Form 10-Q

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

¨ (Do Not Check if a Smaller Reporting Company)

Smaller Reporting Company

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 June 30, 2014

¨	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 July 31, 2014, there were 31,861,426 outstanding shares of the Registrant’s Common Stock.

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three and Six Months Ended June 30, 2014

Table of Contents


Part 1 – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Income (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)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	65

Part II – Other Information

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3.	Defaults Upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	67

Signatures		69

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)


	June 30, 2014			December 31, 2013
Assets
Cash and cash equivalents	$	123,782		$	179,357
Securities available for sale, at fair value (amortized cost of $511,511 as of June 30, 2014 and $549,113 as of December 31, 2013)		505,977			530,926
Loans held for sale, at the lower of cost or fair value		3,842			—
Loans receivable, net of allowance for loan losses of $51,886 as of June 30, 2014 and $57,555 as of December 31, 2013		2,300,810			2,177,498
Accrued interest receivable		6,355			7,055
Premises and equipment, net		13,929			14,221
Other real estate owned, net		1,714			756
Customers’ liability on acceptances		3,186			2,018
Servicing assets		6,355			6,833
Other intangible assets, net		—			1,171
Investment in federal home loan bank stock, at cost		16,385			14,060
Investment in federal reserve bank stock, at cost		11,514			11,196
Income tax assets		53,160			63,841
Bank-owned life insurance		30,147			29,699
Prepaid expenses		2,570			1,415
Other assets		15,049			14,333

Total assets	$	3,094,775		$	3,054,379

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	910,320		$	819,015
Interest-bearing		1,634,529			1,693,310

Total deposits		2,544,849			2,512,325
Accrued interest payable		3,423			3,366
Bank’s liability on acceptances		3,186			2,018
Federal home loan bank advances		97,000			127,546
Accrued expenses and other liabilities		19,969			9,047

Total liabilities		2,668,427			2,654,302

Stockholders’ equity:
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 32,438,850 shares (31,860,956 shares outstanding) as of June 30, 2014 and 32,339,444 shares (31,761,550 shares outstanding) as of December 31, 2013		257			257
Additional paid-in capital		553,741			552,270
Accumulated other comprehensive loss, net of tax benefit of $3,367 as of June 30, 2014 and $8,791 as of December 31, 2013		(2,150	)		(9,380	)
Accumulated deficit		(55,642	)		(73,212	)
Less: treasury stock, at cost; 577,894 shares as of June 30, 2014 and December 31, 2013		(69,858	)		(69,858	)

Total stockholders’ equity		426,348			400,077

Total liabilities and stockholders’ equity	$	3,094,775		$	3,054,379

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Interest and Dividend Income:
Interest and fees on loans	$	28,355		$	27,839		$	56,545		$	54,638
Taxable interest on investment securities		2,375			2,100			4,912			4,216
Tax-exempt interest on investment securities		20			73			96			168
Interest on federal funds sold		—			—			—			6
Interest on interest-bearing deposits in other banks		18			24			38			112
Dividends on federal reserve bank stock		172			196			340			379
Dividends on federal home loan bank stock		236			147			472			255

Total interest and dividend income		31,176			30,379			62,403			59,774

Interest Expense:
Interest on deposits		3,153			3,100			6,375			6,259
Interest on federal home loan bank advances		30			41			78			79
Interest on junior subordinated debentures		—			84			—			678

Total interest expense		3,183			3,225			6,453			7,016

Net interest income before provision for credit losses		27,993			27,154			55,950			52,758
Negative provision for credit losses		(3,866	)		—			(7,166	)		—

Net interest income after provision for credit losses		31,859			27,154			63,116			52,758

Non-Interest Income:
Service charges on deposit accounts		2,568			2,884			5,041			5,932
Remittance fees		491			541			929			1,038
Trade finance fees		306			276			559			553
Other service charges and fees		369			335			700			733
Bank-owned life insurance income		224			233			447			463
Gain on sales of SBA loans guaranteed portion		498			2,378			1,045			5,070
Net loss on sales of other loans		—			(460	)		—			(557	)
Net gain on sales of investment securities		364			303			1,785			312
Other operating income		253			248			395			343

Total non-interest income		5,073			6,738			10,901			13,887

Non-Interest Expense:
Salaries and employee benefits		10,280			8,638			20,539			17,025
Occupancy and equipment		2,469			2,486			4,866			4,971
Deposit insurance premiums and regulatory assessments		399			517			836			751
Data processing		1,112			1,131			2,270			2,289
Other real estate owned expense		—			(20	)		5			12
Professional fees		724			2,364			1,557			4,520
Directors and officers liability insurance		191			219			383			439
Supplies and communications		595			599			1,097			1,060
Advertising and promotion		753			834			1,333			1,380
Loan-related expense		61			91			144			237
Other operating expenses		1,973			1,748			3,800			3,579

Total non-interest expense		18,557			18,607			36,830			36,263

Income from continuting operations before provision for income taxes		18,375			15,285			37,187			30,382
Provision for income taxes		6,866			5,958			14,710			10,926

Income from continuting operations, net of taxes	$	11,509		$	9,327		$	22,477		$	19,456
Discontinued operations
(Loss) income from operations of discontinued subsidiaries (including gain on disposal of $51 in the second quarter of 2014)	$	(1	)	$	244		$	37		$	128
Income tax expense		466			84			481			39

(Loss) income from discontinued operations		(467	)		160			(444	)		89
Net income	$	11,042		$	9,487		$	22,033		$	19,545

Basic earnings per share:
Income from continuing operations, net of taxes	$	0.36		$	0.30		$	0.71		$	0.62
Income from discontinued operations, net of taxes		(0.01	)		—			(0.01	)		—

Basic earnings per share	$	0.35		$	0.30		$	0.70		$	0.62
Diluted earnings per share:
Income from continuing operations, net of taxes	$	0.36		$	0.29		$	0.70		$	0.62
Income from discontinued operations, net of taxes		(0.01	)		0.01			(0.01	)		—

Diluted earnings per share	$	0.35		$	0.30		$	0.69		$	0.62
Weighted-average shares outstanding:
Basic		31,681,033			31,590,760			31,670,436			31,565,013
Diluted		31,974,253			31,655,988			31,950,313			31,633,535

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net Income	$	11,042		$	9,487		$	22,033		$	19,545
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities
Unrealized holding gain (loss) arising during period		6,340			(5,553	)		14,438			(6,121	)
Less: reclassification adjustment for net gain included in net income		(364	)		(303	)		(1,785	)		(312	)
Unrealized (loss) gain on interest-only strip of servicing assets		—			(2	)		1			1
Income tax (expense) benefit related to items of other comprehensive income		(2,617	)		2,397			(5,424	)		2,648

Other comprehensive income (loss)		3,359			(3,461	)		7,230			(3,784	)

Comprehensive Income	$	14,401		$	6,026		$	29,263		$	15,761

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share data)


	Common Stock - Number of Shares							Stockholders’ Equity
	Gross Shares Issued and Outstanding		Treasury Shares			Net Shares Issued and Outstanding		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Treasury Stock, at Cost			Total Stockholders’ Equity
Balance at January 1, 2013		32,074,434		(577,894	)		31,496,540	$	257	$	550,066		$	5,418		$	(107,519	)	$	(69,858	)	$	378,364
Adjustment for the cumulative effect on prior years of retrospectively applying the new method of accounting		—		—			—		—		—			—			(1,112	)		—			(1,112	)
Exercises of stock options		2,241		—			2,241		—		(291	)		—			—			—			(291	)
Exercises of stock warrants		106,056		—			106,056		—		1,289			—			—			—			1,289
Restricted stock awards		—		—			—		—		24			—			—			—			24
Share-based compensation expense		—		—			—		—		165			—			—			—			165
Comprehensive income:
Net income		—		—			—		—		—			—			19,545			—			19,545
Change in unrealized gain on securities available for sale and interest-only strips, net of income taxes		—		—			—		—		—			(3,784	)		—			—			(3,784	)

