HANMI FINANCIAL Annual Report 2003 MEET THE NEW HANMI BANK, a wholly owned subsidiary of Hanmi Financial Corporation (Nasdaq: HAFC). A leading Korean-American bank headquartered in Los Angeles, Hanmi Bank provides high quality individual, corporate and institutional financial services in regional markets. Throughout its history, Hanmi has produced long-term profitable growth while adapting to changing market conditions. We credit this success to practicing sound and prudent risk management techniques and to building enduring relationships with you—our sharehold- ers, customers and employees. At year-end 2003, your bank had total assets of nearly $1.8 billion and 15 full-service offices in California’s Los Angeles, Orange, Santa Clara, and San Diego counties. Renew. With spring comes the emergence of new growth. Hanmi Financial enters 2004 with a reinvigorated commitment to enhance the Bank’s income and profitability. We are completing the preparations for the next growth cycle, and we invite you to watch our business strategies and exciting new directions unfold. Commit. A seed sets its roots before pushing its leaves above ground. A successful bank, like a healthy tree, must be anchored to its commu- nity in order to thrive. Having ties with the customers we serve and the communities in which we all live ensures that we will continue to grow together. STRENGTH In building the business over the past 21 years, your bank has conscientiously worked to make each service and practice as strong as it can be. Linked together, these business units and product offerings deliver reliable services and benefits to our customers. Among them are: (cid:1) Jae Whan “J.W.” Yoo, President and Chief Executive Officer. With 28 years of banking experience, Mr. Yoo provides the banking expertise, management skills, experience and under- standing of the position and your bank to advance Hanmi Financial to the next level. (cid:1) Michael J. Winiarski, C.P.A., Senior Vice President and Chief Financial Officer. One of the first non-Koreans appointed to a senior executive management position at a major Korean- American community bank, Mr. Winiarski will be pivotal in transforming Hanmi from a community bank to a regional financial institution. 3 page which Hanmi Financial built Clearly 2003 was a year in growth. Since our founding by a a new foundation for future group of Korean-American entrepre- neurs in 1982, our key priority has been to provide comprehensive bank- ing services to the Korean-American community of California. Your bank has met that objec- tive and is ready to reach for more— more market share and more customer satisfaction. Hanmi’s next goal is to become the leading regional institu- tion serving Korean-Americans and other ethnic groups. With this broadened ambition came our recog- nition that we needed to make inter- nal adjustments to position ourselves for the future. During the second half of 2003, we recruited or promoted crucial professionals to guide our growth. PASSION The one trait we most value among our employees is passion—a devotion to their work and an inner drive to make Hanmi Bank the best, not only in our niche market but also within the banking industry. To best leverage our staff’s expertise Our loan portfolios are both weighted and effectiveness, Hanmi restructured toward commercial, small business, our internal organization in September. trade finance and consumer lending. By merging or separating functions as And we both offer our core customer needed and shortening the lines of group the ability to work with bankers communication between the CEO who speak their language. and various operating departments, We believe our combined we believe we have expedited our resources will give us new competitive decision-making process. We expect advantages in our market. Our significant benefits from the changes. resources and economies of scale The most profound change will allow us to provide a full range your bank announced in 2003 was of banking services. And our com- the intended acquisition of Pacific bined size will help our transforma- Union Bank. Founded in 1974, tion from a community bank to a Pacific Union is the oldest estab- regional player. lished Korean-American bank in the What will not change in this country. Already, Hanmi is the historic merger is our commitment to largest. Once the acquisition and our relationships with our customers merger are completed (anticipated and our communities. To ensure a for the second quarter of 2004), we smooth transition, Hanmi and Pacific expect our combined assets to total Union have assembled a team to approximately $3.0 billion. With an orchestrate the integration of the two estimated market share of more than banks. Comprising executives from 40 percent, we expect to be more both banks as well as outside experts, than twice as large as our closest the team continues to make consider- Korean-American peer. able progress toward joining the two More than dollars and percent- organizations. Their work includes ages, however, we are looking forward making the merger as seamless as to the resulting combination of two possible for the banks’ customers, banks with similar cultures, services investors and other stakeholders. and products. Both banks focus on small to mid-size business customers. 4 page Reach. With growth and maturity come a desire to do more. Your bank, with the acquisition of Pacific Union Bank, intends to encompass more than the institutions’ combined assets. This historic transaction promises to expand the types of services and products Hanmi Bank can offer and the geographical and demographic markets we can access. 3 page Nourish. Plants can convert sunshine to food, but they need water to survive. Similarly, you, as Hanmi Bank’s core customers, have the inge- nuity to make your businesses thrive and your own hard work pay off, given the appropriate financial support. Your bank is committed to providing the support to get your businesses started and to help you grow. CONNECTIONS Individually, the fibers in a rope would tear easily. Woven together, however, they support many times their own weight. We believe that you— Hanmi Bank’s customers, employees and investors— pull together in much the same way for the benefit of the whole community. As one of the leading financial income of $40,758—as compared to institutions serving the multi-ethnic $47,493 for the total population— communities of California, our they maintained a significantly emphasis has long been on the higher savings rate than other popu- Korean-American community. Our lation groups. And they continue to founders were Korean-American turn to banks such as Hanmi and entrepreneurs who saw a need for a Pacific Union Bank for the value they bank that would cater to a Korean- find in dealing in their own language. speaking clientele. An estimated 39 percent of all foreign- California is home to more born Korean-Americans in California than 40 percent of Korean-Americans and 35 percent in the United States and the largest such community in do not speak English well. the country. An estimated 600,000 We have tailored our business Korean-Americans live in Southern to meet the needs of first-generation California and another 100,000 live Korean immigrants and those who in Northern California. maintain households and/or busi- Moreover, the Korean-American nesses in both countries. As we community has among the highest grow and mature, however, we are levels of business ownership and self- extending our marketing efforts employment per capita in the United toward retaining second-generation States. Korean-Americans are also Korean-Americans as well. among the most highly educated eth- In a related business develop- nic minority groups in the country. ment, Hanmi also has built a signifi- Approximately 44 percent of Koreans cant international trade business. We who are 25 years or older and living provide letters of credit, international in the United States have attained a collection, import/export financing four-year college degree or a higher services and remittance services to degree. Of those living in California, customers wishing to send money 46 percent have bachelors’ or higher to family and friends overseas. This degrees. This compares to 24 percent is a small but rapidly growing and 27 percent, respectively, for the portion of our business and one general population. that we will develop as our service Although Korean-Americans coverage expands. in 2000 had a median household 7 page CONSISTENCY The most successful companies in every industry understand that a customer’s satisfaction hinges on his or her most recent experience. That explains why your bank’s emphasis is on making sure that every interaction customers have is pleasant, professional and predictable—predictably excellent. The name “Hanmi” was formed by above the banking industry norms. the combination of two Korean words Some of our expansion can be credited meaning “Korean-American.” From to the recent influx of immigrants to our inception, and to our very core, Southern California from Korea and we are connected with the Korean- other Asian countries. These new- American community. We have grown comers tend to settle in concentrated with our community’s support, and our areas, and Hanmi has consciously community has grown with our help. established branches to serve many As evidence, Hanmi has a robust of these neighborhoods. Small Business Administration (SBA) Nor have we limited our services loan unit. Given the high levels of only to Korean customers. A growing self-employment among our core percentage of our accounts are held by customer group, it is no wonder that customers of Iranian, Indian, Chinese Hanmi ranks sixth among all SBA and Hispanic descent—a trend we lenders in the Los Angeles District would expect to continue as the and tenth in California. We also strive bank and our neighborhoods grow to offer and underwrite a significant and change. number of low-income housing loans In the meantime, however, the and are recognized as a vital supporter Korean-American banking niche is of all levels of commercial and business still in a rapid growth phase. As immi- lending in our geographic markets. gration from other Asian countries, We are not alone in our success. including Japan and China, has leveled Banks focused on the Korean-American off, the influx from Korea has yet to market have enjoyed growth rates far reach its peak. 8 page Pollinate. No man is an island, and no plant can propagate alone. Ideas are much the same. Innovation comes when thoughts bounce off one another, when individuals speak up with suggestions. Your new Hanmi Bank is establishing an environment that encourages strategic evaluations and innovative creativity among our personnel and the customers we serve. PROFESSIONALISM Hanmi Bank’s ultimate goal is to deliver comprehensive, consistent and quality financial services that are beyond what customers might expect of any bank in the world. Some might consider that a lofty goal. Your bank sees it as simple professionalism—and intends to make it business as usual. Message to Shareholders A Korean story tells of a frog in cial institution, Hanmi will be able to see how expansive its markets are. As a nearly $3.0 billion finan- about the sky is the small a well. All the frog knows circle of blue he can see above him. We will continue to serve the Korean- He may study it. He may love it. Yet, American community, but as a unless that frog gets a new vantage regional bank. We will expand our point, he will have no idea how reach to draw second-generation expansive the sky really is. Korean-Americans and other immi- Hanmi Bank—your bank—is grant populations. We will supple- like that frog. In our earlier years, our ment our financial services with market, or sky, was the local Korean- more comprehensive offerings. We American community. We studied it. will strive for a level of customer We focused on it. We served it. We service and attention to rival that grew steadily and prudently with it of the world’s finest banks. and, in the process, became known We will not settle for being for our reliability. We are proud of the oldest and largest, because those those accomplishments and all of measures do not necessarily reflect your efforts toward our successes. excellence. Your bank intends to be In 2004, however, we will the very best. acquire Pacific Union Bank. It is Reaching that goal will require the Korean-American community’s hard work and tough decisions. We oldest bank, and Hanmi is already began the process in autumn 2003 the largest. Following the acquisition with an internal restructuring designed and merger, your bank most definitely to shorten the lines of communica- will have a new vantage point. tion among decision makers. We are 11 page CONFIDENCE Engineers set buildings and other structures on bedrock for unquestionable integrity and support. Your bank is striving to ensure that Hanmi Financial elicits the same sense of security from investors. Toward that end, we have made return on assets and return on equity our key performance measures and redoubled our efforts to keep the investment community apprised of our developments. implementing new employee incentive previous year’s 55.4 percent. Net plans to recognize and encourage income for 2003 increased 12.8 per- innovative thinking and excellent cus- cent over 2002—to $19.2 million tomer service. Through the acquisition from $17.0 million, and our total and merger, there will be some con- stock returns (price plus dividends) solidation of bank branches and staff. reflected our above-industry perform- These are necessary changes toward ance trends as well. HAFC’s total return improving our financial performance. to shareholders was 21.2 percent in By most measures, 2003 was a 2003, following a 25 percent total strong year. Hanmi Bank’s total assets return in 2002. grew 22.6 percent to $1.79 billion, We are proud of these numbers, continuing our eight-year run of especially given the challenging eco- double-digit growth. This is a particu- nomic environment of the past three larly impressive illustration of our years. Still, we are not satisfied with performance as 2003 saw continuing our earnings per share (EPS), return record-low interest rates. In other on assets (ROA) and return on equity accomplishments, we increased net (ROE) trends. These metrics remain loans from approximately $1 billion suppressed in part because record low at year-end 2002 to $1.25 billion at interest rates have limited our net the end of 2003—up more than 25 interest margin (NIM), or the excess percent. The majority of that growth of the interest rate we earned over our was in commercial and real estate cost of funds. We are taking steps to loans, primarily from new business. improve our NIM. We also are confi- At the same time, our efficiency ratio dent that loan demand from Hanmi’s (expenses divided by revenue) core small- to medium-sized business improved to 51.3 percent from the customers will continue as the economy 12 page Envision. Your new Hanmi Bank is attuned to every detail of its business. Yet we have not lost sight of the bigger picture. The changes and transitions we are instituting now will lead to stronger customer service, employee satisfaction and shareholder value in the future. Harvest. Each calendar year brings a growing cycle in which seeds sprout, plants grow and fruit forms. And every fall, in preparation for winter, the fruit and grains are gathered and counted. Your new Hanmi Bank aims to count its successes in increasing return on assets and return on equity, thereby maximizing shareholder value. gathers upward momentum. More- and visionary, strategic planning that over, the healthier NIM achievable resulted in 2003’s successes and that with higher interest rates would have been dedicated to making the lead to stronger earnings for our acquisition of Pacific Union Bank as shareholders. smooth as possible. In our quest to We do expect the acquisition maintain the market share of both of Pacific Union Bank to be margin- banks, as well as our renowned qual- ally dilutive to earnings per share ity of service, we will continue to in 2004, but accretive in 2005. We focus on our customers. believe we can reduce costs by more We look forward to 2004 with than $10 million over the 18 months optimism and confidence, both born following the close of the transaction, of our past successes. We would not and that we will capture opportunities be where we are today without our to enhance our revenues beginning employees’ dedication, our customers’ in the second half of 2004. loyalty or our investors’ support. On behalf of the Board of Thank you all. We look forward to Directors and management, we would both growing your new Hanmi Bank like to recognize all of the long hours and sharing its successes with you. Sincerely, Jae Whan