Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the Quarterly Period Ended September 30, 2012

or

 

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

For the Transition Period From             To             

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

  90010
(Address of Principal Executive Offices)   (Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨  (Do Not Check if a Smaller Reporting Company)    Smaller Reporting Company   ¨

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

As of October 26, 2012, there were 31,491,141 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

 

PART 1 — FINANCIAL INFORMATION   
ITEM 1.    FINANCIAL STATEMENTS      1   
  

Consolidated Balance Sheets (Unaudited)

     1   
  

Consolidated Statements of Operations (Unaudited)

     2   
  

Consolidated Statements of Comprehensive Income (Unaudited)

     3   
  

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

     4   
  

Consolidated Statements of Cash Flows (Unaudited)

     5   
  

Notes to Consolidated Financial Statements (Unaudited)

     6   
ITEM 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     33   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     62   
ITEM 4.   

CONTROLS AND PROCEDURES

     62   
PART II — OTHER INFORMATION   
ITEM 1.   

LEGAL PROCEEDINGS

     63   
ITEM 1A.   

RISK FACTORS

     63   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     63   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     63   
ITEM 4.   

MINE SAFETY DISCLOSURES

     63   
ITEM 5.   

OTHER INFORMATION

     63   
ITEM 6.   

EXHIBITS

     63   
SIGNATURES      64   


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and Due From Banks

   $ 72,053      $ 80,582   

Interest-Bearing Deposits in Other Banks

     217,375        101,101   

Federal Funds Sold

     13,000        20,000   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     302,428        201,683   

Restricted Cash

     4,393        1,818   

Term Federal Funds Sold

     55,000        115,000   

Securities Available for Sale, at Fair Value (Amortized Cost of $402,978 as of September 30, 2012 and $377,747 as of December 31, 2011)

     410,210        381,862   

Securities Held to Maturity, at Amortized Cost (Fair Value of $59,363 as of December 31, 2011)

     —          59,742   

Loans Held for Sale, at the Lower of Cost or Fair Value

     10,736        22,587   

Loans Receivable, Net of Allowance for Loan Losses of $66,107 as of September 30, 2012 and $89,936 as of December 31, 2011

     1,892,813        1,849,020   

Accrued Interest Receivable

     7,467        7,829   

Premises and Equipment, Net

     15,412        16,603   

Other Real Estate Owned, Net

     364        180   

Customers’ Liability on Acceptances

     2,157        1,715   

Servicing Assets

     5,148        3,720   

Other Intangible Assets, Net

     1,376        1,533   

Investment in Federal Home Loan Bank Stock, at Cost

     19,621        22,854   

Investment in Federal Reserve Bank Stock, at Cost

     10,261        8,558   

Deferred Tax Assets

     48,826        —     

Current Tax Assets

     11,689        9,073   

Bank-Owned Life Insurance

     28,816        28,289   

Prepaid Expenses

     2,239        1,598   

Other Assets

     12,901        11,160   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,841,857      $ 2,744,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

Deposits:

    

Noninterest-Bearing

   $ 694,345      $ 634,466   

Interest-Bearing

     1,669,040        1,710,444   
  

 

 

   

 

 

 

Total Deposits

     2,363,385        2,344,910   

Accrued Interest Payable

     15,266        16,032   

Bank’s Liability on Acceptances

     2,157        1,715   

Federal Home Loan Bank Advances

     3,029        3,303   

Junior Subordinated Debentures

     82,406        82,406   

Accrued Expenses and Other Liabilities

     11,627        10,850   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,477,870        2,459,216   

STOCKHOLDERS’ EQUITY:

    

Common Stock, $0.001 Par Value; Authorized 62,500,000 Shares; Issued 32,067,095 Shares

    

(31,489,201 Shares Outstanding) as of September 30, 2012 and December 31, 2011

     257        257   

Additional Paid-In Capital

     549,814        549,744   

Unearned Compensation

     (92     (166

Accumulated Other Comprehensive Income—Unrealized Gain on Securities

    

Available for Sale and Loss on Interest-Only Strip, Net of Income Taxes of $1,882 as of September 30, 2012 and $602 as of December 31, 2011

     5,364        3,524   

Accumulated Deficit

     (121,498     (197,893

Less Treasury Stock, at Cost; 577,894 Shares as of September 30, 2012 and December 31, 2011

     (69,858     (69,858
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     363,987        285,608   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,841,857      $ 2,744,824   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

1


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

INTEREST AND DIVIDEND INCOME:

        

Interest and Fees on Loans

   $ 26,781      $ 29,355      $ 81,564      $ 89,509   

Taxable Interest on Investment Securities

     1,992        2,022        6,280        7,789   

Tax-Exempt Interest on Investment Securities

     98        39        299        116   

Interest on Term Federal Funds Sold

     191        49        684        94   

Interest on Federal Funds Sold

     20        5        53        22   

Interest on Interest-Bearing Deposits in Other Banks

     142        75        269        243   

Dividends on Federal Reserve Bank Stock

     154        112        430        336   

Dividends on Federal Home Loan Bank Stock

     24        17        82        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest and Dividend Income

     29,402        31,674        89,661        98,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE:

        

Interest on Deposits

     3,639        5,730        12,511        18,657   

Interest on Federal Home Loan Bank Advances

     40        46        126        618   

Interest on Junior Subordinated Debentures

     804        739        2,400        2,148   

Interest on Other Borrowings

     —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

     4,483        6,515        15,037        21,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

     24,919        25,159        74,624        76,743   

Provision for Credit Losses

     —          8,100        6,000        8,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

     24,919        17,059        68,624        68,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME:

        

Service Charges on Deposit Accounts

     2,851        3,225        8,955        9,644   

Insurance Commissions

     1,092        940        3,622        3,403   

Remittance Fees

     476        469        1,417        1,430   

Trade Finance Fees

     274        341        858        966   

Other Service Charges and Fees

     361        389        1,105        1,090   

Bank-Owned Life Insurance Income

     235        237        872        700   

Gain on Sales of SBA Loans Guaranteed Portion

     1,772        1,612        7,245        1,612   

Net Loss on Sales of Other Loans

     (515     (3,057     (8,234     (3,472

Net Gain on Sales of Investment Securities

     10        1,704        1,392        1,634   

Impairment Loss on Investment Securities:

        

Total Other-Than-Temporary Impairment Loss on Investment Securities

     (176     —          (292     —     

Less: Portion of Loss Recognized in Other Comprehensive Income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Impairment Loss Recognized in Earnings

     (176     —          (292     —     

Other Operating Income

     140        118        402        496   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

     6,520        5,978        17,342        17,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSE:

        

Salaries and Employee Benefits

     9,148        8,146        27,707        26,032   

Occupancy and Equipment

     2,623        2,605        7,839        7,820   

Deposit Insurance Premiums and Regulatory Assessments

     283        1,552        3,182        4,999   

Data Processing

     1,211        1,383        3,762        4,269   

Other Real Estate Owned Expense

     352        (86     377        1,549   

Professional Fees

     1,112        1,147        2,950        3,074   

Directors and Officers Liability Insurance

     296        737        888        2,204   

Supplies and Communications

     669        712        1,803        1,786   

Advertising and Promotion

     1,023        631        2,633        2,105   

Loan-Related Expense

     164        222        452        631   

Amortization of Other Intangible Assets

     41        161        157        569   

Expense related to Unconsummated Capital

    Offerings

     —          —          —          2,220   

Other Operating Expenses

     1,882        1,642        5,563        5,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

     18,804        18,852        57,313        62,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES

     12,635        4,185        28,653        23,347   

(Benefit) Provision for Income Taxes

     (644     (18     (47,742     706   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 13,279      $ 4,203      $ 76,395      $ 22,641   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE:

        

Basic

   $ 0.42      $ 0.22      $ 2.43      $ 1.20   

Diluted

   $ 0.42      $ 0.22      $ 2.42      $ 1.20   

WEIGHTED-AVERAGE SHARES OUTSTANDING:

        

Basic

     31,475,976        18,888,474        31,474,042        18,886,415   

Diluted

     31,545,111        18,907,299        31,506,767        18,905,843   

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

2


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

NET INCOME

   $ 13,279      $ 4,203      $ 76,395      $ 22,641   

OTHER COMPREHENSIVE INCOME, NET OF TAX

        

Unrealized Gain on Securities

        

Unrealized Holding Gain Arising During Period

     1,655        2,289        2,248        8,505   

Unrealized Holding Gain Arising from the reclassification of held-to-maturity securities to available-for-sale securities

     1,968        —          1,968        —     

Less: Reclassification Adjustment for Loss (Gain) Included in Net Income

     166        (1,704     (1,100     (1,634

Unrealized Gain on Interest Rate Swap

     —          1        9        3   

Unrealized Gain (Loss) on Interest-Only Strip of Servicing Assets

     2        (9     (4     (8

Income Tax Related to Items of Other Comprehensive Income

     (1,581     —          (1,281     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

     2,210        577        1,840        6,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $        15,489      $        4,780      $        78,235      $        29,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

3


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Number of Shares)

 

    Common Stock – Number of
Shares
    Stockholders’ Equity  
    Gross
Shares
Issued and
Outstanding
    Treasury
Shares
    Net
Shares
Issued and
Outstanding
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Treasury
Stock, at
Cost
    Total
Stockholders’
Equity
 

BALANCE AT JANUARY 1, 2011

    19,478,862        (579,063     18,899,799      $ 156      $ 472,335      $ (219   $ (2,964   $ (226,040   $ (70,012   $ 173,256   

Share-Based Compensation Expense

    —          —          —          —          335        105        —          —          —          440   

Restricted Stock Awards

    7,500        —          7,500        —          78        (78     —          —          —          —     

Comprehensive Income:

                  —         

Net Income

    —          —          —          —          —          —          —          22,641        —          22,641   

Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          6,866        —          —          6,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      29,507   
                   

 

 

 

BALANCE AT SEPTEMBER 30, 2011

    19,486,362        (579,063     18,907,299      $ 156      $ 472,748      $ (192   $ 3,902      $ (203,399   $ (70,012   $ 203,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,744      $ (166   $ 3,524      $ (197,893   $ (69,858   $ 285,608   

Share-Based Compensation Expense

          —          95        49        —          —          —          144   

Restricted Stock Awards

    —          —          —          —          (25     25        —          —          —          —     

Comprehensive Income:

                  —         

Net Income

    —          —          —          —          —          —          —          76,395        —          76,395   

Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          1,840        —          —          1,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      78,235   
                   

 

 

 

BALANCE AT SEPTEMBER 30, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,814      $ (92   $ 5,364      $ (121,498   $ (69,858   $ 363,987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

4


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Nine Months Ended
September 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 76,395      $ 22,641   

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:

    

Depreciation and Amortization of Premises and Equipment

     1,606        1,605   

Amortization of Premiums and Accretion of Discounts on Investment Securities, Net

     2,743        2,052   

Amortization of Other Intangible Assets

     157        569   

Amortization of Servicing Assets

     720        487   

Share-Based Compensation Expense

     144        440   

Provision for Credit Losses

     6,000        8,100   

Net Gain on Sales of Investment Securities

     (1,392     (1,634

Other-Than-Temporary Loss on Investment Securities

     292        —     

Deferred Tax Benefit

     (50,098     —     

Net Gain on Sales of Loans

     (1,311     (1,044

Loss on Sales of Other Real Estate Owned

     92        599   

Valuation Impairment on Other Real Estate Owned

     301        470   

Lower of Cost or Fair Value Adjustment for Loans Held for Sale

     2,300        2,903   

Gain on Bank-Owned Life Insurance Settlement

     (163     —     

Increase in Cash Surrender Value of Bank-Owned Life Insurance

     (709     (701

Origination of Loans Held for Sale

     (86,311     (28,656

Proceeds from Sales of SBA Loans Guaranteed Portion

     95,856        20,011   

Changes in Fair Value of Stock Warrants

     177        —     

Loss on Sale of Premises and Equipment

     5        —     

Loss on Investment in Affordable Housing Partnership

     660        660   

Decrease in Accrued Interest Receivable

     362        823   

Increase in Servicing Assets

     (2,148     (481

Increase in Restricted Cash

     (2,575     —     

Increase in Prepaid Expenses

     (641     (1,253

(Increase) Decrease in Other Assets

     (2,843     852   

Increase in Current Tax Assets

     (2,616     —     

Decrease in Accrued Interest Payable

     (766     (2,476

Increase (Decrease) in Other Liabilities

     1,923        (510
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     38,160        25,457   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock

     3,233        3,320   

Proceeds from Matured or Called Securities Available for Sale

     108,701        171,490   

Proceeds from Sales of Securities Available for sale

     96,538        152,468   

Proceeds from Matured or Called Securities Held to Maturity

     6,704        35   

Proceeds from Sales of Other Real Estate Owned

     1,850        5,598   

Proceeds from Sales of Loans Held for Sale

     87,979        73,126   

Proceeds from Matured Term Federal Funds

     215,000        —     

Proceeds from Insurance Settlement on Bank-Owned Life Insurance

     345        —     

Net (Increase) Decrease in Loans Receivable

     (56,878     114,269   

Purchase of Federal Reserve Bank Stock

     (1,703     (40

Purchases of Loans Receivable

     (82,885     —     

Purchases of Term Federal Fund

     (155,000     —     

Purchases of Securities Available for Sale

     (179,080     (267,432

Purchases of Securities Held to Maturity

     —          (51,844

Purchases of Premises and Equipment

     (420     (633
  

 

 

   

 

 

 

Net Cash Provided By Investing Activities

     44,384        200,357   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (Decrease) in Deposits

     18,475        (113,552

Repayment of Long-Term Federal Home Loan Bank Advances

     (274     (259

Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings

     —          (132,861
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     18,201        (246,672
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     100,745        (20,858

Cash and Cash Equivalents at Beginning of Year

     201,683        249,720   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 302,428      $ 228,862   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash Paid During the Period for:

    

Interest Paid

   $ 15,803      $ 23,900   

Income Taxes Paid

   $ 4,912      $ 3   

Non-Cash Activities:

    

Transfer of Loans Receivable to Other Real Estate Owned

   $ 2,558      $ 3,938   

Transfer of Loans Receivable to Loans Held for Sale

   $ 89,792      $ 66,287   

Transfer of Loans Held for Sale to Loans Receivable

   $ 1,779      $ —     

Loans Provided in the Sale of Loans Held for Sale

   $ —        $ 5,750   

Loans Provided in the Sale of Other Real Estate Owned

   $ —        $ 510   

Reclassification of held-to-maturity securities to available-for-sale securities at amortized cost

   $ 52,674      $ —     

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

5


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

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., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“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 September 30, 2012, 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 consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 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 2011 Annual Report on Form 10-K.

The number of shares of Hanmi Financial’s common stock and the computation of basic and diluted earnings per share were adjusted retroactively for all periods presented to reflect the 1-for-8 reverse stock split of Hanmi Financial’s common stock, which became effective on December 19, 2011.

NOTE 2 — REGULATORY MATTERS

On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order (“Final Order”) with the California Department of Financial Institutions (the “DFI”). The Final Order contained a list of requirements ranging from a capital directive to developing a contingency funding plan. Following a target joint examination of the Bank by the DFI and Federal Reserve Bank of San Francisco (the “FRB”), which commenced in February 2012, and based on the improved condition of the Bank noted at the examination, the Bank entered into a Memorandum of Understanding (“MOU”) with the DFI on May 1, 2012. Concurrently with the entry into the MOU, the DFI issued an order terminating the Final Order. On October 29, 2012, the DFI informed the Bank that the Bank’s overall condition has improved and that the MOU has been terminated. Accordingly, the Bank is no longer subject to any of the requirements imposed by the MOU.

On November 2, 2009, Hanmi Financial and the Bank entered into a Written Agreement (the “Written Agreement”) with the FRB. The Written Agreement contains a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

While Hanmi Financial has taken such actions as necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Written Agreement, there can be no assurance that compliance with the Written 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 Written Agreement could result in further enforcement actions by the FRB, or the placing of the Bank into conservatorship or receivership.

Written Agreement

Pursuant to the Written Agreement, the Board of Directors of the Bank prepared and submitted written plans to the FRB that addressed 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) improving the capital position of the Bank and of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget; and

 

6


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

(viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Written Agreement places restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank. The Written Agreement also requires the Bank to charge off or collect certain problem loans and review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. Hanmi Financial and the Bank are also prohibited from paying dividends without prior approval from the FRB.

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.

Based on submissions to and consultations with the FRB, we believe that the Bank has taken the required corrective action and has complied with substantially all of the requirements of the Written Agreement.

Risk-Based Capital

Federal bank regulatory agencies require bank holding companies such as Hanmi Financial to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. In order to be considered “well capitalized,” federal bank regulatory agencies require depository institutions such as the Bank to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, the federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent. For a bank rated in the highest of the five categories used by federal bank regulatory agencies to rate banks, the minimum leverage ratio is 3.0 percent.

The capital ratios of Hanmi Financial and the Bank were as follows as of September 30, 2012 and December 31, 2011:

 

     Actual     Minimum
Regulatory
Requirement
    Minimum to Be
Categorized as
“Well Capitalized”
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In Thousands)  

September 30, 2012

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 438,822         20.79   $ 168,853         8.00     N/A         N/A   

Hanmi Bank

   $ 419,546         19.91   $ 168,584         8.00   $ 210,730         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 411,921         19.52   $ 84,426         4.00     N/A         N/A   

Hanmi Bank

   $ 392,687         18.63   $ 84,292         4.00   $ 126,438         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 411,921         14.71   $ 111,982         4.00     N/A         N/A   

Hanmi Bank

   $ 392,687         14.05   $ 111,790         4.00   $ 139,738         5.00

December 31, 2011

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 387,328         18.66   $ 166,082         8.00     N/A         N/A   

Hanmi Bank

   $ 364,041         17.57   $ 165,795         8.00   $ 207,243         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 360,500         17.36   $ 83,041         4.00     N/A         N/A   

Hanmi Bank

   $ 337,309         16.28   $ 82,897         4.00   $ 124,346         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 360,500         13.34   $ 108,106         4.00     N/A         N/A   

Hanmi Bank

   $ 337,309         12.50   $ 107,924         4.00   $ 134,905         5.00

 

7


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

Reserve Requirement

The Bank is required to maintain a certain percentage of its deposits as reserves at the FRB. The daily average reserve balance required to be maintained with the FRB was $0 and $1.5 million, and the Bank was in compliance with such requirement as of September 30, 2012 and December 31, 2011, respectively.

