e10vq
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ To _________
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
 
(Exact Name of Registrant as Specified in its Charter)
     
Delaware   95-4788120
     
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
3660 Wilshire Boulevard, Penthouse Suite A    
Los Angeles, California   90010
     
(Address of Principal Executive Offices)   (Zip Code)
(213) 382-2200
 
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
 
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ  Non-Accelerated Filer o
(Do Not Check if a Smaller Reporting Company)
Smaller Reporting Company o
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     As of April 30, 2010, there were 51,182,390 outstanding shares of the Registrant’s Common Stock.
 
 

 


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED MARCH 31, 2010
TABLE OF CONTENTS
             
        Page
 
           
 
  PART I — FINANCIAL INFORMATION        
 
           
  FINANCIAL STATEMENTS        
 
       Consolidated Balance Sheets (Unaudited)     1  
 
       Consolidated Statements of Operations (Unaudited)     2  
 
       Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss (Unaudited)     3  
 
       Consolidated Statements of Cash Flows (Unaudited)     4  
 
       Notes to Consolidated Financial Statements (Unaudited)     5  
 
           
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     26  
 
           
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     51  
 
           
  CONTROLS AND PROCEDURES     51  
 
           
 
  PART II — OTHER INFORMATION        
 
           
  LEGAL PROCEEDINGS     54  
 
           
  RISK FACTORS     54  
 
           
  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     54  
 
           
  DEFAULTS UPON SENIOR SECURITIES     54  
 
           
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     54  
 
           
  OTHER INFORMATION     54  
 
           
  EXHIBITS     55  
 
           
SIGNATURES     57  

 


 

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
                 
    March 31,     December 31,  
    2010     2009  
ASSETS
               
Cash and Due From Banks
  $ 59,677     $ 55,263  
Interest-Bearing Deposits in Other Banks
    139,540       98,847  
 
           
Cash and Cash Equivalents
    199,217       154,110  
Securities Held to Maturity, at Amortized Cost (Fair Value of $862 as of March 31, 2010 and $871 as of December 31, 2009)
    862       869  
Investment Securities Available for Sale, at Fair Value (Amortized Cost of $111,001 as of March 31, 2010 and $130,995 as of December 31, 2009)
    113,369       132,420  
Loans Receivable, Net of Allowance for Loan Losses of $177,820 as of March 31, 2010 and $144,996 as of December 31, 2009
    2,494,966       2,669,054  
Loans Held for Sale, at the Lower of Cost or Fair Value
    10,104       5,010  
Customers’ Liability on Acceptances
    1,914       994  
Premises and Equipment, Net
    18,236       18,657  
Accrued Interest Receivable
    9,026       9,492  
Other Real Estate Owned
    22,399       26,306  
Deferred Income Taxes
          3,608  
Servicing Assets
    3,590       3,842  
Other Intangible Assets
    3,055       3,382  
Federal Home Loan Bank Stock, at Cost
    30,697       30,697  
Federal Reserve Bank Stock, at Cost
    7,878       7,878  
Income Taxes Receivable
    59,680       56,554  
Bank-Owned Life Insurance
    26,639       26,408  
Other Assets
    16,669       13,425  
 
           
 
TOTAL ASSETS
  $ 3,018,301     $ 3,162,706  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES:
               
Deposits:
               
Noninterest-Bearing
  $ 575,015     $ 556,306  
Interest-Bearing
    2,075,265       2,193,021  
 
           
 
               
Total Deposits
    2,650,280       2,749,327  
 
               
Accrued Interest Payable
    13,146       12,606  
Acceptances Outstanding
    1,914       994  
Federal Home Loan Bank Advances
    153,898       153,978  
Other Borrowings
    4,428       1,747  
Junior Subordinated Debentures
    82,406       82,406  
Other Liabilities
    11,207       11,904  
 
           
 
Total Liabilities
    2,917,279       3,012,962  
 
           
COMMITMENTS AND CONTINGENCIES
               
 
               
STOCKHOLDERS’ EQUITY:
               
Common Stock, $0.001 Par Value; Authorized 200,000,000 Shares; Issued 55,814,890 Shares (51,182,390 Shares Outstanding) as of March 31, 2010 and December 31, 2009
    56       56  
Additional Paid-In Capital
    357,359       357,174  
Unearned Compensation
    (281 )     (302 )
Accumulated Other Comprehensive Income — Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $1,002 and $602 as of March 31, 2010 and December 31, 2009, Respectively
    1,417       859  
Accumulated Deficit
    (187,517 )     (138,031 )
Less Treasury Stock, at Cost: 4,632,500 Shares as of March 31, 2010 and December 31, 2009
    (70,012 )     (70,012 )
 
           
 
               
Total Stockholders’ Equity
    101,022       149,744  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 3,018,301     $ 3,162,706  
 
           
See Accompanying Notes to Consolidated Financial Statements (Unaudited).

1


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
INTEREST AND DIVIDEND INCOME:
               
Interest and Fees on Loans
  $ 36,695     $ 45,085  
Taxable Interest on Investment Securities
    1,070       1,350  
Tax-Exempt Interest on Investment Securities
    77       643  
Interest on Term Federal Funds Sold
          700  
Dividends on Federal Reserve Bank Stock
    118       153  
Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements
    17       82  
Interest on Interest-Bearing Deposits in Other Banks
    55       2  
Dividends on Federal Home Loan Bank Stock
    21        
 
           
 
               
Total Interest and Dividend Income
    38,053       48,015  
 
           
INTEREST EXPENSE:
               
Interest on Deposits
    9,704       22,785  
Interest on Federal Home Loan Bank Advances
    346       1,112  
Interest on Junior Subordinated Debentures
    669       988  
 
           
 
               
Total Interest Expense
    10,719       24,885  
 
           
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
    27,334       23,130  
Provision for Credit Losses
    57,996       45,953  
 
           
 
               
NET INTEREST LOSS AFTER PROVISION FOR CREDIT LOSSES
    (30,662 )     (22,823 )
 
           
NON-INTEREST INCOME:
               
Service Charges on Deposit Accounts
    3,726       4,315  
Insurance Commissions
    1,278       1,182  
Remittance Fees
    462       523  
Trade Finance Fees
    351       506  
Other Service Charges and Fees
    412       483  
Bank-Owned Life Insurance Income
    231       234  
Net Gain on Sales of Investment Securities
    105       1,167  
Net Gain on Sales of Loans
          2  
Other Operating Income
    440       66  
 
           
 
               
Total Non-Interest Income
    7,005       8,478  
 
           
NON-INTEREST EXPENSE:
               
Salaries and Employee Benefits
    8,786       7,503  
Other Real Estate Owned Expense
    5,700       143  
Occupancy and Equipment
    2,725       2,884  
Deposit Insurance premiums and Regulatory Assessments
    2,224       1,490  
Data Processing
    1,499       1,536  
Professional Fees
    1,066       616  
Advertising and Promotion
    535       569  
Supplies and Communications
    517       570  
Amortization of Other Intangible Assets
    328       429  
Loan-Related Expense
    307       181  
Other Operating Expenses
    2,537       2,429  
 
           
 
               
Total Non-Interest Expense
    26,224       18,350  
 
           
 
               
LOSS BEFORE BENEFIT FOR INCOME TAXES
    (49,881 )     (32,695 )
Benefit for Income Taxes
    (395 )     (15,499 )
 
           
 
               
NET LOSS
  $ (49,486 )   $ (17,196 )
 
           
 
               
LOSS PER SHARE:
               
Basic
  $ (0.97 )   $ (0.37 )
Diluted
  $ (0.97 )   $ (0.37 )
 
               
WEIGHTED-AVERAGE SHARES OUTSTANDING:
               
Basic
    50,998,990       45,891,043  
Diluted
    50,998,990       45,891,043  
 
               
DIVIDENDS DECLARED PER SHARE
  $     $  
See Accompanying Notes to Consolidated Financial Statements (Unaudited).

2


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED)
(Dollars in Thousands)
                                                                                 
    Common StockNumber of Shares   Stockholders’ Equity      
                                                    Accumulated                      
                                    Additional             Other             Treasury     Total  
            Treasury             Common     Paid-in     Unearned     Comprehensive     Accumulated     Stock,     Stockholders’  
    Issued     Stock     Outstanding     Stock     Capital     Compensation     Income     Deficit     at Cost     Equity  
 
                                                                               
BALANCE AS OF JANUARY 1, 2009
    50,538,049       (4,632,500 )     45,905,549     $ 51     $ 349,304     $ (218 )   $ 544     $ (15,754 )   $ (70,012 )   $ 263,915  
 
                                                                               
Shares Issued for Business Acquisitions
    39,418             39,418             46                               46  
Share-Based Compensation Expense
                            236       6                         242  
Forfeiture of Restricted Stock Award
    (4,000 )           (4,000 )           (64 )     64                          
 
                                                                               
Comprehensive Loss:
                                                                               
Net Loss
                                              (5,196 )           (5,196 )
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes
                                        1,236                   1,236  
 
                                                           
 
                                                                               
Total Comprehensive Loss
                                                                            (3,960 )
 
                                                                             
 
                                                                               
BALANCE AS OF MARCH 31, 2009
    50,573,467       (4,632,500 )     45,940,967     $ 51     $ 349,522     $ (148 )   $ 1,780     $ (20,950 )   $ (70,012 )   $ 260,243  
 
                                                           
 
                                                                               
BALANCE AS OF JANUARY 1, 2010
    55,814,890       (4,632,500 )     51,182,390     $ 56     $ 357,174     $ (302 )   $ 859     $ (138,031 )   $ (70,012 )   $ 149,744  
 
                                                           
 
                                                                               
Share-Based Compensation Expense
                            185       21                         206  
 
                                                                               
Comprehensive Loss:
                                                                               
Net Loss
                                              (49,486 )           (49,486 )
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes
                                        558                   558  
 
                                                           
 
                                                                               
Total Comprehensive Loss
                                                                            (48,928 )
 
                                                                             
 
                                                                               
BALANCE AS OF MARCH 31, 2010
    55,814,890       (4,632,500 )     51,182,390     $ 56     $ 357,359     $ (281 )   $ 1,417     $ (187,517 )   $ (70,012 )   $ 101,022  
 
                                                           
See Accompanying Notes to Consolidated Financial Statements (Unaudited).

3


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Loss
  $ (49,486 )   $ (17,196 )
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities:
               
Depreciation and Amortization of Premises and Equipment
    644       669  
Amortization of Premiums and Accretion of Discounts on Investments, Net
    200       (1,101 )
Amortization of Other Intangible Assets
    327       429  
Amortization of Servicing Assets
    252       235  
Share-Based Compensation Expense
    206       242  
Provision for Credit Losses
    57,996       45,953  
Net Gain on Sales of Securities Available for Sale
    (105 )     (1,167 )
Net Gain on Sales of Loans
          (2 )
Loss on Sales of Other Real Estate Owned
    95        
Provision for Valuation Allowance on Other Real Estate Owned
    5,537       126  
Deferred Tax Benefit
    3,208        
Origination of Loans Held for Sale
    (3,369 )     (201 )
Proceeds from Sales of Loans Held for Sale
    2,959       3,361  
Decrease in Accrued Interest Receivable
    466       645  
Increase in Servicing Asset
          (74 )
Increase in Cash Surrender Value of Bank-Owned Life Insurance
    (231 )     (234 )
Increase in Other Assets
    (3,230 )     (14,004 )
Increase in Income Taxes Receivable
    (3,126 )      
Increase in Accrued Interest Payable
    540       8,695  
Increase (Decrease) in Other Liabilities
    524       (1,844 )
 
           
 
               
Net Cash Provided By Operating Activities
    13,407       24,532  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from Matured or Called Securities Available for Sale
    16,953       27,069  
Proceeds from Matured or Called Securities Held to Maturity
    7        
Proceeds from Sales of Securities Available for Sale
    3,252       38,447  
Proceeds from Sales of Other Real Estate Owned
    2,482        
Net Decrease in Loans Receivable
    105,980       28,249  
Purchases of Securities Available for Sale
    (305 )     (27,758 )
Purchases of Premises and Equipment
    (223 )     (659 )
 
           
 
               
Net Cash Provided By Investing Activities
    128,146       65,348  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
(Decrease) Increase in Deposits
    (99,047 )     126,029  
Repayment of Long-Term Federal Home Loan Bank Advances and Other Borrowings
    (80 )     (121 )
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings
    2,681       (110,026 )
 
           
 
               
Net Cash (Used In) Provided By Financing Activities
    (96,446 )     15,882  
 
           
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    45,107       105,762  
Cash and Cash Equivalents at Beginning of Period
    154,110       215,188  
 
           
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 199,217     $ 320,950  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash Paid During the Period for:
               
Interest Paid
  $ 10,179     $ 16,190  
Income Taxes Paid
  $ 2     $  
Non-Cash Activities:
               
Stock Issued for Business Acquisition
  $     $ 46  
Transfer of Loans to Loan Held for Sale
  $ 4,684     $  
Transfer of Loans to Other Real Estate Owned
  $ 4,397     $ 509  
Loan Provided in the Sale of Other Real Estate Owned
  $ 190     $  
See Accompanying Notes to Consolidated Financial Statements (Unaudited).

4


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
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. and All World Insurance Services, Inc.
     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 March 31, 2010, but are not necessarily indicative of the results that will be reported for the entire year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
     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 Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
     Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.
NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION
     On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order (“Order”) with the California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Order and the Agreement contain a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

5


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)
     While Hanmi Financial intends to take such actions as may be necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Regulatory Order and Agreement, there can be no assurance that Hanmi Financial or the Bank will be able to comply fully with the provisions of the Order and the Agreement, or that compliance with the Order and the Agreement will not have material and adverse effects on the operations and financial condition of Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Order and the Agreement could result in further enforcement actions by both DFI and FRB, or the placing of the Bank into conservatorship or receivership.
Final Order and Written Agreement
     The Order and the Agreement contain substantially similar provisions. The Order and the Agreement require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening Board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, with respect to the Agreement, of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Order and the Agreement also require the Bank to review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and Hanmi Financial and the Bank must obtain prior approval from the FRB prior to declaring and paying dividends.
     Under the Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. The Bank will be required to maintain a ratio of tangible shareholders’ equity to total tangible assets as follows:
     
    Ratio of Tangible Shareholder’s
Date   Equity to Total Tangible Assets
     
By December 31, 2009   Not Less Than 7.0 Percent
By July 31, 2010   Not Less Than 9.0 Percent
From December 31, 2010 and Until the Order is Terminated   Not Less Than 9.5 Percent
     If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be approved by the FRB. As of March 31, 2010, the Bank had a Tier 1 leverage ratio of 5.68 percent and tangible stockholders’ equity to total tangible assets ratio of 5.89 percent.

6


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)
     To comply with the provisions of the Order and the Agreement, additional actions that have been taken include the following:
    The Board Committees have been reorganized after a Board assessment was conducted to leverage the experience and skill base of our directors and to improve Board oversight of the Bank’s operations.
 
    Tools such as a master calendar of scheduled events and policy exception trigger tables have been created to assist the Board in its ability to monitor the Bank’s operations more effectively.
 