Yoo President and Chief Executive Officer Chang Kyu Park Chairman of the Board of Directors 15 page 15 page TOTAL ASSETS TOTAL ASSETS (in billions) (in billions) NET INCOME NET INCOME (in millions) (in millions) TOTAL DEPOSITS TOTAL DEPOSITS (in billions) (in billions) NET LOANS NET LOANS (in billions) (in billions) $2.0 1.5 1.0 0.5 0 $20 15 10 5 0 $1.5 1.2 0.9 0.6 0.3 0 $1.5 1.2 0.9 0.6 0.3 0 FY ’99 ’00 ’01 ’02 ’03 FY ’99 ’00 ’01 ’02 ’03 FY ’99 ’00 ’01 ’02 ’03 FY ’99 ’00 ’01 ’02 ’03 FINANCIAL HIGHLIGHTS (amounts in thousands, except per share amounts) 2003 2002 2001 2000 1999 FOR THE YEAR Net interest income Service charges and fee income Other operating income Noninterest expenses Net income AT YEAR END Total assets Net loans Total deposits Shareholders’ equity PER COMMON SHARE Net income (diluted) Cash dividends declared Book value FINANCIAL RATIOS Net interest margin Nonperforming loans to total gross loans Allowance for loan losses to total gross loans Efficiency ratio Tier 1 capital to average total assets* Total risk-based capital* Return on average assets Return on average equity *Hanmi Bank ratio $ $ $ $ $ 56,965 15,053 4,625 39,325 19,213 $ $ $ $ $ 48,262 13,194 7,719 38,333 17,030 $ $ $ $ $ 43,954 12,533 4,454 32,028 16,810 $ $ $ $ $ 41,538 12,105 2,714 27,796 15,523 $ 33,530 $ 11,229 $ 1,557 $ 24,628 $ 12,006 $1,785,754 $1,247,014 $1,445,835 $ 139,467 $1,456,298 $ 974,139 $1,283,979 $ 124,469 $1,158,760 $ 781,062 $1,042,353 $ 104,873 $1,034,610 $ 620,522 $ 934,581 86,396 $ $740,259 $474,650 $655,730 $ 67,831 $ $ $ 1.34 0.40 9.85 $ $ $ 1.20 $ — $ $ 8.94 1.21 $ — $ $ 7.67 1.14 $ — $ $ 6.36 0.88 — 5.00 3.73% 3.98% 4.32% 5.25% 5.46% 0.68% 0.64% 0.60% 0.40% 0.62% 1.16% 51.31% 7.75% 11.09% 1.18% 14.51% 1.20% 55.41% 8.34% 11.94% 1.30% 15.08% 1.21% 52.40% 8.76% 12.75% 1.53% 17.56% 1.89% 49.32% 8.39% 12.27% 1.78% 19.81% 2.19% 53.15% 9.20% 13.88% 1.74% 18.50% 16 page SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected historical financial information, including per share information as adjusted for the stock dividends and stock splits declared by the Company. This selected historical financial data should be read in conjunction with the financial statements of the Company and the notes thereto appearing elsewhere in this statement and the information contained in “Management’s Discussion and Analysis of Results of Operations and Financial Condition.” The selected historical financial data as of and for each of the years in the five years ended December 31, 2003 are derived from the Company’s audited financial statements. In the opinion of management of the Company, the information presented reflects all adjustments, including normal and recurring accruals, considered necessary for a fair presentation of the results of such periods. SUMMARY FINANCIAL STATEMENTS (dollars in thousands, except for per share data) 2003 2002 2001 2000 1999 For the Year Ended and As of December 31, SUMMARY STATEMENT OF OPERATIONS DATA: Interest income Interest expense Net interest income before provision for loan losses Provision for loan losses Non-interest income Non-interest expenses Income before provision for income taxes Provision for income taxes $ 77,761 $ 20,796 69,607 $ 21,345 76,944 32,990 $ 72,429 $ 52,377 18,847 30,891 56,965 5,680 19,678 39,325 31,638 12,425 48,262 4,800 20,913 38,333 26,042 9,012 43,954 1,400 16,987 32,028 27,513 10,703 41,538 2,250 14,819 27,796 33,530 1,000 12,786 24,628 26,311 10,788 20,688 8,682 Net income $ 19,213 $ 17,030 $ 16,810 $ 15,523 $ 12,006 SUMMARY STATEMENT OF FINANCIAL CONDITION DATA: Cash and cash equivalents Total investment securities Net loans(1) Total assets Total deposits Total liabilities Total shareholders’ equity Average net loans Average investment securities Average interest earning assets Average total assets Average deposits Average interest bearing liabilities Average shareholders’ equity PER SHARE DATA: Earnings per share—Basic(2) Earnings per share—Diluted(2) Book value per share—Basic(2) Cash dividends Common shares outstanding $ 62,595 $ 122,772 $ 414,616 1,247,014 1,785,754 1,445,835 1,646,287 139,467 1,103,765 379,635 1,525,633 1,623,214 1,416,564 1,057,249 132,369 279,548 974,139 1,456,298 1,283,979 1,331,830 124,469 882,625 244,675 1,211,553 1,308,885 1,164,562 854,858 112,927 81,205 213,179 781,062 1,158,760 1,042,353 1,053,887 104,873 701,714 235,034 1,017,422 1,100,182 988,392 736,947 95,740 $ 176,107 $ 69,459 176,318 474,650 740,259 655,730 672,428 67,831 396,607 188,150 614,028 690,797 683,758 424,722 64,896 205,994 620,522 1,034,610 934,581 948,214 86,396 555,045 180,470 791,105 925,608 873,044 569,544 78,363 1.37 $ 1.34 $ 9.85 $ 0.40 $ $ $ $ $ 14,163,410 13,915,433 1.23 $ 1.20 $ 8.94 $ — $ 1.23 1.21 7.67 $ $ $ — $ 1.14 1.14 6.36 0.89 $ 0.88 $ 5.00 $ — — $ 7,434,457 6,679,670 (continued) 12,562,229 17 page SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED) SELECTED PERFORMANCE RATIOS: Return on average equity(3) Return on average assets(4) Net interest spread(5) Net interest margin(6) Average shareholders’ equity to average total assets SELECTED CAPITAL RATIOS: Tier 1 capital to average total assets: Hanmi Financial Hanmi Bank Tier 1 capital to total risk-weighted assets: Hanmi Financial Hanmi Bank Total capital to total risk-weighted assets: Hanmi Financial Hanmi Bank SELECTED ASSET QUALITY RATIOS: Non-performing loans to total gross loans(7) Non-performing assets to total assets(8) Net charge-offs to average total gross loans Allowance for loan losses to total gross loans Allowance for loan losses to non-performing loans Efficiency ratio(9) 2003 2002 2001 2000 1999 14.51% 1.18% 3.13% 3.73% 15.08% 1.30% 3.25% 3.98% 17.56% 1.53% 3.08% 4.32% 19.81% 1.78% 3.73% 5.25% 18.50% 1.74% 4.09% 5.46% 8.15% 8.63% 8.70% 8.98% 9.39% 7.80% 7.75% 10.05% 10.00% 11.13% 11.09% 8.50% 8.34% 11.01% 10.81% 12.14% 11.94% 8.86% 8.76% 11.71% 11.59% 12.87% 12.75% 8.46% 8.39% — 9.20% 11.11% 11.02% — 12.63% 12.37% 12.27% — 13.88% 0.68% 0.64% 0.60% 0.40% 0.62% 0.49% 0.44% 0.43% 0.25% 0.41% 0.29% 0.28% 0.45% 0.16% 0.19% 1.16% 1.20% 1.21% 1.89% 2.19% 170.12% 51.31% 189.48% 55.41% 201.24% 52.40% 469.10% 350.40% 53.15% 49.32% (1) Net loans exclude term Federal funds sold. (2) Restated for a 9% stock dividend declared in 2002, a 12% stock dividend declared in 2001 and a 3-for-2 stock split in 2001. (3) Net income divided by average shareholders’ equity. (4) Net income divided by average total assets. (5) Represents the average rate earned on interest-bearing assets less the average rate paid to interest-bearing liabilities. (6) Represents net interest income as percentage of average interest-earning assets. (7) Non-performing loans consist of non-accrual loans, loans past due 90 days or more and restructured loans. (8) Non-performing assets consist of non-performing loans (see footnote (7) above) and other real estate owned. (9) The efficiency ratio is calculated as the ratio of total non-interest expenses to the sum of net interest income before provision for loan losses and total non-interest income including securities gains and losses. 18 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion presents management’s analysis of the results of operations and financial condition of the Company as of and for the years ended December 31, 2003, 2002 and 2001. The discussion should be read in conjunction with the financial statements of the Company and the notes related thereto presented elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors discussed elsewhere in this Report. CRITICAL ACCOUNTING POLICIES We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our signif- icant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies require us to make significant esti- mates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting poli- cies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these esti- mates 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. We believe the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions that are particularly sus- ceptible to significant change in the preparation of our financial statements. See “Financial Condition—Allowance for Loan Losses” and Note 1 of Notes to the Consolidated Financial Statements. OVERVIEW Over the last three years, the Company has experi- enced significant growth in assets and deposits. Total assets increased to $1,785.8 million at December 31, 2003 from $1,456.3 million and $1,158.8 million at December 31, 2002 and 2001, respectively. Total net loans increased to $1,247.0 million at December 31, 2003 from $974.1 million and $781.1 million exclud- ing $30 million and $40 million of term Federal funds sold at December 31, 2002 and 2001, respectively. Total deposits increased to $1,445.8 million as of December 31, 2003 from $1,284.0 million and $1,042.4 million at December 31, 2002 and 2001, respectively. The Company’s growth has been generated through expansion of relationships with customers within the Bank’s existing markets and expansion into new mar- kets previously not served by the Company. The Company opened a new branch in Santa Clara, California, in February 2003 and added one more branch in Downtown Los Angeles in October 2003, which expanded the Company’s network to fifteen branches. For the year ended December 31, 2003, net income was $19.2 million, representing an increase of $2.2 million or 12.8% from $17.0 million for the year ended December 31, 2002. This resulted in basic earnings per share of $1.37 and $1.23 for the years ended December 31, 2003 and 2002, and diluted earnings per share of $1.34 and $1.20 for the years ended December 31, 2003 and 2002, respectively. The increase in net income, in spite of the decrease in the net interest margin, was largely attributable to a 26% increase in average earning assets. Net interest income increased due to a 28% increase in volume of gross loans. The interest rate paid decreased by 53 basis points while the interest rate earned decreased by 65 basis points. As a result, net interest spread decreased by 12 basis points, from 3.25% in 2002 to 3.13% in 2003. 19 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) For the year ended December 31, 2002, net income was $17.0 million, representing an increase of $220,000 or 1.3% from $16.8 million for the year ended December 31, 2001. This resulted in basic earn- ings per share of $1.23 for each of the years ended December 31, 2002 and 2001, and diluted earnings per share of $1.20 and $1.21 for the years ended December 31, 2002 and 2001, respectively. The slight increase in net income was primarily a result of less income tax expense due to the formation of a real estate investment trust. Net interest income increased due to increases in volume of loans. The interest rate paid decreased by 198 basis points while the interest rate earned decreased only 181 basis points. As a result, net interest spread increased by 17 basis points, from 3.08% in 2001 to 3.25% in 2002. One of the Company’s primary sources of revenue is net interest income, which is the difference between interest and fees derived from earning assets and interest paid on liabilities incurred to fund those assets. The Company’s net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities. It also is affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Another source of income is gain on sale of loans. The Company is a Small Business Administration (“SBA”) lender and actively markets the guaranteed portion of the loans it generates to the secondary market. During 2003, the Company realized $1.5 million of gain from SBA loan sales and $650,000 from mortgage loan sales. Other sources of income include gain on sale of securities available for sale. During 2003, the Company realized $1.1 million of gain from such sales, a 66% or $2.2 mil- lion decrease compared to 2002. The Company also generated substantial non-interest income from serv- ice charges on deposit accounts, and charges and fees generated from international trade finance. The Company’s non-interest expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan losses. Results of operations may also be affected by other factors, including general economic and competitive condi- tions, mergers and acquisitions of other financial insti- tutions within the Company’s market area, changes in interest rates, government policies and actions of reg- ulatory agencies. RESULTS OF OPERATIONS NET INTEREST INCOME AND NET INTEREST MARGIN The Company’s earnings depend largely upon the difference between the interest income received from its loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net interest margin. The Company’s 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. The Company’s net interest income also is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on the Company’s loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are, in turn, affected by general economic con- ditions and other factors beyond the Company’s con- trol, such as Federal economic policies, the general supply of money in the economy, legislative tax poli- cies, governmental budgetary matters and the actions of the Federal Reserve Bank. For the years ended December 31, 2003 and 2002, the Company’s net interest income was $57.0 million and $48.3 million, respectively. The net interest spread and net interest margin for the year ended December 31, 2003 were 3.13% and 3.73%, com- pared to 3.25% and 3.98% for the year ended December 31, 2002, respectively. For the years ended December 31, 2002 and 2001, the Company’s net interest income was $48.3 million and $44.0 million, respectively. The net interest rate spread and net interest margin for the year ended December 31, 2002 were 3.25% and 3.98%, respec- tively, compared to 3.08% and 4.32%, respectively, for the year ended December 31, 2001. The net interest margin for the year ended December 31, 2002 was lower than the net interest margin for the comparable 2001 period primarily due to declining interest rates. interest-earning assets However, the yield on decreased 181 basis points, while the interest rate paid on interest-bearing liabilities declined to 2.50% from 4.48%, or 198 basis points, which resulted in an increase in net interest spread. 20 page Average interest-earning assets increased 25.9% to $1,525.6 million in 2003 from $1,211.6 million in 2002. Average net loans increased 25.1% to $1,103.8 mil- lion in 2003 from $882.6 million in 2002 and average investment securities increased 55% to $379.6 mil- lion in 2003 from $244.7 million in 2002. Total loan interest income increased by 14.4% in 2003 on an annual basis due to the increase in loans outstanding, in spite of a decrease of average yields on net loans from 6.42% in 2002 to 5.88% in 2003. The average interest rate charged on loans decreased reflecting the average prime rate decrease of 46 basis points from 4.71% in 2002 to 4.25% in 2003. The majority of interest-earning assets growth was due to a $161.9 million or 12.6% increase in average total deposits and a $40.5 million or 186% increase in the average balance of Federal Home Loan Bank borrow- ings. Total average interest-bearing liabilities grew by 23.6% to $1,056.5 million in 2003, compared to $854.9 million in 2002. The average interest rate the Company paid for interest-bearing liabilities decreased by 53 basis points from 2.50% in 2002 to 1.97% in 2003. As a result, the net interest spread decreased to 3.13% in 2003, compared to 3.25% in 2002. The following tables show the Company’s average balances of assets, liabilities and shareholders’ equity; the amount of interest income or 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. For the Year Ended December 31, 2003 2002 2001 Average Balance Interest Average Income/ Expense Rate/ Yield Average Balance Interest Average Income/ Expense Rate/ Yield Average Balance Interest Average Income/ Expense Rate/ Yield $1,103,765 $64,849 1,421 33,596 5.88% $882,625 $56,689 1,300 29,699 6.22 6.42% $ 701,714 $59,305 1,490 28,110 6.44 8.45% 7.79 70,465 275,574 6,003 21,844 14,370 — 16 3.40 2,395 3.02 8,321 4.54 273 1.27 277 1.56 225 — — — 1.35 29,204 185,772 3,767 51,456 28,693 288 49 1,340 8,507 207 925 630 8 1 4.59 4.58 5.50 1.80 2.20 2.68 2.51 50,449 156,476 5,037 54,359 16,014 4,582 681 3,114 9,651 259 2,330 533 238 24 6.17 6.17 5.14 4.29 3.33 5.19 3.52 (dollars in thousands) ASSETS: Interest-earning assets: Net loans(1) Municipal securities(2) Obligations of other U.S. government agencies Other debt securities Equity securities Federal funds sold Term Federal funds sold Commercial paper Interest-earning deposits Total interest-earning assets 1,525,633 77,761 5.10% 1,211,553 69,607 5.75% 1,017,422 76,944 7.56% Noninterest-earning assets: Cash and due from banks Premises and equipment, net Accrued interest receivable Other assets Total noninterest- earning assets Total assets 52,067 8,496 6,049 30,969 97,581 $1,623,214 55,049 7,231 6,037 14,443 82,760 $1,100,182 (continued) 54,496 7,638 5,264 29,934 97,332 $1,308,885 21 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) For the Year Ended December 31, 2003 2002 2001 Average Balance Interest Average Income/ Expense Rate/ Yield Average Balance Interest Average Income/ Expense Rate/ Yield Average Balance Interest Average Income/ Expense Rate/ Yield $ 207,689 $ 2,584 1,894 97,070 1.24% $ 176,089 $ 3,036 2,632 92,835 1.95 1.72% $ 109,496 $ 2,610 2,714 77,860 2.84 2.38% 3.49 386,701 302,651 63,138 7,415 7,354 1,549 1.92 2.43 2.45 312,618 251,469 21,847 7,838 7,034 805 2.51 2.80 3.68 277,169 269,548 2,874 13,778 13,785 103 4.97 5.11 3.62 1,057,249 20,796 1.97% 854,858 21,345 2.50% 736,947 32,990 4.48% 422,453 11,143 433,596 1,490,845 132,369 331,551 9,549 341,100 1,195,958 112,927 254,319 13,176 267,495 1,004,442 95,740 (dollars in thousands) LIABILITIES AND SHAREHOLDERS’ EQUITY: Interest-bearing liabilities: Deposits: Money market deposits Savings deposits Time certificates of deposit, $100,000 or more Other time deposits Other borrowings Total interest-bearing liabilities Noninterest-bearing liabilities: Demand deposits Other liabilities Total noninterest- bearing liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity $1,623,214 $1,308,885 $1,100,182 Net interest income Net interest spread(3) Net interest margin(4) $56,965 $48,262 $43,954 3.13% 3.73% 3.25% 3.98% 3.08% 4.32% (1) Loans are net of the allowance for loan losses, deferred fees and related direct costs, and exclude term Federal funds sold. Loan fees have been included in the calculation of interest income. Loan fees were approximately $3.8 million, $3.2 million and $2.