Total comprehensive income																							15,761
Balance at June 30, 2013		32,182,731		(577,894	)		31,604,837	$	257	$	551,253		$	1,634		$	(89,086	)	$	(69,858	)	$	394,200

Balance at January 1, 2014		32,339,444		(577,894	)		31,761,550	$	257	$	552,270		$	(9,380	)	$	(73,212	)	$	(69,858	)	$	400,077
Exercises of stock options		33,695		—			33,695		—		418			—			—			—			418
Exercises of stock warrants		363		—			363		—		2			—			—			—			2
Restricted stock awards		65,348		—			65,348		—		—			—			—			—			—
Share-based compensation expense		—		—			—		—		1,051			—			—			—			1,051
Cash dividends		—		—			—		—		—			—			(4,463	)		—			(4,463	)
Comprehensive income:
Net income		—		—			—		—		—			—			22,033			—			22,033
Change in unrealized loss on securities available for sale and interest-only strips, net of income taxes		—		—			—		—		—			7,230			—			—			7,230

Total comprehensive income																							29,263
Balance at June 30, 2014		32,438,850		(577,894	)		31,860,956	$	257	$	553,741		$	(2,150	)	$	(55,642	)	$	(69,858	)	$	426,348

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	22,033		$	19,545
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		813			997
Amortization of premiums and accretion of discounts on investment securities, net		1,221			1,443
Amortization of other intangible assets		82			82
Amortization of servicing assets		891			739
Amortization of investment in affordable housing partnership		276			402
Share-based compensation expense		1,051			189
Negative provision for credit losses		(7,166	)		—
Gain on sales of investment securities		(1,785	)		(312	)
Gain on sales of loans		(1,045	)		(4,513	)
Loss on sales of other real estate owned		2			—
Loss on sales of subsidiaries		419			—
Valuation adjustment on other real estate owned		—			7
Origination of loans held for sale		(16,569	)		(45,978	)
Proceeds from sales of SBA loans guaranteed portion		14,009			60,562
Change in restricted cash		—			5,350
Change in accrued interest receivable		700			140
Change in cash surrender value of bank-owned life insurance		(447	)		(463	)
Change in prepaid expenses		(1,155	)		(488	)
Change in other assets		(3,622	)		1,489
Change in income tax assets		5,202			(1,365	)
Change in accrued interest payable		57			(9,205	)
Change in stock warrants payable		—			82
Change in other liabilities		11,416			1,239

Net cash provided by operating activities		26,383			29,942

Cash flows from investing activities:
Proceeds from redemption of federal home loan bank and federal reserve bank stock		—			3,603
Proceeds from matured or called securities available for sale		36,553			40,247
Proceeds from sales of securities available for sale		126,056			24,764
Proceeds from sales of other real estate owned		734			548
Proceeds from sales of loans held for sale		—			5,380
Net proceeds from sales of subsidiaries		398			—
Change in loans receivable		(118,166	)		(154,739	)
Purchases of securities available for sale		(124,442	)		(22,329	)
Purchases of premises and equipment		(611	)		(310	)
Purchases of federal reserve bank stock		(2,643	)		(978	)

Net cash used in investing activities		(82,121	)		(103,814	)

Cash flows from financing activities:
Change in deposits		32,524			(34,050	)
Change in short-term federal home loan bank advances		(28,135	)		—
Redemption of federal home loan bank advances		(2,411	)		(192	)
Redemption of junior subordinated debentures		—			(82,406	)
Proceeds from exercise of stock options		418			28
Proceeds from exercise of stock warrants		—			305
Cash dividend paid		(2,233	)		—

Net cash provided by (used in) financing activities		163			(116,315	)

Net decrease in cash and cash equivalents		(55,575	)		(190,187	)
Cash and cash equivalents at beginning of year		179,357			268,047

Cash and cash equivalents at end of period	$	123,782		$	77,860


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid	$	6,396		$	12,430
Income taxes paid	$	8,916		$	11,910
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	1,714		$	800
Transfer of loans receivable to loans held for sale	$	—		$	8,010
Note receivable from sale of insurance subsidiaries	$	1,394		$	—
Conversion of stock warrants into common stock	$	2		$	983
Income tax (expense) benefit related to items of other comprehensive income	$	(5,424	)	$	2,648
Change in unrealized (gain) loss in accumulated other comprehensive income	$	(14,438	)	$	6,120
Cash dividend declared	$	(2,230	)	$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended June 30, 2014 and 2013

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. Hanmi Bank (the “Bank”), a California state chartered bank, is a wholly owned subsidiary of Hanmi Financial. During the second quarter of 2014, we disposed of our other subsidiaries, Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”). See “Note 3 — Sale of Insurance Subsidiaries and Discontinued Operations.”

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its 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 June 30, 2014, 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, 2013 (the “2013 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 1 — Summary of Significant Accounting Policies” in our 2013 Annual Report on Form 10-K. During the three months ended June 30, 2014, we adopted an accounting policy related to accounting for investments in low-income housing tax credit according to Financial Accounting Standards Board (“FASB”) ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. See “Note 2 — Accounting for Investments in Qualified Affordable Housing Projects.”

Note 2 — Accounting for Investments in Qualified Affordable Housing Projects

The Bank invests in qualified affordable housing projects (low income housing) and previously accounted for them under the equity method of accounting. The Bank recognized its share of partnership losses in other operating expenses with the tax benefits recognized in the income tax provision. In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which amends ASC 323-720 to provide the ability to elect the proportional amortization method with the amortization expense and tax benefits recognized through the income tax provision. This ASU is effective for the annual period beginning after December 15, 2014, with early adoption being permitted. The Bank elected to early adopt the provisions of the ASU in the second quarter of 2014 and elected the proportional amortization method as retrospective transition. This accounting change in the amortization methodology resulted in changes to account for amortization recognized in prior periods, which impacted the balance of tax credit investments and related tax accounts. The investment amortization expense is presented as a component of the income tax provision.

The cumulative effect of the retrospective application of this accounting principle as of Jauary 1, 2012 was a negative $1.1 million. Net income in the three and six months ended June 30, 2013 decreased by $32,000 and $84,000, respectively, due to the change in accounting principle.