    Jung Hak Son, a 24 year employee of the Bank, was appointed to the Chief Credit Officer position on December 23, 2009 and the Bank received notice that the regulatory agency interposed no objection to his appointment on March 18, 2010.
 
    Loan policies and procedures continue to be adjusted and enhanced to keep current with the rapidly changing credit and economic environment.
 
    Quantitative and qualitative factors in our allowance for loan losses have been updated to reflect the higher risk in the loan portfolio due to the recessionary economy.
 
    Allowance methodology has been enhanced to better allocate reserves according to more specified loss and concentration risks.
 
    The credit department has also been reorganized and reinforced with additional personnel to increase the level of management loan review and loan monitoring.
 
    Written plans have been developed for each problem loan greater than $3 million and the plans have been implemented and are being monitored to improve loan work out and loan collection.
 
    The Bank’s strategic plan has been reviewed and revised, and the revised plan has been approved by the Board of Directors.
 
    The Bank’s liquidity management plan and contingency funding plan have been significantly revised to reflect the additional restrictions and challenges of the market.
 
    The capital plan has been revised and significant effort is being made to raise the required capital within the time frame mandated by the Order.
 
    A Board Compliance Committee has been organized to monitor the progress toward full compliance with all the provisions of the Agreement and the Order and approves the related progress reports at least on a monthly basis prior to submission to the DFI and FRB according to the schedule established.
     Policies and procedures have been developed, plans have been formulated, documented, approved and submitted and administrative requirements such as submission of quarterly progress reports are also being met. The results of these actions, however, are still subject to review by our regulators.

7


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)
Capital Plan
     Separately, Hanmi Financial has committed to the FRB that it will adopt a consolidated capital plan to augment and maintain a sufficient consolidated capital position. In addition, Hanmi Financial has agreed that it will not (i) declare or pay any dividends or make any payments on its trust preferred securities or any other capital distributions without the prior written consent of the FRB, and (ii) incur, increase or renew any existing debt or purchase, redeem or otherwise acquire any of its capital stock without the prior written consent of the FRB. In order to preserve its capital position, the Board of Hanmi Financial has elected to defer quarterly interest payments on its outstanding trust preferred securities until further notice, beginning with the interest payment that was due on January 15, 2009. Finally, Hanmi Financial has agreed to provide prior written notice and obtain the consent of the FRB prior to appointing any new directors or senior executive officers.
Risk-Based Capital
     The regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, regulators require banking organizations to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio is 3.0 percent. In addition to these uniform risk-based capital guidelines that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
     As of March 31, 2010, Hanmi Financial’s Tier 1 capital (stockholders’ equity plus junior subordinated debentures less intangible assets) was $129.4 million. This represented a decrease of $65.3 million, or 33.5 percent, over Tier 1 capital of $194.7 million as of December 31, 2009. The capital ratios of Hanmi Financial and the Bank were as follows as of March 31, 2010:
                                                 
                                    To be Categorized as
                    Minimum   “Well Capitalized”
                    Regulatory   under Prompt Corrective
    Actual   Requirement   Action Provision
    Amount   Ratio   Amount   Ratio   Amount   Ratio
March 31, 2010   (Dollars in Thousands)
Total Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 211,989       7.86 %   $ 215,856       8.00 %     N/A       N/A  
Hanmi Bank
  $ 210,354       7.81 %   $ 215,493       8.00 %   $ 269,366       10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 129,394       4.80 %   $ 107,928       4.00 %     N/A       N/A  
Hanmi Bank
  $ 174,741       6.49 %   $ 107,746       4.00 %   $ 161,619       6.00 %
Tier 1 Capital (to Average Assets):
                                               
Hanmi Financial
  $ 129,394       4.20 %   $ 123,265       4.00 %     N/A       N/A  
Hanmi Bank
  $ 174,741       5.68 %   $ 123,027       4.00 %   $ 153,783       5.00 %
Going Concern
     As previously mentioned, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. As part of the DFI Final Order issued on November 2, 2009, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million.

8


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)
     We have also committed to the FRB to adopt a consolidated capital plan to augment and maintain a sufficient capital position. Our existing capital resources do not currently satisfy our capital requirements for the foreseeable future and are not sufficient to offset additional problem assets. Further, should our asset quality continue to erode and require significant additional provision for credit losses, resulting in added future net operating losses at the Bank, our capital levels will additionally decline requiring the raising of more capital than the amount currently required to satisfy our agreements with our regulators.
     Our ability to raise additional capital will depend on conditions in the capital markets, which are outside our control, and will also depend upon our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital. An inability to raise additional capital when needed or to comply with the terms of the Order or the Agreement, raises substantial doubt about our ability to continue as a going concern.
     The accompanying interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.
NOTE 3 — FAIR VALUE MEASUREMENTS
Fair Value Option and Fair Value Measurements
     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 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 providing disclosures for 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 security during both interim and annual periods. FASB ASC 825 is effective for interim and annual reporting periods ending after June 15, 2009 and does 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. The adoption of FASB ASC 825 resulted in additional disclosures that are presented in “Note 3 — Fair Value Measurements.”
     FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)” — ASU 2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU 2010-06 resulted in additional disclosures that are presented in “Note 3 — Fair Value Measurements.”

9


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
     We used the following methods and significant assumptions to estimate fair value:
     Investment Securities Available for Sale — The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.
     Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities’ categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.
     Securities classified as Level 3 investment securities are preferred stocks that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into our proprietary valuation model. The fair value of the securities is determined by discounting contractual cash flows at a discount rate derived from a synthetic bond-rating method. This method relies on significant unobservable assumptions such as default spread and expected cash flows, and therefore, we have determined that classification of the instrument as Level 3 is appropriate.
     Loans Held for Sale — Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify these loans as Level 2 and subject to non-recurring fair value adjustments.
     Impaired Loans — FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 2 and subject to non-recurring fair value adjustments.
     Other Real Estate Owned — Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned as Level 2 and subject to non-recurring fair value adjustments.

10


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
     Servicing Assets and Servicing Liabilities — The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows using discount rates and a constant prepayment rate. The discount rate is based on the interest rate charged to a borrower plus a risk adjustment factor of one percent. We utilize the industrial constant prepayment rate provided by Bloomberg. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. Fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs. As such, we classify them as Level 3.
     Other Intangible Assets — Other intangible assets consists of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Fair value measurements of other intangible assets use significant unobservable inputs. As such, we classify them as Level 3 and subject to non-recurring fair value adjustments.
     FASB ASC 320, “Investments — Debt and Equity Securities,” amended current other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-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. FASB ASC 320 did not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. FASB ASC 320 also extended disclosure requirements about debt and equity securities to interim reporting periods. FASB ASC 320 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB ASC 320 requires comparative disclosures only for periods ending after initial adoption. We adopted FASB ASC 320 in the second quarter of 2009 and it had no impact on our financial condition or results of operations.
     Fair Value Measurement
     FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a three-level fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
  Level 1  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
  Level 2  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
 
  Level 3  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

11


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (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 three months ended March 31, 2010.
     As of March 31, 2010, assets and liabilities measured at fair value on a recurring basis are as follows:
                                 
            Level 2              
            Significant              
            Observable              
    Level 1     Inputs With              
    Quoted Prices in     No Active     Level 3        
    Active Markets     Market With     Significant     Balance as of  
    for Identical     Identical     Unobservable     March 31,  
    Assets     Characteristics     Inputs     2010  
    (In Thousands)  
 
                               
ASSETS:
                               
Debt Securities Available for Sale:
                               
Residential Mortgage-Backed Securities
  $     $ 58,418     $     $ 58,418  
U.S. Government Agency Securities
    24,850                   24,850  
Collateralized Mortgage Obligations
          9,840             9,840  
Asset-Backed Securities
          8,010             8,010  
Municipal Bonds
          6,937             6,937  
Other Securities
          3,262       1,258       4,520  
 
                       
Total Debt Securities Available for Sale
  $ 24,850     $ 86,467     $ 1,258     $ 112,575  
 
                       
 
                               
Equity Securities Available for Sale:
                               
Financial Service Industry
  $ 794     $     $     $ 794  
 
                       
 
                               
Total Equity Securities Available for Sale
  $ 794     $     $     $ 794  
 
                       
 
                               
Total Securities Available for Sale
  $ 25,644     $ 86,467     $ 1,258     $ 113,369  
 
                       
 
                               
Servicing Assets
  $     $     $ 3,590     $ 3,590  
 
                               
LIABILITIES:
                               
Servicing Liabilities
  $     $     $ 200     $ 200  
     The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2010:
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
                            Realized and            
                            Unrealized            
    Beginning           Realized and   Gains or Losses           Ending
    Balance as of   Purchases,   Unrealized   in Other   Transfers   Balance as of
    January 1,   Issuances and   Gains or Losses   Comprehensive   In and/or Out   March 31,
    2010   Settlements   in Earnings   Income   of Level 3   2010
    (In Thousands)
ASSETS:
                                               
Securities Available for Sale:
                                               
Other Securities
  1,258     $           $       $       1,258  
Servicing Assets
  $ 3,842     $       (252 )   $       $       3,590  
 
                                               
LIABILITIES:
                                               
Servicing Liabilities
  $ (216 )   $       16     $       $       $ (200 )
 
                                               

12


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
     As of March 31, 2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:
                                 
        Level 2        
            Significant        
            Observable        
    Level 1   Inputs With        
    Quoted Prices in   No Active   Level 3    
    Active Markets   Market With   Significant   Balance as of
    for Identical   Identical   Unobservable   March 31,
    Assets   Characteristics   Inputs   2010
    (In Thousands)
ASSETS:
                               
Loans Held for Sale
  $  —     $ 10,104     $     $ 10,104  
Impaired Loans
  $     $ 229,885     $     $ 229,885  
Other Real Estate Owned
  $     $ 22,399     $     $ 22,399  
Other Intangible Assets
  $     $     $ 3,055     $ 3,055  
 
(1)   Includes real estate loans of $110.4 million, and commercial and industrial loans of $119.5 million.
     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:
                                 
    March 31, 2010   December 31, 2009
    Carrying   Estimated   Carrying   Estimated
    or Contract   Fair   or Contract   Fair
    Amount   Value   Amount   Value
    (In Thousands)
Financial Assets:
                               
Cash and Cash Equivalents
  $ 199,217     $ 199,217     $ 154,110     $ 154,110  
Investment Securities Held to Maturity
    862       862       869       871  
Investment Securities Available for Sale
    113,369       113,369       132,420       132,420  
Loans Receivable, Net of Allowance for Loan Losses
    2,505,070       2,464,351       2,674,064       2,573,080  
Accrued Interest Receivable
    9,026       9,026       9,492       9,492  
Investment in Federal Home Loan Bank Stock
    30,697       30,697       30,697       30,697  
Investment in Federal Reserve Bank Stock
    7,878       7,878       7,878       7,878  
 
                               
Financial Liabilities:
                               
Noninterest-Bearing Deposits
    575,015       575,015       556,306       556,306  
Interest-Bearing Deposits
    2,075,265       2,075,265       2,193,021       2,197,866  
Borrowings
    240,732       241,563       236,453       237,354  
Accrued Interest Payable
    13,146       13,146       12,606       12,606  
 
                               
Off-Balance Sheet Items:
                               
Commitments to Extend Credit
    186,989       194       262,821       177  
Standby Letters of Credit
    17,925       72       17,225       37  

13


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (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 approximate fair value due to the short-term nature of these instruments.
     Investment Securities — The fair value of securities was generally obtained from market bids for similar or identical securities or obtained from independent securities brokers or dealers.
     Loans Receivable, Net of Allowance for Loan Losses — Fair values were estimated for loans 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.
     Accrued Interest Receivable — The carrying amount of accrued interest receivable approximates its fair value.
     Investment in Federal Home Loan Bank and Federal Reserve Bank Stock — The carrying amounts approximate fair value as the stock may be resold to the issuer at carrying value.
     Interest-Bearing Deposits — The fair value of interest-bearing deposits, such as certificates of deposit, was estimated based on discounted cash flows. The discount rate used was based on interest rates currently being offered by the Bank on comparable deposits as to amount and term.
     Borrowings — Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. The fair values disclosed for FHLB advances and junior subordinated debentures are determined by discounting contractual cash flows at current market interest rates for similar instruments. The fair values of overnight FHLB advances and other borrowings are considered to be equivalent to the carrying amount due to the short-term maturity.
     Accrued Interest Payable — The carrying amount of accrued interest payable approximates its fair value.
     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.

14


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 4 — INVESTMENT SECURITIES
     The following is a summary of investment securities held to maturity:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gain     Loss     Value  
    (In Thousands)  
March 31, 2010:
                               
Municipal Bonds
  $ 696     $     $     $ 696  
Mortgage-Backed Securities(1)
    166                   166  
 
                       
 
                               
 
  $ 862     $     $     $ 862  
 
                       
 
                               
December 31, 2009:
                               
Municipal Bonds
  $ 696     $     $     $ 696  
Mortgage-Backed Securities(1)
    173       2             175  
 
                       
 
                               
 
  $ 869     $ 2     $     $ 871  
 
                       
 
(1)   Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
     The following is a summary of investment securities available for sale:
                                 
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gain     Loss     Value  
    (In Thousands)  
March 31, 2010:
                               
Mortgage-Backed Securities (1)
  $ 56,957     $ 1,505     $ 45     $ 58,418  
U.S. Government Agency Securities
    24,996       16       162       24,850  
Collateralized Mortgage Obligations (1)
    9,628       212             9,840  
Asset-Backed Securities
    7,848       163             8,010  
Municipal Bonds
    6,831       142       36       6,937  
Other Securities
    4,230       333       43       4,520  
Equity Securities
    511       283             794  
 
                       
 
                               
 
  $ 111,001     $ 2,654     $ 286     $ 113,369  
 
                       
 
                               
December 31, 2009:
                               
Mortgage-Backed Securities (1)
  $ 65,218     $ 1,258     $ 144     $ 66,332  
U.S. Government Agency Securities
    33,325             562       32,763  
Collateralized Mortgage Obligations (1)
    12,520       269             12,789  
Asset-Backed Securities
    8,127       61             8,188  
Municipal Bonds
    7,369       82       92       7,359  
Other Securities
    3,925       332       62       4,195  
Equity Securities
    511       283             794  
 
                       
 
                               
 
  $ 130,995     $ 2,285     $ 860     $ 132,420  
 
                       
 
(1)   Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

15


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
     The amortized cost and estimated fair value of investment securities at March 31, 2010, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2039, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                                 
    Available for Sale     Held to Maturity  
    Amortized     Estimated     Amortized     Estimated  
    Cost     Fair Value     Cost     Fair Value  
    (In Thousands)  
 
                               
Within One Year
  $     $     $     $  
Over One Year Through Five Years
                696       696  
Over Five Years Through Ten Years
    16,650       16,710              
Over Ten Years
    27,255       27,607              
Mortgage-Backed Securities
    56,957       58,418       166       166  
Collateralized Mortgage Obligations
    9,628       9,840              
Equity Securities
    511       794              
 