Federal Reserve Notices of Proposed Rulemaking

On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital effective January 1, 2013. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or nonaccrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.

NOTE 3 — FAIR VALUE MEASUREMENTS

Fair Value Option and Fair Value Measurements

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820),” provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS. 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. FASB ASU 2011-04 became effective for interim and annual reporting periods beginning after December 15, 2011, and early application was not permitted. The changes to U.S. GAAP as result of ASU 2011-04 are as follows: (i) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or liabilities); (ii) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets (ASU 2011-04 extends that prohibition to all fair value measurements); (iii) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks (this exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position); (iv) Aligns the fair value measurement of instruments classified within an entity’s stockholders’ equity with the guidance for liabilities; (v) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. Our adoption of FASB ASU 2011-04 did not have a significant impact on our financial condition or result of operations.

FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. 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.

FASB ASC 825, “Financial Instruments,” provides additional guidance for estimating fair value in accordance with FASB ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 825 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. FASB ASC 825 also requires additional disclosures relating to fair value measurement inputs and valuation techniques, as well as disclosures of all debt and equity investment securities by major security types rather than by major security categories that should be based on the nature and risks of the securities during both interim and annual periods. FASB ASC 825 became effective for interim and annual reporting periods ending after June 15, 2009 and did not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB ASC 825 requires comparative disclosures only for periods ending after initial adoption. We adopted FASB ASC 825 in the second quarter of 2009. 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 FASB ASC 825 “Financial Instruments.” The adoption of FASB ASC 825 resulted in additional disclosures that are presented in “Note 4 – Investment Securities.”

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

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

Investment Securities Available for Sale – The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve,

 

8


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

prepayment speeds, and default rates. Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and 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-dealers. We review the market prices provided by the broker-dealers for our securities for reasonableness based on our understanding of the marketplace, and 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 as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs. As of September 30, 2012, we had a zero coupon tax credit municipal bond of $788,000. The zero coupon tax credit municipal bond is recorded at estimated fair value using a discounted cash flow method. We measured the zero coupon tax credit municipal bond on a recurring basis with Level 3 inputs.

SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair value. As of September 30, 2012 and December 31, 2011, we had $4.8 and $5.1 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 September 30, 2012 and December 31, 2011, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Non-performing Loans Held for Sale – We reclassify certain non-performing loans as held-for-sale when we 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 which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of September 30, 2012 and December 31, 2011, we had $4.4 million and $15.0 million of non-performing loans held for sale, respectively. We measure non-performing loans held for sale at fair value on a nonrecurring basis with Level 3 inputs.

 

9


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the nine months ended September 30, 2012. As of September 30, 2012 and December 31, 2011, assets and liabilities measured at fair value on a recurring basis are as follows:

 

     Level 1      Level 2      Level 3         
     Quoted Prices in
Active Markets
For Identical
Assets
     Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
     Significant
Unobservable

Inputs
     Balance  
     (In Thousands)  

September 30, 2012

           

ASSETS:

           

Debt Securities Available for Sale:

           

Mortgage-Backed Securities

   $ —         $ 142,168       $ —         $ 142,168   

Collateralized Mortgage Obligations

     —           101,390         —           101,390   

U.S. Government Agency Securities

     79,164         —           —           79,164   

Municipal Bonds-Tax Exempt

     —           11,950         788         12,738   

Municipal Bonds-Taxable

     —           46,234         —           46,234   

Corporate Bonds

     —           19,897         —           19,897   

Other Securities

     —           8,328         —           8,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

     79,164         329,967         788         409,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

     291         —           —           291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

     291         —           —           291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 79,455       $ 329,967       $ 788       $ 410,210   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 1,060       $ 1,060   

December 31, 2011:

           

ASSETS:

           

Debt Securities Available for Sale:

           

Mortgage-Backed Securities

   $ —         $ 113,005       $ —         $ 113,005   

Collateralized Mortgage Obligations

     —           162,837         —           162,837   

U.S. Government Agency Securities

     72,548         —           —           72,548   

Municipal Bonds-Tax Exempt

     —           3,482         —           3,482   

Municipal Bonds-Taxable

     —           6,138         —           6,138   

Corporate Bonds

     —           19,836         —           19,836   

Other Securities

     —           3,335         —           3,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

     72,548         308,633         —           381,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

     681         —           —           681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

     681         —           —           681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 73,229       $ 308,633       $ —         $ 381,862   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 883       $ 883   

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 nine months ended September 30, 2012:

 

     Beginning
Balance as of
January 1,
2012
     Purchase,
Issuances, Sales and
Settlement
     Realized
Gains or Losses
In Earnings
     Unrealized
Gains or Losses
In Other
Comprehensive
Income
     Ending
Balance as of
September 30,
2012
 
     (In Thousands)  

ASSETS:

              

Municipal Bonds-Tax Exempt (1)

   $ —         $ 698       $ —         $ 90       $ 788   

LIABILITIES:

              

Stock Warrants (2)

   $ 883       $ —         $ 177       $ —         $ 1,060   

 

(1) 

Reflects a zero coupon tax credit municipal bond that was previously classified as a held-to-maturity security, which was reclassified as an available-for-sale security during the three months ended September 30, 2012. As the Company was not able to obtain a price from independent external pricing service providers, the discounted cash flow method was used to determine its fair value. The bond carried a par value of $700,000 and an amortized value of $698,000 with a remaining life of 2.5 years at September 30, 2012.

(2) 

Reflects warrants for our common stock issued 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 $9.60 per share of our common stock and expire on October 14, 2015. See “Note 8 – Stockholders’ Equity” for more details.

 

10


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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

For the nine months ended September 30, 2012 and 2011, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

     Level 1      Level 2      Level 3                
     Quoted Prices in
Active Markets
For Identical
Assets
     Significant
Observable
Inputs  With

No Active
Market With
Identical
Characteristics
     Significant
Unobservable

Inputs
     Loss During The
Three Months
Ended September 30,
2012 and 2011
     Loss During The
Nine Months
Ended September 30,
2012 and 2011
 
     (In Thousands)  

September 30, 2012

              

ASSETS:

              

Non-Performing Loans Held for Sale (1)

   $ —         $ —         $ 4,421       $ 519       $ 2,300   

Impaired Loans (2)

   $ —         $ 19,919       $ 10,594       $ 2,259       $ 4,303   

Other Real Estate Owned (3)

   $ —         $ —         $ 364       $ 244       $ 301   

September 30, 2011

              

ASSETS:

              

Non-Performing Loans Held for Sale (4)

   $ —         $ —         $ 4,246       $ —         $ 2,488   

Impaired Loans (5)

   $ —         $ —         $ 103,410       $ 16,328       $ 29,264   

Other Real Estate Owned (6)

   $ —         $ —         $ 248       $ —         $ 194   

 

(1) Includes commercial term loans of $3.2 million and SBA loans of $1.2 million
(2) Includes real estate loans of $4.6 million, commercial and industrial loans of $25.3 million, and consumer loans of $574,000
(3) Includes properties from the foreclosure of a commercial property loan of $103,000 and a SBA loan of $261,000
(4) Includes commercial term loans of $3.8 million and SBA loans of $434,000
(5) Includes real estate loans of $35.6 million, commercial and industrial loans of $66.9 million, and consumer loans of $875,000
(6) Includes a property from the foreclosure of a SBA loan

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

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

The estimated fair values of financial instruments were as follows:

 

     September 30, 2012      December 31, 2011  
     Carrying or
Contract
Amount
     Estimated
Fair Value
     Carrying or
Contract
Amount
     Estimated
Fair Value
 
     (In Thousands)  

Financial Assets:

           

Cash and Cash Equivalents

   $ 302,428       $ 302,428       $ 201,683       $ 201,683   

Restricted Cash

     4,393         4,393         1,818         1,818   

Term Federal Funds

     55,000         55,015         115,000         115,173   

Investment Securities Available for Sale

     410,210         410,210         381,862         381,862   

Investment Securities Held to Maturity

     —           —           59,742         59,363   

Loans Receivable, Net of Allowance for Loan Losses

     1,892,813         1,833,112         1,849,020         1,802,511   

Loans Held for Sale

     10,736         10,736         22,587         22,587   

Accrued Interest Receivable

     7,467         7,467         7,829         7,829   

Investment in Federal Home Loan Bank Stock

     19,621         19,621         22,854         22,854   

Investment in Federal Reserve Bank

     10,261         10,261         8,558         8,558   

Financial Liabilities:

           

Noninterest-Bearing Deposits

     694,345         694,345         634,466         634,466   

Interest-Bearing Deposits

     1,669,040         1,675,056         1,710,444         1,710,878   

Borrowings

     85,435         85,517         85,709         83,853   

Accrued Interest Payable

     15,266         15,266         16,032         16,032   

Off-Balance Sheet Items:

           

Commitments to Extend Credit

     205,833         175         158,748         194   

Standby Letters of Credit

     10,544         26         12,742         26   

 

11


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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 – The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).

Restricted Cash – The carrying amount of restricted cash approximates its fair value (Level 1).

Term Federal Funds – The fair value of term federal funds with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates (Level 2).

Investment Securities – The fair value of investment securities, consisting of investment securities available for sale, is generally obtained from market bids for similar, identical securities or obtained from independent securities brokers or dealers, or other model-based valuation techniques described above (Level 1, 2 and 3).

Loans Receivable, Net of Allowance for Loan Losses – The fair value for loans receivable is estimated based on the discounted cash flow approach. The discount rate was 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 (Level 3).

Loans Held for Sale – Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2 input). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustment is typically significant and result in Level 3 classification of the inputs for determining fair value.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts of investment in Federal Home Loan Bank (“FHLB”) and FRB stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 1).

Non-Interest-Bearing Deposits – The fair value of non-interest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

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 discounted 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 rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).

Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

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 based on the contract term. The dividend yield of zero is based on 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 (Level 3).

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 (Level 3).

 

12


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES

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

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair
Value
 
     (In Thousands)  

December 31, 2011

           

Municipal Bonds-Tax Exempt

   $ 9,815       $ 98       $ 46       $ 9,867   

Municipal Bonds-Taxable

     38,797         117         522         38,392   

Mortgage-Backed Securities (1)

     3,137         2         11         3,128   

U.S. Government Agency Securities

     7,993         2         19         7,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Held to Maturity

   $ 59,742       $ 219       $ 598       $ 59,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

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

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair Value
 
     (In Thousands)  

September 30, 2012

           

Mortgage-Backed Securities (1)

   $ 138,173       $ 3,996       $ 1       $ 142,168   

Collateralized Mortgage Obligations (1)

     100,125         1,296         31         101,390   

U.S. Government Agency Securities

     79,027         185         48         79,164   

Municipal Bonds-Tax Exempt

     12,232         506         —           12,738   

Municipal Bonds-Taxable

     44,336         2,025         127         46,234   

Corporate Bonds

     20,467         62         632         19,897   

Other Securities

     8,264         99         35         8,328   

Equity Securities

     354         —           63         291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 402,978       $ 8,169       $ 937       $ 410,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Mortgage-Backed Securities (1)

   $ 110,433       $ 2,573       $ 1       $ 113,005   

Collateralized Mortgage Obligations (1)

     161,214         1,883         260         162,837   

U.S. Government Agency Securities

     72,385         168         5         72,548   

Municipal Bonds-Tax Exempt

     3,389         93         —           3,482   

Municipal Bonds-Taxable

     5,901         237         —           6,138   

Corporate Bonds

     20,460         —           624         19,836   

Other Securities

     3,318         58         41         3,335   

Equity Securities

     647         85         51         681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 377,747       $ 5,097       $ 982       $ 381,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

The amortized cost and estimated fair value of investment securities at September 30, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale  
     Amortized
Cost
     Estimated
Fair Value
 
     (In Thousands)  

Within One Year

   $ —         $ —     

Over One Year Through Five Years

     33,266         32,891   

Over Five Years Through Ten Years

     94,078         95,429   

Over Ten Years

     36,982         38,041   

Mortgage-Backed Securities

     138,173         142,168   

Collateralized Mortgage Obligations

     100,125         101,390   

Equity Securities

     354         291   
  

 

 

    

 

 

 

Total

   $ 402,978       $ 410,210   
  

 

 

    

 

 

 

During the three months ended September 30, 2012, all held-to-maturity securities were reclassified to available-for-sale securities. The reclassified securities carried a fair value of $52.6 million and an amortized cost of $50.6 million at September 30, 2012. As more than 95% of the reclassified securities were municipal bonds, the Company decided to reclassify all held-to-maturity securities to available-for-sale securities to be more proactive under the current municipal market with a rising risk of default.

 

13


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and nine months ended September 30, 2012, we recorded $176,000 and $292,000, respectively, in OTTI charges in earnings on an available-for-sale security.

The Company had an equity security with a carrying value of $218,000 at September 30, 2012. During 2012, the issuer’s financial condition had deteriorated and it was determined that the value on the investment is other-than-temporarily impaired. Based on the closing price of the shares at September 30, 2012, we recorded an OTTI charge of $176,000 to write down the value of the investment security to its fair value. For the nine months ended September 30, 2012, the total OTTI charge on this equity security was $292,000.

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 September 30, 2012 and December 31, 2011:

 

     Holding Period  
     Less Than 12 Months      12 Months or More      Total  

Investment Securities

Available for Sale

   Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
 
     (In Thousands, Except Number of Securities)  

September 30, 2012

                          

Mortgage-Backed Securities

   $ 1       $ 5,988         1       $ —         $ —           —         $ 1       $ 5,988         1   

Collateralized Mortgage Obligations

     31         9,890         4         —           —           —           31         9,890         4   

U.S. Government Agency Securities

     48         19,448         6         —           —           —           48         19,448         6   

Municipal Bonds-Taxable

     108         2,544         2         19         1,962         3         127         4,506         5   

Corporate Bonds

     —           —           —           632         10,350         3         632         10,350         3   

Other Securities

     —           —           —           35         965         1         35         965         1   

Equity Securities

     63         73         1         —           —           —           63         73         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251       $ 37,943         14       $ 686       $ 13,277         7       $ 937       $ 51,220         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                          

Mortgage-Backed Securities

   $ 1       $ 3,076         1       $ —         $ —           —         $ 1       $ 3,076         1   

Collateralized Mortgage Obligations

     260         36,751         16         —           —           —           260         36,751         16   

U.S. Government Agency Securities

     5         6,061         2         —           —           —           5         6,061         2   

Corporate Bonds

     41         4,445         2         583         15,391         4         624         19,836         6   

Other Securities

     1         12         1         40         959         1         41         971         2   

Equity Securities

     51         85         1         —           —           —           51         85         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 359       $ 50,430         23       $ 623       $ 16,350         5       $ 982       $ 66,780         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impairment losses described previously are not included in the table above. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2012 and December 31, 2011 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 September 30, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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

The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2012 and December 31, 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of September 30, 2012 and December 31, 2011 are warranted.

 

14


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

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 September 30,      Nine Months Ended September 30,  
     2012      2011      2012     2011  
     (In Thousands)  

Gross Realized Gains on Sales of Investment Securities

   $ 10       $ 1,704       $ 1,442      $ 2,673   

Gross Realized Losses on Sales of Investment Securities

     —           —           (50     (1,039
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Realized Gains on Sales of Investment Securities

   $ 10       $ 1,704       $ 1,392      $ 1,634   
  

 

 

    

 

 

    

 

 

   

 

 

 

Proceeds from Sales of Investment Securities

   $ 8,000       $ 38,691       $ 96,538      $ 152,468   

Tax Expense on Sales of Investment Securities

   $ 4       $ 716       $ 585      $ 687   

For the three months ended September 30, 2012, $3.8 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $10,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $4,000 in comprehensive income. Among the $3.8 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the three months ended September 30, 2011, $584,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1.7 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.6 million in comprehensive income.

For the nine months ended September 30, 2012, $3.1 million of net unrealized gains arose during the period and were included in comprehensive income, and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.7 million in comprehensive income. Among the $3.1 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the nine months ended September 30, 2011, $6.9 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1.6 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $249,000 million in comprehensive income.

Investment securities available for sale with carrying values of $19.4 million and $45.8 million as of September 30, 2012 and December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

NOTE 5 — LOANS

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

Real estate loans are 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.

 

15


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Loans Receivable

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

 

     September 30,
2012
    December 31,
2011
 
     (In Thousands)  

Real Estate Loans:

    

Commercial Property

   $ 728,419      $ 663,023   

Construction

     7,868        33,976   

Residential Property

     103,774        52,921   
  

 

 

   

 

 

 

Total Real Estate Loans

     840,061        749,920   

Commercial and Industrial Loans:

    

Commercial Term (1)

     861,906        944,836   

Commercial Lines of Credit (2)

     54,266        55,770   

SBA Loans (3)

     134,264        116,192   

International Loans

     29,378        28,676   
  

 

 

   

 

 

 

Total Commercial and Industrial Loans

     1,079,814        1,145,474   

Consumer Loans

     38,415        43,346   
  

 

 

   

 

 

 

Total Gross Loans

     1,958,290        1,938,740   

Allowance for Loans Losses

     (66,107     (89,936

Deferred Loan Fees

     630        216   
  

 

 

   

 

 

 

Loan Receivables, Net

   $ 1,892,813      $ 1,849,020   
  

 

 

   

 

 

 

 

(1)

Includes owner-occupied property loans of $743.1 million and $776.3 million as of September 30, 2012 and December 31, 2011, respectively.