The following tables present the effect of the retrospective application of this change in accounting principle on the Company’s Balance Sheets, Statement of Income and Statement of Cash Flows for the respective periods:

Hanmi Financial Corporations and Subsidiaries

Consolidated Balance Sheet (Unaudited)


	As of December 31, 2013
	As Previously Reported		Effect of Change in Accounting Principle			As Adjusted
	(In thousands)
Assets
Cash and cash equivalents	$	179,357	$	—		$	179,357
Securities available for sale		530,926		—			530,926
Loans receivable		2,177,498		—			2,177,498
Income tax assets		63,536		305			63,841
Other assets		104,222		(1,465	)		102,757

Total assets	$	3,055,539	$	(1,160	)	$	3,054,379

Liabilities and stockholders’ equity
Liabilities	$	2,654,302	$	—		$	2,654,302
Stockholders’ equity		401,237		(1,160	)		400,077

Total liabilities and stockholders’ equity	$	3,055,539	$	(1,160	)	$	3,054,379

Hanmi Financial Corporations and Subsidiaries

Consolidated Statement of Income (Unaudited)


	For the Three Months Ended June 30, 2013
	As Previously Reported		Effect of Change in Accounting Principle			As Adjusted
	(In thousands, except per share data)
Interest and dividend income	$	30,379	$	—		$	30,379
Interest expense		3,225		—			3,225

Net interest income	$	27,154	$	—		$	27,154
Non-interest income		6,738		—			6,738
Non-interest expense		18,796		(189	)		18,607

Income before provision for income taxes	$	15,096	$	189		$	15,285
Provision for income taxes		5,737		221			5,958

Income from continuing operations	$	9,359	$	(32	)	$	9,327

Earnings per share from continuing operations
Basic	$	0.30	$	—		$	0.30

Diluted	$	0.29	$	—		$	0.29


	For the Six Months Ended June 30, 2013
	As Previously Reported		Effect of Change in Accounting Principle			As Adjusted
	(In thousands, except per share data)
Interest and dividend income	$	59,774	$	—		$	59,774
Interest expense		7,016		—			7,016

Net interest income	$	52,758	$	—		$	52,758
Non-interest income		13,887		—			13,887
Non-interest expense		36,640		(377	)		36,263

Income before provision for income taxes	$	30,005	$	377		$	30,382
Provision for income taxes		10,465		461			10,926

Income from continuing operations	$	19,540	$	(84	)	$	19,456

Earnings per share from continuing operations
Basic	$	0.62	$	—		$	0.62
Diluted	$	0.62	$	—		$	0.62

Hanmi Financial Corporations and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)


	For the Six Months Ended June 30, 2013
	As Previously			Effect of Change in
	Reported			Accounting Principle			As Adjusted
	(In thousands)
Cash flows from operating activities:
Net income	$	19,629		$	(84	)	$	19,545
Total adjustment in net income		10,313			84			10,397

Net cash provided by operating activities	$	29,942		$	—		$	29,942
Cash flows from investing activities:
Net cash used in investing activities		(103,814	)		—			(103,814	)
Cash flows from financing activities:
Net cash used in financing activities		(116,315	)		—			(116,315	)

Net decrease in cash and cash equivalents	$	(190,187	)	$	—		$	(190,187	)
Cash and cash equivalents at beginning of period		268,047			—			268,047

Cash and cash equivalents at end of period	$	77,860		$	—		$	77,860

The Bank determined that there were no events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. Therefore, no impairment was recognized as of June 30, 2014 or December 31, 2013. The investment in low income housing was $12.4 million and $3.0 million as of June 30, 2014 and December 31, 2013, respectively. The Bank’s unfunded commitments related to low income housing investments was $9.8 million as of June 30, 2014 and zero as of December 31, 2013. The Bank recognized $276,000 and $447,000 as a component of income tax expense during the three and six months ended June 30, 2014, respectively, and tax credits and other benefits received from the tax expenses were $423,000 and $665,000 during the three and six months ended June 30, 2014, respectively.

Note 3 — Sale of Insurance Subsidiaries and Discontinued Operations

In June 2014, Hanmi Financial sold its insurance subsidiaries, Chun-Ha and All World, and entered into a stock purchase agreement for their sale. The subsidiaries were classified as held for sale in April 2014 and accounted for as discontinued operations. The operations and cash flows of the businesses have been eliminated and in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.

Hanmi Financial completed the sale of its two insurance subsidiaries to Chunha Holding Corporation on June 30, 2014. The total sales price was $3.5 million, of which $2.0 million was paid upon signing. The $2.0 million was reduced by $1.6 million cash and cash equivalents included in net assets of Chun-Ha and All World, resulting in $398,000 net cash proceeds. The remaining $1.5 million will be payable in three equal installments on each anniversary of the closing date through June 30, 2017.

The sale resulted in a $51,000 gain and a $4,000 income tax benefit from operating loss, offset by a $470,000 capital gain tax and a $52,000 operating loss. Consequently, net loss from discontinued operations in the second quarter of 2014 was $467,000, or $0.01 per diluted share. The discontinued operations generated non-interest income, primarily in the line item for insurance commissions, of $2.7 million in the first six months of 2014 and $1.3 million in the first quarter of 2014. They also incurred non-interest expense in various line items of $2.7 million in the first six months of 2014 and $1.4 million in the first quarter of 2014.

Summarized financial information for our discontinued operations related to Chun-Ha and All World are as follows:


	June 30,		December 31,
	2014		2013
	(In thousands)
Cash and cash equivalents	$	1,602	$	1,396
Premises and equipment, net		90		79
Other intangible assets, net		1,089		1,171
Other assets		2,855		3,298

Total assets	$	5,636	$	5,944

Income tax payable	$	415	$	1,304
Accrued expenses and other liabilities		1,878		2,171

Total liabilities	$	2,293	$	3,475

Net assets of discontinued operations	$	3,343	$	2,469


	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(In thousands)
Non-interest (loss) income	$	(52	)	$	244	$	(14	)	$	128
Gain on disposal		51			—		51			—

(Loss) income before taxes	$	(1	)	$	244	$	37		$	128
Provision for income taxes		466			84		481			39

Net (loss) income from discontinued operations	$	(467	)	$	160	$	(444	)	$	89

Note 4 — Investment Securities

The following is a summary of investment securities available for sale as of June 30, 2014 and December 31, 2013:


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(In thousands)
June 30, 2014
Mortgage-backed securities ⁽¹⁾	$	215,542	$	1,103	$	2,010	$	214,635
Collateralized mortgage obligations ⁽¹⁾		160,422		240		1,037		159,625
U.S. government agency securities		80,960		—		3,096		77,864
Municipal bonds-tax exempt		4,350		97		—		4,447
Municipal bonds-taxable		16,718		158		145		16,731
Corporate bonds		17,017		11		103		16,925
SBA loan pool securities		13,222		—		661		12,561
Other securities		3,030		—		91		2,939
Equity security		250		—		—		250

Total securities available for sale	$	511,511	$	1,609	$	7,143	$	505,977

December 31, 2013
Mortgage-backed securities ⁽¹⁾	$	222,768	$	317	$	6,026	$	217,059
Collateralized mortgage obligations ⁽¹⁾		130,636		274		3,217		127,693
U.S. government agency securities		90,852		—		7,316		83,536
Municipal bonds-tax exempt		13,857		110		30		13,937
Municipal bonds-taxable		33,361		73		1,080		32,354
Corporate bonds		21,013		8		186		20,835
U.S. treasury bills		19,998		—		1		19,997
SBA loan pool securities		13,598		—		969		12,629
Other securities		3,030		—		144		2,886

Total securities available for sale	$	549,113	$	782	$	18,969	$	530,926

⁽¹⁾

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

The amortized cost and estimated fair value of investment securities as of June 30, 2014, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2063, 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	$	699	$	728
Over one year through five years		27,879		27,642
Over five years through ten years		74,439		72,430
Over ten years		32,280		30,667
Mortgage-backed securities		215,542		214,635
Collateralized mortgage obligations		160,422		159,625
Equity security		250		250

Total	$	511,511	$	505,977

FASB ASC 320, Investments – Debt and Equity Securities, requires us to periodically evaluate our investments for other-than-temporary impairment (“OTTI”). There was no OTTI charge during the six months ended June 30, 2014.