                       
 
                               
 
  $ 111,001     $ 113,369     $ 862     $ 862  
 
                       
     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 March 31, 2010 and December 31, 2009:
                                                                         
    Holding Period  
    Less than 12 Months     12 Months or More     Total  
    Gross     Estimated     Number     Gross     Estimated     Number     Gross     Estimated     Number  
Investment Securities   Unrealized     Fair     of     Unrealized     Fair     of     Unrealized     Fair     of  
Available for Sale   Losses     Value     Securities     Losses     Value     Securities     Losses     Value     Securities  
    (In Thousands)  
 
                                                                       
March 31, 2010:
                                                                       
Mortgage-Backed Securities
  $     $           $ 45     $ 4,800       1     $ 45     $ 4,800       1  
Municipal Bonds
    2       313       1       34       839       1       36       1,152       2  
U.S. Government Agency Securities
                      162       14,835       2       162       14,835       2  
Other Securities
    7       1,993       2       36       964       1       43       2,957       3  
 
                                                     
 
                                                                       
 
  $ 9     $ 2,306       3     $ 277     $ 21,438       5     $ 286     $ 23,744       8  
 
                                                     
 
                                                                       
December 31, 2009:
                                                                       
Mortgage-Backed Securities
  $ 144     $ 14,584       3     $     $           $ 144     $ 14,584       3  
Municipal Bonds
    12       303       1       80       793       1       92       1,096       2  
U.S. Government Agency Securities
    562       32,764       6                         562       32,764       6  
Other Securities
    24       1,976       2       39       961       1       62       2,937       3  
 
                                                     
 
                                                                       
 
  $ 742     $ 49,627       12     $ 119     $ 1,754       2     $ 860     $ 51,381       14  
 
                                                     
     All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2010 and December 31, 2009 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2010. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

16


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
     FASB ASC 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2010 and December 31, 2009 are not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2010 and December 31, 2009 are warranted.
     Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense on sales of investment securities were as follows for the periods indicated:
                 
    Three Months Ended March 31,  
    2010     2009  
    (In Thousands)  
 
               
Gross Realized Gains on Sales of Investment Securities
  $ 210     $ 1,276  
Gross Realized Losses on Sales of Investment Securities
    (105 )     (109 )
 
           
 
               
Net Realized Gains on Sales of Investment Securities
  $ 105     $ 1,167  
 
           
 
               
Proceeds from Sales of Investment Securities
  $ 3,252     $ 38,447  
Tax Expense on Sales of Investment Securities
  $ 45     $ 491  
     There were $105,000 and $1.2 million in net realized gains on sales of securities available for sale during the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, $1.0 million ($605,000, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income and previously net unrealized gains of $99,000 ($57,000, net of income taxes) were realized in earnings. For the three months ended March 31, 2009, net unrealized gains of $3.0 million ($1.7 million, net of income taxes) arose during the period and was included in comprehensive income and previously net unrealized gains of $975,000 ($565,000, net of income taxes) were realized in earnings.
     Investment securities available for sale with carrying values of $91.6 million and $123.6 million as of March 31, 2010 and December 31, 2009, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

17


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 5 — LOANS
Loans Receivable
     Loans receivable consisted of the following as of the dates indicated:
                 
    March 31,     December 31,  
    2010     2009  
    (In Thousands)  
Real Estate Loans:
               
Commercial Property
  $ 821,752     $ 839,598  
Construction
    93,222       126,350  
Residential Property
    71,443       77,149  
 
           
 
               
Total Real Estate Loans
    986,417       1,043,097  
 
           
 
               
Commercial and Industrial Loans: (1)
               
Commercial Term Loans
    1,354,793       1,420,034  
SBA Loans
    124,394       134,521  
Commercial Lines of Credit
    104,326       101,159  
International Loans
    44,933       53,488  
 
           
 
               
Total Commercial and Industrial Loans
    1,628,446       1,709,202  
 
           
 
               
Consumer Loans
    58,886       63,303  
 
           
 
               
Total Gross Loans
    2,673,749       2,815,602  
 
               
Deferred Loan Fees
    (963 )     (1,552 )
Allowance for Loan Losses
    (177,820 )     (144,996 )
 
           
 
               
Loans Receivable, Net
  $ 2,494,966     $ 2,669,054  
 
           
 
(1)   Commercial and industrial loans include owner-occupied property loans of $1.08 billion and $1.15 billion as of March 31, 2010 and December 31, 2009, respectively.
     Accrued interest on loans receivable amounted to $8.6 million and $9.3 million at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010 and December 31, 2009, loans receivable totaling $1.47 billion and $1.38 billion, respectively, was pledged to secure FHLB advances and the Fed Discount Window.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
     Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows for the periods indicated:
                         
    As of and for the Three Months Ended  
    March 31,     December 31,     March 31,  
    2010     2009     2009  
            (In Thousands)          
Allowance for Loan Losses:
                       
Balance at Beginning of Period
  $ 144,996     $ 124,768     $ 70,986  
 
                       
Actual Charge-Offs
    (30,114 )     (58,170 )     (12,516 )
Recoveries on Loans Previously Charged Off
    3,721       858       703  
 
                 
 
                       
Net Loan Charge-Offs
    (26,393 )     (57,312 )     (11,813 )
 
                 
 
                       
Provision Charged to Operating Expense
    59,217       77,540       45,770  
 
                 
 
                       
Balance at End of Period
  $ 177,820     $ 144,996     $ 104,943  
 
                 
 
                       
Allowance for Off-Balance Sheet Items:
                       
Balance at Beginning of Period
  $ 3,876     $ 4,416     $ 4,096  
Provision Charged to (Reversal of Charged to) Operating Expense
    (1,221 )     (540 )     183  
 
                 
 
                       
Balance at End of Period
  $ 2,655     $ 3,876     $ 4,279  
 
                 

18


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 5 — LOANS (Continued)
Impaired Loans
     The following table provides information on impaired loans as of the dates indicated:
                 
    Amount     Allowance  
    (In Thousands)  
 
               
March 31, 2010:
               
With No Allocated Allowance:
               
Without Charge-Offs
  $ 77,334     $  
With Charge-Offs
    97,523        
 
           
 
  $ 174,857     $  
 
           
With Allocated Allowance:
               
Without Charge-Offs
  $ 48,786     $ 22,632  
With Charge-Offs
    31,043       4,534  
 
           
 
  $ 79,829     $ 27,166  
 
           
 
               
December 31, 2009:
               
With No Allocated Allowance:
               
Without Charge-Offs
  $ 44,055     $  
With Charge-Offs
    84,674        
 
           
 
  $ 128,729     $  
 
           
With Allocated Allowance:
               
Without Charge-Offs
  $ 41,476     $ 20,413  
With Charge-Offs
    30,529       2,735  
 
           
 
  $ 72,005     $ 23,148  
 
           
     The following is a summary of interest foregone on impaired loans for the periods indicated:
                 
    Three Months Ended  
    March 31,     March 31,  
    2010     2009  
    (In Thousands)  
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance With Their Original Terms
  $ 5,569     $ 5,177  
Less: Interest Income Recognized on Impaired Loans
    (2,771 )     (1,655 )
 
           
 
               
Interest Foregone on Impaired Loans
  $ 2,798     $ 3,522  
 
           
     There were no commitments to lend additional funds to borrowers whose loans are included above.

19


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 5 — LOANS (Continued)
Non-Performing Assets
     The following table details non-performing assets as of the dates indicated:
                 
    March 31,     December 31,  
    2010     2009  
    (In Thousands)  
Non-Accrual Loans
  $ 262,232     $ 219,000  
Loans 90 Days or More Past Due and Still Accruing
          67  
 
           
 
               
Total Non-Performing Loans
    262,232       219,067  
Other Real Estate Owned
    22,399       26,306  
 
           
 
               
Total Non-Performing Assets
  $ 284,631     $ 245,373  
 
           
 
               
Troubled Debt Restructurings on Accrual Status
  $ 10,041     $  
 
           
     Loans on non-accrual status totaled $262.2 million and $219.0 million as of March 31, 2010 and December 31, 2009, respectively. Delinquent loans (defined as 30 days or more past due) were $236.2 million as of March 31, 2010, compared to $186.3 million as of December 31, 2009, representing a 26.8 percent increase. Of $236.2 million, $167.5 million was included in non-performing loans as of March 31, 2010, and of $186.3 million, $145.1 million was included in non-performing loans as of December 31, 2009. We believe that the increases in non-performing loans and delinquent loans are attributable primarily to a current economic recession that is affecting some of our borrower’s ability to honor their commitments.
     Non-performing loans increased by $43.1 million, or 19.7 percent, to $262.2 million as of March 31, 2010, compared to $219.1 million as of December 31, 2009. During the same period, the allowance for loan losses increased by $32.8 million, or 22.6 percent, to $177.8 million from $145.0 million. The allowance for the collateral-dependent loans is calculated by the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated cost to dispose of the property. 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 March 31, 2010, other real estate owned consisted of eleven properties, primarily located in California, with a combined net carrying value of $22.4 million. During the three months ended March 31, 2010, three properties, with a carrying value of $4.4 million, were transferred from loans receivable to other real estate owned and five properties, with a carrying value of $2.8 million, were sold and a loss of $95,000 was recognized. As of December 31, 2009, other real estate owned consisted of thirteen properties with a combined net carrying value of $26.3 million.
     During the three months ended March 31, 2010, we restructured monthly payments on 67 loans, with a net carrying value of $45.5 million as of March 31, 2010, through temporary payment structure modification from principal and interest due monthly to interest only due monthly for six months or less. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, we believe that performance and collection under the revised terms is probable. As of March 31, 2010, troubled debt restructurings on accrual status totaled $10.0 million, all of which were temporary interest rate reductions, and a $2.0 million reserve relating to these loans was included in the allowance for loan losses. As of December 31, 2009, there were no troubled debt restructure loans on accrual status.

20


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 6 — INCOME TAXES
     Under GAAP, a valuation allowance must be recorded if it is “more likely than not” that such deferred tax assets will not be realized. Appropriate consideration is given to all available evidence (both positive and negative) related to the realization of the deferred tax assets on a quarterly basis.
     In conducting our regular quarterly evaluation, we decided to keep establishing a deferred tax asset valuation allowance as of March 31, 2010 based primarily upon the existence of a three-year cumulative loss including management’s current projected results for the year ending December 31, 2009. Although our current financial forecasts indicate that sufficient taxable income will be generated in the future to ultimately realize the existing deferred tax benefits, those forecasts were not considered to constitute sufficient positive evidence to overcome the observable negative evidence associated with the three-year cumulative loss position determined as of March 31, 2010.
     During the first quarter of 2010, we recorded a valuation allowance of $23.6 million against our deferred tax assets, totaling $68.8 million of valuation allowance as of March 31, 2010. We have zero balance of net deferred tax assets as of March 31, 2010.
NOTE 7 — SHARE-BASED COMPENSATION
Share-Based Compensation Expense
     For the three months ended March 31, 2010 and 2009, share-based compensation expense was $206,000 and $242,000, respectively, and the related tax benefits were $87,000 and $102,000, respectively.
Unrecognized Share-Based Compensation Expense
     As of March 31, 2010, unrecognized share-based compensation expense was as follows:
                 
    Unrecognized     Average Expected  
    Expense     Recognition Period  
    (Dollars in Thousands)  
Stock Option Awards
  $ 855     1.6 years
Restricted Stock Awards
    281     3.5 years
 
             
 
               
Total Unrecognized Share-Based Compensation Expense
  $ 1,136     2.1 years
 
             

21


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 7 — SHARE-BASED COMPENSATION (Continued)
Share-Based Payment Award Activity
     The table below provides stock option information for the three months ended March 31, 2010:
                                 
            Weighted-   Weighted-   Aggregate
            Average   Average   Intrinsic
    Number   Exercise   Remaining   Value of
    of   Price Per   Contractual   In-the-Money
    Shares   Share   Life   Options
    (Dollars in Thousands, Except Per Share Data)
Options Outstanding at Beginning of Period
    1,180,358     $ 11.78     6.2 years   $ (1)
 
                               
Options Expired
    (37,243 )   $ 18.31     5.3 years        
Options Forfeited
    (5,600 )   $ 16.68     7.0 years        
 
                               
 
                               
Options Outstanding at End of Period
    1,137,515     $ 11.55     6.0 years   $ 242 (2)
 
                               
 
                               
Options Exercisable at End of Period
    708,515     $ 14.00     4.7 years   $ (2)
 
(1)   Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $1.20 as of December 31, 2009, 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 $2.40 as of March 31, 2010, over the exercise price, multiplied by the number of options.
     There were no options exercised during the three months ended March 31, 2010 and 2009.
Restricted Stock Awards
     The table below provides information for restricted stock awards for the three months ended March 31, 2010:
                 
            Weighted-
            Average
    Number   Grant Date
    of   Fair Value
    Shares   Per Share
Restricted Stock at Beginning of Period
    183,400     $ 1.87  
Restricted Stock Forfeited
             
 
               
Restricted Stock at End of Period
    183,400     $ 1.87  
 
               
NOTE 8 — LOSS PER SHARE
     Earnings (loss) per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. Unvested restricted stock is excluded from the calculation of weighted-average common shares for basic EPS. For diluted EPS, weighted-average common shares include the impact of restricted stock under the treasury method.

22


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 8 — LOSS PER SHARE (Continued)
     The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
                                                 
    Three Months Ended March 31,  
    2010     2009  
    (Numerator)     (Denominator)             (Numerator)     (Denominator)        
            Weighted-     Per             Weighted-     Per  
    Net     Average     Share     Net     Average     Share  
    Loss     Shares     Amount     Loss     Shares     Amount  
            (Dollars in Thousands, Except Per Share Data)          
Basic EPS
  $ (49,486 )     50,998,990     $ (0.97 )   $ (17,196 )     45,891,043     $ (0.37 )
Effect of Dilutive Securities — Options, Warrants and Unvested Restricted Stock
                                   
 
                                   
 
                                               
Diluted EPS
  $ (49,486 )     50,998,990     $ (0.97 )   $ (17,196 )     45,891,043     $ (0.37 )
 
                                   
     For the three months ended March 31, 2010 and 2009, there were 1,320,915 and 1,205,022 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 9 — 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:
                 
    March 31,     December 31,  
    2010     2009  
    (In Thousands)  
Commitments to Extend Credit
  $ 186,989     $ 262,821  
Standby Letters of Credit
    17,925       17,225  
Commercial Letters of Credit
    13,221       13,544  
Unused Credit Card Lines
    23,722       23,408  
 
           
 
               
Total Undisbursed Loan Commitments
  $ 241,857     $ 316,998  
 
           
NOTE 10 — 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.

