value of options granted and pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of the grant date.

	March 31,
	2005			2004
Risk-free interest rate		3.9	%		3.5	%
Expected option life (years)		3.3			6.0
Expected stock price volatility		35.7	%		38.5	%
Dividend yield		0.5	%		0.5	%
Weighted average fair value of options granted during the period	$	7.67		$	6.21

See Note 8 for discussions regarding changes in accounting for stock-based compensation that will take an effect on January 1, 2006.

5. Dividends

     On March 10, 2005, we declared a $0.0275 per share cash dividend paid on April 12, 2005 to stockholders of record at the close of business on March 31, 2005. On June 23, 2005, we declared a $0.0275 per share cash dividend payable on July 17, 2005 to stockholders of record at the close of business on July 5, 2005.

6. Earnings Per Share (“EPS”)

     Basic EPS excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Allocated ESOP shares are considered outstanding for this calculation. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings.

10

     The following table shows how we computed basic and diluted EPS for the periods ended March 31, 2005 and 2004.

	For the three months ended March 31,
	2005						2004 (Restated)
	Net Income		Shares		Per Share		Net Income		Shares		Per Share
	(Numerator)		(Denominator)		(Amount)		(Numerator)		(Denominator)		(Amount)
Basic EPS	$	5,405,082		23,353,801	$	0.23	$	3,540,471		23,156,222	$	0.15
Effect of Dilutive Securities:
Stock Options		—		1,315,920				—		1,279,334
Diluted EPS	$	5,405,082		24,669,721	$	0.22	$	3,540,471		24,435,556	$	0.14

7. Stock Splits

     On May 17, 2004, Nara Bancorp announced that its Board of Directors had approved a two-for-one split of its common stock, effected in the form of a 100% stock dividend, which was distributed on June 15, 2004 to stockholders of record on the close of business on May 31, 2004. The effect of this dividend is that stockholders received one additional share of Nara Bancorp common stock for each share owned. All share and per share information has been restated to reflect the stock split.

8. Recent Accounting Pronouncements

     EITF Issue 03-1 entitled, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”,contains accounting guidance regarding other-than temporary impairment on securities that was to take effect for the quarter ended September 30, 2004. However, the effective date of portions of this guidance has been delayed, and more interpretive guidance is to be issued in the near future. The effect of this new and pending guidance on our financial statements is not known, but it is possible this guidance could change management’s assessment of other-than-temporary impairment in future periods. (See also note 11, herein and see discussion in Note 3 of the Notes to Consolidated Financial Statements for year end December 31, 2004 included in our 2004 Annual Report on Form 10-K related to the fair value of securities available for sale.)

     FAS 123, Revised, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified on or after January 1, 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future dates, as well as the vesting periods provided, and so the effect cannot currently be predicted.

     SOP 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. The effect of this new standard on our financial position and results of operations is not expected to be material upon adoption.

11

9. Loan Receivable and Allowance For Loan Losses

     The following is a summary of loans by major category:

	March 31, 2005			December 31, 2004
Commercial loans	$	465,761,616		$	441,940,400
Real estate loans		796,962,173			717,746,940
Consumer and other loans		66,180,571			64,844,647
		1,328,904,360			1,224,531,987
Unamortized deferred loan fees—net of costs		(3,045,392	)		(2,797,514	)
Allowance for loan losses		(15,715,230	)		(14,626,760	)
Loans receivable—net	$	1,310,143,738		$	1,207,107,713

     Activity in the allowance for loan losses is as follows for the period indicated:

	Three months ended March 31,
	2005			2004
Balance, beginning of period	$	14,626,760		$	12,470,735
Provision for loan losses		1,650,000			1,500,000
Loans charged off		(855,809	)		(717,041	)
Recoveries of charge-offs		294,279			309,984
Balance, end of period	$	15,715,230		$	13,563,678

     At March 31, 2005, December 31, 2004 and March 31, 2004, the Company had classified $2.6 million, $2.8 million and $5.3 million, respectively, of its commercial and real estate loans as impaired, with specific loss allocations of $975 thousand, $797 thousand and $1.3 million, respectively. There were no impaired loans without specific loss allocations. At March 31, 2005, loans on non-accrual status totaled $3.8 million compared to $2.7 million at December 31, 2004 and $5.1 million at March 31, 2004. At March 31, 2005 and December 31, 2004, there were no loans past due more than 90 days and still accruing interest, compared to $179 thousand at March 31, 2004.

10. Derivative Financial Instruments and Hedging Activities

     Under the interest rate swap agreements that the Company has entered into, the Company receives a fixed rate and pays a floating rate. The interest rate swaps qualify as cash flow hedges for accounting purposes, and effectively fix the interest rate received on $140,000,000 of variable rate loans indexed to Prime. As of March 31, 2005, the amounts in accumulated other comprehensive income (loss) associated with these cash flow hedges totaled a loss of $1,456,083 (net of tax benefit of $970,722), of which $48,712 are expected to be reclassified as a reduction into interest income within the next 12 months. As of March 31, 2005, the maximum length of time over which the Company is hedging its exposure to the variability of future cash flows is approximately 7.5 years.

12

Interest rate swap information at March 31, 2005 is summarized as follows:

Current Notional											Unrealized Gain
Amount		Floating Rate	Fixed Rate			Maturity Date		Fair Value			(Loss)
$	20,000,000	H.15 Prime1		6.95	%		4/29/2005	$	15,390		$	11,643
	20,000,000	H.15 Prime1		7.59	%		4/30/2007		218,229			117,058
	20,000,000	H.15 Prime1		6.09	%		10/09/2007		(509,098	)		(509,098	)
	20,000,000	H.15 Prime1		6.58	%		10/09/2009		(679,572	)		(679,572	)
	20,000,000	H.15 Prime1		7.03	%		10/09/2012		(753,434	)		(753,434	)
	20,000,000	H.15 Prime1		5.60	%		12/17/2005		(137,908	)		(137,908	)
	10,000,000	H.15 Prime1		6.32	%		12/17/2007		(223,430	)		(223,430	)
	10,000,000	H.15 Prime1		6.83	%		12/17/2009		(252,064	)		(252,064	)
$	140,000,000							$	(2,321,887	)	$	(2,426,805	)

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

     The realized gain or (loss) on interest rate swaps due to hedge ineffectiveness was ($35,326) and $719,735 for the three months ended March 31, 2005 and 2004, respectively.

     During the first quarters of 2005 and 2004, interest income recorded on swap transactions totaled $416,888 and $904,944, respectively. At March 31, 2005, we pledged as collateral to the interest rate swap counterparties agency securities with a book value of $2.0 million and real estate loans of $4.9 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 the purposes of management reporting: banking operations, trade finance services (“TFS”), and small business administration (“SBA”) lending services. Information related to our remaining centralized functions and eliminations of inter-segment amounts has been aggregated and included in banking operations. Although all three operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. The banking operations segment focuses primarily on commercial and consumer lending and deposit operations throughout our branch network. The TFS segment focuses primarily on allowing 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 access to 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. Non-interest income and non-interest 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 the origination of new loans for the period. We evaluate the overall performance based on profit or loss from operations before income taxes excluding gains and losses that are not expected to reoccur. Future changes in our management structure or reporting methodologies may result in changes to the measurement of our operating segment results.

13

     The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2005 and 2004.

