UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Hanmi Financial Corporation

(213) 382-2200

Not Applicable

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (x)           No (  )

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b.2 of the Exchange Act.).

Yes (x)           No (  )

As of March 31, 2004, there were 14,267,856 outstanding shares of the issuer’s Common Stock.

FORM 10-Q

INDEX

HANMI FINANCIAL CORPORATION

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

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See accompanying notes to consolidated financial statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1. Hanmi Financial Corporation

     Hanmi Financial Corporation (“Hanmi Financial” or the “Company”) is a Delaware corporation incorporated on March 14, 2000 pursuant to a Plan of Reorganization and Agreement of Merger to be the holding company for Hanmi Bank (“Hanmi Bank”). The Company became the holding company for Hanmi Bank in September 2000 and is subject to the Bank Holding Company Act of 1956, as amended.

     Hanmi Bank, the primary subsidiary of the Company, was incorporated under the laws of the State of California on August 24, 1981, and was licensed by the California Department of Financial Institutions on December 15, 1982. Hanmi Bank’s deposit accounts are insured under the Federal Deposit Insurance Act up to applicable limits thereof, and the Bank is a member of the Federal Reserve System. Hanmi Bank’s headquarters office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010.

     Hanmi Bank is a community bank conducting general business banking with its primary market encompassing the multi-ethnic population of the Los Angeles, Orange, San Diego and Santa Clara counties. Hanmi Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. Hanmi Bank’s client base reflects the multi-ethnic composition of these communities. Hanmi Bank currently has fifteen full-service branch offices located in Los Angeles, Orange, San Diego and Santa Clara counties. Of the fifteen offices, Hanmi Bank opened twelve as de novo branches and acquired the other three through acquisition.

Note 2. Basis of Presentation

     In the opinion of management, the consolidated financial statements of Hanmi Financial Corporation and its subsidiaries reflect all the material adjustments necessary for a fair presentation of the results for the interim period ended March 31, 2004, but are not necessarily indicative of the results which will be reported for the entire year. In the opinion of management, the aforementioned consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America.

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

Note 3. Employee Stock-Based Compensation

     The Company measures its employee stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense has been recognized for the stock option plan, as stock options were granted at fair value at the date of grant. Had compensation expense for the Company’s stock option plan been determined based on the fair value estimated using the Black-Scholes model at the grant date for previous awards, the Company’s net income and income per share would have been reduced to the pro forma amounts indicated for the quarters as follows:

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Note 4. Earnings per Share

     Earnings per share is calculated on both a basic and diluted basis. Basic earnings per share 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 earnings per share 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.

     The following table presents a reconciliation of the components used to derive basic and diluted earnings per share for the quarters indicated.

Note 5. Derivative Financial Instruments

     The Company has entered into interest rate swaps to hedge the interest rate risk associated with the cash flows of specifically identified variable-rate loans. As of March 31, 2004, the Company had four interest rate swap agreements with a total notional amount of $60 million, wherein the Company receives a fixed rate of 5.77% and 6.37% at quarterly intervals, for each $20 million notional amount and a fixed rate of 6.51% and 6.76% for each $10 million notional amount, respectively. The Company pays a floating rate at quarterly intervals based on The Wall Street Journal published prime rate.

     At March 31, 2004, the fair value of the interest rate swaps was in a favorable position of $1.5 million. A total of $824,000, net of tax, is included in other comprehensive income. The fair value of the

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interest rate swap is included in other assets in the accompanying consolidated statements of financial condition.

Note 6. Current Accounting Matters

     In accordance with Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”), expected interest rate lock commitments on mortgage loans that will be held for sale must be accounted for as derivatives and marked to market in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). All other interest rate lock commitments are excluded from SFAS 133, pursuant to SFAS 149.