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. (2) Yields on tax-exempt income have been computed on a tax-equivalent basis. (3) Represents the average rate earned on interest-bearing assets less the average rate paid on interest-bearing liabilities. (4) Represents net interest income as a percentage of average interest-earning assets. 22 page The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to changes in average daily balances (volume) or changes in average daily interest rates (rate). The variances attributable to both the volume and rate changes have been allocated to volume and rate changes in proportion to the rela- tionship of the absolute dollar amount of the changes in each: For the Year Ended December 31, 2003 vs. 2002 2002 vs. 2001 Increases (Decreases) Due to Change in Increases (Decreases) Due to Change in Volume Rate Total Volume Rate Total (dollars in thousands) Earning assets—interest income: Net loans Municipal securities Obligations of other U.S. government agencies Other debt securities Equity securities Federal funds sold Term Federal funds sold Commercial paper Interest-earning deposits $13,300 166 1,478 3,290 107 (428) (257) (8) (1) $(5,140) $8,160 121 1,055 (186) 66 (647) (405) (8) (2) (45) (423) (3,476) (41) (219) (148) — (1) $13,389 81 (1,102) 1,611 (68) (118) 322 (152) (18) $(16,005) $ (2,616) (190) (1,774) (1,144) (51) (1,405) 97 (230) (23) (271) (672) (2,755) 17 (1,287) (225) (78) (5) Total 17,647 (9,493) 8,154 13,945 (21,281) (7,336) Deposits and borrowed funds—interest expense: Money market Savings Time certificates of deposit, $100,000 or more Other time deposits Other borrowings 486 115 1,638 1,317 1,080 (937) (853) (2,061) (998) (336) (451) (738) (423) 319 744 1,285 473 1,583 (871) 700 (858) (556) (7,522) (5,880) 2 427 (83) (5,939) (6,751) 702 Total 4,636 (5,185) (549) 3,170 (14,814) (11,644) Change in net interest income $13,011 $(4,308) $8,703 $10,775 $ (6,467) $ 4,308 PROVISION FOR LOAN LOSSES For the year ended December 31, 2003, the provision for loan losses was $5.7 million, compared to $4.8 million for the year ended December 31, 2002, an increase of 18.3%. While the Company’s loan volume increased, the allowance for loan losses decreased to 1.16% of total gross loans from 1.24% in 2002. This decrease in the ratio of the allowance for loans losses to total loans was primarily due to the overall decrease of historical loss factors on pass grade loans. Since the year 2001, the Company has refined its credit management process and instituted a more comprehensive risk rating system. For the year ended December 31, 2002, the provision for loan losses was $4.8 million, compared to $1.4 million for the year ended December 31, 2001, an increase of 242.9%. 23 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) Provisions to the allowance for loan losses are made quarterly, in anticipation of probable loan losses. The quarterly provision is based on the allowance need, which is calculated using a formula designed to provide adequate allowances for anticipated losses. The formula is composed of various components. The allowance is determined by assigning specific allowances for all classified loans. All loans that are not classified are then given certain allocations according to type with larger percentages applied to loans deemed to be of a higher risk. These percentages are determined based on the Company’s prior loss history by type of loan, adjusted for current economic factors. 2003 2002 2001 2000 1999 Allowance for Loan Losses Applicable to: Real estate loans: Construction Commercial property Residential property Commercial and industrial loans Consumer loans Unallocated Allowance Amount Total Loans Allowance Amount Total Loans Allowance Amount Total Loans Allowance Amount Total Loans Allowance Amount Total Loans $ 427 $ 43,047 $ 267 $ 39,237 $ 163 $ 33,618 $ 68 $ 8,543 $ 28 $ 3,512 374 397,853 337 284,465 1,108 198,336 1,311 147,810 1.422 125,842 191 58,477 149 47,891 258 49,526 262 48,192 — 39,787 12,761 846 135 685,557 54,878 — 10,788 652 76 560,370 44,416 — 7,728 738 69 457,973 38,645 — 6,173 571 3,591 378,247 38,486 — 5,492 395 3,287 260,457 38,682 — Total $14,734 $1,239,812 $12,269 $976,379 $10,064 $778,098 $11,976 $621,278 $10,624 $468,280 The allowance is based on estimates, and ultimate future losses may vary from current estimates. Underlying trends in the economic cycle, particularly in Southern California, which management cannot completely predict, will influence credit quality. It is always possible that future economic or other factors may adversely affect Hanmi Bank’s borrowers. As a result, the Company may sustain loan losses in any particular period that are siz- able in relation to the allowance, or exceed the allowance. In addition, the Company’s asset quality may deterio- rate through a number of possible factors, including: • rapid growth; • failure to maintain or enforce appropriate underwriting standards; • failure to maintain an adequate number of qualified loan personnel; and • failure to identify and monitor potential problem loans. As a result of these and other factors, loan losses may be substantial in relation to the allowance or exceed the allowance. 24 page NON-INTEREST INCOME The following table sets forth the various components of the Company’s non-interest income for the years indicated: (dollars in thousands) Service charges on deposit accounts Trade finance fees Remittance fees Other service charges and fees Bank-owned life insurance income Gain on sale of loans Gain on sale of securities available for sale Gain on sale of other real estate owned Increase in fair value of interest rate swaps Other income Total 2003 2002 2001 $10,339 2,887 952 875 499 2,157 1,094 82 35 758 $ 9,195 2,410 786 803 552 1,875 3,265 — 1,368 659 $ 9,222 1,915 602 794 — 1,345 2,751 16 — 342 $19,678 $20,913 $16,987 The Company earns non-interest income from four major sources: service charges on deposit accounts, fees generated from international trade finance, gain on the sale of loans and gain on sale of securities available for sale. Non-interest income has become a significant part of the Company’s revenue in the past several years. For the year ended December 31, 2003, non-interest income was $19.7 million, a decrease of 6.0% from $20.9 million for the year ended December 31, 2002. This decrease was largely attributable to the $2.2 mil- lion decrease in gain on sale of securities available for sale and a $1.3 million decrease in the change in fair value of interest rate swaps. The large increase in service charges on deposit accounts and trade finance fees offsets this decrease and resulted in a comparatively small overall decrease in non-interest income of $1.2 million. Service charge income on deposit accounts increased with the growing deposit volume and number of accounts. The Company constantly reviews service charges to maximize service charge income while still maintaining its competitive position. The service charges on deposit accounts increased by $1.1 million or 12.4% for the year 2003 compared to 2002. The increase in service charges was mainly due to the expansion of the Company’s branch network through- out the years and a response to the competitive envi- ronment after experiencing a slight decrease in service charges on deposit accounts in 2002. Fees generated from international trade finance increased by 19.8% from $2.4 million to $2.9 million during 2003. The increase was primarily due to the recovery of the general economies of Pacific Rim countries from the monetary crisis in prior years. Average trade finance loans increased by $8.4 million or 20.6% from $40.6 million in 2002 to $48.9 million in 2003. Gain on the sale of loans was approximately $2.2 mil- lion in 2003, compared to $1.9 million and $1.3 million in 2002 and 2001, respectively, representing increases of 15.0% and 39.4% for the years ended December 31, 2002 and 2003, respectively. While SBA loan sales remained active during 2003, the increase in gain on sale of loans resulted from the Company’s increased sales activity in mortgage loans. The Company sells the guaranteed portion of SBA loans in the secondary markets, while retaining servicing rights. During the year 2003, the Company sold approximately $35.1 mil- lion of SBA loans. Gain on sale of securities available for sale decreased by 66.5% from $3.3 million in 2002 to $1.1 million dur- ing 2003. The Company sold approximately $57.1 mil- lion of securities, recognizing premiums of 1.4% over the carrying value of such securities. The ability to generate such gains in the future is not assured since any gains are dependent on market interest rates. The increase of other income in 2003 compared to 2002 and 2001 is mainly due to an increase of credit card fee income and sales commission from mutual funds and insurance products. 25 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) For the year ended December 31, 2002, non-interest income was $20.9 million, an increase of $3.9 million or 23.1% from $17.0 million for the year ended December 31, 2001. This increase was largely attribut- able to the $530,000 increase in gain on sale of loans, a $495,000 increase in trade finance fees, a $514,000 increase in gain on sale of securities available for sale, a $1.4 million increase in the fair value of interest rate swaps and a $552,000 increase in income from bank- owned life insurance. For the year ended December 31, 2001, non-interest income was $17.0 million, an increase of $2.2 million or 14.6% from $14.8 million for the year ended December 31, 2000. This increase was largely attribut- able to a $2.8 million gain on sale of securities. As a part of its continuing effort to expand non-interest income, the Company introduced non-depository products, such as life insurance, mutual funds and annuities, to customers in December 2001. During the year 2003, the Company generated income of $228,000 from this activity, which represented a 16.3% increase from $196,000 earned in 2002. NON-INTEREST EXPENSES The following table sets forth the breakdown of non- interest expenses for the years indicated: (dollars in thousands) 2003 2002 2001 Salaries and employee benefits Occupancy and equipment Data processing Advertising and $21,214 5,198 3,080 $17,931 4,330 2,784 $16,786 3,877 2,347 promotional expenses 1,635 1,523 1,747 Supplies and communications Professional fees Loan referral fees Impairment of investment securities Other operating expenses 1,496 1,167 921 — 4,614 1,466 1,003 691 4,416 4,189 1,417 1,110 540 270 3,934 Total $39,325 $38,333 $32,028 Total non-interest expenses increased by $1 million or 2.6% in 2003. This increase in 2003 was relatively minor due to the charges made for impairment of investment securities during 2002, when the Company recorded an impairment charge of $4.4 million on corporate bonds issued by WorldCom, Inc. The $5.0 million bond was purchased in January 2001 and WorldCom defaulted on it in January 2002. As of December 31, 2003, the remaining $1.0 million par value was carried at $119,000 and had a market value of $335,000. During 2003, the Company sold $4.0 million par value of that bond and recognized a gain of $782,000. Excluding the impairment charges during 2002, total non-interest expense would have increased by $5.4 million or 15.9% to $39.3 million in 2003 from $33.9 million in 2002. The increase was primarily due to the expansion of the Company’s branch network, causing an increase in salaries, occupancy and data processing expenses. Two full branches were added to the Company’s network in 2003, which required an increase in staff (salaries and employee benefits), as well as additional rent for the new locations. The busi- ness generated by the new branches also created the need for additional data processing expenses to sup- port the larger customer base and volume. Total non-interest expense increased by $6.3 million or 19.7% in 2002. Excluding the impairment charges, total non-interest expense would have increased by $1.9 million or 6% to $33.9 million from $32.0 million. The increase in 2002 was primarily due to the addition of one new branch to the Company’s network, which required an increase in staff (salaries and employee benefits), and additional rent for the new location, as well as additional data processing expenses to sup- port the larger customer base and loan volume. PROVISION FOR INCOME TAXES For the year ended December 31, 2003, the Company recognized a provision for income taxes of $12.4 mil- lion on net income before tax of $31.6 million, repre- senting an effective tax rate of 39.3%, compared to a provision of $9.0 million on net income before tax of $26.0 million, representing an effective tax rate of 34.6%, for 2002. In June 2002, Hanmi Bank formed a real estate investment trust (“REIT”). On December 31, 2003, the California Franchise Tax Board announced its position that certain transactions related to REITs will be disallowed pursuant to California Senate Bill 614 and Assembly Bill 1601. The higher tax rate in 2003 compared to 2002 was primarily due to a reversal in the fourth quarter of 2003 of income tax benefits recog- nized in the first three quarters of 2003 from the REIT, in response to this newly enacted California legislation. 26 page The Company made investments in various tax credit funds totaling $4.1 million and recognized an income tax credit of approximately $382,000 of tax credits earned from qualified low-income housing invest- ments in 2003. The Company recognized an income tax credit of approximately $303,000 for the tax year 2002 from $4.6 million in such investments. The Company intends to continue to make such invest- ments as part of an effort to lower its effective tax rate and to receive credit under the Community Reinvestment Act. For the year ended December 31, 2001, the Company recognized a provision for income taxes of $10.7 million on net income before tax of $27.5 million, representing an effective tax rate of 38.9%. As indicated in Note 7 in the Notes to the Consolidated Financial Statements, income tax expense is the sum of two components, current tax expense and deferred tax expense (benefit). Current tax expense is the result of applying the current tax rate to taxable income. The deferred portion is intended to account for the fact that income on which taxes are paid differs from financial statement pretax income because certain items of income and expense are recognized in differ- ent years for income tax purposes than in the finan- cial statements. These differences in the years that income and expenses are recognized cause “tempo- rary differences.” Most of the Company’s temporary differences involve recognizing more expenses in its financial statements than it has been allowed to deduct for taxes, and therefore the Company normally has a net deferred tax asset. At December 31, 2003, the Company had net deferred tax assets of $7.2 million. FINANCIAL CONDITION LOAN PORTFOLIO Total gross loans increased by $276.3 million or 27.9% in 2003. Total gross loans comprised 70.9% of total assets at December 31, 2003 compared with 67.9% and 68.4% at December 31, 2002 and 2001, respectively. The table below sets forth the composition of the Company’s loan portfolio by major category. Commer- cial and industrial loans comprised the largest portion of the total loan portfolio, representing 56.2% of total loans at December 31, 2003, as compared with 57.9% and 57.6% of total loans at December 31, 2002 and 2001, respectively. Commercial loans include term loans and revolving lines of credit. Term loans typically have a maturity of three to five years and are extended to finance the purchase of business entities, business equipment, leasehold improvements or for permanent working capital. SBA guaranteed loans usually have a longer maturity (five to 20 years). Lines of credit, in general, are extended on an annual basis to businesses that need temporary working capital and/or import/export financing. These borrowers are well diversified as to industry, location, and their current and target markets. The Company manages its portfolio to avoid concen- tration in any of the areas mentioned. The commercial loan portfolio also includes the SBA loans held for sale, which totaled approximately $25.5 million and $12.5 million at December 31, 2003 and 2002, respectively. Real estate loans were $499.4 million and $371.6 mil- lion at December 31, 2003 and 2002, respectively, rep- resenting 39.4% and 37.5%, respectively, of the total loan portfolio. Real estate loans are extended to finance the purchase and/or improvement of commer- cial real estate and residential property. The properties generally are user owned but may be for investment purposes. Underwriting guidelines include, among other things, review of appraised value, limitations on loan-to-value ratios, and minimum cash flow require- ments to service debt. The majority of the properties taken as collateral are located in Southern California. The Company does not actively pursue consumer installment loans, which historically have represented less than 10% of the total loan portfolio. The majority of installment loans are automobile loans, which the Company provides as a service to existing clients. 