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 June 30, 2014 and December 31, 2013:


	Holding Period
	Less Than 12 Months						12 Months or More						Total
	Gross		Estimated		Number		Gross		Estimated		Number		Gross		Estimated		Number
	Unrealized		Fair		of		Unrealized		Fair		of		Unrealized		Fair		of
	Loss		Value		Securities		Loss		Value		Securities		Loss		Value		Securities
	(In thousands, except number of securities)
June 30, 2014
Mortgage-backed securities	$	220	$	21,601		5	$	1,790	$	68,558		24	$	2,010	$	90,159		29
Collateralized mortgage obligations		363		67,236		16		674		19,818		9		1,037		87,054		25
U.S. government agency securities		—		—		—		3,096		74,864		27		3,096		74,864		27
Municipal bonds-taxable		—		—		—		145		6,996		7		145		6,996		7
Corporate bonds		—		—		—		103		7,885		2		103		7,885		2
SBA loan pool securities		—		—		—		661		12,561		4		661		12,561		4
Other securities		—		—		—		91		2,935		5		91		2,935		5

Total	$	583	$	88,837		21	$	6,560	$	193,617		78	$	7,143	$	282,454		99

December 31, 2013
Mortgage-backed securities	$	3,437	$	170,324		51	$	2,589	$	30,947		12	$	6,026	$	201,271		63
Collateralized mortgage obligations		2,353		87,026		27		864		14,657		7		3,217		101,683		34
U.S. government agency securities		3,942		50,932		19		3,374		32,606		12		7,316		83,538		31
Municipal bonds-tax exempt		30		8,562		5		—		—		—		30		8,562		5
Municipal bonds-taxable		787		22,817		16		293		3,813		4		1,080		26,630		20
Corporate bonds		9		5,024		1		177		11,803		3		186		16,827		4
U.S. treasury bills		1		19,996		2		—		—		—		1		19,996		2
SBA loan pool securities		—		—		—		969		12,629		4		969		12,629		4
Other securities		48		1,957		3		96		929		3		144		2,886		6

Total	$	10,607	$	366,638		124	$	8,362	$	107,384		45	$	18,969	$	474,022		169

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2014 and December 31, 2013 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 June 30, 2014 and December 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 basis. 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 June 30, 2014 and December 31, 2013 were not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2014 and December 31, 2013 were warranted.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands)
Gross realized gains on sales of investment securities	$	365		$	304		$	1,786		$	313
Gross realized losses on sales of investment securities		(1	)		(1	)		(1	)		(1	)

Net realized gains on sales of investment securities	$	364		$	303		$	1,785		$	312

Proceeds from sales of investment securities	$	45,843		$	15,764		$	131,077		$	24,764
Tax expense on sales of investment securities	$	153		$	127		$	751		$	131

For the three months ended June 30, 2014, there was a $364,000 net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized gains of $100,000 in comprehensive income. For the three months ended June 30, 2013, there was a $303,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $812,000 in comprehensive income.

For the six months ended June 30, 2014, there was a $1.8 million net gain in earnings resulting from the sale of investment securities that had previously been recorded as net unrealized losses of $177,000 in comprehensive income. For the six months ended June 30, 2013, there was a $312,000 net gain in earnings resulting from the redemption and sale of investment securities that had previously been recorded as net unrealized gains of $856,000 in comprehensive income.

Investment securities available for sale with par values of $69.7 million and $47.6 million as of June 30, 2014 and December 31, 2013, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits and for other purposes as required or permitted by law.

Note 5 — 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 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 Small Business Administration (“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 functions that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

The majority of the Bank’s loan portfolio consists of commercial real estate 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:


	June 30,			December 31,
	2014			2013
	(In thousands)
Real estate loans:
Commercial property ⁽¹⁾
Retail	$	561,654		$	543,619
Hotel/Motel		338,128			322,927
Gas station		283,097			292,557
Other		797,176			731,617
Construction		1,467			—
Residential property		108,561			79,078

Total real estate loans		2,090,083			1,969,798
Commercial and industrial loans:
Commercial term		115,493			124,391
Commercial lines of credit		70,801			71,042
International loans		44,015			36,353

Total commercial and industrial loans		230,309			231,786
Consumer loans		28,843			32,505

Total gross loans		2,349,235			2,234,089
Allowance for loans losses		(51,886	)		(57,555	)
Deferred loan costs		3,461			964

Loans receivable, net	$	2,300,810		$	2,177,498

⁽¹⁾

Includes owner-occupied property loans of $962.7 million and $957.3 million as of June 30, 2014 and December 31, 2013, respectively.

Accrued interest on loans receivable was $5.1 million and $5.4 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, loans receivable totaling $921.2 million and $568.7 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Bank’s (“FRB”) 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 June 30, 2014 and 2013:


	Real Estate			Commercial and Industrial			Consumer		Total
	(In thousands)
June 30, 2014
Balance at beginning of period	$	390		$	—		$	—	$	390
Origination of loans held for sale		8,124			2,091			—		10,215
Sales of loans held for sale		(5,944	)		(815	)		—		(6,759	)
Principal payoffs and amortization		(2	)		(2	)		—		(4	)

Balance at end of period	$	2,568		$	1,274		$	—	$	3,842

June 30, 2013
Balance at beginning of period	$	5,769		$	274		$	—	$	6,043
Origination of loans held for sale		21,752			1,082			—		22,834
Reclassification from loans receivable to loans held for sale		1,066			3,571			—		4,637
Sales of loans held for sale		(25,213	)		(5,743	)		—		(30,956	)
Principal payoffs and amortization		(1	)		(4	)		—		(5	)

Balance at end of period	$	3,373		$	(820	)	$	—	$	2,553

For the three months ended June 30, 2014, there was no reclassification of loans receivable as loans held for sale, and loans held for sale of $6.8 million were sold. For the three months ended June 30, 2013, loans receivable of $4.6 million were reclassified as loans held for sale, and loans held for sale of $31.0 million were sold.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2014 and 2013:


	Real Estate			Commercial and Industrial			Consumer		Total
	(In thousands)
June 30, 2014
Balance at beginning of period	$	—		$	—		$	—	$	—
Origination of loans held for sale		14,393			2,176			—		16,569
Sales of loans held for sale		(11,818	)		(899	)		—		(12,717	)
Principal payoffs and amortization		(7	)		(3	)		—		(10	)

Balance at end of period	$	2,568		$	1,274		$	—	$	3,842

June 30, 2013
Balance at beginning of period	$	7,977		$	329		$	—	$	8,306
Origination of loans held for sale		43,092			2,886			—		45,978
Reclassification from loans receivable to loans held for sale		4,439			3,571			—		8,010
Sales of loans held for sale		(52,120	)		(7,601	)		—		(59,721	)
Principal payoffs and amortization		(15	)		(5	)		—		(20	)

Balance at end of period	$	3,373		$	(820	)	$	—	$	2,553

For the six months ended June 30, 2014, there was no reclassification of loans receivable as loans held for sale, and loans held for sale of $12.7 million were sold. For the six months ended June 30, 2013, loans receivable of $8.0 million were reclassified as loans held for sale, and loans held for sale of $59.7 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						As of and for the
	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	56,593		$	61,191		$	57,555		$	63,305
Charge-offs		(2,547	)		(3,490	)		(4,151	)		(6,514	)
Recoveries on loans previously charged off		1,741			1,867			5,992			2,581

Net loan (charge-offs) recoveries		(806	)		(1,623	)		1,841			(3,933	)
(Negative provision) provision charged to operating expense		(3,901	)		308			(7,510	)		504

Balance at end of period	$	51,886		$	59,876		$	51,886		$	59,876

Allowance for off-balance sheet items:
Balance at beginning of period	$	1,557		$	1,628		$	1,248		$	1,822
Provision (negative provision) charged to operating expense		35			(308	)		344			(502	)