     The Securities and Exchange Commission (“SEC”) issued guidance in Staff Accounting Bulletin No. 105 (“SAB 105”). SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. Servicing assets are to be recognized only once the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. The guidance in SAB 105 must be applied to interest rate locks initiated after March 31, 2004 and is to be applied prospectively. The application of SAB 105 is not expected to have a material effect on the Company.

Note 7. Subsequent Events

     On April 30, 2004, the Company completed its acquisition of Pacific Union Bank (“PUB”) and merged PUB with Hanmi Bank. The Company paid $164.5 million in cash to acquire 5,537,431 of the PUB shares owned by Korea Exchange Bank. All of the remaining PUB shares were converted in the acquisition into shares of the Company’s common stock based on an exchange ratio of 1.156 Hanmi shares for each PUB share.

     Immediately prior to the completion of the acquisition, the Company also issued a total of 3,947,369 shares of its common stock pursuant to a private placement for total proceeds of $75,000,000 before expenses and placement fees. As a result of the issuance of shares in the merger and the private placement, the number of outstanding Company shares has increased to approximately 24,427,000 as of April 30, 2004.

     On April 28, 2004, the Company issued $20.6 million additional junior subordinated debentures pursuant to a private placement underwritten by Trapeza Funding V, LLC and included in a pool of trust preferred securities assembled by Trapeza.

     The Company issued junior subordinated notes bearing interest at three-month LIBOR plus 2.63% totaling $20,619,000 in exchange for funds raised in the trust preferred offering and the Company’s $619,000 common equity investment in the trust.

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

     The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition for the quarter ended March 31, 2004. This analysis should be read in conjunction with the Company’s Annual Report included in Form 10-K for the year ended December 31, 2003 and with the unaudited financial statements and notes as set forth in this report.

Critical Accounting Policies

     We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain accounting policies require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which 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 our Board of Directors.

     We believe the allowance for loan losses is the critical accounting policy that requires the most significant estimates and assumptions, which are particularly susceptible to significant change in the preparation of our financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Final Condition — Allowance and Provision for Loan Losses” for a description of the Company’s methodology for determining the allowance for loan losses.

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Selected Financial Data

     The following table sets forth certain selected financial data concerning the Company for the periods indicated:

(1)		Calculations are based upon annualized net income.
(2)		Net interest margin is calculated by dividing annualized net interest income by total average interest-earning assets.
(3)		The efficiency ratio is calculated as the ratio of total noninterest expenses to the sum of net interest income before provision for loan losses and total noninterest income including securities gains and losses.
(4)		The required ratios for a “well-capitalized” institution under regulatory standards are 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital.
(5)		Non-performing assets consist of non-performing loans, which include non-accrual loans, loans past due 90 days or more and still accruing interest, restructured loans, and other real estate owned.

Forward-Looking Information

     Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward looking statements relate to, among other things, expectations of the environment in which the Company operates and projection of future performance. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the Company involves inherent risks and

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uncertainties. Risks and uncertainties include possible future deteriorating economic conditions in the Company’s areas of operation; interest-rate risk associated with volatile interest rates and related asset-liability matching risk; the ability to manage the integration of Pacific Union Bank’s operations into ours in a cost-effective manner; the ability to manage our growth; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available-for-sale securities declining significantly in value as interest rates rise; and regulatory risks associated with the variety of current and future regulations to which the Company is subject, including any changes in the Small Business Administration’s loan programs and changes in the regulatory capital treatment of trust preferred securities. For additional information concerning these factors, see the Company’s filings with the Securities and Exchange Commission, and in particular, the Company’s Form 10-K under the heading “Factors That May Affect Future Results of Operation,” “Interest Rate Risk Management,” and “Liquidity and Capital Resources.”