27 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The following table sets forth the amount of total loans outstanding in each category as of the dates indicated: (dollars in thousands) Real estate loans: Construction Commercial property Residential property Commercial and industrial loans(1) Consumer loans Total gross loans Amount Outstanding as of December 31, 2003 2002 2001 2000 1999 $ 43,047 397,853 58,477 711,011 54,878 $ 39,237 284,465 47,891 572,910 44,416 $ 33,618 198,336 49,526 472,920 38,645 $ 8,543 147,810 48,192 391,093 38,486 $ 3,512 125,842 39,787 278,958 38,682 $1,265,266 $988,919 $793,045 $634,124 $486,781 (1) Loans held for sale were included at the lower of cost or market. The following table sets forth the percentage distribution of loans in each category as of the dates indicated: Real estate loans: Construction Commercial property Residential property Commercial and industrial loans Installment loans Total gross loans Percentage Distribution of Loans as of December 31, 2003 2002 2001 2000 1999 3.40% 3.97% 4.24% 1.35% 0.72% 31.44 4.62 56.20 4.34 28.77 4.84 57.93 4.49 25.01 6.25 59.63 4.87 23.31 7.60 61.67 6.07 25.85 8.17 57.31 7.95 100.00% 100.00% 100.00% 100.00% 100.00% As of December 31, 2003 and 2002, the Company had commitments to extend credit of $253.7 million and $197.3 million, obligations under standby letters of credit of approximately $34.4 million and $22.1 million, obli- gations under commercial letters of credit of $34.3 million and $21.3 million, and under credit card loans of approximately $3.8 million and $3.5 million, respectively. Based upon the Company’s historical experience, the outstanding loan commitments are expected to remain relatively stable throughout the year. The table below shows the maturity distribution and repricing intervals of the Company’s outstanding loans as of December 31, 2003. In addition, the table shows the distribution of such loans between those with variable or floating interest rates and those with fixed or predetermined interest rates. The table excludes non-accrual loans of $8.1 million at December 31, 2003. (dollars in thousands) Real estate loans: Construction Commercial property Residential property Commercial and industrial loans Consumer loans Total Loans with predetermined interest rates Loans with variable interest rates Within One Year After One But Within After Five Five Years Years $ 43,047 381,500 18,754 678,030 32,047 — $ 5,174 26,595 14,750 22,777 — $ $11,179 12,002 11,308 — Total 43,047 397,853 57,351 704,088 54,824 $1,153,378 $69,296 $34,489 $1,257,163 $ 49,533 $1,103,845 $56,835 $12,461 $34,489 $ $ 140,857 — $1,116,306 28 page As of December 31, 2003, 2002 and 2001, total non- performing assets were the same as non-performing loans. During these same periods, total loans increased by 27.9% in 2003 from 2002, and 24.7% in 2002 from 2001. As a result, the ratio of non-performing assets to total loans and OREO increased to 0.68% at December 31, 2003, from 0.65% at December 31, 2002 and 0.63% at December 31, 2001. As of December 31, 2003, the Company had no OREO. Except for non-performing loans set forth below and loans disclosed as impaired, the Company’s manage- ment is not aware of any loans as of December 31, 2003 for which known credit problems of the bor- rower 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. The Company’s management cannot, however, predict the extent to which a deteri- oration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of bor- rower may adversely affect a borrower’s ability to pay. NON-PERFORMING ASSETS Non-performing assets are comprised of loans on non- accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO”). Loans are generally placed on non-accrual status when they become 90 days past due unless management believes the loan is adequately collateralized and in the process of collec- tion. Loans may be restructured by management when a borrower has experienced some change in financial status, causing an inability to meet the origi- nal repayment terms, and where the Company believes the borrower eventually will overcome those circumstances and repay the loan in full. OREO con- sists 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, the Company stops recognizing income from the interest on the loan and reverses any uncol- lected interest that had been accrued but unpaid. These loans may or may not be collateralized, but col- lection efforts are continuously pursued. The Company’s non-performing loans were $8.7 mil- lion at December 31, 2003, compared to $6.5 million and $5 million at December 31, 2002 and 2001, respectively, representing a 34% increase in 2003 and a 30% increase in 2002. 29 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The following table provides information with respect to the components of the Company’s non-performing assets as of December 31 of the years indicated: (dollars in thousands) Non-accrual loans: Real estate loans: Commercial property Residential property Commercial and industrial loans Consumer loans Total Loans 90 days or more past due and still accruing (as to principal or interest): Real estate: Residential property Commercial Total Total non-performing loans Other real estate owned 2003 2002 2001 2000 1999 $ 527 1,126 6,398 53 8,104 — 557 557 8,661 — $ — 287 5,522 49 5,858 $ 1,183 730 2,275 94 $ 516 649 923 71 4,282 2,159 $ 206 1,023 1,536 188 2,953 261 356 617 6,475 — 117 602 719 5,001 — 3 391 394 2,553 — — 79 79 3,032 — Total non-performing assets $ 8,661 $ 6,475 $ 5,001 $ 2,553 $ 3,032 Non-performing loans as a percentage of total loans Non-performing assets as a percentage of total loans and other real estate owned Total loans 0.68% 0.65% 0.63% 0.40% 0.62% 0.68% 0.65% 0.63% 0.40% 0.62% $1,265,266 $988,919 $793,045 $634,124 $486,781 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level that is believed to be adequate by management to absorb estimated probable loan losses inherent in the loan portfolio. The adequacy of the allowance is deter- mined through periodic evaluations of the Company’s portfolio and other pertinent factors, which are inher- ently subjective as the process calls for various signifi- cant estimates and assumptions. Among others, the estimates involve the amounts and timing of expected future cash flows and fair value of collateral on impaired loans, estimated losses on loans based on historical loss experience, various qualitative factors, and uncertainties in estimating losses and inherent risks in the various credit portfolios, which may be subject to substantial change. On a quarterly basis, the Company utilizes a classification migration model and individual loan review analysis tools, as a starting point for determining the allowance for loan loss adequacy. The Company’s loss migration analysis tracks twelve quarters of loan losses to deter- mine historical loss experience in every classification category (i.e., pass, special mention, substandard and doubtful) for each loan type, except consumer loans (auto, mortgage and credit cards) which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances, unused commitments, and off-balance sheet exposures, such as letters of credit. The individual loan review analysis is the other axis of the allowance allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolios. The results from the above two analyses are thereafter compared to independently generated information such as peer group comparisons and the Federal regu- latory interagency policy for loan and lease losses. Further assignments are made based on general and specific economic conditions, as well as performance trends within specific portfolio segments and individ- ual concentrations of credit. 30 page The allowance for loan losses was $14.7 million at December 31, 2003, compared to $12.3 million at December 31, 2002. The increase in the allowance for loan losses in 2003 was due primarily to the increase in gross loan volume. The ratio of the allowance for loan losses to gross loans has decreased nonetheless, primarily due to the decrease in the specific allocation by $1.3 million and the foreign country risk allocation by $0.5 million. The loan loss estimation, based on historical losses, and specific allocations of the allowance are per- formed on a quarterly basis. Adjustments to allowance allocations for specific segments of the loan portfolio may be made as a result thereof, based on the accu- racy of forecasted loss amounts and other loan- or policy-related issues. The Company determines the appropriate overall allowance for loan losses based on the foregoing analysis, tak- ing into account management’s judgment. Allowance methodology is reviewed on a periodic basis and modi- fied as appropriate. Based on this analysis, including the aforementioned factors, the Company believes that the allowance for loan losses is adequate as of December 31, 2003. (dollars in thousands) Allowance for Loan Losses: Balance at beginning of year Actual charge-offs: Real estate loans: Commercial property Residential property Commercial and industrial loans Consumer loans Total Recoveries on loans previously charged off: Real estate loans: Construction Commercial property Residential property Commercial and industrial loans Consumer loans Total Net loan charge-offs Provision charged to operating expenses Balance at end of year Ratios: Net loan charge-offs to average total loans Net loan charge-offs to total loans at end of period Allowance for loan losses to average total loans Allowance for loan losses to total loans at end of period Net loan charge-offs to allowance for loan losses at end of period Net loan charge-offs to provision charged to operating expenses Allowance for loan losses to non-performing loans Years Ended December 31, 2003 2002 2001 2000 1999 $12,269 $10,064 $11,976 $10,624 $10,423 198 — 3,687 538 4,423 — 21 6 859 322 1,208 3,215 5,680 — — 3,213 358 3,571 — — — 871 105 976 — — 3,782 324 4,106 — 273 — 307 214 794 — — 1,383 399 1,782 30 — — 691 163 884 2,595 4,800 3,312 1,400 898 2,250 79 73 1,432 417 2,001 — 595 23 514 70 1,202 799 1,000 $14,734 $12,269 $10,064 $11,976 $10,624 0.29% 0.29% 0.46% 0.16% 0.20% 0.25% 1.32% 0.26% 1.37% 0.42% 1.41% 0.14% 2.11% 0.16% 2.60% 1.16% 1.24% 1.27% 1.89% 2.18% 21.82% 21.15% 32.91% 7.50% 7.52% 56.60% 54.06% 236.57% 39.91% 79.90% 170.12% 189.48% 201.24% 469.10% 350.40% 31 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The Company concentrates the majority of its earning assets in loans. In all forms of lending, there are inher- ent risks. The Company concentrates the preponder- ance of its loan portfolio in either commercial loans or real estate loans. A small part of the portfolio is repre- sented by installment loans primarily for the purchase of automobiles. While the Company believes that its underwriting cri- teria are prudent, outside factors can adversely impact credit quality. Having experienced the problems mentioned above in the past, the Company has attempted to mitigate collection problems by supporting its loans by fungi- ble collateral. Additionally, a significant portion of the portfolio is represented by loans guaranteed by the SBA, which further reduces the Company’s potential for loss. The Company also utilizes credit review in an effort to maintain loan quality. Loans are reviewed throughout the year with new loans and those that are delinquent receiving special attention. In addition to the Company’s internal grading system, loans criticized by this credit review are downgraded with appropriate allowance added if required. As indicated above, the Company formally assesses the adequacy of the allowance on a quarterly basis by: • reviewing the adversely graded, delinquent or otherwise questionable loans; • generating an estimate of the loss potential in each such loan; • adding a risk factor for industry, economic or other external factors; and • evaluating the present status of each loan. Although management believes the allowance is ade- quate to absorb losses as they arise, no assurance can be given that the Company will not sustain losses in any given period, which could be substantial in rela- tion to the size of the allowance. INVESTMENT PORTFOLIO The investment portfolio maintained by the Company as of December 31, 2003 was composed primarily of collateralized mortgage obligations (“CMO”), mortgage-backed securities (“MBS”), U.S. government agency securities (“Agencies”), municipal bonds and corporate bonds. During 2003, the Bank shifted funds from money market instruments (primarily Federal funds) to longer-term instruments to increase its returns. As of December 31, 2002, the Bank’s assets included overnight and term Federal funds aggregating $85.0 million. During 2003, these funds were redeployed into municipal bonds, MBS, Agencies, CMOs, and corporate bonds. Because municipal bonds were an attractive long-term investment alternative and offer significant tax benefits, the Company increased its investments in this sector. Investments in MBS were centered in 10- and 15-year pass-through mortgages, which kept the overall duration of the portfolio from increasing significantly. Investments in Agencies focused mainly on one-time callable bonds. Investments in corporate bonds were limited to investment grade, large capital- ization issuers in the financial sector, with positions limited to $2.7 million par value per issuer. Overall, the Company lengthened its portfolio duration, but limited its extension risk. Investment securities available for sale increased to 99.7% of the total investment portfolio as of December 31, 2003, from 97.3% in 2002. Most of the securities held by the Company carried fixed interest rates. Other than holdings of Agencies, there were no investments in securities of any one issuer exceeding 10% of the Company’s shareholders’ equity as of December 31, 2003, 2002 or 2001. 