Three Months Ended March 31,
(Dollars in thousands)

Business Segment
Banking
Operations	TFS	SBA	Company

2005
Net interest income, before provision for loan loss	$	13,618	$	1,404	$	2,310	$	17,332
Less provision for loan losses		1,610		20		20		1,650
Non-interest income		2,286		702		1,191		4,179
Net revenue		14,294		2,086		3,481		19,861
Non-interest expense		8,849		716		1,135		10,700
Income before taxes	$	5,445	$	1,370	$	2,346	$	9,161
Goodwill	$	1,909	$	—	$	—	$	1,909
Total assets	$	1,249,708	$	125,763	$	214,762	$	1,590,233
2004 (restated)
Net interest income, before provision for loan loss	$	8,483	$	3,021	$	1,808	$	13,312
Less provision for loan losses		810		430		260		1,500
Non-interest income		2,334		655		1,196		4,185
Net revenue		10,007		3,246		2,744		15,997
Non-interest expense		7,228		2,260		779		10,267
Income before taxes	$	2,779	$	986	$	1,965	$	5,730
Goodwill	$	1,909	$	—	$	—	$	1,909
Total assets	$	1,003,740	$	97,291	$	176,718	$	1,277,749

12. Other-Than-Temporary Impairment

     For the three months ended March 31, 2004 and for the year ended December 31, 2004, we recorded an impairment charge of $1.6 million and $2.6 million, respectively on government sponsored enterprise preferred stocks as a result of other-than-temporary declines in their market values. Management determined that the unrealized losses on these securities at March 31, 2004 and December 31, 2004 should be considered other-than-temporary and therefore recorded as impairment charges as these investments had significant unrealized loss positions for more than one year and it was difficult to forecast significant market value recovery in a reasonable time frame. During the first quarter of 2005, those government sponsored enterprise preferred stocks were sold, resulting in a gain of approximately $15,000.

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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 three-month periods ended March 31, 2005 and 2004. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004 and with the unaudited consolidated financial statements and notes set forth in this report.

GENERAL

     On March 30, 2005, Nara Bancorp filed a Form 8-K announcing that on February 23, 2005, a letter (the “Letter”) dated October 10, 2002 addressed to the former President and Chief Executive Officer of Nara Bancorp, Inc. (the “Company”) and signed by the former Chairman of the Board of the Company was brought to the attention of the Audit Committee. The Letter addressed the relinquishment of certain profit sharing rights held by the former President and Chief Executive Officer payable in 2003 and 2004 and the Letter further provided that Nara Bank, a wholly-owned subsidiary of the Company, purportedly agreed to reimburse the former President and Chief Executive Officer for certain automobile and country club expenses and to provide him with compensation for additional work to be performed after his retirement, all in an amount not to exceed the amount of profit sharing rights to be relinquished by him.

     A special sub-committee of the Audit Committee of the Board of Directors of the Company (the “Subcommittee”) engaged independent counsel to conduct an investigation of matters relating to the Letter. The Subcommittee discovered that the amount the former President and Chief Executive Officer relinquished was approximately $600,000 in 2003 and $0 in 2004. The Subcommittee determined that the failure to disclose and account for the arrangement to reimburse certain expense amounts up to approximately $600,000 contemplated by the Letter had an effect on the Company’s previously issued consolidated financial statements for the years ended December 31, 2003 and 2002. The Subcommittee evaluated the error in accordance with the quantitative and qualitative guidance set forth in SEC Staff Accounting Bulletin No. 99. As a result thereof, on March 24, 2005, the Subcommittee concluded (and on March 25, 2005 the Board of Directors concurred) that the Company should restate its consolidated financial statements for the years ended December 31, 2003 and 2002 and, accordingly, the previously issued financial statements and the related independent auditors reports thereon for the years ended December 31, 2003 and 2002 should no longer be relied upon. The Subcommittee discussed this conclusion with the Company’s independent registered public accounting firm for 2004 as well as its former independent registered public accounting firm for 2003 and 2002. Additionally, the Subcommittee engaged its current independent registered public accounting firm to re-audit the Company’s 2003 and 2002 consolidated financial statements.

     On March 30, 2005, the Company announced in a current report on Form 8-K that it was restating its consolidated financial statements for the fiscal years ended December 31, 2003 and 2002. In the course of the re-audits of the Company’s consolidated financial statements for the fiscal years ended December 31, 2003 and 2002, certain additional errors were also identified (i.e., other than the one relating to the Letter) in the Company’s consolidated financial statements for 2003 and 2002. Specifically, errors were identified in accounting for bank owned life insurance, lease arrangements under which the Company occupies its premises, incentive compensation, profit sharing and bonus payments to certain employees and various other accounting matters. Accordingly, the Company’s 2003 and 2002 consolidated financial statements and previously released information for 2004 were restated for these accounting errors and the restated financial statements were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     All financial information contained in this Quarterly Report on Form 10-Q as of and for the three months ended March 31, 2004, and as of and for the year ended December 31, 2004 gives effect to the restatement discussed above (the “Restatement”). Information regarding the effect of the restatement on our financial position as of December 31, 2004 and results of operations for the three months ended March 31, 2004 is provided in Note 2 to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

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Selected Financial Data

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

	At or For The Three Months Ended March 31,
	2005		2004
	(Dollars in thousands, except per share data)
			(Restated)
Income Statement data:
Interest income	$	24,094	$	17,246
Interest expense		6,762		3,934
Net interest income		17,332		13,312
Provision for loan losses		1,650		1,500
Net interest income after provision for loan losses		15,682		11,812
Non-interest income		4,179		4,185
Non-interest expense		10,700		10,267
Income before income tax provision		9,161		5,730
Income tax provision		3,756		2,190
Net income	$	5,405	$	3,540
Per Share Data: *
Earnings per share — basic	$	0.23	$	0.15
Earnings per share — diluted		0.22		0.14
Book value (period end)	$	4.45	$	3.83
Common shares outstanding		23,366,660		23,170,178
Weighted average shares — basic		23,353,801		23,156,222
Weighted average shares — diluted		24,669,721		24,435,556
Statement of Financial Condition Data — At Period End:
Assets	$	1,590,233	$	1,277,749
Securities available for sale and held to maturity		136,284		127,384
Gross loan, net of deferred loan fees and costs (excludes loans held for sale)		1,325,859		1,048,609
Deposits		1,357,263		1,080,655
Federal Home Loan Bank borrowings		63,500		52,000
Subordinated debentures		39,268		39,268
Stockholders’ equity		104,082		88,644

* Number of shares and per share data were retroactively adjusted for the stock split declared on May 17, 2004.

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	For The Three Months Ended March 31,
	2005			2004
	(Dollars in thousands, except per share data)
				(Restated)
Average Balance Sheet Data:
Assets	$	1,533,157		$	1,262,861
Securities available for sale and held to maturity		138,386			127,990
Gross loans, including loans held for sale		1,277,808			1,027,993
Deposits		1,277,592			1,062,369
Stockholder’s equity		102,687			86,363
Selected Performance Ratios:
Return on average assets (1)		1.41	%		1.12	%
Return on average stockholders’ equity (1)		21.05	%		16.40	%
Non-interest expense to average assets (1)		2.79	%		3.25	%
Efficiency ratio (2)		49.74	%		58.68	%
Net interest margin (3)		4.79	%		4.50	%
Regulatory Capital Ratios (4)
Leverage capital ratio (5)		8.74	%		8.70	%
Tier 1 risk-based capital ratio		9.43	%		9.88	%
Total risk-based capital ratio		10.95	%		11.70	%
Asset Quality Ratios:
Allowance for loan losses to gross loans		1.19	%		1.29	%
Allowance for loan losses to non-performing loans		409.46	%		259.15	%
Total non-performing assets to total assets (6)		0.26	%		0.44	%

(1)	Calculations are based on annualized net income.
(2)	Efficiency ratio is defined as non-interest expense divided by the sum of net interest income and noninterest income plus non-interest income.
(3)	Net interest margin is calculated by dividing annualized net interest income by average total interest earning assets.
(4)	The required ratios for the “well-capitalized” institution are 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital.
(5)	Calculations are based on average quarterly asset balances.
(6)	Non-performing assets include non-accrual loans, other real estate owned, and restructured loans.