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Results of Operations

     The Company’s net income for the three months ended March 31, 2004 was $6.4 million or $0.44 per diluted share compared to $4.2 million or $0.30 per diluted share for the three months ended March 31, 2003. The 50.6% increase in net income for 2004 as compared to 2003 was mainly due to a $4.8 million, or 39.4%, increase in net interest income before provision for loan losses. Non-interest income increased by $329,000, or 7.3%, mainly due to an increase in service charges on deposit accounts. Non-interest expenses increased by $1.5 million, primarily attributable to increases in salaries and employee benefits expenses of $1.0 million. The annualized return on average assets was 1.44% for the three months ended March 31, 2004 compared to a return on average assets of 1.14% for the same period in 2003, an increase of 30 basis points. The annualized return on average equity was 17.89% for the three months ended March 31, 2004, compared to a return on average equity of 13.55% for the same period in 2003, an increase of 4.34%.

Net Interest Income before Provision for Loan Losses

     The principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. The net interest spread is the yield on average interest-earning assets less the average cost of interest-bearing deposits and borrowed funds.

     For the three months ended March 31, 2004, the Company’s net interest income before provision for loan losses was $16.9 million. This represented an increase of $4.8 million, or 39.4% over net interest income before provision for loan losses of $12.1 million for the three months ended March 31, 2003. The net interest rate spread increased to 3.50% for the three months ended March 31, 2004, from 2.80% for the same period in 2003. The change was mainly due to an increase in the level of outstanding loans and investments. The net interest margin also increased to 4.05% for the three months ended March 31, 2004, from 3.47% for the same period in 2003 due to an increase in the volume of interest earning assets with higher interest rates.

     Total interest income increased $4.6 million or 26.6% to $22.1 million for the three months ended March 31, 2004 from $17.5 million for the three months ended March 31, 2003. The increase was mainly the result of an increase in the volume of interest-earning assets. Average interest-earning assets increased by $272.0 million, or 19.4%, to $1.67 billion, compared to $1.40 billion a year ago.

     The Company’s interest expense on deposits and other borrowed funds for the three months ended March 31, 2004 decreased by $142,000, or 2.7%, to $5.2 million from $5.3 million for the three months ended March 31, 2003. The decrease reflected a decrease in interest cost paid to depositors and for borrowings attributable to declining market interest rates, which offsets the increase in the volume of interest-bearing deposits and borrowings. Average interest-bearing liabilities were $1.16 billion for the three months ended March 31, 2004, which represented an increase of $183.9 million or 18.9% from average interest-bearing liabilities of $971.8 million for the three months ended March 31, 2003.

     The cost of average interest-bearing liabilities decreased to 1.79% for the three months ended March 31, 2004, compared to a cost of 2.19% for the same period in 2003. Overall interest on deposits decreased mainly due to repricing of interest rates on long-term certificates of deposit to lower interest rates as the deposits matured.

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     The table below presents the average yield on each category of interest-earning assets, average rate paid on each category of interest-bearing liabilities, and the resulting interest rate spread and net yield on interest-earning assets for periods indicated. All average balances are daily average balances.

(1)		Loan fees have been included in the calculation of interest income. Loan fees were $949,000 and $641,000 for the three months ended March 31, 2004 and 2003, respectively. Loans are net of the allowance for loan losses, deferred fees and related direct costs.
(2)		Yields on tax-exempt income have been computed on a tax-equivalent basis.
(3)		Represents the average rate earned on interest-bearing assets less the average rate paid on interest-bearing liabilities.
(4)		Represents annualized net interest income as percentage of average interest-earning assets.

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     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.

Provision for Loan Losses

     For the three months ended March 31, 2004, the Company made an additional provision of $900,000, and this represented a decrease of $280,000, or 23.7%, from $1.2 million in the same period in 2003. The Company’s management believes that the allowance is sufficient for the inherent losses in the loan portfolio at March 31, 2004. (See Allowance and Provision for Loan Losses.)

Non-interest Income

     Non-interest income includes revenues earned from sources other than interest income. It is mainly composed of service charges and fees on deposit accounts, fees charged on trade finance, and gain on sale of loans and investment securities. Non-interest income was $4.8 million for the first quarter of 2004, which represented an increase of $329,000, or 7.3%, compared to $4.5 million recognized during the same quarter in 2003.