32 page The following table summarizes the amortized cost, fair value and distribution of the Company’s investment securities as of the dates indicated: (dollars in thousands) Held to Maturity: Municipal bonds Mortgage-backed securities Corporate bonds Total Available for Sale: Investment Portfolio as of December 31, 2003 2002 2001 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ $ 690 638 — 689 645 — $ 1,088 1,457 4,997 $ 1,126 1,487 4,983 $ 2,963 2,838 11,754 $ 3,030 2,891 11,871 $ 1,328 $ 1,334 $ 7,542 $ 7,596 $ 17,555 $ 17,792 Collateralized mortgage obligations Mortgage-backed securities U.S. government agencies Municipal bonds Corporate bonds Other securities $125,491 117,139 80,845 60,741 13,641 15,055 $124,096 117,484 81,426 61,403 13,903 14,976 $102,212 78,112 53,408 17,810 594 16,630 $102,877 79,173 53,901 18,237 1,188 16,630 $ 55,240 65,218 11,093 31,944 28,119 2,165 $ 55,415 65,364 11,309 32,290 28,877 2,165 Total $412,912 $413,288 $268,766 $272,006 $193,779 $195,420 The following table summarizes the maturity and/or repricing schedule for the Company’s investment securities and their weighted average yield as of December 31, 2003: (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Collateralized mortgage obligations(1) Mortgage-backed securities(1) Obligations of other U.S. government agencies Obligations of state and local political subdivisions(2) Corporate bonds Other securities $29,194 15,807 2.70% $ 72,014 71,514 2.31 3.35% $22,890 24,671 2.42 4.20% 3.07 — $ 6,125 — 4.17% 35,907 3.28 45,521 3.49 — — — — 1,029 — 13,920 5.67 — 2.88 972 — 1,056 6.27 — 7.29 2,855 13,903 — 6.30 3.78 — 57,238 — — 6.32 — — $95,857 2.90% $191,077 3.07% $64,319 3.79% $63,363 6.16% (1) Collateralized mortgage obligations and mortgage-backed securities have contractual maturities through 2033. Above table is based on the expected pre- payment schedule. (2) The yield on obligations of state and local political subdivisions has been computed on a tax-equivalent basis. DEPOSITS Total deposits at December 31, 2003, 2002 and 2001 were $1,445.8 million, $1,284.0 million and $1,042.4 million, respectively, representing an increase of $161.9 million or 12.6% in 2003 and $241.6 million or 23.2% in 2002. The continuous growth of deposit vol- ume in 2003 is primarily attributable to increased mar- keting at existing branches and the addition of two new branches. During 2002, the deposit composition proportion changed due to increasing demand deposits, and this remained stable during 2003. This is due to the dramatic drop in interest rates and man- agement’s efforts to decrease the Company’s interest expense on deposits. At December 31, 2003, 2002 and 2001, the total time deposits outstanding were $667.8 million, $583.5 million and $518.2 million, respectively, representing 46.2%, 45.4% and 49.7% of total deposits. Demand deposits and money market accounts 33 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) increased by $78.8 million or 13.1% and $166.9 million or 38.3% in 2003 and 2002, respectively. At December 31, 2003, noninterest-bearing demand deposits repre- sented 32.9% of total deposits compared to 32.1% at December 31, 2002. The average rate paid on time deposits in denominations of $100,000 or more was 1.92%, 2.51% and 4.97% for the years ended December 31, 2003, 2002 and 2001, respectively. Average deposits for the years ended December 31, 2003, 2002 and 2001 were $1,416.6 million, $1,164.6 mil- lion and $988.4 million, respectively. Average deposits, therefore, grew by 21.6% in 2003 and 26.7% in 2002. Deposits are the Company’s primary source of funds. As the Company’s need for funds to lend has grown and the loan growth rate surpassed the deposit growth rate in 2003, the Company utilized Federal Home Loan Bank borrowings to supply additional funds with lower interest rates. Total borrowings including Federal funds purchased at December 31, 2003 were $179.8 million representing an increase of $145.4 million. The Company accepts brokered deposits on a selec- tive basis at prudent interest rates to augment deposit growth. There were no brokered deposits as of December 31, 2003. As of December 31, 2003, the Company had $100 million of state time deposits over $100,000 with an average interest rate of 1.17%. The table below summarizes the distribution of average daily deposits and the average daily rates paid for the periods indicated: (dollars in thousands) Demand, noninterest-bearing Money market Savings Time deposits, $100,000 or more Other time deposits Total deposits For the Years Ended December 31, 2003 2002 2001 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate $ 422,453 207,689 97,070 386,701 302,651 $1,416,564 1.24% 1.95 1.92 2.43 $ 331,551 176,089 92,835 312,618 251,469 $1,164,562 1.72% 2.84 2.51 2.80 $254,319 109,496 77,860 277,169 269,548 $988,392 2.38% 3.49 4.97 5.11 The table below summarizes the maturity of the Company’s time deposits in denominations of $100,000 or greater at December 31 of the years indicated: (dollars in thousands) Three months or less Over three months through six months Over six months through twelve months Over twelve months 2003 2002 2001 $261,274 57,034 52,815 17,821 $231,410 46,470 40,520 5,144 $189,360 44,209 39,459 3,757 $388,944 $323,544 $276,785 INTEREST RATE RISK MANAGEMENT Interest rate risk indicates the Company’s exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the eco- nomic value of fixed-income assets, which is the pres- ent 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 the Company’s exposure to market interest rate. The level of interest rate risk can be managed through the changing of gap positions and the volume of fixed-income assets and so forth. For successful management of interest rate risk, the Company uses various methods with which to measure existing and future interest rate risk expo- sures. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement tech- niques used to quantify interest rate risk exposure. 34 page The following table shows the most recent status of the Company’s gap position. (dollars in thousands) ASSETS Cash (noninterest-earning) Cash (interest-earning) FRB and FHLB stock Securities: Fixed rate Floating rate Loans: Fixed rate Floating rate Non-accrual Unearned income, allowance for loan losses and discount Interest rate swap Other assets Total assets LIABILITIES Deposits: Demand deposits Savings MMDA NOW accounts Time certificates of deposit, $100,000 or more Other time deposits Other borrowed funds Other liabilities Shareholders’ equity Total Repricing gap Cumulative gap Cumulative gap as a percentage of total assets Cumulative gap as a percentage of interest-earning assets Within Three Months After Three Months But Within One Year After One Year But Within Five Years After Five Years Non- Interest- Bearing Total $ — 3,171 — — — — — $ 59,424 — — — — — — $ 10,355 $ 59,424 3,171 10,355 22,923 13,909 $ 58,007 1,018 $ 164,321 26,756 119,757 7,925 — — 365,008 49,608 19,669 1,096,484 — 29,864 7,360 — — (60,000) — — — 11,137 56,835 12,461 — — 60,000 — 34,489 — — 140,857 — — 1,116,305 8,104 8,104 — (18,252) — — 40,037 — (18,252) — 51,174 $1,096,156 $ 107,386 $ 320,373 $172,526 $ 89,313 $1,785,754 $ 41,638 18,093 39,731 844 $ 104,793 29,526 51,084 2,027 $ 257,219 45,415 79,463 7,093 $ 71,450 3,835 18,920 6,924 261,274 167,855 153,895 — — 109,849 106,228 — — — 17,748 4,753 20,000 — — 73 — 6,000 — $ 20,557 139,467 — $ 475,100 96,869 189,198 16,888 388,944 278,836 179,895 20,557 139,467 $ 683,330 $ 403,507 $ 431,691 $107,202 $160,024 $1,785,754 $ 412,826 412,826 $ (296,121) $ (111,318) $ 65,324 70,711 116,705 5,387 $ (70,711) — 23.12% 6.54% 0.30% 3.96% 24.33% 6.88% 0.32% 4.17% 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 matur- ing or repricing within the same time period. Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabili- ties are assigned based on their maturity dates. Core deposits that have no maturity dates (demand deposits, savings, MMDA and NOW accounts) are assigned to categories based on expected decay rates. On December 31, 2003, the cumulative repricing gap as a percentage of earning assets in the less-than-three- month period was 24.33%. This was a large decrease from the previous year’s figure of 34.54%. The decrease was caused by a rise in borrowings and interest rate swaps of $60 million. The cumulative repricing percent- age in the three-to-twelve-month period also moved lower, reaching 6.88%. In terms of fixed and floating gap positions, which are used internally to control repricing risk, the accumulated fixed gap position between assets and liabilities as a percentage of interest-earning assets was (8.67)%. The floating gap position in the less-than- one-year period was 7.94%. Both the fixed and floating gap positions were maintained within Bank guidelines. 35 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The following table summarizes the most recent status of the Company’s gap position. (dollars in thousands) Less than 3 Months December 31, 3 to 12 Months December 31, 2003 2002 2003 2002 Cumulative repricing Percentage of total assets Percentage of earning assets Internal policy guideline (percentage of earning assets) $412,826 $463,933 $116,705 $163,128 23.12% 24.33% 35.00% 31.86% 34.54% 35.00% 6.54% 6.88% 20.00% 11.20% 12.14% 20.00% The spread between interest income on earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and inter- est rate changes substantially affect the Company’s financial performance. The Company emphasizes capi- tal protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, the Company prudently manages its assets and liabil- ities and closely monitors the percentage changes in net interest income and equity value in relation to limits established within the Company’s guidelines. increase in overall deposits compared to the previous year, the severity of asset sensitivity in the less-than- three-month period weakened despite the overall increase in loans, particularly floating rate loans. In addition, the interest rate swaps of $60 million also contributed to lessening the asset sensitivity in the less-than-three-month period. The increase in liabilities surpassed the increase in assets repricing in the three- to-twelve-month period, but in terms of cumulative basis, the gap position in the less-than-twelve-month period was still asset-sensitive. The repricing gap analysis measures the static timing of repricing risk of assets and liabilities. When com- pared to the previous year, 2003 saw a large decrease in the less-than-three-month period cumulative repricing amount. The ratio to total assets decreased to 23.12% and the ratio to earning assets decreased to 24.33%. However, there was greater movement in the three-to-twelve-month period. The cumulative repric- ing amount decreased by $46.4 million from the previ- ous year. This made the Company less asset-sensitive in the event of market interest rate movements. In 2003, due to significant increases in Federal Home Loan Bank advances and Federal funds purchased along with an To supplement traditional gap analysis, the Company performs simulation modeling to estimate the poten- tial effects of interest rate changes. The following table summarizes one of the stress simulations performed by the Company 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 the Company’s balance sheet. 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. HYPOTHETICAL CHANGES IN INTEREST RATES December 31, 2003 (dollars in thousands) Projected Changes (%) Change in Amount Expected Amount Change in Interest Rate (bps) 200 100 0 (100) (200) Net Interest Income Economic Value of Equity Guideline Projected Guideline Projected (25.0)% (12.5)% 0% (12.5)% (25.0)% 9.08% 4.26% 0% (4.58)% (14.66)% (25.0)% (12.5)% 0% (12.5)% (25.0)% (23.66)% (12.27)% 0% 12.79% 27.25% Net Interest Income $ 5,520 $ 2,592 — $(2,785) $(8,915) Economic Value of Equity $(39,682) $(20,580) — $ 21,457 $ 45,700 Net Interest Income $66,324 $63,396 $60,804 $58,019 $51,889 Economic Value of Equity $128,045 $147,147 $167,727 $189,184 $213,427 36 page In the above stress simulation, for a 100 basis point decline in interest rates, the Company may be exposed to a 4.58% decline in net interest income and a 12.79% increase in the economic value of equity. For a 100 basis point increase in interest rates, net interest income may increase by 4.26%, but the economic value of equity may decrease by 12.27%. For a 200 basis point increase in interest rates, net interest income may increase by 9.08%, but eco- nomic value of equity may decrease by 23.66%. For a 200 basis point decrease in interest rates, net interest income may decrease by 14.66%, but economic value of equity may increase by 27.25%. As shown in the above table, all figures remained well within internal policy guidelines. The estimated sensitivity does not necessarily repre- sent a Company forecast and the results may not be indicative of actual change to the Company’s net inter- est income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, pre- payments 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 condi- tions, there is no assurance as to the predictive nature of these conditions, including how customer prefer- ences or competitor influences might change. LIQUIDITY AND CAPITAL RESOURCES Liquidity of the Bank is defined as the ability to supply cash as quickly as needed without causing a severe deterioration in its profitability. The Bank’s major liq- uidity on the asset side stems from available cash positions. Federal funds sold and short-term invest- ments categorized as trading and/or available for sale securities, which can be disposed of without signifi- cant capital losses in the ordinary business cycle. Liquidity sources on the liability side come from bor- rowing capacities, which include Federal funds lines, repurchase agreements, FRB discount window and Federal Home Loan Bank advances. Thus, mainte- nance of high quality securities that can be used for collateral in repurchase agreements or other secured borrowings is another important feature of liquidity management. Liquidity risk may occur when the Bank has few short-duration securities available for sale and/or is not capable of raising funds as quickly as necessary at acceptable rates in the capital or money markets. Also, a heavy and sudden increase in cash demands for loans and/or deposits can tighten the liquidity position. Several ratios are reviewed on a daily, monthly and quarterly basis to manage the liq- uidity position and to preempt any liquidity crisis. Six specific statistics, which include the loan-to-asset ratio, off-balance sheet items, and dependence on non-core deposits, foreign deposits, lines of credit, and liquid assets are reviewed quarterly for liquidity management purposes. Heavy loan demand and limited liquid assets increased pressure for liquidity in 2003, but the Company still had sufficient liquid assets to meet loan demand. LIQUIDITY RATIOS AND TRENDS December 31, 2003 2002 2001 6% 12% 40% 45% 12% 45% 45% 40% 44% 20% 30% 27% Short-term investments/ total assets Core deposits/total assets Short-term non-core funding/total assets Short-term investments/ short-term non-core funding dependence LIQUIDITY MEASURES December 31, Guidelines 2003 2002 2001 Less than 85% 70% 67% 67% Less than 50% 30% 29% 28% Less than 133% 116% 105% 103% Less than 25% 18% 17% 13% Net loans/ total assets Investments/ deposits Loans and investments/ deposits Off-balance sheet items/ total assets The net loans to total assets ratio increased to 70% in 2003. Despite fluctuations during the year, net loans grew faster than assets through the year. For the year, the ratio of loans to assets remained below the 85% guideline, ranging from 67% to 70%. 37 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) The investments to deposits ratio rose marginally to 30%. The loans and investments to deposits ratio increased slightly to 116%. Off-balance sheet items as a percentage of total assets rose in 2003 to 18.31% from 16.59% in 2002. The total amount increased to $326 million. Most of the increase was due to a $56 million increase in unused commitments. Another area of increase was financial standby letters of credit, which rose by $12 million. Although the per- centage of off-balance sheet items to total assets increased, it remained well within policy guidelines of 25%. The Company had four interest rate swaps aggre- gating $60 million at the end of the year. The ratios of short-term non-core funding to total assets and short- term investments to short-term non-core funding dependence were 45% and 20%, respectively. Foreign deposit risk deals with dependency on foreign deposits that could adversely affect the Bank’s liquid- ity. These liabilities are assumed to be volatile in accordance with the variability of social, political and environmental conditions in foreign countries. The Bank monitors separately on a quarterly basis foreign deposits and Brazilian deposits, and exposures to both categories remained well within the Bank’s internal guidelines. There were increases to the lines of credit secured by the Company to meet its liquidity needs. The Company maintained a total of $67 million in credit lines. In addi- tion, the Company maintained Master Repurchase Agreements with Wachovia Bank, Banc of America Securities, Bear Stearns, Union Bank of California, UBS PaineWebber, Lehman Brothers, Merrill Lynch and Morgan Stanley, all of which can furnish liquidity to the Company in consideration of bonds collateral. The Company also can meet its liquidity needs through borrowings from the Federal Home Loan Bank of San Francisco. The Company is eligible to bor- row up of 25% of its total assets from the FHLB. The maintenance of a proper level of liquid assets is critical for both the liquidity and profitability of the Company. Since the primary objective of the investment portfolio is to maintain proper liquidity, it is deemed appropriate for management to maintain sufficient liquid assets to avoid exposure to avoidable liquidity risk. As of December 31, 2003, the Company had no material commitments for capital expenditures. The Company raises capital in the form of deposits, borrowings (primarily Federal Home Loan Bank advances) and equity, and expects to continue to rely upon deposits as the primary source of capital. (See a discussion of the expected source of capital for the acquisition of PUB below, “Business Combination.”) BUSINESS COMBINATION On December 22, 2003, the Company entered into a definitive agreement to acquire Pacific Union Bank (“PUB”), a commercial bank with assets of approxi- mately $1.1 billion, for an aggregate purchase price estimated at $295 million. Under the agreement, the Company will acquire all the outstanding shares of PUB for $164.5 million cash plus a quantity of Hanmi Financial shares specified in the agreement. The num- ber of shares to be exchanged is subject to a “collar” set forth in the agreement and is based upon the vol- ume weighted market value of Hanmi Financial shares for the five business days prior to the closing date, which is expected to take place in the second quarter of 2004. The number of shares to be exchanged is as follows: Hanmi Financial Share Price $26.50 or more $25.01–$26.49 $19.00–$25.00 $17.51–$18.99 $17.50 or less Number of shares 5,773,672 shares Shares with an aggregate market value of $153,002,325 6,120,093 shares Shares with an aggregate market value of $116,281,767 6,644,672 shares The acquisition has been structured to qualify as a tax-free exchange under the Federal Internal Revenue Code, which requires that aggregate cash considera- tion paid not exceed 58% of the transaction value. 