23


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 11 — LIQUIDITY
     FASB ASC 275, “Risks and Uncertainties,” requires reporting entities to disclose information about the nature of their operations and vulnerabilities due to certain concentrations. Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.
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, 2010. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of March 31, 2010, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $2.8 million, down from $3.5 million as of December 31, 2009.
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 originated through its branch platform. As of March 31, 2010, the Bank was considered to be “undercapitalized” under the regulatory framework for prompt corrective action, as the Bank’s total risk-based capital ratio fell slightly below 8%. Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. According to the FDIC’s Financial Institution Letter, FIL-69-2009, requires institutions that are not well capitalized must use national rate caps to determine conformance for non-local depositors beginning January 1, 2010 and for local depositors beginning March 1, 2010. Due to the FDIC’s rules, the Bank is currently restricted from accepting brokered deposits and offering deposit rates above the national rate caps.
     In an effort to preserve liquidity under the restrictions, the Bank deployed innovative products, such as Advantage and Diamond Freedom CDs, and utilized Internet rate service providers in the month of March 2010. Through this campaign and the use of Internet rate service providers, the Bank achieved the objectives of maintaining adequate liquidity and reducing its reliance on brokered deposits. As a result, total deposits slightly decreased by $99.0 million, or 3.6 percent, from $2.75 billion as of December 31, 2009 to $2.65 billion as of March 31, 2010. The Bank’s wholesale funds, consisting of Federal Home Loan Bank (“FHLB”) advances and brokered deposits, continuously decreased by $140.5 million to $217.3 million at March 31, 2010 from $357.8 million at December 31, 2009.

24


 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)
NOTE 11 — LIQUIDITY (Continued)
     The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 20 percent of its total assets. As of March 31, 2010, our total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $532.1 million and $377.1 million, respectively. The Bank’s FHLB borrowings as of March 31, 2010 totaled $153.9 million, representing 5.1 percent of total assets. As of May 10, 2010, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $494.0 million and $340.2 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
     As a means of augmenting its liquidity, the Bank had an available borrowing source of $239.4 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $557.0 million, and had no borrowings as of March 31, 2010. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2009, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million. This line of credit will continue for a term of one year, and, unless amended or terminated, will automatically renew for successive one-year terms.
     Current market conditions have limited the Bank’s liquidity sources principally to secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or FRB 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 is currently restricted from accepting brokered deposits as a funding source. As of March 31, 2010, brokered deposits were $63.4 million, or 2.3 percent of total deposits. All brokered deposits are currently scheduled to mature prior to June 30, 2010. The Bank successfully replaced $670.7 million and $140.5 million of brokered deposits during 2009 and the first quarter of 2010, respectively. If the Bank is unable to replace these maturing deposits with new deposits, the Bank believes that it nonetheless has adequate liquidity resources to fund its obligations through its secured credit lines with the FHLB and Fed Discount Window.
NOTE 13 — SUBSEQUENT EVENTS
     Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of March 31, 2010.

25


 

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 months ended March 31, 2010. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 and with the unaudited consolidated financial statements and notes thereto set forth in 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 Form 10-Q 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”). 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 continue as a going concern;
 
    failure to maintain adequate levels of capital and liquidity to support our operations;
 
    a significant number of our customers failing to perform under their loans and other terms of credit agreements;
 
    the effect of regulatory orders we have entered into and potential future supervisory action against us or Hanmi Bank;
 
    fluctuations in interest rates and a decline in the level of our interest rate spread;
 
    failure to attract or retain deposits;
 
    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;
 
    failure to attract or retain our key employees;
 
    failure to maintain our status as a financial holding company;
 
    adequacy of our allowance for loan losses;
 
    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 the financial markets that may result in other-than-temporary impairment charges relating to our securities portfolio;
 
    competition in our primary market areas;
 
    demographic changes in our primary market areas; and
 
    significant government regulations, legislation and potential changes thereto.

26


 

     For a discussion of some of the other factors that might cause such a difference, see the discussion contained in this Form 10-Q under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors.” Also see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009 as well as other factors we identify from time to time in our periodic reports filed pursuant to the Exchange Act. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.
CRITICAL ACCOUNTING POLICIES
     We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2009. Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2009. 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.

27


 

SELECTED FINANCIAL DATA
     The following tables set forth certain selected financial data for the periods indicated.
                 
    As of and for the
    Three Months Ended
    March 31,
    2010   2009
    (Dollars in Thousands, Except Per Share Data)
AVERAGE BALANCES:
               
Average Gross Loans, Net (1)
  $ 2,765,701     $ 3,349,085  
Average Investment Securities
  $ 125,340     $ 182,284  
Average Interest-Earning Assets
  $ 3,010,938     $ 3,806,186  
Average Total Assets
  $ 3,086,198     $ 3,946,727  
Average Deposits
  $ 2,662,960     $ 3,202,032  
Average Borrowings
  $ 257,132     $ 440,053  
Average Interest-Bearing Liabilities
  $ 2,360,992     $ 3,115,332  
Average Stockholders’ Equity
  $ 137,931     $ 263,553  
Average Tangible Equity (2)
  $ 134,679     $ 258,775  
PER SHARE DATA:
               
Earnings (Loss) Per Share — Basic
  $ (0.97 )   $ (0.37 )
Earnings (Loss) Per Share — Diluted
  $ (0.97 )   $ (0.37 )
Common Shares Outstanding
    51,182,390       45,940,967  
Book Value Per Share (3)
  $ 1.97     $ 5.40  
Tangible Book Value Per Share (4)
  $ 1.91     $ 5.31  
SELECTED PERFORMANCE RATIOS:
               
Return on Average Assets (5) (6)
    (6.50 %)     (1.77 %)
Return on Average Stockholders’ Equity (5) (7)
    (145.50 %)     (26.46 %)
Return on Average Tangible Equity (5) (8)
    (149.02 %)     (26.95 %)
Efficiency Ratio (9)
    76.37 %     57.92 %
Net Interest Spread (10)
    3.29 %     1.91 %
Net Interest Margin (11)
    3.69 %     2.50 %
Average Stockholders’ Equity to Average Total Assets
    4.47 %     6.68 %
SELECTED CAPITAL RATIOS: (12)
               
Total Risk-Based Capital Ratio:
               
Hanmi Financial
    7.86 %     10.57 %
Hanmi Bank
    7.81 %     10.50 %
Tier 1 Risk-Based Capital Ratio:
               
Hanmi Financial
    4.80 %     9.29 %
Hanmi Bank
    6.49 %     9.22 %
Tier 1 Leverage Ratio:
               
Hanmi Financial
    4.20 %     8.16 %
Hanmi Bank
    5.68 %     8.10 %
SELECTED ASSET QUALITY RATIOS:
               
Non-Performing Loans to Total Gross Loans (13)
    9.77 %     4.71 %
Non-Performing Assets to Total Assets (14)
    9.43 %     4.06 %
Net Loan Charge-Offs to Average Total Gross Loans (15)
    3.87 %     1.43 %
Allowance for Loan Losses to Total Gross Loans
    6.63 %     3.16 %
Allowance for Loan Losses to Non-Performing Loans
    67.81 %     67.13 %
 
(1)   Loans are net of deferred fees and related direct costs.
 
(2)   Average tangible equity is calculated by subtracting average other intangible assets from average stockholders’ equity. See “Non-GAAP Financial Measures.”
 
(3)   Total stockholders’ equity divided by common shares outstanding.
 
(4)   Tangible equity divided by common shares outstanding. See “Non-GAAP Financial Measures.”
 
(5)   Calculation based upon annualized net income.
 
(6)   Net income divided by average total assets.
 
(7)   Net income divided by average stockholders’ equity.
 
(8)   Net income divided by average tangible equity. See “Non-GAAP Financial Measures.”
 
(9)   Total non-interest expenses divided by the sum of net interest income before provision for credit losses and total non-interest income.
 
(10)   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.
 
(11)   Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using in effective marginal rate of 35 percent.
 
(12)   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).
 
(13)   Non-performing loans consist of non-accrual loans and loans past due 90 days or more and still accruing interest.
 
(14)   Non-performing assets consist of non-performing loans (see footnote (13) above) and other real estate owned.
 
(15)   Calculation based upon annualized net loan charge-offs.

28


 

Non-GAAP Financial Measures
     Return on Average Tangible Equity
     Return on average tangible equity is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Average tangible equity is calculated by subtracting average other intangible assets from average stockholders’ equity. Banking and financial institution regulators also exclude other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substitute 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 the GAAP performance measure to this non-GAAP performance measure for the periods indicated:
                 
    Three Months Ended  
    March 31,  
    2010     2009  
    (Dollars in Thousands)  
Average Stockholders’ Equity
  $ 137,931     $ 263,553  
Less Average Other Intangible Assets
    (3,252 )     (4,778 )
 
           
Average Tangible Equity
  $ 134,679     $ 258,775  
 
           
Return on Average Stockholders’ Equity
    (145.50 %)     (26.46 %)
Effect of Average Other Intangible Assets
    (3.52 %)     (0.49 %)
 
           
 
               
Return on Average Tangible Equity
    (149.02 %)     (26.95 %)
 
           
     Tangible Book Value Per Share
     Tangible book value per share is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Tangible book value per share is calculated by subtracting other intangible assets from total stockholders’ equity and dividing the difference by the number of shares of common stock outstanding. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substitute 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 the GAAP performance measure to this non-GAAP performance measure for the periods indicated:
                 
    March 31,  
    2010     2009  
    (Dollars in Thousands,  
    Except Per Share Data)  
Total Stockholders’ Equity
  $ 101,022     $ 248,243  
Less Other Intangible Assets
    (3,055 )     (4,521 )
 
           
Tangible Equity
  $ 97,967     $ 243,722  
 
           
Book Value Per Share
  $ 1.97     $ 5.40  
Effect of Other Intangible Assets
    (0.06 )     (0.09 )
 
           
Tangible Book Value Per Share
  $ 1.91     $ 5.31  
 
           

29


 

EXECUTIVE OVERVIEW
     During the first quarter of 2010, we recognized net losses of $49.5 million or $(0.97) per share, compared to $35.9 million or $(0.70) per share and $17.2 million or $(0.37) per share during the fourth quarter and first quarter of 2009, respectively. The losses during the first quarter of 2010 were primarily driven by provision for credit losses of $58.0 million, reflecting the sustained weakness of the national and regional economies. We recorded $77.0 million and $46.0 million in provision for credit losses during the fourth quarter and first quarter of 2009. Despite challenging economic conditions, we successfully maintained a strong liquidity position, and expanded our stabilized deposit base, as well as improving our net interest margin through a continuation of our balance sheet deleveraging, and the development and ongoing promotion of new deposit products. In addition, during the first quarter of 2010, we continued to undertake aggressive actions to proactively manage our credit risk exposure through accelerated problem loan resolutions, prudent charge-offs of loans lacking cash flow and collateral equity, and enhanced methodology for allowance for loan losses to better allocate reserves according to more specified portfolio risks.
     We continued to proactively identify problem loans at their earliest stage and effectively manage them until resolution. During the fourth quarter of 2009, we had taken initiatives to fortify the function of our credit department by splitting review and monitoring subdivisions to handle problem loans in a time effective manner and created our note sales department to accelerate problem loan resolutions as part of our ongoing asset improvement strategy. Building on the changes that we implemented, we initiated additional programs, such as increased extent and frequency of independent loan review and collateral reappraisals, to further strengthen our loan grading systems and allowance for loan losses methodology. See “Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for additional information on methodologies used to determine the allowance for loan losses.
     During the first quarter of 2010, to maintain a strong level of liquidity and expand our stabilized deposit base, we launched innovative and flexible products with call options and penalty-free withdrawals at disciplined pricing. In addition, we utilized Internet rate service providers to further supplement our efforts to maintain adequate liquidity and diversify our funding sources. As the direct result of the implementation of our liquidity preservation strategy under the FDIC’s rate restriction during the first quarter of 2010, we successfully shifted a substantial portion of non-maturity money market deposits to time deposits. As of March 31, 2010, total deposits decreased by $99.0 million, or 3.6 percent, to $2.65 billion, compared to $2.75 billion at December 31, 2009. This decrease primarily resulted from a $133.6 million decrease in brokered deposits, partially offset by an $18.7 million increase in demand deposits. Total gross loans decreased by $141.9 million, or 5.0% to $2.67 billion at March 31, 2010, from $2.82 billion at December 31, 2009 mainly through natural amortization and payoffs as well as the sale of $33.8 million in problem loans. With sufficient liquidity generated from the strategic plans throughout the first quarter of 2010, we were well positioned to build up our liquidity reserves in the form of marketable securities.
     Despite the challenging economic environment and deposit market, our net interest margin continued to improve. With the successful promotion of the new deposit products at disciplined pricing during the first quarter of 2010 and a series of core deposit campaigns throughout 2009, we were able to replace high cost volatile time and non-time deposits with low-cost stable retail deposits. Our low cost demand deposits increased by $18.7 million, or 3.4% to $575.0 million at March 31, 2010 from $556.3 million at December 31, 2009, while total deposits decreased by $99.0 million, or 3.6 percent, to $2.65 billion at March 31, 2010, compared to $2.75 billion at December 31, 2009 which primarily resulted from a $133.6 million decrease in brokered deposits. During the first quarter of 2010, our quarterly net interest margin increased 23 basis points, or 3.69 percent, compared with 3.46 percent during the fourth quarter of 2009, and increased 119 basis points, compared with 2.50 percent during the first quarter of 2009.

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     Outlook for 2010
     As we stated in our Annual report on Form 10-K for the year ended December 31, 2009, our strategic focus areas for 2010 were to raise sufficient capital, to sustain liquidity and improve credit quality.
     In regards to the capital order mandated by our regulators, the minimum capital requirement to raise $100 million by July 31, 2010 is intended to bring the Bank’s tangible capital ratio to over 9%. With our solid franchise value driven by loyal customers and dedicated employees, we believe we will be able to raise a sufficient level of capital within the required timeframe. However, there can be no assurance that we will be successful in our efforts.
     As demonstrated by our results of operation during the first quarter of 2010, our liquidity position remained strong. We will continue to deleverage our long-term assets until the necessary capital is raised, while preserving our deposit base to maintain an adequate level of liquidity. Responding to the interest rate restriction amended by the FDIC, we launched new deposit products with flexible and innovative features during the first quarter of 2010. The success of deposit products enabled us to maintain strong liquidity position coupled with the increase in demand deposits. We will continue to deploy more products tailored to meet the ever-changing needs of customers. In addition to our innovative retail product orientation, we will also continue to improve our customer service quality through various programs including “mystery shoppers” and customer surveys. We believe our new deposit products coupled with our enhanced customer service quality will enable us to preserve our deposit base and attract new customers without compromising our net interest margin.
     We expect our credit quality to remain a challenge for 2010 with elevated levels of problem assets, reserves and charge-offs. A number of initiatives have been implemented in an effort to minimize our continuously deteriorating credit quality. We will continue to refine our credit risk management system to meet the changing external and internal environments.
RESULTS OF OPERATIONS
Net Interest Income Before Provision for Credit Losses
     Our earnings depend largely upon the difference between the interest income received from our loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” The difference between the yield earned on interest-earning assets and the cost of interest-bearing liabilities is “net interest spread.” Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the “net interest margin.”
     Net interest income is affected by the change in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” Our net interest income also is affected by changes in the yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate changes.” Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are affected by general economic conditions and other factors beyond our control, such as Federal economic policies, the general supply of money in the economy, income tax policies, governmental budgetary matters and the actions of the FRB.