Balance at end of period	$	1,592		$	1,320		$	1,592		$	1,320

The allowance for off-balance sheet items is maintained at a level believed to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of June 30, 2014 and December 31, 2013, the allowance for off-balance sheet items amounted to $1.6 million and $1.2 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2014 and 2013:


	Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
June 30, 2014
Allowance for loan losses:
Beginning balance	$	44,230		$	10,425		$	633		$	1,305		$	56,593
Charge-offs		(60	)		(2,474	)		(13	)		—			(2,547	)
Recoveries on loans previously charged off		87			1,652			2			—			1,741
(Negative provision) provision		(3,954	)		135			(82	)		—			(3,901	)

Ending balance	$	40,303		$	9,738		$	540		$	1,305		$	51,886

Ending balance: individually evaluated for impairment	$	2,448		$	2,605		$	113		$	—		$	5,166

Ending balance: collectively evaluated for impairment	$	37,855		$	7,133		$	427		$	1,305		$	46,720

Loans receivable:
Ending balance	$	2,090,083		$	230,309		$	28,843		$	—		$	2,349,235

Ending balance: individually evaluated for impairment	$	35,616		$	10,741		$	1,529		$	—		$	47,886

Ending balance: collectively evaluated for impairment	$	2,054,467		$	219,568		$	27,314		$	—		$	2,301,349

June 30, 2013
Allowance for loan losses:
Beginning balance	$	46,328		$	11,064		$	1,795		$	2,004		$	61,191
Charge-offs		(2,289	)		(1,165	)		(36	)		—			(3,490	)
Recoveries on loans previously charged off		1,101			760			6			—			1,867
Provision (negative provision)		1,256			459			119			(1,526	)		308

Ending balance	$	46,396		$	11,118		$	1,884		$	478		$	59,876

Ending balance: individually evaluated for impairment	$	711		$	4,328		$	385		$	—		$	5,424

Ending balance: collectively evaluated for impairment	$	45,685		$	6,790		$	1,499		$	478		$	54,452

Loans receivable:
Ending balance	$	1,964,853		$	187,156		$	35,380		$	—		$	2,187,389

Ending balance: individually evaluated for impairment	$	28,267		$	15,760		$	1,647		$	—		$	45,674

Ending balance: collectively evaluated for impairment	$	1,936,586		$	171,396		$	33,733		$	—		$	2,141,715

The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2014 and 2013:


	Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
June 30, 2014
Allowance for loan losses:
Beginning balance	$	43,550		$	11,287		$	1,427		$	1,291		$	57,555
Charge-offs		(1,188	)		(2,896	)		(67	)		—			(4,151	)
Recoveries on loans previously charged off		3,005			2,973			14			—			5,992
(Negative provision) provision		(5,064	)		(1,626	)		(834	)		14			(7,510	)

Ending balance	$	40,303		$	9,738		$	540		$	1,305		$	51,886

Ending balance: individually evaluated for impairment	$	2,448		$	2,605		$	113		$	—		$	5,166

Ending balance: collectively evaluated for impairment	$	37,855		$	7,133		$	427		$	1,305		$	46,720

Loans receivable:
Ending balance	$	2,090,083		$	230,309		$	28,843		$	—		$	2,349,235

Ending balance: individually evaluated for impairment	$	35,616		$	10,741		$	1,529		$	—		$	47,886

Ending balance: collectively evaluated for impairment	$	2,054,467		$	219,568		$	27,314		$	—		$	2,301,349

June 30, 2013
Allowance for loan losses:
Beginning balance	$	49,472		$	10,636		$	2,280		$	917		$	63,305
Charge-offs		(3,575	)		(2,740	)		(199	)		—			(6,514	)
Recoveries on loans previously charged off		1,282			1,244			55			—			2,581
(Negative provision) provision		(783	)		1,978			(251	)		(440	)		504

Ending balance	$	46,396		$	11,118		$	1,885		$	477			59,876

Ending balance: individually evaluated for impairment	$	711		$	4,328		$	385		$	—			5,424

Ending balance: collectively evaluated for impairment	$	45,685		$	6,790		$	1,500		$	477			54,452

Loans receivable:
Ending balance	$	1,964,853		$	187,156		$	35,380		$	—			2,187,389

Ending balance: individually evaluated for impairment	$	28,267		$	15,760		$	1,647		$	—			45,674

Ending balance: collectively evaluated for impairment	$	1,936,586		$	171,396		$	33,733		$	—			2,141,715

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. A third party loan review is required on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), 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,” “Substandard” or “Doubtful.” 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.

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 as Loss will be charged off in a timely manner.

As of June 30, 2014 and December 31, 2013, pass/pass-watch (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans, disaggregated by loan class, were as follows:


	Pass/Pass-Watch (Grade 0-4)		Criticized (Grade 5)		Classified (Grade 6-7)		Total Loans
	(In thousands)
June 30, 2014
Real estate loans:
Commercial property
Retail	$	549,750	$	6,625	$	5,279	$	561,654
Hotel/Motel		325,745		7,386		4,997		338,128
Gas station		273,300		1,846		7,951		283,097
Other		773,540		10,903		12,733		797,176
Construction		1,467		—		—		1,467
Residential property		106,801		—		1,760		108,561
Commercial and industrial loans:
Commercial term		103,734		1,953		9,806		115,493
Commercial lines of credit		69,070		—		1,731		70,801
International loans		43,764		251		—		44,015
Consumer loans		26,795		148		1,900		28,843

Total gross loans	$	2,273,966	$	29,112	$	46,157	$	2,349,235

December 31, 2013
Real estate loans:
Commercial property
Retail	$	531,014	$	5,309	$	7,296	$	543,619
Hotel/Motel		308,483		1,796		12,648		322,927
Gas station		279,636		3,104		9,817		292,557
Other		690,481		8,524		32,612		731,617
Residential property		77,422		—		1,656		79,078
Commercial and industrial loans:
Commercial term		107,712		2,007		14,672		124,391
Commercial lines of credit		69,823		—		1,219		71,042
International loans		35,777		576		—		36,353
Consumer loans		30,044		163		2,298		32,505

Total gross loans	$	2,130,392	$	21,479	$	82,218	$	2,234,089

The following is an aging analysis of past due loans, disaggregated by loan class, as of the dates indicated:


	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)
June 30, 2014
Real estate loans:
Commercial property
Retail	$	820	$	—	$	732	$	1,552	$	560,102	$	561,654	$	—
Hotel/Motel		53		—		2,462		2,515		335,613		338,128		—
Gas station		166		—		3,947		4,113		278,984		283,097		—
Other		356		11		930		1,297		795,879		797,176		—
Construction		—		—		—		—		1,467		1,467		—
Residential property		884		—		113		997		107,564		108,561		—
Commercial and industrial loans:
Commercial term		1,975		587		2,623		5,185		110,308		115,493		—
Commercial lines of credit		140		795		—		935		69,866		70,801		—
International loans		—		—		—		—		44,015		44,015		—
Consumer loans		249		21		46		316		28,527		28,843		—

Total gross loans	$	4,643	$	1,414	$	10,853	$	16,910	$	2,332,325	$	2,349,235	$	—

December 31, 2013
Real estate loans:
Commercial property
Retail	$	202	$	426	$	2,196	$	2,825	$	540,794	$	543,619	$	—
Hotel/Motel		1,087		—		1,532		2,619		320,308		322,927		—
Gas station		141		410		153		704		291,853		292,557		—
Other		423		2,036		839		3,297		728,320		731,617		—
Residential property		—		122		279		401		78,677		79,078		—
Commercial and industrial loans:
Commercial term		1,443		886		3,269		5,598		118,793		124,391		—
Commercial lines of credit		—		150		250		400		70,642		71,042		—
International loans		—		—		—		—		36,353		36,353		—
Consumer loans		311		42		77		430		32,075		32,505		—