(2)

Includes owner-occupied property loans of $1.3 million and $936,000 as of September 30, 2012 and December 31, 2011, respectively.

(3)

Includes owner-occupied property loans of $115.3 million and $93.6 million as of September 30, 2012 and December 31, 2011, respectively.

Accrued interest on loans receivable amounted to $5.5 million and $5.7 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, loans receivable totaling $517.0 million and $797.1 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Discount Window.

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

September 30, 2012

         

Balance at Beginning of Period

   $ 1,289      $ 3,849      $ —         $ 5,138   

Origination of Loans Held For Sale

     —          25,722        —           25,722   

Reclassification from Loan Receivables to Loans Held for Sale

     8,917        16,404        —           25,321   

Sales of Loans Held for Sale

     (8,828     (36,050     —           (44,878

Principal Payoffs and Amortization

     (21     (27     —           (48

Valuation Adjustments

     —          (519     —           (519
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2011

         

Balance at Beginning of Period

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

Origination of Loans Held For Sale

     —          13,560        —           13,560   

Reclassification from Loan Receivables to Loans Held for Sale

     14,236        17,117        —           31,353   

Sales of Loans Held for Sale

     (5,506     (46,238     —           (51,744

Principal Payoffs and Amortization

     (7     (65     —           (72

Valuation Adjustments

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 9,697      $ 27,505      $ —         $ 37,202   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2012, loans receivable of $25.3 million were reclassified as loans held for sale, and loans held for sale of $44.9 million were sold. For the three months ended September 30, 2011, loans receivable of $31.4 million were reclassified as loans held for sale, and loans held for sale of $51.7 million were sold. There were no purchases of loans receivable for the three months ended September 30, 2012 and 2011.

 

16


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

September 30, 2012

         

Balance at Beginning of Period

   $ 11,068      $ 11,519      $ —         $ 22,587   

Origination of Loans Held For Sale

     —          86,311        —           86,311   

Reclassification from Loan Receivables to Loans Held for Sale

     41,141        48,651        —           89,792   

Reclassification from Loans Held for Sale to Other Real Estate Owned

     (360     —          —           (360

Reclassification from Loans Held for Sale to Loan Receivables

     (1,647     (132     —           (1,779

Sales of Loans Held for Sale

     (47,531     (135,505     —           (183,036

Principal Payoffs and Amortization

     (190     (289     —           (479

Valuation Adjustments

     (1,124     (1,176     —           (2,300
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2011

         

Balance at Beginning of Period

   $ 3,666      $ 32,954      $ —         $ 36,620   

Origination of Loans Held For Sale

     —          28,656        —           28,656   

Reclassification from Loan Receivables to Loans Held for Sale

     33,514        38,523        —           72,037   

Sales of Loans Held for Sale

     (27,329     (68,682     —           (96,011

Principal Payoffs and Amortization

     (21     (1,177     —           (1,198

Valuation Adjustments

     (133     (2,769     —           (2,902
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 9,697      $ 27,505      $ —         $ 37,202   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2012, loans receivable of $89.8 million were reclassified as loans held for sale, and loans held for sale of $183.0 million were sold. For the nine months ended September 30, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential mortgage loans were purchased. For the nine months ended September 30, 2011, loans receivable of $72.0 million were reclassified as loans held for sale, and loans held for sale of $96.0 million were sold. There were no purchases of loans receivable for the nine months ended September 30, 2011.

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

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

 

     As of and for the Three Months Ended     As of and for the Nine Months Ended  
     September 30,
2012
    June 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 
     (In Thousands)  

Allowance for Loan Losses:

          

Beginning Balance

   $ 71,893      $ 81,052      $ 109,029      $ 89,936      $ 146,059   

Actual Charge-Offs

     (7,223     (14,716     (16,551     (34,260     (62,384

Recoveries on Loans Previously Charged Off

     1,320        1,324        1,045        3,681        8,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (5,903     (13,392     (15,506     (30,579     (53,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision Charged to Operating Expense

     117        4,233        7,269        6,750        8,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 66,107      $ 71,893      $ 100,792      $ 66,107      $ 100,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

          

Beginning Balance

   $ 2,348      $ 2,581      $ 2,391      $ 2,981      $ 3,417   

Provision Charged to (Reversal of Charged to) Operating Expense

     (117     (233     831        (750     (195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,231      $ 2,348      $ 3,222      $ 2,231      $ 3,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the allowance for credit losses by portfolio segment for the three months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and Industrial
     Consumer      Unallocated     Total  
     (In Thousands)  

September 30, 2012

            

Allowance for Loan Losses:

            

Beginning Balance

   $ 21,406      $ 46,810       $ 1,757       $ 1,920      $ 71,893   

Charge-Offs

     1,321        5,571         331         —          7,223   

Recoveries on Loans Previously Charged Off

     58        1,251         11         —          1,320   

Provision

     1,080        174         783         (1,920     117   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,223      $ 42,664       $ 2,220       $ —        $ 66,107   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 768      $ 5,148       $ 398       $ —        $ 6,314   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,455      $ 37,516       $ 1,822       $ —        $ 59,793   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Loans Receivables:

            

Ending Balance

   $ 840,061      $ 1,079,814       $ 38,415       $ —        $ 1,958,290   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,315      $ 41,084       $ 1,238       $ —        $ 58,637   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,746      $ 1,038,730       $ 37,177       $ —        $ 1,899,653   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011

            

Allowance for Loan Losses:

            

Beginning Balance

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

Charge-Offs

     2,142        14,023         386         —          16,551   

Recoveries on Loans Previously Charged Off

     —          1,014         31         —          1,045   

Provision

     (165     4,961         992         1,481        7,269   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,808      $ 74,797       $ 2,224       $ 1,963      $ 100,792   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 3,630      $ 25,915       $ 285       $ —        $ 29,830   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 18,178      $ 48,882       $ 1,939       $ 1,963      $ 70,962   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Loans Receivables:

            
            

Ending Balance

   $ 754,472      $ 1,192,740       $ 44,819       $ —        $ 1,992,031   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 47,172      $ 95,959       $ 1,158       $ —        $ 144,289   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 707,300      $ 1,096,781       $ 43,661       $ —        $ 1,847,742   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The following table details the information on the allowance for credit losses by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

     Real Estate      Commercial
and Industrial
    Consumer      Unallocated     Total  
     (In Thousands)  

September 30, 2012

            

Allowance for Loan Losses:

            

Beginning Balance

   $ 19,637       $ 66,005      $ 2,243       $ 2,051      $ 89,936   

Charge-Offs

     9,406         24,079        775         —          34,260   

Recoveries on Loans Previously Charged Off

     575         3,053        53         —          3,681   

Provision

     10,419         (2,317     699         (2,051     6,750   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,223       $ 42,664      $ 2,220       $ —        $ 66,107   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 768       $ 5,148      $ 398       $ —        $ 6,314   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,455       $ 37,516      $ 1,822       $ —        $ 59,793   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Loans Receivables:

            

Ending Balance

   $ 840,061       $ 1,079,814      $ 38,415       $ —        $ 1,958,290   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,315       $ 41,084      $ 1,238       $ —        $ 58,637   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,746       $ 1,038,730      $ 37,177       $ —        $ 1,899,653   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

September 30, 2011

            

Allowance for Loan Losses:

            

Beginning Balance

   $ 32,766       $ 108,986      $ 2,079       $ 2,228      $ 146,059   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Charge-Offs

     14,786         46,715        883         —          62,384   

Recoveries on Loans Previously Charged Off

     2,744         6,025        53         —          8,822   

Provision

     1,084         6,501        975         (265     8,295   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,808       $ 74,797      $ 2,224       $ 1,963      $ 100,792   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 3,630       $ 25,915      $ 285       $ —        $ 29,830   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 18,178       $ 48,882      $ 1,939       $ 1,963      $ 70,962   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Loans Receivables:

            

Ending Balance

   $ 754,472       $ 1,192,740      $ 44,819       $ —        $ 1,992,031   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 47,172       $ 95,959      $ 1,158       $ —        $ 144,289   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 707,300       $ 1,096,781      $ 43,661       $ —        $ 1,847,742   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Credit Quality Indicators

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

Pass: pass loans, grade (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention” (5), “Substandard” (6) or “Doubtful” (7). This 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, or (0) to (4):

 

Pass or (0):

  loans secured in full by cash or cash equivalents.

Pass or (1):

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

Pass or (2):

  requires 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 centered in liquid assets and strong income.

Pass or (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 or (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): Special Mention credits are potentially weak, as the borrower is exhibiting deteriorating trends which, if not corrected, could jeopardize repayment of the debt and result in a substandard classification. Credits which have significant actual, not potential, weaknesses are considered more severely classified.

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

Doubtful 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 which may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss or (8): Loans classified as 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 it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

 

19


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

     Pass
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total Loans  
     (In Thousands)  

September 30, 2012

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 362,174       $ 3,073       $ 5,121       $ 370,368   

Land

     4,703         —           12,259         16,962   

Other

     318,598         20,988         1,503         341,089   

Construction

     —           —           7,868         7,868   

Residential Property

     99,815         —           3,959         103,774   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     89,958         1,729         26,453         118,140   

Secured By Real Estate

     683,550         5,618         54,598         743,766   

Commercial Lines of Credit

     51,397         876         1,993         54,266   

SBA Loans

     121,260         1,442         11,562         134,264   

International Loans

     29,378         —           —           29,378   

Consumer Loans

     35,312         207         2,896         38,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,796,145       $ 33,933       $ 128,212       $ 1,958,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 292,914       $ 8,858       $ 10,685       $ 312,457   

Land

     4,351         —           3,418         7,769   

Other

     297,734         8,428         36,635         342,797   

Construction

     —           14,080         19,896         33,976   

Residential Property

     48,592         —           4,329         52,921   

Commercial and Industrial Loans:

              —     

Commercial Term

              —     

Unsecured

     100,804         8,680         41,796         151,280   

Secured By Real Estate

     634,822         36,290         122,444         793,556   

Commercial Lines of Credit

     44,985         7,676         3,109         55,770   

SBA Loans

     96,983         1,496         17,713         116,192   

International Loans

     26,566         —           2,110         28,676   

Consumer Loans

     40,454         676         2,216         43,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,588,205       $ 86,184       $ 264,351       $ 1,938,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following is an aging analysis of past due loans, disaggregated by class of loan, as of September 30, 2012 and December 31, 2011:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past
Due
     Total
Past Due
     Current      Total Loans      Accruing
90 Days
or More
Past Due
 
     (In Thousands)  

September 30, 2012

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ —         $ —         $ —         $ —         $ 370,368       $ 370,368       $ —     

Land

     —           —           —           —           16,962         16,962         —     

Other

     —           —           —           —           341,089         341,089         —     

Construction

     —           —           7,868         7,868         —           7,868         —     

Residential Property

     512         241         319         1,072         102,702         103,774         —     

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     1,125         731         613         2,469         115,671         118,140         —     

Secured By Real Estate

     —           —           1,921         1,921         741,845         743,766         —     

Commercial Lines of Credit

     —           —           416         416         53,850         54,266         —     

SBA Loans

     2,267         592         3,212         6,071         128,193         134,264         —     

International Loans

     —           —           —           —           29,378         29,378         —     

Consumer Loans

     271         15         136         422         37,993         38,415         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,175       $ 1,579       $ 14,485       $ 20,239       $ 1,938,051       $ 1,958,290       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 485       $ —         $ —         $ 485       $ 311,972       $ 312,457       $ —     

Land

     —           —           —           —           7,769         7,769         —     

Other

     —           —           —           —           342,797         342,797         —     

Construction

     —           —           8,310         8,310         25,666         33,976         —     

Residential Property

     277         1,613         2,221         4,111         48,810         52,921         —     

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     438         611         1,833         2,882         148,398         151,280         —     

Secured By Real Estate

     3,162         6,496         1,202         10,860         782,696         793,556         —     

Commercial Lines of Credit

     —           —           416         416         55,354         55,770         —     

SBA Loans

     260         472         7,108         7,840         108,352         116,192         —     

International Loans

     —           —           —           —           28,676         28,676         —     

Consumer Loans

     126         7         154         287         43,059         43,346         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,748       $ 9,199       $ 21,244       $ 35,191       $ 1,903,549       $ 1,938,740       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

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

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

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

 

21


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

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

 

     Recorded
Investment
     Unpaid
Principal
Balance
     With No
Related
Allowance
Recorded
     With
Allowance
Recorded
     Related
Allowance
 
     (In Thousands)  

September 30, 2012

              

Real Estate Loans:

              

Commercial Property

              

Retail

   $ 2,606       $ 2,680       $ 2,606       $ —         $ —     

Land

     2,037         2,204         2,037         —           —     

Other

     532         532         —           532         37   

Construction

     7,868         8,075         7,868         —           —     

Residential Property

     3,272         3,323         576         2,696         731   

Commercial and Industrial Loans:

              

Commercial Term

              

Unsecured

     13,595         14,535         451         13,144         3,825   

Secured By Real Estate

     19,841         20,967         16,733         3,108         655   

Commercial Lines of Credit

     1,547         1,713         863         684         3   

SBA Loans

     6,101         10,113         4,515         1,586         665   

Consumer Loans

     1,238         1,283         266         972         398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,637       $ 65,425       $ 35,915       $ 22,722       $ 6,314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Real Estate Loans:

              

Commercial Property

              

Retail

   $ 1,260       $ 1,260       $ 1,100       $ 160       $ 126   

Land

     3,178         3,210         —           3,178         360   

Other

     14,773         14,823         1,131         13,642         3,004   

Construction

     14,120         14,120         14,120         —           —     

Residential Property

     5,368         5,408         3,208         2,160         128   

Commercial and Industrial Loans:

              

Commercial Term

              

Unsecured

     16,035         16,559         244         15,791         10,793   

Secured By Real Estate

     53,159         54,156         14,990         38,169         7,062   

Commercial Lines of Credit

     1,431         1,554         715         716         716   

SBA Loans

     11,619         12,971         9,445         2,174         1,167   

Consumer Loans

     746         788         511         235         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 121,689       $ 124,849       $ 45,464       $ 76,225       $ 23,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

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

 

     Average
Recorded
Investment
for the Three
Months
Ended
     Interest
Income
Recognized
for the Three
Months
Ended
     Average
Recorded
Investment
for the Nine
Months
Ended
     Interest
Income
Recognized
for the Nine
Months
Ended
 
     (In Thousands)   

September 30, 2012

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 2,597       $ 47       $ 2,162       $ 95   

Land

     2,054         45         2,134         136   

Other

     534         5         937         38   

Construction

     7,868         29         8,016         207   

Residential Property

     3,279         34         3,265         118   

Commercial and Industrial Loans:

              —     

Commercial Term

              —     

Unsecured

     13,723         214         14,079         644   

Secured By Real Estate

     19,990         342         21,834         1,300   

Commercial Lines of Credit

     1,555         16         1,742         46   

SBA Loans

     6,168         330         7,489         813   

Consumer Loans

     1,257         49         1,021         59   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 59,025       $ 1,111       $ 62,679       $ 3,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 8,754       $ 27       $ 9,733       $ 78   

Land

     16,376         12         22,192         12   

Other

     21,768         282         21,879         372   

Construction

     11,057         272         11,201         317   

Residential Property

     2,364         8         2,386         8   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     18,972         82         19,554         148   

Secured By Real Estate

     66,108         813         64,667         1,809   

Commercial Lines of Credit

     2,398         2         2,631         5   

SBA Loans

     19,333         23         20,256         63   

Consumer Loans

     1,181         1         1,286         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 168,311       $ 1,522       $ 175,785       $ 2,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (In Thousands)   

Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance With Their Original Terms

   $     1,382      $     3,063      $     4,315      $     7,143   

Less: Interest Income Recognized on Impaired Loans

     (1,111     (1,522     (3,456     (2,815
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Foregone on Impaired Loans

   $ 271      $ 1,541      $ 859      $ 4,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

23


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Non-Accrual Loans

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

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

 

     September 30,      December 31,  
     2012      2011  
     (In Thousands)  

Real Estate Loans:

     

Commercial Property

     

Retail

   $ 1,102       $ 1,260   

Land

     2,037         2,362   

Other

     —           1,199   

Construction

     7,868         8,310   

Residential Property

     1,411         2,097   

Commercial and Industrial Loans:

     

Commercial Term

     

Unsecured

     8,106         7,706   

Secured By Real Estate

     8,418         11,725   

Commercial Lines of Credit

     1,359         1,431   

SBA Loans

     13,048         15,479   

Consumer Loans

     1,343         809   
  

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 44,692       $ 52,378   
  

 

 

    

 

 

 

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

 

     September 30,
2012
     December 31,
2011
 
     (In Thousands)  

Non-Accrual Loans

   $ 44,692       $ 52,378   

Loans 90 Days or More Past Due and Still Accruing

     —           —     
  

 

 

    

 

 

 

Total Non-Performing Loans

     44,692         52,378   

Other Real Estate Owned

     364         180   
  

 

 

    

 

 

 

Total Non-Performing Assets

   $ 45,056       $ 52,558   
  

 

 

    

 

 

 

Loans on non-accrual status, excluding loans held for sale, totaled $44.7 million as of September 30, 2012, compared to $52.4 million as of December 31, 2011, representing a 14.7 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $20.2 million as of September 30, 2012, compared to $35.2 million as of December 31, 2011, representing a 42.6 percent decrease.

As of September 30, 2012, other real estate owned consisted of two properties with a combined carrying value of $364,000 with a valuation adjustment of $257,000. For the nine months ended September 30, 2012, five properties were transferred from loans receivable to other real estate owned at fair value less selling cost of $2.6 million and recorded a valuation adjustment of $301,000. As of December 31, 2011, there was one real estate owned property, located in Colorado, with a net carrying value of $180,000.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

As a result of the amendments in ASU No. 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.

 

24


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

During the nine months ended September 30, 2012, we restructured monthly payments on 50 loans, with a net carrying value of $12.9 million as of September 30, 2012, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

The following table details troubled debt restructuring, disaggregated by type of concession and by type of loans as of September 30, 2012 and December 31, 2011:

 

    Non-Accrual TDRs     Accrual TDRs  
    Deferral
of
Principal
    Deferral of
Principal
and Interest
    Reduction
of
Principal
or Interest
    Extension
of
Maturity
    Total     Deferral
of
Principal
    Deferral of
Principal
and Interest
    Reduction
of
Principal
or Interest
    Extension
of
Maturity
    Total  
    (In Thousands)  

September 30, 2012

                   

Real Estate Loans:

                   

Commercial Property

                   

Retail

  $ —        $ —        $ —        $ 1,102      $ 1,102      $ —        $ —        $ —        $ 177      $ 177   

Other

    —          —          —          —          —          532        —          —          —          532   

Residential Property

    835        —          121        —          956        1,289        572        —          —          1,861   

Commercial and Industrial Loans:

                   

Commercial Term

                   

Unsecured

    —          615        5,802        869        7,286        1,010        —          1,127        2,388        4,525   

Secured By Real Estate

    2,374        1,385        338        1,413        5,510        2,111        —          324        6,495        8,930   

Commercial Lines of Credit

    684        —          —          258        942        —          —          188        —          188   

SBA Loans

    2,905        1,365        934        —          5,204        490        33        229        —          752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $6,798      $ 3,365      $ 7,195      $ 3,642      $ 21,000      $ 5,432      $ 605      $ 1,868      $ 9,060      $ 16,965   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

                   

Real Estate Loans:

                   

Commercial Property

                   

Retail

  $ —        $ —        $ —        $ 1,260      $ 1,260      $ —        $ —        $ —        $ —        $ —     

Other

    900        —          —          —          900        1,480        —          —          —          1,480   

Residential Property

    —          —          138        —          138        2,167        572        —          —          2,739   

Commercial and Industrial Loans:

                   

Commercial Term

                   

Unsecured

    765        669        4,650        484        6,568        185        —          7,069        1,584        8,838   

Secured By Real Estate

    1,202        1,523        2,403        3,243        8,371        2,005        —          8,628        2,699        13,332   

Commercial Lines of Credit

    715        —          —          198        913        —            —          —          —     

SBA Loans

    2,758        1,524        794        —          5,076        1,354        468        —          —          1,986   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,340      $ 3,716      $ 7,985      $ 5,185      $ 23,226      $ 7,191      $ 1,040      $ 15,697      $ 4,283      $ 28,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details troubled debt restructurings, disaggregated by class of loans, for the three months ended September 30, 2012 and 2011:

 

     For the Three Months Ended  
     September 30, 2012      September 30, 2011  
      Number
of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Number
of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
     (In Thousands, Except Number of Loans)  

Real Estate Loans:

                 

Commercial Property

                 

Retail (1)

     1       $ 131       $ 177         —         $ —         $ —     

Other (2)

     1         538         532         3         3,782         3,782   

Residential Property (3)

     —           —           —           1         458         449   

Commercial and Industrial Loans:

                 

Commercial Term

                 

Unsecured (4)

     5         777         759         29         8,279         8,131   

Secured By Real Estate (5)

     3         4,525         4,475         7         6,706         6,115   

Commercial Lines of Credit (6)

     —           —           —           1         123         120   

SBA Loans (7)

     3         78         89         17         2,684         2,615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13       $ 6,049       $ 6,032         58       $ 22,032       $ 21,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes a modification of $177,000 through extension of maturity

(2) 

Includes a modification of $532,000 through payment deferral for the three months ended September 30, 2012 and a modification of $3.8 million through payment deferral for the three months ended September 30, 2011

(3) 

Includes a modification of $449,000 through payment deferral

(4) 

Includes modifications of $750,000 through extension of maturity and $9,000 through payment deferral for the three months ended September 30, 2012 and modifications of $6.3 million through reduction of principal or accrued interest, $1.2 million through payment deferral and $700,000 through extension of maturity for the three months ended September 30, 2011

(5) 

Includes modifications of $3.1 million through payment deferral and $1.4 million through extension of maturity for the three months ended September 30, 2012, and modifications of $1.2 million through reduction of principal or accrued interest and $4.9 million through payment deferral for the three months ended September 30, 2011

(6) 

Includes a modification of $120,000 through extension of maturity

(7) 

Includes modifications of $48,000 through payment deferral and $41,000 through reduction of principal or accrued interest for the three months ended September 30, 2012, and modifications of $2.3 million through payment deferral and $273,000 through reduction of principal or accrued interest

 

26


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details troubled debt restructurings, disaggregated by class of loans, for the nine months ended September 30, 2012 and 2011:

 

     For the Nine Months Ended  
     September 30, 2012      September 30, 2011  
     Number
of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Number
of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
     (In Thousands, Except Number of Loans)  

Real Estate Loans:

                 

Commercial Property

                 

Retail (1)

     1       $ 184       $ 177         2       $ 2,982       $ 2,895   

Other (2)

     1         547         532         5         5,606         5,588   

Residential Property (3)

     —           —           —           2         1,325         1,315   

Commercial and Industrial Loans:

                 

Commercial Term

                 

Unsecured (4)

     31         5,362         4,940         45         14,126         13,556   

Secured By Real Estate (5)

     5         5,584         5,307         17         21,342         20,033   

Commercial Lines of Credit (6)

     1         202         188         1         123         120   

SBA Loans (7)

     11         1,060         1,000         24         7,693         7,149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     50       $ 12,939       $ 12,144         96       $ 53,197       $ 50,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes a modification of $177,000 through extension of maturity for the nine months ended September 30, 2012 and a modification of $2.9 million through payment deferral for the nine months ended September 30, 2011

(2)

Includes a modification of $532,000 through payment deferral for the nine months ended September 30, 2012, and includes a modification of $5.6 million through payment deferral for the nine months ended September 30, 2011

(3)

Includes a modification of $1.3 million through payment deferral

(4)

Includes modifications of $2.2 million through extension of maturity, $1.9 million through reduction of principal or accrued interest, $884,000 through payment deferral for the nine months ended September 30, 2012, and modifications of $11.3 million through reduction of principal or accrued interest, $1.2 million through payment deferral, and $1.1 million through extension of maturity for the nine months ended September 30, 2011

(5)

Includes modifications of $3.1 million through payment deferral, $1.9 million through extension of maturity and $338,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and modifications of $9.3 million through reduction of principal or accrued interest, $7.4 million through payment deferrals, and $3.3 million in extension of maturity for the nine months ended September 30, 2011

(6)

Includes a modification of $188,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and a modification of $120,000 through extension of maturity for the nine months ended September 30, 2011

(7)

Includes modifications of $551,000 through payment deferral and $449,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and modifications of $6.2 million through payment deferral and $919,000 through reduction of principal or accrued interest for the nine months ended September 30, 2011

As of September 30, 2012 and December 31, 2011, total TDR loans receivable, excluding loans held for sale, was $38.0 million and $51.6 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDR loans are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At September 30, 2012, TDR loans, excluding loans held for sale, were subjected to specific impairment analysis and a $4.8 million reserve relating to these loans was included in the allowance for loan losses. At December 31, 2011, TDR loans, excluding loans held for sale, were subjected to specific impairment analysis and the related allowance for loan losses was $14.2 million.

 

 

27


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by class of loans, during the three months and nine months ended September 30, 2012 and 2011:

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30, 2012      September 30, 2011      September 30, 2012      September 30, 2011  
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
     Number
of
Loans
     Recorded
Investment
 
     (In Thousands)  

Real Estate Loans:

                       

Commercial Property

                       

Retail

     —         $ —           —         $ —           —         $ —           1       $ 1,425   

Other

     —           —           —           —           —           —           2         1,805   

Residential Property

     —           —           1         449         —           —           1         449   

Commercial and Industrial Loans:

                       

Commercial Term

                       

Unsecured

     3         171         8         3,344         6         431         18         6,055   

Secured By Real Estate

     —           —           3         3,137         —           —           9         10,684   

Commercial Lines of Credit

     —           —           —           —           1         258         —           —     

SBA Loans

     6         272         11         1,575         6         272         17         6,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     9       $ 443         23       $ 8,505         13       $ 961         48       $ 26,431   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Servicing Assets

The changes in servicing assets were as follows for the nine months ended September 30, 2012 and 2011:

 

      September 30,
2012
     September 30,
2011
 
     (In Thousands)  

Balance at Beginning of Period

   $ 3,720       $ 2,890   

Additions

     2,148         481   

Amortization

     720         (487
  

 

 

    

 

 

 

Balance at End of Period

   $ 5,148       $ 2,884   
  

 

 

    

 

 

 

At September 30, 2012 and 2011, we serviced loans sold to unaffiliated parties in the amounts of $277.7 million and $187.9 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.

NOTE 6 — INCOME TAXES

We accounted for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enacted date.

We record net tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. To the extent future earnings are recognized, the realization of the deferred tax asset will be recorded as a credit to income tax expense. Until such time as the valuation allowance is reversed, we will generally not record an income tax provision or benefit on the statement of operations. Our deferred tax valuation allowance was $5.4 million and $82.3 million at September 30, 2012 and December 31, 2011, respectively. For the three and nine months ended September 30, 2012, we reversed a valuation allowance of $4.9 million and $57.9 million, respectively, on its deferred taxes assets.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percentage points occurs by one or more five-percent shareholders within a three-year period. We determined that such an ownership change occurred as of November 18, 2011, as a result of a registered rights and best efforts public offering and an underwritten public offering of our common stock. Based on calculations, this ownership change resulted in estimated limitations on the utilization of net operating loss carryforwards and tax credits. We estimate that approximately $5.3 million of our California net operating loss carryforward deferred tax asset will be effectively eliminated and no valuation allowance reversal was recognized for such deferred tax assets. Pursuant to Section 382, a portion of the limited net operating loss carryforwards becomes available for use each year. We estimate that approximately $10.4 million of the restricted net operating loss carryforwards become available for such use.

 

28


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 7 — SHARE-BASED COMPENSATION

Share-Based Compensation Expense

For the three months ended September 30, 2012 and 2011, share-based compensation expense was $42,000 and $59,000, respectively, and the related tax benefits were $18,000 and $25,000, respectively. For the nine months ended September 30, 2012 and 2011, share-based compensation expense was $144,000 and $440,000, respectively, and the related tax benefits were $61,000 and $185,000, respectively.

Unrecognized Share-Based Compensation Expense

As of September 30, 2012, unrecognized share-based compensation expense was as follows:

 

     Unrecognized
Expense
     Average Expected
Recognition Period
 
     (In Thousands)  

Stock Option Awards

   $ 84         2.3 years   

Restricted Stock Awards

     92         1.8 years   
  

 

 

    

Total Unrecognized Share-Based Compensation Expense

   $ 176         2.1 years   
  

 

 

    

The table below provides stock option information for the three months ended September 30, 2012:

 

     Number
of

Shares
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value of
In-the-Money
Options
 
     (Dollars in Thousands, Except Per Share Data)  

Options Outstanding at Beginning of Period

     129,900      $ 79.86         5.1 years       $ 14  (1) 

Options Expired

     (1,075   $ 129.01         2.7 years         —     
  

 

 

         

Options Outstanding at End of Period

     128,825      $ 79.45         4.9 years       $ 120  (2) 

Options Exercisable at End of Period

     105,325      $ 94.92         4.3 years       $ 57  (2) 

 

(1)

Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $10.48 as of June 30, 2012, 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 $12.81 as of September 30, 2012, over the exercise price, multiplied by the number of options.

The table below provides stock option information for the nine months ended September 30, 2012:

 

     Number
of

Shares
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value of
In-the-Money
Options
 
     (Dollars in Thousands, Except Per Share Data)  

Options Outstanding at Beginning of Period

     143,325      $ 81.27         5.5 years       $ —    (1) 

Options Expired

     (14,500   $ 97.49         4.2 years       $ —     
  

 

 

         

Options Outstanding at End of Period

     128,825      $ 79.45         4.3 years       $ 120  (2) 

Options Exercisable at End of Period

     105,325      $ 94.92         4.3 years       $ 57  (2) 

 

(1) 

Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $7.40 as of December 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 $12.81 as of September 30, 2012, over the exercise price, multiplied by the number of options.

There were no options exercised during the three and nine months ended September 30, 2012.

Restricted Stock Awards

The table below provides information for restricted stock awards for the three and nine months ended September 30, 2012:

 

     Three Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2012
 
     Number
of
Shares
     Weighted-
Average
Grant Date
Fair Value
Per Share
     Number
of
Shares
    Weighted-
Average
Grant Date
Fair Value
Per Share
 

Restricted Stock at Beginning of Period

     13,225       $ 12.10         19,725      $ 11.87   

Restricted Stock Vested

     —         $ —           (6,500   $ 10.75   
  

 

 

       

 

 

   

Restricted Stock at End of Period

     13,225       $ 12.10         13,225      $ 12.10   
  

 

 

       

 

 

   

 

29


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

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 250,000 shares of our common stock for services performed. The warrants have an exercise price of $9.60 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility 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 percent. 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 percent 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 September 30, 2012, compared to $883,000 at December 31, 2011, the fair value increased by $177,000, which we have included in other operating expenses for the nine months ended September 30, 2012. We used a weighted average expected stock volatility of 48.37 percent and a remaining contractual life of 3.0 years based on the contract terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 0.44 percent used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.

NOTE 9 — EARNINGS PER SHARE

Earnings 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.

 

30


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 9 — EARNINGS PER SHARE (Continued)

 

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

 

     2012     2011  
     (Numerator)      (Denominator)            (Numerator)      (Denominator)         
     Net Income      Weighted-
Average
Shares
     Per
Share
Amount
    Net Income      Weighted-
Average
Shares
     Per
Share
Amount
 
     (Dollars in Thousands, Except Per Share Data)  

Three Months Ended September 30,

                

Basic EPS

   $ 13,279         31,475,976       $ 0.42      $ 4,203         18,888,474       $ 0.22   

Effect of Dilutive Securities – Options, Warrants and Unvested Restricted Stock

     —           69,135         —          —           18,825         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 13,279         31,545,111       $ 0.42      $ 4,203         18,907,299       $ 0.22   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30,

                

Basic EPS

   $ 76,395         31,474,042       $ 2.43      $ 22,641         18,886,415       $ 1.20   

Effect of Dilutive Securities – Options, Warrants and Unvested Restricted Stock

     —           32,725         (0.01     —           19,428         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 76,395         31,506,767       $ 2.42      $ 22,641         18,905,843       $ 1.20   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2012 and 2011, there were 80,825 and 390,150 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 nine months ended September 30, 2012 and 2011, there were 122,525 and 390,150 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.

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:

 

     September 30,
2012
     December 31,
2011
 
     (In Thousands)  

Commitments to Extend Credit

   $ 205,833       $ 158,748   

Standby Letters of Credit

     10,544         12,742   

Commercial Letters of Credit

     5,442         9,298   

Unused Credit Card Lines

     13,588         15,937   
  

 

 

    

 

 

 

Total Undisbursed Loan Commitments

   $ 235,408       $ 196,725   
  

 

 

    

 

 

 

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.

 

31


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

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, 2012. 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, we are prohibited from making interest payments on our outstanding junior subordinated debentures under the terms of the Written Agreement without the prior written consent on FRB, beginning with the interest payment that was due on January 15, 2009. Accrued interest payable on junior subordinated debentures amounted to $12.2 million and $9.8 million at September 30, 2012 and December 31, 2011, respectively. Upon the termination of the Written Agreement, management intends to pay interest in arrears on our junior subordinated debentures to bring them current. As of September 30, 2012, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $30.2 million, down from $31.7 million as of December 31, 2011.

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 September 30, 2012, the Bank had no brokered deposits, and had FHLB advances of $3.0 million compared to $3.3 million as of December 31, 2011.

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 September 30, 2012, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $317.5 million and $314.5 million, respectively. The Bank’s FHLB borrowings as of September 30, 2012 totaled $3.0 million, representing 0.11 percent of total assets.

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.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $56.1 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $90.8 million, and had no borrowings as of September 30, 2012. Additionally, the Bank is currently in the primary credit of the Borrower in Custody Program of the Fed Discount Window. The primary credit is available to depository institutions in sound overall condition to meet short-term (typically overnight), backup funding needs. Normally, prime credit will be granted on a “no-questions-asked,” minimal administered basis generally with no restriction. Furthermore, in October 2011, 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.

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 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

On October 29, 2012, the DFI informed the Bank that the Bank’s overall condition has improved and that the Memorandum of Understanding entered into between the Bank and the DFI on May 1, 2012 (the “MOU”) has been terminated. Accordingly, the Bank is no longer subjected to any of the requirements imposed by the MOU.

On October 31, 2012, Lonny D. Robinson tendered his resignation as Executive Vice President and Chief Financial Officer of Hanmi Financial and the Bank, effective November 13, 2012. Mr. Robinson’s resignation does not stem from any disagreement with Hanmi Financial or the Bank. Concurrently with Mr. Robinson’s resignation, the Board of Directors of Hanmi Financial has appointed Mark Yoon as interim Chief Financial Officer, effective November 13, 2012. Mr. Yoon currently serves as Hanmi Financial’s Senior Vice President and Chief Strategy Officer and will continue in those roles while he serves as interim Chief Financial Officer.

Management has evaluated subsequent events through the date of issuance of the financial data included herein. Other than the events disclosed above, there have been no subsequent events that occurred during such period would require disclosure in this Quarterly Report on Form 10-Q or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of September 30, 2012.

 

32


Table of Contents
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 nine months ended September 30, 2012. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report on Form 10-K”) 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 September 30, 2012 (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 factors include the following:

 

   

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;

 

   

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;

 

   

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 South Korea;

 

   

the effects of litigation against us;

 

   

significant government regulations, legislation and potential changes thereto, including as a result of the Dodd-Frank Act;

 

   

other risks described herein and in the other reports we file with the Securities and Exchange Commission; and

 

   

our ability to recapture deferred tax assets.

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,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk Management” and “Capital Resources and Liquidity” in our 2011 Annual Report on Form 10-K, including our Quarterly Reports on Form 10-Q, 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.

 

33


Table of Contents

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 2011 Annual Report on Form 10-K. 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 2011 Annual Report on Form 10-K. 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.

 

34


Table of Contents

SELECTED FINANCIAL DATA

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

 

     As of and for the  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In Thousands, Except Per Share Data)  

AVERAGE BALANCES:

        

Average Gross Loans, Net (1)

   $ 1,958,819      $ 2,077,934      $ 1,982,369      $ 2,149,101   

Average Investment Securities

   $ 386,513      $ 394,379      $ 409,544      $ 454,560   

Average Interest-Earning Assets

   $ 2,694,571      $ 2,660,776      $ 2,671,300      $ 2,785,115   

Average Total Assets

   $ 2,829,778      $ 2,700,629      $ 2,765,308      $ 2,813,865   

Average Deposits

   $ 2,361,534      $ 2,383,639      $ 2,335,771      $ 2,423,194   

Average Borrowings

   $ 85,482      $ 87,386      $ 85,884      $ 171,212   

Average Interest-Bearing Liabilities

   $ 1,766,709      $ 1,859,847      $ 1,754,943      $ 2,005,110   

Average Stockholders’ Equity

   $ 352,980      $ 200,971      $ 313,816      $ 189,658   

PER SHARE DATA:

        

Earnings Per Share — Basic

   $ 0.42      $ 0.22      $ 2.43      $ 1.20   

Earnings Per Share — Diluted

   $ 0.42      $ 0.22      $ 2.42      $ 1.19   

Common Shares Outstanding

     31,489,201        18,907,299        31,489,201        18,907,299   

Book Value Per Share (2)

   $ 11.56      $ 10.75      $ 11.56      $ 10.75   

PERFORMANCE RATIOS:

        

Return on Average Assets (3) (4)

     1.87     0.62     3.69     1.08

Return on Average Stockholders’ Equity (3) (5)

     14.97     8.30     32.52     15.96

Efficiency Ratio (6)

     59.81     60.55     62.32     66.63

Net Interest Spread (7)

     3.34     3.34     3.35     3.29

Net Interest Margin (8)

     3.69     3.75     3.74     3.69

Average Stockholders’ Equity to Average Total Assets

     12.47     7.44     11.35     6.74

SELECTED CAPITAL RATIOS: (9)

        

Total Risk-Based Capital Ratio:

        

Hanmi Financial

     20.79     14.58    

Hanmi Bank

     19.91     14.72    

Tier 1 Risk-Based Capital Ratio:

        

Hanmi Financial

     19.52     12.63    

Hanmi Bank

     18.63     13.42    

Tier 1 Leverage Ratio:

        

Hanmi Financial

     14.71     9.80    

Hanmi Bank

     14.05     10.41    

ASSET QUALITY RATIOS:

        

Non-Performing Loans to Total Gross Loans (10)

     2.28     3.92     2.28     3.92

Non-Performing Assets to Total Assets (11)

     1.59     2.91     1.59     2.91

Net Loan Charge-Offs to Average Gross Loans (12)

     1.21     2.98     2.06     3.32

Allowance for Loan Losses to Total Gross Loans

     3.38     5.06     3.38     5.06

Allowance for Loan Losses to Total Non-Performing Loans

     147.92     129.24     147.92     129.24

 

(1) 

Loans are net of deferred fees and related direct costs

(2)

Total stockholders’ equity divided by common shares outstanding

(3)

Calculation based on annualized net income

(4)

Net income divided by average total assets

(5)

Net income 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)

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

(12)

Calculation based on annualized net loan charge-offs

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 U.S. generally accepted accounting principles (“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

 

35


Table of Contents

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 Financial and the 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 FINANCIAL CORPORATION

 

      As of September 30,  
     2012     2011  
     (In Thousands)  

Total Assets

   $ 2,841,857      $ 2,686,570   

Less Other Intangible Assets

     (1,376     (1,664
  

 

 

   

 

 

 

Tangible Assets

   $ 2,840,481      $ 2,684,906   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 363,987      $ 203,203   

Less Other Intangible Assets

     (1,376     (1,664
  

 

 

   

 

 

 

Tangible Stockholders’ Equity

   $ 362,611      $ 201,539   
  

 

 

   

 

 

 

Total Stockholders’ Equity to Total Assets Ratio

     12.81     7.56

Tangible Common Equity to Tangible Assets Ratio

     12.77     7.51

Common Shares Outstanding

     31,489,201        18,907,299   

Tangible Common Equity Per Common Share

   $ 11.52      $ 10.66   

HANMI BANK

 

      As of September 30,  
     2012     2011  
     (In Thousands)  

Total Assets

   $   2,836,931      $    2,681,517   

Less Other Intangible Assets

     —          (94
  

 

 

   

 

 

 

Tangible Assets

   $ 2,836,931      $ 2,681,423   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 424,546      $ 285,250   

Less Other Intangible Assets

     —          (94
  

 

 

   

 

 

 

Tangible Stockholders’ Equity

   $ 424,546      $ 285,156   
  

 

 

   

 

 

 

Total Stockholders’ Equity to Total Assets Ratio

     14.96     10.64

Tangible Common Equity to Tangible Assets Ratio

     14.96     10.63

 

36


Table of Contents

EXECUTIVE OVERVIEW

Outlook for 2012

As set forth in our 2011 Annual Report on Form 10-K, our strategic focuses for 2012 will be to enhance our capital position, continue to improve our credit quality and fully comply with all of the requirements of the Written Agreement.

We believe that our proactive initiatives to manage credit risk exposure have resulted in improvement of our asset quality over the past several quarters. We are committed to refining our credit risk management systems to meet the challenges of our changing economic environment.

Based on our current liquidity and capital position, we have begun to consider strategic changes. We are currently planning to develop innovative new products and services as well as generate quality new loans to expand our existing customer base with the goal of improving our profitability. In the event that the Written Agreement is lifted, we intend to pay interest in arrears on our outstanding junior subordinated debentures to bring them current.

RESULTS OF OPERATIONS

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are affected principally by changes to interest rates, the demand for such loans, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board (“FRB”).

Net interest income before provision for credit losses declined by $240,000, or 1.0 percent, to $24.9 million for the third quarter of 2012, compared to net interest income before provision for credit losses of $25.2 million for the third quarter of 2011. Net interest income before provision for credit losses for the nine months ended September 30, 2012 was $74.6 million, a decline of $2.1 million, from net interest income before provision for credit losses of $76.7 million for the nine months ended September 30, 2011. The decrease in net interest income from 2011 to 2012 was primarily attributable to the reduction in total loans and a decline in loan yields as new loans were originated at lower yields than loans existing in the portfolio. Net interest margin of 3.69 percent, for the third quarter of 2012, was 6 basis points lower than net interest margin of 3.75 percent for the third quarter of 2011. Net interest margin for the nine months of 2012 was 3.74 percent, an increase of 5 basis points from 3.69 percent for the first nine months of 2011.

Interest income decreased by $2.3 million, or 7.2 percent, to $29.4 million for the third quarter of 2012, compared to $31.7 million for the third quarter of 2011. Interest income for the first nine months of 2012 was also declined by $8.5 million, to $89.7 million, from $98.2 million for the first nine months of 2011. The decrease in interest income was also primarily due to a decrease in loans and a decline in loan yields. Average net loan balances decreased by $119.1 million, to $1.96 billion for the third quarter of 2012, compared to $2.08 billion for the third quarter of 2011. Average net loan balances for the nine months ended September 30, 2012 was $1.98 billion, a decline from $2.15 billion for the nine months ended September 30, 2011. The decrease in average net loans was a result of management’s strategy to sell problems loans as well as SBA loans guaranteed portion through the nine months of 2012, in addition to an increase in loans that were paid off during the period.

Yield on average net loans decreased to 5.44 percent for the third quarter of 2012, down from 5.60 percent for the third quarter of 2011. Yield on average net loans was 5.50 percent and 5.57 percent for the nine months ended September 30, 2012 and 2011, respectively. The decrease in loan yields was a result of new loans originated at lower yields due to the overall decline in loan interest rates and stiff competition during the third quarter of 2012 and first nine months of 2012. Yield on total investment securities and other earning assets decreased to 1.45 percent and 1.60 percent, for the three and nine months ended September 30, 2012, respectively, from 1.59 percent and 1.83 percent for the three and nine months ended September 30, 2011, respectively. The decline was due to the reinvestment of proceeds from securities sold at lower yields and an increase in the balance of lower yielding fed funds sold and interest-bearing deposits in other banks.

Interest expense decreased $2.0 million, or 31.2 percent, to $4.5 million for the third quarter of 2012 compared to $6.5 million for the third quarter of 2011. Interest expense for the first nine months of 2012 was $15.0 million, a decline of $6.4 million from $21.4 million for the first nine months of 2011. The average balance of our interest bearing liabilities decreased $93.1 million

 

37


Table of Contents

to $1.77 billion for the third quarter of 2012, compared to $1.86 billion for the third quarter of 2011, and decreased from $2.01 billion for the first nine months of 2011, to $1.75 billion for the first nine months of 2012. The decrease is attributable to the Company’s strategy of lowering overall cost of funds by allowing higher cost deposits to run off (i.e., not renew) when they mature. Total cost of interest bearing liabilities decreased to 1.01 percent and 1.14 percent for the three and nine months ended September 30, 2012, respectively, from 1.39 percent and 1.43 percent for the three and nine months ended September 30, 2012, respectively. The decline in cost of funds resulted from an improved deposits mix, reduced interest rates on deposits, and the reduction of higher costing time and money market deposits throughout the first nine months 2012.

 

38


Table of Contents

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  
     September 30, 2012     September 30, 2011  
     Average
Balance
    Interest
Income/
Expense
     Average
Rate/
Yield
    Average
Balance
    Interest
Income/
Expense
     Average
Rate/
Yield
 
     (In Thousands)  
ASSETS               

Interest-Earning Assets:

              

Gross Loans, Net of Deferred Loan Fees (1)

   $ 1,958,819      $ 26,781         5.44   $ 2,077,934      $ 29,355         5.60

Municipal Securities — Taxable

     44,887        452         4.03     10,732        115         4.29

Municipal Securities — Tax Exempt (2)

     12,587        151         4.79     4,526        60         5.30

Obligations of Other U.S. Government Agencies

     74,345        280         1.51     106,029        387         1.46

Other Debt Securities

     254,694        1,260         1.98     273,092        1,519         2.22

Equity Securities

     30,886        178         2.31     32,491        129         1.59

Federal Funds Sold

     17,925        20         0.44     4,734        5         0.42

Term Federal Funds Sold

     78,967        191         0.96     42,913        49         0.46

Interest-Bearing Deposits in Other Banks

     221,461        142         0.26     108,325        75         0.28
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Interest-Earning Assets

     2,694,571        29,455         4.35     2,660,776        31,694         4.73
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-Earning Assets:

              

Cash and Cash Equivalents

     70,591             67,153        

Allowance for Loan Losses

     (71,481          (107,456     

Other Assets

     136,097             80,156        
  

 

 

        

 

 

      

Total Noninterest-Earning Assets

     135,207             39,853        
  

 

 

        

 

 

      

TOTAL ASSETS

     2,829,778             2,700,629        
  

 

 

        

 

 

      
LIABILITIES AND STOCKHOLDERS’ EQUITY               

Interest-Bearing Liabilities:

              

Deposits:

              

Savings

     111,432        516         1.84     107,643        674         2.48

Money Market Checking and NOW Accounts

     555,454        859         0.62     475,712        805         0.67

Time Deposits of $100,000 or More

     660,036        1,467         0.88     854,894        3,237         1.50

Other Time Deposits

     354,305        797         0.89     334,212        1,014         1.20

FHLB Advances

     3,076        40         5.17     3,437        46         5.31

Other Borrowings

     —          —           0.00     1,543        —           0.00

Junior Subordinated Debentures

     82,406        804         3.88     82,406        739         3.56
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Interest-Bearing Liabilities

     1,766,709        4,483         1.01     1,859,847        6,515         1.39
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-Bearing Liabilities:

              

Demand Deposits

     680,307             611,178        

Other Liabilities

     29,782             28,633        
  

 

 

        

 

 

      

Total Noninterest-Bearing Liabilities

     710,089             639,811        

Total Liabilities

     2,476,798             2,499,658        

Stockholders’ Equity

     352,980             200,971        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,829,778           $ 2,700,629        
  

 

 

        

 

 

      

NET INTEREST INCOME

     $ 24,972           $ 25,179      
    

 

 

        

 

 

    

COST OF DEPOSITS

          0.61          0.95
       

 

 

        

 

 

 

NET INTEREST SPREAD (3)

          3.34          3.34
       

 

 

        

 

 

 

NET INTEREST MARGIN (4)

          3.69          3.75
       

 

 

        

 

 

 

 

(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 $282,000 and $557,000 for the three months ended September 30, 2012 and 2011, 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.

 

39


Table of Contents

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.

 

     Three Months Ended September 30, 2012 vs.
Three Months  Ended September 30, 2011
 
     Increases (Decreases) Due to Change in  
     Volume     Rate     Total  
     (In Thousands)  

Interest and Dividend Income:

      

Gross Loans, Net of Deferred Loan Fees

   $ (1,697   $ (877   $ (2,574

Municipal Securities-Taxable

     344        (7     337   

Municipal Securities-Tax Exempt

     97        (6     91   

Obligations of Other U.S. Government Agencies

     (119     12        (107

Other Debt Securities

     (98     (161     (259

Equity Securities

     (6     55        49   

Federal Funds Sold

     15        0        15   

Term Federal Funds Sold

     61        81        142   

Interest-Bearing Deposits in Other Banks

     74        (7     67   
  

 

 

   

 

 

   

 

 

 

Total Interest and Dividend Income

     (1,329     (910     (2,239

Interest Expense:

      

Savings

     23        (181     (158

Money Market Checking and NOW Accounts

     126        (72     54   

Time Deposits of 100,000 or More

     (630     (1,140     (1,770

Other Time Deposits

     58        (275     (217

FHLB Advances

     (5     (1     (6

Other Borrowings

     —          —          —     

Junior Subordinated Debentures

     —          65        65   
  

 

 

   

 

 

   

 

 

 

Total Interest Expense

     (428     (1,604     (2,032
  

 

 

   

 

 

   

 

 

 

Change in Net Interest Income

   $ (1,757   $ (2,514   $ (4,271
  

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2012 and 2011, net interest income before provision for credit losses on a tax-equivalent basis was $25.0 million and $25.2 million, respectively. Interest income decreased 7.1 percent to $29.5 million for the three months ended September 30, 2012 from $31.7 million for the same period in 2011. Interest expense decreased 31.2 percent to $4.5 million for the three months ended September 30, 2012 from $6.5 million for the same period in 2011. The net interest spread and net interest margin for the three months ended September 30, 2012 were 3.34 percent and 3.69 percent, respectively, compared to 3.34 percent and 3.75 percent, respectively, for the same period in 2011. The decrease in net interest income was primarily due to the decrease in gross loans resulting from the disposition of non-performing loans under 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 $119.1 million, or 5.7 percent, to $1.96 billion for the three months ended September 30, 2012 from $2.08 billion for the same period in 2011. Average investment securities decreased by $7.9 million, or 2.0 percent, to $386.5 million for the three months ended September 30, 2012 from $394.4 million for the same period in 2011. Average interest-earning assets increased by $33.8 million, or 1.3 percent, to $2.69 billion for the three months ended September 30, 2012 from $2.66 billion for the same period in 2011. The increase in average interest earning assets was mainly due to an increase in overall liquidity position resulting from the capital raise of $77.1 million, in net proceeds, during the fourth quarter of 2011, partially offset by a $22.1 million decrease in total deposits. The average interest-bearing liabilities decreased by $93.1 million, or 5.0 percent, to $1.77 billion for the three months ended September 30, 2012, from $1.86 billion for the same period in 2011.

The average yield on interest-earning assets decreased by 38 basis points to 4.35 percent for the three months ended September 30, 2012, from 4.73 percent for the three months ended September 30, 2011, primarily due to lower yields on the loan portfolio in the current low interest rate environment and an excess cash balance. Total loan interest and fee income decreased by $2.6 million, or 8.8 percent, to $26.8 million for the three months ended September 30, 2012, from $29.4 million for the three months ended September 30, 2011, due primarily to a 5.7 percent decrease in the average gross loans and lower interest rates on new loans due to rising competition in the market. The average yield on loans decreased to 5.44 percent for the three months ended September 30, 2012, from 5.60 percent for the three months ended September 30, 2011. The average cost on interest-bearing liabilities decreased by 37 basis points to 1.01 percent for the three months ended September 30, 2012, from 1.39 percent for the three months ended September 30, 2011. 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. There were no brokered deposits for the three months ended September 30, 2012 and 2011.

 

40


Table of Contents
     Nine Months Ended  
     September 30, 2012     September 30, 2011  
     Average
Balance
    Interest
Income/
Expense
     Average
Rate/
Yield
    Average
Balance
    Interest
Income/
Expense
     Average
Rate/
Yield
 
     (In Thousands)  
ASSETS               

Interest-Earning Assets:

              

Gross Loans, Net of Deferred Loan Fees (1)

   $ 1,982,369      $ 81,564         5.50   $ 2,149,101      $ 89,508         5.57

Municipal Securities — Taxable

     44,881        1,340         3.98     13,930        433         4.14

Municipal Securities — Tax Exempt (2)

     12,959        460         4.73     4,373        179         5.46

Obligations of Other U.S. Government Agencies

     75,058        985         1.75     134,779        1,639         1.62

Other Debt Securities

     276,646        3,955         1.91     301,478        5,717         2.53

Equity Securities

     31,486        512         2.17     34,030        394         1.54

Federal Funds Sold

     16,545        53         0.43     6,160        22         0.48

Term Federal Funds Sold

     91,898        684         0.99     25,542        94         0.49

Interest-Bearing Deposits in Other Banks

     139,458        269         0.26     115,722        243         0.28
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Interest-Earning Assets

     2,671,300        89,822         4.49     2,785,115        98,229         4.72
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-Earning Assets:

              

Cash and Cash Equivalents

     70,303             67,791        

Allowance for Loan Losses

     (79,502          (125,990     

Other Assets

     103,207             86,949        
  

 

 

        

 

 

      

Total Noninterest-Earning Assets

     94,008             28,750        
  

 

 

        

 

 

      

TOTAL ASSETS

     2,765,308             2,813,865        
  

 

 

        

 

 

      
LIABILITIES AND STOCKHOLDERS’ EQUITY               

Interest-Bearing Liabilities:

              

Deposits:

              

Savings

     109,605        1,675         2.04     110,795        2,157         2.60

Money Market Checking and NOW Accounts

     512,086        2,313         0.60     471,179        2,817         0.80

Time Deposits of $100,000 or More

     700,443        5,978         1.14     943,366        10,773         1.53

Other Time Deposits

     346,925        2,545         0.98     308,558        2,910         1.26

FHLB Advances

     3,478        126         4.84     87,369        618         0.95

Other Borrowings

     —          —           0.00     1,437        1         0.09

Junior Subordinated Debentures

     82,406        2,400         3.89     82,406        2,148         3.49
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Interest-Bearing Liabilities

     1,754,943        15,037         1.14     2,005,110        21,424         1.43
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-Bearing Liabilities:

              

Demand Deposits

     666,712             589,296        

Other Liabilities

     29,837             29,801        
  

 

 

        

 

 

      

Total Noninterest-Bearing Liabilities

     696,549             619,097        

Total Liabilities

     2,451,492             2,624,207        

Stockholders’ Equity

     313,816             189,658        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,765,308           $ 2,813,865        
  

 

 

        

 

 

      

NET INTEREST INCOME

     $ 74,785           $ 76,805      
    

 

 

        

 

 

    

COST OF DEPOSITS

          0.72          1.03
       

 

 

        

 

 

 

NET INTEREST SPREAD (3)

          3.35          3.29
       

 

 

        

 

 

 

NET INTEREST MARGIN (4)

          3.74          3.69
       

 

 

        

 

 

 

 

(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 $1.0 million and $1.6 million for the nine months ended September 30, 2012 and 2011, 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.

 

41


Table of Contents

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.

 

     Nine Months Ended September 30, 2012 vs.
Nine Months Ended  September 30, 2011
 
   Increases (Decreases) Due to Change in  
     Volume     Rate     Total  
     (In Thousands)  

Interest and Dividend Income:

      

Gross Loans, Net of Deferred Loan Fees

   $ (6,779   $ (1,165   $ (7,944

Municipal Securities-Taxable

     902        5        907   

Municipal Securities-Tax Exempt

     278        3        281   

Obligations of Other U.S. Government Agencies

     (628     (26     (654

Other Debt Securities

     (441     (1,321     (1,762

Equity Securities

     2        116        118   

Federal Funds Sold

     31        (0     31   

Term Federal Funds Sold

     423        167        590   

Interest-Bearing Deposits in Other Banks

     28        (2     26   
  

 

 

   

 

 

   

 

 

 

Total Interest and Dividend Income

     (6,184     (2,223     (8,407

Interest Expense:

      

Savings

     (23     (459     (482

Money Market Checking and NOW Accounts

     (9     (495     (504

Time Deposits of 100,000 or More

     (2,404     (2,391     (4,795

Other Time Deposits

     28        (393     (365

FHLB Advances

     (417     (75     (492

Other Borrowings

     —          (1     (1

Junior Subordinated Debentures

     —          252        252   
  

 

 

   

 

 

   

 

 

 

Total Interest Expense

     (2,825     (3,562     (6,387
  

 

 

   

 

 

   

 

 

 

Change in Net Interest Income

   $ (9,009   $ (5,785   $ (14,794
  

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2012 and 2011, net interest income before provision for credit losses on a tax-equivalent basis was $74.8 million and $76.8 million, respectively. Interest income decreased 8.6 percent to $89.8 million for the nine months ended September 30, 2012 from $98.2 million for the same period in 2011. Interest expense decreased 29.9 percent to $15.0 million for the nine months ended September 30, 2012 from $21.4 million for the same period in 2011. The net interest spread and net interest margin for the nine months ended September 30, 2012 were 3.35 percent and 3.74 percent, respectively, compared to 3.29 percent and 3.69 percent, respectively, for the same period in 2011. The decrease in net interest income was primarily due to the decrease in gross loans resulting from the disposition of non-performing loans under 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 $166.7 million, or 7.8 percent, to $1.98 billion for the nine months ended September 30, 2012 from $2.15 billion for the same period in 2011. Average investment securities decreased by $45.0 million, or 9.9 percent, to $409.5 million for the nine months ended September 30, 2012 from $454.6 million for the same period in 2011. Average interest-earning assets decreased by $113.8 million, or 4.1 percent, to $2.67 billion for the nine months ended September 30, 2012 from $2.79 billion for the same period in 2011. The decrease in average interest earning assets was a direct result of our balance sheet deleveraging and credit quality improvement strategy during 2011and 2012 through the disposition of problem assets while maintaining a strong level of liquidity. Consistent with this strategy, the average interest-bearing liabilities decreased by $250.2 million, or 12.5 percent, to $1.75 billion for the nine months ended September 30, 2012, from $2.01 billion for the same period in 2011. Average Federal Home Loan Bank advances decreased by $83.9 million, or 96.0 percent, to $3.5 million for the nine months ended September 30, 2012, from $87.4 million for the same period in 2011.

The average yield on interest-earning assets decreased by 23 basis points to 4.49 percent for the nine months ended September 30, 2012, from 4.72 percent for the nine months ended September 30, 2011, primarily due to lower yields on investment securities and loan portfolio yield in the current low interest rate environment. Total loan interest and fee income decreased by $7.9 million, or 8.8 percent, to $81.6 million for the nine months ended September 30, 2012, from $89.5 million for the nine months ended September 30,2011, due primarily to a 7.8 percent decrease in the average gross loans.

The average yield on loans decreased by 7 basis points to 5.50 percent for the nine months ended September 30, 2012, from 5.57 percent for the nine months ended September 30, 2011. The average cost on interest-bearing liabilities decreased by 29 basis points to 1.14 percent for the nine months ended September 30, 2012, from 1.43 percent for the nine months ended September 30, 2011. 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. There were no brokered deposits for the nine months ended September 30, 2012 and 2011.

 

42


Table of Contents

Provision for Credit Losses

In anticipation of credit risks inherent in our lending business, we set aside allowance for loan losses through charges to earnings. These charges are made not only for our outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credit, or letters of credit. The charges made for our outstanding loan portfolio are recorded to the allowance for loan losses, whereas charges for off-balance sheet items are recorded to the reserve for off-balance sheet items, and are presented as a component of other liabilities.

For the nine months ended September 30, 2012, overall credit quality has continued to improve and net charge-offs have decreased to less than $30.6 million for the past three quarters. Non-accrual loans declined by 42.7 percent, delinquencies declined by 42.5 percent, and net charge-offs were reduced by 42.9 percent from September 30, 2011 to September 30, 2012. All other credit metrics have also experienced improvements as the quality of the loan portfolio has improved. Although we experienced an overall improvement in credit quality in the loan portfolio, the allowance for loan losses coverage ratio of our loan portfolio remained high at 3.38 percent at September 30, 2012. Therefore, during the third quarter of 2012 we recorded no provision for credit losses. Provision for credit losses for the nine months ended September 30, 2012 was $6.0 million as we did record provisions of $2.0 million and $4.0 million in the first and second quarter of 2012, respectively. For the third quarter and first nine months of 2011, provision for credit losses totaled $8.1 million.

Non-Interest Income

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

 

     Three Months Ended        
     September 30,     Increase (Decrease)  
     2012     2011     Amount     Percentage  
     (In Thousands)  

Service Charges on Deposit Accounts

   $ 2,851      $ 3,225      $ (374     -11.6

Insurance Commissions

     1,092        940        152        16.2

Remittance Fees

     476        469        7        1.5

Trade Finance Fees

     274        341        (67     -19.6

Other Service Charges and Fees

     361        389        (28     -7.2

Bank-Owned Life Insurance Income

     235        237        (2     -0.8

Gain on Sales of SBA Loans Guaranteed Portion

     1,772        1,612        160        9.9

Net Loss on Sales of Other Loans

     (515     (3,057     2,542        -83.2

Net Gain on Sales of Investment Securities

     10        1,704        (1,694     -99.4

Impairment Loss on Investment Securities

     (176     —          (176     NM   

Other Operating Income

     140        118        22        18.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

   $ 6,520      $ 5,978      $ 542        9.1
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended
September 30,
    Increase (Decrease)  
     2012     2011     Amount     Percentage  
     (In Thousands)  

Service Charges on Deposit Accounts

   $ 8,955        9,644      $ (689     -7.1

Insurance Commissions

     3,622        3,403        219        6.4

Remittance Fees

     1,417        1,430        (13     -0.9

Trade Finance Fees

     858        966        (108     -11.2

Other Service Charges and Fees

     1,105        1,090        15        1.4

Bank-Owned Life Insurance Income

     872        700        172        24.6

Net Gain on Sales of SBA Loans

     7,245        1,612        5,633        349.4

Net Loss on Sales of Other Loans

     (8,234     (3,472     (4,762     137.2

Net Gain on Sales of Investment Securities

     1,392        1,634        (242     -14.8

Impairment Loss on Investment Securities

     (292     —          (292     NM   

Other Operating Income

     402        496        (94     -19.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

   $ 17,342      $ 17,503      $ (161     -0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income increased to $6.5 million for the third quarter of 2012, compared to $6.0 million for the same period in 2011. Non-interest income as a percentage of average assets was 0.23 percent for the third quarter of 2012, up from 0.22 percent of average assets for the third quarter of 2011. Total non-interest income for the nine months ended September 30, 2012 was $17.3 million, compared to $17.5 million for the same period in 2011. Non-interest income as a percentage of average assets for the first nine months of 2012 was 0.63 percent, slightly up from 0.62 percent for the same period in 2011.

One of our largest sources of non-interest income for the three months ended September 30, 2012 was net gain on sale of SBA loans guaranteed portion, which totaled $1.8 million, or 27.2 percent of total non-interest income, compared to a net gain on sale of SBA loans guaranteed portion totaling $1.6 million, or 27.0 percent of non-interest income for the same period of the previous year. Gain on sale of SBA loans guaranteed portion for the first nine months of 2012 totaled $7.2 million, or 41.8 percent of total non-interest income, an increase from $1.6 million, or 9.2 percent for the first nine months of 2011.

 

43


Table of Contents

Our other large source of non-interest income for the third quarter of 2012 was service charges on deposit accounts, which represented 43.7 percent of our total non-interest income for the three months ended September 30, 2012, and 51.6 percent of non-interest income for the nine months ended September 30, 2012. Service charge income decreased to $2.9 million for the third quarter of 2012, compared with $3.2 million for the prior year’s same period.

Net loss on sales of other loans, which includes the valuation to loans held for sale, decreased to $515,000 for the three months ended September 30, 2012 from $3.1 million for the three months ended September 30, 2011. But the net loss on sales of other loans increased to $8.2 million for the first nine months of 2012 from $3.5 million for prior year’s same period. The increase in net loss on sales of other loans from periods in 2011 to 2012 was a result of the management’s effort to reduce problem and non-performing assets.

Valuation of loans held for sale is recorded on loans previously categorized as held-for-sale that were not sold and experienced a decline in value. If the value of a held-for-sale loan, or underlying property, has declined based on quoted prices or appraisals, a valuation is recorded to reflect the decline. Valuation of loans held-for-sale totaled $519,000 and $2.3 million for the three months and nine months ended September 30, 2012, respectively, compared to $0 and $2.9 million for the three months and nine months ended September 30, 2011. The decline in valuations on held-for-sale loans from 2011 to 2012 was a result of a reduction in loan sales and loans held-for-sale during the first nine months of 2012.

 

44


Table of Contents

Non-Interest Expense

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

 

     Three Months Ended
September 30,
    Increase (Decrease)  
     2012      2011     Amount     Percentage  
     (In Thousands)  

Salaries and Employee Benefits

   $ 9,148       $ 8,146      $ 1,002        12.3

Occupancy and Equipment

     2,623         2,605        18        0.7

Deposit Insurance Premiums and Regulatory Assessments

     283         1,552        (1,269     -81.8

Data Processing

     1,211         1,383        (172     -12.4

Other Real Estate Owned Expense

     352         (86     438        509.3

Professional Fees

     1,112         1,147        (35     -3.1

Directors and Officers Liability Insurance

     296         737        (441     -59.8

Supplies and Communications

     669         712        (43     -6.0

Advertising and Promotion

     1,023         631        392        62.1

Loan-Related Expense

     164         222        (58     -26.1

Amortization of Other Intangible Assets

     41         161        (120     -74.5

Expense related to Unconsummated Capital Offerings

     —           —          —          NM   

Other Operating Expenses

     1,882         1,642        240        14.6
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

   $ 18,804       $ 18,852      $ (48     -0.3
  

 

 

    

 

 

   

 

 

   

 

 

 
     Nine Months Ended
September 30,
    Increase (Decrease)  
     2012      2011     Amount     Percentage  
     (In Thousands)  

Salaries and Employee Benefits

   $ 27,707       $ 26,032      $ 1,675        6.4

Occupancy and Equipment

     7,839         7,820        19        0.2

Deposit Insurance Premiums and Regulatory Assessments

     3,182         4,999        (1,817     -36.3

Data Processing

     3,762         4,269        (507     -11.9

Other Real Estate Owned Expense

     377         1,549        (1,172     -75.7

Professional Fees

     2,950         3,074        (124     -4.0

Directors and Officers Liability Insurance

     888         2,204        (1,316     -59.7

Supplies and Communications

     1,803         1,786        17        1.0

Advertising and Promotion

     2,633         2,105        528        25.1

Loan-Related Expense

     452         631        (179     -28.4

Amortization of Other Intangible Assets

     157         569        (412     -72.4

Expense related to Unconsummated Capital Offerings

     —           2,220        (2,220     -100.0

Other Operating Expenses

     5,563         5,541        22        0.4
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

   $ 57,313       $ 62,799      $ (5,486     -8.7
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense decreased to $18.8 million for the third quarter of 2012, compared to $18.9 million for the same period in 2011. Non-interest expense as a percentage of average assets was 0.66 percent for the third quarter of 2012, down from 0.70 percent of average assets for the third quarter of 2011. Total non-interest expense for the nine months ended September 30, 2012 was $57.3 million, compared to $62.8 million for the nine months ended September 30, 2011. Non-interest income as a percentage of average assets for the first nine months of 2012 was 2.07 percent, down from 2.23 percent for the first nine months of 2011.

Reflecting continuing asset quality improvement, premiums for deposit insurance premium and regulatory assessments decreased by $1.2 million and $1.8 million, or 81.8 percent and 36.3 percent, to $283,000 and $3.2 million for the three and nine months ended September 30, 2012, respectively, compared to $1.6 million and $5.0 million for the three and nine months ended September 30, 2011, respectively. For the same reason, along with a change in new insurance carriers, directors and officers liability insurance also decreased by $441,000 and $1.3 million, or 59.8 percent and 59.7 percent, to $296,000 and $888,000, for the three and nine months ended September 30, 2012, respectively, compared to $737,000 and $2.2 million for the three and nine months ended September 30, 2011, respectively. Other real estate owned expenses decreased by $1.2 million due mainly to our reduction of OREO properties over the past several quarters.

Salaries and employee benefits, however, increased by $1.0 million and $1.7 million, or 12.3 percent and 6.4 percent, to $9.1 million or $27.7 million, for the three and nine months ended September 30, 2012, respectively, compared to $8.1 million and $26.0 million for the three and nine months ended September 30, 2011, respectively, due mainly to increased bonus provision recorded and incentive commissions during 2012.

Provision for Income Taxes

We accounted for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method,

 

45


Table of Contents

deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enacted date.