31


 

     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  
    March 31, 2010     March 31, 2009  
            Interest     Average             Interest     Average  
    Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate  
    (Dollars in Thousands)  
ASSETS
                                               
Interest-Earning Assets:
                                               
Gross Loans, Net (1)
  $ 2,765,701     $ 36,695       5.38 %   $ 3,349,085     $ 45,085       5.46 %
Municipal Securities (2)
    7,549       118       6.25 %     58,886       989       6.72 %
Obligations of Other U.S. Government Agencies
    32,120       383       4.77 %     9,578       96       4.01 %
Other Debt Securities
    85,671       701       3.27 %     113,820       1,254       4.41 %
Equity Securities
    39,369       125       1.27 %     41,727       153       1.47 %
Federal Funds Sold
    14,118       17       0.48 %     94,585       82       0.35 %
Term Federal Funds Sold
                      138,344       700       2.02 %
Interest-Earning Deposits
    66,410       55       0.33 %     161       2       4.97 %
 
                                       
 
                                               
Total Interest-Earning Assets
    3,010,938       38,094       5.13 %     3,806,186       48,361       5.15 %
 
                                       
 
                                               
Noninterest-Earning Assets:
                                               
Cash and Cash Equivalents
    67,157                       84,054                  
Allowance for Loan Losses
    (157,296 )                     (72,583 )                
Other Assets
    165,399                       129,070                  
 
                                           
 
                                               
Total Noninterest-Earning Assets
    75,260                       140,541                  
 
                                           
 
                                               
TOTAL ASSETS
  $ 3,086,198                     $ 3,946,727                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Interest-Bearing Liabilities:
                                               
Deposits:
                                               
Savings
  $ 115,625       824       2.89 %   $ 82,029       505       2.50 %
Money Market Checking and NOW Accounts
    558,916       1,622       1.18 %     343,354       1,854       2.19 %
Time Deposits of $100,000 or More
    924,055       4,677       2.05 %     1,078,650       10,322       3.88 %
Other Time Deposits
    505,264       2,581       2.07 %     1,171,246       10,104       3.50 %
Federal Home Loan Bank Advances
    173,062       346       0.81 %     356,190       1,112       1.27 %
Other Borrowings
    1,664                   1,457              
Junior Subordinated Debentures
    82,406       669       3.29 %     82,406       988       4.86 %
 
                                       
 
                                               
Total Interest-Bearing Liabilities
    2,360,992       10,719       1.84 %     3,115,332       24,885       3.24 %
 
                                       
 
                                               
Noninterest-Bearing Liabilities:
                                               
Demand Deposits
    559,100                       526,753                  
Other Liabilities
    28,175                       41,089                  
 
                                           
 
                                               
Total Noninterest-Bearing Liabilities
    587,275                       567,842                  
 
                                           
 
                                               
Total Liabilities
    2,948,267                       3,683,174                  
Stockholders’ Equity
    137,931                       263,553                  
 
                                           
 
                                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 3,086,198                     $ 3,946,727                  
 
                                           
 
                                               
NET INTEREST INCOME
          $ 27,375                     $ 23,476          
 
                                           
 
                                               
NET INTEREST SPREAD (3)
                    3.29 %                     1.91 %
 
                                           
 
                                               
NET INTEREST MARGIN (4)
                    3.69 %                     2.50 %
 
                                           
 
(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 $450,000 and $391,000 for the three months ended March 31, 2010 and 2009, 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.

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     The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
                         
    Three Months Ended March 31, 2010 vs.  
    Three Months Ended March 31, 2009  
    Increases (Decreases) Due to Change in  
    Volume     Rate     Total  
    (In Thousands)  
 
                       
Interest and Dividend Income:
                       
Gross Loans, Net
  $ (7,749 )   $ (641 )   $ (8,390 )
Municipal Securities
    (806 )     (65 )     (871 )
Obligations of Other U.S. Government Agencies
    266       21       287  
Other Debt Securities
    (271 )     (282 )     (553 )
Equity Securities
    (8 )     (20 )     (28 )
Federal Funds Sold
    (89 )     24       (65 )
Term Federal Funds Sold
    (350 )     (350 )     (700 )
Interest-Earning Deposits
    57       (4 )     53  
 
                 
 
                       
Total Interest and Dividend Income
    (8,950 )     (1,317 )     (10,267 )
 
                 
 
                       
Interest Expense:
                       
Savings
    230       89       319  
Money Market Checking and NOW Accounts
    854       (1,086 )     (232 )
Time Deposits of $100,000 or More
    (1,316 )     (4,329 )     (5,645 )
Other Time Deposits
    (4,381 )     (3,142 )     (7,523 )
Federal Home Loan Bank Advances
    (451 )     (315 )     (766 )
Junior Subordinated Debentures
          (319 )     (319 )
 
                 
 
                       
Total Interest Expense
    (5,064 )     (9,102 )     (14,166 )
 
                 
 
                       
Change in Net Interest Income
  $ (3,886 )   $ 7,785     $ 3,899  
 
                 
     For the three months ended March 31, 2010 and 2009, net interest income before provision for credit losses was $27.3 million and $23.1 million, respectively. Interest income decreased 20.70 percent to $38.1 million for the three months ended March 31, 2010 from $48.0 million for the same period in 2009 and interest expense decreased 56.93 percent to $10.7 million for the three months ended March 31, 2010 from $24.9 million for the same period in 2009. The net interest spread and net interest margin for the three months ended March 31, 2010 were 3.29 percent and 3.69 percent, respectively, compared to 1.91 percent and 2.50 percent, respectively, for the same period in 2009. The increase in net interest income was primarily due to lower deposit costs resulting from our replacing high-cost promotional time deposits with low-cost deposit products through a series of core deposit campaigns. This increase is partially offset by the impact of a higher level of nonaccrual loans.
     Average gross loans decreased by $583.4 million, or 17.40 percent, to $2.77 billion for the three months ended March 31, 2010 from $3.35 billion for the same period in 2009. Average interest-earning assets decreased by $795.2 million, or 20.90 percent, to $3.01 billion for the three months ended March 31, 2010 from $3.81 billion for the same period in 2009. The $795.2 million decrease in average interest earning assets for the three months ended March 31, 2010 was attributable primarily to our preplanned deleveraging strategy throughout 2009. Consistent with this strategy, the average interest-bearing liabilities decreased by $754.3 million, or 24.20 percent to $2.36 billion for the three months ended March 31, 2010 from $3.12 billion for the same period in 2009. Average FHLB advances decreased by $183.1 million, or 51.41 percent, to $173.1 million for the three months ended March 31, 2010 from $356.2 million for the same period in 2009.

33


 

     The yield on average interest-earning assets slightly decreased by two basis points from 5.15 percent for the three months ended March 31, 2009 to 5.13 percent for the same period in 2010, primarily reflecting a decrease in the average yield on loans. Total loan interest and fee income decreased by 18.6 percent for the three months ended March 31, 2010 due primarily to a 17.40 percent decrease in the average gross loans. The average yield on loans slightly decreased from 5.46 percent for the three months ended March 31, 2010 to 5.38 percent for the same period in 2009. This decrease resulted from an increase in our overall level of nonaccrual loans. Our interest income reversal on nonaccrual loans increased by $475,000, or 65.51 percent from $725,000 for the three months ended March 31, 2009 to $1.2 million for the same period in 2010. The average cost on interest-bearing liabilities significantly decreased by 130 basis points from 3.24 percent for the three months ended March 31, 2009 to 1.84 percent for the same period in 2010. This decrease was primarily due to a continued shift in funding sources toward lower-cost funds through successful core deposits campaigns in the second half of 2009. Total average non-time deposits, a low-cost funding source, increased by $281.5 million, or 29.57%, to $1.23 billion for the three months ended March 31, 2010 from $952.1 million for the same period in 2009.
Provision for Credit Losses
     For the three months ended March 31, 2010 and 2009, the provision for credit losses was $58.0 million and $46.0 million, respectively. The increase in the provision for credit losses is attributable to increases in net charge-offs, non-performing loans and criticized and classified loans. Net charge-offs increased $14.6 million, or 123.4 percent, from $11.8 million for the three months ended March 31, 2009 to $26.4 million for the same period in 2010. Non-performing loans increased from $156.3 million, or 4.71 percent of total gross loans, as of March 31, 2009 to $262.2 million, or 9.77 percent of total gross loans, as of March 31, 2010. See “Non-Performing Assets” and “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details.
Non-Interest Income
     The following table sets forth the various components of non-interest income for the periods indicated:
                                 
    Three Months Ended        
    March 31,     Increase (Decrease)  
    2010     2009     Amount     Percentage  
    (Dollars in Thousands)  
 
                               
Service Charges on Deposit Accounts
  $ 3,726     $ 4,315     $ (589 )     (13.7 %)
Insurance Commissions
    1,278       1,182       96       8.1 %
Remittance Fees
    462       523       (61 )     (11.7 %)
Other Service Charges and Fees
    412       483       (71 )     (14.7 %)
Trade Finance Fees
    351       506       (155 )     (30.6 %)
Bank-Owned Life Insurance Income
    231       234       (3 )     (1.3 %)
Net Gain on Sales of Investment Securities
    105       1,167       (1,062 )     (91.0 %)
Net Gain on Sales of Loans
          2       (2 )     (100.0 %)
Other Operating Income
    440       66       374       566.7 %
 
                       
 
                               
Total Non-Interest Income
  $ 7,005     $ 8,478     $ (1,473 )     (17.4 %)
 
                       
     We earn non-interest income from five major sources: service charges on deposit accounts, insurance commissions, remittance fees, other service charges and fees and fees generated from international trade finance. In addition, we sell certain assets primarily for risk management purposes. For the three months ended March 31, 2010, non-interest income was $7.0 million, a decrease of $1.5 million, or 17.4 percent, from $8.5 million for the same period in 2009. The decrease in non-interest income is primarily attributable to the decrease in net gain on sales of investment securities and decreases in service charges on deposit accounts, partially offset by an increase in other operating income.
     Service charges on deposit accounts decreased by $589,000, or 13.7 percent, from $4.3 million for the three months ended March 31, 2009 to $3.7 million for the same period in 2010. The decrease was primarily due to a decrease of $405,000 in NSF charges and a decrease in account analysis fees, reflecting a decrease in the number of accounts subject to account analysis fees.
     Insurance commission increased by $96,000, or 8.1 percent, from $1.2 million for the three months ended March 31, 2009 to $1.3 million for the same period in 2010. The increase was primarily attributable to an increased sales and marketing efforts of insurance products through the branch banking.

34


 

     Remittance fees decreased by $61,000, or 11.7 percent, from $523,000 for the three months ended March 31, 2009 to $462,000 for the same period in 2010. The change reflects decrease in remittance activities due to the sluggish economy.
     Other service charges and fees decreased by $71,000, or 14.7 percent, from $483,000 for the three months ended March 31, 2009 to $412,000 for the same period in 2010. The decrease was primarily attributable to a decrease in loan application fees related to loan origination.
     Fees generated from international trade finance decreased by $155,000, or 30.6 percent, from $506,000 for the three months ended March 31, 2009 to $351,000 for the same period in 2010. Trade finance fees relate primarily to import and export letters of credit. The decrease was primarily attributable to a decline in the volume of export letter of credit due to the continuation of stressed conditions in the international trade market.
     Net gain on sales of investment securities decreased by $1.1 million, or 91.0 percent, from $1.2 million for the three months ended March 31, 2009 to $105,000 for the same period in 2010. The decrease was due to a decline in sale transactions of investment securities as the Bank had no liquidity need requiring a liquidation of investment securities and did not rebalance its investment portfolio.
     Other operating income increased by $374,000 from $66,000 for the three months ended March 31, 2009 to $440,000 for the same period in 2010. The increase was attributable primarily to a $274,000 recovery on a previously recorded loss on sale of OREO during the three months ended March 31, 2010. There was no such recovery for the same period in 2009.
Non-Interest Expense
     The following table sets forth the breakdown of non-interest expense for the periods indicated:
                                 
    Three Months Ended        
    March 31,     Increase (Decrease)  
    2010     2009     Amount     Percentage  
    (Dollars in Thousands)  
 
                               
Salaries and Employee Benefits
  $ 8,786     $ 7,503     $ 1,283       17.1 %
Other Real Estate Owned Expense
    5,700       143       5,557       3,886.0 %
Occupancy and Equipment
    2,725       2,884       (159 )     (5.5 %)
Deposit Insurance Premiums and Regulatory Assessments
    2,224       1,490       734       49.3 %
Data Processing
    1,499       1,536       (37 )     (2.4 %)
Professional Fees
    1,066       616       450       73.1 %
Advertising and Promotion
    535       569       (34 )     (6.0 %)
Supplies and Communications
    517       570       (53 )     (9.3 %)
Amortization of Other Intangible Assets
    328       429       (101 )     (23.5 %)
Loan-Related Expense
    307       181       126       69.6 %
Other Operating Expenses
    2,537       2,429       108       4.4 %
 
                       
 
                               
Total Non-Interest Expense
  $ 26,224     $ 18,350     $ 7,874       42.9 %
 
                       
     For the three months ended March 31, 2010 and 2009, non-interest expense was $26.2 million and $18.4 million, respectively. The efficiency ratio for the three months ended March 31, 2010 was 76.37 percent, compared to 58.05 percent for the same period in 2009. The overall increase in non-interest expense was primarily due to a $5.6 million increase in OREO expense and a $734,000 increase in FDIC insurance premiums.
     Salaries and employee benefits increased $1.3 million, or 17.1 percent, from $7.5 million for the three months ended March 31, 2009 to $8.8 million for the same period in 2010. The increase was primarily due to the absence of reversal of a $2.5 million previously accrued liability on a post-retirement death benefit through an amendment to our bank-owned life insurance policy that was recognized during the three months ended March 31, 2009.
     Other real estate owned expense increased $5.6 million from $143,000 for the three months ended March 31, 2009 to $5.7 million for the same period in 2010. The increase was due primarily to a $5.5 million increase in our valuation allowance for six OREO properties resulting from the further declines in property values.