Total gross loans	$	3,607	$	4,072	$	8,595	$	16,274	$	2,217,815	$	2,234,089	$	—

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
	(In thousands)
June 30, 2014
Real estate loans:
Commercial property
Retail	$	5,198	$	5,427	$	2,665		2,533	$	403
Hotel/Motel		4,627		5,337		4,166		461		1,500
Gas station		12,400		12,905		11,779		621		238
Other		10,569		11,905		8,475		2,094		307
Residential property		2,822		2,942		2,822		—		—
Commercial and industrial loans:
Commercial term		8,952		9,429		2,400		6,552		2,570
Commercial lines of credit		704		799		521		183		3
International loans		1,085		1,085		450		635		32
Consumer loans		1,529		1,664		622		907		113

Total gross loans	$	47,886	$	51,493	$	33,900	$	13,986	$	5,166

December 31, 2013
Real estate loans:
Commercial property
Retail	$	6,244	$	6,332	$	3,767	$	2,477	$	305
Hotel/Motel		6,200		6,940		4,668		1,532		1,183
Gas station		9,389		9,884		8,592		797		209
Other		11,451		12,882		9,555		1,896		351
Residential property		2,678		2,773		2,678		—		—
Commercial and industrial loans:
Commercial term		13,834		14,308		2,929		10,905		3,806
Commercial lines of credit		614		686		173		441		252
International loans		1,087		1,087		286		801		78
Consumer loans		1,569		1,671		644		925		284

Total gross loans	$	53,066	$	56,563	$	33,292	$	19,774	$	6,468

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


	Average Recorded Investment for the Three Months Ended		Interest Income Recognized for the Three Months Ended		Average Recorded Investment for the Six Months Ended		Interest Income Recognized for the Six Months Ended
	(In thousands)
June 30, 2014
Real estate loans:
Commercial property
Retail	$	5,286	$	108	$	6,295	$	179
Hotel/Motel		4,712		80		4,121		129
Gas station		12,432		181		10,944		369
Other		10,624		228		11,124		451
Residential property		2,833		30		2,692		57
Commercial and industrial loans:
Commercial term		9,085		140		10,952		317
Commercial lines of credit		713		11		729		25
International loans		1,131		—		1,130		—
Consumer loans		1,535		16		1,547		30

Total gross loans	$	48,351	$	794	$	49,534	$	1,557

June 30, 2013
Real estate loans:
Commercial property
Retail	$	3,098	$	24	$	4,193	$	78
Hotel/Motel		3,944		121		3,940		257
Gas station		8,739		173		8,773		340
Other		9,583		290		9,919		536
Residential property		3,027		31		3,043		59
Commercial and industrial loans:
Commercial term		13,687		263		13,836		501
Commercial lines of credit		1,060		9		1,286		24
International loans		1,330		—		1,414		—
Consumer loans		1,649		15		1,646		27

Total gross loans	$	46,117	$	926	$	48,050	$	1,822

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


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
	(In thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	1,215		$	1,057		$	2,427		$	2,125
Less: Interest income recognized on impaired loans		(794	)		(926	)		(1,557	)		(1,822	)

Interest foregone on impaired loans	$	421		$	131		$	870		$	303

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, as of the dates indicated:


	June 30,		December 31,
	2014		2013
	(In thousands)
Real estate loans:
Commercial property
Retail	$	2,802	$	2,946
Hotel/Motel		3,631		5,200
Gas station		5,356		2,492
Other		4,369		4,808
Residential property		1,162		1,365
Commercial and industrial loans:
Commercial term		5,965		7,146
Commercial lines of credit		521		423
Consumer loans		1,575		1,497

Total non-accrual loans	$	25,381	$	25,877

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


	June 30,		December 31,
	2014		2013
	(In thousands)
Non-accrual loans	$	25,381	$	25,877
Loans 90 days or more past due and still accruing		—		—

Total non-performing loans		25,381		25,877
Other real estate owned		1,714		756

Total non-performing assets	$	27,095	$	26,633

Loans on non-accrual status, excluding loans held for sale, totaled $25.4 million as of June 30, 2014, compared to $25.9 million as of December 31, 2013, representing a 1.9 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $16.9 million as of June 30, 2014, compared to $16.3 million as of December 31, 2013, representing a 3.9 percent increase.

As of June 30, 2014, other real estate owned (“OREO”) consisted of two properties in California with a combined carrying value of $1.7 million and no valuation adjustment. As of December 31, 2013, there were three OREOs located in Washington and California with a combined carrying value of $756,000 and a valuation adjustment of $56,000.

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.

The following table details troubled debt restructurings, disaggregated by concession type and by loan type, as of June 30, 2014 and December 31, 2013:


	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)
June 30, 2014
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	2,614	$	2,614	$	309	$	—	$	—	$	—	$	309
Hotel/Motel		1,200		738		—		—		1,938		996		—		—		—		996
Gas station		1,138		—		—		—		1,138		363		—		—		—		363
Other		—		1,199		494		62		1,755		3,334		—		798		1,380		5,512
Residential property		769		—		—		—		769		—		—		—		313		313
Commercial and industrial loans:
Commercial term		62		4		1,246		902		2,214		129		227		2,169		2,286		4,811
Commercial lines of credit		238		—		140		143		521		—		—		183		—		183
Consumer loans		—		—		139		—		139		—		—		—		—		—

Total	$	3,407	$	1,941	$	2,019	$	3,721	$	11,088	$	5,131	$	227	$	3,150	$	3,979	$	12,487

December 31, 2013
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	750	$	750	$	—	$	—	$	—	$	474	$	474
Hotel/Motel		1,272		758		—		—		2,030		1,000		—		—		—		1,000
Gas station		1,291		—		729		—		2,020		365		—		—		2,609		2,974
Other		403		1,279		555		—		2,237		2,956		—		1,253		2,027		6,236
Residential property		795		—		—		—		795		—		—		—		—		—
Commercial and industrial loans:
Commercial term		25		206		1,449		851		2,531		1,203		—		2,286		3,817		7,306
Commercial lines of credit		—		—		—		173		173		—		—		191		—		191
International loans		—		—		—		—		—		—		—		1,087		—		1,087
Consumer loans		—		—		—		—		—		—		—		149		—		149

Total	$	3,786	$	2,243	$	2,733	$	1,774	$	10,536	$	5,524	$	—	$	4,966	$	8,927	$	19,417

As of June 30, 2014 and December 31, 2013, total TDRs, excluding loans held for sale, were $23.6 million and $30.0 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 June 30, 2014 and December 31, 2013, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $2.6 million and $2.8 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructurings, disaggregated by loan class, for the three months ended June 30, 2014 and 2013:


	June 30, 2014						June 30, 2013
	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, except number of loans)
Real estate loans:
Commercial property
Retail ⁽¹⁾		1	$	2,002	$	1,882		—	$	—	$	—
Other ⁽²⁾		1	$	65	$	62		1	$	148	$	140
Residential property ⁽³⁾		1		316		313		—		—		—
Commercial and industrial loans:
Commercial term ⁽⁴⁾		2		59		53		6		518		498
Commercial lines of credit ⁽⁵⁾		1		146		140		—		—		—
Consumer loans ⁽⁶⁾		—		—		—		1		149		149

Total		6	$	2,588	$	2,450		8	$	815	$	787

⁽¹⁾

Includes a modification of $1.9 million through an extension of maturity for the three months ended June 30, 2014.