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     This increase was mainly due to an increase of $262,000, or 10.9%, in service charges on deposit accounts and increases in trade finance fees and remittance fee income. The increase was mainly due to expansion of the branch network (the opening of branches in Silicon Valley and Downtown Los Angeles in the first and fourth quarters of 2003, respectively), and an overall deposit increase. Other non-interest income increased by $134,000, mainly attributable to the positive adjustment related to interest rate swap ineffectiveness of $80,000. All these increases were offset by a decrease in the gain on sale of securities of $148,000.

     The company sells the guaranteed portion of SBA loans in the secondary market, while the Company retains servicing rights. Gain on sale of loans increased slightly to $469,000 for the quarter ended March 31, 2004, compared to $444,000 in the same quarter in 2003 and decreased by $59,000, or 11.2%, compared to $528,000 recognized in the fourth quarter of 2003.

     Non-interest income decreased $256,000, or 5.0%, compared to the fourth quarter of 2003. This decrease was primarily due to a decrease in gain on sale of securities of $241,000. Non-interest income increased $328,000, or 7.3%, compared to the first quarter of 2003, primarily as a result of fee income growth of $331,000 year over year.

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     The breakdown of non-interest income by category is reflected below:

Non-interest Expenses

     Non-interest expenses for the first quarter of 2004 increased $1.5 million or 16.2% to $10.4 million in the first quarter of 2004 from $8.9 million for the same period in 2003. This increase was primarily attributable to increases in salaries and employee benefits and occupancy expenses, which totalled $7.1 million in the first quarter of 2004.

     Salaries and employee benefits for the first quarter of 2004 increased by $1.0 million, or 21.4% to $5.7 million from $4.7 million for the same period in 2003 due to an addition of two new branches and annual salary adjustments.

     Occupancy and equipment expenses for the first quarter of 2004 increased $200,000, or 16.9% to $1.4 million from $1.2 million for the same period in 2003. This increase is also a result of the Company’s ongoing expansion new branches as well as annual adjustments of existing leases for other branch premises.

     Data processing fees for the first quarter of 2004 increased by $60,000, or 7.9% to $820,000 from $760,000 during the same period in 2003. Additional expense was incurred mainly due to increase in the volume of transaction accounts resulting from the increase in the number of transaction deposit accounts.

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     For the first quarter of 2004, supplies and communication expenses decreased $55,000, or 13.4% to $357,000, despite the expansion of the branch network. This is largely a result of a decrease in telephone expense attributable to an installation of new telephone system. Advertising and promotion expenses increased $133,000, or 32.3% to $545,000 due to a vigorous marketing strategy.

     The breakdown of non-interest expense by category is reflected below:

Provision for Income Taxes

     For the quarter ended March 31, 2004, the Company recognized a provision for income taxes of $4.1 million on net income before tax of $10.5 million, representing an effective tax rate of 39.0%. The tax rate for the same quarter in 2003 was 35.0% and this lower tax rate for the first quarter in 2003 was mainly due to the recognition of an income tax benefit generated from a Real Estate Investment Trust (“REIT”), a special purpose subsidiary of the Company. The provision for taxes for the fourth quarter of 2003 was $4.8 million, which includes the reversal of tax benefits recognized in the first three quarters of 2003, bringing the provision for the full year to an effective rate of 39.3%. No tax benefit attributable to the REIT was recognized in the first quarter of 2004.

