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 contains 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 Item 1A "Risk Factors" 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, to a lesser extent, 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 New York City metropolitan area. We offer our banking services through our network of 21 banking offices in California, the New York metropolitan area, New Jersey and 6 loan production offices mostly located in other parts of the country, to our customers who typically are small- to medium-sized businesses in our market areas. We accept deposits and originate a variety of loans including commercial business loans, commercial real estate loans, trade finance and Small Business Administration (SBA) loans. We discontinued originating consumer loans; however, we continue to service consumer loans in portfolio.

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 are derived 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 income from the sale of SBA loans. Our major expenses are the interest we pay on deposits and borrowings, provisions for loan losses and general operating expenses, which primarily consist of salaries and employee benefits and occupancy costs. Interest rates are highly sensitive to many factors that are beyond our control, such as changes in the national economy and in the related monetary policies of the Board of Governors of the Federal Reserve System, inflation, unemployment, consumer spending and political events. We cannot predict the impact that these factors and future changes in domestic and foreign economic and political conditions might have on our performance.

We have a significant business and geographic concentration in the Korean communities in California and in the New York City metropolitan area and our results are affected by economic conditions in these areas and in Korea. A further decline in economic and business conditions in our market areas and in Korea 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.

Year 2008 was a very challenging year for us, especially with the unprecedented events happening in the financial services industry. The housing crisis, the unraveling of sub-prime loans, the freezing of the credit markets, which led to failures of major investment banks and commercial banks and thrifts, dramatic reductions in interest rates by the Federal Reserve and the intervention by the U.S. Treasury, all have led to unprecedented market volatility. The resulting contraction in the economy, evidenced by high unemployment, asset price declines and falling consumer spending, leading to falling business revenues, has hurt financial services companies, including our bank. During 2008, we experienced significant deterioration in our loan portfolio caused by the slowdown in the economy. The increased provision for loan losses, along with the compression in net interest margin due to rate cuts, and the decline in SBA loan sale gains adversely affected our net income in 2008. Our net income was $2.8 million for the year ended December 31, 2008, representing a 92% decrease from $33.2 million for the year ended December 31, 2007.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. All of our significant accounting policies are described in Note 1 of our consolidated financial statements presented elsewhere herein and are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The following is a summary of the more judgmental and complex accounting estimates and principles affecting the financial condition and results reported in our financial statements. In each area, we have identified the variables we believe to be the most important in the estimation process. We use the best information available to us to make the estimations necessary to value the related assets and liabilities in each of these areas.

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which has a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical data and management's analysis of other qualitative factors, including the current economic environment as described under "Financial Condition-Allowance for Loan Losses" below.

We are obligated to assess, at each reporting date, whether there is an "other-than-temporary" impairment to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income or loss. We examine all individual securities that are in an unrealized loss position at each reporting date for other-than-temporary impairment. Specific investment level factors we examine to assess impairment include the severity and duration of the loss, the nature, financial condition and results of operations of the issuers of the securities and whether there has been any cause for default on the securities or any change in the rating of the securities by the various rating agencies. Additionally, we reexamine the financial resources and overall ability we have and our intent to hold the securities until their fair values recover. During the second quarter of 2008, we recognized an other than temporary impairment charge of $1.7 million on a non-agency asset backed security with a book value of $1.7 million. The impairment charge was due to a down grade of the security by one of the rating agencies. The security has been written down in full. We do not believe that we had any other investment securities with unrealized losses that would be deemed to be "other-than-temporarily" impaired as of December 31, 2008. Investment securities are discussed in more detail under "Financial Condition -Investment Securities Portfolios" below.

Certain SBA loans that we have the intent to sell prior to maturity are designated as held for sale at origination and are recorded at the lower of cost or market value, on an aggregate basis. A valuation allowance is established if the aggregate market value of such loans is lower than their cost, and operations are charged or credited for valuation adjustments. A portion of the premium on sale of SBA loans is recognized as other operating income at the time of the sale. The remaining portion of the premium (relating to the portion of the loan retained) is deferred and amortized over the remaining life of the loan as an adjustment to yield. Servicing assets are recognized when loans are sold with servicing retained. Servicing assets are recorded based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate plus 1% to 2%. The market rate is used to determine servicing costs. Servicing assets are amortized in proportion to and over the period of estimated future servicing income. Management periodically evaluates the servicing asset for impairment, which is the amount, if any, by which the carrying value of the servicing asset exceeds the fair value of the servicing asset. Impairment, if it occurs, is recognized as a write down or charge-off in the period of impairment.

We assess the carrying value of intangible assets including goodwill at least annually in order to determine if such intangible assets are impaired. In reviewing the carrying value of intangible assets, we assess the recoverability of such assets by evaluating the fair value of the related business unit. Any impairment would be required to be recorded during the period identified. If our intangible assets were determined to be impaired, the related charge to earnings could be material. We plan to assess the carrying value of intangible assets during the first quarter of 2009 due to a recent decline in the market value of our common stock below book value. For additional information regarding intangible assets, see Note 5 to our consolidated financial statements presented elsewhere herein.

Results of Operations

General

Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from the loans we extend to our customers and investments, and interest expense is generated from interest-bearing deposits our customers have with us and borrowings that we may have, such as Federal Home Loan Bank borrowings and subordinated debentures. Our ability to generate profitable levels of net interest income is largely dependent on our ability to manage the levels of interest earning assets and interest-bearing liabilities, and the rates received or paid on them, as well as our ability to maintain sound asset quality and appropriate levels of capital and liquidity. As mentioned above, interest income and interest expense may fluctuate based on factors beyond our control, such as economic or political conditions.

We attempt to minimize the effect of interest rate fluctuations on net interest margin by monitoring our interest-sensitive assets and our interest-sensitive liabilities. Net interest income can be affected by a change in the composition of assets and liabilities, for example, if higher yielding loans were to replace a like amount of lower yielding investment securities. Changes in the level of nonaccrual loans and changes in volume and changes in rates can also affect net interest income. Volume changes are caused by differences in the level of interest-earning assets and interest-bearing liabilities. Rate changes result from differences in yields earned on assets and rates paid on liabilities.

We also have non-interest income, including service charges and fees on deposit accounts, fees from trade finance activities and the issuance of letters of credit, and net gains on sale of loans that were held for sale and investment securities available for sale. Our non-interest income can be reduced by net losses on sales of other real estate owned and charges for other than temporary impairment on investment securities and derivative instruments.

In addition to interest expense, our income is impacted by provisions for loan losses, and non-interest expenses, primarily salaries and benefits and occupancy expense.

Net Income

Our net income was $2.8 million for 2008, compared to $33.2 million for 2007 and $33.8 million for 2006, representing a decrease of 92% for 2008 compared to the prior year. Our earnings per common share based on fully diluted shares were $0.09, $1.25 and $1.28 for 2008, 2007 and 2006, respectively. The return on average assets was 0.11%, 1.50% and 1.75% and the return on average stockholders' equity was 1.15%, 16.21% and 20.34% for these same periods.

Net income for 2008 decreased significantly primarily due to higher loan loss provisions, lower net interest income due to margin compression and lower non-interest income from lower gains on sale of SBA and other loans and net losses on sales of other real estate owned and a charge for other than temporary impairment on a security available for sale. During 2007, net income decreased slightly as compared with 2006 due to higher loan loss provisions and non-interest expense, partially offset by higher net interest income and non-interest income.

Operations Summary



                                                                 Year Ended December 31,
                                           Increase (Decrease)                         Increase (Decrease)
                              2008          Amount            %           2007          Amount            %           2006
                                                                 (Dollars in thousands)
Interest income             $ 166,928    $     (8,845 )        (5 )%    $ 175,773    $     19,942          13 %     $ 155,831
Interest expense               70,707          (7,861 )       (10 )%       78,568          17,352          28 %        61,216

Net interest income            96,221            (984 )        (1 )%       97,205           2,590           3 %        94,615
Provision for loan
losses                         48,825          41,295         548 %         7,530           3,776         101 %         3,754
Non-interest income            13,993          (8,580 )       (38 )%       22,573           3,304          17 %        19,269
Non-interest expense           57,009             559           1 %        56,450           2,523           5 %        53,927

Income before income tax
provision                       4,380         (51,418 )       (92 )%       55,798            (405 )        -1 %        56,203
Income tax provision            1,625         (20,974 )       (93 )%       22,599             202           1 %        22,397

Net income                  $   2,755    $    (30,444 )       (92 )%    $  33,199    $       (607 )        (2 )%    $  33,806

Net Interest Income and Net Interest Margin

Net interest income was $96.2 million for 2008, compared to $97.2 million for 2007 and $94.6 million for 2006. The net interest margin was 3.96% for 2008 compared to 4.60% for 2007 and 5.14% for 2006.

Net interest income decreased $984 thousand, or 1%, during 2008. The decrease is primarily due to a decline in net interest margin from a series of rate cuts made by Federal Reserve Board throughout the year, offset by 15% growth in average interest earning assets. The Wall Street Journal prime rate, to which approximately 50% of our loans are tied, decreased 400 basis points throughout 2008.

Net interest income increased $2.6 million, or 3%, during 2007. The increase resulted from an increase of $271.5 million, or 15%, in average interest-earning assets partially offset by a decline in net interest margin. The decline in net interest margin reflects the impact of the higher cost of deposits resulting from competition and the lower yield on variable rate loans as a result of a 100 basis point decrease in the prime rate during 2007.

Interest income reversed for non-accrual loans (net of income recognized) was $689 thousand for 2008, compared to $697 thousand for 2007 and $219 thousand for 2006. Excluding this effect, the net interest margin for 2008, 2007 and 2006 was 3.99%, 4.64% and 5.15%, respectively.

Interest Income

Interest income was $166.9 million for 2008, compared to $175.8 million for 2007 and $155.8 million for 2006. The yield on average interest-earning assets was 6.87% for 2008, compared to 8.32% for 2007 and 8.47% for 2006.

The decrease in interest income of $8.8 million, or 5%, for 2008 compared to 2007 was primarily due to a decline in the prime rate to which our adjustable rate loans are tied, partially offset by 11% growth in average loans. The average yield on loans decreased 150 basis points to 7.23% for 2008, compared to 8.73% for 2007.

Average loans increased $210.3 million to $2.09 billion for 2008 from $1.88 billion for 2007. Interest income on securities increased $4.5 million, or 46%, to $14.4 million for 2008 from $9.9 million for 2007, primarily due to the growth in the securities portfolio. The average yield on investment securities for 2008 decreased to 4.82% from 4.95% for 2007, due to a decrease in LIBOR rates to which the floating rate securities are tied.

The increase in interest income of $19.9 million, or 13%, for 2007 compared to 2006 was primarily due to a $271.5 million increase in average interest-earning assets, which resulted mainly from loan growth. Average loans increased $286.0 million, or 18%, to $1.88 billion for 2007 from $1.59 billion for 2006. The increase in interest income from loan growth was partially offset by the decrease in the average yield on loans, which decreased to 8.73% for 2007 from 9.06% for 2006 resulting from the 100 basis point decrease in the prime rate for 2007. During 2007, interest income on loans increased $25.1 million due to the growth in loan volume, and decreased $5.3 million due to the decrease in interest rates. Interest income on securities also increased $1.4 million, or 17%, to $9.9 million for 2007 from $8.4 million for 2006, mostly attributable to the growth in the securities portfolio and to the replacement of lower yielding securities with higher yielding securities.

Interest Expense

Deposits

Interest expense on deposits was $54.1 million for 2008 compared to $68.2 million for 2007 and $55.6 million for 2006. The average cost of total deposits was 2.91% for 2008 compared to 3.85% for 2007 and 3.38% for 2006. The average cost of interest-bearing deposits was 3.54% for 2008 compared to 4.87% for 2007 and 4.38% for 2006. The decrease in interest expense on total deposits of $14.2 million, or 21%, for 2008 compared to 2007 was due to the decrease in rates paid on deposits as the market interest rates decreased, partially offset by an increase in average interest-bearing deposits. Average interest-bearing deposits increased $127 million, or 9% during 2008 while average non-interest bearing deposits decreased $43 million, or 12%.

Year 2008 has been a more difficult and challenging year to retain deposits, especially during the second half of the year. The significant slowdown in the economy, combined with the failure of certain financial institutions and the lower interest rate environment, resulted in deposit outflows from the banking system generally. In response to concerns that this trend might continue or worsen, Congress enacted a temporary increase in FDIC deposit insurance coverage from $100,000 to $250,000 on a temporary basis until December 31, 2009. In addition, the FDIC established its Temporary Liquidity Guarantee Program that, among other things, insures non-interest bearing transaction accounts at participating FDIC insured institutions, including the Bank, in unlimited amounts through December 31, 2009. We experienced a significant outflow of deposits during fourth quarter 2008 resulting from customers transferring money to South Korea to take advantage of the weakening of the Korean won and higher deposit rates paid by South Korean banks. Despite these hurdles, we were able to increase deposits, with the increases continuing to be concentrated in interest-bearing deposits.

The increase in interest expense on total deposits of $12.7 million, or 23%, for 2007 compared to 2006 was due to the increase in rates paid for deposits resulting from continued robust competition for deposits during the year and an increase in volume. Downward repricing of deposit rates lagged the repricing of the federal funds rate due to competition and the fixed maturities of CDs. Additionally, average interest-bearing deposits increased $128.9 million, or 10%, to $1.40 billion for 2007 from $1.27 billion for 2006. Average time deposits increased $91.4 million, or 10%, during 2007. The increase in cost of deposits occurred for all types of interest-bearing deposits. During 2007, $6.8 million of the increase in interest expense on deposits was attributable to the increase in the rates paid on deposits, and $5.9 million was attributable to the net growth in average deposits.

Borrowings

Borrowings include borrowings from the FHLB, the FRB, federal funds purchased and subordinated debentures. As part of our asset liability management, we utilize FHLB borrowings to supplement our deposit source of funds. Therefore, there may be fluctuations in these balances depending on the short-term liquidity and longer-term financing needs of the Bank.

Average FHLB and other borrowings increased $210.7 million, or 131%, for 2008 compared to 2007 to augment the funding from deposits. The continued competition for deposits in our marketplace made it difficult to fund loans and investments solely from deposits, and the use of FHLB advances provided an alternative

funding source. Interest expense on FHLB borrowings and federal funds purchased was $13.9 million for 2008, compared to $7.0 million for 2007 and $2.3 million for 2006. The average cost of those borrowings was 3.74% for 2008, compared to 4.33% for 2007 and 4.72% for 2006. Interest expense on subordinated debentures was $2.7 million for 2008, compared to $3.3 million for 2007 and $3.3 million for 2006.

The average cost of subordinated debentures was 7.15% for 2008, compared to 8.87% for 2007 and 9.00% for 2006, as the 3-month LIBOR, to which all but one of our issues of subordinated debentures is tied, decreased over the years.

Net Interest Margin and Net Interest Rate Spread

We analyze our earnings performance using, among other measures, the net interest spread and net interest margin. The net interest spread represents the difference between the average yield on interest-earning assets and average rate paid on interest-bearing liabilities. Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net interest margin. Our net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, as well as the ratio of the amounts of interest-earning assets to interest-bearing liabilities.

Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and other competitive factors. These factors are in turn affected by general economic conditions and other factors including those beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board. The table below presents the average yield on each category of interest-earning asset, the average rate paid on each category of interest-bearing liability, and the resulting net interest spread and net interest margin for each year in the three-year period ended December 31, 2008.

Average Balance Sheet and Analysis of Net Interest Income



                                                                             Year Ended December 31,
                                                2008                                  2007                                  2006
                                                Interest    Average                   Interest    Average                   Interest    Average
                                    Average      Income/    Yield/        Average      Income/    Yield/        Average      Income/    Yield/
                                    Balance      Expense     Rate         Balance      Expense     Rate         Balance      Expense     Rate
                                                                             (Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans(1)(2)(3)                    $ 2,089,803   $ 151,172      7.23 %   $ 1,879,457   $ 164,163      8.73 %   $ 1,593,453   $ 144,349      9.06 %
Other investments                      23,498       1,010      4.30 %        12,460         690      5.54 %         9,253         511      5.52 %
Securities(3)                         298,886      14,416      4.82 %       199,293       9,867      4.95 %       185,587       8,435      4.55 %
Federal funds sold                     16,816         330      1.96 %        20,514       1,053      5.13 %        51,883       2,536      4.89 %

Total interest-earning assets       2,429,003     166,928      6.87 %     2,111,724     175,773      8.32 %     1,840,176     155,831      8.47 %
Non-interest earning assets:
Cash and due from bank                 33,376                                53,406                                34,757
Premises and equipment, net            11,674                                11,753                                 9,907
Accrued interest receivable             8,781                                 9,208                                 8,192
Intangible assets                       4,587                                 4,935                                 5,610
Other assets                           57,246                                25,488                                36,271

Total non-interest earning
assets                                115,664                               104,790                                94,737

Total assets                      $ 2,544,667                           $ 2,216,514                           $ 1,934,913

INTEREST-BEARING LIABILITIES:
Deposits:
Demand, interest-bearing          $   280,055       8,264      2.95 %   $   241,152       9,895      4.10 %   $   210,604       7,074      3.36 %
Savings                               133,791       4,920      3.68 %       143,762       5,373      3.74 %       136,846       4,155      3.04 %
Time certificates                   1,113,667      40,896      3.67 %     1,015,717      52,979      5.22 %       924,288      44,328      4.80 %
FHLB and other borrowings             372,142      13,932      3.74 %       161,410       6,988      4.33 %        48,949       2,311      4.72 %
Subordinated debentures                37,683       2,695      7.15 %        37,564       3,333      8.87 %        37,187       3,348      9.00 %

Total interest-bearing
liabilities                         1,937,338      70,707      3.65 %     1,599,605      78,568      4.91 %     1,357,874      61,216      4.51 %

Non-interest bearing
liabilities
Demand deposits                       328,116                               371,599                               373,789
Other liabilities                      40,413                                40,447                                37,044
Stockholders' equity                  238,800                               204,863                               166,206

. . .