Hanmi Financial - 10-Q quarterly report FY2011 Q2

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended June 30, 2011

or


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

For the Transition Period From _________ To _________

Commission File Number: 000-30421

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. Yesþ No o

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 þNo o

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.


Large Accelerated Filer o	Accelerated Filer þ	Non-Accelerated Filer o	Smaller Reporting Company o
		(Do Not Check if a Smaller Reporting Company)

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

As of July 29, 2011, there were 151,258,390 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, 2011 AND 2010

TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)		1
Consolidated Statements of Operations (Unaudited)		2
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited)		3
Consolidated Statements of Cash Flows (Unaudited)		4
Notes to Consolidated Financial Statements (Unaudited)		5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		70
ITEM 4. CONTROLS AND PROCEDURES		70

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		70
ITEM 1A. RISK FACTORS		70
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		71
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		72
ITEM 4. REMOVED AND RESERVED		72
ITEM 5. OTHER INFORMATION		72
ITEM 6. EXHIBITS		73
SIGNATURES		74
EX-31.1
EX-31.1
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Data)


	June 30,			December 31,
	2011			2010
ASSETS
Cash and Due From Banks	$	67,166		$	60,983
Interest-Bearing Deposits in Other Banks		131,757			158,737
Federal Funds Sold		—			30,000


Cash and Cash Equivalents		198,923			249,720

Securities Held to Maturity, at Amortized Cost (Fair Value of $835 as of June 30, 2011 and $847 as of December 31, 2010)		833			845
Investment Securities Available for Sale, at Fair Value (Amortized Cost of $386,299 as of June 30, 2011 and $415,491 as of December 31, 2010)		390,212			413,118
Loans Receivable, Net of Allowance for Loan Losses of $109,029 as of June 30, 2011 and $146,059 as of December 31, 2010		1,959,564			2,084,447
Loans Held for Sale, at the Lower of Cost or Fair Value		44,105			36,620
Accrued Interest Receivable		7,512			8,048
Premises and Equipment, Net		16,869			17,599
Other Real Estate Owned, Net		1,340			4,089
Customers’ Liability on Acceptances		1,629			711
Servicing Assets		2,545			2,890
Other Intangible Assets, Net		1,825			2,233
Investment in Federal Home Loan Bank Stock, at Cost		25,076			27,282
Investment in Federal Reserve Bank Stock, at Cost		7,489			7,449
Income Taxes Receivable		9,188			9,188
Bank-Owned Life Insurance		27,813			27,350
Other Assets		15,912			15,559


TOTAL ASSETS	$	2,710,835		$	2,907,148


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing	$	600,812		$	546,815
Interest-Bearing		1,797,563			1,919,906


Total Deposits		2,398,375			2,466,721

Accrued Interest Payable		14,226			15,966
Bank’s Liability on Acceptances		1,629			711
Federal Home Loan Bank Advances		3,479			153,650
Other Borrowings		1,034			1,570
Junior Subordinated Debentures		82,406			82,406
Accrued Expenses and Other Liabilities		11,321			12,868


Total Liabilities		2,512,470			2,733,892


COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 500,000,000 Shares; Issued 155,890,890 Shares (151,258,390 Shares Outstanding) and 155,830,890 Shares (151,198,390 Shares Outstanding) as of June 30, 2011 and December 31, 2010, respectively		156			156
Additional Paid-In Capital		472,717			472,335
Unearned Compensation		(219	)		(219	)
Accumulated Other Comprehensive Income (Loss) — Unrealized Gain (Loss) on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $602 as of June 30, 2011 and December 31, 2010, respectively		3,325			(2,964	)
Accumulated Deficit		(207,602	)		(226,040	)
Less Treasury Stock, at Cost: 4,632,500 Shares as of June 30, 2011 and December 31, 2010		(70,012	)		(70,012	)


Total Stockholders’ Equity		198,365			173,256


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,710,835		$	2,907,148

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

1

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans	$	29,249		$	34,486		$	60,154		$	71,181
Taxable Interest on Investment Securities		3,094			1,359			5,767			2,443
Tax-Exempt Interest on Investment Securities		37			77			77			154
Dividends on Federal Reserve Bank Stock		112			103			224			207
Dividends on Federal Home Loan Bank Stock		20			20			41			41
Interest on Interest-Bearing Deposits in Other Banks		79			99			168			154
Interest on Federal Funds Sold		9			16			17			33
Interest on Term Federal Funds Sold		18			11			45			11


Total Interest and Dividend Income		32,618			36,171			66,493			74,224


INTEREST EXPENSE:
Interest on Deposits		6,192			8,813			12,927			18,517
Interest on Federal Home Loan Bank Advances		239			339			572			685
Interest on Other Borrowings		1			31			1			31
Interest on Junior Subordinated Debentures		711			692			1,409			1,361


Total Interest Expense		7,143			9,875			14,909			20,594


NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES		25,475			26,296			51,584			53,630
Provision for Credit Losses		—			37,500			—			95,496


NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES		25,475			(11,204	)		51,584			(41,866	)


NON-INTEREST INCOME:
Service Charges on Deposit Accounts		3,278			3,602			6,419			7,328
Insurance Commissions		1,203			1,206			2,463			2,484
Remittance Fees		499			523			961			985
Trade Finance Fees		328			412			625			763
Other Service Charges and Fees		368			372			701			784
Bank-Owned Life Insurance Income		233			235			463			466
Net Gain (Loss) on Sales of Investment Securities		(70	)		—			(70	)		105
Net Gain (Loss) on Sales of Loans		(77	)		220			(415	)		214
Other Operating Income		255			106			378			552


Total Non-Interest Income		6,017			6,676			11,525			13,681


NON-INTEREST EXPENSE:
Salaries and Employee Benefits		8,762			9,011			17,886			17,797
Deposit Insurance Premiums and Regulatory Assessments		1,377			4,075			3,447			6,299
Occupancy and Equipment		2,650			2,674			5,215			5,399
Directors and Officers Liability Insurance		733			716			1,467			1,433
Other Real Estate Owned Expense		806			1,718			1,635			7,418
Data Processing		1,487			1,487			2,886			2,986
Professional Fees		1,138			1,022			1,927			2,088
Supplies and Communication		496			574			1,074			1,091
Advertising and Promotion		908			503			1,474			1,038
Loan-Related Expense		184			310			409			617
Amortization of Other Intangible Assets		190			301			408			629
Expenses Related to Unconsummated Capital Offerings		2,220			—			2,220			—
Other Operating Expenses		1,935			2,374			3,899			4,194


Total Non-Interest Expense		22,886			24,765			43,947			50,989


INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		8,606			(29,293	)		19,162			(79,174	)
Provision (Benefit) for Income Taxes		605			(36	)		724			(431	)


NET INCOME (LOSS)	$	8,001		$	(29,257	)	$	18,438		$	(78,743	)


EARNINGS (LOSS) PER SHARE:
Basic	$	0.05		$	(0.57	)	$	0.12		$	(1.54	)
Diluted	$	0.05		$	(0.57	)	$	0.12		$	(1.54	)
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		151,104,636			51,036,573			151,082,945			51,017,885
Diluted		151,258,390			51,036,573			151,257,350			51,017,885
DIVIDENDS DECLARED PER SHARE	$	—		$	—		$	—		$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

2

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)(UNAUDITED)

(In Thousands; Except Share Data)


	Common Stock - Number of Shares									Stockholders’ Equity
																Accumulated
											Additional					Other			Retained			Treasury			Total
			Treasury					Common			Paid-In		Unearned			Comprehensive			Earnings			Stock,			Stockholders’
	Issued		Stock			Outstanding		Stock			Capital		Compensation			Income (Loss)			(Deficit)			at Cost			Equity
BALANCE AS OF JANUARY 1, 2010		55,814,890		(4,632,500	)		51,182,390	$	56		$	357,174	$	(302	)	$	859		$	(138,031	)	$	(70,012	)	$	149,744
Exercises of Stock Options and Stock Warrants		16,000		—			16,000		—			22		—			—			—			—			22
Share-Based Compensation Expense		—		—			—		—			445		41			—			—			—			486
Comprehensive Loss:
Net Loss		—		—			—		—			—		—			—			(78,743	)		—			(78,743	)
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—			—		—			1,671			—			—			1,671


Total Comprehensive Loss																										(77,072	)


BALANCE AS OF JUNE 30, 2010		55,830,890		(4,632,500	)		51,198,390	$	56		$	357,641	$	(261	)	$	2,530		$	(216,774	)	$	(70,012	)	$	73,180


BALANCE AS OF JANUARY 1, 2011		155,830,890		(4,632,500	)		151,198,390	$	156		$	472,335	$	(219	)	$	(2,964	)	$	(226,040	)	$	(70,012	)	$	173,256


Share-Based Compensation Expense		—		—			—		—			304		78			—			—			—			382
Restricted Stock Awards		60,000		—			60,000		—			78		(78	)		—			—			—			—

Comprehensive Income:
Net Income		—		—			—		—			—		—			—			18,438			—			18,438
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—			—		—			6,289			—			—			6,289

Total Comprehensive Income																										24,727


BALANCE AS OF JUNE 30, 2011		155,890,890		(4,632,500	)		151,258,390	$	156		$	472,717	$	(219	)	$	3,325		$	(207,602	)	$	(70,012	)	$	198,365

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

3

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)


	Six Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)	$	18,438		$	(78,743	)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment		1,083			1,204
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net		1,227			288
Amortization of Other Intangible Assets		408			629
Amortization of Servicing Assets		345			496
Share-Based Compensation Expense		382			486
Provision for Credit Losses		—			95,496
Net Gain (Loss) on Sales of Investment Securities		70			(105	)
Net Gain on Sales of Loans		(2,489	)		(214	)
(Gain) Loss on Sales of Other Real Estate Owned		681			(154	)
Provision for Valuation Allowance on Other Real Estate Owned		470			6,503
Lower of Cost or Fair Value Adjustment for Loans Held for Sale		2,903			—
Deferred Tax Benefit		—			3,608
Origination of Loans Held for Sale		(16,056	)		(1,782	)
Net Proceeds from Sales of Loans Held for Sale		—			79,254
Loss on Investment in Affordable Housing Partnership		440			440
Decrease in Accrued Interest Receivable		536			1,690
Increase in Cash Surrender Value of Bank-Owned Life Insurance		(463	)		(466	)
Increase in Other Assets		(789	)		(3,489	)
Decrease in Income Tax Receivable		—			46,857
(Decrease) Increase in Accrued Interest Payable		(1,636	)		1,418
(Decrease) Increase in Other Liabilities		(521	)		682


Net Cash Provided By Operating Activities		5,029			154,098


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock		2,206			2,236
Proceeds from Matured or Called Investment Securities Available for Sale		70,841			37,023
Proceeds from Matured or Called Investment Securities Held to Maturity		12			13
Proceeds from Sales of Investment Securities Available for Sale		157,777			3,252
Net Proceeds from Sales of Loans Held for Sale		45,963			—
Proceeds from Sales of Other Real Estate Owned		3,736			5,042
Net Decrease in Loans Receivable		83,809			163,888
Purchases of Federal Reserve Bank Stock		(40	)		—
Purchases of Investment Securities Available for Sale		(200,724	)		(95,415	)
Purchases of Premises and Equipment		(353	)		(464	)


Net Cash Provided By Investing Activities		163,227			115,575


CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Deposits		(68,346	)		(174,213	)
Proceeds from Exercise of Stock Options		—			22
Repayment of Long-Term Federal Home Loan Bank Advances		(171	)		(162	)
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings		(150,536	)		1,315


Net Cash Used In Financing Activities		(219,053	)		(173,038	)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(50,797	)		96,635
Cash and Cash Equivalents at Beginning of Period		249,720			154,110


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	198,923		$	250,745


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid	$	16,649		$	19,176
Income Taxes Paid, Net of Refunds	$	3		$	(49,971	)
Non-Cash Activities:
Loan Provided in the Sale of Loans Held for Sale	$	5,750		$	—
Transfer of Loans to Other Real Estate Owned	$	2,752		$	10,366
Transfer of Loans to Loans Held for Sale	$	37,806		$	101,620
Loans Provided in the Sale of Other Real Estate Owned	$	510		$	1,217

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

4

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

NOTE 1 — BASIS OF PRESENTATION

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

In the opinion of management, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended June 30, 2011, but are not necessarily indicative of the results that will be reported for the entire year. 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. In the opinion of management, the aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim 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 “SEC”). The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report on Form 10-K”).

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

Descriptions of our significant accounting policies are included in “Note 2 — Summary of Significant Accounting Policies” in our 2010 Annual Report on Form 10-K.

Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.

NOTE 2 — REGULATORY MATTERS

On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of a Final Order (“Final Order”) with the California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Final Order and the Agreement contain a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

While Hanmi Financial intends to take such actions as may be necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Final Order and the Agreement, there can be no assurance that Hanmi Financial or the Bank will be able to comply fully with the provisions of the Final Order and the Agreement, or that compliance with the Final Order and the Agreement will not have material and adverse effects on the operations and financial condition of Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Final Order and the Agreement could result in further enforcement actions by both DFI and FRB, or the possible placement of the Bank into conservatorship or receivership.

Final Order and Written Agreement

The Final Order and the Agreement contain substantially similar provisions, and require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening Board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi)

5

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 2 — REGULATORY MATTERS (Continued)

improving the capital position of the Bank and, with respect to the Agreement, of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; and (viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Final Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank, and require the Bank to charge off or collect certain problem loans and to review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and Hanmi Financial and the Bank must obtain prior approval from the FRB prior to declaring and paying dividends.

Under the Final Order, the Bank is required to increase its capital and maintain certain regulatory capital ratios prior to certain dates as follows: 1) by July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million, and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent, and 2) by December 31, 2010, and thereafter during the life of the Final Order, the Bank will be required to maintain a ratio of tangible stockholders’ equity to total tangible assets of not less than 9.5 percent.

If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan approved by the FRB. On July 27, 2010, we completed a registered rights and best efforts offering in which we raised $116.8 million in net proceeds. As a result, we satisfied the $100 million capital contribution requirement set forth in the Final Order. While the Bank’s tangible stockholders’ equity to total tangible assets ratio was 8.59% at December 31, 2010, the ratio increased to 10.33 percent at June 30, 2011. Therefore, the Bank is currently in compliance with the tangible capital ratio requirement.

6

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 2 — REGULATORY MATTERS (Continued)

Risk-Based Capital

Federal bank regulatory agencies require 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 regulators require banking organizations to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. For a bank rated in the highest of the five categories used by the regulators to rate banks, the minimum leverage ratio is 3.0 percent. In addition to these uniform risk-based capital guidelines that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

As of June 30, 2011, Hanmi Financial’s Tier 1 capital (stockholders’ equity plus qualified junior subordinated debentures less intangible assets) was $257.9 million. This represented an increase of $25.2 million, or 10.8 percent, over Tier 1 capital of $232.7 million as of December 31, 2010. The capital ratios of Hanmi Financial and the Bank were as follows as of June 30, 2011:


											To be Categorized as
						Minimum					“Well Capitalized”
						Regulatory					under Prompt Corrective
	Actual					Requirement					Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Thousands)
June 30, 2011
Total Capital (to Risk-Weighted Assets):
Hanmi Financial	$	301,045		13.92	%	$	173,032		8.00	%		N/A		N/A
Hanmi Bank	$	302,827		14.02	%	$	172,802		8.00	%	$	216,003		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial	$	257,911		11.92	%	$	86,516		4.00	%		N/A		N/A
Hanmi Bank	$	274,785		12.72	%	$	86,401		4.00	%	$	129,602		6.00	%
Tier 1 Capital (to Average Assets):
Hanmi Financial	$	257,911		9.09	%	$	113,504		4.00	%		N/A		N/A
Hanmi Bank	$	274,785		9.70	%	$	113,260		4.00	%	$	141,576		5.00	%

7

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS

Fair Value Option and Fair Value Measurements

We determine the fair value of our assets and liabilities in accordance with ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value of an asset or liability is determined based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact for the asset or liability.

In determining fair value, we use various methods including market and income approaches. Based on these approaches, we utilize certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we classify and disclose assets and liabilities based on the fair value hierarchy presented below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency.

In January 2010, the FASB issued ASU No. 2010-6, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. This requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlements in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarifies that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. In addition, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation were effective for the first reporting period beginning after December 31, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis was effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU 2010-06 did not have a material effect on our financial condition or result of operations.

We used the following methods and significant assumptions to estimate fair value:

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 or 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. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.

8

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities’ categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace. We also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Securities classified as Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into our proprietary valuation model. As of June 30, 2011 and December 31, 2010, we had no level 3 investment securities.

SBA Loans Held for Sale – All Small Business Administration (“SBA”) loans originate for sale. Loans held for sale are carried at the lower of cost or fair value. As of June 30, 2011 and December 31, 2010, we had $24.3 million and $10.0 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At June 30, 2011 and December 31, 2010, the entire balance of the loans held for sale was recorded at its cost on a nonrecurring basis with Level 2 inputs.

Non-performing Loans Held for Sale – We reclassify certain non-performing loans when we make the decision 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 from buyers. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of June 30, 2011 and December 31, 2010, we had $19.8 million and $26.6 million of non-performing loans held for sale, respectively, and measured them on a nonrecurring basis with Level 3 inputs.

Impaired Loans – FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 3 and subject to non-recurring fair value adjustments.

Other Real Estate Owned – Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned, which is subject to non-recurring fair value adjustments, as Level 3.

Servicing Assets and Servicing Liabilities – The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. The valuation model inputs and results are compared to widely available published industry data for reasonableness. Since fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs, we classify them as Level 3.

9

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Other Intangible Assets – Other intangible assets consist of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Since fair value measurements of other intangible assets use significant unobservable inputs, we classify them, which are subject to non-recurring fair value adjustments, as Level 3.

Stock Warrants – The fair value of stock warrants was determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant. As such, we classify them, which are subject to non-recurring fair value adjustments, as Level 3.

Fair Value Measurement

FASB ASC 820 defines fair value 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. FASB ASC 820 also establishes a three-level fair value hierarchy that 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 in accordance with ASC 825, Financial Instruments.

We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, mortgage servicing assets, 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.

10

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We recognize transfers of assets between levels at the end of each respective quarterly reporting period. However, there were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three and six months ended June 30, 2011.