Forward-Looking Information

     Certain matters discussed in this report may constitute forward-looking statements under Section 27A of the Securities Act of 1933 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 to which we are subject. For additional information concerning these factors, see “Item 1. Business — Factors That May Affect Business or The Value of Our Stock” contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

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RESULTS OF OPERATIONS

     You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statements and accompanying notes presented elsewhere in this Report. This discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Business—Factors That May Impact Our Business or the Value of Our Stock” and elsewhere in this Report.

Overview

     Nara Bancorp, Inc. is a bank holding company headquartered in Los Angeles, California. We offer a full range of commercial banking and consumer financial services through our wholly owned subsidiary, Nara Bank, a California state-chartered bank. Nara Bank primarily focuses its business in Korean communities in California and in the greater New York City metropolitan area. Through our network of 16 branches and 8 loan production offices, we offer commercial banking and consumer financial services to 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, commercial real estate loans, trade finance, Small Business Administration (SBA) loans, automobile and various consumer loans.

     Our principal business involves earning interest on loans and investment securities that are funded by customer deposits and other borrowings. Our operating income and net income derives primarily from the difference between interest income received from interest-earning assets and interest expense paid on interest-bearing liabilities and, to a lesser extent, from fees received in connection with servicing loan and deposit accounts and fees from the sale of SBA loans. Our major expenses are the interest we pay on deposits and borrowings and general operating expenses which primarily consist of salaries and employee benefits, occupancy, and provision for loan losses. Interest rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment. We cannot predict the impact that future changes in domestic and foreign economic conditions might have on our performance.

     Our business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board (FRB). The FRB 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 FRB 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 of future changes in monetary and fiscal policies cannot be predicted.

     From time to time, legislation and regulations are enacted which have 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 our operating environment 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.

     We have a significant geographic concentration in the Korean communities in California and in the greater New York City metropolitan area, and our results are affected by economic conditions in these areas. A decline in economic and business conditions in our market areas could have a material impact on the quality of our loan portfolio or the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

     During the first quarter of 2005, we experienced continued growth in our assets due to growth in our existing branches. Our total assets grew by 5% to $1,590.2 million at March 31, 2005 from $1,507.7 million at December 31, 2004. The increase in total assets for the period was primarily due to growth in our loans funded by increases in deposits and borrowings. The loan growth during the first quarter of 2005 was predominantly in real estate and commercial loans and deposit growth was in time deposits that are $100,000 or more.

     Our net income was $5.4 million for the three months ended March 31, 2005 and represents a 54% increase from $3.5 million for the three months ended March 31, 2004. The major contributor to the increase in net income for the three months ended March 31, 2005 was a 30% increase in net interest income for three months ended March 31, 2005 compared to the same period of 2004 as a result of loan growth and an increase in our interest in net interest margin. More detailed discussions are in the various sections below.

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Net income

     Our net income for the three months ended March 31, 2005 was $5.4 million, or $0.22 per diluted share, compared to $3.5 million, or $0.14 per diluted share, for the same quarter of 2004, which represented an increase of $1.9 million or 54%. The increase resulted primarily from an increase in net interest income due to growth in our loan portfolio. As a result of the Restatement, our net income decreased $603 thousand or $0.02 per diluted share for the three months ended March 31, 2004, compared to amounts previously reported. The adjustments related primarily to non-interest expense and are addressed further below and in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

     The annualized return on average assets was 1.41% for the first quarter of 2005 compared to 1.12% for the same period of 2004. The annualized return on average equity was 21.05 % for the first quarter of 2005 compared to 16.40% for the same period of 2004. The resulting efficiency ratio was 49.74% for the three months ended March 31, 2005 compared with 58.68% for the same period of 2004. Our improved efficiency ratio was primarily due to an increase in net interest income from growth in interest earning assets. The recent improvement in efficiency ratio over the past quarters could be negatively affected by the unexpected expenses related to the Restatement.

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, interest rate swaps and investments and the interest paid on deposits and borrowed funds. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing deposits and borrowed funds. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities as well as by changes in the yield earned on interest-earning assets and the rates paid on interest-bearing liabilities.

     Net interest income before provision for loan losses was $17.3 million for the three months ended March 31, 2005, an increase of $4.0 million, or 30% from net interest income of $13.3 million for the same quarter of 2004. This increase was primarily due to an increase in average interest earning assets, which increased $264.7 million or 22% to $1,448.7 million for the first quarter of 2005 from $1,184.0 million for the same quarter of 2004.

     Interest income for the first quarter of 2005 was $24.1 million, which represented an increase of $6.9 million or 40% over interest income of $17.2 million for the same quarter of 2004. The increase was the net result of a $4.3 million increase in interest income due to an increase in volume of average interest-earning assets (volume change) and a $2.5 million increase in interest income due to an increase in the average yield earned on those average interest-earning assets (rate change).

     Interest expense for the first quarter of 2005 was $6.8 million, an increase of $2.9 million or 74% over interest expense of $3.9 million for the same quarter of 2004. The increase was primarily the result of a $1.1 million increase in interest expense due to an increase in volume of average interest-bearing liabilities (volume change) and a $1.7 million increase in interest expense due to an increase in the average rates paid on interest-bearing liabilities (rate change). Interest-bearing liabilities increased in part as a result of a growth in deposits following a bank-wide marketing campaign promoting new deposit accounts with higher interest rates.

     Net Interest Margin

     The average yield on average interest-earning assets increased to 6.65% for the first quarter of 2005 compared with 5.83% for the same quarter of 2004. The increase was primarily due to an increase in market interest rates, including a 125 basis points increase by the Federal Reserve Board in the prime rate between those periods. The prime rate was increased five times between the two periods in increments of 25 basis points. The weighted average prime rate for the first quarter of 2005 was 5.34% compared to 4.00% during the same quarter of 2004. The average cost of

19

interest-bearing liabilities also increased to 2.53 % for the first quarter of 2005 from 1.87% for the same quarter of 2004.

     The net interest margin was 4.79% for the first quarter of 2005 compared with 4.50% for the same quarter of 2004. Despite a 125 basis point increase in prime rate between the two periods, the net interest margin only increased by 29 basis points primarily due to increases in the cost of interest-bearing liabilities. Due to fierce competition for deposits among Korean-American banks, especially De Novo banks, the cost of deposits increased faster than we anticipated. The average cost of interest bearing deposits increased to 2.32% for the first quarter of 2005 from 1.66% for the same quarter of 2004. The average cost of subordinated debentures, which are mostly tied to 3 month LIBOR adjusting quarterly, also increased as market interest rates increased. The average cost of total deposits, including noninterest bearing deposits, for the first quarter of 2005 was 1.71% compared to 1.15% for the same quarter of 2004.

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

	Three months ended						Three months ended
	March 31, 2005						March 31, 2004
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate *		Balance		Expense		Rate *
	(Dollars in thousands)
INTEREST EARNINGS ASSETS:
Loans(1) (2)	$	1,277,808	$	22,455		7.03%	$	1,027,993	$	15,785		6.14%
Other investments		6,728		74		4.40%		5,325		56		4.21%
Securities(3)		138,386		1,400		4.05%		127,990		1,340		4.19%
Federal funds sold		25,746		165		2.56%		22,719		65		1.14%
Total interest earning assets	$	1,448,668	$	24,094		6.65%	$	1,184,027	$	17,246		5.83%
INTEREST BEARING LIABILITITES:
Demand, interest-bearing	$	297,136	$	1,586		2.14%	$	153,420	$	531		1.38%
Savings		113,511		517		1.82%		150,150		651		1.73%
Time certificates of deposit		531,192		3,355		2.53%		439,717		1,901		1.73%
FHLB borrowings		90,381		647		2.86%		59,353		292		1.97%
Subordinated debentures		37,145		657		7.07%		37,115		559		6.02%
Total interest bearing liabilities	$	1,069,365	$	6,762		2.53%	$	839,755	$	3,934		1.87%
Net interest income			$	17,332					$	13,312
Net interest margin						4.79%						4.50%
Net interest spread						4.12%						3.96%
Average interest-earning assets to average interest-bearing liabilities						135.47%						141.00%

*	Annualized
(1)	Interest income on loans includes loan fees and net interest settlement from interest rate swaps.
(2)	Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loan held for sale.
(3)	Interest income and yields are not presented on a tax-equivalent basis.