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Financial Condition

Summary of Changes in Balance Sheets March 31, 2004 compared to December 31, 2003

     In the first quarter of 2004, the Company increased its liquidity and net interest margin through selective sales of securities in anticipation of the closing of its acquisition of Pacific Union Bank for $164.5 million cash and shares of the Company, as specified in the merger agreement. In the first quarter of 2004, the Company’s total assets decreased by $24.9 million, or 1.4% to $1.76 billion at March 31, 2004 from $1.79 billion at December 31, 2003. The decrease was mainly due to sales of investment securities available for sale and loans with a corresponding reduction in borrowings. Investment securities available for sale decreased $52.1 million or 12.6% to $361.2 million from $413.3 million at December 31, 2003. Loans, net of unearned loan fees, allowance for loan losses and loans held for sale, totaled $1.28 billion at March 31, 2004, which represents an increase of $34.6 million or 2.8% from $1.25 billion at December 31, 2003. The increase in assets was mainly funded by deposits, which increased by $31.1 million or 2.2% to $1.48 billion at March 31, 2004 from $1.45 billion at December 31, 2003.

Investment Security Portfolio

     The Company classifies its securities as held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards No. 115. Those securities that the Company has the ability and intent to hold to maturity are classified as “held-to-maturity securities.” All other securities are classified as “available-for-sale.” The Company owned no trading securities at March 31, 2004. 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 securities currently held by the Company consist primarily of mortgage-backed securities, collateralized mortgage obligations U.S. government agency securities, and municipal bonds.

     As of March 31, 2004, held-to-maturity securities totaled $1.3 million and available-for-sale securities totaled $361.2 million, compared to $1.3 million and $413.3 million at December 31, 2003, respectively.

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Loan Portfolio

     The Company carries all loans at face amount, less payments collected, net of deferred loan origination fees and costs, and the allowance for loan losses. Interest on all loans is accrued daily and once a loan is placed on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. Loans are placed on non-accrual status when principal and interest on a loan is past due 90 days or more, unless a loan is both well secured and in process of collection.

     The Company’s net loans, including loans held for sale of $27.1 million, were $1.28 billion at March 31, 2004. This represented an increase of $34.6 million or 2.8% over net loans of $1.25 billion at December 31, 2003.

     Total commercial loans, composed of domestic commercial, trade-financing loans, and SBA commercial loans, were $747.1 million at March 31, 2004, which represented an increase of $36.1 million or 5.1% from $711.0 million at December 31, 2003.

     The following table shows the Company’s loan composition by type including loans held for sale.

(1)

Amount includes loans held for sale, at the lower of cost or market, of $27.1 million and $25.5 million at March 31, 2004 and December 31, 2003.

     At March 31, 2004, accruing loans 90 days past due or more were $101,000, a decrease of $456,000 from $557,000 at December 31, 2003. This was due in large part to the payoff of several trust receipt loans in the amount of $386,000 during the first quarter of 2004.

     Non-accrual loans were $5.1 million at March 31, 2004, a decrease of $3.0 million from $8.1 million at December 31, 2003. The decrease was due to the charge-off of the $1.7 million unsecured portion of a $3.2 million commercial term loan, the pay off of two residential mortgage loans for $800,000 and the reinstatement of a commercial term loan for $527,000, and a commercial line of credit for $494,000, which was placed back on the accrual.

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     The table below shows the composition of the Company’s nonperforming assets as of the dates indicated.

Allowance and Provision for Loan Losses

     The allowance for loan losses is maintained at a level that is believed to be adequate by management to absorb estimated incurred loan losses inherent in various financial instruments. The adequacy of the allowance is determined through periodic evaluations of the Company’s portfolio and other pertinent factors, which are inherently subjective as the process calls for various significant estimates and assumptions. Among others, the estimates involve the amounts and timing of expected future cash flows and fair value of collateral on impaired loans, estimated losses on loans based on historical loss experience, various qualitative factors, and uncertainties in estimating losses and inherent risks in the various credit portfolios, which may be subject to substantial change.