As of June 30, 2011 and December 31, 2010, assets and liabilities measured at fair value on a recurring basis are as follows:


	Level 1		Level 2		Level 3
			Significant
			Observable
			Inputs With
	Quoted Prices in		No Active				Balance as of
	Active Markets		Market With		Significant		June 30,
	for Identical		Identical		Unobservable		2011 and December
	Assets		Characteristics		Inputs		31, 2010
			(In Thousands)
June 30, 2011
ASSETS:
Debt Securities Available for Sale:
Collateralized Mortgage Obligations	$	—	$	125,929	$	—	$	125,929
U.S. Government Agency Securities		106,325		—		—		106,325
Residential Mortgage-Backed Securities		—		117,777		—		117,777
Corporate Bonds		—		20,385		—		20,385
Municipal Bonds		—		9,256		—		9,256
Asset-Backed Securities		—		6,799		—		6,799
Other Securities		—		3,281		—		3,281

Total Debt Securities Available for Sale	$	106,325	$	283,427	$	—	$	389,752


Equity Securities Available for Sale:
Financial Services Industry	$	460		—		—	$	460


Total Equity Securities Available for Sale	$	460	$	—	$	—	$	460


Total Securities Available for Sale	$	106,785	$	283,427	$	—	$	390,212


LIABILITIES:
Stock Warrants	$	—	$	—	$	1,289	$	1,289

December 31, 2010
ASSETS:
Debt Securities Available for Sale:

Collateralized Mortgage Obligations	$	—	$	137,193	$	—	$	137,193
U.S. Government Agency Securities		113,334		—		—		113,334
Residential Mortgage-Backed Securities		—		109,842		—		109,842
Municipal Bonds		—		21,028		—		21,028
Corporate Bonds		—		20,205		—		20,205
Asset-Backed Securities		—		7,384		—		7,384
Other Securities		—		3,259		—		3,259

Total Debt Securities Available for Sale	$	113,334	$	298,911	$	—	$	412,245


Equity Securities Available for Sale:
Financial Services Industry	$	873		—		—	$	873


Total Equity Securities Available for Sale	$	873	$	—	$	—	$	873


Total Securities Available for Sale	$	114,207	$	298,911	$	—	$	413,118


LIABILITIES:
Stock Warrants	$	—	$	—	$	1,600	$	1,600

11

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

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 three and six months ended June 30, 2011:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Realized and

Unrealized

Beginning

Realized and

Gains or Losses

Ending

Balance as of

Purchases,

Unrealized

in Other

Transfers

Balance as of

March 31,

Issuances and

Gains or Losses

Comprehensive

In and/or Out

June 30,

2011

Settlements

in Earnings

Income

of Level 3

2011

(In Thousands)

LIABILITIES:

Stock Warrants⁽¹⁾

$

1,614

$

—

$

325

$

—

$

—

$

1,289

Realized and

Unrealized

Beginning

Realized and

Gains or Losses

Ending

Balance as of

Purchases,

Unrealized

in Other

Transfers

Balance as of

December 31,

Issuances and

Gains or Losses

Comprehensive

In and/or Out

June 30,

2010

Settlements

in Earnings

Income

of Level 3

2011

(In Thousands)

LIABILITIES:

Stock Warrants⁽¹⁾

$

1,600

$

—

$

311

$

—

$

—

$

1,289


⁽¹⁾		Reflects warrants for our common stock issued to Cappello Capital Corp. in connection with services it 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 $1.20 per share and expire on October 14, 2015. See “Note 8 — Stockholders’ Equity” for more details.

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

For the three and six months ended June 30, 2011 and 2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:


	Level 1		Level 2		Level 3
	Quoted Prices in		Significant Observable Inputs With No Active					Losses During The		Losses During The
	Active Markets		Market With		Significant			Three Months Ended		Six Months Ended
	for Identical		Identical			Unobservable			June 30,		June 30,
	Assets		Characteristics		Inputs			2011 and 2010		2011 and 2010
June 30, 2011
ASSETS:
Non-Performing Loans Held for Sale	$	—	$	—	$	18,683	⁽¹⁾	$	682	$	9,462
Impaired Loans	$	—	$	—	$	178,090	⁽²⁾	$	14,314	$	23,940
Other Real Estate Owned	$	—	$	—	$	1,298	⁽³⁾	$	203	$	770

June 30, 2010
ASSETS:
Non-Performing Loans Held for Sale	$	—	$	—	$	23,663	⁽⁴⁾	$	5,337	$	7,053
Impaired Loans	$	—	$	—	$	168,184	⁽⁵⁾	$	19,857	$	48,696
Other Real Estate Owned	$	—	$	—	$	22,499	⁽⁶⁾	$	966	$	5,912


⁽¹⁾		Includes commercial property loans of $418,000, commercial term loans of $12.0 million, SBA loans of $6.0 million and residential property loans of $266,000.

⁽²⁾		Includes real estate loans of $73.7 million, commercial and industrial loans of $103.7 million, and consumer loans of $732,000 .

⁽³⁾		Includes properties from the foreclosure of commercial property loans of $308,000 and SBA loans of $990,000.

⁽⁴⁾		Includes commercial term loans of $8.8 million and commercial property loans of $14.9 million.

⁽⁵⁾		Includes real estate loans of $43.7 million, commercial and industrial loans of $124.1 million, and consumer loans of $388,000.

⁽⁶⁾		Includes properties from the foreclosure of real estate loans of $19.4 million, and commercial and industrial loans of $3.1 million.

12

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

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 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.

13

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

The estimated fair values of financial instruments were as follows:


	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	or Contract		Fair		or Contract		Fair
	Amount		Value		Amount		Value
			(In Thousands)
Financial Assets:
Cash and Cash Equivalents	$	198,923	$	198,923	$	249,720	$	249,720
Investment Securities Held to Maturity		833		835		845		847
Investment Securities Available for Sale		390,212		390,212		413,118		413,118
Loans Receivable, Net of Allowance for Loan Losses		1,959,564		1,943,118		2,084,447		2,025,368
Loans Held for Sale		44,105		44,105		36,620		36,620
Accrued Interest Receivable		7,512		7,512		8,048		8,048
Investment in Federal Home Loan Bank Stock		25,076		25,076		27,282		27,282
Investment in Federal Reserve Bank Stock		7,489		7,489		7,449		7,449

Financial Liabilities:
Noninterest-Bearing Deposits		600,812		600,812		546,815		546,815
Interest-Bearing Deposits		1,797,563		1,807,148		1,919,906		1,927,314
Borrowings		86,919		87,017		237,626		233,077
Accrued Interest Payable		14,226		14,226		15,966		15,966

Off-Balance Sheet Items:
Commitments to Extend Credit		167,018		100		178,424		130
Standby Letters of Credit		14,771		36		15,226		50

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:

Cash and Cash Equivalents – For short-term instruments, including cash and due from banks, and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.

Investment Securities – Fair values for investment securities are based on quoted market prices when available or through the use of market prices obtained from independent securities brokers or dealers, when market quotes are not readily accessible or available.

Loans Receivable, Net of Allowance for Loan Losses – Fair values for loans receivable are estimated based on the discounted cash flow approach. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for loan losses relating to performing and nonperforming loans results in a fair valuation of such loans. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans, and may differ materially from the values that we may ultimately realize.

Loans Held for Sale – For loans held for sale, the carrying value approximates fair value.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value.

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts approximate fair value as the stock may be resold to the issuer at carrying value.

Noninterest-Bearing Deposits – The fair value of noninterest-bearing deposits is equal to the amount payable on demand at the reporting date.

14

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on the discounted value of contractual cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rates used for fair valuation are based on interest rates currently being offered by the Bank on comparable deposits as to amount and term.

Borrowings – Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, junior subordinated debentures and other borrowings. Discounted cash flows are used to value borrowings.

Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value.

Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant.

Commitments to Extend Credit and Standby Letters of Credit – The fair values of commitments to extend credit and standby letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.

NOTE 4 — INVESTMENT SECURITIES

The following is a summary of investment securities held to maturity:


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
	(In Thousands)
June 30, 2011:
Municipal Bonds	$	697	$	—	$	—	$	697
Mortgage-Backed Securities ⁽¹⁾		136		2		—		138


	$	833	$	2	$	—	$	835


December 31, 2010:
Municipal Bonds	$	696	$	—	$	—	$	696
Mortgage-Backed Securities ⁽¹⁾		149		2		—		151


	$	845	$	2	$	—	$	847


⁽¹⁾		Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

15

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

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


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
	(In Thousands)
June 30, 2011:
Collateralized Mortgage Obligations ⁽¹⁾	$	124,940	$	1,114	$	125	$	125,929
Mortgage-Backed Securities ⁽¹⁾		115,019		2,793		35		117,777
U.S. Government Agency Securities		106,162		260		97		106,325
Corporate Bonds		20,454		23		92		20,385
Municipal Bonds		9,296		80		120		9,256
Asset-Backed Securities ⁽²⁾		6,476		323		—		6,799
Other Securities		3,305		17		41		3,281
Equity Securities ⁽³⁾		647		—		187		460


	$	386,299	$	4,610	$	697	$	390,212


December 31, 2010:
Collateralized Mortgage Obligations ⁽¹⁾	$	139,053	$	470	$	2,330	$	137,193
U.S. Government Agency Securities		114,066		98		830		113,334
Mortgage-Backed Securities ⁽¹⁾		108,436		2,137		731		109,842
Municipal Bonds		22,420		48		1,440		21,028
Corporate Bonds		20,449		13		257		20,205
Asset-Backed Securities ⁽²⁾		7,115		269		—		7,384
Other Securities		3,305		—		46		3,259
Equity Securities ⁽³⁾		647		226		—		873


	$	415,491	$	3,261	$	5,634	$	413,118


⁽¹⁾		Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

⁽²⁾		Collaterized debentures of small business investment companies and state and local development companies, and guaranteed by SBA.

⁽³⁾		Balances presented for amortized cost, representing two equity securities, were net of an OTTI charge of $790,000, which was related to a credit loss, as of December 31, 2010. We recorded an OTTI charge of $790,000 to write down the value of one equity investment to its fair value during the year ended December 31, 2010.

The amortized cost and estimated fair value of investment securities at June 30, 2011, by contractual maturity, are shown below. Although collateralized mortgage obligations, mortgage-backed securities and asset-backed securities have contractual maturities through 2041, 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				Held to Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
			(In Thousands)
Within One Year	$	—	$	—	$	—	$	—
Over One Year Through Five Years		103,279		103,360		697		697
Over Five Years Through Ten Years		32,191		32,199		—		—
Over Ten Years		3,747		3,688		—		—
Collateralized Mortgage Obligations		124,940		125,929		—		—
Mortgage-Backed Securities		115,019		117,777		136		138
Asset-Backed Securities		6,476		6,799		—		—
Equity Securities		647		460		—		—


	$	386,299	$	390,212	$	833	$	835

In accordance with FASB ASC 320, “Investments — Debt and Equity Securities,” amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and six months ended June 30, 2011 and 2010, there were no OTTI charges recorded in earnings.

16

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

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, 2011 and December 31, 2010:


	Holding Period
	Less than 12 Months						12 Months or More						Total
	Gross		Estimated		Number		Gross		Estimated		Number		Gross		Estimated		Number
Investment Securities	Unrealized		Fair		of		Unrealized		Fair		of		Unrealized		Fair		of
Available for Sale	Losses		Value		Securities		Losses		Value		Securities		Losses		Value		Securities
							(In Thousands)
June 30, 2011:
Mortgage-Backed Securities	$	35	$	4,744		1	$	—	$	—		—	$	35	$	4,744		1
Collateralized Mortgage Obligations		125		29,630		8		—		—		—		125		29,630		8
Municipal Bonds		59		2,827		5		61		2,323		2		120		5,150		7
U.S. Government Agency Securities		97		26,903		7		—		—		—		97		26,903		7
Equity Securities		187		460		2		—		—		—		187		460		2
Other Securities		—		—		—		41		958		1		41		958		1
Corporate Bonds		74		12,895		3		18		2,982		1		92		15,877		4


	$	577	$	77,459		26	$	120	$	6,263		4	$	697	$	83,722		30


December 31, 2010:
Mortgage-Backed Securities	$	731	$	62,738		16	$	—	$	—		—	$	731	$	62,738		16
Collateralized Mortgage Obligations		2,330		99,993		20		—		—		—		2,330		99,993		20
Municipal Bonds		1,440		16,907		11		—		—		—		1,440		16,907		11
U.S. Government Agency Securities		830		69,266		14		—		—		—		830		69,266		14
Other Securities		3		1,997		2		43		957		1		46		2,954		3
Corporate Bonds		257		17,210		5		—		—		—		257		17,210		5


	$	5,591	$	268,111		68	$	43	$	957		1	$	5,634	$	269,068		69

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2011 and December 31, 2010 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, 2011. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The unrealized losses on investments in U.S. agencies securities were caused by changes in market interest rates or the widening of market spreads subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of June 30, 2011. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 2011, all of them are issued and guaranteed by U.S. government sponsored entities.

17

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not by concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

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. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. 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, 2011 and December 31, 2010 are not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2011 and December 31, 2010 are warranted.

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010
				(In Thousands)
Gross Realized Gains on Sales of Investment Securities	$	969		$	—	$	969		$	210
Gross Realized Losses on Sales of Investment Securities		(1,039	)		—		(1,039	)		(105	)

Net Realized Gains on Sales of Investment Securities	$	(70	)	$	—	$	(70	)	$	105

Proceeds from Sales of Investment Securities	$	157,777		$	—	$	157,777		$	3,252
Tax Expense on Sales of Investment Securities	$	—		$	—	$	—		$	45

For the three months ended June 30, 2011, $6.2 million ($3.6 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized a $70,000 loss in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $1.3 million in comprehensive income. For the three months ended June 30, 2010, $1.9 million ($1.1 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income. For the six months ended June 30, 2011, $6.3 million ($3.6 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized a $70,000 loss in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $1.5 million in comprehensive income. For the six months ended June 30, 2010, $2.9 million ($1.7 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized a $105,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $99,000 in comprehensive income.

Investment securities available for sale with carrying values of $66.2 million and $118.0 million as of June 30, 2011 and December 31, 2010, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

18

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

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 change, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.

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

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

Loans Receivable

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


	June 30,			December 31,
	2011			2010
	(In Thousands)
Real Estate Loans:
Commercial Property	$	688,842		$	729,222
Construction		40,684			60,995
Residential Property		58,059			62,645

Total Real Estate Loans		787,585			852,862

Commercial and Industrial Loans: ⁽¹⁾
Commercial Term		1,032,274			1,118,999
SBA		105,049			105,688
Commercial Lines of Credit		50,636			59,056
International		46,560			44,167

Total Commercial and Industrial Loans		1,234,519			1,327,910

Consumer Loans		46,500			50,300

Total Gross Loans		2,068,604			2,231,072
Allowance for Loans Losses		(109,029	)		(146,059	)
Deferred Loan Fees		(11	)		(566	)

Loans Receivable, Net	$	1,959,564		$	2,084,447


⁽¹⁾		Commercial and industrial loans include owner-occupied property loans of $846.5 million and $894.8 million as of June 30, 2011 and December 31, 2010, respectively.

Accrued interest on loans receivable amounted to $6.0 million and $6.5 million at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, loans receivable totaling $904.5 million and $1.03 billion, respectively, was pledged to secure borrowings from the FHLB and the Fed Discount Window.

The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the three months ended June 30, 2011 and 2010.

19

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)


				Commercial
	Real Estate			and Industrial			Consumer		Total
				(Dollars in Thousands)
June 30, 2011
Loans Held for Sale:
Beginning Balance	$	3,513		$	44,136		$	—	$	47,649
Origination of Loans Held for Sale		—			1,771			—		1,771
Reclassification from Loans Receivable to Loans Held for sale		266			9,567			—		9,833
Sales of Loans Held for sale		(2,664	)		(11,557	)		—		(14,221	)
Principal Payoffs and Amortization		(8	)		(237	)		—		(245	)
Valuation Adjustments		(133	)		(549	)		—		(682	)

Ending Balance	$	974		$	43,131		$	—	$	44,105


June 30, 2010
Loans Held for Sale:
Beginning Balance	$	—		$	10,104		$	—	$	10,104
Origination of Loans Held for Sale		—			462			—		462
Reclassification from Loans Receivable to Loans Held for sale		22,584			60,500			—		83,084
Sales of Loans Held for sale		(7,731	)		(55,257	)		—		(62,988	)
Principal Payoffs and Amortization		—			(118	)		—		(118	)
Valuation Adjustments		—			—			—		—

Ending Balance	$	14,853		$	15,691		$	—	$	30,544

For the three months ended June 30, 2011, loans receivable of $9.8 million were reclassified as loans held for sale, and loans held for sale of $14.2 million were sold. For the same period ended June 30, 2010, loans receivable of $83.1 million were reclassified as loans held for sale, and loans held for sale of $63.0 million were sold. The net proceeds from the sale of non-performing loans were $18.0 million and $57.4 million for the three months ended June 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the three months ended June 30, 2011 and 2010.

The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2011 and 2010.


				Commercial
	Real Estate			and Industrial			Consumer		Total
				(Dollars in Thousands)
June 30, 2011
Loans Held for Sale:
Beginning Balance	$	3,666		$	32,954		$	—	$	36,620
Origination of Loans Held for Sale		—			16,056			—		16,056
Reclassification from Loans Receivable to Loans Held for sale		18,175			19,631			—		37,806
Sales of Loans Held for sale		(20,653	)		(22,140	)		—		(42,793	)
Principal Payoffs and Amortization		(14	)		(667	)		—		(681	)
Valuation Adjustments		(200	)		(2,703	)		—		(2,903	)

Ending Balance	$	974		$	43,131		$	—	$	44,105


June 30, 2010
Loans Held for Sale:
Beginning Balance	$	—		$	5,010		$	—	$	5,010
Origination of Loans Held for Sale		—			1,782			—		1,782
Reclassification from Loans Receivable to Loans Held for sale		35,401			66,219			—		101,620
Sales of Loans Held for sale		(20,548	)		(57,137	)		—		(77,685	)
Principal Payoffs and Amortization		—			(183	)		—		(183	)
Valuation Adjustments		—			—			—		—

Ending Balance	$	14,853		$	15,691		$	—	$	30,544

For the six months ended June 30, 2011, loans receivable of $37.8 million were reclassified as loans held for sale, and loans held for sale of $42.8 million were sold. For the same period ended June 30, 2010, loans receivable of $101.6 million were reclassified as loans held for sale and loans held for sale of $77.7 million were sold. The net proceeds from the sale of non-performing loans were $45.9 million and $73.6 million for the six months ended June 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the six months ended June 30, 2011 and 2010.

20

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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

Activity in the allowance for loan losses and 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,			March 31,			June 30,			June 30,			June 30,
	2011			2011			2010			2011			2010
							(In Thousands)
Allowance for Loan Losses:
Balance at Beginning of Period	$	125,780		$	146,059		$	177,820		$	146,059		$	144,996

Actual Charge-Offs		(20,652	)		(25,181	)		(40,718	)		(45,833	)		(70,832	)
Recoveries on Loans Previously Charged Off		4,151			3,626			1,772			7,777			5,493

Net Loan Charge-Offs		(16,501	)		(21,555	)		(38,946	)		(38,056	)		(65,339	)

Provision Charged to Operating Expenses		(250	)		1,276			37,793			1,026			97,010

Balance at End of Period	$	109,029		$	125,780		$	176,667		$	109,029		$	176,667


Allowance for Off-Balance Sheet Items:
Balance at Beginning of Period	$	2,141		$	3,417		$	2,655		$	3,417		$	3,876
Provision Charged to Operating Expenses		250			(1,276	)		(293	)		(1,026	)		(1,514	)

Balance at End of Period	$	2,391		$	2,141		$	2,362		$	2,391		$	2,362

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2011 and 2010.