38 page FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS In addition to other factors set forth herein, below is a discussion of certain factors which may affect the Company’s financial operations and should be consid- ered in evaluating the Company. Our Southern California business focus and economic conditions in Southern California could adversely affect our operations. Hanmi Bank’s operations are primarily located in Los Angeles and Orange counties. As a result of this geographic concentration, the Company’s results depend largely upon economic conditions in these areas. A deterioration in economic condition in Hanmi Bank’s market area, or a significant natural or manmade disaster in these market areas, could have a material adverse effect on the quality of Hanmi Bank’s loan port- folio, the demand for its products and services and on its overall financial condition and results of operations. The Company’s earnings are affected by changing inter- est rates. Changes in interest rates affect the level of loans, deposits and investments, the credit profile of existing loans, the rates received on loans and securi- ties and the rates paid on deposits and borrowings. Significant fluctuations in interest rates may have a material adverse effect on the Company’s financial condition and results of operations. A failure to effectively integrate PUB’s operations with Hanmi Financial’s could adversely affect our earnings and financial condition. In December 2003, we entered into a definitive agreement to acquire PUB. We are currently planning the integration of the data process- ing systems, facilities and personnel of PUB into Hanmi. If we experience difficulties in integrating the two banks, we could experience higher than antici- pated administrative costs or the loss of customers, resulting in lower than anticipated earnings and/or adverse changes in our financial condition. Hanmi may fail to realize the anticipated benefits of the merger with PUB. The success of the merger will depend on, among other things, Hanmi’s ability to realize anticipated cost savings and revenue enhance- ments and to combine the businesses of its subsidiary Hanmi Bank and PUB in a manner that permits growth opportunities to occur and that does not materially disrupt the existing customer relationships of PUB or result in decreased revenues resulting from any loss of customers. If Hanmi is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected. Hanmi and PUB have operated and, until the comple- tion of the merger, will continue to operate, independ- ently. It is possible that the integration process could result in the loss of key employees, the disruption of Hanmi’s or PUB’s ongoing businesses, diversion of management time on merger-related issues, or incon- sistencies in standards, controls, procedures and poli- cies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger. Uncertainty regarding the merger may result in the loss of the employees and customers of Hanmi and PUB prior to the completion of the merger. Employees of Hanmi and PUB may experience uncertainty about their future role with the combined company. This may adversely affect the ability of the combined company to retain and attract key management and other per- sonnel. Similarly, uncertainty regarding the merger may cause customers of Hanmi and PUB to withdraw their business prior to the completion of the merger. Any loss of Hanmi’s or PUB’s customers could have a material adverse effect on Hanmi’s or PUB’s respective businesses, regardless of whether or not the merger is ultimately completed. There can be no assurance that customers of each of Hanmi or PUB will continue their business without regard to the proposed merger. We are subject to government regulations that could limit or restrict our activities, which in turn could adversely affect our operations. The financial services industry is subject to extensive Federal and state supervision and regulation. Significant new laws, changes in existing laws, or repeals of existing laws may cause the Company’s results to differ materially. Further, Federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit 39 page MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) conditions for the Company, and a material change in these conditions could have a material adverse affect on the Company’s financial condition and results of operations. Competition may adversely affect our performance. The banking and financial services businesses in the Company’s market areas are highly competitive. The Company faces competition in attracting deposits and in making loans. The increasingly competitive environ- ment is a result of changes in regulation, changes in technology and product delivery systems, and the pace of consolidation among financial services providers. The results of the Company in the future may differ depending upon the nature and level of competition. If a significant number of borrowers, guarantors or related parties fail to perform as required by the terms of their loans, we could sustain losses. A significant source of risk arises from the possibility that losses will be sus- tained because borrowers, guarantors or related par- ties may fail to perform in accordance with the terms of their loans. The Company has adopted underwrit- ing and credit monitoring procedures and credit poli- cies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of non-performance, tracking loan perform- ance and diversifying the Company’s credit portfolio. These policies and procedures, however, may not pre- vent unexpected losses that could have a material adverse effect on the Company’s financial condition and results of operations. OFF-BALANCE SHEET COMMITMENTS As part of its service to its small to medium-sized busi- ness customers, Hanmi Bank from time to time issues formal commitments and lines of credit. These com- mitments can be either secured or unsecured. They may be in the form of revolving lines of credit for sea- sonal working capital needs or may take the form of commercial letters of credit and standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional com- mitments issued by Hanmi Bank to guarantee the performance of a customer to a third party. The following table shows the distribution of the Hanmi Bank’s undisbursed loan commitments as of the dates indicated: (dollars in thousands) Commitments to extend credit Standby letters of credit Commercial letters of credit Guaranteed credit cards Total December 31, 2003 2002 $253,722 34,434 34,261 3,801 $197,257 22,122 21,316 3,465 $326,218 $244,160 SMALL BUSINESS ADMINISTRATION GUARANTEED LOANS Hanmi Bank originates loans qualifying for guarantees issued by the United States SBA, an independent agency of the Federal government. The SBA guarantees on such loans currently range from 75% to 85% of the prin- cipal and accrued interest. Under certain circumstances, the guarantee of principal and interest may be less than 75%. In general, the guaranteed percentage is less than 75% for loans over $1.3 million. As of December 31, 2003, Hanmi Bank had 19 SBA loans totaling $27.7 million that exceeded $1.3 million individually. Hanmi Bank typically requires that SBA loans be secured by business assets and by a first or second deed of trust on any available real property. SBA loans have terms ranging from seven to 25 years depending on the use of the proceeds. To qualify for an SBA loan, a borrower must demonstrate the capacity to service and repay the loan, without liquidating the collateral, on the basis of historical earnings or reliable projections. Hanmi Bank generally sells to unrelated third parties a substantial amount of the guaranteed portion of the SBA guaranteed loans that it originates. When Hanmi Bank sells an SBA loan, it may be obligated to repur- chase the loan (for a period of 90 days after the sale) if the loan fails to comply with certain representations and warranties given by the Bank. Hanmi Bank retains the obligation to service the SBA loans, for which it receives servicing fees. Those unsold portions of the SBA loans that remain owned by Hanmi Bank are included in its assets. As of December 31, 2003, Hanmi Bank had $101.1 million in SBA loans remaining on its balance sheet, and was servicing $83.2 million of sold SBA loans. 40 page CONTRACTUAL OBLIGATIONS The Company’s contractual obligations as of December 31, 2003 are as follows: (dollars in thousands) Contractual Obligations Long-term debt obligations Operating lease obligations Total Payment Due by Period Less than 1 Year — $2,214 $2,214 1–3 Years — $3,723 3–5 Years $20,000 2,757 $3,723 $22,757 More than 5 Years $6,000 — $6,000 Total $26,000 8,694 $34,694 RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issued FASB Interpretation No. 46R (revised December 2003), “Consolidation of Variable Interest Entities”, which addresses how a busi- ness enterprise should evaluate whether it has a con- trolling financial interest in an entity through means other than voting rights and accordingly should con- solidate the entity. FASB Interpretation No. 46R (“FIN No. 46R”) replaces FASB Interpretation No. 46, which was issued in January 2003. The Company will be required to apply FIN No. 46R to variable interests in variable interest entities (“VIE”) created after December 31, 2003. For VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recog- nized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN No. 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The application of FIN No. 46R is not expected to have a material effect on the Company’s consoli- dated financial statements. FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”), was issued in May 2003. It establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain manda- torily redeemable financial instruments, SFAS No. 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable finan- cial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS No. 150. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures regard- ing market risks in Hanmi Bank’s portfolio, see “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations— Interest Rate Risk Management and—Liquidity and Capital Resources.” 41 page CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands) ASSETS Cash and due from banks Federal funds sold Cash and cash equivalents Federal Reserve Bank stock Federal Home Loan Bank stock Securities held to maturity, at amortized cost (fair value: 2003—$1,334; 2002—$7,596) (note 3) Securities available for sale, at fair value (note 3) Term Federal funds sold Loans receivable, net of allowance for loan losses: 2003—$14,734; 2002—$12,269 (note 4) Loans held for sale, at the lower of cost or fair value Customers’ liability on acceptances Premises and equipment, net (note 5) Accrued interest receivable Deferred income taxes, net (note 7) Servicing asset Goodwill and intangible assets Bank-owned life insurance—cash surrender value Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits (note 6): Noninterest-bearing Interest-bearing: Savings Money market checking Time deposits of $100,000 or more Other time deposits Total deposits Accrued interest payable Acceptances outstanding Treasury, tax and loan remittances Other borrowed funds Other liabilities Total liabilities Commitments and contingencies (notes 12 and 13) Shareholders’ equity (notes 3, 8 and 9): Preferred stock, $.001 par value; authorized 10,000,000 shares; issued and outstanding, none Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding, 14,163,410 shares in 2003 and 13,915,433 shares in 2002 Additional paid-in capital Accumulated other comprehensive income: Unrealized gain on securities available for sale and interest rate swaps, net of income taxes of $220 and $1,135 in 2003 and 2002, respectively Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. 42 page December 31, 2003 2002 $ 62,595 — 62,595 2,935 7,420 1,328 413,288 — 1,221,560 25,454 3,930 8,435 6,686 7,207 2,364 2,043 11,137 9,372 $ 67,772 55,000 122,772 2,945 1,634 7,542 272,006 30,000 961,599 12,540 4,472 8,240 5,533 4,223 2,065 2,164 10,637 7,926 $1,785,754 $1,456,298 $ 475,100 $ 412,060 96,860 206,086 388,944 278,836 1,445,835 4,403 3,930 3,104 179,895 9,120 98,121 190,314 323,544 259,940 1,283,979 3,385 4,472 3,347 34,450 2,197 1,646,287 1,331,830 — — 14 103,082 386 35,985 14 99,941 2,105 22,408 139,467 124,468 $1,785,754 $1,456,298 CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) Interest income: Interest and fees on loans Interest on securities and interest-bearing deposits in other financial institutions Interest on term Federal funds sold Interest on Federal funds sold and securities purchased under agreements to resell Total interest income Interest expense (notes 6 and 12) Net interest income before provision for loan losses Provision for loan losses (note 4) Net interest income after provision for loan losses Non-interest income: Service charges on deposit accounts Trade finance fees Remittance fees Other service charges and fees Bank-owned life insurance income Gain on sale of loans Gain on sale of securities Increase in fair value of interest rate swaps Other income Total non-interest income Non-interest expenses: Salaries and employee benefits (note 11) Occupancy and equipment (note 13) Data processing Advertising and promotional expense Supplies and communication Professional fees Loan referral fees Impairment of securities Other operating expenses Total non-interest expenses Income before provision for income taxes Provision for income taxes (note 7) Net income Earnings per share (note 10): Basic Diluted See accompanying notes to consolidated financial statements. 43 page Years Ended December 31, 2003 2002 2001 $64,849 $56,689 $59,305 12,410 225 277 77,761 20,796 56,965 5,680 51,285 10,339 2,887 952 875 499 2,157 1,094 35 840 19,678 21,214 5,198 3,080 1,635 1,496 1,167 921 — 4,614 39,325 31,638 12,425 11,363 630 925 69,607 21,345 48,262 4,800 43,462 9,195 2,410 786 803 552 1,875 3,265 1,368 659 14,776 533 2,330 76,944 32,990 43,954 1,400 42,554 9,222 1,915 602 794 — 1,345 2,751 — 358 20,913 16,987 17,931 4,330 2,784 1,523 1,466 1,003 691 4,416 4,189 38,333 26,042 9,012 16,786 3,877 2,347 1,747 1,417 1,110 540 270 3,934 32,028 27,513 10,703 $19,213 $17,030 $16,810 $ 1.37 $ 1.34 $ 1.23 $ 1.20 $ 1.23 $ 1.21 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Years Ended December 31, 2003, 2002 and 2001 Number of Shares Outstanding 7,434,457 71,378 893,823 (20,000) 4,182,571 — — Common Stock $ 7 1 1 — 4 — — — — 12,562,229 222,022 1,131,182 — — 13 — 1 — — — — Additional Paid-In Capital $ 65,415 717 15,307 (345) (4) Accumulated Other Comprehensive Income (Loss) $ (299) — — — — Retained Earnings $ 21,273 — (15,309) — — Total Shareholders’ Equity $ 86,396 718 (1) (345) — — — — 81,090 1,469 17,382 — — — — — (7) 16,810 (7) 16,810 1,302 — 1,302 1,003 — — — — 22,767 — (17,382) 18,112 104,873 1,469 1 (7) 17,030 (7) 17,030 1,102 — 1,102 13,915,433 247,977 — — 14 — — — 99,941 3,141 — — 2,105 — — — 22,408 — (5,636) 19,213 18,132 124,468 3,141 (5,636) 19,213 — — — (1,719) — (1,719) 17,494 (dollars in thousands, except share data) Balance, December 31, 2000 Stock options exercised Stock dividend Stock retirement Stock split Cash paid for fractional shares Net income Change in unrealized gain on securities available for sale, net of tax Total comprehensive income Balance, December 31, 2001 Stock options exercised Stock dividend Cash paid for fractional shares Net income Change in unrealized gain on securities available for sale, net of tax Total comprehensive income Balance, December 31, 2002 Stock options exercised Cash dividend Net income Change in unrealized loss on securities available for sale and interest rate swaps, net of tax Total comprehensive income Balance, December 31, 2003 14,163,410 $14 $103,082 $ 386 $ 35,985 $139,467 See accompanying notes to consolidated financial statements. 44 page CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization Provision for loan losses Provision for other real estate owned losses Federal Reserve Bank and Federal Home Loan Bank stock dividends Gain on sale of securities available for sale Change in fair value of interest rate swaps Impairment loss on investment securities held to maturity Gain on sale of loans Gain on sale of other real estate owned Loss on disposition of premises and equipment Deferred tax benefit Write-off of interest-only strip Origination of loans held for sale Proceeds from sale of loans held for sale Change in: (Increase) decrease in accrued interest receivable Increase in cash surrender value of bank-owned life insurance Increase in other assets and servicing assets Increase (decrease) in accrued interest payable Increase (decrease) in other liabilities Years Ended December 31, 2003 2002 2001 $ 19,213 $ 17,030 $ 16,810 1,891 5,680 — (107) (1,094) (35) — (2,157) (82) 67 (2,069) — (45,858) 35,100 (1,153) (500) (1,832) 1,018 5,506 1,427 4,800 — (895) (3,265) (1,368) 4,416 (1,875) — — (469) — (33,226) 37,508 (125) (634) (2,045) (1,341) 1,011 1,283 1,400 40 (46) (2,751) — 270 (1,345) (16) 66 (41) 95 (24,450) 23,696 1,443 — (2,079) (1,654) (1,522) Net cash and cash equivalents provided by operating activities 13,588 20,949 11,199 Cash flows from investing activities: Net increase in loans receivable Proceeds from matured term Federal funds sold Proceeds from matured or called securities held to maturity Proceeds from sale of securities available for sale Proceeds from matured or called securities available for sale Proceeds from termination of interest rate swap Proceeds from sale of other real estate owned Purchase of Federal Reserve Bank stock and Federal Home Loan Bank stock Purchases of securities held to maturity Purchases of securities available for sale Bank-owned life insurance premiums paid Purchase of premises and equipment, net (265,641) 30,000 6,214 45,051 170,346 — 204 (5,669) — (358,218) — (2,031) (190,284) — 10,012 102,343 105,245 1,368 — (522) — (283,726) — (1,832) (200,170) — 5,109 65,156 121,073 — 307 (469) (688) (193,195) (10,000) (1,932) Net cash and cash equivalents used in investing activities (379,744) (257,396) (214,809) (continued) 45 page CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) Cash flows from financing activities: Years Ended December 31, 2003 2002 2001 Net increase in deposits Proceeds from other borrowed funds (Payment of ) proceeds from treasury, tax and loan remittances Proceeds from exercise of stock options Cash paid for fractional shares on dividends Cash dividends paid Cash paid for stock retirement $161,856 145,445 (243) 3,141 — (4,220) — $241,626 34,450 475 1,469 (7) — — $107,772 — 571 718 (7) — (345) Net cash and cash equivalents provided by financing activities 305,979 278,013 108,709 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosures of cash flow information: Interest paid Income taxes paid Supplemental schedule of non-cash investing and financing activities: Transfer of loans to other real estate owned Transfer of retained earnings to common stock and additional paid-in capital for stock dividends Accrued dividends See accompanying notes to consolidated financial statements. (60,177) 122,772 41,566 81,206 (94,901) 176,107 $ 62,595 $122,772 $ 81,206 $ 19,778 $ 9,469 $ 22,686 $ 9,125 $ 34,644 $ 10,703 $ 122 $ — $ 331 $ — $ 1,416 $ 17,382 — $ $ 15,308 — $ 46 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Hanmi Financial Corporation and subsidiary conform to accounting principles generally accepted in the United States of America and to prevailing practices within the banking industry. A summary of the signifi- cant accounting policies consistently applied in the preparation of the accompanying consolidated finan- cial statements follows. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Hanmi Financial Corporation (the “Company”) and its wholly owned subsidiary, Hanmi Bank (the “Bank”), after elimination of all material intercompany transactions and balances. The Company was formed as a holding company of the Bank and registered with the Securities and Exchange Commission under the Securities Act of 1933 on March 17, 2001. Subsequent to the formation of the Company, each of the Bank’s shares was exchanged for one share of the Company with an equal value. The Company’s primary operations are related to tradi- tional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank. The Bank is a California state-chartered, FDIC-insured financial institution. The Bank maintains a branch network of fifteen locations, serving individuals and small to medium-sized busi- nesses in Los Angeles and surrounding areas. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from banks, Federal funds sold and securities purchased under resale agreements, all of which have maturities of less than 90 days. SECURITIES Securities are classified into three categories and accounted for as follows: • Securities that the Company has the positive intent and ability to hold to maturity are clas- sified as “held to maturity” and reported at amortized cost; • Securities that are bought and held principally for the purpose of selling them in the near future are classified as “trading securities” and reported at fair value. Unrealized gains and losses are recognized in earnings; and • Securities not classified as held to maturity or trading securities are classified as “available for sale” and reported at fair value. Unrealized gains and losses are reported as a separate compo- nent of shareholders’ equity as accumulated other comprehensive income, net of deferred income taxes. Accreted discounts and amortized premiums on investment securities are included in interest income, and unrealized and realized gains or losses related to holding or selling of securities are calculated using the specific-identification method. To the extent there is an impairment of value deemed other than temporary for a security held to maturity or available for sale, a loss is recognized in earnings. The Company also has a minority investment in a non- publicly traded company, Pacific International Bank. The investment is included in other assets on the Company’s consolidated balance sheet and is carried at cost. The Company monitors the investment for impairment and makes appropriate reductions in car- rying value when necessary. DERIVATIVE INSTRUMENTS On January 1, 2001, the Company adopted the provi- sions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). This standard requires the Company to record all derivatives at fair value and permits the Company to designate deriva- tive instruments as being used to hedge changes in fair value or changes in cash flows. Changes in the fair value of derivatives that offset changes in cash flows of the hedged item are recorded initially in other com- prehensive income. Amounts recorded in other com- prehensive income are subsequently reclassified into earnings during the same period in which the hedged item affects earnings. If a derivative qualifies as a fair value hedge, then changes in the fair value of the hedg- ing derivative are recorded in earnings and are offset by changes in fair value attributable to the hedged risk of the hedged item. Any portion of the changes in the fair value of derivatives designated as a hedge that is deemed ineffective is recorded in earnings along with changes in the fair value of derivatives with no hedge designation. During 2003, the Company entered into four interest rate swap agreements with a total notional amount of $60 million for hedging purposes. 47 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LOANS LOAN INTEREST INCOME AND FEES The Company originates loans for investment, with such designation made at the time of origination. Loans are recorded at the contractual amounts due from borrowers, adjusted for unamortized discounts and premiums, undisbursed funds, net deferred loan fees and origination costs, and the allowance for loan losses. Certain Small Business Administration (“SBA”) loans that may be sold prior to maturity have been desig- nated as held for sale at origination and are recorded at the lower of cost or fair value, determined on an aggre- gate basis. A valuation allowance is established if the market value of such loans is lower than their cost, and operations are charged or credited for valuation adjust- ments. A portion of the gains on sale of SBA loans is recognized as non-interest income at the time of the sale. The remaining portion of the gain is deferred and amortized over the estimated life of the loan as an adjustment to the yield. Upon sales of such loans, the Company receives a fee for servicing the loans. The servicing asset is recorded based on the present value of the contractually specified servicing fee, net of adequate compensation, for the estimated life of the loan, discounted by a rate in the range of 11% to 12% and a constant prepayment rate ranging from 6% to 16%. The servicing asset is amortized in proportion to and over the period of estimated servicing income. The Company capitalized $652,000 and $750,000 of servicing assets during 2003 and 2002, respectively, and amortized $352,000 and $359,000 during the years ended December 31, 2003 and 2002, respec- tively. Management periodically evaluates the servic- ing asset for impairment. Impairment, if it occurs, is recognized in a valuation allowance in the period of impairment. Interest-only strips are recorded based on the present value of the excess of total servicing fee over the con- tractually specified servicing fee for the estimated life of the loan, calculated using the same assumptions as noted above. Such interest-only strips are accounted for at the estimated fair value, with unrealized gains or losses recorded as adjustments to earnings. LOANS HELD FOR SALE Loans originated and intended for sale in the second- ary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Interest on loans is credited to income as earned and is accrued only if deemed collectible. Direct loan orig- ination costs are offset by loan origination fees with the net amount deferred and recognized over the contractual lives of the loans as a yield adjustment using the interest method. Discounts or premiums associated with purchased loans are accreted or amortized to interest income using the interest method over the contractual lives of the loans, adjusted for prepayments. Accretion of discounts and deferred loan fees is discontinued when loans are placed on non-accrual status. Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. As a general rule, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due. However, in certain instances, the Company may place a particular loan on non-accrual status earlier, depending upon the individual circumstances sur- rounding 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 princi- pal 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. ALLOWANCE FOR LOAN LOSSES Management believes that, as of December 31, 2003, the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s estimates are based on previous loan loss experience; volume, growth and composition of the loan portfolio; the value of collateral; and current economic conditions. The Company’s lending is con- centrated in consumer, commercial, construction and real estate loans in greater Los Angeles. Although management believes the level of the allowance as of December 31, 2003 and 2002 is adequate to absorb losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably be predicted at this date. 48 page Loan losses are charged, and recoveries are credited to the allowance account. Additions to the allowance account are charged to the provision for loan losses. The allowance for loan losses is maintained at a level considered adequate by management to absorb prob- able losses in the loan portfolio. The adequacy of the allowance is determined by management based upon an evaluation and review of the loan portfolio, consid- eration of historical loan loss experience, current eco- nomic conditions, changes in the composition of the loan portfolio, analysis of collateral values and other pertinent factors. Loans are measured for impairment when it is proba- ble that all amounts, including principal and interest, will not be collected in accordance with the contrac- tual terms of the loan agreement. The amount of impairment and any subsequent changes are recorded through the provision for loan losses as an adjustment to the allowance for loan losses. Accounting standards require that an impaired loan be measured based on: • the present value of the expected future cash flows, discounted at the loan’s effective interest rate, or • the loan’s observable fair value, or • the fair value of the collateral, if the loan is collateral-dependent. The Company evaluates installment loans for impair- ment on a pooled basis. These loans are considered to be smaller balance, homogeneous loans and are eval- uated on a portfolio basis considering the projected net realizable value of the portfolio compared to the net carrying value of the portfolio. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accu- mulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is computed on the straight-line method over the estimated useful lives of the related assets, which range from three to 30 years. Leasehold improvements are capitalized and amortized using the straight-line method over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. GOODWILL AND INTANGIBLE ASSETS Goodwill, which represents the excess of purchase price over fair value of net assets acquired, amounted to $1.8 million as of December 31, 2003 and 2002. The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), effective January 1, 2002. SFAS No. 142 requires that goodwill be recorded at the reporting unit level. Reporting units are defined as an operating segment. SFAS No. 142 prohibits the amortization of goodwill but requires that it be tested for impairment at least annually, or earlier if events have occurred that might indicate impairment. The Company ceased amortization of goodwill as of January 1, 2002. The Company’s impairment test is performed in two phases. The first step involves com- paring the fair vale of the reporting unit with its carry- ing amount, including goodwill. Fair value of the reporting unit is estimated using two different valua- tion techniques: (a) discounted earnings cash flow and (b) average market price to earnings multiple using a management selected peer group. If the fair value of the reporting unit exceeds its fair value an additional procedure must be performed. That additional proce- dure involves comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. An impairment loss is recorded through earnings to the extent the carrying amount of goodwill exceeds its implied fair value. As of December 31, 2003, management is unaware of any circumstances that would indicate a potential impairment of goodwill. The Company amortizes core deposit intangible (“CDI”) balances using the straight-line method over seven years. As required upon adoption of SFAS No. 142, the Bank evaluated the useful lives assigned to the CDI assets and determined that no change was necessary and amortization expense was not adjusted for the year ended December 31, 2003. As required by SFAS No. 142, the CDI balance is assessed for impairment or recoverability whenever events or changes in circum- stances indicate the carrying amount may not be recoverable. The CDI recoverability analysis is consis- tent with the Company’s policy for assessing impair- ment or disposal of long-lived assets. As of and for the year ended December 31, 2003, management is not aware of any circumstances that would indicate impairment of the CDI assets, and no impairment charges were recorded through earnings in 2003. 