     The following table illustrates the changes in our interest income, interest expenses, and amounts 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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	Three months ended
	March 31, 2005 over March 31, 2004
	Net
	Increase			Change due to
	(Decrease)			Rate			Volume
	(Dollars in thousands)
INTEREST INCOME
Interest and fees on loans and interest rate swaps	$	6,670		$	2,487		$	4,183
Interest on other investments		18			3			15
Interest on securities		60			(46	)		106
Interest on federal funds sold		100			90			10
Total interest income	$	6,848		$	2,534		$	4,314
INTEREST EXPENSE
Interest on demand deposits	$	1,055		$	387		$	668
Interest on savings		(134	)		32			(166	)
Interest on time certificates of deposit		1,454			1,002			452
Interest on FHLB borrowings		355			165			190
Interest on subordinated debentures		98			98			—
Total interest expense	$	2,828		$	1,684		$	1,144
Net Interest Income	$	4,020		$	850		$	3,170

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’ examination of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in our market areas. 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 probable incurred 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. If the allowance for loan losses was inadequate, it may have a material adverse effect on our financial condition.

     We recorded a $1.7 million in provision for loan losses during the first quarter of 2005 compared to $1.5 million in the same quarter of 2004. This change reflects the results of our review and analysis of the loan portfolio and the adequacy of our existing allowance for loan losses in light of the growth experienced in our loan portfolio and the level of our net charge-offs and non-performing loans. We believe that the allowance is sufficient to absorb probable incurred losses in our loan portfolio at March 31, 2005. See Allowance for Loan Losses below 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 on deposits accounts, fees received from letter of credit operations, net gains or losses on interest rate swaps and net gains on sales of SBA loans and securities available for sale.

     Non-interest income for the first quarter of 2005 was $4.2 million compared to $4.2 million for the same quarter of 2004. During the first quarter of 2005 we originated $15.7 million in SBA loans and sold $14.1 million. During the first quarter of 2004, we originated $11.8 million in SBA loans and sold $11.2 million. Despite the

21

increase in sales of SBA loans, the net gains on sales of SBA loans for the first quarter of 2005 decreased $92 thousand or 11% compared to the same period of 2004. This decrease is primarily due to increases in the fees we paid to the brokers to generate those loans. Servicing fee income related to SBA loans increased due to an increase in average servicing assets. Service charges on deposit accounts decreased primarily due to closing of accounts for check cashing businesses, which generated significant fees and a deposit promotion for no-fee deposit accounts in 2005. For the three months ended March 31, 2004 and for the year ended December 31, 2004, we recorded an impairment charge of $1.6 million and $2.6 million, respectively on government sponsored enterprise preferred stocks as a result of other than temporary declines in their market values. All of those securities were sold during the first quarter of 2005. During the first quarter of 2005, we recorded $15 thousand in net gains from the sale of $7.4 million in these preferred stocks compared to net gains of $305 thousand from the sale of $6.3 million of securities available for sale during the same quarter of 2004. During the first quarter of 2005, we recognized a net loss of $35 thousand from our interest rate swaps compared to a net gain of $720 thousand for the same quarter of 2004. The loss from the interest rate swaps in the quarter ending March 31, 2005 is primarily due to an increase in interest rates, and we expect additional losses as interest rates are expected to continue to increase. The breakdown of changes in our non-interest income by category is illustrated below:

	Three								Three
	Months								Months
	Ended			Increase (Decrease)					Ended
	March 31, 2005			Amount			Percent (%)		March 31, 2004
									(Restated)
	(Dollars in thousands)
Service charges on deposits	$	1,578		$	(449	)		-22%	$	2,027
International service fees		675			13			2%		662
Wire transfer fees		341			42			14%		299
Loan servicing fees, net		399			115			40%		284
Earnings on cash surrender value of life insurance		145			(36	)		-20%		181
Net gains on sales of SBA loans		749			(92	)		-11%		841
Net gains on sales of securities available for sale		15			(290	)		-95%		305
Net gains (losses) on interest rate swaps		(35	)		(755	)		-105%		720
Other than temporary impairment on securities		—			1,633			-100%		(1,633	)
Other		312			(187	)		-37%		499
Total noninterest income	$	4,179		$	(6	)		0%	$	4,185

Non-interest Expense

     Non-interest expense for the first quarter of 2005 was $10.7 million compared to $10.3 million for the same quarter of 2004, an increase of $433 thousand or 4%. Salaries and employee benefits for the three months ended March 31, 2004 were restated to include additional bonuses of $937 thousand to be accrued for the period. Salaries and employee benefits decreased to $5.3 million for the three months ended March 31, 2005 from $5.8 million for the same quarter of 2004. The decrease is primarily related to a decline in the level of bonuses approved by the Bank’s Board of Directors. However, based on the Board of Directors’ review of the financial results for the quarter ending March 31, 2005, the expected financial results for the quarter ending June 30, 2005 and the level of bonuses that are being paid to employees of the Bank’s competitors, the Board of Directors approved an increase in the mid year bonuses that will be paid to employees for first six months of fiscal 2005. Therefore, we are expecting salaries and employee benefits to increase to approximately $5.9 million for the quarter ending June 30, 2005. Further, based on the changes in the expected level of bonuses to be paid for the remainder of fiscal 2005, we expect that salaries and employee benefits will be slightly higher for the remainder of fiscal 2005 compared to the same period of fiscal 2004. Occupancy expense for the three months ended March 31, 2004 was restated to include expense for leases with escalating rents on a straight-line basis over the lease term, rather than as paid, and to correctly account for leasehold improvement amortization. The restatement of occupancy expenses related to such accounting was an increase of $193 thousand for the three months ended March

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31, 2004. Professional fees for the first quarter of 2005 were $756 thousand compared to $330 thousand for the same quarter of 2004. This increase is primarily due to legal and accounting expenses incurred during the first quarter of 2005 related to the special Subcommittee investigation discussed above under “General.”

     The breakdown of changes in our non-interest expense is illustrated below:

	Three							Three
	Months							Months
	Ended		Increase (Decrease)					Ended
	March 31, 2005		Amount			Percent (%)		March 31, 2004
								(Restated)
	(Dollars in thousands)
Salaries and employee benefits	$	5,263	$	(555	)		-10%	$	5,818
Occupancy		1,597		137			9%		1,460
Furniture and equipment		510		91			22%		419
Advertising and marketing		390		83			27%		307
Communications		186		25			16%		161
Data processing		610		37			6%		573
Professional fees		756		426			129%		330
Office supplies and forms		97		(2	)		-2%		99
Regulatory fees		252		74			42%		178
Director fees		130		7			6%		123
Credit related expenses		92		(17	)		-16%		109
Amortization of intangibles assets		187		11			6%		176
Other		630		116			23%		514
Total non-interest expense	$	10,700	$	433			4%	$	10,267

Provision for Income Taxes

     The provision for income taxes was $3.8 million and $2.2 million on income before income taxes of $9.2 million and $5.7 million for the three months ended March 31, 2005 and 2004, respectively. The effective tax rate for the quarter ended March 31, 2005 was 41% compared with 38% for the quarter ended March 31, 2004. The increase in the effective tax rate during the first quarter of 2005 was primarily due to less nontaxable income during the period and higher state income taxes.