			Commercial
	Real Estate		and Industrial		Consumer		Unallocated			Total
	(Dollars in Thousands)
June 30, 2011
Allowance for Loan Losses:
Beginning Balance	$	25,884	$	93,878	$	1,732	$	4,286		$	125,780
Charge-Offs		5,591		14,741		320		—			20,652
Recoveries on Loans Previously Charged Off		2,223		1,915		13		—			4,151
Provision		1,599		1,793		162		(3,804	)		(250	)

Ending Balance	$	24,115	$	82,845	$	1,587	$	482		$	109,029

Ending Balance: Individually Evaluated for Impairment	$	3,324	$	26,149	$	223	$	—		$	29,696

Ending Balance: Collectively Evaluated for Impairment	$	20,791	$	56,696	$	1,364	$	482		$	79,333

Loans Receivable:
Ending Balance	$	787,585	$	1,234,519	$	46,500	$	—		$	2,068,604

Ending Balance: Individually Evaluated for Impairment	$	78,065	$	114,560	$	870	$	—		$	193,495

Ending Balance: Collectively Evaluated for Impairment	$	709,520	$	1,119,959	$	45,630	$	—		$	1,875,109


June 30, 2010
Allowance for Loan Losses:
Beginning Balance	$	31,597	$	143,994	$	2,229	$	—		$	177,820
Charge-Offs		12,412		27,951		355		—			40,718
Recoveries on Loans Previously Charged Off		162		1,530		80		—			1,772
Provision		12,698		22,931		244		1,920			37,793

Ending Balance	$	32,045	$	140,504	$	2,198	$	1,920		$	176,667

Ending Balance: Individually Evaluated for Impairment	$	3,963	$	24,495	$	23	$	—		$	28,481

Ending Balance: Collectively Evaluated for Impairment	$	28,082	$	116,009	$	2,175	$	1,920		$	148,186

Loans Receivable:
Ending Balance	$	913,966	$	1,503,948	$	55,790	$	—		$	2,473,704

Ending Balance: Individually Evaluated for Impairment	$	100,854	$	161,138	$	388	$	—		$	262,380

Ending Balance: Collectively Evaluated for Impairment	$	813,112	$	1,342,810	$	55,402	$	—		$	2,211,324

21

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2011 and 2010.


			Commercial
	Real Estate		and Industrial		Consumer			Unallocated			Total
	(Dollars in Thousands)
June 30, 2011
Allowance for Loan Losses:
Beginning Balance	$	32,766	$	108,986	$	2,079		$	2,228		$	146,059
Charge-Offs		12,644		32,693		496			—			45,833
Recoveries on Loans Previously Charged Off		2,744		5,011		22			—			7,777
Provision		1,249		1,541		(18	)		(1,746	)		1,026

Ending Balance	$	24,115	$	82,845	$	1,587		$	482		$	109,029

Ending Balance: Individually Evaluated for Impairment	$	3,324	$	26,149	$	223		$	—		$	29,696

Ending Balance: Collectively Evaluated for Impairment	$	20,791	$	56,696	$	1,364		$	482		$	79,333

Loans Receivable:
Ending Balance	$	787,585	$	1,234,519	$	46,500		$	—		$	2,068,604

Ending Balance: Individually Evaluated for Impairment	$	78,065	$	114,560	$	870		$	—		$	193,495

Ending Balance: Collectively Evaluated for Impairment	$	709,520	$	1,119,959	$	45,630		$	—		$	1,875,109


June 30, 2010
Allowance for Loan Losses:
Beginning Balance	$	30,081	$	112,225	$	2,690		$	—		$	144,996
Charge-Offs		17,817		52,037		978			—			70,832
Recoveries on Loans Previously Charged Off		1,865		3,507		121			—			5,493
Provision		17,916		76,809		365			1,920			97,010

Ending Balance	$	32,045	$	140,504	$	2,198		$	1,920		$	176,667

Ending Balance: Individually Evaluated for Impairment	$	3,963	$	24,495	$	23		$	—		$	28,481

Ending Balance: Collectively Evaluated for Impairment	$	28,082	$	116,009	$	2,175		$	1,920		$	148,186

Loans Receivable:
Ending Balance	$	913,966	$	1,503,948	$	55,790		$	—		$	2,473,704

Ending Balance: Individually Evaluated for Impairment	$	100,854	$	161,138	$	388		$	—		$	262,380

Ending Balance: Collectively Evaluated for Impairment	$	813,112	$	1,342,810	$	55,402		$	—		$	2,211,324

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.

Pass-grade (0 to 4) loans are reviewed for reclassification on an annual basis, while criticized (5) and classified (6 and 7) loans are reviewed semi-annually. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

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

Pass 0: Secured in full by cash or cash equivalents.

Pass 1: A very strong, well-structured credit relationship with an established borrower.

22

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirements, excellent liquidity, and very strong capital.

Pass 2: These loans require a well-structured credit that may not be as seasoned or as high quality as grade 1. Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This category includes individuals with substantial net worth supported by liquid assets and strong income.

Pass 3: Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheet proportions and significant cash flow coverage, although they may be somewhat more leveraged and exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans which are designated this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity

Pass 4: Loans or commitments to borrowers exhibiting either somewhat weaker balance sheet proportions or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result of this, the Bank may have secured its exposure in an effort to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.

Special Mention or 5: A Special Mention credit has potential weaknesses that deserve management’s close attention, as the borrower is exhibiting deteriorating trends that, if not corrected, could jeopardize repayment of the debt and result in a “Substandard” (6) grade. Credits which have significant actual, not potential, weaknesses are assigned lower grades than this grade.

Substandard or 6: A Substandard credit has a well-defined weakness or weaknesses that jeopardize 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 or 7: A Doubtful credit 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 that may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss or 8: Loans classified Loss are 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 that the loan should be charged off now, even though partial or full recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

23

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)


	Pass		Criticized		Classified
	(Grade 0-4)		(Grade 5)		(Grade 6-7)		Total Loans
	(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	274,428	$	11,015	$	33,903	$	319,346
Land		3,610		—		26,256		29,866
Other		278,636		20,966		40,028		339,630
Construction		8,529		14,080		18,075		40,684
Residential Property		54,936		—		3,123		58,059

Commercial and Industrial Loans:
Commercial Term
Unsecured		113,299		17,597		55,206		186,102
Secured by Real Estate		617,367		72,790		156,015		846,172
Commercial Lines of Credit		38,580		8,758		3,298		50,636
SBA		71,024		580		33,445		105,049
International		40,698		312		5,550		46,560

Consumer Loans		43,990		574		1,936		46,500

Total	$	1,545,097	$	146,672	$	376,835	$	2,068,604


December 31, 2010:
Real Estate Loans:
Commercial Property
Retail	$	302,696	$	18,507	$	38,568	$	359,771
Land		3,845		—		37,353		41,198
Other		265,957		20,804		41,493		328,254
Construction		12,958		25,897		22,139		60,994
Residential Property		59,329		—		3,315		62,644

Commercial and Industrial Loans:
Commercial Term
Unsecured		134,709		24,620		63,739		223,068
Secured by Real Estate		617,200		107,645		171,086		895,931
Commercial Lines of Credit		40,195		8,019		10,841		59,055
SBA		68,994		731		35,965		105,690
International		38,447		4,693		1,027		44,167

Consumer Loans		48,027		347		1,926		50,300

Total	$	1,592,357	$	211,263	$	427,452	$	2,231,072

24

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The following is an aging analysis of past due loans, disaggregated by loan class, as of June 30, 2011 and December 31, 2010:


	30-59 Days Past				90 Days or More								Accruing 90 Days or
	Due		60-89 Days Past Due		Past Due		Total Past Due		Current		Total Loans		More Past Due
	(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	—	$	—	$	—	$	—	$	319,346	$	319,346	$	—
Land		—		—		21,970		21,970		7,896		29,866		—
Other		4,081		—		—		4,081		335,549		339,630		—
Construction		—		—		12,298		12,298		28,386		40,684		—
Residential Property		1,883		895		695		3,473		54,586		58,059		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		1,874		759		1,237		3,870		182,232		186,102		—
Secured by Real Estate		4,816		2,142		2,104		9,062		837,110		846,172		—
Commercial Lines of Credit		—		—		1,422		1,422		49,214		50,636		—
SBA		3,136		3,740		9,943		16,819		88,230		105,049		—
International		2,943		399		—		3,342		43,218		46,560		—

Consumer Loans		1,024		321		40		1,385		45,115		46,500		—

Total	$	19,757	$	8,256	$	49,709	$	77,722	$	1,990,882	$	2,068,604	$	—


December 31, 2010:
Real Estate Loans:
Commercial Property
Retail	$	—	$	—	$	7,857	$	7,857	$	351,913	$	359,770	$	—
Land		—		—		25,725		25,725		15,471		41,196		—
Other		—		—		7,212		7,212		321,043		328,255		—
Construction		10,409		—		8,477		18,886		42,108		60,994		—
Residential Property		522		—		1,240		1,762		60,883		62,645		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		2,208		2,781		6,842		11,831		211,237		223,068		—
Secured by Real Estate		5,111		3,720		10,530		19,361		876,570		895,931		—
Commercial Lines of Credit		454		—		1,745		2,199		56,857		59,056		—
SBA		2,287		8,205		13,957		24,449		81,241		105,690		—
International		—		—		—		—		44,167		44,167		—

Consumer Loans		596		202		865		1,663		48,637		50,300		—

Total	$	21,587	$	14,908	$	84,450	$	120,945	$	2,110,127	$	2,231,072	$	—

Impaired Loans

Loans are identified and classified as 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 they are classified as Substandard loans in an amount over 5% of the Bank’s Tier 1 Capital; 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.

25

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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 collateral value 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, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

26

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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


	Recorded		Unpaid Principal		With No Related		With an Allowance		Related
	Investment		Balance		Allowance Recorded		Recorded		Allowance
					(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	15,810	$	16,329	$	8,845	$	6,963	$	565
Land		26,008		26,008		25,184		825		105
Other		21,624		21,748		3,698		17,926		2,623
Construction		12,298		12,396		12,298		—		—
Residential Property		2,325		2,386		1,982		343		31

Commercial and Industrial Loans:
Commercial Term
Unsecured		14,999		15,463		661		14,338		11,040
Secured by Real Estate		83,382		85,570		41,163		42,219		9,092
Commercial Lines of Credit		3,028		3,097		1,218		1,810		1,394
SBA		17,780		19,437		7,340		10,441		1,380
International		3,243		3,243		—		3,243		3,243

Consumer Loans		870		898		379		491		223

Total	$	201,367	$	206,575	$	102,768	$	98,599	$	29,696


December 31, 2010:
Real Estate Loans:
Commercial Property
Retail	$	17,606	$	18,050	$	6,336	$	11,270	$	1,543
Land		35,207		35,295		5,482		29,725		1,485
Other		11,357		11,476		10,210		1,147		33
Construction		17,691		17,831		13,992		3,699		280
Residential Property		1,926		1,990		1,926		—		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		17,847		18,799		6,465		11,382		10,313
Secured by Real Estate		80,213		81,395		35,154		45,059		11,831
Commercial Lines of Credit		4,067		4,116		1,422		2,645		1,321
SBA		17,715		18,544		7,112		10,603		2,122
International		127		141		—		127		127

Consumer Loans		934		951		393		541		393

Total	$	204,690	$	208,588	$	88,492	$	116,198	$	29,448

27

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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


	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	for the Three		for the Three		for the Six		for the Six
	Months		Months		Months		Months
	Ended		Ended⁽¹⁾		Ended		Ended⁽¹⁾
	(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	17,260	$	26	$	17,633	$	51
Land		27,561		—		29,023		—
Other		21,849		60		21,864		121
Construction		12,535		—		12,578		—
Residential Property		2,371		—		2,386		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		15,365		53		15,571		105
Secured by Real Estate		84,898		456		85,504		821
Commercial Lines of Credit		3,076		2		3,090		4
SBA		18,900		31		19,107		57
International		3,243		—		2,255		—

Consumer Loans		889		1		893		1

Total	$	207,947	$	629	$	209,904	$	1,160

June 30, 2010:
Real Estate Loans:
Commercial Property
Retail	$	17,977	$	—	$	25,664	$	—
Land		43,425		59		45,164		114
Other		16,492		55		18,524		216
Construction		9,823		—		9,823		—
Residential Property		2,725		—		2,784		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		20,289		—		18,278		9
Secured by Real Estate		111,388		67		104,745		293
Commercial Lines of Credit		6,132		56		5,499		82
SBA		25,573		—		26,083		—
International		284		—		588		—

Consumer Loans		396		—		531		—

Total	$	254,504	$	237	$	257,683	$	714


(1)		Represents interest income recognized on impaired loans subsequent to classification as impaired.

For the three and six months ended June 30, 2011, we recognized interest income of $0 and $33,000, respectively, on one impaired commercial term loan secured by real estate using a cash-basis method. For the three and six months ended June 30, 2010, we recognized interest income of $67,000 and $204,000, respectively, on one impaired commercial term loan secured by real estate using a cash-basis method. Except for such loan, no other interest income was recognized on impaired loans subsequent to classification as impaired using a cash-basis method.

28

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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,
	2011			2010			2011			2010
	(In Thousands)
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance With Their Original Terms	$	2,001		$	3,755		$	4,475		$	7,030
Less: Interest Income Recognized on Impaired Loans		(629	)		(237	)		(1,160	)		(714	)

Interest Foregone on Impaired Loans	$	1,372		$	3,518		$	3,315		$	6,316

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 collectibility 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 become current and full repayment is expected.

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


	June 30,		December 31,
	2011		2010
	(In Thousands)
Real Estate Loans:
Commercial Property
Retail	$	14,335	$	10,998
Land		25,184		25,725
Other		3,772		8,953
Construction		12,298		17,691
Residential Property		1,460		1,926

Commercial and Industrial Loans:
Commercial Term
Unsecured		10,758		17,065
Secured by Real Estate		46,454		31,053
Commercial Lines of Credit		2,905		2,798
SBA		23,263		25,054
International		3,243		127

Consumer Loans		824		1,047

Total	$	144,496	$	142,437

29

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

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


	June 30,		December 31,
	2011		2010
	(In Thousands)
Non-Accrual Loans	$	144,496	$	142,437
Loans 90 Days or More Past Due and Still Accruing		—		—

Total Non-Performing Loans		144,496		142,437
Other Real Estate Owned		1,340		4,089

Total Non-Performing Assets	$	145,836	$	146,526

Troubled Debt Restructurings on Accrual Status	$	19,793	$	47,395

Loans on non-accrual status, excluding non-performing loans held for sale of $22.6 million, totaled $144.5 million as of June 30, 2011, compared to $142.4 million as of December 31, 2010, representing an 1.4 percent increase. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $77.7 million as of June 30, 2011, compared to $120.9 million as of December 31, 2010, representing a 35.7 percent decrease.

As of June 30, 2011, other real estate owned consisted of five properties, primarily located in California, with a combined net carrying value of $1.3 million. During the six months ended June 30, 2011, five properties, with a carrying value of $2.8 million, were transferred from loans receivable to other real estate owned, and eight properties, with a carrying value of $4.4 million, were sold and a loss of $681,000 was recognized. As of December 31, 2010, other real estate owned consisted of eight properties with a combined net carrying value of $4.1 million.

During the six months ended June 30, 2011, we restructured monthly payments on 92 loans, with a net carrying value of $77.4 million as of June 30, 2011, through temporary payment structure modifications ranging from changing the amount of principal and interest due monthly to allowing for interest only due monthly payments for six months or less. For the restructured loans on accrual status, we believe 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 is probable. As of June 30, 2011, TDR loans, excluding loans held for sale, totaled $76.0 million, all of which were temporary interest rate reductions, and a $13.2 million reserve relating to these loans was included in the allowance for loan losses. As of December 31, 2010, TDR loans, excluding loans held for sale, totaled $72.2 million and the related allowance for loan losses was $10.2 million.

30

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 6 — INCOME TAXES

Under GAAP, a valuation allowance must be recorded if it is “more likely than not” that such deferred tax assets will not be realized. Appropriate consideration is given to all available evidence (both positive and negative) related to the realization of the deferred tax assets on a quarterly basis.

In conducting our regular quarterly evaluation, we decided to maintain a full deferred tax asset valuation allowance as of June 30, 2011 based primarily upon the existence of a three-year cumulative loss position. Although our current financial forecasts indicate that sufficient taxable income will be generated in the future to ultimately realize the existing deferred tax benefits, those forecasts were not considered to constitute sufficient positive evidence to overcome the observable negative evidence associated with the three-year cumulative loss position determined as of June 30, 2011.

At June 30, 2011, the valuation allowance decreased to $82.7 million compared to $88.6 million at March 31, 2011 and $92.7 million at December 31, 2010. This decrease was mainly due to a decrease of deferred tax assets balance related to credit loss provision. We had zero balance of net deferred tax assets as of June 30, 2011 and December 31, 2010. During the first half of 2010, we recorded an additional valuation allowance of $37.8 million against our deferred tax assets, resulting in $83.0 million of valuation allowance at June 30, 2010. There was $1.2 million of net deferred tax liabilities as of June 30, 2010.

The tax expense recognized for the three and six months ended June 30, 2011 was primarily due to an out-of-period adjustment of $605,000 and $718,000, respectively, to reserve for certain ASC 740-10(FIN 48) exposure items. During the fourth quarter of 2009, the Company recorded a tax benefit upon electing a 5-year net operating loss carryback according to the IRS Code section IRC § 172(b)(1)(H) amended in November 2009. This out -of-period adjustment was to reinstate the reserves that the Company released as the statute of limitations had expired in previous years. Due to the Company filing amended tax returns as a result of the tax law revision, the Company needed to reestablish these reserves. The tax benefit recognized during the first half of 2010 was primarily due to the reversal of FIN 48 reserves related to lower assessment from the result of the State of California Franchise Tax Board audit for the tax year 2005 through 2007.

NOTE 7 — SHARE-BASED COMPENSATION

Share-Based Compensation Expense

The table below shows the share-based compensation expense and related tax benefits for the periods indicated:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(In Thousands)
Share-Based Compensation Expense	$	69	$	280	$	382	$	486
Related Tax Benefits	$	29	$	118	$	161	$	205

Unrecognized Share-Based Compensation Expense

As of June 30, 2011, unrecognized share-based compensation expense was as follows:


	Unrecognized		Average Expected
	Expense		Recognition Period
	(Dollars in Thousands)
Stock Option Awards	$	192	1.9 years
Restricted Stock Awards		219	2.2 years

Total Unrecognized Share-Based Compensation Expense	$	411	2.1 years

31

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 7 — SHARE-BASED COMPENSATION (Continued)

Share-Based Payment Award Activity

The table below provides stock option information for the three months ended June 30, 2011:

Weighted-

Aggregate

Average

Intrinsic

Number

Exercise

Remaining

Value of

of

Price Per

Contractual

In-the-Money

Shares

Share

Life

Options

(Dollars in Thousands, Except Per Share Data)

Options Outstanding at Beginning of Period

1,210,091

$

10.58

5.7 years

$

—

⁽¹⁾

Options Expired

(17,200

)

$

16.15

1.1 years

Options Outstanding at End of Period

1,192,891

$

10.50

5.5 years

$

—

⁽²⁾

Options Exercisable at End of Period

927,291

$

12.80

4.6 years

$

—

⁽²⁾


⁽¹⁾		Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $1.24 as of March 31, 2011, over the exercise price, multiplied by the number of options.

⁽²⁾		Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $1.07 as of June 30, 2011, over the exercise price, multiplied by the number of options.

The table below provides stock option information for the six months ended June 30, 2011:


				Weighted-		Weighted-	Aggregate
				Average		Average	Intrinsic
	Number			Exercise		Remaining	Value of
	of			Price Per		Contractual	In-the-Money
	Shares			Share		Life	Options
	(Dollars in Thousands, Except Per Share Data)
Options Outstanding at Beginning of Period		1,066,891		$	11.93	5.3 years	$	—	⁽¹⁾
Options Granted		150,000		$	1.30	9.7 years
Options Expired		(21,200	)	$	16.54	4.1 years
Options Forfeited		(2,800	)	$	18.00	4.8 years

Options Outstanding at End of Period		1,192,891		$	10.50	5.5 years	$	—	⁽²⁾

Options Exercisable at End of Period		927,291		$	12.80	4.6 years	$	—	⁽²⁾


⁽¹⁾		Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $1.15 as of December 31, 2010, over the exercise price, multiplied by the number of options.