We record net tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. To the extent future earnings are recognized, the realization of the deferred tax asset will be recorded as a credit to income tax expense. Until such time as the valuation allowance is reversed, we will generally not record an income tax provision or benefit on the statement of operations. Our deferred tax valuation allowance was $5.4 million and $82.3 million at September 30, 2012 and December 31, 2011, respectively. For the three and nine months ended as of September 30, 2012, we reversed a valuation allowance of $4.9 million and $57.9 million, respectively, on its deferred tax assets.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percentage points occurs by one or more five-percent shareholders within a three-year period. We determined that such an ownership change occurred as of November 18, 2011, as a result of a registered rights and best efforts public offering and an underwritten public offering of our common stock. Based on calculations, this ownership change resulted in estimated limitations on the utilization of net operating loss carryforwards and tax credits. We estimate that approximately $5.3 million of our California net operating loss carryforward deferred tax asset will be effectively eliminated and no valuation allowance reversal was recognized for such deferred tax assets. Pursuant to Section 382, a portion of the limited net operating loss carryforwards becomes available for use each year. We estimate that approximately $10.4 million of the restricted net operating loss carryforwards become available for such use.

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 September 30, 2012 and December 31, 2011. 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 September 30, 2012, 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 100.00 percent and 86.47 percent of the total investment portfolio as of September 30, 2012 and December 31, 2011, 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 September 30, 2012 and December 31, 2011.

During the three months ended September 30, 2012, all held-to-maturity securities were reclassified to available-for-sale securities. The reclassified securities carried a fair value of $52.6 million and an amortized cost of $50.6 million at September 30, 2012. As more than 95% of the reclassified securities were municipal bonds, the Company decided to reclassify all held-to-maturity securities to available-for-sale securities to be more proactive under the current municipal market with a rising risk of default.

As of September 30, 2012, securities available for sale were $410.2 million, or 14.43 percent of total assets, compared to $381.9 million, or 13.91 percent of total assets, as of December 31, 2011. For the nine months ended September 30, 2012, our securities available for sale increased by $28.3 million; however, total investment portfolio, including both held-to-maturity and available-for-sale securities, decreased by $31.4 million, or 7.1 percent, from $441.6 million as of December 31, 2011, in the form of sales, calls, prepayments and scheduled amortization, which was partially offset by the purchase of $179.1 million to maintain an investment portfolio mix and size consistent with our capital market expectations and asset-liability management strategies.

 

46


Table of Contents

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

 

     September 30, 2012     December 30, 2011  
     Amortized
Cost
     Estimated
Fair

Value
     Unrealized
Gain
(Loss)
    Amortized
Cost
     Estimated
Fair

Value
     Unrealized
Gain
(Loss)
 
     (In Thousands)  

Securities Held to Maturity:

                

Municipal Bonds-Tax Exempt

   $ —         $ —         $ —        $ 9,815       $ 9,867       $ 52   

Municipal Bonds-Taxable

     —           —           —          38,797         38,392         (405

Mortgage-Backed Securities (1)

     —           —           —          3,137         3,128         (9

U.S. Government Agency Securities

     —           —           —          7,993         7,976         (17
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Securities Held to Maturity

   $ —         $ —         $ —        $ 59,742       $ 59,363       $ (379
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities Available for Sale:

                

Mortgage-Backed Securities (1)

   $ 138,173       $ 142,168       $ 3,995      $ 110,433       $ 113,005       $ 2,572   

Collateralized Mortgage Obligations (1)

     100,125         101,390         1,265        161,214         162,837         1,623   

U.S. Government Agency Securities

     79,027         79,164         137        72,385         72,548         163   

Municipal Bonds-Tax Exempt

     12,232         12,738         506        3,389         3,482         93   

Municipal Bonds-Taxable

     44,336         46,234         1,898        5,901         6,138         237   

Corporate Bonds

     20,467         19,897         (570     20,460         19,836         (624

Other Securities

     8,264         8,328         64        3,318         3,335         17   

Equity Securities

     354         291         (63     647         681         34   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 402,978       $ 410,210       $ 7,232      $ 377,747       $ 381,862       $ 4,115   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) 

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

The amortized cost and estimated fair value of investment securities as of September 30, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale  
     Amortized
Cost
     Estimated
Fair Value
 
     (In Thousands)  

Within One Year

   $ —         $ —     

Over One Year Through Five Years

     33,266         32,891   

Over Five Years Through Ten Years

     94,078         95,429   

Over Ten Years

     36,982         38,041   

Mortgage-Backed Securities

     138,173         142,168   

Collateralized Mortgage Obligations

     100,125         101,390   

Equity Securities

     354         291   
  

 

 

    

 

 

 

Total

   $ 402,978       $ 410,210   
  

 

 

    

 

 

 

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and nine months ended September 30, 2012, we recorded $176,000 and $292,000, respectively, in OTTI charges in earnings on an available-for-sale security.

The Company had an equity security with a carrying value of $218,000 at September 30, 2012. During 2012, the issuer’s financial condition had deteriorated and it was determined that the value on the investment is other-than- temporarily impaired. Based on the closing price of the shares at September 30, 2012, we recorded an OTTI charge of $176,000 to write down the value of the investment security to its fair value. For the nine months ended September 30, 2012, the total OTTI charge on this equity security was $292,000.

 

47


Table of Contents

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 September 30, 2012 and December 31, 2011:

 

     Holding Period  
     Less Than 12 Months      12 Months or More      Total  

Investment Securities

Available for Sale

   Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
 
     (In Thousands, Except Number of Securities)  

September 30, 2012

                          

Mortgage-Backed Securities

   $ 1       $ 5,988         1       $ —         $ —           —         $ 1       $ 5,988         1   

Collateralized Mortgage Obligations

     31         9,890         4         —           —           —           31         9,890         4   

U.S. Government Agency Securities

     48         19,448         6         —           —           —           48         19,448         6   

Municipal Bonds-Taxable

     108         2,544         2         19         1,962         3         127         4,506         5   

Corporate Bonds

     —           —           —           632         10,350         3         632         10,350         3   

Other Securities

     —           —           —           35         965         1         35         965         1   

Equity Securities

     63         73         1         —           —           —           63         73         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251       $ 37,943         14       $ 686       $ 13,277         7       $ 937       $ 51,220         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                          

Mortgage-Backed Securities

   $ 1       $ 3,076         1       $ —         $ —           —         $ 1       $ 3,076         1   

Collateralized Mortgage Obligations

     260         36,751         16         —           —           —           260         36,751         16   

U.S. Government Agency Securities

     5         6,061         2         —           —           —           5         6,061         2   

Corporate Bonds

     41         4,445         2         583         15,391         4         624         19,836         6   

Other Securities

     1         12         1         40         959         1         41         971         2   

Equity Securities

     51         85         1         —           —           —           51         85         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 359       $ 50,430         23       $ 623       $ 16,350         5       $ 982       $ 66,780         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impairment losses described previously are not included in the table above. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2012 and December 31, 2011 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 September 30, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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

The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2012 and December 31, 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of September 30, 2012 and December 31, 2011 are warranted.

Investment securities available for sale with carrying values of $19.4 million and $45.8 million as of September 30, 2012 and December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

 

48


Table of Contents

Loan Portfolio

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

 

     September 30,
2012
    December 31,
2011
    Increase (Decrease)  
       Amount     Percentage  
     (In Thousands)  

Real Estate Loans:

        

Commercial Property

   $ 728,419      $ 663,023      $ 65,396        9.9

Construction

     7,868        33,976        (26,108     -76.8

Residential Property

     103,774        52,921        50,853        96.1
  

 

 

   

 

 

   

 

 

   

Total Real Estate Loans

     840,061        749,920        90,141        12.0

Commercial and Industrial Loans:

        

Commercial Term

     861,906        944,836        (82,930     -8.8

Commercial Lines of Credit

     54,266        55,770        (1,504     -2.7

SBA Loans

     134,264        116,192        18,072        15.6

International Loans

     29,378        28,676        702        2.4
  

 

 

   

 

 

   

 

 

   

Total Commercial and Industrial Loans

     1,079,814        1,145,474        (65,660     -5.7

Consumer Loans (1)

     38,415        43,346        (4,931     -11.4
  

 

 

   

 

 

   

 

 

   

Total Gross Loans

     1,958,290        1,938,740        19,550        1.0

Allowance for Loans Losses

     (66,107     (89,936     23,829        -26.5

Deferred Loan Costs

     630        216        414        191.7
  

 

 

   

 

 

   

 

 

   

Loan Receivables, Net

   $ 1,892,813      $ 1,849,020      $ 43,793        2.4
  

 

 

   

 

 

   

 

 

   

 

(1) 

Consumer loans include home equity line of credit.

As of September 30, 2012 and December 31, 2011, loans receivable (excluding loans held for sale), net of deferred loan costs and allowance for loan losses, totaled $1.89 billion and $1.85 billion, respectively, representing an increase of $43.8 million, or 2.4 percent. Total gross loans increased by $19.6 million, or 1.0 percent, to $1.96 billion as of September 30, 2012, from $1.94 billion as of December 31, 2011.

During the nine months ended September 30, 2012, total loan disbursement consisted of $278.4 million in term loans and $11.4 million in lines of credits. The Bank also purchased one year adjustable rate single family residential mortgage loans totaling $67.6 million during the first quarter of 2012 and commercial real estate loans totaling $15.2 million during the second quarter of 2012. During the nine months ended September 30, 2012, we experienced decreases in loans from $89.8 million transfers to loans held for sale, $34.3 million gross charge-offs, $154.3 million pay-offs, and other net amortizations.

As of September 30, 2012, 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:

 

Industry

   Balance as of
September 30, 2012
     Percentage of Total
Gross Loans Outstanding
 
     (In Thousands)         

Lessor of Non-Residential Buildings

   $ 359,517         18.36

Accommodation/Hospitality

   $ 301,858         15.41

Gasoline Stations

   $ 270,740         13.83

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 collectability 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 collectability 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 September 30, 2012 and December 31, 2011 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.

 

49


Table of Contents

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

 

     September 30,
2012
    December 31,
2011
    Increase (Decrease)  
       Amount     Percentage  
     (In Thousands)  

Non-Performing Loans:

        

Real Estate Loans:

        

Commercial Property

        

Retail

   $ 1,102      $ 1,260      $ (158     -12.5

Land

     2,037        2,362        (325     -13.8

Other

     —          1,199        (1,199     -100.0

Construction

     7,868        8,310        (442     -5.3

Residential Property

     1,411        2,097        (686     -32.7

Commercial and Industrial Loans:

        

Commercial Term

        

Unsecured

     8,106        7,706        400        5.2

Secured By Real Estate

     8,418        11,725        (3,307     -28.2

Commercial Lines of Credit

     1,359        1,431        (72     -5.0

SBA Loans

     13,048        15,479        (2,431     -15.7

Consumer Loans

     1,343        809        534        66.0
  

 

 

   

 

 

   

 

 

   

Total Non-Accrual Loans

     44,692        52,378        (7,686     -14.7

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

     —          —          —          NM   
  

 

 

   

 

 

   

 

 

   

Total Non-Performing Loans (1)

     44,692        52,378        (7,686     -14.7

Other Real Estate Owned

     364        180        184        102.2
  

 

 

   

 

 

   

 

 

   

Total Non-Performing Assets

   $ 45,056      $ 52,558      $ (7,502     -14.3
  

 

 

   

 

 

   

 

 

   

Non-Performing Loans as a Percentage of Total Gross Loans

     2.28     2.70    

Non-Performing Assets as a Percentage of Total Assets

     1.59     1.91    

Total Debt Restructured Performing Loans

   $ 16,965      $ 28,375       

 

(1)

Includes troubled debt restructured non-performing loans of $21.0 million and $23.2 million as of September 30, 2012 and December 31, 2011, respectively.

Non-accrual loans totaled $44.7 million as of September 30, 2012, compared to $52.4 million as of December 31, 2011, representing a 14.7 percent decrease. Delinquent loans (defined as 30 days or more past due) were $20.2 million as of September 30, 2012, compared to $35.2 million as of December 31, 2011, representing a 42.5 percent decrease. Of the $20.2 million delinquent loans as of September 30, 2012, $16.2 million was included in non-performing loans. The $21.2 million of $35.2 million delinquent loans as of December 31, 2011 was included in non-performing loans. During the nine months ended September 30, 2012, loans totaling $38.8 million were placed on nonaccrual status. The additions to nonaccrual loans were offset by $11.1 million in charge-offs, $27.0 million in sales of problem loans, $13.8 million in principal paydowns and payoffs, $3.9 million that were placed back to accrual status, $1.3 million that were transferred to OREO, and $4.4 million classified to loans held for sale.

The ratio of non-performing loans to total gross loans also decreased to 2.28 percent at September 30, 2012 from 2.70 percent at December 31, 2011. During the same period, our allowance for loan losses decreased by $23.8 million, or 26.5 percent, to $66.1 million from $89.9 million. Of the $44.7 million non-performing loans, approximately $38.9 million were impaired based on the definition contained in FASB ASC 310, “Receivables,” which resulted in aggregate impairment reserve of $3.6 million as of September 30, 2012. 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 September 30, 2012, other real estate owned consisted of two properties with a combined carrying value of $364,000 with a valuation adjustment of $257,000. For the nine months ended September 30, 2012, five properties were transferred from loans receivable to other real estate owned at fair value less selling cost of $2.6 million and recorded a valuation adjustment of $301,000. As of December 31, 2011, there was one real estate owned property, located in Colorado, with a net carrying value of $180,000.

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.

 

50


Table of Contents

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

 

     Recorded
Investment
     Unpaid
Principal
Balance
     With No
Related
Allowance
Recorded
     With
Allowance
Recorded
     Related
Allowance
 
     (In Thousands)  

September 30, 2012

              

Real Estate Loans:

              

Commercial Property

              

Retail

   $ 2,606       $ 2,680       $ 2,606       $ —         $ —     

Land

     2,037         2,204         2,037         —           —     

Other

     532         532         —           532         37   

Construction

     7,868         8,075         7,868         —           —     

Residential Property

     3,272         3,323         576         2,696         731   

Commercial and Industrial Loans:

              

Commercial Term

              

Unsecured

     13,595         14,535         451         13,144         3,825   

Secured By Real Estate

     19,841         20,967         16,733         3,108         655   

Commercial Lines of Credit

     1,547         1,713         863         684         3   

SBA Loans

     6,101         10,113         4,515         1,586         665   

Consumer Loans

     1,238         1,283         266         972         398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,637       $ 65,425       $ 35,915       $ 22,722       $ 6,314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Real Estate Loans:

              

Commercial Property

              

Retail

   $ 1,260       $ 1,260       $ 1,100       $ 160       $ 126   

Land

     3,178         3,210         —           3,178         360   

Other

     14,773         14,823         1,131         13,642         3,004   

Construction

     14,120         14,120         14,120         —           —     

Residential Property

     5,368         5,408         3,208         2,160         128   

Commercial and Industrial Loans:

              

Commercial Term

              

Unsecured

     16,035         16,559         244         15,791         10,793   

Secured By Real Estate

     53,159         54,156         14,990         38,169         7,062   

Commercial Lines of Credit

     1,431         1,554         715         716         716   

SBA Loans

     11,619         12,971         9,445         2,174         1,167   

Consumer Loans

     746         788         511         235         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 121,689       $ 124,849       $ 45,464       $ 76,225       $ 23,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

51


Table of Contents

The following table provides information on impaired loans for the period indicated:

 

     Average
Recorded
Investment
for the Three
Months
Ended
    Interest
Income
Recognized
for the Three
Months
Ended
    Average
Recorded
Investment
for the Nine
Months
Ended
    Interest
Income
Recognized
for the Nine
Months
Ended
 
     (In Thousands)  

September 30, 2012

        

Real Estate Loans:

        

Commercial Property

        

Retail

   $ 2,597      $ 47      $ 2,162      $ 95   

Land

     2,054        45        2,134        136   

Other

     534        5        937        38   

Construction

     7,868        29        8,016        207   

Residential Property

     3,279        34        3,265        118   

Commercial and Industrial Loans:

        

Commercial Term

        

Unsecured

     13,723        214        14,079        644   

Secured By Real Estate

     19,990        342        21,834        1,300   

Commercial Lines of Credit

     1,555        16        1,742        46   

SBA Loans

     6,168        330        7,489        813   

Consumer Loans

     1,257        49        1,021        59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 59,025      $ 1,111      $ 62,679      $ 3,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

        

Real Estate Loans:

        

Commercial Property

        

Retail

   $ 8,754      $ 27      $ 9,733      $ 78   

Land

     16,376        12        22,192        12   

Other

     21,768        282        21,879        372   

Construction

     11,057        272        11,201        317   

Residential Property

     2,364        8        2,386        8   

Commercial and Industrial Loans:

        

Commercial Term

        

Unsecured

     18,972        82        19,554        148   

Secured By Real Estate

     66,108        813        64,667        1,809   

Commercial Lines of Credit

     2,398        2        2,631        5   

SBA Loans

     19,333        23        20,256        63   

Consumer Loans

     1,181        1        1,286        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 168,311      $ 1,522      $ 175,785      $ 2,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In Thousands)  

Interest Income That Would Have Been Recognized Had Impaired Loans

        

Performed in Accordance With Their Original Terms

   $     1,382      $     3,063      $     4,315      $     7,143   

Less: Interest Income Recognized on Impaired Loans

     (1,111     (1,522     (3,456     (2,815
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Foregone on Impaired Loans

   $ 271      $ 1,541      $ 859      $ 4,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2012, we restructured monthly payments for 50 loans, with a net carrying value of $12.9 million at the time of modification, which we subsequently classified as troubled debt restructured loans. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less. As of September 30, 2012, troubled debt restructurings on accrual status totaled $17.0 million, all of which were temporary interest rate and payment reductions and extensions of maturity, and a $2.2 million reserve relating to these loans is included in the allowance for loan losses. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of September 30, 2012, troubled debt restructuring on non-accrual status totaled $21.0 million, and a $2.6 million reserve relating to these loans is included in the allowance for loan losses.

