UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 000-50245

NARA BANCORP, INC.

(213) 639-1700

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

     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

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PART I

FINANCIAL INFORMATION

(Continued)

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NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited)

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

See accompanying notes to condensed consolidated financial statements (unaudited)

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2005 and 2004

(Unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited)

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

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

See accompanying notes to condensed consolidated financial statements (unaudited)

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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:

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     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.

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.

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

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.

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9. Loan Receivable and Allowance For Loan Losses

     The following is a summary of loans by major category:

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

     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.

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

     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.

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

Three Months Ended March 31,
(Dollars in thousands)

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:

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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

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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:

     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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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

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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: