Form 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2013

¨	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: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		95-4788120
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A Los Angeles, California		90010
(Address of Principal Executive Offices)		(Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(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. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of April 30, 2013, there were 31,588,767 outstanding shares of the Registrant’s Common Stock.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED MARCH 31, 2013

TABLE OF CONTENTS


PART 1 - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3

	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Operations (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54

ITEM 4.	CONTROLS AND PROCEDURES	54

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	55

ITEM 1A.	RISK FACTORS	55

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	56

ITEM 4.	MINE SAFETY DISCLOSURES	56

ITEM 5.	OTHER INFORMATION	56

ITEM 6.	EXHIBITS	56

SIGNATURES		57

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)


	March 31,			December 31,
	2013			2012
ASSETS
Cash and Due From Banks	$	69,642		$	92,350
Interest-Bearing Deposits in Other Banks		75,657			175,697

Cash and Cash Equivalents		145,299			268,047
Restricted Cash		—			5,350
Securities Available-for-Sale, at Fair Value (Amortized Cost of $413,132 as of March 31, 2013 and $443,712 as of December 31, 2012)		419,903			451,060
Loans Held for Sale, at the Lower of Cost or Fair Value		6,043			8,306
Loans Receivable, Net of Allowance for Loan Losses of $61,191 as of March 31, 2013 and $63,305 as of December 31, 2012		2,061,156			1,986,051
Accrued Interest Receivable		7,526			7,581
Premises and Equipment, Net		14,792			15,150
Other Real Estate Owned, Net		900			774
Customers’ Liability on Acceptances		2,170			1,336
Servicing Assets		6,004			5,542
Other Intangible Assets, Net		1,294			1,335
Investment in Federal Home Loan Bank Stock, at Cost		16,014			17,800
Investment in Federal Reserve Bank Stock, at Cost		12,222			12,222
Income Tax Assets		57,084			60,028
Bank-Owned Life Insurance		29,284			29,054
Prepaid Expenses		2,676			2,084
Other Assets		10,056			10,800

TOTAL ASSETS	$	2,792,423		$	2,882,520

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing	$	709,650		$	720,931
Interest-Bearing		1,623,362			1,675,032

Total Deposits		2,333,012			2,395,963
Accrued Interest Payable		3,192			11,775
Bank’s Liability on Acceptances		2,170			1,336
Federal Home Loan Bank Advances		2,840			2,935
Junior Subordinated Debentures		51,478			82,406
Accrued Expenses and Other Liabilities		10,626			9,741

TOTAL LIABILITIES		2,403,318			2,504,156

STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 62,500,000 Shares; Issued 32,166,661 Shares (31,588,767 Shares Outstanding) and 32,074,434 shares (31,496,540 Shares Outstanding) as of March 31, 2013 and December 31, 2012		257			257
Additional Paid-In Capital		551,064			550,123
Unearned Compensation		(44	)		(57	)
Accumulated Other Comprehensive Income-Unrealized Gain on Securities Available-for-Sale and Interest-Only Strip, Net of Income Taxes of $1,695 as of March 31, 2013 and $1,946 as of December 31, 2012		5,095			5,418
Accumulated Deficit		(97,409	)		(107,519	)
Less Treasury Stock, at Cost; 577,894 Shares as of March 31, 2013 and December 31, 2012		(69,858	)		(69,858	)

TOTAL STOCKHOLDERS’ EQUITY		389,105			378,364

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,792,423		$	2,882,520

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)


	Three Months Ended
	March 31,
	2013			2012
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans	$	26,799		$	27,542
Taxable Interest on Investment Securities		2,116			2,098
Tax-Exempt Interest on Investment Securities		95			102
Interest on Term Federal Funds Sold		—			325
Interest on Federal Funds Sold		6			128
Interest on Interest-Bearing Deposits in Other Banks		88			2
Dividends on Federal Reserve Bank Stock		183			68
Dividends on Federal Home Loan Bank Stock		108			29

Total Interest and Dividend Income		29,395			30,294

INTEREST EXPENSE:
Interest on Deposits		3,159			4,919
Interest on Federal Home Loan Bank Advances		38			43
Interest on Junior Subordinated Debentures		594			799

Total Interest Expense		3,791			5,761

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES		25,604			24,533
Provision for Credit Losses		—			2,000

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		25,604			22,533

NON-INTEREST INCOME:
Service Charges on Deposit Accounts		3,048			3,168
Insurance Commissions		1,213			1,236
Remittance Fees		497			454
Trade Finance Fees		277			292
Other Service Charges and Fees		398			364
Bank-Owned Life Insurance Income		230			399
Gain on Sales of SBA Loans Guaranteed Portion		2,692			—
Net Loss on Sales of Other Loans		(97	)		(2,393	)
Net Gain on Sales of Investment Securities		9			1
Other Operating Income		90			112

Total Non-Interest Income		8,357			3,633

NON-INTEREST EXPENSE:
Salaries and Employee Benefits		9,351			9,110
Occupancy and Equipment		2,556			2,595
Deposit Insurance Premiums and Regulatory Assessments		234			1,401
Data Processing		1,170			1,253
Other Real Estate Owned Expense		32			(44	)
Professional Fees		2,156			749
Directors and Officers Liability Insurance		220			297
Supplies and Communications		495			558
Advertising and Promotion		672			601
Loan-Related Expense		146			200
Amortization of Other Intangible Assets		41			71
Other Operating Expenses		2,094			1,955

Total Non-Interest Expense		19,167			18,746

INCOME BEFORE PROVISION FOR INCOME TAXES		14,794			7,420
Provision for Income Taxes		4,684			79

NET INCOME	$	10,110		$	7,341

EARNINGS PER SHARE:
Basic	$	0.32		$	0.23
Diluted	$	0.32		$	0.23
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		31,538,980			31,470,520
Diluted		31,626,667			31,489,569

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)


	Three Months Ended
	March 31,
	2013			2012
NET INCOME	$	10,110		$	7,341
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (Loss) Gain on Securities
Unrealized Holding (Loss) Gain Arising During Period		(568	)		674
Less: Reclassification Adjustment for Gain Included in Net Income		(9	)		—
Unrealized Gain on Interest Rate Swap		—			1
Unrealized Gain on Interest-only Strip of Servicing Assets		3			2
Income Tax Benefit Related to Items of Other Comprehensive Income		251			—

Other Comprehensive (Loss) Income		(323	)		677

COMPREHENSIVE INCOME	$	9,787		$	8,018

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Number of Shares)


	Common Stock - Number of Shares							Stockholders’ Equity
	Gross					Net										Accumulated
	Shares					Shares				Additional						Other			Retained			Treasury			Total
	Issued and		Treasury			Issued and		Common		Paid-in			Unearned			Comprehensive			Earnings			Stock,			Stockholders’
	Outstanding		Shares			Outstanding		Stock		Capital			Compensation			Income (Loss)			(Deficit)			at Cost			Equity
BALANCE AT JANUARY 1, 2012		32,066,987		(577,786	)		31,489,201	$	257	$	549,744		$	(166	)	$	3,524		$	(197,893	)	$	(69,858	)	$	285,608
Share-Based Compensation Expense		—		—			—		—		67			25			—			—			—			92
Comprehensive Income:
Net Income		—		—			—		—		—			—			—			7,341			—			7,341
Change in Unrealized Gain on Securities
Available-for-Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—		—			—			677			—			—			677

Total Comprehensive Income																										8,018

BALANCE AT MARCH 31, 2012		32,066,987		(577,786	)		31,489,201	$	257	$	549,811		$	(141	)	$	4,201		$	(190,552	)	$	(69,858	)	$	293,718

BALANCE AT JANUARY 1, 2013		32,074,434		(577,894	)		31,496,540	$	257	$	550,123		$	(57	)	$	5,418		$	(107,519	)	$	(69,858	)	$	378,364
Share-Based Compensation Expense		—		—			—		—		84			13			—			—			—			97
Exercises of Stock Options		1,679		—			1,679		—		(298	)		—			—			—			—			(298	)
Exercises of Stock Warrants		90,548		—			90,548		—		1,155			—			—			—			—			1,155
Comprehensive Income:
Net Income		—		—			—		—		—			—			—			10,110			—			10,110
Change in Unrealized Gain on Securities
Available-for-Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—		—			—			(323	)		—			—			(323	)

Total Comprehensive Income																										9,787

BALANCE AT MARCH 31, 2013		32,166,661		(577,894	)		31,588,767	$	257	$	551,064		$	(44	)	$	5,095		$	(97,409	)	$	(69,858	)	$	389,105

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)


	Three Months Ended
	March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	10,110		$	7,341
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment		504			554
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net		769			1,078
Amortization of Other Intangible Assets		41			71
Amortization of Servicing Assets		329			205
Share-Based Compensation Expense		97			92
Provision for Credit Losses		—			2,000
Net Gain on Sales of Investment Securities		(9	)		(1	)
Net (Gain) Loss on Sales of Loans		(2,595	)		1,736
Loss on Investment in Affordable Housing Partnership		—			220
Gain on Sales of Other Real Estate Owned		(5	)		—
Gain on Bank-Owned Life Insurance Settlement		—			(163	)
Valuation Impairment on Other Real Estate Owned		7			—
Lower of Cost or Fair Value Adjustment for Loans Held for Sale		—			657
Origination of Loans Held for Sale		(23,144	)		(25,866	)
Proceeds from Life Insurance		—			344
Proceeds from Sales of SBA Loans Guaranteed Portion		30,745			—
Changes in Fair Value of Stock Warrants		91			170
Decrease in Restricted Cash		5,350			—
Decrease (Increase) in Accrued Interest Receivable		55			(140	)
Increase in Servicing Assets		(791	)		—
Decrease (Increase) in Income Tax Assets		2,876			(2,428	)
Increase in Cash Surrender Value of Bank-Owned Life Insurance		(230	)		(236	)
Increase in Prepaid Expenses		(592	)		(1,606	)
Increase in Other Assets		(87	)		(4,957	)
Decrease in Accrued Interest Payable		(8,583	)		(430	)
Increase in Other Liabilities		2,582			247

Net Cash Provided (Used In) By Operating Activities		17,520			(21,112	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock		1,786			1,093
Proceeds from Matured or Called Securities Available-for-Sale		20,820			40,873
Proceeds from Sales of Securities Available-for-sale		9,000			3,000
Proceeds from Matured or Called Securities Held to Maturity		—			135
Proceeds from Sales of Other Real Estate Owned		281			—
Proceeds from Sales of Loans Held for Sale		1,454			26,961
Net Increase in Loans Receivable		(79,815	)		(20,353	)
Purchase of Loans Receivable		—			(67,428	)
Purchases of Term Federal Fund		—			(5,000	)
Purchases of Securities Available-for-Sale		—			(18,113	)
Purchases of Premises and Equipment		(146	)		(223	)

Net Cash Used In Investing Activities		(46,620	)		(39,055	)

CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Deposits		(62,951	)		18,816
Proceeds from Exercise of Stock Options		21			—
Proceeds from Exercise of Stock Warrant		305			—
Repayment of Long-Term Federal Home Loan Bank Advances		(95	)		(90	)
Redemption of Junior Subordinated Debenture		(30,928	)		—

Net Cash (Used In) Provided By Financing Activities		(93,648	)		18,726

NET DECREASE IN CASH AND CASH EQUIVALENTS		(122,748	)		(41,441	)
Cash and Cash Equivalents at Beginning of Year		268,047			201,683

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	145,299		$	160,242

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid	$	12,374		$	5,331
Income Taxes Paid	$	1,800		$	2,507
Non-Cash Activities:
Transfer of Loans Receivable to Other Real Estate Owned	$	513		$	1,080
Transfer of Loans Receivable to Loans Held for Sale	$	3,373		$	37,481
Conversion of Stock Warrant into Common Stock	$	850		$	—
Income Tax Benefit Related to Items of Other Comprehensive Income	$	251		$	—
Change in Unrealized Gain or Loss in Accumulated Other Comprehensive Income	$	568		$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

NOTE 1 — BASIS OF PRESENTATION

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Our primary subsidiary is Hanmi Bank (the “Bank”), a California state chartered bank. Our other subsidiaries are Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”).

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2013, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Annual Report on Form 10-K”).

The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Descriptions of our significant accounting policies are included in “Note 2 — Summary of Significant Accounting Policies” in our 2012 Annual Report on Form 10-K.

NOTE 2 — INVESTMENT SECURITIES

The following is a summary of investment securities available-for-sale:


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
	(In Thousands)
March 31, 2013:
Mortgage-Backed Securities ⁽¹⁾	$	146,889	$	3,008	$	503	$	149,394
Collateralized Mortgage Obligations⁽¹⁾		90,972		2,081		185		92,868
U.S. Government Agency Securities		80,991		116		177		80,930
Municipal Bonds-Tax Exempt		12,185		526		—		12,711
Municipal Bonds-Taxable		44,159		2,124		127		46,156
Corporate Bonds		20,473		200		301		20,372
SBA Loan Pool Securities		14,084		—		166		13,918
Other Securities		3,025		58		53		3,030
Equity Securities		354		170		—		524

Total Securities Available-for-Sale	$	413,132	$	8,283	$	1,512	$	419,903

December 31, 2012:
Mortgage-Backed Securities ⁽¹⁾	$	157,185	$	3,327	$	186	$	160,326
Collateralized Mortgage Obligations⁽¹⁾		98,821		1,775		109		100,487
U.S. Government Agency Securities		92,990		222		94		93,118
Municipal Bonds-Tax Exempt		12,209		603		—		12,812
Municipal Bonds-Taxable		44,248		2,029		135		46,142
Corporate Bonds		20,470		176		246		20,400
SBA Loan Pool Securities		14,104		4		82		14,026
Other Securities		3,331		73		47		3,357
Equity Securities		354		78		40		392

Total Securities Available-for-Sale	$	443,712	$	8,287	$	939	$	451,060

(1)

Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities

The amortized cost and estimated fair value of investment securities at March 31, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale
	Amortized		Estimated
	Cost		Fair Value
	(In Thousands)
Within One Year	$	—	$	—
Over One Year Through Five Years		28,245		28,281
Over Five Years Through Ten Years		101,508		102,738
Over Ten Years		45,164		46,098
Mortgage-Backed Securities		146,889		149,394
Collateralized Mortgage Obligations		90,972		92,868
Equity Securities		354		524

Total	$	413,132	$	419,903

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. There was no OTTI charged during the first quarter of 2013.

Gross unrealized losses on investment securities available-for-sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of March 31, 2013 and December 31, 2012:


	Holding Period
	Less Than 12 Months						12 Months or More						Total
Investment Securities Available-for-Sale	Gross Unrealized Loss		Estimated Fair Value		Number of Securities		Gross Unrealized Loss		Estimated Fair Value		Number of Securities		Gross Unrealized Loss		Estimated Fair Value		Number of Securities
	(In Thousands, Except Number of Securities)
March 31, 2013:
Mortgage-Backed Securities	$	503	$	35,523		12	$	—	$	—		—	$	503	$	35,523		12
Collateralized Mortgage Obligations		185		18,076		7		—		—		—		185		18,076		7
U.S. Government Agency Securities		177		35,799		12		—		—		—		177		35,799		12
Municipal Bonds-Taxable		124		4,577		4		3		464		1		127		5,041		5
Corporate Bonds		116		4,871		1		185		10,801		3		301		15,672		4
SBA Loan Pool Securities		166		13,918		4		—		—		—		166		13,918		4
Other Securities		1		25		2		52		947		1		53		972		3

Total	$	1,272	$	112,789		42	$	240	$	12,212		5	$	1,512	$	125,001		47

December 31, 2012:
Mortgage-Backed Securities	$	186	$	28,354		10	$	—	$	—		—	$	186	$	28,354		10
Collateralized Mortgage Obligations		109		14,344		5		—		—		—		109		14,344		5
U.S. Government Agency Securities		94		26,894		9		—		—		—		94		26,894		9
Municipal Bonds-Taxable		126		4,587		4		9		1,964		3		135		6,551		7
Corporate Bonds		—		—		—		246		10,738		3		246		10,738		3
SBA Loan Pool Securities		82		11,004		3		—		—		—		82		11,004		3
Other Securities		1		12		1		46		953		1		47		965		2
Equity Securities		40		96		1		—		—		—		40		96		1

Total	$	638	$	85,291		33	$	301	$	13,655		7	$	939	$	98,946		40

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2013 and December 31, 2012 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2013. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.

The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2013 and December 31, 2012 are not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2013 and December 31, 2012 are warranted.

Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense on sales of investment securities were as follows for the periods indicated:


	Three Months Ended
	March 31,
	2013		2012
	(In Thousands)
Gross Realized Gains on Sales of Investment Securities	$	9	$	1
Gross Realized Losses on Sales of Investment Securities		—		—

Net Realized Gains on Sales of Investment Securities	$	9	$	1

Proceeds from Sales of Investment Securities	$	9,000	$	3,000
Tax Expense on Sales of Investment Securities	$	4	$	—

For the three months ended March 31, 2013, $577,000 of net unrealized loss arose during the period and was included in comprehensive income, and there was a $9,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $34,000 in comprehensive income. For the three months ended March 31, 2012, $674,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1,000 gain in earnings resulting from the redemption of investment securities that had previously been recorded as net unrealized gains of $4,000.

Investment securities available-for-sale with carrying values of $16.5 million and $18.2 million as of March 31, 2013 and December 31, 2012, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

NOTE 3 — LOANS

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.

Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy. Most of the Bank’s lending activity occurs within Southern California.

Loans Receivable

Loans receivable consisted of the following as of the dates indicated:


	March 31,			December 31,
	2013			2012
	(In Thousands)
Real Estate Loans:
Commercial Property	$	831,019		$	787,094
Residential Property		94,735			101,778

Total Real Estate Loans		925,754			888,872
Commercial and Industrial Loans:
Commercial Term ⁽¹⁾		921,009			884,364
Commercial Lines of Credit ⁽²⁾		49,608			56,121
SBA Loans ⁽³⁾		158,687			148,306
International Loans		31,448			34,221

Total Commercial and Industrial Loans		1,160,752			1,123,012
Consumer Loans		35,180			36,676

Total Gross Loans		2,121,686			2,048,560
Allowance for Loans Losses		(61,191	)		(63,305	)
Deferred Loan Fees		661			796

Loans Receivable, Net	$	2,061,156		$	1,986,051

(1)

Includes owner-occupied property loans of $882.5 million and $774.2 million as of March 31, 2013 and December 31, 2012, respectively.

(2)

Includes owner-occupied property loans of $1.3 million and $1.4 million as of March 31, 2013 and December 31, 2012, respectively.

(3)

Includes owner-occupied property loans of $141.9 million and $128.4 million as of March 31, 2013 and December 31, 2012, respectively.

Accrued interest on loans receivable was $5.5 million and $5.4 million at March 31, 2013 and December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, loans receivable totaling $614.8 million and $524.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s federal discount window.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended March 31, 2013 and 2012:


	Real Estate			Commercial and Industrial			Consumer		Total
	(In Thousands)
March 31, 2013
Balance at Beginning of Period	$	—		$	8,306		$	—	$	8,306
Origination of Loans Held For Sale		—			23,144			—		23,144
Reclassification from Loans Receivable to Loans Held for Sale		—			3,373			—		3,373
Sales of Loans Held for Sale		—			(28,765	)		—		(28,765	)
Principal Payoffs and Amortization		—			(15	)		—		(15	)

Balance at End of Period	$	—		$	6,043		$	—	$	6,043

March 31, 2012
Balance at Beginning of Period	$	11,068		$	11,519		$	—	$	22,587
Origination of Loans Held For Sale		—			25,866			—		25,866
Reclassification from Loans Receivable to Loans Held for Sale		17,076			20,405			—		37,481
Reclassification from Loans Receivable to Other Real Estate Owned		(360	)		—			—		(360	)
Sales of Loans Held for Sale		(16,794	)		(11,903	)		—		(28,697	)
Principal Payoffs and Amortization		(111	)		(116	)		—		(227	)
Valuation Adjustments		—			(657	)		—		(657	)

Balance at End of Period	$	10,879		$	45,114		$	—	$	55,993

For the three months ended March 31, 2013, a loan receivable of $3.4 million was reclassified as loans held for sale, and loans held for sale of $28.8 million were sold. For the three months ended March 31, 2012, loans receivable of $37.5 million were reclassified as loans held for sale, and loans held for sale of $28.7 million were sold.

Allowance for Loan Losses and Allowance for Off-Balance Sheet Items

Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:


	As of and for the
	Three Months Ended
	March 31,			December 31,			March 31,
	2013			2012			2012
	(In Thousands)
Allowance for Loan Losses:
Balance at Beginning of Period	$	63,305		$	66,107		$	89,936
Actual Charge-Offs		(3,024	)		(3,966	)		(12,321	)
Recoveries on Loans Previously Charged Off		714			757			1,037

Net Loan Charge-Offs		(2,310	)		(3,209	)		(11,284	)
Provision Charged to Operating Expense		196			407			2,400

Balance at End of Period	$	61,191		$	63,305		$	81,052

Allowance for Off-Balance Sheet Items:
Balance at Beginning of Period	$	1,824		$	2,231		$	2,981
Provision Charged to Operating Expense		(196	)		(407	)		(400	)

Balance at End of Period	$	1,628		$	1,824		$	2,581

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:


	Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In Thousands)
March 31, 2013
Allowance for Loan Losses:
Beginning Balance	$	18,180		$	41,928		$	2,280		$	917		$	63,305
Charge-Offs		(213	)		(2,647	)		(164	)		—			(3,024	)
Recoveries on Loans Previously Charged Off		8			657			49			—			714
Provision		(143	)		(378	)		(370	)		1,087			196

Ending Balance	$	17,832		$	39,560		$	1,795		$	2,004		$	61,191

Ending Balance: Individually Evaluated for Impairment	$	95		$	4,388		$	401		$	—		$	4,884

Ending Balance: Collectively Evaluated for Impairment	$	17,737		$	35,172		$	1,394		$	2,004		$	56,307

Loans Receivable:
Ending Balance	$	925,754		$	1,160,752		$	35,180		$	—		$	2,121,686

Ending Balance: Individually Evaluated for Impairment	$	8,047		$	39,965		$	1,639		$	—		$	49,651

Ending Balance: Collectively Evaluated for Impairment	$	917,707		$	1,120,787		$	33,541		$	—		$	2,072,035

March 31, 2012
Allowance for Loan Losses:
Beginning Balance	$	19,637		$	66,005		$	2,243		$	2,051		$	89,936
Charge-Offs		(2,842	)		(9,115	)		(364	)		—			(12,321	)
Recoveries on Loans Previously Charged Off		—			1,013			24			—			1,037
Provision		5,435			(3,265	)		341			(111	)		2,400

Ending Balance	$	22,230		$	54,638		$	2,244		$	1,940		$	81,052

Ending Balance: Individually Evaluated for Impairment	$	536		$	16,686		$	—		$	—		$	17,222

Ending Balance: Collectively Evaluated for Impairment	$	21,694		$	37,952		$	2,244		$	1,940		$	63,830

Loans Receivable:
Ending Balance	$	834,056		$	1,102,140		$	40,782		$	—		$	1,976,978

Ending Balance: Individually Evaluated for Impairment	$	16,395		$	50,960		$	402		$	—		$	67,757

Ending Balance: Collectively Evaluated for Impairment	$	817,661		$	1,051,180		$	40,380		$	—		$	1,909,221

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. All loans are reviewed by a third-party loan reviewer on a semi-annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass: Pass loans, grades (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention (5),” “Substandard (6)” or “Doubtful (7).” This category is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass category, or grades (0) to (4):

Pass (0):

Loans or commitments secured in full by cash or cash equivalents.

Pass (1):

Loans or commitments requiring a very strong, well-structured credit relationship with an established borrower. The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirement, excellent liquidity, and very strong capital.

Pass (2):

Loans or commitments requiring a well-structured credit that may not be as seasoned or as high quality as grade (1). Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This grade includes individuals with substantial net worth supported by liquid assets and strong income.

Pass (3):

Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheets and significant cash flow coverage, although they may be somewhat more leveraged and exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans with this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity.

Pass (4):

Loans or commitments to borrowers exhibiting either somewhat weaker balance sheets or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result, the Bank may have secured its exposure to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.

Special Mention: A Special Mention credit, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard credit, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

Doubtful: A Doubtful credit, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.


	Pass (Grade 0-4)		Criticized (Grade 5)		Classified (Grade 6-7)		Total Loans
	(In Thousands)
March 31, 2013
Real Estate Loans:
Commercial Property
Retail	$	395,952	$	3,946	$	3,304	$	403,202
Land		5,677		—		8,062		13,739
Other		401,291		12,070		717		414,078
Residential Property		92,735		—		2,000		94,735
Commercial and Industrial Loans:
Commercial Term
Unsecured		80,022		624		17,854		98,500
Secured By Real Estate		760,095		15,838		46,576		822,509
Commercial Lines of Credit		46,908		849		1,851		49,608
SBA Loans		146,389		1,115		11,183		158,687
International Loans		30,018		—		1,430		31,448
Consumer Loans		32,393		190		2,597		35,180

Total Gross Loans	$	1,991,480	$	34,632	$	95,574	$	2,121,686

December 31, 2012
Real Estate Loans:
Commercial Property
Retail	$	386,650	$	3,971	$	2,324	$	392,945
Land		5,491		—		8,516		14,007
Other		366,518		12,132		1,492		380,142
Residential Property		99,250		—		2,528		101,778
Commercial and Industrial Loans:
Commercial Term
Unsecured		87,370		663		22,139		110,172
Secured By Real Estate		710,723		13,038		50,431		774,192
Commercial Lines of Credit		53,391		863		1,867		56,121
SBA Loans		136,058		1,119		11,129		148,306
International Loans		34,221		—		—		34,221
Consumer Loans		33,707		201		2,768		36,676

Total Gross Loans	$	1,913,379	$	31,987	$	103,194	$	2,048,560

The following is an aging analysis of past due loans, disaggregated by loan class, as of March 31, 2013 and December 31, 2012:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Accruing 90 Days or More Past Due
	(In Thousands)
March 31, 2013
Real Estate Loans:
Commercial Property
Retail	$	2,004	$	—	$	—	$	2,004	$	401,198	$	403,202	$	—
Land		—		—		—		—		13,739		13,739		—
Other		—		—		—		—		414,078		414,078		—
Construction		—		—		—		—		—		—		—
Residential Property		222		—		819		1,041		93,694		94,735		—
Commercial and Industrial Loans:
Commercial Term
Unsecured		1,005		724		1,470		3,199		95,301		98,500		—
Secured By Real Estate		—		122		926		1,048		821,461		822,509		—
Commercial Lines of Credit		238		—		604		842		48,766		49,608		—
SBA Loans		4,158		1,205		4,006		9,369		149,318		158,687		—
International Loans		—		—		—		—		31,448		31,448		—
Consumer Loans		307		16		571		894		34,286		35,180		—

Total Gross Loans	$	7,934	$	2,067	$	8,396	$	18,397	$	2,103,289	$	2,121,686	$	—

December 31, 2012
Real Estate Loans:
Commercial Property
Retail	$	—	$	111	$	—	$	111	$	392,834	$	392,945	$	—
Land		—		—		335		335		13,672		14,007		—
Other		—		—		—		—		380,142		380,142		—
Construction		—		—		—		—		—		—		—
Residential Property		—		588		311		899		100,879		101,778		—
Commercial and Industrial Loans:
Commercial Term
Unsecured		918		1,103		1,279		3,300		106,872		110,172		—
Secured By Real Estate		1,949		—		926		2,875		771,317		774,192		—
Commercial Lines of Credit		—		188		416		604		55,517		56,121		—
SBA Loans		3,759		1,039		2,800		7,598		140,708		148,306		—
International Loans		—		—		—		—		34,221		34,221		—
Consumer Loans		61		146		538		745		35,931		36,676		—

Total Gross Loans	$	6,687	$	3,175	$	6,605	$	16,467	$	2,032,093	$	2,048,560	$	—

Impaired Loans

Loans are considered impaired when non-accrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:


	Recorded Investment		Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
March 31, 2013
Real Estate Loans:
Commercial Property
Retail	$	2,785	$	2,838	$	1,835	$	950	$	42	$	2,796	$	26
Land		1,687		1,937		1,687		—		—		1,712		40
Other		526		526		—		526		53		527		4
Construction		—		—		—		—		—		—		—
Residential Property		3,049		3,104		3,049		—		—		3,059		27
Commercial and Industrial Loans:
Commercial Term
Unsecured		13,064		14,006		4,206		8,858		3,328		13,254		186
Secured By Real Estate		17,449		18,592		15,575		1,874		425		17,513		313
Commercial Lines of Credit		1,505		1,702		1,505		—		—		1,512		15
SBA Loans		6,517		10,101		4,766		1,750		578		6,473		273
International Loans		1,430		1,430		859		572		57		1,498		—
Consumer Loans		1,639		1,710		391		1,248		401		1,643		12

Total Gross Loans	$	49,651	$	55,946	$	33,873	$	15,778	$	4,884	$	49,987	$	896

December 31, 2012
Real Estate Loans:
Commercial Property
Retail	$	2,930	$	3,024	$	2,930	$	—	$	—	$	2,357	$	136
Land		2,097		2,307		2,097		—		—		2,140		179
Other		527		527		—		527		67		835		43
Construction		—		—		—		—		—		6,012		207
Residential Property		3,265		3,308		1,866		1,399		94		3,268		164
Commercial and Industrial Loans:
Commercial Term
Unsecured		14,532		15,515		6,826		7,706		2,144		14,160		821
Secured By Real Estate		22,050		23,221		9,520		12,530		2,319		21,894		1,723
Commercial Lines of Credit		1,521		1,704		848		673		230		1,688		64
SBA Loans		6,170		10,244		4,294		1,876		762		7,173		1,131
International Loans		—		—		—		—		—		—		—
Consumer Loans		1,652		1,711		449		1,203		615		1,205		73

Total Gross Loans	$	54,744	$	61,561	$	28,830	$	25,914	$	6,231	$	60,732	$	4,541

The following is a summary of interest foregone on impaired loans for the periods indicated:


	Three Months Ended,
	March 31,			March 31,
	2013			2012
	(In Thousands)
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms	$	1,068		$	1,428
Less: Interest Income Recognized on Impaired Loans		(896	)		(1,106	)

Interest Foregone on Impaired Loans	$	172		$	322

There were no commitments to lend additional funds to borrowers whose loans are included above.

Non-Accrual Loans

Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

The following table details non-accrual loans, disaggregated by loan class, for the periods indicated:


	March 31,		December 31,
	2013		2012
	(In Thousands)
Real Estate Loans:
Commercial Property
Retail	$	950	$	1,079
Land		1,687		2,097
Other		—		—
Construction		—		—
Residential Property		1,638		1,270
Commercial and Industrial Loans:
Commercial Term
Unsecured		7,253		8,311
Secured By Real Estate		6,353		8,679
Commercial Lines of Credit		1,505		1,521
SBA Loans		11,852		12,563
International Loans		—		—
Consumer Loans		1,655		1,759

Total Non-Accrual Loans	$	32,893	$	37,279

The following table details non-performing assets as of the dates indicated:


	March 31,		December 31,
	2013		2012
	(In Thousands)
Non-Accrual Loans	$	32,893	$	37,279
Loans 90 Days or More Past Due and Still Accruing		—		—

Total Non-Performing Loans		32,893		37,279
Other Real Estate Owned		900		774

Total Non-Performing Assets	$	33,793	$	38,053

Loans on non-accrual status, excluding loans held for sale, totaled $32.9 million as of March 31, 2013, compared to $37.3 million as of December 31, 2012, representing an 11.8 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $18.4 million as of March 31, 2013, compared to $16.5 million as of December 31, 2012, representing an 11.7 percent increase.

As of March 31, 2013, other real estate owned (“OREO”) consisted of two properties in Virginia and California. For the three months ended March 31, 2013, one property was transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $513,000, and a valuation adjustment of $126,000 was recorded. As of December 31, 2012, there were two properties located in Illinois and Virginia with a combined carrying value of $774,000 and no valuation adjustment.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

As a result of the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.

During the three months ended March 31, 2013, we restructured monthly payments on 4 loans, with a net carrying value of $1.6 million as of March 31, 2013, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of March 31, 2013 and December 31, 2012:


	Non-Accrual TDRs										Accrual TDRs
	Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total		Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total
	(In Thousands)
March 31, 2013
Real Estate Loans:
Commercial Property
Retail	$	—	$	—	$	—	$	950	$	950	$	350	$	—	$	—	$	175	$	525
Other		—		—		—		—		—		526		—		—		—		526
Residential Property		819		—		—		—		819		—		—		—		—		—
Commercial and Industrial Loans:
Commercial Term
Unsecured		—		576		4,029		998		5,603		922		—		794		2,776		4,492
Secured By Real Estate		2,263		1,085		298		—		3,646		2,139		—		512		4,527		7,178
Commercial Lines of Credit		663		—		188		238		1,089		—		—		—		—		—
SBA Loans		2,865		1,237		781		—		4,883		453		—		80		—		533
International Loans		—		—		—		—		—		—		—		1,430		—		1,430

Total	$	6,610	$	2,898	$	5,296	$	2,186	$	16,990	$	4,390	$	—	$	2,816	$	7,478	$	14,684

December 31, 2012
Real Estate Loans:
Commercial Property
Retail	$	—	$	—	$	—	$	1,080	$	1,080	$	357	$	—	$	—	$	175	$	532
Other		—		—		—		—		—		527		—		—		—		527
Residential Property		827		—		—		—		827		—		572		—		—		572
Commercial and Industrial Loans:
Commercial Term
Unsecured		—		658		4,558		1,413		6,629		976		—		1,090		3,260		5,326
Secured By Real Estate		2,317		1,343		318		—		3,978		4,444		—		448		4,547		9,439
Commercial Lines of Credit		673		—		188		244		1,105		—				—		—		—
SBA Loans		2,831		1,287		1,032		—		5,150		484		—		100		—		584

Total	$	6,648	$	3,288	$	6,096	$	2,737	$	18,769	$	6,788	$	572	$	1,638	$	7,982	$	16,980

The following table details troubled debt restructuring, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:


	March 31, 2013						March 31, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(In Thousands)
Real Estate Loans:
Commercial Property
Retail ⁽¹⁾		—	$	—	$	—		1	$	102	$	102
Other⁽²⁾		—		—		—		2		509		504
Commercial and Industrial Loans:
Commercial Term
Unsecured ⁽³⁾		1		197		198		20		3,615		3,537
Secured By Real Estate ⁽⁴⁾		—		—		—		2		1,813		1,801
SBA Loans ⁽⁵⁾		1		8		7		6		472		455
International Loans ⁽⁶⁾		2		1,584		1,430		—		—		—

Total		4	$	1,789	$	1,635		31	$	6,511	$	6,399

(1)

Includes a modification of $102,000 through an extension of maturity for the three months ended March 31, 2012.

(2)

Includes modifications of $504,000 through extensions of maturity for the three months ended March 31, 2012.

(3)

Includes a modification of $198,000 through an extension of maturity for the three months ended March 31, 2013, and modifications of $1.6 million through reductions of principal or accrued interest and $1.9 million through extensions of maturity for the three months ended March 31, 2012.

(4)

Includes modifications of $1.3 million through a reduction of principal or accrued interest and $501,000 through an extension of maturity for the three months ended March 31, 2012.

(5)

Includes a modification of $7,000 through a payment deferral for the three months ended March 31, 2013, and modifications of 133,000 through payment deferrals and $322,000 through reductions of principal or accrued interest for the three months ended March 31, 2012.

(6)

Includes modifications of $1.4 million through reductions of principal or accrued interest for the three months ended March 31, 2013.

As of March 31, 2013 and December 31, 2012, total TDRs, excluding loans held for sale, were $31.7 million and $35.7 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDRs are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At March 31, 2013 and December 31, 2012, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.7 million and $3.6 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three months ended March 31, 2013 and 2012:


	Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(In Thousands)
Real Estate Loans:
Commercial Property
Retail		—	$	—		1	$	102
Other		—		—		1		279
Residential Property		—		—		1		865
Commercial and Industrial Loans:
Commercial Term
Unsecured		7		730		10		3,401
Secured By Real Estate		1		1,306		—		—
Commercial Lines of Credit		1		188		—		—
SBA Loans		1		32		10		848

Total		10	$	2,256		23	$	5,495

Servicing Assets

The changes in servicing assets were as follows for the three months ended March 31, 2013 and 2012:


	March 31,			March 31,
	2013			2012
	(In Thousands)
Balance at Beginning of Period	$	5,542		$	3,720
Additions		791			—
Amortization		(329	)		(205	)

Balance at End of Period	$	6,004		$	3,515

At March 31, 2013 and 2012, we serviced loans sold to unaffiliated parties in the amounts of $316.2 million and $211.1 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.

NOTE 4 — INCOME TAXES

The Company’s effective tax rate was 31.66% and 1.07% with income tax expenses of $4.7 million and $79,000 for the three months ended March 31, 2013 and 2012, respectively. Income tax expense of $4.7 million for the first quarter of 2013 includes favorable discrete items of $779,000, related mainly to adjustments of stock options and state tax attributes. Due to a full valuation allowance against the Company’s entire net deferred tax asset, 1.07% of its effective tax rate for the three months ended March 31, 2012 resulted from 2012 state income taxes. Management concluded that deferred tax assets were more-likely-than-not to be realized, and therefore, maintaining a valuation allowance was no longer required as of March 31, 2013.

As of March 31, 2013, the Company was subject to examination by various federal and state tax authorities for the years ended December 31, 2004 through 2011. The Company was subjected to audits by the Internal Revenue Service for the 2009 tax year, by the California FTB for the 2008 and 2009 tax years, and by the Texas Comptroller of Public Accounts for the 2008 tax year. Management does not anticipate any material changes in our financial statements due to the results of those audits.

NOTE 5 — STOCKHOLDERS’ EQUITY

Stock Warrants

As part of the agreement dated as of July 27, 2010 with Cappello Capital Corp., the placement agent in connection with our best efforts offering and the financial advisor in connection with our completed rights offering, we issued warrants to purchase 250,000 shares of our common stock for services performed. The warrants have an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the warrant was equal to the zero coupon rate in effect at the time of the grant.

Upon re-measuring the fair value of the stock warrants at March 31, 2013, the fair value decreased by $51,000, which we have included in other operating expenses for the three months ended March 31, 2013. We used a weighted average expected stock volatility of 36.99 percent and a remaining contractual life of 2.3 years based on the contract terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 0.47 percent used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.

NOTE 6 — REGULATORY MATTERS

Risk-Based Capital

Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent.

In order for banks to be considered “well capitalized,” federal bank regulatory agencies require them to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent.

The capital ratios of Hanmi Financial and the Bank were as follows as of March 31, 2013 and 2012:


						Minimum					Minimum to Be
						Regulatory					Categorized as
	Actual					Requirement					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In Thousands)
March 31, 2013
Total Capital (to Risk-Weighted Assets):
Hanmi Financial	$	439,587		19.45	%	$	180,839		8.00	%		N/A		N/A
Hanmi Bank	$	421,661		18.69	%	$	180,515		8.00	%	$	225,644		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial	$	410,825		18.17	%	$	90,419		4.00	%		N/A		N/A
Hanmi Bank	$	393,015		17.42	%	$	90,257		4.00	%	$	135,386		6.00	%
Tier 1 Capital (to Average Assets):
Hanmi Financial	$	410,825		14.68	%	$	111,968		4.00	%		N/A		N/A
Hanmi Bank	$	393,015		14.07	%	$	111,758		4.00	%	$	139,698		5.00	%
March 31, 2012
Total Capital (to Risk-Weighted Assets):
Hanmi Financial	$	394,973		18.74	%	$	168,569		8.00	%		N/A		N/A
Hanmi Bank	$	373,171		17.74	%	$	168,325		8.00	%	$	210,406		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial	$	367,927		17.46	%	$	84,284		4.00	%		N/A		N/A
Hanmi Bank	$	346,154		16.45	%	$	84,162		4.00	%	$	126,243		6.00	%
Tier 1 Capital (to Average Assets):
Hanmi Financial	$	367,927		13.44	%	$	109,456		4.00	%		N/A		N/A
Hanmi Bank	$	346,154		12.67	%	$	109,247		4.00	%	$	136,559		5.00	%

Federal Reserve Notices of Proposed Rulemaking

On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or non-accrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.

NOTE 7 — FAIR VALUE MEASUREMENTS

Fair Value Measurements

FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:



• Level 1 —		Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

• Level 2 —		Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

• Level 3 —		Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

We record investment securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, other real estate owned, and other intangible assets, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:

Investment Securities Available-for-Sale – The fair values of investment securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and SBA loan pool securities. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal bonds is determined based on a proprietary model maintained by the broker-dealers. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.

As of March 31, 2013, we had a zero coupon tax credit municipal bond of $774,000 compared to $779,000 as of December 31, 2012. This bond was recorded at estimated fair value using a discounted cash flow method, and was measured on a recurring basis with Level 3 inputs. Key assumptions used in measuring the fair value of the tax credit bond as of March 31, 2013 were discount rate and cash flows. The discount rate was derived from the term structure of Bank Qualified (“BQ”) “A-” rated municipal bonds, as the tax credit bond’s guarantee had the similar credit strength. The contractual future cash flows were the tax credits to be received for a remaining life of two years. If the discount rate is adjusted down to the term structure of BQ “BBB-” rating municipal bonds, the tax credit bond’s value would decline by 1.6 percent. We do not anticipate a significant deterioration of the tax credit bond’s credit quality. Management reviews the discount rate on an ongoing basis based on current market rates.

SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair value. As of March 31, 2013 and December 31, 2012, we had $3.7 million and $7.8 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2013 and December 31, 2012, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Non-Performing Loans Held for Sale – We reclassify certain non-performing loans as held for sale when we decide to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2013 and December 31, 2012, we had $2.3 million and $484,000 of non-performing loans held for sale, respectively, which are measured on a nonrecurring basis with Level 2 inputs.

Stock Warrants – The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The fair value of the warrants was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing modeling and was measured on a recurring basis with Level 3 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2013. As of March 31, 2013 and December 31, 2012, assets and liabilities measured at fair value on a recurring basis are as follows:


	Level 1		Level 2		Level 3
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs with No Active Market with Identical Characteristics		Significant Unobservable Inputs		Balance
	(In Thousands)
As of March 31, 2013
ASSETS:
Debt Securities Available-for-Sale:
Mortgage-Backed Securities	$	—	$	149,394	$	—	$	149,394
Collateralized Mortgage Obligations		—		92,868		—		92,868
U.S. government Agency Securities		80,930		—

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