Financial Condition

     At March 31, 2005, our total assets were $1,590.2 million, an increase of $82.5 million or 5% from $1,507.7 million at December 31, 2004. The growth was primarily due to increases in our loans funded by growth in our deposits.

Loan Portfolio

     We carry all loans (except for certain SBA loans held-for-sale) at face amount, less payments collected, net of deferred loan origination fees and costs and the allowance for loan losses. SBA loans held-for-sale are carried at the lower of cost or market value in the aggregate. Interest on all loans is accrued daily. Once a loan is placed on non- accrual status, accrual of interest is discontinued and previously accrued interest is reversed. Loans are placed on non-accrual status 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.

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     As of March 31, 2005, our gross loans (net of deferred loan fees and costs) increased by $104.2 million or 9% to $1,325.9 million from $1,221.7 million at December 31, 2004. Commercial loans, which include domestic commercial, international trade finance, SBA loans, and equipment leasing, at March 31, 2005 increased by $23.9 million or 5% to $465.8 million from $441.9 million at December 31, 2004. Real estate loans increased by $79.3 million or 11% to $797.0 million at March 31, 2005 from $717.7 million at December 31, 2004. Although the demand for real estate loans continued to be strong, management continued to make efforts to maintain a balanced mix in the loan portfolio.

     The following table illustrates our loan portfolio by amount and percentage of gross loans in each major loan category at the dates indicated:

	March 31, 2005					December 31, 2004
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Loan Portfolio Composition:
Commercial loans	$	465,762			35.0%	$	441,940			36.1%
Real estate loans		796,962			60.0%		717,747			58.6%
Consumer and other loans		66,180			5.0%		64,845			5.3%
Total loans outstanding		1,328,904			100.0%		1,224,532			100.0%
Unamortized loan fees, net of costs		(3,045	)				(2,798	)
Allowance for loan losses		(15,715	)				(14,627	)
Loans Receivable, net	$	1,310,144				$	1,207,107

     We normally do not extend lines of credit and make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for extending loan facilities to our customers. We perform annual reviews of such commitments prior to the renewal. The following table shows our loan commitments and letters of credit outstanding at the dates indicated:

	March 31, 2005		December 31, 2004
	(Dollars in thousands)
Loan commitments	$	155,230	$	151,726
Standby letters of credit		12,130		22,108
Other commercial letters of credit		28,322		29,035
	$	195,682	$	202,869

     At March 31, 2005, our nonperforming assets (nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans, and other real estate owned) were $4.2 million, an increase of $1.3 million from $2.9 million at December 31, 2004. Non-performing assets to total assets was 0.26% and 0.19% at March 31, 2005 and December 31, 2004, respectively. At March 31, 2005, nonperforming loans were $3.8 million, an increase of $1.1 million from $2.7 million at December 31, 2004. This $1.1 million increase is composed of various loans of which $930 thousand was charged off during April and May of 2005. Of the $3.8 million in nonperforming loans, $2.5 million are fully secured by real estate. At March 31, 2005, nonperforming loans to total gross loans was 0.29% compared to 0.22% at December 31, 2004.

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     The following table illustrates the composition of our nonperforming assets as of the dates indicated.

	March 31, 2005			December 31, 2004
	(Dollars in thousands)
Nonaccrual loans	$	3,838		$	2,679
Loan past due 90 days or more, still accruing		—			—
Total Nonperforming Loans		3,838			2,679
Other real estate owned		—			—
Restructured loans		322			229
Total Nonperforming Assets	$	4,160		$	2,908
Nonperforming loans to total gross loans		0.29	%		0.22	%
Nonperforming assets to total assets		0.26	%		0.19	%

Allowance for Loan Losses

     The allowance for loan losses was $15.7 million at March 31, 2005, compared to $14.6 million at December 31, 2004 and $13.6 million at March 31, 2004. We recorded a provision for loan losses of $1.7 million during the three months ended March 31, 2005 compared to $1.5 million for the same period of 2004. The increase in the provision for loan losses is primarily due to growth in our loan portfolio and increased net charge-offs. Average loans totaled $1.3 billion for the quarter ending March 31, 2005 compared to $1.0 billion for the same quarter last year. During the three months ended March 31, 2005, we charged off $856 thousand and recovered $294 thousand for net charge-offs of $562 thousand compared to net charge-offs of $407 thousand for the same quarter of last year. The allowance for loan losses was 1.19% of gross loans at March 31, 2005, compared to 1.20% at December 31, 2004 and 1.29% at March 31, 2004. The total classified loans at March 31, 2005 were $9.6 million, compared to $10.0 million at March 31, 2004.

     We believe the level of the allowance for loan losses as of March 31, 2005 is adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that economic conditions which adversely affect our service areas or other circumstances will not need to be reflected in increased provisions or loan losses in the future.

     The following table provides a breakdown of the allowance for loan losses by category of loans at March 31, 2005 and December 31, 2004:

	Allocation of Allowance for Loan Losses
(Dollars in thousands)	March 31, 2005				December 31,2004
			% of Loans in				% of Loans in
			Each Category to				Each Category to
Loan Type	Amount		Total Loans		Amount		Total oans
Commercial	$	6,180		35%	$	5,871		36%
Real estate		8,536		60%		7,961		59%
Consumer		966		5%		786		5%
Unallocated		33		N/A		9		N/A
Total allowance	$	15,715		100%	$	14,627		100%

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     The following table shows the provisions made for loan losses, the amount of loans charged off, the recoveries on loans previously charged off together with the balance in the allowance for loan losses at the beginning and end of each period, the amount of average and total loans outstanding, and other pertinent ratios as of the dates and for the periods indicated:

	Three months ended March 31,
	2005			2004
	(Dollars in thousands)
LOANS:
Average gross loans	$	1,277,808		$	1,027,993
Total gross loans net of deferred loan fees and costs at end of period		1,325,859			1,048,609
ALLOWANCE:
Balance-beginning of period	$	14,627		$	12,471
Less: Loans Charged off:
Commercial		656			314
Real estate		—			—
Consumer		200			403
Total loans charged off		856			717
Plus: Loan Recoveries
Commercial		210			251
Real estate		—			2
Consumer		84			57
Total loan recoveries		294			310
Net loans charged off		562			407
Provision for loan losses		1,650			1,500
Balance-end of period	$	15,715		$	13,564
Net loan charge-offs to average total loans *		0.18	%		0.16	%
Net loan charge-offs to total loans at end of period *		0.17	%		0.16	%
Allowance for loan losses to average total loans		1.23	%		1.32	%
Allowance for loan losses to total loans at end of period		1.19	%		1.29	%
Net loan charge-offs to beginning allowance *		15.37	%		13.05	%
Net loan charge-offs to provision for loan losses		34.06	%		27.13	%

* Annualized

Total loans are net of deferred loan fees and costs of $3,045,000 and $2,798,000 at March 31, 2005 and 2004, respectively.

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, 2005 and December 31, 2004. 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, mortgage backed and municipal bonds.

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     As of March 31, 2005, we had $2.0 million in held-to-maturity securities and $134.3 million in available-for-sale securities compared to $2.0 million and $133.4 million, respectively at December 31, 2004. The total net unrealized loss on the available-for sale securities at March 31, 2005 was $2.1 million compared to net unrealized loss of $718 thousand at December 31, 2004. During the first three months of 2005, a total of $14.9 million in securities available-for-sale were purchased, $7.4 million of government sponsored enterprise preferred stocks were sold, and total gross gains of $15 thousand were recognized.