⁽²⁾

Includes a modification of $62,000 through an extension of maturity for the three months ended June 30, 2014 and a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013.

⁽³⁾

Includes a modification of $313,000 through an extension of maturity for the three months ended June 30, 2014.

⁽⁴⁾

Includes modifications of $41,000 through a payment deferral and $12,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014, and modifications of $42,000 through a reduction of principal or accrued interest and $456,000 through extensions of maturity for the three months ended June 30, 2013.

⁽⁵⁾

Includes a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2014.

⁽⁶⁾

Includes a modification of $149,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013.

During the three months ended June 30, 2014, we restructured monthly payments on six loans, with a net carrying value of $2.5 million as of June 30, 2014, 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 loan class, for the six months ended June 30, 2014 and 2013:


	June 30, 2014						June 30, 2013
	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, except number of loans)
Real estate loans:
Commercial property
Retail ⁽¹⁾		1	$	2,002	$	1,882		—	$	—	$	—
Other ⁽²⁾		2		1,011		1,005		1		153		140
Residential property ⁽³⁾		1		317		313		—		—		—
Commercial and industrial loans:
Commercial term ⁽⁴⁾		5		327		287		8		772		699
Commercial lines of credit ⁽⁵⁾		2		400		378		—		—		—
International loans ⁽⁶⁾		—		—		—		2		1,584		1,280
Consumer loans ⁽⁷⁾		—		—		—		1		149		149

Total		11	$	4,057	$	3,865		12	$	2,658	$	2,268

⁽¹⁾

Includes a modification of $1.9 million through an extension of maturity for the six months ended June 30, 2014.

⁽²⁾

Includes modifications of $62,000 through an extension of maturity and $943,000 through a payment deferral for the six months ended June 30, 2014, and a modification of $140,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013.

⁽³⁾

Includes a modification of $313,000 through an extension of maturity for the six months ended June 30, 2014.

⁽⁴⁾

Includes modifications of $41,000 through a payment deferral, $65,000 through reductions of principal or accrued interest and $181,000 through an extension of maturity for the six months ended June 30, 2014, and modifications of $7,000 through a payment deferral, $42,000 through a reduction of principal or accrued interests and $650,000 through extensions of maturity for the six months ended June 30, 2013.

⁽⁵⁾

Includes modifications of $140,000 through a reduction of principal or accrued interest and $238,000 through a payment deferral for the six months ended June 30, 2014.

⁽⁶⁾

Includes a modification of $1.3 million through reductions of principal or accrued interest for the six months ended June 30, 2013.

⁽⁷⁾

Includes a modification of $149,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013.

During the six months ended June 30, 2014, we restructured monthly payments on eleven loans, with a net carrying value of $3.9 million as of June 30, 2014, 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 that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, for the three and six months ended June 30, 2014 and 2013, respectively:


	Three Months Ended								Six Months Ended
	June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(In thousands, except number of loans)
Real estate loans:
Commercial property
Retail		—	$	—		—	$	—		1	$	309		—	$	—
Hotel/Motel		—		—		—		—		1		996		—		—
Gas station		—		—		—		—		—		—		1		1,274
Other		—		—		1		140		1		364		1		140
Commercial and industrial loans:
Commercial term		2		212		5		341		2		212		5		341
Commercial lines of credit		1		140		—		—		1		140		—		—

Total		3	$	352		6	$	481		6	$	2,021		7	$	1,755

Servicing Assets

The changes in servicing assets for the six months ended June 30, 2014 and 2013 were as follows:


	Six Months Ended June 30,
	2014			2013
	(In thousands)
Balance at beginning of period	$	6,833		$	5,542
Additions		413			1,580
Amortization		(891	)		(739	)

Balance at end of period	$	6,355		$	6,383

At June 30, 2014 and 2013, we serviced loans sold to unaffiliated parties in the amounts of $333.0 million and $330.4 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 6 — Income Taxes

The Company’s income tax expenses for the continuing operations were $6.9 million for the three months ended June 30, 2014, compared to $6.0 million for the same period in 2013. The effective income tax rate was 37.37 percent for the three months ended June 30, 2014, compared to 38.98 percent for the same period in 2013. The decrease in the effective tax rate for the three months ended June 30, 2014, as compared to the same period in 2013, was due mainly to a $400,000 discrete deferred tax benefit generated from the sale of the insurance businesses and tax benefits to be realized from investments in low income tax credit funds, which further reduced tax rates in the quarter, offset by the expiration of the California EZ net interest deduction and EZ hiring credits. Management concluded that deferred tax assets were more likely than not to be realized, and therefore, no valuation allowance was required as of June 30, 2014.

As of June 30, 2014, the Company was subject to examinations by various federal and state tax authorities for the tax years ended December 31, 2004 through 2012. As of June 30, 2014, the Company was subjected to audits or examinations by the Internal Revenue Service for the 2009 tax year and the California Franchise Tax Board for the 2008 and 2009 tax years. Management does not anticipate any material changes in our financial statements due to the results of the audits.

Note 7 — 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 their 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, 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 warrants 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 June 30, 2014, the fair value decreased to $400 for the three months ended June 30, 2014. We used a weighted average expected stock volatility of 26.41 percent and a remaining contractual life of 1.1 years based on the contract terms. We also used a dividend yield of 1.30 percent and a risk free rate of 0.35 percent that was equal to the zero coupon rate in effect at the end of the measurement period.

Note 8 — Accumulated Other Comprehensive Income

Activity in accumulated other comprehensive income for the three months ended June 30, 2014 and 2013 was as follows:


	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Interest-Only Strip			Tax (Expense) Benefit			Total
	(In thousands)
For the three months ended June 30 2014:
Balance at beginning of period	$	(11,510	)	$	17		$	5,984		$	(5,509	)
Other comprehensive income (loss) before reclassification		6,340			—			(2,617	)		3,723
Reclassification from accumulated other comprehensive income		(364	)		—			—			(364	)

Period change		5,976			—			(2,617	)		3,359

Balance at end of period	$	(5,534	)	$	17		$	3,367		$	(2,150	)

For the three months ended June 30, 2013:
Balance at beginning of period	$	6,771		$	19		$	(1,695	)	$	5,095
Other comprehensive (loss) income before reclassification		(5,553	)		(2	)		2,397			(3,158	)
Reclassification from accumulated other comprehensive income		(303	)		—			—			(303	)

Period change		(5,856	)		(2	)		2,397			(3,461	)

Balance at end of period	$	915		$	17		$	702		$	1,634

For the three months ended June 30, 2014, there were a $3.7 million of net unrealized gain on available-for-sale securities and interest-only strip, and a $364,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $364,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $100,000 in accumulated other comprehensive income.

For the three months ended June 30, 2013, there were a $3.2 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $303,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $303,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $812,000 in accumulated other comprehensive income.

Activity in accumulated other comprehensive income for the six months ended June 30, 2014 and 2013 was as follows:


	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Interest-Only Strip		Tax (Expense) Benefit			Total
	(In thousands)
For the six months ended June 30 2014:
Balance at beginning of period	$	(18,187	)	$	16	$	8,791		$	(9,380	)
Other comprehensive income (loss) before reclassification		14,438			1		(5,424	)		9,015
Reclassification from accumulated other comprehensive income		(1,785	)		—		—			(1,785	)

Period change		12,653			1		(5,424	)		7,230

Balance at end of period	$	(5,534	)	$	17	$	3,367		$	(2,150	)

For the six months ended June 30, 2013:
Balance at beginning of period	$	7,348		$	16	$	(1,946	)	$	5,418
Other comprehensive (loss) income before reclassification		(6,121	)		1		2,648			(3,472	)
Reclassification from accumulated other comprehensive income		(312	)		—		—			(312	)

Period change		(6,433	)		1		2,648			(3,784	)

Balance at end of period	$	915		$	17	$	702		$	1,634

For the six months ended June 30, 2014, there were a $9.0 million of net unrealized gain on available-for-sale securities and interest-only strip, and a $1.8 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.8 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized losses of $177,000 in accumulated other comprehensive income.