35


 

     Deposit insurance premiums and regulatory assessments increased $734,000, or 49.3 percent, from $1.5 million for the three months ended March 31, 2009 to $2.2 million for the same period in 2010. The increase was due to higher assessment rates for FDIC insurance on deposits, and was partially offset by the decrease in average total deposits. The assessment rates increased by 15 basis points from 17 basis points for the three months ended March 31, 2009 to 32 basis points for the same period in 2010 due to the change in risk assessment categories from II to III.
Benefit for Income Taxes
     For the three months ended March 31, 2010, income tax benefits of $395,000 were recognized on pre-tax loss of $49.9 million, representing an effective tax rate of 0.8 percent, compared to income tax benefits of $6.5 million recognized of pre-tax loss of $11.7 million, representing an effective tax rate of 55.6 percent, for the same period in 2009. This decrease in the effective rate was due to the recording of valuation of allowance of $23.6 million during the first quarter of 2010. There was no valuation allowance in the same period in 2009.
FINANCIAL CONDITION
Investment Portfolio
     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 March 31, 2010, the investment portfolio was composed primarily of mortgage-backed securities, U.S. Government agency securities, collateralized mortgage obligations, asset-backed securities and municipal bonds. Investment securities available for sale were 99.3 percent and 99.4 percent of the total investment portfolio as of March 31, 2010 and December 31, 2009, 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 March 31, 2010 and December 31, 2009.
     As of March 31, 2010, securities available for sale were $113.4 million, or 3.8 percent of total assets, compared to $132.4 million, or 4.2 percent of total assets, as of December 31, 2009. Securities available for sale, at fair value, decreased $19.1 million, or 14.4 percent, from December 31, 2009 to March 31, 2010. The decrease was due primarily to both $9.2 million of principal repayments in the form of calls, prepayments, and scheduled amortization as well as $3.2 million proceeds from the sale of mortgage-backed securities with a $105,000 gain realized.
The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on investment securities as of the dates indicated:
                                                 
    March 31, 2010     December 31, 2009  
            Estimated     Unrealized             Estimated     Unrealized  
    Amortized     Fair     Gain     Amortized     Fair     Gain  
    Cost     Value     (Loss)     Cost     Value     (Loss)  
    (In Thousands)  
 
                                               
Held to Maturity:
                                               
Municipal Bonds
  $ 696     $ 696     $     $ 696     $ 696     $  
Mortgage-Backed Securities (1)
    166       166             173       175       2  
 
                                   
 
                                               
Total Held to Maturity
  $ 862     $ 862     $     $ 869     $ 871     $ 2  
 
                                   
 
                                               
Available for Sale:
                                               
Mortgage-Backed Securities (1)
  $ 56,957     $ 58,418     $ 1,460     $ 65,218     $ 66,332     $ 1,114  
U.S. Government Agency Securities
    24,996       24,850       (146 )     33,325       32,763       (562 )
Collateralized Mortgage Obligations (1)
    9,628       9,840       212       12,520       12,789       269  
Asset-Backed Securities
    7,848       8,010       163       8,127       8,188       61  
Municipal Bonds
    6,831       6,937       106       7,369       7,359       (10 )
Other Securities
    4,230       4,520       290       3,925       4,195       270  
Equity Securities
    511       794       283       511       794       283  
 
                                   
 
                                               
Total Available for Sale
  $ 111,001     $ 113,369     $ 2,368     $ 130,995     $ 132,420     $ 1,425  
 
                                   
 
(1)   Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

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     The amortized cost and estimated fair value of investment securities as of March 31, 2010, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2039, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                                 
    Available for Sale     Held to Maturity  
            Estimated             Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
            (In Thousands)          
 
Within One Year
  $     $     $     $  
Over One Year Through Five Years
                696       696  
Over Five Years Through Ten Years
    16,650       16,710              
Over Ten Years
    27,255       27,607              
Mortgage-Backed Securities
    56,957       58,418       166       166  
Collateralized Mortgage Obligations
    9,628       9,840              
Equity Securities
    511       794              
 
                       
 
  $ 111,001     $ 113,369     $ 862     $ 862  
 
                       
     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 March 31, 2010 and December 31, 2009:
                                                                         
    Holding Period  
    Less than 12 Months     12 Months or More     Total  
    Gross     Estimated     Number     Gross     Estimated     Number     Gross     Estimated     Number  
Investment Securities   Unrealized     Fair     of     Unrealized     Fair     of     Unrealized     Fair     of  
Available for Sale   Losses     Value     Securities     Losses     Value     Securities     Losses     Value     Securities  
                                    (In Thousands)                                  
 
                                                                       
March 31, 2010:
                                                                       
Mortgage-Backed Securities
  $     $           $ 45     $ 4,800       1     $ 45     $ 4,800       1  
Municipal Bonds
    2       313       1       34       839       1       36       1,152       2  
U.S. Government Agency Securities
                      162       14,835       2       162       14,835       2  
Other Securities
    7       1,993       2       36       964       1       43       2,957       3  
 
                                                     
 
  $ 9     $ 2,306       3     $ 277     $ 21,438       5     $ 286     $ 23,744       8  
 
                                                     
 
                                                                       
December 31, 2009:
                                                                       
Mortgage-Backed Securities
  $ 144     $ 14,584       3     $     $           $ 144     $ 14,584       3  
Municipal Bonds
    12       303       1       80       793       1       92       1,096       2  
U.S. Government Agency Securities
    562       32,764       6                         562       32,764       6  
Other Securities
    24       1,976       2       39       961       1       63       2,937       3  
 
                                                     
 
  $ 742     $ 49,627       12     $ 119     $ 1,754       2     $ 861     $ 51,381       14  
 
                                                     
     All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2010 and December 31, 2009 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of March 31, 2010. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
     FASB ASC 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of their amortized cost bases. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2010 and December 31, 2009 are not other-than-temporarily impaired, and therefore, we do not believe that any impairment charges as of March 31, 2010 and December 31, 2009 are warranted.

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Loan Portfolio
     The following table shows the loan composition by type, including loans held for sale, as of the dates indicated.
                                 
    March 31,     December 31,     Increase (Decrease)  
    2010     2009     Amount     Percentage  
            (Dollars in Thousands)          
 
Real Estate Loans:
                               
Commercial Property
  $ 821,752     $ 839,598     $ (17,846 )     (2.1 %)
Construction
    93,222       126,350       (33,128 )     (26.2 %)
Residential Property
    71,443       77,149       (5,706 )     (7.4 %)
 
                       
Total Real Estate Loans
    986,417       1,043,097       (56,680 )     (5.4 %)
 
                       
 
                               
Commercial and Industrial Loans: (1)
                               
Commercial Term Loans (2)
    1,359,477       1,420,034       (60,557 )     (4.3 %)
Commercial Lines of Credit
    104,326       101,159       3,167       3.1 %
SBA Loans (3)
    129,814       139,531       (9,717 )     (7.0 %)
International Loans
    44,933       53,488       (8,555 )     (16.0 %)
 
                       
Total Commercial and Industrial Loans
    1,638,550       1,714,212       (75,662 )     (4.4 %)
 
                       
Consumer Loans
    58,886       63,303       (4,417 )     (7.0 %)
 
                       
Total Loans — Gross
    2,683,853       2,820,612       (136,759 )     (4.8 %)
Deferred Loan Fees
    (963 )     (1,552 )     589       (38.0 %)
Allowance for Loan Losses
    (177,820 )     (144,996 )     (32,824 )     22.6 %
 
                       
Net Loans Receivable
  $ 2,505,070     $ 2,674,064     $ (168,994 )     (6.3 %)
 
                       
 
(1)   Commercial and industrial loans include owner-occupied property loans of $1.08 billion and $1.15 billion as of March 31, 2010 and December 31, 2009, respectively.
 
(2)   Includes loans held for sale, at the lower of cost or fair value, of $4.7 million and $0 as of March 31, 2010 and December 31, 2009, respectively.
 
(3)   Includes loans held for sale, at the lower of cost or fair value, of $5.4 million and $5.0 million as of March 31, 2010 and December 31, 2009, respectively.
     As of March 31, 2010 and December 31, 2009, loans receivable (including loans held for sale), net of deferred loan fees and allowance for loan losses, totaled $2.51 billion and $2.67 billion, respectively, a decrease of $169.0 million, or 6.3 percent. Total gross loans decreased by $136.8 million, or 4.8 percent, from $2.82 billion as of December 31, 2009 to $2.68 billion as of March 31, 2010, reflecting the continued implementation of our deleveraging strategy.
     During the first quarter of 2010, total new loan production and advances amounted to $138.7 million. For the same period, we experienced decreases in loans totaling $275.5 million, comprised of $204.5 million in principal amortization and payoffs, $30.1 million in charge-offs, $33.8 million in problem loan sales, $2.7 million in SBA loan sales and $4.4 million that were transferred to OREO. The $60.6 million decrease in commercial term loans was attributable primarily to $27.3 million in principal amortization and payoffs, $20.9 million in charge-offs and $12.4 million in loan sales for the three months ended March 31, 2010.
     Real estate loans, composed of commercial property, construction loans and residential property, decreased $56.7 million, or 5.4 percent, to $986.4 million as of March 31, 2010 from $1.04 billion as of December 31, 2009, representing 36.8 percent and 37.0 percent, respectively, of total gross loans. Commercial and industrial loans, composed of owner-occupied commercial property, trade finance, SBA and commercial lines of credit, decreased $75.7 million, or 4.4 percent, to $1.64 billion as of March 31, 2010 from $1.71 billion as of December 31, 2009, representing 61.1 percent and 60.8 percent, respectively, of total gross loans. Consumer loans decreased $4.4 million, or 7.0 percent, to $58.9 million as of March 31, 2010 from $63.3 million as of December 31, 2009.

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     As of March 31, 2010, our loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of total gross loans outstanding:
                 
    Balance as of     Percentage of Total  
Industry   March 31, 2010     Gross Loans Outstanding  
    (In Thousands)          
Lessors of Non-Residential Buildings
  $ 406,877       15.2 %
Accommodation/Hospitality
  $ 403,507       15.0 %
Gasoline Stations
  $ 312,221       11.6 %
     There was no other concentration of loans to any one type of industry exceeding ten percent of total gross loans outstanding.
Non-Performing Assets
     Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due and still accruing interest. Non-performing assets consist of non-performing loans and OREO. Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.
     Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, we stop recognizing income from the interest on the loan and reverse any uncollected interest that had been accrued but unpaid. These loans may or may not be collateralized, but collection efforts are continuously pursued.
     Except for non-performing loans set forth below, our management is not aware of any loans as of March 31, 2010 and December 31, 2009 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. Our 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.

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     The following table provides information with respect to the components of non-performing assets as of the dates indicated:
                                 
    March 31,     December 31,     Increase (Decrease)  
    2010     2009     Amount     Percentage  
            (Dollars in Thousands)          
Non-Accrual Loans
  $ 262,232     $ 219,000     $ 43,232       19.7 %
Loans 90 Days or More Past Due and Still Accruing
          67       (67 )     (100.0 %)
 
                       
Total Non-Performing Loans
    262,232       219,067       43,165       19.7 %
Other Real Estate Owned
    22,399       26,306       (3,907 )     (14.9 %)
 
                       
Total Non-Performing Assets
  $ 284,631     $ 245,373     $ 39,258       16.0 %
 
                       
Troubled Debt Restructurings on Accrual Status
  $ 10,041     $     $ 10,041        
     Non-accrual loans totaled $262.2 million as of March 31, 2010, compared to $219.0 million as of December 31, 2009, representing a 19.7 percent increase. Delinquent loans (defined as 30 days or more past due) were $236.2 million as of March 31, 2010, compared to $186.3 million as of December 31, 2009, representing a 26.8 percent increase. Of $236.2 million, $167.5 million was included in non-performing loans as of March 31, 2010, and of $186.3 million, $145.1 million was included in non-performing loans as of December 31, 2009. The increases in non-performing loans and delinquent loans are attributable primarily to a sustained recession that is affecting some of our borrowers’ ability to honor their commitments.
     Non-performing loans increased by $43.2 million, or 19.7 percent, to $262.2 million as of March 31, 2010, compared to $219.1 million as of December 31, 2009. During the first quarter of 2010, loans totaling $103.4 million were placed on nonaccrual status. The additions to nonaccrual loans of $103.4 million were offset by $28.3 million in net charge-offs, $20.0 million in sales of problem loans, $7.1 million in principal paydowns and payoffs, and $4.8 million that were transferred to OREO. The $43.2 million increase in non-performing loans is attributable primarily to the $48.3 million increase in non-performing commercial real estate loans, which make up $218.0 million, or 83.1 percent, of the $262.2 million of nonaccrual loans as of March 31, 2010.
     The ratio of non-performing loans to total gross loans also increased to 9.77 percent at March 31, 2010 from 7.77 percent at December 31, 2009. During the same period, our allowance for loan losses increased by $32.8 million, or 22.6 percent, to $177.8 million from $145.0 million. Of the $262.2 million non-performing loans, approximately $256.2 million were impaired based on the definition contained in FASB ASC 310, “Receivables,” which resulted in aggregate impairment reserve of $25.1 million as of March 31, 2010. 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 March 31, 2010, $218.0 million, or 83.1 percent, of the $262.2 million of non-performing loans were secured by real estate, compared to $176.0 million, or 80.3 percent, of the $219.1 million of non-performing loans as of December 31, 2009. In light of declining property values in the current economic recession affecting the real estate markets, the Bank continued to obtain current appraisals and factor in adequate market discounts on the collateral to compensate for non-current appraisals.
     As of March 31, 2010, other real estate owned consisted of eleven properties, primarily located in California, with a combined net carrying value of $22.4 million. During the three months ended March 31, 2010, three properties, with a carrying value of $4.4 million, were transferred from loans receivable to other real estate owned and five properties, with a carrying value of $2.8 million, were sold and a loss of $95,000 was recognized. As of December 31, 2009, other real estate owned consisted of thirteen properties with a combined net carrying value of $26.3 million.

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     We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.
     The following table provides information on impaired loans as of the dates indicated:
                 
    March 31,     December 31,  
    2010     2009  
    (In Thousands)  
Recorded Investment With Related Allowance
  $ 79,829     $ 91,371  
Recorded Investment With No Related Allowance
    174,856       109,363  
Allowance on Impaired Loans
    (27,166 )     (23,148 )
 
           
 
               
Net Recorded Investment in Impaired Loans
  $ 227,519     $ 177,586  
 
           
     The following is a summary of interest foregone on impaired loans for the periods indicated:
                 
    Three Months Ended March 31,  
    2010     2009  
    (In Thousands)  
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance With Their Original Terms
  $ 5,569     $ 5,177  
Less: Interest Income Recognized on Impaired Loans
    (2,771 )     (1,655 )
 
           
Interest Foregone on Impaired Loans
  $ 2,798     $ 3,522  
 
           
     During the three months ended March 31, 2010, we restructured monthly payments on 67 loans, with a net carrying value of $45.5 million as of March 31, 2010, through temporary payment structure modification from principal and interest due monthly to interest only due monthly for six months or less. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, we believe that performance and collection under the revised terms is probable. As of March 31, 2010, troubled debt restructurings on accrual status totaled $10.0 million, all of which were temporary interest rate reductions, and a $2.0 million reserve relating to these loans is included in the allowance for loan losses. As of December 31, 2009, troubled debt restructured loans on accrual status totaled $36.7 million and the related allowance was $714,000.
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 10 general loan pools of risk-rated loans (commercial real estate, construction, commercial term — unsecured, commercial term — T/D secured, commercial line of credit, SBA, international, consumer installment, consumer line of credit, and miscellaneous loans) as well as 3 homogenous loan pools (residential mortgage, auto loans, and credit card). For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade (pass, special mention, substandard, and doubtful) to determine risk factors for potential loss inherent in the current outstanding loan portfolio.