As of December 31, 2011, troubled debt restructurings on accrual status totaled $28.4 million, all of which were temporary interest rate and payment reductions, and an $8.0 million reserve relating to these loans is included in the allowance for loan losses. As of December 31, 2011, troubled debt restructuring on non-accrual status totaled $23.2 million, and a $6.3 million reserve relating to these loans is included in the allowance for loan losses.

 

52


Table of Contents

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

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 ten 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 three 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 2011, 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 second quarter of 2011, 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.

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.

 

53


Table of Contents

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.

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.

 

54


Table of Contents

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:

 

     September 30, 2012      December 31, 2011  
     Allowance
Amount
     Loans
Receivable
     Allowance
Amount
     Loans
Receivable
 
     (In Thousands)  

Real Estate Loans:

           

Commercial Property

   $ 19,420       $ 728,419       $ 17,129       $ 663,023   

Construction

     —           7,868         1,403         33,976   

Residential Property

     1,803         103,774         1,105         52,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     21,223         840,061         19,637         749,920   

Commercial and Industrial Loans:

     42,664         1,079,814         66,005         1,145,474   

Consumer Loans

     2,220         38,415         2,243         43,346   

Unallocated

     —           —           2,051         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,107       $ 1,958,290       $ 89,936       $ 1,938,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 Three Months Ended     As of and for the Nine Months Ended  
     September 30,
2012
    June 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 
     (In Thousands)  

Allowance for Loan Losses:

          

Balance at Beginning of Period

   $ 71,893      $ 81,052      $ 109,029      $ 89,936      $ 146,059   

Actual Charge-Offs

     (7,223     (14,716     (16,551     (34,260     (62,384

Recoveries on Loans Previously Charged Off

     1,320        1,324        1,045        3,681        8,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (5,903     (13,392     (15,506     (30,579     (53,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision Charged to Operating Expense

     117        4,233        7,269        6,750        8,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 66,107      $ 71,893      $ 100,792      $ 66,107      $ 100,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

          

Balance at Beginning of Period

   $ 2,348      $ 2,581      $ 2,391      $ 2,981      $ 3,417   

Provision Charged to (Reversal of Charged to) Operating Expense

     (117     (233     831        (750     (195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 2,231      $ 2,348      $ 3,222      $ 2,231      $ 3,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net Loan Charge-Offs to Average Total Gross Loans (1)

     1.21     2.67     2.98     2.06     3.32

Net Loan Charge-Offs to Total Gross Loans (1)

     1.21     2.75     3.11     2.08     3.59

Allowance for Loan Losses to Average Total Gross Loans

     3.37     3.59     4.85     3.33     4.69

Allowance for Loan Losses to Total Gross Loans

     3.38     3.69     5.06     3.38     5.06

Net Loan Charge-Offs to Allowance for Loan Losses (1)

     35.72     74.51     61.54     61.68     70.85

Net Loan Charge-Offs to Provision Charged to Operating Expenses

     5,045.30     316.37     213.32     453.02     645.71

Allowance for Loan Losses to Non-Performing Loans

     147.92     159.26     129.24     147.92     129.24

Balance:

          

Average Total Gross Loans Outstanding During Period

   $ 1,958,819      $ 2,003,475      $ 2,077,934      $ 1,982,369      $ 2,149,101   

Total Gross Loans Outstanding at End of Period

   $ 1,958,290      $ 1,949,624      $ 1,992,031      $ 1,958,290      $ 1,992,031   

Non-Performing Loans at End of Period

   $ 44,692      $ 45,143      $ 77,991      $ 44,692      $ 77,991   

 

(1) 

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

The allowance for loan losses decreased by $23.8 million, or 26.5 percent, to $66.1 million as of September 30, 2012, compared to $89.9 million as of December 31, 2011. The allowance for loan losses as a percentage of total gross loans decreased to 3.38 percent as of September 30, 2012 from 4.64 percent as of December 31, 2011. The provision for loan losses decreased by $1.5 million to $6.8 million for the nine months ended September 30, 2012 from $8.3 million for the nine months ended September 30, 2011. The $6.8 million provision for loan losses was offset by the $750,000 reversal in provision for off-balance items, resulting in a $6.0 million total provision for credit losses for the nine months ended September 30, 2012. The $8.3 million provision for loan losses was offset by the $195,000 reversal in provision for off-balance items, resulting in an $8.1 million provision for credit losses for the nine months ended September 30, 2011.

 

55


Table of Contents

The decrease in the allowance for loan losses as of September 30, 2012 was due primarily to decreases in historical loss rates, and classified assets. Due to these factors, general reserves decreased by $6.2 million, or 14.8 percent, to $35.6 million as of September 30, 2012 as compared to $41.8 million at December 31, 2011. However, total qualitative reserves increased by $1.5 million, or 6.2 percent, to $24.1 million as of September 30, 2012 as compared to $22.6 million as of December 31, 2011, due mainly to an additional qualitative factor related to charge-offs and losses from problem notes.

Total impaired loans, excluding loans held for sale, decreased by $63.1 million, or 51.8 percent, to $58.6 million as of September 30, 2012 as compared to $121.7 million at December 31, 2011. Accordingly, specific reserve allocations associated with impaired loans decreased by $17.1 million, or 73.1 percent, to $6.3 million as of September 30, 2012 as compared to $23.4 million as of December 31, 2011.

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

 

     As of and for the  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012     2011  
     (In Thousands)  

Charge-offs:

          

Real Estate Loans:

   $ 1,321       $ 2,142       $ 9,406      $ 14,786   

Commercial Term

     4,576         8,573         22,190        32,512   

Commercial Lines of Credit

     201         1,916         203        5,646   

SBA Loans

     794         3,435         1,686        8,339   

International Loans

     —           99         —          219   

Consumer Loans

     331         386         775        882   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Charge-offs

     7,223         16,551         34,260        62,384   

Recoveries:

          

Real Estate Loans:

     58         —           575        2,744   

Commercial Term

     913         925         2,470        5,518   

Commercial Lines of Credit

     269         59         291        291   

SBA Loans

     64         23         284        79   

International Loans

     5         7         8        137   

Consumer Loans

     11         31         53        53   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Recoveries

     1,320         1,045         3,681        8,822      
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Charge-offs

   $      5,903       $       15,506       $        30,580      $       53,562   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended September 30, 2012, total charge-offs were $7.2 million, a decrease of $9.4 million, or 56.6 percent, from $16.6 million for the three months ended September 30, 2011. The decreases in the three months ended September 30, 2012 from the three months ended September 30, 2011 were mainly due to decreases in charge-offs of commercial term loans by $4.0 million, SBA loans by $2.6 million and commercial lines of credit by $1.7 million.

The Bank recorded in other liabilities an allowance for off-balance sheet exposure, primarily unfunded loan commitments, of $2.2 million and $3.0 million as of September 30, 2012 and December 31, 2011, respectively. The decrease was primarily due to lower reserve factors based on historical loss rates. 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 September 30, 2012 and December 31, 2011.

Deposits

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

 

     September 30,
2012
     December 31,
2011
     Increase (Decrease)  
         Amount     Percentage  
     (In Thousands)  

Demand – Noninterest-Bearing

   $ 694,345       $ 634,466       $ 59,879        9.4

Interest-Bearing:

          

Savings

     111,654         104,664         6,990        6.7

Money Market Checking and NOW Accounts

     563,785         449,854         113,931        25.3

Time Deposits of $100,000 or More

     635,802         822,165         (186,363     -22.7

Other Time Deposits

     357,799         333,761         24,038        7.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Deposits

   $ 2,363,385       $ 2,344,910       $ 18,475        0.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits increased by $18.5 million, or 0.8 percent, to $2.36 billion as of September 30, 2012 from $2.34 billion as of December 31, 2011. The increases 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 nine months ended September 30, 2012, $494.9 million of high-cost promotional time deposits and $51.5 million of deposits raised from rate listing services matured.

 

56


Table of Contents

While time deposits of $100,000 or more decreased by $186.4 million, or 22.7 percent, to $635.8 million at September 30, 2012 from $822.2 million at December 31, 2011, core deposits (defined as demand, savings, money market, NOW accounts and other time deposits) increased by $204.8 million, or 13.5 percent, to $1.73 billion at September 30, 2012 from $1.52 billion at December 31, 2011. Time deposits of $250,000 or more also decreased by $98.4 million, or 27.0 percent, to $266.5 million from $364.9 million at December 31, 2011. Noninterest-bearing demand deposits represented 29.4 percent of total deposits at September 30, 2012 compared to 27.1 percent at December 31, 2011. We had no brokered deposits as of September 30, 2012 and December 31, 2011.

Federal Home Loan Bank Advances and Other Borrowings

FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight federal funds. At September 30, 2012, advances from the FHLB were $3.0 million, a decrease of $274,000 from $3.3 million at December 31, 2011, with a remaining maturity of 1.63 years at 5.27 percent.

Junior Subordinated Debentures

During the second 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 September 30, 2012 and December 31, 2011. 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 $12.2 million and $9.8 million at September 30, 2012 and December 31, 2011, respectively.

 

57


Table of Contents

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 September 30, 2012:

 

     Less
Than
Three
Months
    More Than
Three
Months But
Less Than
One Year
    More Than
One Year
But Less
Than Five
Years
    More Than
Five Years
    Non-
Interest-
Sensitive
    Total  
     (In Thousands)  
ASSETS             

Cash and Due from Bank

   $ —        $ —        $ —        $ —        $ 72,053      $ 72,053   

Interest-Bearing Deposits in Other Banks

     217,375        —          —          —          —          217,375   

Fed Funds Sold

     13,000        —          —          —          —          13,000   

Restricted Cash

     —          —          —          —          4,393        4,393   

Term Fed Funds Sold

     55,000        —          —          —          —          55,000   

Investment Securities:

             —       

Fixed Rate

     29,773        61,207        156,620        79,573        17,597        344,770   

Floating Rate

     36,089        15,527        11,751        1,888        186        65,441   

Loans:

               —     

Fixed Rate

     61,904        141,794        354,833        18,108        —          576,639   

Floating Rate

     1,271,129        57,806        21,177        73        —          1,350,185   

Non-Accrual (1)

             48,981        48,981   

Deferred Loan Fees, Discount, and Allowance for Loan Losses

     —          —          —          —          (72,256     (72,256

Federal Home Loan Bank and Federal Reserve Bank Stock

     —          —          —          29,882          29,882   

Other Assets

     —          28,816        —          5,107        102,472        136,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,684,269      $ 305,150      $ 544,382      $ 134,630      $ 173,425      $ 2,841,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY             

Liabilities:

            

Deposits:

            

Demand – Noninterest-Bearing

   $ —        $ —        $ —        $ —        $ 694,345      $ 694,345   

Savings

     9,204        19,773        58,465        24,211        —          111,654   

Money Market Checking and NOW Accounts

     69,325        177,397        209,610        107,452        —          563,785   

Time Deposits

            

Fixed Rate

     154,474        607,287        231,780        2          993,543   

Floating Rate

     59        —          —          —            59   

Federal Home Loan Bank Advances

     95        294        2,640        —            3,029   

Junior Subordinated Debentures

     82,406                82,406   

Other Liabilities

             29,049        29,049   

Stockholders’ Equity

             363,987        363,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 315,563      $ 804,752      $ 502,496      $ 131,665      $ 1,087,381      $ 2,841,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repricing Gap

   $ 1,368,706      $ (499,602   $ 41,886      $ 2,966      $ (913,956   $ —     

Cumulative Repricing Gap

   $ 1,368,706      $ 869,104      $ 910,990      $ 913,956      $ —        $ —     

Cumulative Repricing Gap as a Percentage of Total Assets

     48.16     30.58     32.06     32.16     0.00  

Cumulative Repricing Gap as a Percentage of Interest-Earning Assets

     50.78     32.25     33.80     33.91     0.00  

 

(1) 

Includes non-accrual loans in loans held for sale.

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 and other time deposits) are assigned to categories based on expected decay rates.

As of September 30, 2012, the cumulative repricing gap for the three-month period was at an asset-sensitive position and 50.78 percent of interest-earning assets, which increased from 36.85 percent as of December 31, 2011. The increase was mainly due to a $302.5 million decrease in fixed rate time deposits, a $118.3 million increase in cash and due from other banks, and a $34.4 million increase in floating rate loans, partially offset by a $47.0 million decrease in federal funds sold.

 

58


Table of Contents

The cumulative repricing gap for the twelve-month period was at an asset-sensitive position and was 32.25 percent of interest-earning assets, which increased from 22.26 percent as of December 31, 2011. The increase was mainly due to a $288.1 million decrease in fixed rate time deposits, a $116.3 million increase in cash and due from other banks, a $62.8 million increase in floating rate loans, and a $50.0 million increase in money market checking and NOW accounts, partially offset by a $67.0 million decrease in federal funds sold, a $42.8 million decrease in fixed rate investment securities, and a $40.5 million increase in fixed rate loans.

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

 

     Less Than Three Months     Less Than Twelve Months  
     September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
 
     (In Thousands)  

Cumulative Repricing Gap

   $ 1,368,706      $ 960,898      $ 869,104      $ 580,284   

Percentage of Total Assets

     48.16     35.01     30.58     21.14

Percentage of Interest-Earning Assets

     50.78     36.85     32.25     22.26

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. In order 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 Change

  

Change in Amount

Change in

Interest

Rate

  

Net

Interest

Income

  

Economic

Value of

Equity

  

Net

Interest

Income

  

Economic

Value of

Equity

     (In Thousands)

200%

   12.84%    4.99%    $12,730    $19,984

100%

   5.52%    2.58%    $5,479    $10,347

(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.

 

59


Table of Contents

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, 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.

As of September 30, 2012, the Bank was “well capitalized” according to the regulatory guidelines.

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.

Based on submissions to and consultations with the FRB, we believe that the Bank has taken the required corrective action and has complied with substantially all of the requirements of the Written Agreement.

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, 2012. 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, we are prohibited from making interest payments on our outstanding junior subordinated debentures under the terms of the Written Agreement without the prior written consent on FRB, beginning with the interest payment that was due on January 15, 2009. Accrued interest payable on junior subordinated debentures amounted to $12.2 million and $9.8 million at September 30, 2012 and December 31, 2011, respectively. Upon the termination of the Written Agreement, management intends to pay interest in arrears on our junior subordinated debentures to bring them current. As of September 30, 2012, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $30.2 million, down from $31.7 million as of December 31, 2011.

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 September 30, 2012, the Bank had no brokered deposits, and had FHLB advances of $3.0 million compared to $3.3 million as of December 31, 2011.

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 September 30, 2012, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $317.5 million and $314.5 million, respectively. The Bank’s FHLB borrowings as of September 30, 2012 totaled $3.0 million, representing 0.11 percent of total assets.

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.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $56.1 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $90.8 million, and had no borrowings as of September 30, 2012. Additionally, the Bank is currently in the primary credit of the Borrower in Custody Program of the Fed Discount Window. The primary credit is available to depository institutions in sound overall condition to meet short-term (typically overnight), backup funding needs. Normally, prime credit will be granted on a “no-questions-asked,” minimal administered basis generally with no restriction. Furthermore, in October 2011, 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.

 

60


Table of Contents

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 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 Quarterly Report on Form 10-Q and “Item 1. Business — Off-Balance Sheet Commitments” in our 2011 Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS

There have been no material changes to the contractual obligations described in our 2011 Annual Report on Form 10-K.

RECENTLY ISSUED ACCOUNTING STANDARDS

FASB ASU No. 2011-08, “Testing Goodwill for Impairment (Topic 350)” – FASB ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. The amendments in FASB ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of FASB ASU 2011-08 did not have a significant impact on our financial condition or result of operations.

FASB ASU 2011-05, “Presentation of Comprehensive Income (Topic 220)” – FASB 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 FASB ASU 2011-05 are effective fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of FASB ASU 2011-05 did not 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)” – FASB ASU 2011-04 provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS. 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 FASB ASU 2011-04 change the wording used to describe U.S. GAAP requirements for fair value and disclosing information about fair value measurements. FASB ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. Adoption of FASB ASU 2011-04 did not have a significant impact on our financial condition or result of operations.

SUBSEQUENT EVENTS

On October 29, 2012, the DFI informed the Bank that the Bank’s overall condition has improved and that the Memorandum of Understanding entered into between the Bank and the DFI on May 1, 2012 (the “MOU”) has been terminated. Accordingly, the Bank is no longer subjected to any of the requirements imposed by the MOU.

On October 31, 2012, Lonny D. Robinson tendered his resignation as Executive Vice President and Chief Financial Officer of Hanmi Financial and the Bank, effective November 13, 2012. Mr. Robinson’s resignation does not stem from any disagreement with Hanmi Financial or the Bank. Concurrently with Mr. Robinson’s resignation, the Board of Directors of Hanmi Financial has appointed Mark Yoon as interim Chief Financial Officer, effective November 13, 2012. Mr. Yoon currently serves as Hanmi Financial’s Senior Vice President and Chief Strategy Officer and will continue in those roles while he serves as interim Chief Financial Officer.

Management has evaluated subsequent events through the date of issuance of the financial data included herein. Other than the events disclosed above, there have been no subsequent events that occurred during such period would require disclosure in this Quarterly Report on Form 10-Q or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of September 30, 2012.

 

61


Table of Contents
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 September 30, 2012, 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 September 30, 2012, 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.

 

62


Table of Contents

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 2011 Annual Report on Form 10-K.

 

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

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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).

 

63


Table of Contents

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:  

November 2, 2012

    By:    /s/ Jay S. Yoo
        Jay S. Yoo
        President and Chief Executive Officer
      By:    /s/ Lonny D. Robinson
        Lonny D. Robinson
        Executive Vice President and Chief Financial Officer

 

64