For the six months ended June 30, 2013, there were a $3.5 million of net unrealized loss on available-for-sale securities and interest-only strip, and a $312,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption of available-for-sale securities. The $312,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of investment securities under non-interest income. The securities were previously recorded as unrealized gains of $856,000 in accumulated other comprehensive income.

Note 9 — 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, the agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0 percent.

In order for banks to be considered “well capitalized,” the 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, the agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0 percent.

The capital ratios of Hanmi Financial and the Bank as of June 30, 2014 and December 31, 2013 were as follows:


	Actual					Minimum Regulatory Requirement					Minimum to Be Categorized as “Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
June 30, 2014
Total capital (to risk-weighted assets):
Hanmi Financial	$	456,689		17.92	%	$	203,828		8.00	%		N/A		N/A
Hanmi Bank	$	436,987		17.17	%	$	203,562		8.00	%	$	254,453		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	424,280		16.65	%	$	101,914		4.00	%		N/A		N/A
Hanmi Bank	$	404,913		15.91	%	$	101,781		4.00	%	$	152,672		6.00	%
Tier 1 capital (to average assets):
Hanmi Financial	$	424,280		14.09	%	$	120,415		4.00	%		N/A		N/A
Hanmi Bank	$	404,913		13.49	%	$	120,056		4.00	%	$	150,070		5.00	%
December 31, 2013
Total capital (to risk-weighted assets):
Hanmi Financial	$	426,614		17.48	%	$	195,210		8.00	%		N/A		N/A
Hanmi Bank	$	409,095		16.79	%	$	194,880		8.00	%	$	243,600		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	395,763		16.26	%	$	97,605		4.00	%		N/A		N/A
Hanmi Bank	$	378,295		15.53	%	$	97,440		4.00	%	$	146,160		6.00	%
Tier 1 capital (to average assets):
Hanmi Financial	$	395,763		13.62	%	$	116,249		4.00	%		N/A		N/A
Hanmi Bank	$	378,295		13.05	%	$	115,984		4.00	%	$	144,980		5.00	%

Regulatory Capital Rule Adjustments

In July 2013, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Additionally, the rules implement a new capital conservation buffer. Under the final rules, an institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount. The rules will become effective January 1, 2015 for smaller, non-complex banking organizations with full implementation of the capital conservation buffer and certain deductions and adjustments to regulatory capital through January 1, 2019. The Company will continue to evaluate the new changes, and expects that the Company and the Bank will meet the capital requirements.

Note 10 — 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, SBA loan pool securities, and equity securities in market that are not active. 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 June 30, 2014, we had a zero coupon tax credit municipal bond of $728,000 compared to $748,000 as of December 31, 2013. 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 June 30, 2014 were discount rate and cash flows. The discount rate was derived from the term structure of Bank Qualified (“BQ”) “BBB” 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 0.74 year. 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 – SBA loans held for sale are carried at the lower of cost or fair value. As of June 30, 2014 and December 31, 2013, we had $3.8 million and zero 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 June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, we did not have non-performing loans held for sale, 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, 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 June 30, 2014. As of June 30, 2014 and December 31, 2013, 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)
June 30, 2014
Assets:
Securities available for sale:
Mortgage-backed securities	$	—	$	214,635	$	—	$	214,635
Collateralized mortgage obligations		—		159,625		—		159,625
U.S. government agency securities		77,864		—		—		77,864
Municipal bonds-tax exempt		—		3,719		728		4,447
Municipal bonds-taxable		—		16,731		—		16,731
Corporate bonds		—		16,925		—		16,925
SBA loan pools securities		—		12,561		—		12,561
Other securities		—		2,939		—		2,939
Equity security		—		250		—		250

Total securities available for sale	$	77,864	$	427,385	$	728	$	505,977

December 31, 2013
Assets:
Securities available for sale:
Mortgage-backed securities	$	—	$	217,059	$	—	$	217,059
Collateralized mortgage obligations		—		127,693		—		127,693
U.S. government agency securities		83,536		—		—		83,536
Municipal bonds-tax exempt		—		13,189		748		13,937
Municipal bonds-taxable		—		32,354		—		32,354
Corporate bonds		—		20,835		—		20,835
U.S. treasury bills		19,997		—		—		19,997
SBA loan pools securities		—		12,629		—		12,629
Other securities		—		2,886		—		2,886

Total securities available for sale	$	103,533	$	426,645	$	748	$	530,926

Liabilities:
Stock warrants	$	—	$	—	$	2	$	2

The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2014:


	Beginning Balance as of January 1, 2014		Purchases, Issuances and Settlement			Realized Gains or Losses in Earnings		Unrealized Gains or Losses in Other Comprehensive Income			Ending Balance as of June 30, 2014
						(In thousands)
Assets:
Municipal bonds-tax exempt ⁽¹⁾	$	748	$	—		$	—	$	(20	)	$	728
Liabilities:
Stock warrants ⁽²⁾	$	2	$	(2	)	$	—	$	—		$	—

⁽¹⁾

Reflects a zero coupon tax credit municipal bond. As the Company was not able to obtain a price from independent external pricing service providers, the discounted cash flow method was used to determine its fair value. The bond carried a par value of $700,000 and an amortized value of $699,000 with a remaining life of 0.74 year at June 30, 2014.

⁽²⁾

Reflects warrants for our common stock issued in connection with services Cappello Capital Corp. provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise price of $9.60 per share of our common stock and expire on October 14, 2015. See “Note 7 – Stockholders’ Equity” for more details. The carrying value at June 30, 2014 was $400.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of June 30, 2014 and December 31, 2013, assets and liabilities measured at fair value on a non-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		Loss During the Six Months Ended June 30, 2014
			(In thousands)
June 30, 2014
Assets:
Impaired loans ⁽¹⁾	$	—	$	32,714	$	3,251	$	2,301
Other real estate owned ⁽²⁾		—		1,714		—		17


	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		Loss During the Twelve Months Ended December 31, 2013
			(In thousands)
December 31, 2013
Assets:
Impaired loans ⁽³⁾	$	—	$	36,254	$	1,738	$	2,431
Other real estate owned ⁽⁴⁾		—		756		—		10

⁽¹⁾

Include real estate loans of $33.2 million, commercial and industrial loans of $1.4 million, and consumer loans of $1.4 million.

⁽²⁾

Includes properties from the foreclosure of real estate loans of $1.7 million.

⁽³⁾

Include real estate loans of $32.2 million, commercial and industrial loans of $2.8 million, and consumer loans of $1.3 million.

⁽⁴⁾

Includes properties from the foreclosure of real estate loans of $756,000.

FASB ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The estimated fair values of financial instruments were as follows:


	June 30, 2014
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	123,782	$	123,782	$	—	$	—
Securities available for sale		505,977		77,864		427,385		728
Loans receivable, net of allowance for loan losses		2,300,810		—		—		2,298,104
Loans held for sale		3,842		—		3,842		—
Accrued interest receivable		6,355		6,355		—		—
Investment in federal home loan bank stock		16,385		16,385		—		—
Investment in federal reserve bank stock		11,514		11,514		—		—
Financial liabilities:
Noninterest-bearing deposits