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     During the first quarter of 2010, to enhance reserve calculations to better reflect the Bank’s current loss profile, the two loan pools of Commercial Real Estate and Commercial Term — T/D secured were subdivided according to the 21 collateral codes used by the Bank to identify commercial property types (Apartment, Auto, Car Wash, Casino, Church, Condominium, Gas Station, Golf Course, Industrial, Land, Manufacturing, Medical, Mixed Used, Motel, Office, Retail, School, Supermarket, Warehouse, Wholesale, and Others). This further segregation allows the Bank to more specifically allocate reserves within the CRE portfolio according to risks defined by historic loss as well as current loan concentrations of the different collateral types.
     Risk factor calculations were previously based on 12-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent six quarters. In the first quarter of 2010, the historic loss window was reduced to 8 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.
     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 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, outlook for the future, etc.
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 experience, ability, and depth of lending management and staff;
 
    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;
 
    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.

42


 

     In order to systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The above factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the asset portfolio along with corresponding basis points for qualitative adjustments.
     The following table 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  
    March 31,     December 31,     March 31,  
    2010     2009     2009  
          (Dollars in Thousands)        
 
Allowance for Loan Losses:
                       
Balance at Beginning of Period
  $ 144,996     $ 124,768     $ 70,986  
Actual Charge-Offs
    (30,114 )     (58,170 )     (12,516 )
Recoveries on Loans Previously Charged Off
    3,721       858       703  
 
                 
Net Loan Charge-Offs
    (26,393 )     (57,312 )     (11,813 )
 
                 
Provision Charged to Operating Expenses
    59,217       77,540       45,770  
 
                 
Balance at End of Period
  $ 177,820     $ 144,996     $ 104,943  
 
                 
Allowance for Off-Balance Sheet Items:
                       
Balance at Beginning of Period
  $ 3,876     $ 4,416     $ 4,096  
Provision Charged to Operating Expenses
    (1,221 )     (540 )     183  
 
                 
Balance at End of Period
  $ 2,655     $ 3,876     $ 4,279  
 
                 
Ratios:
                       
Net Loan Charge-Offs to Average Total Gross Loans (1)
    3.87 %     7.77 %     1.43 %
Net Loan Charge-Offs to Total Gross Loans (1)
    3.99 %     8.06 %     1.44 %
Allowance for Loan Losses to Average Total Gross Loans
    6.43 %     4.95 %     3.13 %
Allowance for Loan Losses to Total Gross Loans
    6.63 %     5.14 %     3.16 %
Net Loan Charge-Offs to Allowance for Loan Losses (1)
    60.20 %     156.82 %     45.65 %
Net Loan Charge-Offs to Provision Charged to Operating Expenses
    44.57 %     73.91 %     25.81 %
Allowance for Loan Losses to Non-Performing Loans
    67.81 %     66.19 %     67.13 %
 
                       
Balances:
                       
Average Total Gross Loans Outstanding During Period
  $ 2,766,965     $ 2,926,357     $ 3,350,343  
Total Gross Loans Outstanding at End of Period
  $ 2,683,853     $ 2,820,612     $ 3,319,722  
Non-Performing Loans at End of Period
  $ 262,232     $ 219,067     $ 156,331  
 
(1)   Net loan charge-offs are annualized to calculate the ratios.
     The allowance for loan losses increased by $32.8 million, or 22.6 percent, to $177.8 million as of March 31, 2010 as compared to $145.0 million as of December 31, 2009. The allowance for loan losses as a percentage of total gross loans increased to 6.63 percent as of March 31, 2010 from 5.14 percent as of December 31, 2009. The provision for credit losses decreased by $19.0 million, or 24.7 percent, to $58.0 million as of March 31, 2010 as compared to $77.0 million as of December 31, 2009.
     The increase in the allowance for loan losses as of March 31, 2010 was due primarily to subsequent increases in historical loss rates as well as migration of loans into more adverse risk rating categories. Due to this increase in reserve factors derived from historic loss rates and migration of loans into adverse risk rating categories, general reserves increased $29.9 million, or 33.2 percent, to $120.0 million as of March 31, 2010 as compared to $90.1 million at December 31, 2009. In addition, qualitative adjustments were increased by 15 basis points for 7 general loan pools of risk-rated loans (real commercial real estate, construction, commercial term — unsecured, commercial term — T/D secured, commercial line of credit, SBA, international). However, total qualitative reserves decreased $1.1 million, or 3.6 percent, to $30.5 million as of March 31, 2010 as compared to $31.6 million as of December 31, 2009. This was a direct result of the decrease in overall loan volume of $136.8 million, or 4.8 percent, to $2.68 billion at March 31, 2010 as compared to $2.82 billion at December 31, 2009. Despite the decrease in overall loan volume, general reserves were impacted much more significantly by the higher reserve factors and more adverse loan grading, resulting in the increases noted above.

43


 

     The total impaired loans increased $54.0 million, or 26.9 percent, to $254.7 million as of March 31, 2010 as compared to $200.7 million at December 31, 2009. However, specific reserve allocations associated with impaired loans only increased $4.1 million, or 17.7 percent, to $27.2 million as of March 31, 2010 as compared to $23.1 million as of December 31, 2009. The comparatively low increase in impairment reserve was mainly due to timely charge-off of collateral dependent loans that are 90 or more days past due. As the impairment reserve is mostly derived from shortfalls in collateral dependent loans, the amount of required impairment reserve has been limited due to the charge-offs recorded.
     For the three months ended March 31, 2010, total charge-offs were $30.1 million, compared to $58.2 million for the three months ended December 31, 2009. Charge-offs in the loan pool of commercial term (T/D secured and unsecured) decreased $9.5 million to $20.9 million for the three months ended March 31, 2010 as compared to $30.3 million for the three months ended December 31, 2009. Charge-offs in commercial real estate loans also decreased $8.1 million to $5.4 million for the three months ended March 31, 2010 as compared to $13.5 million for the three months ended December 31, 2009. In addition, charge-offs in construction loans decreased $5.6 million to $0 for the three months ended March 31, 2010 as compared to $5.6 million for the three months ended December 31, 2009. Furthermore, charge-offs in commercial lines of credit and SBA loans decreased $1.7 million and $1.6 million to $251,000 and $3.0 million, respectively for the three months ended March 31, 2010, compared to $2.0 million and $4.6 million, respectively, for the three months ended December 31, 2009.
     The Bank also recorded in other liabilities an allowance for off-balance sheet exposure, primarily unfunded loan commitments, of $2.7 million and $3.9 million as of March 31, 2010 and December 31, 2009, respectively. 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 March 31, 2010 and December 31, 2009.
Deposits
     The following table shows the composition of deposits by type as of the dates indicated.
                                 
    March 31,     December 31,     Increase (Decrease)  
    2010     2009     Amount     Percentage  
    (Dollars in Thousands)  
 
                               
Demand — Noninterest-Bearing
  $ 575,015     $ 556,306     $ 18,709       3.4 %
Interest-Bearing:
                               
Savings
    121,041       111,172       9,869       8.9 %
Money Market Checking and NOW Accounts
    488,366       685,858       (197,492 )     (28.8 %)
Time Deposits of $100,000 or More
    1,048,688       815,190       233,498       28.6 %
Other Time Deposits
    417,170       580,801       (163,631 )     (28.2 %)
 
                       
 
Total Deposits
  $ 2,650,280     $ 2,749,327     $ (99,047 )     (3.6 %)
 
                       
     Total deposits decreased $99.0 million, or 3.6 percent, to $2.65 billion as of March 31, 2010 from $2.75 billion as of December 31, 2009. Total time deposits outstanding increased $69.9 million, or 5.0 percent, to $1.47 billion as of March 31, 2010 from $1.40 billion as of December 31, 2009, representing 55.3 percent and 50.8 percent respectively, of total deposits. . Due to the implementation of our liquidity preservation strategy to extend the term structure of deposits under the FDIC’s interest rate restriction, we successfully shifted a substantial portion of non-maturity money market deposits to one and two-year maturity time deposits through Advantage and Diamond Freedom CD with innovative and flexible features such as call options, penalty-free withdrawals, and additional deposits. To supplement our efforts to maintain adequate liquidity and diversify our funding sources, we utilized Internet rate service providers and raised funds through issuing mostly one-year time deposits to financial institutions in the U.S.

44


 

     Brokered deposits decreased by $140.5 million from $203.9 million as of December 31, 2009 to $63.4 million as of March 31, 2010. All of our brokered deposits as of March 31, 2010 will mature in the second quarter of 2010. The Bank is currently restricted from accepting brokered deposits due to our capital classification. Although brokered deposits are not a guaranteed source of funds, it may affect our ability to maintain necessary liquidity if we continue to be not allowed accepting brokered deposits. We plan to continue to reduce the Bank’s reliance on wholesale funding, including FHLB advances and brokered deposits, and to build our deposit base with long-term relationships.
     On October 3, 2008, the FDIC deposit insurance limit on most deposit accounts was increased from $100,000 to $250,000. This increase is in effect through December 31, 2013. As of March 31, 2010, time deposits of more than $250,000 were $331.1 million.
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 March 31, 2010, advances from the FHLB were $153.9 million, a decrease of $80,000, from the December 31, 2009 balance of $154.0 million. The decrease is due to our successful implementation of a strategy to preserve liquidity with retail and non-brokered institutional deposits during the first quarter of 2010. As of March 31, 2010, there were no FHLB advances with a remaining maturity of less than one year.
Junior Subordinated Debentures
     During the first half of 2004, we issued two junior subordinated notes bearing interest at the three-month London InterBank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the three-month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of which were used to finance the purchase of PUB, totaled $82.4 million as of March 31, 2010 and December 31, 2009. 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 the Order and the Agreement without the prior written consent of the FRB and DFI. Accrued interest payable on junior subordinated debentures amounted to $4.7 million and $4.1 million at March 31, 2010 and December 31, 2009, respectively.

45


 

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 March 31, 2010:
                                                 
            After                          
            Three     After One                    
            Months     Year But                    
    Within     But     Within     After     Non-        
    Three     Within     Five     Five     Interest-        
    Months     One Year     Years     Years     Sensitive     Total  
    (Dollars in Thousands)  
 
                                               
ASSETS
                                               
Cash and Due From Banks
  $     $     $     $     $ 59,677     $ 59,677  
Interest-Bearing Deposits in Other Banks
    139,540                               139,540  
Investment Securities:
                                               
Fixed Rate
    2,505       5,730       27,035       65,924             101,193  
Floating Rate
    67       362       3,933       8,675             13,038  
Loans:
                                               
Fixed Rate
    94,378       229,718       552,572       4,936             881,604  
Floating Rate
    1,492,774       22,781       20,837       3,625             1,540,017  
Non-Accrual
                            262,232       262,232  
Deferred Loan Fees and Allowance for Loan Losses
                            (178,783 )     (178,783 )
Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock
                      38,575             38,575  
Other Assets
          26,639             7,505       127,064       161,208  
 
                                   
 
Total Assets
  $ 1,729,264     $ 285,230     $ 604,377     $ 129,240     $ 270,190     $ 3,018,301  
 
                                   
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Demand — Noninterest-Bearing
  $     $     $     $     $ 575,015     $ 575,015  
Savings
    11,995       28,761       58,602       21,683             121,041  
Money Market Checking and NOW Accounts
    67,392       140,335       197,917       82,722             488,366  
Time Deposits:
                                               
Fixed Rate
    477,804       797,340       190,657                   1,465,801  
Floating Rate
    58                               58  
Federal Home Loan Bank Advances
    150,205       634       3,058                   153,897  
Other Borrowings
    4,428                               4,428  
Junior Subordinated Debentures
    82,406                               82,406  
Other Liabilities
                            26,267       26,267  
Stockholders’ Equity
                            101,022       101,022  
 
                                   
 
Total Liabilities and Stockholders’ Equity
  $ 794,288     $ 967,070     $ 450,234     $ 104,405     $ 702,304     $ 3,018,301  
 
                                   
 
Repricing Gap
  $ 934,977     $ (681,840 )   $ 154,142     $ 24,835     $ (432,114 )   $  
Cumulative Repricing Gap
  $ 934,977     $ 253,137     $ 407,279     $ 432,114     $     $  
Cumulative Repricing Gap as a Percentage of Total Assets
    30.98 %     8.39 %     28.97 %     14.32 %              
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets
    34.45 %     9.33 %     32.22 %     15.92 %              
     The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same period). Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no maturity dates (demand deposits, savings, money market checking and NOW accounts) are assigned to categories based on expected decay rates.

46


 

     As of March 31, 2010, the cumulative repricing gap for the three-month period was asset-sensitive position and 34.45 percent of interest-earning assets, which increased from 30.97 percent as of December 31, 2009. The increase was caused primarily by an increase of $44.0 million in interest-bearing deposits in other banks and $31.1 million and $170.8 million decreases in money market account and fixed rate time deposits, respectively, with maturities or expected to reprice within three months, partially offset by a decrease of $191.9 million in fixed and floating rate loans with maturities or expected to reprice within three months. The cumulative repricing gap for the twelve-month period was asset-sensitive position and 9.33 percent of interest-earning assets, which decreased from the December 31, 2009 figure of 9.61 percent. This decrease was caused primarily by a decrease of $251.6 million in fixed and floating rate loans and an increase of $10.3 million in NOW account deposits with maturities or expected to reprice within twelve months, partially offset by $97.3 million and $115.1 million decreases in money market account and fixed rate time deposits, respectively, and an increase of $40.7 million in interest-bearing deposits in other banks with maturities or expected to reprice within twelve months.
     The following table summarizes the status of the cumulative gap position as of the dates indicated.
                                 
    Less Than Three Months   Less Than Twelve Months
    March 31,   December 31,   March 31,   December 31,
    2010   2009   2010   2009
    (Dollars in Thousands)
 
Cumulative Repricing Gap
  $ 934,977     $ 889,466     $ 253,137     $ 276,131  
Cumulative Repricing Gap as a Percentage of Total Assets
    30.98 %     28.12 %     8.39 %     8.73 %
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets
    34.45 %     30.97 %     9.33 %     9.61 %
     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 Changes   Change in Amount
Change in   Net   Economic   Net   Economic
Interest   Interest   Value of   Interest   Value of
Rate   Income   Equity   Income   Equity
(Dollars in Thousands)
 
  200 %     18.54 %     12.31 %   $ 22,723     $ 9,792    
 
  100 %     9.47 %     6.23 %   $ 11,605     $ 4,955    
 
  (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.