     Securities with an amortized cost of $5.0 million were pledged to secure public deposits and for other purposes as required or permitted by law at March 31, 2005. Securities with a carrying value of $15.6 million and $85.6 million were pledged to the FHLB of San Francisco and the State of California Treasurer’s Office, respectively, at March 31, 2005.

     The following table summarizes the amortized cost, estimated fair value and distribution of our investment securities portfolio as of the dates indicated:

Investment Portfolio

	At March 31, 2005							At December 31, 2004
	Amortized		Estimated		Net Unrealized			Amortized		Estimated			Net Unrealized
	cost		Fair Value		Gain (Loss)			cost		Fair Value			Gain (Loss)
	(Dollars in thousands)
Available-for-sale:
U.S. Government agency	$	75,518	$	74,424	$	(1,094	)	$	62,657	$	62,512		$	(145	)
Collateralized mortgage obligations		21,867		21,091	$	(776	)		23,735		23,129			(606	)
Mortgage-backed securities		25,427		24,954	$	(473	)		26,751		26,575			(176	)
Municipal Bonds		9,569		9,829	$	260			9,578		9,784			206
Corporate debt securities		3,980		3,985	$	5			3,980		3,983			3
Government sponsored enterprise Preferred Stock		—		—	$	—			7,403		7,403			—
												��
Total available-for-sale	$	136,361	$	134,283	$	(2,078	)	$	134,104	$	133,386		$	(718	)
Held to Maturity:
Corporate debt securities	$	2,001	$	2,070	$	69		$	2,001	$	2,088		$	87
Total held-to-maturity	$	2,001	$	2,070	$	69		$	2,001	$	2,088		$	87
Total investment portfolio	$	138,362	$	136,353	$	(2,009	)	$	136,105	$	135,474		$	(631	)

     The following table shows our investments’ gross unrealized losses and estimated fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss positions, at March 31, 2005.

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	Less than 12 months					12 months or longer					Total
Description of	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
Securities:	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(Dollars in thousands)
U.S. Government agency	$	72,422	$	(1,096	)	$	—	$	—		$	72,422	$	(1,096	)
Collateralized mortgage obligations		12,050		(460	)		6,411		(325	)	$	18,461	$	(785	)
Mortgage-backed securities		17,369		(247	)		5,467		(263	)	$	22,836	$	(510	)
Municipal bonds		420		(2	)		—		—		$	420	$	(2	)
Total Temporarily Impaired Securities	$	102,261	$	(1,805	)	$	11,878	$	(588	)	$	114,139	$	(2,393	)

     The unrealized losses were created due to what we believe is a temporary condition, mainly fluctuations in interest rates, and do not reflect a deterioration of credit quality of the issuers. For the three months ended March 31, 2005 and 2004, we did not have any sales of investment securities resulting in realized losses. For investments in an unrealized loss position at March 31, 2005, we have the intent and ability to hold these investments until full recovery. During the three months ended March 31, 2004, we recognized $1.6 million in impairment charges related to other than temporary declines in market values for government sponsored enterprise preferred stocks. We did not record any other than temporary declines in market values during the three months ended March 31, 2005.

Deposits and Other Borrowings

     Deposits.Deposits are our primary source of funds used in our lending and investment activities. At March 31, 2005, our deposits increased by $101.3 million or 8% to $1,357.3 million from $1,256.0 million at December 31, 2004. Noninterest bearing demand deposits totaled $363.6 million at March 31, 2005, an increase of $35.3 million or 11% from $328.3 million at December 31, 2004. Time deposits of $100,000 or more totaled $527.8 million, an increase of $120.7 million or 30% from $407.1 million at December 31, 2004. Interest-bearing demand deposits, including money market and super now accounts, totaled $270.7 million, a decrease of $52.8 million or 16% from $323.5 million at December 31, 2004. This decrease was primarily due to the transfer of money market accounts to either time deposits or for personal use. Most of those accounts were opened during a money market account promotional period in the second quarter of 2004. The growth in deposits was the result of a deposit promotion for our time deposits as well as normal internal growth. There has been fierce competition in the market to solicit deposit customers as loan demand continues to be strong. Most of the demand accounts were in the interest-bearing deposits where customers seek higher rates. As demand for loans has continued, competition has intensified to attract new customers and additional deposits that may be used to fund the loans. During February of 2005, we launched a bank-wide deposit campaign with the new “Prime CD”, which has a variable rate tied to the prime rate, adjusting quarterly. Approximately $81.0 million in Prime CDs were opened during the first quarter of 2005.

     At March 31, 2005, 27% of the total deposits were non-interest bearing demand deposits, 45% were time deposits, and 28% were interest bearing demand deposits. By comparison, at December 31, 2004, 26% of the total deposits were non-interest bearing demand deposits, 39% were time deposits, and 35% were interest bearing demand deposits.

     At March 31, 2005, we had a total of $84.9 million in brokered deposits and $75.0 million in State deposits compared to $45.1 million and $65.0 million at December 31, 2004, respectively. During the first quarter of 2005, we had an increase of $39.8 million in brokered deposits. Due to fierce competition and higher rates offered for deposits, brokered deposits have been a stable alternative and cost effective source of funds. The State deposits were collateralized with securities with a carrying value of $85.6 million at March 31, 2005. The State deposits are subject to withdrawal based on the State’s periodic evaluations.

     Other Borrowings. Advances may be obtained from the FHLB of San Francisco to supplement our supply of lendable funds. Advances from the FHLB of San Francisco are typically secured by a pledge of mortgage loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.

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     The following table shows our outstanding borrowings from the FHLB at March 31, 2005. All FHLB advances carry fixed interest rates.

FHLB Advances	Issue Date	Maturity Date	Interest Rate
$    5,000,000	10/19/00	10/19/07	6.70%
4,000,000	12/17/04	04/18/05	2.52%
8,000,000	12/27/04	04/27/05	2.60%
8,000,000	12/30/04	12/31/07	3.65%
9,000,000	02/28/05	02/28/08	4.10%
3,500,000	03/31/05	04/01/05	2.88%
26,000,000	03/31/05	05/02/05	2.84%
$ 63,500,000			3.38%

     At March 31, 2005 and December 31, 2004, five wholly-owned subsidiary grantor trusts established by Nara Bancorp had issued $38 million of pooled Trust Preferred Securities (“trust preferred securities”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures. The trusts used the net proceeds from the offering to purchase a like amount of subordinated debentures (the “Debentures”) of Nara Bancorp. The Debentures are the sole assets of the trusts. Nara Bancorp’s obligations under the subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by Nara Bancorp of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. Nara Bancorp has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.

Off-Balance-Sheet Activities And Contractual Obligations

     We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.

     Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. However, since certain off-balance-sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. These activities are necessary to meet the financing needs of our customers.

     We also enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We utilize interest rate swap contracts to help manage the risk of changing interest rates. Our accounting for interest rate swap contracts is discussed below under Item 3.

     We do not anticipate that our current off-balance-sheet activities will have a material impact on future results of operations and financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3– “Quantitative and Qualitative Disclosures about Market Risks”.

     We continue to lease our banking facilities and equipment under non-cancelable operating leases with terms providing monthly payments over periods up to 30 years.

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     The following table shows our contractual obligations and commitments as of March 31, 2005.