⁽²⁾		Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $1.07 as of June 30, 2011, over the exercise price, multiplied by the number of options.

There were no options exercised during the three and six months ended June 30, 2011, and total intrinsic value of options exercised during the three and six months ended June 30, 2010 was $14,000.

32

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 7 — SHARE-BASED COMPENSATION (Continued)

Restricted Stock Awards

The table below provides restricted stock award information for the periods indicated:


	Three Months Ended					Six Months Ended
	June 30, 2011					June 30, 2011
				Weighted-					Weighted-
				Average					Average
	Number			Grant Date		Number			Grant Date
	of			Fair Value		of			Fair Value
	Shares			Per Share		Shares			Per Share
Restricted Stock at Beginning of Period		185,600		$	1.72		145,600		$	1.77

Restricted Stock Granted		—		$	—		60,000		$	1.30
Restricted Stock Vested		(35,000	)	$	1.40		(55,000	)	$	1.33

Restricted Stock at End of Period		150,600		$	1.75		150,600		$	1.75

NOTE 8 — STOCKHOLDERS’ EQUITY

Stock Warrants

As part of the agreement executed on 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 two million shares of our common stock for services performed. The warrants have an exercise price of $1.20 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging — Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility is 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%. The expected life assumption is based on the contract term of five years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 2.07% used for the warrant is 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, 2011, compared to $1.6 million at December 31, 2010, the fair value decreased by $311,000, which we have included in other operating expenses for the six months ended June 30, 2011. We used a weighted average expected stock volatility of 83.02% and a remaining contractual life of 4.3 years based on the contract terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 1.75% used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.

33

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 9 — EARNINGS (LOSS) PER SHARE

Earnings (loss) per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. Unvested restricted stock is excluded from the calculation of weighted-average common shares for basic EPS. For diluted EPS, weighted-average common shares include the impact of restricted stock under the treasury method.

The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:


	2011						2010
			(Denominator)							(Denominator)
	(Numerator)		Weighted-		Per		(Numerator)			Weighted-		Per
	Net		Average		Share		Net			Average		Share
	Income		Shares		Amount		Loss			Shares		Amount
	(Dollars in Thousands, Except Per Share Data)
Three Months Ended June 30:

Basic EPS	$	8,001		151,104,636	$	0.05	$	(29,257	)		51,036,573	$	(0.57	)
Effect of Dilutive Securities — Options, Warrants and Unvested Restricted Stock		—		153,754		—		—			—		—

Diluted EPS	$	8,001		151,258,390	$	0.05	$	(29,257	)		51,036,573	$	(0.57	)


Six Months Ended June 30:
Basic EPS	$	18,438		151,082,945	$	0.12	$	(78,743	)		51,017,885	$	(1.54	)
Effect of Dilutive Securities — Options, Warrants and Unvested Restricted Stock		—		174,405		—		—			—		—


Diluted EPS	$	18,438		151,257,350	$	0.12	$	(78,743	)		51,017,885	$	(1.54	)

For the three months ended June 30, 2011 and 2010, there were 3,192,891 and 1,266,115 options, warrants and unvested restricted stock outstanding, respectively, that were not included in the computation of diluted EPS because their effect would be anti-dilutive. For the six months ended June 30, 2011 and 2010, there were 1,192,891 and 1,266,115 options, warrants and unvested restricted stock outstanding, respectively, that were not included in the computation of diluted EPS because their effect would be anti-dilutive.

NOTE 10 — OFF-BALANCE SHEET COMMITMENTS

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty.

34

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 10 — OFF-BALANCE SHEET COMMITMENTS (Continued)

Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:


	June 30,		December 31,
	2011		2010
	(In Thousands)
Commitments to Extend Credit	$	167,018	$	178,424
Standby Letters of Credit		14,771		15,226
Commercial Letters of Credit		7,654		11,899
Unused Credit Card Lines		17,058		24,649

Total Undisbursed Loan Commitments	$	206,501	$	230,198

NOTE 11 — SEGMENT REPORTING

Through our branch network and lending units, we provide a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time and savings deposits; and commercial and industrial, real estate and consumer lending. While our chief decision makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one reportable operating segment.

NOTE 12 — LIQUIDITY

Hanmi Financial

Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through December 31, 2011. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of June 30, 2011, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $6.3 million, down from $7.7 million at December 31, 2010.

Hanmi Bank

Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2011, in compliance with its regulatory restrictions, the Bank had no brokered deposits, and had FHLB advances of $3.5 million, a decrease of $150.2 million from $153.7 million at December 31, 2010.

The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of June 30, 2011, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $391.6 million and $387.7 million, respectively. The Bank’s FHLB borrowings as of June 30, 2011 totaled $3.5 million, representing 0.1 percent of total assets.

As of August 5, 2011, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $378.1 million and $374.6 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time.

35

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (Continued)

NOTE 12 — LIQUIDITY (Continued)

To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $150.5 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $321.1 million, and had no borrowings as of June 30, 2011. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2010, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million.

Current market conditions have limited the Bank’s liquidity sources principally to interest-bearing deposits, unpledged marketable securities, and secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or Federal Reserve Bank would not reduce the Bank’s borrowing capacity or that the Bank would be able to continue to replace deposits at competitive rates. As of June 30, 2011, in compliance with its regulatory restrictions, the Bank did not have any brokered deposits and would consult in advance with its regulators if it were to consider accepting brokered deposits in the future.

The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.

The Bank believes that it nonetheless has adequate liquidity resources to fund its obligations with its interest-bearing deposits, unpledged marketable securities, and secured credit lines with the FHLB and Fed Discount Window.

NOTE 13 — SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of June 30, 2011.

36

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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2011. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (this “Report”).

FORWARD-LOOKING STATEMENTS

Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward —looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, plan and availability, plans and objectives of management for future operations, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. These risks, uncertainties and other factors include the following:

	•		failure to raise enough capital to support our operations or meet our regulatory requirements, including requirements under the Final Order and the Agreement;

	•		failure to maintain adequate levels of capital to support our operations;

	•		a significant number of customers failing to perform under their loans or other extensions of credit;

	•		our compliance with and the effect of regulatory orders and agreements that we and Hanmi Bank have entered into with our respective regulators and potential future supervisory or governmental actions against us or Hanmi Bank;

	•		fluctuations in interest rates and a decline in the level of our interest rate spread;

	•		failure to attract or retain deposits and restrictions on taking brokered deposits;

	•		sources of liquidity available to us and to Hanmi Bank becoming limited or our potential inability to access sufficient sources of liquidity when needed or the requirement that we obtain government waivers to do so;

	•		adverse changes in domestic or global financial markets, economic conditions or business conditions;

	•		regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;

	•		significant reliance on loans secured by real estate and the associated vulnerability to downturns in the local real estate market, natural disasters and other variables impacting the value of real estate;

	•		our use of appraisals in deciding whether to make loans secured by real property, which does not ensure that the value of the real property collateral will be sufficient to pay our loans;

	•		failure to attract or retain our key employees;

	•		credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;

	•		our ability to raise capital on reasonable terms;

	•		volatility and disruption in financial, credit and securities markets, and the price of our common stock;

	•		deterioration in financial markets that may result in impairment charges relating to our securities portfolio;

	•		competition and demographic changes in our primary market areas;

	•		global hostilities, acts of war or terrorism, including but not limited to, conflict between North Korea and

37

			South Korea;

	•		the effects of climate change and attendant regulation on our customers and borrowers;

	•		the effects of litigation against us;

	•		failed or circumvented internal controls and procedures;

	•		adverse changes in the soundness of other financial institutions with whom we have trading, clearing, counterparty or other relationships;

	•		risks associated with security breaches in our online banking services, and fears of security breaches that limit the growth of our online services;

	•		significant government regulations, legislation and potential changes thereto; and

	•		other risks described herein and in the other reports and statements we file with the SEC.

For a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Report under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010 as well as other factors we identify from time to time in our periodic reports filed pursuant to the Exchange Act. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

CRITICAL ACCOUNTING POLICIES

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the“Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2010. Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2010. We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors.

38

SELECTED FINANCIAL DATA

The following tables set forth certain selected financial data for the periods indicated.


	As of and for the
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in Thousands, Except Per Share Data)
AVERAGE BALANCES:
Average Gross Loans, Net ⁽¹⁾	$	2,136,976		$	2,611,178		$	2,185,274		$	2,688,012
Average Investment Securities	$	497,052		$	158,543		$	485,148		$	142,034
Average Interest-Earning Assets	$	2,804,709		$	2,965,975		$	2,848,313		$	2,988,332
Average Total Assets	$	2,836,967		$	2,978,245		$	2,871,419		$	3,031,917
Average Deposits	$	2,427,934		$	2,617,738		$	2,443,299		$	2,640,224
Average Borrowings	$	190,447		$	240,189		$	213,820		$	248,614
Average Interest-Bearing Liabilities	$	2,025,392		$	2,292,121		$	2,078,947		$	2,326,367
Average Stockholders’ Equity	$	189,528		$	91,628		$	183,906		$	114,651
PER SHARE DATA:
Earnings (Loss) Per Share — Basic	$	0.05		$	(0.57	)	$	0.12		$	(1.54	)
Earnings (Loss) Per Share — Diluted	$	0.05		$	(0.57	)	$	0.12		$	(1.54	)
Common Shares Outstanding		151,258,390			51,198,390			151,258,390			51,198,390
Book Value Per Share ⁽²⁾	$	1.31		$	1.43		$	1.31		$	1.43
SELECTED PERFORMANCE RATIOS:
Return on Average Assets ^{(3) (4)}		1.13	%		(3.94	%)		1.29	%		(5.24	%)
Return on Average Stockholders’ Equity ^{(3) (5)}		16.93	%		(128.07	%)		20.22	%		(138.50	%)
Efficiency Ratio ⁽⁶⁾		72.67	%		75.11	%		69.64	%		75.75	%
Net Interest Spread ⁽⁷⁾		3.26	%		3.17	%		3.26	%		3.22	%
Net Interest Margin ⁽⁸⁾		3.65	%		3.56	%		3.66	%		3.62	%
Average Stockholders’ Equity to Average Total Assets		6.68	%		3.08	%		6.40	%		3.78	%
SELECTED CAPITAL RATIOS: ⁽⁹⁾
Total Risk-Based Capital Ratio:
Hanmi Financial		13.92	%		7.31	%
Hanmi Bank		14.02	%		7.35	%
Tier 1 Risk-Based Capital Ratio:
Hanmi Financial		11.92	%		3.69	%
Hanmi Bank		12.72	%		6.02	%
Tier 1 Leverage Ratio:
Hanmi Financial		9.09	%		3.06	%
Hanmi Bank		9.70	%		4.99	%
SELECTED ASSET QUALITY RATIOS:
Non-Performing Loans to Total Gross Loans ^{(10) (11)}		7.91	%		9.67	%		7.91	%		9.67	%
Non-Performing Assets to Total Assets ⁽¹²⁾		6.21	%		9.13	%		6.21	%		9.13	%
Net Loan Charge-Offs to Average Total Gross Loans ⁽¹³⁾		3.10	%		5.98	%		3.51	%		4.90	%
Allowance for Loan Losses to Total Gross Loans		5.16	%		7.05	%		5.16	%		7.05	%
Allowance for Loan Losses to Non-Performing Loans		65.25	%		72.96	%		65.25	%		72.96	%


⁽¹⁾		Loans are net of deferred fees and related direct costs.

⁽²⁾		Total stockholders’ equity divided by common shares outstanding.

⁽³⁾		Calculation based upon annualized net loss.

⁽⁴⁾		Net loss divided by average total assets.

⁽⁵⁾		Net loss divided by average stockholders’ equity.

⁽⁶⁾		Total non-interest expenses divided by the sum of net interest income before provision for credit losses and total non-interest income.

⁽⁷⁾		Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

⁽⁸⁾		Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

⁽⁹⁾		The required ratios for a “well-capitalized” institution, as defined by regulations of the Board of Governors of the Federal Reserve System, are 10 percent for the Total Risk-Based Capital Ratio (total capital divided by total risk-weighted assets); 6 percent for the Tier 1 Risk-Based Capital Ratio (Tier 1 capital divided by total risk-weighted assets); and 5 percent for the Tier 1 Leverage Ratio (Tier 1 capital divided by average total assets).

⁽¹⁰⁾		Non-performing loans consist of non-accrual loans and loans past due 90 days or more and still accruing interest.

⁽¹¹⁾		This Quarterly Report on Form 10-Q includes corrected data regarding total non-performing loans as of and for the quarter ended June 30, 2011, which differ from and supersede data included in the Earnings Release dated July 21, 2011. These corrections had no effect on the statement of operations or earnings per share for the second quarter of 2011.

⁽¹²⁾		Non-performing assets consist of non-performing loans (see footnote (10) and (11) above) and other real estate owned.

⁽¹³⁾		Calculation based upon annualized net loan charge-offs.

39

Non-GAAP Financial Measures

Tangible Stockholders’ Equity to Tangible Assets Ratio

The ratio of tangible stockholders’ equity to tangible assets is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Bank’s capital strength. Tangible equity is calculated by subtracting goodwill and other intangible assets from total stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from total stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure, excluding the impact of these items, provides useful supplemental information that is essential to a proper understanding of the capital strength of Hanmi Bank. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:

Hanmi Bank


	June 30,			December 31,
	2011			2010
	(In Thousands)
Total Assets	$	2,705,997		$	2,900,415
Less Intangible Assets		(184	)		(450	)


Tangible Assets	$	2,705,813		$	2,899,965


Total Stockholders’ Equity	$	279,712		$	249,637
Less Intangible Assets		(184	)		(450	)


Tangible Stockholders’ Equity	$	279,528		$	249,187


Total Stockholders’ Equity to Total Assets Ratio		10.34	%		8.61	%
Tangible Stockholders’ Equity to Tangible Assets Ratio		10.33	%		8.59	%

As of June 30, 2011 and December 31, 2010, the Bank had a tangible stockholders’ equity to tangible assets ratio of 10.33% and 8.59%, respectively.

40

EXECUTIVE OVERVIEW

For the second quarter ended June 30, 2011, we reported net income of $8.0 million, or $0.05 per diluted share, compared to a net loss of $29.3 million, or $(0.57) per diluted share for the same period in 2010. We reported net income for the first six months ended June 30, 2011 of $18.4 million, or $0.12 per diluted share, compared to a net loss of $78.7 million, or $(1.54) per diluted share for the same period in 2010. The increase in net income for the second quarter and first half ended June 30, 2011 was primarily driven by the lack of any provision for credit losses, reflecting continued improvement in most credit metrics. We recorded $37.5 million and $95.5 million in provision for credit losses for the second quarter ended June 30, 2010 and for the first half of 2010, respectively.

With profits generated for three consecutive quarters since the fourth quarter of 2010 and the successful completion of the $120 million registered rights and best efforts offering during the third quarter of 2010, the Bank exceeded the threshold for being considered “well-capitalized” for regulatory purposes since September 30, 2010 and, as of June 30, 2011, complies with the tangible capital ratio requirement set forth in the Final Order.

Significant financial highlights include (as of and for the period ended June 30, 2011):

	•		The Bank’s total risk-based capital ratio improved to 14.02 percent as of June 30, 2011 compared to 12.22 percent as of December 31, 2010. The Bank’s tangible common equity to tangible assets ratio also improved to 10.33 percent as of June 30, 2011 compared to 8.59 percent as of December 31, 2010.

	•		Due to the success of recent marketing initiatives, core deposits (defined as total deposits less time deposits greater than $100,000) increased by $171.4 million, or 12.7 percent, to $1.52 billion as of June 30, 2011 from $1.35 billion as of December 31, 2010. At June 30, 2011, noninterest-bearing demand deposits represented 25.1 percent of total deposits compared to 22.2 percent of total deposits at December 31, 2010.

	•		The average loan yield improved by 19 basis points to 5.49 percent in the second quarter of 2011 compared to 5.30 percent for the same period in 2010, and improved by 21 basis points to 5.55 percent for the first half of 2011 compared to 5.34 percent for the same period in 2010, reflecting the improvement in credit quality.

	•		The cost of funds decreased primarily through downward re-pricing of matured time deposits. The average funding cost decreased by 32 basis points to 1.41 percent in the second quarter of 2011 compared to 1.73 percent for the same period in 2010, and decreased by 34 basis points to 1.45 percent for the first half of 2011 compared to 1.79 percent for the same period in 2010.

	•		Net interest margin improved by 9 basis points to 3.65 percent in the second quarter of 2011 compared to 3.56 percent for the same period in 2010, and improved by 4 basis points to 3.66 percent for the first half of 2011 compared to 3.62 percent for the same period in 2010.

Outlook for the Remainder of 2011

Our priorities for the remainder of 2011 are to reevaluate the adequacy of our capital given the level and nature of the risks to which we are exposed, continue to improve our credit quality, and fully comply with all of the requirements of the Final Order and the Agreement.

We will continue to actively work down problem loans through bulk and individual note sales, and redeploy the proceeds into performing loans or securities investments. We believe that our continuous proactive initiatives to manage credit risk exposure have resulted in improvement of our asset quality over the past several quarters. Our commitment to elevate our credit risk management systems will continue in order to meet the challenges of our uncertain economic environment. In addition, we have reinvigorated sales with targeted marketing programs that focus on generating quality loans and core deposits to improve profitability and expand existing customer base.

41

RESULTS OF OPERATIONS

Net Interest Income before Provision for Credit Losses

Our earnings depend largely upon the difference between the interest income received from our loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” The difference between the yield earned on interest-earning assets and the cost of interest-bearing liabilities is “net interest spread.” Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the “net interest margin.”

Net interest income is affected by the change in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” Our net interest income also is affected by changes in the yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate changes.” Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are affected by general economic conditions and other factors beyond our control, such as Federal economic policies, the general supply of money in the economy, income tax policies, governmental budgetary matters and the actions of the FRB.

42

Three Months Ended June 30, 2011 vs. Three Months Ended June 30, 2010

The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.


	Three Months Ended
	June 30, 2011								June 30, 2010
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars in Thousands)
ASSETS
Interest-Earning Assets:
Gross Loans, Net ⁽¹⁾	$	2,136,976		$	29,248		5.49	%	$	2,611,178		$	34,486		5.30	%
Municipal Securities:
Taxable		13,603			140		4.12	%		—			—		—
Tax — Exempt ⁽²⁾		4,125			57		5.53	%		7,484			119		6.36	%
Obligations of Other U.S. Government Agencies		152,438			629		1.65	%		65,894			560		3.40	%
Other Debt Securities		326,886			2,326		2.85	%		85,165			800		3.76	%
Equity Securities ⁽⁵⁾		34,078			133		1.56	%		37,979			123		1.30	%
Federal Funds Sold		7,067			9		0.51	%		12,198			16		0.52	%
Term Federal Funds Sold		13,681			18		0.53	%		7,253			11		0.61	%
Interest-Earning Deposits		115,855			79		0.27	%		138,824			99		0.29	%


Total Interest-Earning Assets ⁽²⁾		2,804,709			32,639		4.67	%		2,965,975			36,214		4.90	%


Noninterest-Earning Assets:
Cash and Cash Equivalents		68,371								68,536
Allowance for Loan Losses		(125,152	)							(182,103	)
Other Assets		89,039								125,837


Total Noninterest-Earning Assets		32,258								12,270


TOTAL ASSETS	$	2,836,967							$	2,978,245


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Deposits:
Savings	$	111,723			734		2.64	%	$	125,016			922		2.96	%
Money Market Checking and NOW Accounts		488,723			1,010		0.83	%		458,137			1,217		1.07	%
Time Deposits of $100,000 or More		926,024			3,477		1.51	%		1,090,412			5,057		1.86	%
Other Time Deposits		308,475			971		1.26	%		378,367			1,617		1.71	%
Federal Home Loan Bank Advances		106,710			239		0.90	%		153,859			339		0.88	%
Other Borrowings		1,331			1		0.30	%		3,924			31		3.17	%
Junior Subordinated Debentures		82,406			711		3.46	%		82,406			692		3.37	%


Total Interest-Bearing Liabilities		2,025,392			7,143		1.41	%		2,292,121			9,875		1.73	%


Noninterest-Bearing Liabilities:
Demand Deposits		592,989								565,806
Other Liabilities		29,058								28,690


Total Noninterest-Bearing Liabilities		622,047								594,496


Total Liabilities		2,647,439								2,886,617
Stockholders’ Equity		189,528								91,628


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,836,967							$	2,978,245


NET INTEREST INCOME				$	25,496							$	26,339


NET INTEREST SPREAD ⁽²⁾ ⁽³⁾							3.26	%							3.17	%


NET INTEREST MARGIN ⁽²⁾ ⁽⁴⁾							3.65	%							3.56	%


⁽¹⁾		Loans are net of deferred fees and related direct costs, but excluding the allowance for loan losses. Non-accrual loans are included in the average loan balance. Loan fees have been included in the calculation of interest income. Loan fees were $570,000 and $477,000 for the three months ended June 30, 2011 and 2010, respectively.