47


 

CAPITAL RESOURCES AND LIQUIDITY
     Capital Resources
     In order to ensure adequate levels of capital, the Board continually assesses projected sources and uses of capital in conjunction with projected changes 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. Hanmi Financial and the Bank are deemed to be “undercapitalized” as of March 31, 2010. It is our most important priority to raise a sufficient capital to absorb potential credit losses in the future and continuously stay above the well capitalized status. Total stockholders’ equity was $101.0 million at March 31, 2010, which represented a decrease of $48.7 million, or 32.5 percent, compared to $149.7 million at December 31, 2009. The decrease was primarily due to provision for credit losses of $58.0 million for the three months ended March 31, 2010.
     Under the Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. For more details, see discussion in “Notes to Consolidated Financial Statements, Note 2 — Regulatory Matters and Going Concern Consideration.” The Bank will be required to maintain a ratio of tangible shareholder’s equity to total tangible assets as follows:
     
    Ratio of Tangible Shareholder’s
Date   Equity to Total Tangible Assets
 
By December 31, 2009
  Not Less Than 7.0 Percent
By July 31, 2010   Not Less Than 9.0 Percent
From December 31, 2010 and Until the Order is Terminated   Not Less Than 9.5 Percent
     If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. Inability to comply with the capital ratios identified in the Order raises substantial doubt about our ability to continue as a going concern. The Board and management will make their utmost efforts to raise a sufficient capital within the required timeframe, although there can be no assurance that we will be successful. As of March 31, 2010, the Bank had a Tier 1 leverage ratio of 5.68 percent and tangible stockholder’s equity to total tangible assets ratio of 5.89 percent.
     Liquidity — Hanmi Financial
     Hanmi Financial is a company separate and apart from the Bank that must provide for its own liquidity. Substantially all of Hanmi Financial’s revenues are obtained from dividends declared and paid by the Bank. Under applicable California law, the Bank cannot make any distribution (including a cash dividend) to its shareholder (Hanmi Financial) in an amount which exceeds the lesser of: (i) the retained earnings of the Bank or (ii) the net income of the Bank for its last three fiscal years, less the amount of any distributions made by the Bank to its shareholder during such period. Notwithstanding the foregoing, with the prior approval of the California Commissioner of Financial Institutions, the Bank may make a distribution (including a cash dividend) to Hanmi Financial in an amount not exceeding the greatest of: (i) the retained earnings of the Bank; (ii) the net income of the Bank for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year. The Bank currently has deficit retained earnings and has suffered net losses in 2007, 2008 and 2009. See “Dividends” for further information. As a result, the California Financial Code does not provide authority for the Bank to declare a dividend to Hanmi Financial, with or without Commissioner approval. In addition, the Bank continues to be prohibited by the Agreement and the Order, from paying dividends to Hanmi Financial unless it receives prior regulatory approval. For more details, see discussion in “Notes to Consolidated Financial Statements, Note 2 — Regulatory Matters and Going Concern Consideration.”

48


 

     Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through December 31, 2010. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of March 31, 2010, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $2.8 million, down from $3.5 million as of December 31, 2009.
     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 originated through its branch platform. As of March 31, 2010, the Bank was considered to be “undercapitalized” under the regulatory framework for prompt corrective action, as the Bank’s total risk-based capital ratio fell slightly below 8%. Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. According to the FDIC’s Financial Institution Letter, FIL-69-2009, requires institutions that are not well capitalized must use national rate caps to determine conformance for non-local depositors beginning January 1, 2010 and for local depositors beginning March 1, 2010. Due to the FDIC’s rules, the Bank is currently restricted from accepting brokered deposits and offering deposit rates above the national rate caps.
     In an effort to preserve liquidity under the restrictions, the Bank deployed innovative products, such as Advantage and Diamond Freedom CDs, and utilized Internet rate service providers in the month of March. Through this campaign and the use of Internet rate service providers, the Bank achieved its objectives of maintaining adequate liquidity and reducing its reliance on brokered deposits. As a result, total deposits slightly decreased by $99.0 million, or 3.6 percent, from $2.75 billion as of December 31, 2009 to $2.65 billion as of March 31, 2010. The Bank’s wholesale funds, consisting of Federal Home Loan Bank (“FHLB”) advances and brokered deposits, continuously decreased by $140.5 million to $217.3 million at March 31, 2010 from $357.8 million at December 31, 2009.
     The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 20 percent of its total assets. As of March 31, 2010, our total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $532.1 million and $377.1 million, respectively. The Bank’s FHLB borrowings as of March 31, 2010 totaled $153.9 million, representing 5.1 percent of total assets. As of May 10, 2010, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $494.0 million and $340.2 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
     As a means of augmenting its liquidity, the Bank had an available borrowing source of $239.4 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $557.0 million, and had no borrowings as of March 31, 2010. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2009, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million. This line of credit will continue for a term of one year, and, unless amended or terminated, will automatically renew for successive one-year terms.

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     Current market conditions have limited the Bank’s liquidity sources principally to secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or FRB 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 is currently restricted from accepting brokered deposits as a funding source. As of March 31, 2010, brokered deposits were $63.4 million, or 2.3 percent of total deposits. All brokered deposits are currently scheduled to mature prior to June 30, 2010. The Bank successfully replaced $670.7 million and $140.5 million of brokered deposits during 2009 and the first quarter of 2010, respectively. If the Bank is unable to replace these maturing deposits with new deposits, the Bank believes that it nonetheless has adequate liquidity resources to fund its obligations through its secured credit lines with the FHLB and Fed Discount Window.
OFF-BALANCE SHEET ARRANGEMENTS
     For a discussion of off-balance sheet arrangements, see “Note 9 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements (Unaudited) in this Report and “Item 1. Business — Off-Balance Sheet Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2009.
CONTRACTUAL OBLIGATIONS
     There have been no material changes to the contractual obligations described in our Annual Report on Form 10-K for the year ended December 31, 2009.
RECENTLY ISSUED ACCOUNTING STANDARDS
     FASB ASC 105, “Generally Accepted Accounting Principles” — The FASB ASC is the exclusive authoritative reference for non-governmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth. The FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the FASB ASC is non-authoritative. FASB ASC 105 did not have a material effect on our financial condition or results of operations.
     FASB ASC 810, “Consolidations” — FASB ASC 810 amends the guidance related to the consolidation of variable interest entities (“VIE’s”). It requires reporting entities to evaluate former qualifying special-purpose entities (“QSPE’s”) for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. FASB ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FASB ASC 810-10-50. FASB ASC 810 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPE’s and entities currently subject to the guidance related to the consolidation of VIE’s will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. FASB ASC 810 did not have a material effect on our financial condition or results of operations.
     FASB ASC 860, “Transfers and Servicing” — FASB ASC 860 amends the guidance related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. FASB ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FASB ASC 810-10-50. FASB ASC 860 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. FASB ASC 860’s disclosure requirements must be applied to transfers that occurred before and after its effective date. FASB ASC 860 did not have a material effect on our financial condition or results of operations.

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     FASB ASC 855, “Subsequent Events” — FASB ASC 855 addresses accounting and disclosure requirements related to subsequent events. FASB ASC 855 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. The adoption of FASB ASC 855 did not have a material effect on our financial condition or results of operations.
     FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)” — ASU 2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Adoption of ASU 2010-06 did not have a significant impact on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “— Liquidity and Capital Resources.”
ITEM 4. CONTROLS AND PROCEDURES
     Disclosure Controls and Procedures
     Evaluation of Disclosure Controls and Procedures
     Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Hanmi Financial files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that Hanmi Financial files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
     Hanmi Financial carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of March 31, 2010 pursuant to Exchange Act Rule 13a-15b. Based on that evaluation and the identification of the material weakness in Hanmi Financial’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting”, the Chief Executive Officer and Chief Financial Officer have concluded that Hanmi Financial’s disclosure controls and procedures were not effective as of March 31, 2010.

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      Management’s Report on Internal Control Over Financial Reporting
     Management of Hanmi Financial is responsible for establishing and maintaining adequate internal control over financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission. Hanmi Financial’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those written policies and procedures that:
    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP;
 
    provide reasonable assurance that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
     Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of Hanmi Financial’s financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
     As of March 31, 2010, Hanmi Financial carried out an evaluation, under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of internal control over financial reporting pursuant to Rule 13a-15(c), as adopted by the SEC under the Exchange Act. In evaluating the effectiveness of the internal control over financial reporting, management used the framework established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
     A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of Hanmi Financial’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness as of March 31, 2010 related to management’s policies and procedures for the monitoring and timely evaluation of and revision to management’s approach for assessing credit risk inherent in the Company’s loan portfolio to reflect changes in the economic environment. Specifically, neither the internal loan review grading process control nor the information and communication control that are designed to prompt senior management’s review over the adequacy of the loan loss reserve factors were operating effectively.
     Based on our assessment and the criteria discussed above, Hanmi Financial has concluded that, as of March 31, 2010, internal control over financial reporting was not effective as a result of the aforementioned material weakness.

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      Changes in Internal Control over Financial Reporting
     During the fourth quarter of 2009, we implemented the following changes in our internal control over financial reporting to address a previously reported material weakness:
     We designed and implemented several key initiatives to significantly strengthen our internal loan review function. These included:
    intensive review by the loan monitoring department to validate the appropriateness of loan grades;
 
    expanded additional review of all loan grading changes by management and senior loan officers;
 
    independent third party review to ensure the assessment of our internal loan grades.
     We implemented several key changes to ensure the adequacy of allowance for loan losses. These included:
    increasing qualitative adjustments based on current and potential loss scenarios to sufficiently reflect deterioration in the asset portfolio as well as economic decline;
 
    implementing more stringent assessment of restructured loans by down-grading all such loans to Substandard;
 
    closely monitoring collateral dependent loans by continually obtaining up to date valuations;
 
    adhering to more stringent requirements for charge-offs regards to impaired loans.
     Our changes described above implemented during the fourth quarter of 2009 due to the previously identified material weakness have materially affected such internal control over financial reporting.
      Remediation of Material Weakness
     We determined the following additional steps necessary to address the aforementioned material weaknesses, including:
    increasing management oversight of the loan portfolio by establishing two new departments to primarily focus on performing quality control review and monitoring;
 
    providing intensive onsite review and training to loan officers and other branch staffs by management;
 
    outsourcing to independent third parties for credit review to validate the appropriateness of internal loan grading.
     We began to execute the remediation plans identified above in the fourth quarter of 2009 and currently are testing to confirm that our controls and procedures are effective for the second quarter of 2010.

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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
ITEM 1A. RISK FACTORS
     There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 that was filed on March 15, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
     None.

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ITEM 6. EXHIBITS
     
Exhibit    
Number   Document
3.1
  Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation (1)
 
   
3.2
  Certificate of Second Amendment of Certificate of Incorporation of Hanmi Financial Corporation (1)
 
   
3.3
  Certificate of Third Amendment of Certificate of Incorporation of Hanmi Financial Corporation (2)
 
   
3.4
  Amended and Restated Bylaws of Hanmi Financial Corporation (1)
 
   
3.5
  Certificate of Amendment to Bylaws of Hanmi Financial Corporation dated November 21, 2007 (1)
 
   
3.6
  Certificate of Amendment to Bylaws of Hanmi Financial Corporation dated October 14, 2009 (3)
 
   
4
  Specimen stock certificate representing Hanmi Financial Corporation Common Stock (4)
 
   
10.1
  Amended and Restated Trust Agreement of Hanmi Capital Trust I dated as of January 8, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
 
   
10.2
  Hanmi Capital Trust I Junior Subordinated Indenture dated as of January 8, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.1) (5)
 
   
10.3
  Hanmi Capital Trust I Guarantee Agreement dated as of January 8, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
 
   
10.4
  Hanmi Capital Trust I Form of Common Securities Certificate (included as exhibit B to Exhibit 10.1) (5)
 
   
10.5
  Hanmi Capital Trust I Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.1) (5)
 
   
10.6
  Amended and Restated Trust Agreement of Hanmi Capital Trust II dated as of March 15, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
 
   
10.7
  Hanmi Capital Trust II Junior Subordinated Indenture dated as of March 15, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.6) (5)
 
   
10.8
  Hanmi Capital Trust II Guarantee Agreement dated as of March 15, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
 
   
10.9
  Hanmi Capital Trust II Form of Common Securities Certificate (included as exhibit B to Exhibit 10.6) (5)
 
   
10.10
  Hanmi Capital Trust II Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.6) (5)
 
   
10.11
  Amended and Restated Trust Agreement of Hanmi Capital Trust III dated as of April 28, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
 
   
10.12
  Hanmi Capital Trust III Junior Subordinated Indenture dated as of April 28, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.11) (5)
 
   
10.13
  Hanmi Capital Trust III Guarantee Agreement dated as of April 28, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
 
   
10.14
  Hanmi Capital Trust III Form of Common Securities Certificate (included as exhibit B to Exhibit 10.11) (5)
 
   
10.15
  Hanmi Capital Trust III Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.11) (5)
 
   
10.16
  Employment Agreement Between Hanmi Financial Corporation and Hanmi Bank, on the One Hand, and Jay S. Yoo, on the Other Hand, dated as of June 19, 2008 (6)
 
   
10.17
  Hanmi Financial Corporation 2007 Equity Compensation Plan (7)
 
   
10.18
  Hanmi Financial Corporation Year 2000 Stock Option Plan (8)
 
   
10.19
  Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan (1)
 
   
10.20
  Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan (1)
 
   
10.21
  Employment Offer Letter with Brian E. Cho, executed November 1, 2007 (9)
 
   
10.22
  Securities Purchase Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd. (10)
 
   
10.23
  Registration Rights Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd. (10)
 
   
10.24
  First Amendment to the Securities Purchase Agreement, dated July 31, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd. (11)

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ITEM 6. EXHIBITS (Continued)
     
Exhibit    
Number   Document
10.25
  Amended and Restated Term Sheet, dated September 14, 2009, by and among Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners LLC (12)
 
   
10.26
  Second Amendment to the Securities Purchase Agreement, dated September 28, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd. (13)
 
   
10.27
  First Amendment to the Amended and Restated Term Sheet, dated September 28, 2009, by and between Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners, LLC (13)
 
   
10.28
  Final Order, dated November 2, 2009, issued to Hanmi Bank by the California Department of Financial Institutions (14)
 
   
10.29
  Written Agreement, dated November 2, 2009, by and between Hanmi Financial Corporation and Hanmi Bank, on one hand, and the Federal Reserve Bank of San Francisco, on the other hand (14)
 
   
14
  Code of Ethics (15)
 
   
21
  Subsidiaries of the Registrant (9)
 
   
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
 
(1)   Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 13, 2009.
 
(2)   Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed with the SEC on August 11, 2009, as amended November 18, 2009.
 
(3)   Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-3 filed with the SEC on February 4, 2010.
 
(4)   Previously filed and incorporated by reference herein from Hanmi Financial Corporation’s Registration Statement on Form S-4 filed with the SEC on March 20, 2000.
 
(5)   Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004.
 
(6)   Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed with the SEC on August 11, 2008.
 
(7)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on June 26, 2007.
 
(8)   Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-8 filed with the SEC on August 18, 2000.
 
(9)   Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 29, 2008.
 
(10)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on June 15, 2009.
 
(11)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on August 3, 2009.
 
(12)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on September 14, 2009.
 
(13)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on October 2, 2009.
 
(14)   Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on November 5, 2009.
 
(15)   Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 16, 2005.
 
  Constitutes a management contract or compensatory plan or arrangement.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  HANMI FINANCIAL CORPORATION
 
 
Date: May 10, 2010  By:   /s/ Jay S. Yoo    
    Jay S. Yoo   
    President and Chief Executive Officer   
 
     
  By:   /s/ Brian E. Cho    
    Brian E. Cho   
    Executive Vice President and Chief Financial Officer   
 

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