Contractual Obligations and commitments	Payments due by period
(dollars in thousands)	Total		Less than 1 year		1-3 years		3-5 years		Over 5 years
Time Deposits	$	611,272	$	591,451	$	19,337	$	384	$	100
Subordinated Debentures		39,268		—		—		—		39,268
Federal Home Loan Bank Borrowings		63,500		41,500		22,000		—		—
Operating Lease Obligations		42,740		5,191		8,921		7,445		21,183
Unused commitments to extend credit		155,230		155,230		—		—		—
Standby letters of credit		12,130		12,130		—		—		—
Other commercial letters of credits		28,322		28,322		—		—		—
Employment agreement		710		275		435		—		—
Total	$	953,172	$	834,099	$	50,693	$	7,829	$	60,551

Stockholders’ Equity and Regulatory Capital

     To ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. We consider on an ongoing basis, among other things, cash generated from operations, access to capital from financial markets or the issuance of additional securities, including common stock or notes, to meet our capital needs. Total stockholders’ equity was $104.1 million at March 31, 2005. This represented an increase of $2.8 million or 3% over total stockholders’ equity of $101.3 million at December 31, 2004.

     The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier I 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 I 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.

     At March 31, 2005, our Tier I capital, defined as stockholders’ equity less intangible assets, plus proceeds from the Trust Preferred Securities (subject to limitations), was $133.5 million, compared to $127.0 million at December 31, 2004, representing an increase of $6.5 million or 5% over total Tier I. This increase was primarily due to net income of $5.4 million reduced by the payments of cash dividends. At March 31, 2005, we had a ratio of total capital to total risk-weighted assets of 10.95% and a ratio of Tier I capital to total risk- weighted assets of 9.43%. The Tier I leverage ratio was 8.74% at March 31, 2005.

     As of March 31, 2005, the Bank has met the criteria as a “well capitalized institution” under the regulatory framework for prompt corrective action. The following table presents the amounts of our regulatory capital and capital ratios, compared to regulatory capital requirements for capital adequacy purposes as of March 31, 2005 and December 31, 2004.

     As a result of a recent regulatory examination, our regulatory agencies are expected to place additional restrictions and requirements on our Company, which may limit our growth and expansion and our ability to pay cash dividends without prior regulatory approval.

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	As of March 31, 2005
(Dollars in thousands)	Actual					Required					Excess
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Leverage ratio	$	133,524		8.7	%	$	61,091		4.0	%	$	72,433		4.7	%
Tier I risk-based capital ratio	$	133,524		9.4	%	$	56,659		4.0	%	$	76,865		5.4	%
Total risk-based capital ratio	$	155,126		11.0	%	$	113,319		8.0	%	$	41,807		3.0	%

	As of December 31, 2004
	Actual					Required					Excess
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Leverage ratio	$	126,971		8.9	%	$	56,979		4.0	%	$	69,992		4.9	%
Tier I risk-based capital ratio	$	126,971		9.7	%	$	52,357		4.0	%	$	74,614		5.7	%
Total risk-based capital ratio	$	149,123		11.4	%	$	104,713		8.0	%	$	44,410		3.4	%

Liquidity Management

     Liquidity risk is the risk to earnings or capital resulting from our inability to meet our obligations when they come due without incurring unacceptable losses. Liquidity risk includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with a minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base; marketability, maturity, and pledging of investments; and the demand for credit.

     Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans and the routine liquidation of securities from our available-for-sale portfolio. Our primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.

     We manage liquidity risk by controlling the level of federal funds and by maintaining lines of credit with correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank of San Francisco. The sale of investment securities available-for-sale can also serve as a contingent source of funds. Increasing the deposit rates is considered a last resort in raising funds to increase liquidity.

     As a means of augmenting our liquidity, we have established federal funds lines with corresponding banks and the Federal Home Loan Bank of San Francisco. At March 31, 2005, our borrowing capacity included $56.0 million in federal funds line facilities from correspondent banks and $251.4 million in unused Federal Home Loan Bank of San Francisco advances. In addition to these lines, our liquid assets include cash and due from banks, federal funds sold and securities available for sale that are not pledged. The aggregate book value of these assets totaled $90.5 million at March 31, 2005 compared to $121.8 million at December 31, 2004. We believe our liquidity sources to be stable and adequate.

     Because our primary sources and uses of funds are deposits and loans, the relationship between gross loans and total deposits provides a useful measure of our liquidity. Typically, the higher the ratio of loans to deposits, the more we rely on borrowings and our loan portfolio to provide short-term liquidity needs. Because repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan to deposit ratio, the less liquid are our assets. At March 31, 2005, our gross loan to deposit ratio was 97.7% an increase from 97.0% at December 31, 2004.

     The results of a recent regulatory examination indicate that our liquidity will need to be carefully monitored in the future as we continue to grow our deposits, particularly as we may be unable to retain our California State Treasurer’s deposits totaling $75.0 million at March 31, 2005.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The objective of our asset and liability management activities is to improve our earnings by adjusting the type and mix of assets and liabilities to effectively address changing conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of asset and liabilities and emphasizing growth in retail deposits, as a percentage of interest-bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling non-interest expense, and enhancing non-interest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of reducing the effects these fluctuations might have on associated cash flows or values. Finally, we perform internal analyses to measure, evaluate and monitor risk.

     Interest Rate Risk

     Interest rate risk is the most significant market risk impacting us. Market risk is the risk of loss to future earnings, to fair values of our assets and liabilities, or to future cash flows that may result from changes in the price of a financial instrument. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and values of our assets and liabilities and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset and Liability Management Committee (“ALCO”), which is composed of Nara Bank’s senior executives and other designated officers.

     The fundamental objective of our ALCO is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALCO meets regularly to monitor the interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, investment activities and directs changes in the composition of the statement of financial condition. Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.

     Swaps

     As part of our asset and liability management strategy, we may enter into 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. Interest rate swaps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts. During 2002, we entered into eight different interest rate swap agreements.

     Under the interest rate 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 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 (loss) (“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 statements of income as a part of non-interest income. As of March 31, 2005, the amounts in accumulated OCI associated with these cash flow hedges totaled a loss of $1,456,083 (net of tax of $970,722), of which $48,712 is expected to be reclassified as a reduction into interest income within the next 12 months. As of

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March 31, 2005, the maximum length of time over which we are hedging our exposure to the variability of future cash flows is approximately 7.5 years.

     During the first quarter of 2005 and 2004, interest income recorded from swap transactions totaled $416,888 and $904,944, respectively. At March 31, 2005, we pledged as collateral to the interest rate swap counterparties agency securities with a book value of $2.0 million and real estate loans of $4.9 million.

     Interest Rate Sensitivity

     Our monitoring activities related to managing interest rate risk include both interest rate sensitivity “gap” analysis and the use of a simulation model. While traditional gap analysis provides a simple picture of the interest rate risk embedded in the statement of financial condition, it provides only a static view of interest rate sensitivity at a specific point in time and does not measure the potential volatility in forecasted results relating to changes in market interest rates over time. Accordingly, we combine the use of gap analysis with the use of a simulation model, which provides a dynamic assessment of interest rate sensitivity.

     The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated to reprice within a specific time period and the amount of interest-bearing liabilities anticipated to reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets repricing within a specific time period exceeds the amount of interest-bearing liabilities repricing within that same time period. Positive cumulative gaps suggest that earnings will increase when interest rates rise and decrease when interest rates fall. Negative cumulative gaps suggest that earnings will increase when interest rates fall and decrease when interest rates rise.

     The following table shows our gap position as of March 31, 2005.