⁽²⁾		Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

⁽³⁾		Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

⁽⁴⁾		Represents annualized net interest income as a percentage of average interest-earning assets.

⁽⁵⁾		Includes investment in Federal Home Loan Bank stock and Federal Reserve Bank stock.

43

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes were allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.


	Three Months Ended June 30, 2011 vs.
	Three Months Ended June 30, 2010
	Increases (Decreases) Due to Change in
	Volume			Rate			Total
	(In Thousands)
Interest and Dividend Income:
Gross Loans, Net	$	(6,452	)	$	1,214		$	(5,238	)
Municipal Securities:
Taxable		140			—			140
Tax — Exempt		(48	)		(14	)		(62	)
Obligations of Other U.S. Government Agencies		463			(394	)		69
Other Debt Securities		1,763			(237	)		1,526
Equity Securities		(14	)		24			10
Federal Funds Sold		(7	)		—			(7	)
Term Federal Funds Sold		8			(1	)		7
Interest-Earning Deposits		(16	)		(4	)		(20	)


Total Interest and Dividend Income		(4,163	)		588			(3,575	)


Interest Expense:
Savings		(93	)		(95	)		(188	)
Money Market Checking and NOW Accounts		77			(284	)		(207	)
Time Deposits of $100,000 or More		(698	)		(882	)		(1,580	)
Other Time Deposits		(266	)		(380	)		(646	)
Federal Home Loan Bank Advances		(106	)		6			(100	)
Other Borrowings		(12	)		(18	)		(30	)
Junior Subordinated Debentures		—			19			19


Total Interest Expense		(1,098	)		(1,634	)		(2,732	)


Change in Net Interest Income	$	(3,065	)	$	2,222		$	(843	)

For the three months ended June 30, 2011 and 2010, net interest income before provision for credit losses on a tax equivalent basis was $25.5 million and $26.3 million, respectively. Interest income decreased 9.8 percent to $32.6 million for the three months ended June 30, 2011 from $36.2 million for the same period in 2010. Interest expense also decreased 27.7 percent to $7.1 million for the three months ended June 30, 2011 from $9.9 million for the same period in 2010. The net interest spread and net interest margin for the three months ended June 30, 2011 were 3.26 percent and 3.65 percent, respectively, compared to 3.17 percent and 3.56 percent, respectively, for the same period in 2010. The decrease in net interest income was primarily due to the decrease in loan volume resulting from the credit quality improvement strategy, coupled with relatively weak loan demand in current challenging business and economic conditions. This decrease was mostly offset by lower deposit costs resulting from the replacement of high-cost promotional time deposits with low-cost deposit products through a series of core deposit campaigns.

Average gross loans decreased by $474.2 million, or 18.2 percent, to $2.14 billion for the three months ended June 30, 2011 from $2.61 billion for the same period in 2010. Average investment securities increased by $338.5 million, or 213.5 percent, to $497.1 million for the three months ended June 30, 2011 from $158.5 million for the same period in 2010. Average interest-earning assets decreased by $161.2 million, or 5.4 percent, to $2.80 billion for the three months ended June 30, 2011 from $2.97 billion for the same period in 2010. The decrease in average interest earning assets was a direct result of our balance sheet deleveraging and credit quality improvement strategy implemented since early 2009 through the disposition of problem assets while maintaining a strong level of liquidity with increased investment in short and mid-term instruments. Consistent with this strategy, the average interest-bearing liabilities decreased by $266.7 million, or 11.6 percent, to $2.03 billion for the three months ended June 30, 2011 from $2.29 billion for the same period in 2010. Average FHLB advances decreased by $47.1 million, or 30.6 percent, to $106.7 million for the three months ended June 30, 2011 from $153.9 million for the same period in 2010.

The average yield on interest-earning assets decreased by 23 basis points to 4.67 percent for the three months ended June 30, 2011 from 4.90 percent for the same period in 2010, primarily due to lower yields on investment securities in the current low interest rate environment, partially offset by an increase in loan portfolio yields. Total loan interest and fee income decreased by $5.2 million, or 15.19 percent, to $29.2 million for the three months ended June

44

30, 2011 from $34.5 million for the same period in 2010 due primarily to an 18.16 percent decrease in the average gross loans. The average yield on loans increased to 5.49 percent for the three months ended June 30, 2011 from 5.30 percent for the same period in 2010. This increase reflected improvement in credit quality metrics, including lowered levels of delinquent loan and non-performing loans. The average cost on interest-bearing liabilities decreased by 32 basis points to 1.41 percent for the three months ended June 30, 2011 from 1.73 percent for the same period in 2010. This decrease was primarily due to a continued shift in funding sources toward lower-cost funds through disciplined deposit pricing while reducing wholesale funds and rate sensitive deposits. Average brokered deposits decreased to zero for the three months ended June 30, 2011 from $39.7 million for the same period in 2010. Average FHLB advances decreased by $47.1 million, or 30.64 percent, to $106.7 million for the three months ended June 30, 2011 from $153.9 million for the same period in 2010.

45

Six Months Ended June 30, 2011 vs. Six Months Ended June 30, 2010

The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.


	Six Months Ended
	June 30, 2011								June 30, 2010
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars in Thousands)
ASSETS
Interest-Earning Assets:
Gross Loans, Net ⁽¹⁾	$	2,185,274		$	60,153		5.55	%	$	2,688,012		$	71,181		5.34	%
Municipal Securities:
Taxable		15,556			318		4.09	%		—			—		—
Tax — Exempt ⁽²⁾		4,294			119		5.54	%		7,517			237		6.31	%
Obligations of Other U.S. Government Agencies		149,392			1,252		1.68	%		49,100			943		3.84	%
Other Debt Securities		315,906			4,198		2.66	%		85,417			1,500		3.51	%
Equity Securities ⁽⁵⁾		34,813			265		1.52	%		38,671			248		1.28	%
Federal Funds Sold		6,884			17		0.49	%		13,152			33		0.50	%
Term Federal Funds Sold		16,713			45		0.54	%		3,646			11		0.60	%
Interest-Earning Deposits		119,481			168		0.28	%		102,817			154		0.30	%


Total Interest-Earning Assets ⁽²⁾		2,848,313			66,535		4.71	%		2,988,332			74,307		5.01	%


Noninterest-Earning Assets:
Cash and Cash Equivalents		68,115								67,850
Allowance for Loan Losses		(135,411	)							(169,768	)
Other Assets		90,402								145,503


Total Noninterest-Earning Assets		23,106								43,585


TOTAL ASSETS	$	2,871,419							$	3,031,917


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Deposits:
Savings	$	112,398			1,483		2.66	%	$	120,347			1,745		2.92	%
Money Market Checking and NOW Accounts		468,875			2,012		0.87	%		508,248			2,839		1.13	%
Time Deposits of $100,000 or More		988,336			7,536		1.54	%		1,007,693			9,734		1.95	%
Other Time Deposits		295,518			1,896		1.29	%		441,465			4,198		1.92	%
Federal Home Loan Bank Advances		130,030			572		0.89	%		163,407			685		0.85	%
Other Borrowings		1,384			1		0.15	%		2,801			31		2.23	%
Junior Subordinated Debentures		82,406			1,409		3.45	%		82,406			1,361		3.33	%


Total Interest-Bearing Liabilities		2,078,947			14,909		1.45	%		2,326,367			20,593		1.79	%


Noninterest-Bearing Liabilities:
Demand Deposits		578,172								562,471
Other Liabilities		30,394								28,428


Total Noninterest-Bearing Liabilities		608,566								590,899


Total Liabilities		2,687,513								2,917,266
Stockholders’ Equity		183,906								114,651


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,871,419							$	3,031,917


NET INTEREST INCOME				$	51,626							$	53,714


NET INTEREST SPREAD ⁽³⁾							3.26	%							3.22	%


NET INTEREST MARGIN ⁽⁴⁾							3.66	%							3.62	%


⁽¹⁾		Loans are net of deferred fees and related direct costs, but excluding the allowance for loan losses. Non-accrual loans are included in the average loan balance. Loan fees have been included in the calculation of interest income. Loan fees were $1.1 million and $927,000 for the six months ended June 30, 2011 and 2010, respectively.

⁽²⁾		Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.

⁽³⁾		Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

⁽⁴⁾		Represents annualized net interest income as a percentage of average interest-earning assets.

⁽⁵⁾		Includes investment in Federal Home Loan Bank stock and Federal Reserve Bank stock.

46

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.


	Six Months Ended June 30, 2011 vs.
	Six Months Ended June 30, 2010
	Increases (Decreases) Due to Change in
	Volume			Rate			Total
	(In Thousands)
Interest and Dividend Income:
Gross Loans, Net	$	(13,747	)	$	2,719		$	(11,028	)
Municipal Securities:
Taxable		318			—			318
Tax — Exempt		(92	)		(26	)		(118	)
Obligations of Other U.S. Government Agencies		1,908			(1,599	)		309
Other Debt Securities		3,814			(1,116	)		2,698
Equity Securities		(58	)		75			17
Federal Funds Sold		(15	)		(1	)		(16	)
Term Federal Funds Sold		37			(3	)		34
Interest-Earning Deposits		38			(24	)		14


Total Interest and Dividend Income		(7,797	)		25			(7,772	)


Interest Expense:
Savings		(111	)		(151	)		(262	)
Money Market Checking and NOW Accounts		(207	)		(620	)		(827	)
Time Deposits of $100,000 or More		(184	)		(2,014	)		(2,198	)
Other Time Deposits		(1,160	)		(1,142	)		(2,302	)
Federal Home Loan Bank Advances		(146	)		33			(113	)
Other Borrowings		(11	)		(19	)		(30	)
Junior Subordinated Debentures		—			48			48


Total Interest Expense		(1,819	)		(3,865	)		(5,684	)


Change in Net Interest Income	$	(5,978	)	$	3,890		$	(2,088	)

For the six months ended June 30, 2011 and 2010, net interest income before provision for credit losses on a tax equivalent basis was $51.6 million and $53.7 million, respectively. Interest income decreased 10.5 percent to $66.5 million for the six months ended June 30, 2011 from $74.3 million for the same period in 2010. Interest expense also decreased 27.6 percent to $14.9 million for the six months ended June 30, 2011 from $20.6 million for the same period in 2010. The net interest spread and net interest margin for the six months ended June 30, 2011 were 3.26 percent and 3.66 percent, respectively, compared to 3.22 percent and 3.62 percent, respectively, for the same period in 2010. The decrease in net interest income was primarily due to the decrease in loan volume resulting from the credit quality improvement strategy, coupled with relatively weak loan demand in current challenging business and economic conditions. This decrease was partially offset by lower deposit costs resulting from the replacement of high-cost promotional time deposits with low-cost deposit products through a series of core deposit campaigns.

Average gross loans decreased by $502.7 million, or 18.7 percent, to $2.19 billion for the six months ended June 30, 2011 from $2.69 billion for the same period in 2010. Average investment securities increased by $343.1 million, or 241.6 percent, to $485.1 million for the six months ended June 30, 2011 from $142.0 million for the same period in 2010. Average interest-earning assets decreased by $140.0 million, or 4.7 percent, to $2.85 billion for the six months ended June 30, 2011 from $2.99 billion for the same period in 2010. The decrease in average interest earning assets was a direct result of our balance sheet deleveraging and credit quality improvement strategy implemented since early 2009 through the disposition of problem assets while maintaining a strong level of liquidity with increased investment in short and mid-term instruments. Consistent with this strategy, the average interest-bearing liabilities decreased by $247.4 million, or 10.6 percent, to $2.08 billion for the six months ended June 30, 2011 from $2.33 billion for the same period in 2010. Average FHLB advances decreased by $33.4 million, or 20.4 percent, to $130.0 million for the six months ended June 30, 2011 from $163.4 million for the same period in 2010.

The yield on average interest-earning assets decreased by 30 basis points to 4.71 percent for the six months ended June 30, 2011 from 5.01 percent for the same period in 2010, primarily due to lower yields on investment securities in the current low interest rate environment, partially offset by an increase in loan portfolio yields. Total loan interest and fee income decreased by $11.0 million, or 15.49 percent to $60.2 million for the six months ended June 30, 2011 from $71.2 million for the same period in 2010 due primarily to an 18.70 percent decrease in the average gross loans.

47

The average yield on loans increased to 5.55 percent for the six months ended June 30, 2011 from 5.34 percent for the same period in 2010. This increase reflected improvement in credit quality metrics, including improved levels of delinquent and non-performing loans. The average cost on interest-bearing liabilities decreased by 34 basis points to 1.45 percent for the six months ended June 30, 2011 from 1.79 percent for the same period in 2010. This decrease was primarily due to a continued shift in funding sources toward lower-cost funds through disciplined deposit pricing while reducing wholesale funds and rate sensitive deposits. Average brokered deposits decreased to zero for the six months ended June 30, 2011 from $52.0 million for the same period in 2010. Average FHLB advances decreased by $33.4 million, or 20.43 percent to $130.0 million for the six months ended June 30, 2011 from $163.4 million for the same period in 2010.

Provision for Credit Losses

For the three months ended June 30, 2011 and 2010, the provision for credit losses was $0 and $37.5 million, respectively. For the six months ended June 30, 2011 and 2010, the provision for credit losses was $0 and $95.5 million, respectively. The decrease in the provision for credit losses is attributable to decreases in net charge-offs and problem loans, reflecting the improvement in asset quality through aggressive management of our problem assets. Net charge-offs decreased $22.4 million, or 57.6 percent, to $16.5 million for the three months ended June 30, 2011 from $38.9 million for the same period in 2010. Non-performing loans decreased to $167.1 million, or 7.91 percent of total gross loans, as of June 30, 2011 from $242.1 million, or 9.67 percent of total gross loans, as of June 30, 2010. See “Non-Performing Assets” and “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details. We continually assess the quality of our loan portfolio to determine whether additional provision for credit losses is necessary. We anticipate future provisions will be required to account for probable credit losses.

Non-Interest Income

We earn non-interest income from five major sources: service charges on deposit accounts, insurance commissions, remittance fees, other service charges and fees and fees generated from international trade finance. In addition, we sell certain assets, including investment securities, non-performing loans and SBA loans, primarily for risk management purposes.

Three Months Ended June 30, 2011 vs. Three Months Ended June 30, 2010

The following table sets forth the various components of non-interest income for the periods indicated:


	Three Months Ended
	June 30,					Increase (Decrease)
	2011			2010		Amount			Percentage
	(Dollars in Thousands)
Service Charges on Deposit Accounts	$	3,278		$	3,602	$	(324	)		(9.0	%)
Insurance Commissions		1,203			1,206		(3	)		(0.2	%)
Remittance Fees		499			523		(24	)		(4.6	%)
Trade Finance Fees		328			412		(84	)		(20.4	%)
Other Service Charges and Fees		368			372		(4	)		(1.1	%)
Bank-Owned Life Insurance Income		233			235		(2	)		(0.9	%)
Net Loss on Sales of Investment Securities		(70	)		—		(70	)		—	%
Net Gain (Loss) on Sales of Loans		(77	)		220		(297	)		—	%
Other Operating Income		255			106		149			—	%


Total Non-Interest Income	$	6,017		$	6,676	$	(659	)		(9.9	%)

For the three months ended June 30, 2011, non-interest income was $6.0 million, a decrease of $659,000, or 9.9 percent, from $6.7 million for the same period in 2010. The decrease in non-interest income was primarily attributable to the decrease in service charges on deposit accounts and net gain on sales of loans, partially offset by the increase in other operating income. The service charges on deposit accounts decreased by $324,000, or 9.0 percent, to $3.3 million for the three months ended June 30, 2011 compared to $3.6 million for the same period in 2010, due mainly to a decrease of $299,000 in non-sufficient fund charges, reflecting the continued underlying decline in activity as customers better managed their account balances. Net loss on sales of loans increased by $297,000 for the three months ended June 30, 2011 compared to the same period in 2010. The net loss on sales of loans reflected $682,000 of valuation adjustments on loans held for sale, partially offset by $605,000 of gains from the sales of loans held for sale. Other operating income increased by $149,000 to $255,000 for the three months ended June 30, 2011 compared to $106,000 for the same period in 2010. The increase was primarily attributable to an $85,000 increase in foreign exchange gain driven by favorable changes in exchange rates.

48

Six Months Ended June 30, 2011 vs. Six Months Ended June 30, 2010

The following table sets forth the various components of non-interest income for the periods indicated:


	Six Months Ended
	June 30,					Increase (Decrease)
	2011			2010		Amount			Percentage
	(Dollars in Thousands)
Service Charges on Deposit Accounts	$	6,419		$	7,328	$	(909	)		(12.4	%)
Insurance Commissions		2,463			2,484		(21	)		(0.8	%)
Remittance Fees		961			985		(24	)		(2.4	%)
Other Service Charges and Fees		701			784		(83	)		(10.6	%)
Trade Finance Fees		625			763		(138	)		(18.1	%)
Bank-Owned Life Insurance Income		463			466		(3	)		(0.6	%)
Net Gain (Loss) on Sales of Loans		(415	)		214		(629	)		—	%
Net Gain (Loss) on Sales of Investment Securities		(70	)		105		(175	)		—	%
Other Operating Income		378			552		(174	)		(31.5	%)


Total Non-Interest Income	$	11,525		$	13,681	$	(2,156	)		(15.8	%)

For the six months ended June 30, 2011, non-interest income was $11.5 million, a decrease of $2.2 million, or 15.8 percent, from $13.7 million for the same period in 2010. The decrease in non-interest income was primarily attributable to the decreases in service charges on deposit accounts, net gain on sales of loans and investment securities, and other operating income. The service charges on deposit accounts decreased by $909,000, or 12.4 percent, to $6.4 million for the six months ended June 30, 2011 compared to $7.3 million for the same period in 2010, due mainly to a decrease of $820,000 in non-sufficient fund charges, reflecting the continued underlying decline in activity as customers better managed their account balances. Net loss on sales of loans increased by $629,000 for the six months ended June 30, 2011 compared to the same period in 2010. This increase reflected $2.9 million of valuation adjustments on loans held for sale, partially offset by $2.5 million of gains from the sales of loans held for sale. Net gain on sales of investment securities decreased by $175,000 for the six months ended June 30, 2011 compared to the same period in 2010. The sales of investment securities for the first half of 2011 were a direct result of implementing our rate risk minimization strategy through replacing long- duration investments with short-duration ones in anticipation of rising rates. The proceeds from the sale of investment securities provided additional liquidity to reduce the FHLB advance due in June 2011. Other operating income decreased by $174,000, or 31.5 percent, to $378,000 for the six months ended June 30, 2011 compared to $552,000 for the same period in 2010. The decrease was primarily attributable to the absence of a $274,000 recovery on a previously recorded loss on sale of OREO during the first quarter of 2010, partially offset by an $82,000 increase in foreign exchange gain driven by favorable changes in exchange rates.