     On a quarterly basis, the Company utilizes a classification migration model and individual loan review analysis tools as starting points for determining the adequacy of the allowance for loan losses. The Company’s loss migration analysis tracks twelve quarters of loan losses to determine historical loss experience in every classification category (i.e., pass, special mention, substandard, and doubtful) for each loan type, except consumer loans (automobile, mortgage, and credit card), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances, unused commitments, and off-balance sheet exposures, such as letters of credit. The individual loan review analysis is the other axis of the allowance allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolios.

     The results from the above two analyses are thereafter compared to independently generated information such as peer group comparisons and the federal regulatory interagency policy for loan and lease losses. Further assignments are made based on general and specific economic conditions, as well as performance trends within specific portfolio segments and individual concentrations of credit.

     The allowance for loan losses was $13.8 million at March 31, 2004, compared to $14.7 million at December 31, 2003. The decrease in the allowance for loan losses at March 31, 2004 was due primarily to the charge-off of one loan in the amount of $1.7 million, for which a specific allocation had been reserved. Accordingly, the ratio of the allowance for loan losses to gross loans has decreased to 1.06% from 1.16% at December 31, 2003.

     The loan loss estimation based on historical losses, and specific allocations of the allowance are performed on a quarterly basis. Adjustments to allowance allocations for specific segments of the loan portfolio may be made as a result thereof, based on the accuracy of forecasted loss amounts and other loan- or policy-related issues.

     The Company determines the appropriate overall allowance for loan losses based on the foregoing analysis, taking into account management’s judgment. The allowance methodology is reviewed on a periodic basis and modified as appropriate. Based on this analysis, including the aforementioned factors, the Company believes that the allowance for loan losses is adequate as of March 31, 2004.

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     The Company concentrates the majority of its earning assets in loans. In all forms of lending, there are inherent risks. The Company concentrates the preponderance of its loan portfolio in either commercial loans or real estate loans. A small part of the portfolio is represented by installment loans mainly for the purchase of automobiles.

     While the Company believes that its underwriting criteria are prudent, outside factors can adversely impact credit quality. The Company has attempted to mitigate collection problems by supporting its loans by fungible collateral. Additionally, a portion of the portfolio is represented by loans guaranteed by the SBA, which further reduces the Company’s potential for loss. The Company also utilizes credit review in an effort to maintain loan quality. Loans are reviewed throughout the year with new loans and those that are delinquent receiving special attention. In addition to the Company’s internal grading system, loans criticized in this credit review are downgraded with appropriate allowances added if required.

     As indicated above, the Company formally assesses the adequacy of the allowance on a quarterly basis by:

	•		reviewing the adversely graded, delinquent or otherwise questionable loans for impairment;
	•		generating an estimate of the loss potential for each such impaired loan;
	•		adding a risk factor for industry, economic or other external factors; and
	•		evaluating the present status of each loan.

     Although management believes the allowance is adequate to absorb losses as they arise, no assurance can be given that the Company will not sustain losses in any given period, which could be substantial in relation to the size of the allowance.

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Deposits

     During the first quarter , the Company’s total deposits increased $31.1 million, or 2.2%, to $1.48 billion at March 31, 2004 from $1.45 billion at December 31, 2003. This increase was mostly due to an increase in money market checking accounts of $86.2 million, up 41.8% to $292.3 million. Demand deposits totaled $487.7 million, representing an increase of $12.6 million or 2.7% from total demand deposits of $475.1 million at December 31, 2003.

     Time certificates of deposit of $100,000 or more totaled $386.8 million at March 31, 2004. This represented a decrease of $2.1 million or 0.6%, compared to $388.9 million at December 31, 2003. Other time deposits also decreased by $60.5 million or 21.7% to $218.3 million from $278.8 million at December 31, 2003.

     Core deposits (defined as demand, money market, and savings deposits) grew $93.8 million, or 12.1%, to $871.8 million as of March 31, 2004 from $778.1 million as of December 31, 2003. The overall deposit increase and change of deposit composition was mainly due to an expansion of the branch network during 2003 and the results of a special deposit campaign for money market accounts during the first quarter of 2004.