	0-90 days			91-365 days			1-5 years		Over 5 yrs		Total
	(Dollars in thousands)
Total Investments *	$	37,210		$	8,650		$	95,065	$	34,951	$	175,876
Total Loans, including loans held for sale		1,226,378			24,131			74,012		11,467		1,335,988
Rate Sensitive Assets	$	1,263,588		$	32,781		$	169,077	$	46,418	$	1,511,864
Deposits
Time Deposits of $100,000 or more	$	281,909		$	226,878		$	18,881	$	100	$	527,768
Other Time Deposits		42,912			39,752			840		—		83,504
Money Market		257,256			—			—		—		257,256
NOW Accounts		13,447			—			—		—		13,447
Savings Deposits		111,674			—			—		—		111,674
FHLB Borrowings		41,500			—			22,000		—		63,500
Subordinated Debentures		—			—			—		39,268		39,268
Rate Sensitive Liabilities	$	748,698		$	266,630		$	41,721	$	39,368	$	1,096,417
Interest Rate Swap	$	(120,000	)	$	20,000		$	80,000	$	20,000	$	—
Net GAP Position	$	394,890		$	(213,849	)	$	207,356	$	27,050	$	415,447
Net Cumulative Gap Position	$	394,890		$	181,041		$	388,397	$	415,447

* Includes investment securities, federal funds sold, FRB stock, FHLB stock, and interest bearing deposits with other financial institutions.

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     The simulation model discussed above also provides our ALCO with the ability to simulate our net interest income. In order to measure, at March 31, 2005, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase in market interest rates.

     At March 31, 2005, our net interest income and market value of equity exposed to these hypothetical changes in market interest rates are illustrated in the following table.

	Estimated
	Net Interest	Market Value of
Simulated Rate Changes	Income Sensitivity	Equity Volatility
+ 200 basis points	5.6%	17.1%
+ 100 basis points	3.1%	8.6%
- 100 basis points	(1.7)%	(9.3)%
- 200 basis points	(4.6)%	(18.7)%

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Item 4. Controls and Procedures

     a. Evaluation of disclosure controls and procedures

     We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of March 31, 2005. Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer determined that, as a result of errors identified in the financial statements for the previously reported years ended December 31, 2002, and 2003 and quarters and year-to-date periods ended March 31, 2004, June 30, 2004 and September 30, 2004, our disclosure controls and procedures were not effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported as and when required. These errors resulted in the restatement of the financial statements for such periods.

     In light of this determination and as part of the work undertaken in connection with this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (i) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented in this report.

     b. Management’s responsibility for financial statements

     Our management is responsible for the integrity and objectivity of all information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations for the periods and as of the dates stated therein.

     The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, Crowe Chizek and Company LLP, and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.

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     c. Changes in internal control over financial reporting

     As previously disclosed in Item 9A of our annual report on Form 10-K for the year ended December 31, 2004 and filed on June 30, 2005, there were four material weaknesses in our internal control over financial reporting relating to accounting for deferred compensation agreements, accounting for various related compensation, accounting for lease arrangements and accounting for bank owned life insurance. In fiscal 2005, and through the date of this filing, we have taken the following steps to improve our internal controls over financial reporting:

               1. Accounting for Deferred Compensation Arrangements.The Company is implementing enhancements to its internal control over financial reporting to provide reasonable assurance that accounting errors and control deficiencies of this type will not recur. These steps include:

                    •Amending of the Company’s Bylaws to state that Board members are not officers of the Company and may not sign contracts on behalf of the Company.

                    •Amending of the Company’s Code of Business Conduct and Ethics by adding the following two paragraphs:

                                 All contracts, letters, memoranda of understanding or other agreements relating to employment matters for senior management must be signed on behalf of Nara Bank or Nara Bancorp only upon the approval of the Compensation Committee of Nara Bancorp or the Board of Directors of Nara Bancorp.

                                 All material contracts and agreements must be reviewed by in-house counsel, and disclosed quarterly to the Audit Committee of Nara Bancorp or to the Company’s independent auditors.

               2. Accounting for Various Employee Related Compensation.The Company is implementing enhancements to its internal control over financial reporting to provide reasonable assurance that accounting errors and control deficiencies of this type will not recur. These steps include:

               •Developing and implementing a detailed bonus accrual methodology.

               •Approval of the bonus accrual methodology by the Board of Directors and adoption of a procedure whereby the Board of Directors will approve such bonus accrual methodology on an annual basis.

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                    •Adoption of a procedure whereby the quarterly bonus accrual calculations are reviewed and approved by the Board of Directors prior to reporting the Company’s quarterly financial results.

                    •Adoption of a procedure whereby the quarterly bonus accrual calculations will be disclosed to the Company’s independent auditors.

               3. Accounting for Lease Arrangements.The Company is implementing enhancements to its internal control over financial reporting to provide reasonable assurance that accounting errors and control deficiencies of this type will not recur. These steps include:

                    •Adoption of a procedure that all new lease agreements will be reviewed and approved by in-house counsel.

                    •Adoption of a procedure that all lease agreements will be reviewed and approved by the Chief Financial Officer for proper accounting implementation.

                    •Adoption of a procedure whereby, on a quarterly basis, the Controller will review all new additions to leasehold improvements to determine the proper amortization period.

                    •Adoption of a procedure whereby, on a quarterly basis, the Controller will update the analysis of lease agreements, to determine if all leases are properly classified as operating or capital leases and to determine if the impact of rent escalation clauses has been accounted for on a straight line basis.

                    •Adoption of a procedure whereby all new lease agreements and the Company’s related accounting analyses will be disclosed to the Company’s independent auditors on a quarterly basis.

               4. Accounting for Bank Owned Life Insurance.The Company has implemented enhancements to its internal control over financial reporting to provide reasonable assurance that accounting errors and control deficiencies of this type will not recur. These steps include:

                    •Amending certain split dollar life insurance agreements during the fourth quarter of 2004 to eliminate the requirement that the Company continue to maintain the policies, or replace them with comparable life insurance policies, until the death of the split dollar participants.

                    •Updating the calculation of the cash surrender value of life insurance discounts with disclosure to the Company’s independent auditors on a quarterly basis.

               Other than as described above, there have been no changes in our internal control over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

     We are a party to routine litigation incidental to our business, none of which is considered likely to have a material adverse effect on us. See further discussion in Note 13 – Commitments and Contingencies of the Notes to Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K. For a discussion of litigation risks relating to our recent accounting restatement, please refer to the discussion in our Annual Report on Form 10-K for the Year ended December 31, 2004 under the caption“Business-Factors That May Impact Our Business or the Value of Our Stock – We face risks related to our recent accounting restatements including potential litigation and regulatory actions,” included in Item 1 Business of our 2004 Annual Report onForm 10-K.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

     (a) – (c) None.

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 5. Other Information

     None

Item 6. Exhibits

     Exhibits

     The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated herein) as part of this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NARA BANCORP, INC.
Date: June 30, 2005	/s/ Ho Yang
	Ho Yang
	President and Chief Executive Officer
	(Principal executive officer)
Date: June 30, 2005	/s/ Christine Oh
	Christine Oh
	Acting Chief Financial Officer
	(Principal financial officer)

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INDEX TO EXHIBITS

Number	Description of Document
3.1	Amended Certificate of Incorporation (filed as an exhibit to Nara Bancorp’s registration statement filed on Form S-8 on February 5, 2003 and incorporated herein by this reference)
3.2	Amended and Restated Bylaws of Nara Bancorp (filed as an exhibit to Nara Bancorp’s current report on Form 8-K filed June 9, 2005 and incorporated herein by this reference)
10.1	Lease for premise located at 1890 West Redondo Beach Boulevard, Gardena, California
10.2	Lease for premise located at 10055 Garden Grove Boulevard Unit A, Garden Grove, California
10.3	Lease for premise located at 209-01 Northern Boulevard, Bayside, New York
31.1	Certification of Chief Executive Officer pursuant to section 302 of Sarbanes-Oxley of 2002
31.2	Certification of Acting Chief Financial Officer pursuant to section 302 of Sarbanes-Oxley of 2002
32.1	Certification of Chief Executive Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002
32.2	Certification of Acting Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002

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