49

Non-Interest Expense

Three Months Ended June 30, 2011 vs. Three Months Ended June 30, 2010

The following table sets forth the breakdown of non-interest expense for the periods indicated:


	Three Months Ended
	June 30,				Increase (Decrease)
	2011		2010		Amount			Percentage
	(Dollars in Thousands)
Salaries and Employee Benefits	$	8,762	$	9,011	$	(249	)		(2.8	%)
Occupancy and Equipment		2,650		2,674		(24	)		(0.9	%)
Data Processing		1,487		1,487		—			—	%
Deposit Insurance Premiums and Regulatory Assessments		1,377		4,075		(2,698	)		(66.2	%)
Professional Fees		1,138		1,022		116			11.4	%
Advertising and Promotion		908		503		405			80.5	%
Other Real Estate Owned Expense		806		1,718		(912	)		(53.1	%)
Directors and Officers Liability Insurance		733		716		17			2.4	%
Supplies and Communications		496		574		(78	)		(13.6	%)
Amortization of Other Intangible Assets		190		301		(111	)		(36.9	%)
Loan-Related Expense		184		310		(126	)		(40.6	%)
Expenses Related to Unconsummated Capital Raises		2,220		—		2,220			—	%
Other Operating Expenses		1,935		2,374		(439	)		(18.5	%)


Total Non-Interest Expense	$	22,886	$	24,765	$	(1,879	)		(7.6	%)

For the three months ended June 30, 2011, non-interest expense was $22.9 million, a decrease of $1.9 million, or 7.6 percent, from $24.8 million for the same period in 2010. The efficiency ratio for the three months ended June 30, 2011 was 72.67 percent, compared to 75.11 percent for the same period in 2010. The $1.9 million decrease in non-interest expense was primarily due to the decreases in deposit insurance premiums and regulatory assessments and OREO expense, partially offset by increases in expenses related to unconsummated capital raises and advertising and promotion. The deposit insurance premiums and regulatory assessments decreased by $2.7 million, or 66.2 percent, to $1.4 million for the three months ended June 30, 2011 compared to $4.1 million for the same period in 2010, primarily due to the lower assessment rates for the FDIC insurance on deposits. The assessment rates decreased by 22 basis points to 23 basis points for the three months ended June 30, 2011 from 45 basis points for the same period in 2010, resulting from the improvement in risk categories of the Bank and the Dodd-Frank Act’s changes to the FDIC assessment system. OREO expense decreased by $912,000, or 53.1 percent to $806,000 for the three months ended June 30, 2011 compared to $1.7 million for the same period in 2010, primarily as a result of a $937,000 decrease in valuation allowance. During the three months ended June 30, 2011, non-interest expense included $2.2 million for our unconsummated capital offerings related to a definitive securities purchase agreement with Woori Finance Holdings Co. Ltd. and a planned equity offering. Advertising and promotion increased by $405,000, or 80.5 percent, to $908,000 for the three months ended June 30, 2011 compared to $503,000 for the same period in 2010, primarily due to the launch of new branding campaigns.

50

Six Months Ended June 30, 2011 vs. Six Months Ended June 30, 2010

The following table sets forth the breakdown of non-interest expense for the periods indicated:


	Six Months Ended
	June 30,				Increase (Decrease)
	2011		2010		Amount			Percentage
	(Dollars in Thousands)
Salaries and Employee Benefits	$	17,886	$	17,797	$	89			0.5	%
Occupancy and Equipment		5,215		5,399		(184	)		(3.4	%)
Deposit Insurance Premiums and Regulatory Assessments		3,447		6,299		(2,852	)		(45.3	%)
Data Processing		2,886		2,986		(100	)		(3.3	%)
Professional Fees		1,927		2,088		(161	)		(7.7	%)
Other Real Estate Owned Expense		1,635		7,418		(5,783	)		(78.0	%)
Advertising and Promotion		1,474		1,038		436			42.0	%
Directors and Officers Liability Insurance		1,467		1,433		34			2.4	%
Supplies and Communications		1,074		1,091		(17	)		(1.6	%)
Loan-Related Expense		409		617		(208	)		(33.7	%)
Amortization of Other Intangible Assets		408		629		(221	)		(35.1	%)
Expenses Related to Unconsummated Capital Raises		2,220		—		2,220			—	%
Other Operating Expenses		3,899		4,194		(295	)		(7.0	%)


Total Non-Interest Expense	$	43,947	$	50,989	$	(7,042	)		(13.8	%)

For the six months ended June 30, 2011, non-interest expense was $43.9 million, a decrease of $7.0 million, or 13.8 percent, from $51.0 million for the same period in 2010. The efficiency ratio for the three months ended June 30, 2011 was 69.64 percent, compared to 75.75 percent for the same period in 2010. The $7.0 million decrease in non-interest expense was primarily due to the decreases in OREO expense and deposit insurance premiums and regulatory assessments, partially offset by increases in expenses related to unconsummated capital raises and advertising and promotion. OREO expense decreased by $5.8 million, or 78.0 percent, to $1.6 million for the six months ended June 30, 2011 compared to $7.4 million for the same period in 2010, primarily as a result of a $6.0 million decrease in valuation allowance. The deposit insurance premiums and regulatory assessments decreased by $2.9 million, or 45.3 percent, to $3.4 million for the three months ended June 30, 2011 compared to $6.3 million for the same period in 2010, primarily due to the lower assessment rates for the FDIC insurance on deposits. The average assessment rates decreased by 17 basis points to 28 basis points for the six months ended June 30, 2011 from 45 basis points for the same period in 2010, resulting from the improvement in risk categories of the Bank and the Dodd-Frank Act’s changes to the FDIC assessment system in early April of 2011. Partially offsetting the declines in non-interest expense were the $2.2 million expense for our unconsummated capital offerings and the $436,000 increase in advertising and promotion for the six months ended June 30, 2011 compared to the same period in 2010.

Provision for Income Taxes

For the three months ended June 30, 2011, income tax expense of $605,000 was recognized on pre-tax income of $8.6 million, representing an effective tax rate of 7.0 percent, compared to income tax benefits of $36,000 recognized on pre-tax loss of $29.3 million, representing an effective tax rate of 0.1 percent for the same period in 2010. For the six months ended June 30, 2011, income tax expense of $724,000 was recognized on pre-tax income of $19.2 million, representing an effective tax rate of 3.8 percent, compared to income tax benefits of $431,000 recognized on pre-tax loss of $79.2 million, representing an effective tax rate of 0.5 percent for the same period in 2010.

The tax expense recognized for the three and six months ended June 30, 2011 was primarily due to an out of period adjustment of $605,000 and $718,000, respectively, to reserve for certain ASC 740-10(FIN 48) exposure items. During the fourth quarter of 2009, the Company recorded a tax benefit upon electing a 5-year net operating loss carryback according to the IRS Code section IRC § 172(b)(1)(H) amended in November 2009. This out-of-period adjustment was to reinstate the reserves that the Company released as the statute of limitations had expired in previous years. Due to the Company filing amended tax returns as a result of the tax law revision, the Company needed to reestablish these reserves. The tax benefit recognized during the first half of 2010 was primarily due to the reversal of FIN 48 reserves related to lower assessment from the result of the State of California Franchise Tax Board audit for the tax year 2005 through 2007.

51

FINANCIAL CONDITION

Investment Portfolio

Investment securities are classified as held to maturity or available for sale in accordance with GAAP. Those securities that we have the ability and the intent to hold to maturity are classified as “held to maturity.” All other securities are classified as “available for sale.” There were no trading securities as of June 30, 2011 and December 31, 2010. Securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available for sale securities are stated at fair value. The composition of our investment portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. The investment portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.

As of June 30, 2011, the investment portfolio was composed primarily of mortgage-backed securities, U.S. government agency securities, and collateralized mortgage obligations. Investment securities available for sale were 99.79 percent and 99.80 percent of the total investment portfolio as of June 30, 2011 and December 31, 2010, respectively. Most of the securities held carried fixed interest rates. Other than holdings of U.S. government agency securities, there were no investments in securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2011 and December 31, 2010.

As of June 30, 2011, securities available for sale were $390.2 million, or 14.4 percent of total assets, compared to $413.1 million, or 14.2 percent of total assets, as of December 31, 2010. Securities available for sale, at fair value, decreased $22.9 million, or 5.54 percent, from December 31, 2010 to June 30, 2011. The decrease was due primarily to $95.6 million of sales of securities, $108.2 million of matured and called bonds and $24.8 million of principal paydowns, partially offset by $200.7 million of purchased securities and $6.3 million of fair value increases.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on investment securities as of the dates indicated:


	June 30, 2011							December 31, 2010
			Estimated		Unrealized					Estimated		Unrealized
	Amortized		Fair		Gain			Amortized		Fair		Gain
	Cost		Value		(Loss)			Cost		Value		(Loss)
	(In Thousands)
Securities Held to Maturity:
Municipal Bonds	$	697	$	697	$	—		$	696	$	696	$	—
Mortgage-Backed Securities ⁽¹⁾		136		138		2			149		151		2


Total Securities Held to Maturity	$	833	$	835	$	2		$	845	$	847	$	2


Securities Available for Sale:
Collateralized Mortgage Obligations	$	124,940	$	125,929	$	989		$	139,053	$	137,193	$	(1,860	)
Mortgage-Backed Securities ⁽¹⁾		115,019		117,777		2,758			108,436		109,842		1,406
U.S. Government Agency Securities		106,162		106,325		163			114,066		113,334		(732	)
Corporate Bonds		20,454		20,385		(69	)		20,449		20,205		(244	)
Municipal Bonds		9,296		9,256		(40	)		22,420		21,028		(1,392	)
Asset-Backed Securities ⁽²⁾		6,476		6,799		323			7,115		7,384		269
Other Securities		3,305		3,281		(24	)		3,305		3,259		(46	)
Equity Securities ⁽³⁾		647		460		(187	)		647		873		226


Total Securities Available for Sale	$	386,299	$	390,212	$	3,913		$	415,491	$	413,118	$	(2,373	)


⁽¹⁾		Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

⁽²⁾		Collateralized debentures of small business investment companies and state and local development companies, and guaranteed by SBA.

⁽³⁾		Balances presented for amortized cost, representing two equity securities, were net of an OTTI charge of $790,000, which was related to a credit loss, as of December 31, 2010. We recorded an OTTI charge of $790,000 to write down the value of one equity investment to its fair value during the year ended December 31, 2010.

52

The amortized cost and estimated fair value of investment securities as of June 30, 2011, by contractual maturity, are shown below. Although collateralized mortgage obligations, mortgage-backed securities and asset-backed securities have contractual maturities through 2041, 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				Held to Maturity
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Within One Year	$	—	$	—	$	—	$	—
Over One Year Through Five Years		103,279		103,360		697		697
Over Five Years Through Ten Years		32,191		32,199		—		—
Over Ten Years		3,747		3,688		—		—
Collateralized Mortgage Obligations		124,940		125,929		—		—
Mortgage-Backed Securities		115,019		117,777		136		138
Asset-Backed Securities		6,476		6,799		—		—
Equity Securities		647		460		—		—


	$	386,299	$	390,212	$	833	$	835

We perform periodic reviews for impairment in accordance with FASB ASC 320. 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, 2011 and December 31, 2010:


	Holding Period
	Less than 12 Months						12 Months or More						Total
	Gross		Estimated		Number		Gross		Estimated		Number		Gross		Estimated		Number
Investment Securities	Unrealized		Fair		of		Unrealized		Fair		of		Unrealized		Fair		of
Available for Sale	Losses		Value		Securities		Losses		Value		Securities		Losses		Value		Securities
	(In Thousands)
June 30, 2011:
Mortgage-Backed Securities	$	35	$	4,744		1	$	—	$	—		—	$	35	$	4,744		1
Collateralized Mortgage Obligations		125		29,630		8		—		—		—		125		29,630		8
Municipal Bonds		59		2,827		5		61		2,323		2		120		5,150		7
U.S. Government Agency Securities		97		26,903		7		—		—		—		97		26,903		7
Equity Securities		187		460		2		—		—		—		187		460		2
Other Securities		—		—		—		41		958		1		41		958		1
Corporate Bonds		74		12,895		3		18		2,982		1		92		15,877		4


	$	577	$	77,459		26	$	120	$	6,263		4	$	697	$	83,722		30


December 31, 2010:
Mortgage-Backed Securities	$	731	$	62,738		16	$	—	$	—		—	$	731	$	62,738		16
Collateralized Mortgage Obligations		2,330		99,993		20		—		—		—		2,330		99,993		20
Municipal Bonds		1,440		16,907		11		—		—		—		1,440		16,907		11
U.S. Government Agency Securities		830		69,266		14		—		—		—		830		69,266		14
Other Securities		3		1,997		2		43		957		1		46		2,954		3
Corporate Bonds		257		17,210		5		—		—		—		257		17,210		5


	$	5,591	$	268,111		68	$	43	$	957		1	$	5,634	$	269,068		69

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 2011 and December 31, 2010 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, 2011. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The unrealized losses on investments in U.S. agencies securities were caused by changes in market interest rates or the widening of market spreads subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

53

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of June 30, 2011. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not more likely than not that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 2011, all of them are issued and guaranteed by governmental sponsored entities. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not by concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

FASB ASC 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. Therefore, in the opinion of management, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2011 and December 31, 2010 are not other-than-temporarily impaired, and therefore, no impairment charges as of June 30, 2011 and December 31, 2010 are warranted.

Investment securities available for sale with carrying values of $66.2 million and $118.0 million as of June 30, 2011 and December 31, 2010, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

54

Loan Portfolio

The following table shows the loan composition by type, including loans held for sale, as of the dates indicated.


	June 30,			December 31,			Increase (Decrease)
	2011			2010			Amount			Percentage
	(Dollars in Thousands)
Real Estate Loans:
Commercial Property ⁽¹⁾	$	689,550		$	731,482		$	(41,932	)		(5.7	%)
Construction ⁽²⁾		40,684			62,400			(21,716	)		(34.8	%)
Residential Property		58,325			62,645			(4,320	)		(6.9	%)


Total Real Estate Loans		788,559			856,527			(67,968	)		(7.9	%)


Commercial and Industrial Loans: ⁽³⁾
Commercial Term ⁽⁴⁾		1,045,131			1,133,892			(88,761	)		(7.8	%)
Commercial Lines of Credit		50,636			59,056			(8,420	)		(14.3	%)
SBA ⁽⁵⁾		135,323			123,750			11,573			9.4	%
International		46,560			44,167			2,393			5.4	%


Total Commercial and Industrial Loans		1,277,650			1,360,865			(83,215	)		(6.1	%)


Consumer Loans		46,500			50,300			(3,800	)		(7.6	%)


Total Loans — Gross		2,112,709			2,267,692			(154,983	)		(6.8	%)

Deferred Loan Fees		(11	)		(566	)		555			(98.1	%)
Allowance for Loan Losses		(109,029	)		(146,059	)		37,030			(25.4	%)


Net Loans Receivable	$	2,003,669		$	2,121,067		$	(117,398	)		(5.5	%)


⁽¹⁾		Includes loans held for sale, at the lower of cost or fair value, of $708,000 and $2.3 million as of June 30, 2011 and December 31, 2010, respectively.

⁽²⁾		Includes loans held for sale, at the lower of cost or fair value, of $0 and $1.4 million as of June 30, 2011 and December 31, 2010, respectively.

⁽³⁾		Includes owner-occupied property loans of $846.5 million and $894.8 million as of June 30, 2011 and December 31, 2010, respectively.

⁽⁴⁾		Includes loans held for sale, at the lower of cost or fair value, of $12.9 million and $14.9 million as of June 30, 2011 and December 31, 2010, respectively.

⁽⁵⁾		Includes loans held for sale, at the lower of cost or fair value, of $30.3 million and $18.1 million as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011 and December 31, 2010, loans receivable (including loans held for sale), net of deferred loan fees and allowance for loan losses, totaled $2.00 billion and $2.12 billion, respectively, a decrease of $117.4 million, or 5.5 percent. Total gross loans decreased by $155.0 million, or 6.8 percent, from $2.27 billion as of December 31, 2010 to $2.11 billion as of June 30, 2011.

During the first half of 2011, total new loan production and advances amounted to $169.1 million. For the same period, we experienced decreases in loans totaling $323.5 million, comprised of $224.5 million in principal amortization and payoffs, $47.7 million in charge-offs, $49.2 million in problem loan sales, and $2.1 million that were transferred to OREO. For the first half of 2011, the $41.9 million decrease in commercial property loans was attributable to $64.2 million in principal amortization and payoffs, $12.0 million in charge-offs, and $21.5 million in loan sales, partially offset by new loan production and advances of $55.8 million. The $88.8 million decrease in commercial term loans for the six months ended June 30, 2011 was attributable to $117.2 million in principal amortization and payoffs, $24.1 million in charge-offs, and $22.6 million in loan sales, partially offset by new loan production and advances of $75.1 million.

Real estate loans, composed of commercial property, construction loans and residential property, decreased $68.0 million, or 7.9 percent, to $788.6 million as of June 30, 2011 from $856.5 million as of December 31, 2010, representing 37.3 percent and 37.8 percent, respectively, of total gross loans. Commercial and industrial loans, composed of owner-occupied commercial property, trade finance, SBA and commercial lines of credit, decreased $83.2 million, or 6.1 percent, to $1.28 billion as of June 30, 2011 from $1.36 billion as of December 31, 2010, representing 60.5 percent and 60.0 percent, respectively, of total gross loans. Consumer loans decreased $3.8 million, or 7.6 percent, to $46.5 million as of June 30, 2011 from $50.3 million as of December 31, 2010.

55

As of June 30, 2011, our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of total gross loans outstanding:


	Balance as of		Percentage of Total
Industry	June 30, 2011		Gross Loans Outstanding
	(In Thousands)
Lessors of Non-Residential Buildings	$	372,732		17.6	%
Accommodation/Hospitality	$	307,428		14.6	%
Gasoline Stations	$	270,816		12.8	%

There was no other concentration of loans to any one type of industry exceeding ten percent of total gross loans outstanding.

Non-Performing Assets

Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due and still accruing interest. Non-performing assets consist of non-performing loans and OREO. 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 an asset 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 collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, we stop recognizing income from the interest on the loan and reverse any uncollected interest that had been accrued but unpaid. These loans may or may not be collateralized, but collection efforts are continuously pursued.

Except for non-performing loans set forth below, management is not aware of any loans as of June 30, 2011 and December 31, 2010 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.

56

The following table provides information with respect to the components of non-performing assets as of the dates indicated:


	June 30,			December 31,			Increase (Decrease)
	2011			2010			Amount			Percentage
				(Dollars in Thousands)
Non-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Commercial Property	$	44,132		$	47,937		$	(3,805	)		(7.9	%)
Construction		12,298			19,097			(6,799	)		(35.6	%)
Residential Property		1,726			1,925			(199	)		(10.3	%)
Commercial and Industrial Loans:
Commercial Term		70,811			63,012			7,799			12.4	%
Commercial Lines of Credit		2,905			2,798			107			3.8	%
SBA		31,163			33,085			(1,922	)		(5.8	%)
International		3,243			127			(3,116	)		—	%
Consumer Loans		824			1,047			(223	)		(21.3	%)


Total Non-Accrual Loans		167,102			169,028			(1,926	)		(1.1	%)

Loans 90 Days or More Past Due and Still Accruing (as to Principal or Interest):		—			—			—			—


Total Non-Performing Loans ^{(1) (2)}		167,102			169,028			(1,926	)		(1.1	%)

Other Real Estate Owned		1,340			4,089			(2,749	)		(67.2	%)


Total Non-Performing Assets	$	168,442		$	173,117		$	(4,675	)		(2.7	%)


Non-Performing Loans as a Percentage of Total Gross Loans		7.91	%		7.45	%
Non-Performing Assets as a Percentage of Total Assets		6.21	%		5.95	%

Troubled Debt Restructured Performing Loans	$	19,793		$	47,395		$	(27,602	)		(58.2	%)


⁽¹⁾		Includes troubled debt restructured non-performing loans of $66.0 million and $27.0 million as of June 30, 2011 and December 31, 2010, respectively.

⁽²⁾		Includes loans held for sale.

Non-accrual loans totaled $167.1 million as of June 30, 2011, compared to $169.0 million as of December 31, 2010, representing a 1.1 percent decrease. Delinquent loans (defined as 30 days or more past due) were $97.2 million as of June 30, 2011, compared to $147.5 million as of December 31, 2010, representing a 34.1 percent decrease. Of the $97.2 million delinquent loans as of June 30, 2011, $81.6 million was included in non-performing loans. The $126.1 million of $147.5 million delinquent loans as of December 31, 2010 was included in non-performing loans. During the first six months of 2011, loans totaling $81.8 million were placed on nonaccrual status. The additions to nonaccrual loans of $81.8 million were offset by $35.1 million in charge-offs, $29.3 million in sales of problem loans, $14.3 million in principal paydowns and payoffs, $3.2 million that were placed back to accrual status, and $1.9 million that were transferred to OREO.

The ratio of non-performing loans to total gross loans increased to 7.91 percent at June 30, 2011 from 7.45 percent at December 31, 2010. During the same period, our allowance for loan losses decreased by $37.0 million, or 25.4 percent, to $109.0 million from $146.1 million. Of the $167.1 million non-performing loans, approximately $128.9 million were impaired based on the definition contained in FASB ASC 310, “Receivables,” which resulted in aggregate impairment reserve of $19.3 million as of June 30, 2011. We calculate our allowance for the collateral-dependent loans as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. 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, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

As of June 30, 2011, $140.2 million, or 83.9 percent, of the $167.1 million of non-performing loans were secured by real estate, compared to $138.1 million, or 81.7 percent, of the $169.0 million of non-performing loans as of December 31, 2010. In light of declining property values in the current challenging economic condition affecting the real estate markets, the Bank obtained current appraisals for most non-performing loan collaterals, but factored in adequate market discounts on some non-performing loan collaterals to compensate for their non-current appraisals.

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As of June 30, 2011, other real estate owned consisted of five properties, primarily located in California, with a combined net carrying value of $1.3 million. During the six months ended June 30, 2011, five properties, with a carrying value of $2.8 million, were transferred from loans receivable to other real estate owned and eight properties, with a carrying value of $4.4 million, were sold and a loss of $681,000 was recognized. As of December 31, 2010, other real estate owned consisted of eight properties with a combined net carrying value of $4.1 million.

We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an 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, impaired loans are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

The following table provides information on impaired loans as of the dates indicated:


	Recorded		Unpaid Principal		With No Related		With an Allowance
	Investment		Balance		Allowance Recorded		Recorded		Related Allowance
					(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	15,810	$	16,329	$	8,845	$	6,963	$	565
Land		26,008		26,008		25,184		825		105
Other		21,624		21,748		3,698		17,926		2,623
Construction		12,298		12,396		12,298		—		—
Residential Property		2,325		2,386		1,982		343		31

Commercial and Industrial Loans:
Commercial Term
Unsecured		14,999		15,463		661		14,338		11,040
Secured by Real Estate		83,382		85,570		41,163		42,219		9,092
Commercial Lines of Credit		3,028		3,097		1,218		1,810		1,394
SBA		17,780		19,437		7,340		10,441		1,380
International		3,243		3,243		—		3,243		3,243

Consumer Loans		870		898		379		491		223

Total	$	201,367	$	206,575	$	102,768	$	98,599	$	29,696


December 31, 2010:
Real Estate Loans:
Commercial Property
Retail	$	17,606	$	18,050	$	6,336	$	11,270	$	1,543
Land		35,207		35,295		5,482		29,725		1,485
Other		11,357		11,476		10,210		1,147		33
Construction		17,691		17,831		13,992		3,699		280
Residential Property		1,926		1,990		1,926		—		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		17,847		18,799		6,465		11,382		10,313
Secured by Real Estate		80,213		81,395		35,154		45,059		11,831
Commercial Lines of Credit		4,067		4,116		1,422		2,645		1,321
SBA		17,715		18,544		7,112		10,603		2,122
International		127		141		—		127		127

Consumer Loans		934		951		393		541		393

Total	$	204,690	$	208,588	$	88,492	$	116,198	$	29,448

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


	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	for the Three		for the Three		for the Six		for the Six
	Months		Months		Months		Months
	Ended		Ended ⁽¹⁾		Ended		Ended ⁽¹⁾
			(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	17,260	$	26	$	17,633	$	51
Land		27,561		—		29,023		—
Other		21,849		60		21,864		121
Construction		12,535		—		12,578		—
Residential Property		2,371		—		2,386		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		15,365		53		15,571		105
Secured by Real Estate		84,898		456		85,504		821
Commercial Lines of Credit		3,076		2		3,090		4
SBA		18,900		31		19,107		57
International		3,243		—		2,255		—

Consumer Loans		889		1		893		1

Total	$	207,947	$	629	$	209,904	$	1,160


June 30, 2010:
Real Estate Loans:
Commercial Property
Retail	$	17,977	$	—	$	25,664	$	—
Land		43,425		59		45,164		114
Other		16,492		55		18,524		216
Construction		9,823		—		9,823		—
Residential Property		2,725		—		2,784		—

Commercial and Industrial Loans:
Commercial Term
Unsecured		20,289		—		18,278		9
Secured by Real Estate		111,388		67		104,745		293
Commercial Lines of Credit		6,132		56		5,499		82
SBA		25,573		—		26,083		—
International		284		—		588		—

Consumer Loans		396		—		531		—

Total	$	254,504	$	237	$	257,683	$	714


⁽¹⁾		Represents interest income recognized on impaired loans subsequent to classification as impaired.

For the three and six months ended June 30, 2011, we recognized interest income of $0 and $33,000, respectively, on one impaired commercial term loan secured by real estate using a cash-basis method. For the three and six months ended June 30, 2010, we recognized interest income of $67,000 and $204,000, respectively, on one impaired commercial term loan secured by real estate using a cash-basis method. Except for such loan, no other interest income was recognized on impaired loans subsequent to classification as impaired using a cash-basis method.

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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,
	2011			2010			2011			2010
				(In Thousands)
Interest Income That Would Have Been Recognized Had Impaired
Loans Performed in Accordance With Their Original Terms	$	2,001		$	3,755		$	4,475		$	7,030
Less: Interest Income Recognized on Impaired Loans		(629	)		(237	)		(1,160	)		(714	)

Interest Foregone on Impaired Loans	$	1,372		$	3,518		$	3,315		$	6,316

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

During the six months ended June 30, 2011, we restructured monthly payments on 92 loans, with a net carrying value of $77.4 million as of June 30, 2011, through temporary payment structure modification from principal and interest due monthly to interest only due monthly for six months or less. 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, we believe that performance and collection under the revised terms is probable. As of June 30, 2011, troubled debt restructurings on accrual status totaled $19.8 million, all of which were temporary interest rate reductions, and a$4.4 million reserve relating to these loans is included in the allowance for loan losses. Troubled debt restructurings on accrual status are comprised of loans that are contractually current and have sustained repayment ability and performance or well secured and in process of collection. As of December 31, 2010, troubled debt restructured loans on accrual status totaled $47.4 million and a $6.4 million reserve relating to these loans is included in the allowance for loan losses.

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

The Bank will charge off a loan and declare a loss when its collectability is sufficiently questionable that the Bank can no longer justify showing the loan as an asset on its balance sheet. To determine if a loan should be charged off, all possible sources of repayment are analyzed, including the potential for future cash flow from income or liquidation of other assets, the value of any collateral, and the strength of co-makers or guarantors. When these sources do not provide a reasonable probability that principal can be collected in full, the Bank will fully or partially charge off the loan.

Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.

To determine general reserve requirements, existing loans are divided into 10 general loan pools of risk-rated loans (commercial real estate, construction, commercial term — unsecured, commercial term — T/D secured, commercial line of credit, SBA, international, consumer installment, consumer line of credit, and miscellaneous loans) as well as 3 homogenous loan pools (residential mortgage, auto loans, and credit card). For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade (pass, special mention, substandard, and doubtful) to determine risk factors for potential loss inherent in the current outstanding loan portfolio.

During the first quarter of 2010, to enhance reserve calculations to better reflect the Bank’s current loss profile, the two loan pools of commercial real estate and commercial term — T/D secured were subdivided according to the 21 collateral codes used by the Bank to identify commercial property types (apartment, auto, car wash, casino, church, condominium, gas station, golf course, industrial, land, manufacturing, medical, mixed used, motel, office, retail, school, supermarket, warehouse, wholesale, and others). This further segregation allows the Bank to more specifically allocate reserves within the commercial real estate portfolio according to risks defined by historic loss as well as current loan concentrations of the different collateral types.

Risk factor calculations were previously based on 12-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent six quarters. In the first quarter of 2010, the historic loss window was reduced to eight quarters with 1.5 to 1 weighting given to the most recent four quarters. The enhanced window places greater emphasis on losses taken by the Bank within the past year, as recent loss history is more relevant to the Bank’s risks given the rapid changes to asset quality within the current economic conditions.

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As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis; however, as with risk-rated loans, risk factor calculations are based on 8-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent four quarters.

The Bank will charge off a loan and declare a loss when its collectability is sufficiently questionable that the Bank can no longer justify showing the loan as an asset on its balance sheet. To determine if a loan should be charged off, all possible sources of repayment are analyzed, including the potential for future cash flow from income or liquidation of other assets, the value of any collateral, and the strength of co-makers or guarantors. When these sources do not provide a reasonable probability that principal can be collected in full, the Bank will fully or partially charge off the loan.

For purposes of determining the allowance for credit losses, the loan portfolio is subdivided into three portfolio segments: real estate, commercial and industrial, and consumer. The portfolio segment of real estate contains the allowance loan pools of commercial real estate, construction, and residential mortgage. The portfolio segment of commercial and industrial contains the loan pools of commercial term — unsecured, commercial term — T/D secured, commercial line of credit, SBA, international, and miscellaneous. Lastly, the portfolio segment of Consumer contains the loan pools of consumer installment, consumer line of credit, auto, and credit card.

Real estate loans, which are mostly dependent on rental income from non-owner occupied or investor properties, have been subject to increased losses. Prior to 2009, no historic losses were recorded for loans secured by commercial real estate. However, given the decrease in sales and increase in vacancies due to the current slowed economy, losses in loans secured by office and retail properties have been significant. Loans secured by vacant land have also had significant losses as valuations have decreased and further development has been limited. Also, commercial term — T/D secured loans, which are mostly owner-occupied property loans, have been subject to decreases in collateral value and have had more losses than prior to the current economic condition. Similarly, construction loans have been subject to losses due to unforeseen difficulties in completion of projects. As such, allocations to general reserves for those loan pools have been higher than that of loan pools with lower risk. Residential mortgage loans constitute a limited concentration within the Bank’s entire loan portfolio, and losses as well as supplementary reserves have been minimal.

Commercial and industrial loans, which are largely subject to changes in business cash flow, have had the most historic losses within the Bank’s entire loan portfolio. The largest loan pool within the commercial and industrial sector is commercial term — T/D secured, which are mostly loans secured by owner-occupied business properties. Loans secured by car washes, gas stations, golf courses, and motels have had the most significant losses, as the hospitality and recreation industries have been negatively affected by the current economy. As such, allocations to general reserve for those loan pools have been increased. Also, commercial term — unsecured and SBA loans have had considerable losses and additional general reserves as decreased business cash flow due to the challenging economic condition has weakened borrowers’ repayment abilities.

Consumer loans constitute a limited concentration within the Bank’s loan portfolio and are mostly evaluated in bulk for general reserve requirements due to the relatively small volume per loan.

Specific reserves are allocated for loans deemed “impaired.” FASB ASC 310, “Receivables,” indicates that a loan is “impaired” when it is probable that a creditor will be unable to collect all amounts due, including principal and interest, according to the contractual terms and schedules of the loan agreement. Loans that represent significant concentrations of credit, material non-performing loans, insider loans and other material credit exposures are subject to FASB ASC 310 impairment analysis.

Loans that are determined to be impaired under FASB ASC 310, are individually analyzed to estimate the Bank’s exposure to loss based on the following factors: the borrower’s character, the current financial condition of the borrower and the guarantor, the borrower’s resources, the borrower’s payment history, repayment ability, debt servicing ability, action plan, the prevailing value of the underlying collateral, the Bank’s lien position, general economic conditions, specific industry conditions, and outlook for the future.

The loans identified as impaired are measured using one of the three methods of valuations: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate, (2) the fair market value of the collateral if the loan is collateral dependent, or (3) the loan’s observable market price.

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When determining the appropriate level for allowance for loan losses, the management considers qualitative adjustments for any factors that are likely to cause estimated credit losses associated with the Bank’s current portfolio to differ from historical loss experience, including but not limited to:

	•		changes in lending policies and procedures, including underwriting standards and collection, charge-offs, and recovery practice;

	•		changes in national and local economic and business conditions and developments, including the condition of various market segments;

	•		changes in the nature and volume of the portfolio;

	•		changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings, charge-offs and other loan modifications;

	•		changes in the quality of the Bank’s loan review system and the degree of oversight by the Board of Directors;

	•		the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

	•		transfer risk on cross-border lending activities; and

	•		the effect of external factors such as competition and legal and regulatory requirements as well as declining collateral values on the level of estimated credit losses in the Bank’s current portfolio.

In order to systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The above factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the asset portfolio along with corresponding basis points for qualitative adjustments.

The following table reflects our allocation of allowance for loan and lease losses by loan category as well as the loans receivable for each loan type:


	June 30, 2011				December 31, 2010
	Allowance		Loans		Allowance		Loans
Allowance for Loan Losses Applicable To	Amount		Receivable		Amount		Receivable
			(Dollars in Thousands)
Real Estate Loans:
Commercial Property	$	21,298	$	688,842	$	26,248	$	729,222
Construction		1,984		40,684		5,606		60,995
Residential Property		833		58,059		911		62,645


Total Real Estate Loans ⁽¹⁾		24,115		787,585		32,765		852,862


Commercial and Industrial Loans: ⁽¹⁾		82,845		1,234,519		108,986		1,327,910

Consumer Loans		1,587		46,500		2,077		50,300
Unallocated		482		—		2,231		—


Total	$	109,029	$	2,068,604	$	146,059	$	2,231,072


⁽¹⁾		Excludes loans held for sale.

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The following table sets forth certain information regarding our allowance for loan losses and allowance for off-balance sheet items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to loan pool and grade as well as actual current commitment usage figures by loan type to existing contingent liabilities.


			As of and for the								As of and for the
	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2011			2011			2010			2011			2010
				(Dollars in Thousands)
Allowance for Loan Losses:
Balance at Beginning of Period	$	125,780		$	146,059		$	177,820		$	146,059		$	144,996


Actual Charge-Offs		(20,652	)		(25,181	)		(40,718	)		(45,833	)		(70,832	)
Recoveries on Loans Previously Charged Off		4,151			3,626			1,772			7,777			5,493


Net Loan Charge-Offs		(16,501	)		(21,555	)		(38,946	)		(38,056	)		(65,339	)


Provision Charged to Operating Expenses		(250	)		1,276			37,793			1,026			97,010


Balance at End of Period	$	109,029		$	125,780		$	176,667		$	109,029		$	176,667


Allowance for Off-Balance Sheet Items:
Balance at Beginning of Period	$	2,141		$	3,417		$	2,655		$	3,417		$	3,876
Provision Charged to Operating Expenses		250			(1,276	)		(293	)		(1,026	)		(1,514	)


Balance at End of Period	$	2,391		$	2,141		$	2,362		$	2,391		$	2,362


Ratios:
Net Loan Charge-Offs to Average Total Gross Loans ⁽¹⁾		3.10	%		3.91	%		5.98	%		3.51	%		4.90	%
Net Loan Charge-Offs to Total Gross Loans ⁽¹⁾		3.13	%		4.02	%		6.24	%		3.63	%		5.26	%
Allowance for Loan Losses to Average Total Gross Loans		5.10	%		5.63	%		6.76	%		4.99	%		6.57	%
Allowance for Loan Losses to Total Gross Loans		5.16	%		5.79	%		7.05	%		5.16	%		7.05	%
Net Loan Charge-Offs to Allowance for Loan Losses ⁽¹⁾		60.70	%		69.50	%		88.42	%		70.39	%		74.58	%
Net Loan Charge-Offs to Provision Charged to Operating Expenses		—	%		—	%		103.05	%		—	%		67.35	%
Allowance for Loan Losses to Non-Performing Loans		65.25	%		82.90	%		72.96	%		65.25	%		72.96	%

Balances:
Average Total Gross Loans Outstanding During Period	$	2,137,144		$	2,234,570		$	2,612,077		$	2,185,587		$	2,689,093
Total Gross Loans Outstanding at End of Period	$	2,112,709		$	2,173,692		$	2,504,248		$	2,112,709		$	2,504,248
Non-Performing Loans at End of Period	$	167,102		$	151,730		$	242,133		$	167,102		$	242,133


⁽¹⁾		Net loan charge-offs are annualized to calculate the ratios.

The allowance for loan losses decreased by $37.0 million, or 25.4 percent, to $109.0 million as of June 30, 2011 as compared to $146.1 million as of December 31, 2010. The allowance for loan losses as a percentage of total gross loans decreased to 5.16 percent as of June 30, 2011 from 6.44 percent as of December 31, 2010. For the three months ended June 30, 2011 and 2010, the provision for credit losses was $0 and $37.5 million, respectively. For the six months ended June 30, 2011 and 2010, the provision for credit losses was $0 and $95.5 million, respectively. For the three months ended June 30, 2011, the $250,000 provision for off-balance items was offset by the $250,000 reversal in provision for loans, resulting in the $0 total provision for credit losses as of June 30, 2011. For the six months ended June 30, 2011, the $1.0 million provision for loans was offset by the $1.0 million reversal in provision for off-balance items, resulting in the $0 total provision for credit losses as of June 30, 2011.

The decrease in the allowance for loan losses as of June 30, 2011 was due primarily to subsequent decreases in historical loss rates, classified assets, and overall gross loans. Due to these factors, general reserves decreased $33.8 million, or 38.1 percent, to $54.9 million as of June 30, 2011 as compared to $88.7 million at December 31, 2010. In addition, total qualitative reserves decreased $2.0 million, or 8.1 percent, to $23.5 million as of June 30, 2011 as compared to $25.5 million as of December 31, 2010. This was a direct result of the decrease in overall loan volume of $155.0 million, or 6.8 percent, to $2.11 billion at June 30, 2011 as compared to $2.27 billion at December 31, 2011. Improvements in metrics related to credit quality as well as decreases in overall gross loan balances have directly resulted in subsequent decreases in allowance and provision for loan losses as of June 30, 2011.

Total impaired loans, excluding loans held for sale, decreased $11.2 million, or 5.5 percent, to $193.5 million as of June 31, 2011 as compared to $204.7 million at December 31, 2010. However, specific reserve allocations associated with impaired loans increased $0.3 million, or 0.8 percent, to $29.7 million as of June 30, 2011 as compared

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to $29.4 million as of December 31, 2010. The increase in impairment reserves was mostly due to more conservative discounts taken by the Bank on out-dated valuations and out-of-state collaterals as a measure of prudence against potential losses.

The following table presents a summary of charge-offs by the loan portfolio.


	As of and for the
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
			(Dollars in Thousands)
Charge-offs:
Real Estate Loans	$	5,591	$	12,412	$	12,644	$	17,817
Commercial Term Loans		9,591		19,572		23,939		40,426
SBA Loans		577		3,354		3,730		6,334
Commercial Lines of Credit		4,453		4,831		4,904		5,083
International Loans		120		194		120		194
Consumer Loans		320		355		496		978

Total Charge-offs		20,652		40,718		45,833		70,832

Recoveries:
Real Estate Loans		2,223		162		2,744		1,865
Commercial Term Loans		1,666		1,015		4,594		2,596
SBA Loans		122		136		232		487
Commercial Lines of Credit		4		42		56		86
International Loans		123		337		129		338
Consumer Loans		13		80		22		121

Total Recoveries		4,151		1,772		7,777		5,493

Net Charge-offs	$	16,501	$	38,946	$	38,056	$	65,339

For the three months ended June 30, 2011, total net charge-offs were $16.5 million, compared to $38.9 million for the same period in 2010. During the six months ended June 30, 2011, total net charge-offs were $38.1 million, compared to $65.3 million for the same period in 2010.

The Bank recorded in other liabilities an allowance for off-balance sheet exposure, primarily unfunded loan commitments, of $2.4 million and $3.4 million as of June 30, 2011 and December 31, 2010, respectively. The decrease was primarily due to lower reserve factors based on historical loss rates as well as decreases in total off-balance items. The Bank closely monitors the borrower’s repayment capabilities while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these reserves are adequate for losses inherent in the loan portfolio and off-balance sheet exposure as of June 30, 2011 and December 31, 2010.

Deposits

The following table shows the composition of deposits by type as of the dates indicated.


	June 30,		December 31,		Increase (Decrease)
	2011		2010		Amount			Percentage
			(Dollars in Thousands)
Demand — Noninterest-Bearing	$	600,812	$	546,815	$	53,997			9.9	%
Interest-Bearing:
Savings		110,935		113,968		(3,033	)		(2.7	%)
Money Market Checking and NOW Accounts		484,132		402,481		81,651			20.3	%
Time Deposits of $100,000 or More		878,871		1,118,621		(239,750	)		(21.4	%)
Other Time Deposits		323,625		284,836		38,789			13.6	%


Total Deposits	$	2,398,375	$	2,466,721	$	(68,346	)		(2.8	%)

Total deposits decreased $68.3 million, or 2.8 percent, to $2.40 billion as of June 30, 2011 from $2.47 billion as of December 31, 2010. Total time deposits outstanding decreased $201.0 million, or 14.3 percent, to $1.20 billion as of June 30, 2011 from $1.40 billion as of December 31, 2010, representing 50.1 percent and 56.9 percent, respectively, of total deposits. The decreases in total deposits were the direct results of strategic plans aiming to increase core deposits while reducing the reliance on volatile wholesale funds and rate-sensitive time deposits. During the first half of 2011, $166.4 million of high-cost promotional time deposits and $152.9 million of deposits raised from rate listing services

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matured. Core deposits (defined as total deposits less time deposits greater than $100,000) increased by $171.4 million, or 12.7 percent, to $1.52 billion as of June 30, 2011 from $1.35 billion as of December 31, 2010. At June 30, 2011, noninterest-bearing demand deposits represented 25.1 percent of total deposits compared to 22.2 percent at December 31, 2010. We had no brokered deposits as of June 30, 2011 and December 31, 2010. As of June 30, 2011, time deposits of more than $250,000 were $346.9 million.

Federal Home Loan Bank Advances

FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight federal funds. At June 30, 2011, advances from the FHLB were $3.5 million, a decrease of $150.1 million from the December 31, 2010 balance of $153.7 million. As of June 30, 2011, there were no FHLB advances with a remaining maturity of less than one year.

Junior Subordinated Debentures

During the first half of 2004, we issued two junior subordinated notes bearing interest at the three-month London InterBank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the three-month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of which were used to finance the purchase of Pacific Union Bank, totaled $82.4 million at June 30, 2011 and December 31, 2010. In October 2008, we committed to the FRB that no interest payments on the junior subordinated debentures would be made without the prior written consent of the FRB. Therefore, in order to preserve its capital position, Hanmi Financial’s Board of Directors has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. In addition, we are prohibited from making interest payments on our outstanding junior subordinated debentures under the terms of our recently issued regulatory enforcement actions without the prior written consent of the FRB and DFI. Accrued interest payable on junior subordinated debentures amounted to $8.3 million and $6.9 million at June 30, 2011 and December 31, 2010, respectively.

65

INTEREST RATE RISK MANAGEMENT

Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures, giving effect to historical attrition rates of core deposits. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.

The following table shows the status of our gap position as of June 30, 2011:


				After
				Three			After One
				Months			Year But
	Within			But			Within			After			Non-
	Three			Within			Five			Five			Interest-
	Months			One Year			Years			Years			Sensitive			Total
							(Dollars in Thousands)
ASSETS
Cash and Due From Banks	$	—		$	—		$	—		$	—		$	67,166		$	67,166
Interest-Bearing Deposits in Other Banks		129,768			1,989			—			—			—			131,757
Investment Securities:
Fixed Rate		43,625			65,080			115,351			84,250			9,801			318,107
Floating Rate		28,482			11,095			23,494			9,399			468			72,938
Loans:
Fixed Rate		114,492			152,607			377,522			16,266			—			660,887
Floating Rate		1,233,939			30,110			24,782			1,230			—			1,290,061
Non-Accrual		—			—			—			—			167,102			167,102
Deferred Loan Fees, Discounts, Valuation Adjustment and Allowance for Loan Losses		—			—			—			—			(114,381	)		(114,381	)
Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock		—			—			—			32,565			—			32,565
Other Assets		—			27,813			—			6,173			50,647			84,633


Total Assets	$	1,550,306		$	288,694		$	541,149		$	149,883		$	180,803		$	2,710,835


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand — Noninterest-Bearing	$	—		$	—		$	—		$	—		$	600,812		$	600,812
Savings		10,983			26,358			53,748			19,846			—			110,935
Money Market Checking and NOW Accounts		35,242			168,756			215,821			64,313			—			484,132
Time Deposits:
Fixed Rate		185,241			790,547			226,650			—			—			1,202,438
Floating Rate		58			—			—			—			—			58
Federal Home Loan Bank Advances		61			277			3,141			—			—			3,479
Other Borrowings		1,034			—			—			—			—			1,034
Junior Subordinated Debentures		82,406			—			—			—			—			82,406
Other Liabilities		—			—			—			—			27,176			27,176
Stockholders’ Equity		—			—			—			—			198,365			198,365


Total Liabilities and Stockholders’ Equity	$	315,025		$	985,938		$	499,360		$	84,159		$	826,353		$	2,710,835


Repricing Gap	$	1,235,281		$	(697,244	)	$	41,789		$	65,724		$	(645,550	)	$	—
Cumulative Repricing Gap	$	1,235,281		$	538,037		$	579,826		$	645,550		$	—		$	—
Cumulative Repricing Gap as a Percentage of Total Assets		45.57	%		19.85	%		21.39	%		23.81	%		—
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets		49.29	%		21.47	%		23.13	%		25.76	%		—

The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same period). Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no maturity dates (demand deposits, savings, money market checking and NOW accounts) are assigned to categories based on expected decay rates.

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As of June 30, 2011, the cumulative repricing gap for the three-month period was at an asset-sensitive position and was 49.29 percent of interest-earning assets, which increased from 33.67 percent as of December 31, 2010. The increase was mainly caused by decreases of $150.0 million and $243.2 million in Federal Home Loan Bank advances and fixed rate time deposits, respectively, partially offset by decreases of $54.6 million and $49.1 million in interest-bearing deposits in other banks and fixed rate loans, respectively.

The cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 21.47 percent of interest-earning assets, which decreased from 31.25 percent as of December 31, 2010. The decrease was primarily caused by decreases of $160.9 million, $89.0 million, $57.0 million, and $5.1 million in fixed rate loans, floating rate loans, interest-bearing deposits in other banks, and floating rate securities, respectively, and increases of $166.4 million and $36.3 million in fixed rate time deposits, and money market checking and NOW accounts, respectively. Partially offsetting the declines in the twelve-month period gap were a decrease of $150.0 million in FHLB advances and an increase of $44.8 million in fixed rate investment securities, respectively.

The following table summarizes the status of the cumulative gap position as of the dates indicated.


	Less Than Three Months						Less Than Twelve Months
	June 30,			December 31,			June 30,			December 31,
	2011			2010			2011			2010
				(Dollars in Thousands)
Cumulative Repricing Gap	$	1,235,281		$	921,942		$	538,037		$	855,812
Cumulative Repricing Gap as a Percentage of Total Assets		45.57	%		31.71	%		19.85	%		29.44	%
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets		49.29	%		33.67	%		21.47	%		31.25	%

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. To achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjustment in interest rates reflected below.


Rate Shock Table
	Percentage Changes						Change in Amount
Change in	Net			Economic			Net			Economic
Interest	Interest			Value of			Interest			Value of
Rate	Income			Equity			Income			Equity
	(Dollars in Thousands)
200%		10.26	%		(8.91	)%	$	11,285		$	(30,908	)
100%		4.62	%		(4.37	)%	$	5,081		$	(15,174	)
(100%)		(1	)		(1	)		(1	)		(1	)
(200%)		(1	)		(1	)		(1	)		(1	)


⁽¹⁾		The table above only reflects the impact of upward shocks due to the fact that a downward parallel shock of 100 basis points or more is not possible given that some short-term rates are currently less than one percent.

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. To ensure adequate capital levels, the Board continually assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.

Under the Final Order, the Bank is required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million, and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent. By December 31, 2010, and thereafter during the life of the Final Order, the Bank will be required to maintain a ratio of tangible stockholders’ equity to total tangible assets of not less than 9.5 percent.

If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan submitted to the FRB. On July 27, 2010, we completed a registered rights and best efforts offering in which we raised $116.8 million in net proceeds. As a result, we satisfied the $100 million capital contribution requirement set forth in the Final Order. While the Bank’s tangible stockholders’ equity to total tangible assets ratio was 8.59 percent at December 31, 2010, the ratio increased to 10.33 percent at June 30, 2011. Therefore, the Bank is currently in compliance with the tangible capital ratio requirement. Further, the Bank’s capital ratios exceeded the ratios required to be considered “well capitalized” under the regulatory PCA guidelines.

Our board has assessed and will continue to periodically assess our capital position. If it determines that the Bank’s capital does not exceed the amount necessary to fund its operating and strategic needs and to fully comply with regulatory orders we are subject to, we will evaluate various opportunities to further enhance our capital position with additional capital.

Liquidity — Hanmi Financial

Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through December 31, 2011. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of June 30, 2011, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $6.3 million, down from $7.7 million as of December 31, 2010.

Liquidity — Hanmi Bank

Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2011, in compliance with its regulatory restrictions, the Bank had no brokered deposits, and had FHLB advances of $3.5 million, a decrease of $150.2 million from $153.7 million at December 31, 2010.

The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of June 30, 2011, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $391.2 million and $387.7 million, respectively. The Bank’s FHLB borrowings as of June 30, 2011 totaled $3.5 million, representing 0.1 percent of total assets. As of August 5, 2011, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $378.1 million and $374.6 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

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As a means of augmenting its liquidity, the Bank had an available borrowing source of $150.5 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $321.1 million, and had no borrowings as of June 30, 2011. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2010, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million.

Current market conditions have limited the Bank’s liquidity sources principally to interest-bearing deposits, unpledged marketable securities, and secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or Federal Reserve Bank would not reduce the Bank’s borrowing capacity or that the Bank would be able to continue to replace deposits at competitive rates. As of June 30, 2011, in compliance with its regulatory restrictions, the Bank did not have any brokered deposits and would consult in advance with its regulators if it were to consider accepting brokered deposits in the future.

The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.

The Bank believes that it nonetheless has adequate liquidity resources to fund its obligations with its interest-bearing deposits, unpledged marketable securities, and secured credit lines with the FHLB and Fed Discount Window.

OFF-BALANCE SHEET ARRANGEMENTS

For a discussion of off-balance sheet arrangements, see “Note 10 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements (Unaudited) in this Report and “Item 1. Business — Off-Balance Sheet Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2010.

CONTRACTUAL OBLIGATIONS

There have been no material changes to the contractual obligations described in our Annual Report on Form 10-K for the year ended December 31, 2010.

RECENTLY ISSUED ACCOUNTING STANDARDS

FASB ASU 2011-05, “Presentation of Comprehensive Income (Topic 220)” — ASU 2011-05 is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. These amendments apply to all entities that report items of other comprehensive income, in any period presented. Under the amendments to Topic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in ASU 2011-05 are effective fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of ASU 2011-05 is not expected to have a significant impact on our financial condition or result of operations.

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820)” — ASU 2011-04 provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS.

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The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or allowed. ASU 2011-04 supersedes most of the guidance in ASC topic 820, but many of the changes are clarifications of existing guidance or wording changes to reflect IFRS 13. Amendments in ASU 2011-04 change the wording used to describe U.S. GAAP requirements for fair value and disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. Adoption of ASU 2011-04 is not expected to have a significant impact on our financial condition or result of operations.

FASB ASU 2011-02, “Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” — ASU 2011-02 clarifies the guidance for evaluating whether a restructuring constitutes a troubled debt restructuring (‘TDR”). The guidance requires that a creditor separately conclude that both of the following exist: i) The restructuring constitutes a concession, ii) The debtor is experiencing financial difficulties. In addition, the guidance clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a TDR. The amendments in ASU 2011-02 are 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. We are evaluating the impact of adoption of ASU 2011-02 on its disclosures in the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “— Capital Resources and Liquidity.”

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2011, Hanmi Financial carried out an evaluation, under the supervision and with the participation of Hanmi Financial’s management, including Hanmi Financial’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Hanmi Financial’s disclosure controls and procedures and internal controls over financial reporting pursuant to Securities and Exchange Commission rules. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Hanmi Financial’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

During our most recent fiscal quarter ended June 30, 2011, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010 that was filed with the SEC on March 16, 2011. Together with those risk factors and other information on the risks we face and our management of risk contained in this Quarterly Report on Form 10-Q, the following presents additional risks that may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also adversely impact our financial condition, business operations and results of operations.

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Our use of appraisals in deciding whether to make loans secured by real property does not ensure that the value of the real property collateral will be sufficient to repay our loans. In considering whether to make a loan secured by real property, we require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and requires the exercise of a considerable degree of judgment and adherence to professional standards. If the appraisal does not reflect the amount that may be obtained upon sale or foreclosure of the property, whether due to declines in property values after the date of the original appraisal or defective preparation, we may not realize an amount equal to the indebtedness secured by the property and may suffer losses.

Our controls and procedures could fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our business, results of operations and financial condition.

We could be liable for breaches of security in our online banking services. Fear of security breaches could limit the growth of our online services. We offer various Internet-based services to our clients, including online banking services. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology we use to protect client transaction data. Although we have developed systems and processes that are designed to prevent security breaches and periodically test our security, failure to mitigate breaches of security could adversely affect our ability to offer and grow our online services and could harm our business.

The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.

A failure by the U.S. government to meet the conditions of the August 2011 debt ceiling agreement or to reduce its budget deficits or a downgrade of U.S. sovereign debt from its AAA credit rating could have a material adverse effect on the availability of financing, our borrowing costs, the liquidity and valuation of securities in our investment portfolio, our financial condition and our results of operations. As widely reported, there continues to be concerns over the ability of the United States government to reduce its budget deficits and resolve its debt crisis. The U.S. sovereign debt continues to be under review for a downgrade of its AAA credit rating to account for the risk that U.S. lawmakers fail to meet the conditions of the August 2011 debt ceiling agreement and/or reduce its overall debt. Any such failures or a downgrade of the U.S. sovereign debt rating could have a material adverse effect both on the U.S. economy and on the global economy. In particular, this could cause disruption in the capital markets and impact the stability of future U.S. treasury auctions and the trading market for U.S. government securities, resulting in increased interest rates and borrowing costs. The Bank relies on customer deposits, brokered deposits and advances from the Federal Home Loan Bank to fund operations. The Bank’s financial flexibility will be severely constrained if it is unable to maintain its access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If the Bank is required to rely on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected. Any of these factors could negatively impact our borrowing costs and our liquidity, which could have a material adverse impact on our financial condition and our results of operations.

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

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

Corrections of Certain Data Regarding Non-performing Loans Set Forth in Our Earnings Release dated July 21, 2011.

This Quarterly Report on Form 10-Q includes corrected data regarding total non-performing loans as of and for the quarter ended June 30, 2011, which differ from and supersede data included in the Earnings Release dated July 21, 2011. These corrections had no effect on the consolidated statements of operations or earnings per share for the second quarter of 2011.

The following table sets forth the corrected items.

Total Non-Performing Loans


	As Previously Reported					Adjustment					As Adjusted
						(In Thousands)
								Percentage
	Balance		Percentage			Amount		Change			Balance		Percentage
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	14,335		9.0	%	$	—		—		$	14,335		8.6	%
Land		25,184		15.9	%		—		—			25,184		15.1	%
Other		3,672		2.3	%		941		0.5	%		4,613		2.8	%
Construction		12,298		7.8	%		—		—			12,298		7.4	%
Residential Property		1,726		1.1	%		—		—			1,726		1.0	%

Commercial and Industrial Loans:
Commercial Term Unsecured		8,389		5.3	%		2,369		1.1	%		10,758		6.4	%
Secured by Real Estate		54,754		34.5	%		5,299		1.4	%		60,053		35.9	%
Commercial Lines of Credit		2,905		1.8	%		—		—			2,905		1.7	%
SBA		31,163		19.7	%		—		—			31,163		18.6	%
International		3,243		2.0	%		—		—			3,243		1.9	%

Consumer Loans		824		0.5	%		—		—			824		0.5	%

Total	$	158,493		100.0	%	$	8,609				$	167,012		100.0	%

72

ITEM 6. EXHIBITS


Exhibit
Number		Document
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema Document *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *


*		Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

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SIGNATURES

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


	HANMI FINANCIAL CORPORATION
Date: August 9, 2011	By:	/s/ Jay S. Yoo
		Jay S. Yoo
		President and Chief Executive Officer


	By:	/s/ Brian E. Cho
		Brian E. Cho
		Executive Vice President and Chief Financial Officer

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Hanmi Financial - 10-Q quarterly report FY2011 Q2

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