49 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the year ended December 31, 2001, prior to the adoption of SFAS No. 142, goodwill was amortized using the straight-line method over the expected periods to be benefited, generally 15 years. The CDI was amortized using the straight-line method over seven years. In the event that circumstances indicated potential impairment of the intangible asset carrying value, the Company assessed recoverability of intan- gible assets by determining whether the amortization of the balance over its remaining life could be recov- ered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, was measured based on projected discounted future operating cash flows using a dis- count rate reflecting the Company’s average cost of funds. The amortization of goodwill in 2001 amounted to $157,000. INCOME TAXES The Company provides for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differ- ences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Pro forma disclosure of net income and earnings per share is provided as if the fair value-based method had been applied. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), the Company’s net income and earnings per share for the years ended December 31, 2003, 2002 and 2001 would have been reduced to the pro forma amounts indicated below: (dollars in thousands, except per share data) Net income: 2003 2002 2001 As reported Compensation expense $19,213 521 $17,030 791 $16,810 258 Pro forma $18,692 $16,239 $16,552 Earnings per share: As reported: Basic Diluted Pro forma: Basic Diluted $ 1.37 $ 1.34 $ 1.23 $ 1.20 $ 1.23 $ 1.21 $ 1.33 $ 1.30 $ 1.19 $ 1.16 $ 1.21 $ 1.19 The estimated fair value of options granted was $6.59 per share in 2003, $ 5.04 per share in 2002 and $5.26 per share in 2001. The weighted average fair value of options granted under the Company’s fixed stock option plan in 2003, 2002 and 2001 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assump- tions: no dividend yield; expected volatility of 31% in 2003, 37% in 2002 and 37% in 2001; expected lives of three to five years in 2003, 2002 and 2001; and risk-free interest rates of 1.87%, 2.39% and 4.38% in 2003, 2002 and 2001, respectively. EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed by divid- ing earnings available to common shareholders by the weighted average number of common shares out- standing for the period. Diluted EPS reflects the poten- tial dilution of securities that could share in the earnings. EPS data for 2001 was retroactively restated reflecting the 2002 stock dividend. 50 page IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for long-lived assets in accord- ance with the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of ” (“SFAS No. 121”). This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recov- erable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be gener- ated by the asset. If such assets are considered to be impaired, the impairment to be recognized is meas- ured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclo- sure 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. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN No. 46R”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation No. 46, which was issued in January 2003. The Company will be required to apply FIN No. 46R to variable interests in variable interest entities (“VIE”) created after December 31, 2003. For variable interests in VIEs cre- ated before January 1, 2004, FIN No. 46R will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabil- ities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN No. 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The application of this FIN No. 46R is not expected to have a material effect on the Company’s consolidated financial statements. FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”), was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and other- wise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company cur- rently does not have any financial instruments that are within the scope of this Statement. RECLASSIFICATIONS Certain reclassifications were made to the prior year’s presentation to conform to the current year’s presentation. (2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Company purchases government agency securi- ties and/or whole loans under agreements to resell the same securities (reverse repurchase agreements) with primary dealers. Amounts advanced under these agreements represent short-term invested cash. Securities subject to the reverse repurchase agree- ments are held in the name of the Company by dealers who arrange the transactions. In the event that the fair value of the securities decreases below the carrying amount of the related reverse repurchase agreement, the counterparties are required to designate an equivalent value of addi- tional securities in the name of the Company. There was no balance outstanding with the primary dealers as of December 31, 2003 or 2002. 51 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the securities purchased under agreements to resell at December 31, 2003: Balance at year end Average balance outstanding during the year Maximum amount outstanding at any month-end during the year Weighted average interest rate during the year (3) SECURITIES The following is a summary of the securities held to maturity at December 31: (dollars in thousands) $ — $ 4,192 $20,000 1.38% Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value 2003 Municipal bonds Mortgage-backed securities 2002 Corporate bonds Municipal bonds Mortgage-backed securities $ 690 638 $1,328 $4,997 1,088 1,457 $7,542 — $ 7 $ 7 — $39 30 $69 $ 1 — $ 1 $14 1 — $15 The following is a summary of securities available for sale at December 31: 2003 Collateralized mortgage obligations Mortgage-backed securities U.S. government agency securities Municipal bonds Corporate bonds Other 2002 Collateralized mortgage obligations Mortgage-backed securities U.S. government agency securities Municipal bonds Corporate bonds Other Amortized Cost Gross Unrealized Gain Gross Unrealized Loss $125,491 117,139 80,845 60,741 13,641 15,055 $412,912 $102,212 78,112 53,408 17,810 594 16,630 $268,766 $ 274 830 606 910 309 — $2,929 $ 840 1,063 493 479 594 — $3,469 $1,669 485 25 248 47 79 $2,553 $ 175 2 — 52 — — $ 229 52 page $ 689 645 $1,334 $4,983 1,126 1,487 $7,596 Estimated Fair Value $124,096 117,484 81,426 61,403 13,903 14,976 $413,288 $102,877 79,173 53,901 18,237 1,188 16,630 $272,006 The amortized cost and estimated fair value of investment securities at December 31, 2003, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2033, 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. Within one year Over one year through five years Over five years through ten years Over ten years Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Available for Sale Held to Maturity Amortized Cost $ 15,022 59,316 38,915 55,973 Estimated Fair Value $ 14,949 59,928 39,227 56,548 169,226 170,652 117,139 125,491 1,056 117,484 124,096 1,056 243,686 242,636 Amortized Cost Estimated Fair Value — — — $ 690 690 638 — — 638 — — — $ 689 689 645 — — 645 $412,912 $413,288 $1,328 $1,334 Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by invest- ment category and length of time that individual securities have been in a continuous unrealized loss position, at December, 31 2003, were are follows: Less than 12 Months 12 Months or More Total Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Available for Sale: Collateralized mortgage obligations(1) Mortgage-backed securities(2) U.S. government agency securities(3) Municipal bonds(4) Corporate bonds(5) Other $1,497 485 25 248 47 79 $2,381 $ 54,999 55,070 14,959 12,012 6,094 11,887 $172 $25,622 $1,669 485 25 248 47 79 $ 80,621 55,070 14,959 12,012 6,094 11,887 $155,021 $172 $25,622 $2,553 $180,643 Held to Maturity: Municipal bonds — — $ 1 $ 689 $ 1 $ 689 (1) Collateralized mortgage obligations: The decline in fair value is attributable to changes in interest rates. Since the Company has the ability and the intent to hold these investments until a market price recovery or until maturity, these investments are not considered other-than-temporarily impaired. (2) Mortgage-backed securities (“MBS”): The unrealized losses on investments in MBS were caused by interest rate increases. The MBS were issued by Fannie Mae, Freddie Mac and Ginnie Mae. Most of these securities are pass-throughs with 10- to 15-year final maturities, thus reducing extension risk. Since the Company has the ability and the intent to hold these investments until a market price recovery or until maturity, the investments are not considered other- than-temporarily impaired. (3) U.S. government agency securities: The unrealized losses on investments in U.S. government agency securities were caused by interest rate increases. Since the Company has the ability and the intent to hold these investments until a market price recovery or until the bonds are called or until maturity, the investments are not considered other-than-temporarily impaired. (4) Municipal bonds: The unrealized losses on investments in municipal bonds were caused by interest rate increases. The municipal bonds are all insured and AAA rated and should not experience downward price pressure due to credit risk. Since the Company has the ability and the intent to hold these invest- ments until a market price recovery or until the bonds are called or until maturity, the investments are not considered other-than-temporarily impaired. (5) Corporate bonds: The unrealized losses in corporate securities are associated with holdings of Lehman Brothers and Bank of America obligations. The unrealized losses were the result of interest rate changes and not due to increased credit risk. Both bonds maintained or received upgrades in their ratings since the time of our purchase. Since the Company has the ability and the intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. (6) Other securities: The unrealized losses on investments in other securities were the result of interest rate increases. Most of the losses are attributable to an investment in an adjustable rate mortgage mutual fund. The fund’s underlying securities are mortgage-backed securities, and the losses were the result of interest rate changes. Because the Company has the ability and the intent to hold these investments until a market price recovery or maturity, these invest- ments are not considered other-than-temporarily impaired. 53 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Securities with carrying values of approximately $278.5 million and $170.5 million on December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. At December 31, 2003, the Company held a WorldCom Inc. corporate bond in its available for sale portfolio with an amortized carrying value of approximately $119,000. On January 15, 2003, such investment matured, and WorldCom defaulted on the repayment. The Company wrote down its cost basis in the invest- ment to fair value, recognizing a loss of approximately $4.4 million during the year ended December 31, 2002, as the Company’s management considered such decline in market value an other-than-temporary con- dition. In 2003, the Company sold $4 million par value of this bond and recognized gains of $782,000. There were $1.1 million, $3.3 million and $2.8 million in net realized gains during the years ended December 31, 2003, 2002 and 2001, respectively. During 2003, $1.8 million ($1.3 million net of tax) of unrealized losses arose during the year and were included in comprehensive income and $1.1 million ($692,000 net of tax) of previously unrealized gains were realized in earnings. In 2002, $2.5 million ($1.7 million net of tax) of unrealized gains arose during the year and were included in comprehensive income and $882,000 ($574,000 net of tax) of previously unrealized gains was realized in earnings. In 2001, $2.5 million ($1.5 million net of tax) of unrealized losses arose dur- ing the year and were included in comprehensive income and $460,000 ($281,000 net of tax) of previ- ously unrealized gains was realized in earnings. (4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable consist of the following at December 31: (dollars in thousands) 2003 2002 Real estate loans: Construction Commercial property Residential property Commercial and industrial loans Consumer loans Total gross loans Allowance for loans losses Deferred loan fees $ 43,047 397,853 58,477 685,557 54,878 $ 39,237 284,465 47,891 560,370 44,416 1,239,812 (14,734) (3,518) 976,379 (12,269) (2,511) Loans receivable, net $1,221,560 $961,599 At December 31, 2003 and 2002, the Company serviced loans sold to unaffiliated parties in the amounts of approximately $101.4 million and $89.6 million, respectively. Activity in the allowance for loan losses is as follows: (dollars in thousands) 2003 2002 2001 Years Ended December 31, Balance, beginning of year $12,269 $10,064 $11,975 Provision for loan losses 1,400 Loans charged off (4,105) Recoveries of charge-offs 794 5,680 (4,423) 1,208 4,800 (3,571) 976 Balance, end of year $14,734 $12,269 $10,064 The following is a summary of the investment in impaired loans and the related allowance for loan losses: (dollars in thousands) Recorded investment in impaired loans Related allowance for loan losses Impaired loans without specific allowances December 31, 2003 2002 $6,285 $4,799 2,967 2,972 392 55 The average recorded investment in impaired loans during the years ended December 31, 2003, 2002 and 2001 approximated $6.4 million, $4.8 million and $4.3 million, respectively. Interest income of approximately $204,000, $273,000 and $513,000 was recognized on impaired loans during the years ended December 31, 2003, 2002 and 2001, respectively. Loans on non-accrual status totaled approximately $8.1 million and $5.9 million at December 31, 2003 and 2002, respectively. If interest on non-accrual loans had been recognized at the original interest rates, interest income would have increased approxi- mately $362,000, $203,000 and $323,000 during the years ended December 31, 2003, 2002 and 2001, respectively. The Company is not committed to lend additional funds to debtors whose loans are impaired. Loans past due 90 days or more and still accruing inter- est totaled $557,000 and $617,000 at December 31, 2003 and 2002, respectively. Restructured loans at December 31, 2003 totaled $640,000; there were no restructured loans at December 31, 2002. 54 page The following is an analysis of all loans to officers and directors of the Company and their affiliates. In the opinion of management, all such loans were made under terms that are consistent with the Company’s normal lending policies. (dollars in thousands) Outstanding balance, beginning of year Credit granted, including renewals Repayments Years Ended December 31, 2003 2002 $ 2,645 $ 3,725 668 (1,748) 127 (1,887) A summary of interest expense on deposits is as fol- lows for the years ended December 31, 2003, 2002 and 2001: (dollars in thousands) 2003 2002 2001 Money market checking Savings Time deposits of $100,000 or more Other time deposits Other borrowings $ 2,584 1,894 $ 3,036 $ 2,610 2,714 2,632 7,415 7,354 1,549 7,838 7,034 805 13,778 13,785 103 Total $20,796 $21,345 $32,990 Outstanding balance, end of year $ 885 $ 2,645 (7) INCOME TAXES Income from these loans totaled approximately $153,000 and $135,000 for the years ended December 31, 2003 and 2002, respectively, and is reflected in the accompanying consolidated state- ments of operations. (5) PREMISES AND EQUIPMENT The following is a summary of the major components of premises and equipment as of December 31: (dollars in thousands) Land Buildings and improvements Furniture and equipment Leasehold improvements Accumulated depreciation and amortization 2003 2002 $ 1,820 3,034 8,052 5,826 $ 1,820 3,034 7,011 5,155 18,732 17,020 (10,297) (8,780) $ 8,435 $ 8,240 (6) DEPOSITS Time deposits by maturity are as follows at December 31, 2003 and 2002: (dollars in thousands) Less than three months After three months to six months After six months to twelve months After twelve months Total 2003 2002 $429,129 $359,586 120,441 94,561 8,896 116,983 99,094 22,574 $667,780 $583,484 A summary of the income tax provision for the years ended December 31, 2003, 2002 and 2001 follows: (dollars in thousands) 2003 2002 2001 Current: Federal State Deferred: Federal State $10,852 3,642 $8,410 $ 8,684 2,060 1,071 14,494 9,481 10,744 (1,732) (337) (390) (79) (2,069) (469) (60) 19 (41) Provision for income taxes $12,425 $9,012 $10,703 As of December 31, 2003 and 2002, the Federal and state deferred tax assets are as follows: (dollars in thousands) Deferred tax assets: Loan loss provision Depreciation State taxes Other Deferred tax liabilities: Purchase accounting Unrealized gain on available for sale securities and interest rate swaps Other Valuation allowance 2003 2002 $6,754 667 895 31 $ 5,374 421 371 154 8,347 6,320 (142) (181) (220) (98) (1,135) (101) (460) (1,417) (680) (680) Net deferred tax assets $7,207 $ 4,223 55 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Management believes that it is more likely than not that the results of future operations will generate suffi- cient taxable income to realize the deferred tax assets, net of the valuation allowance. At December 31, 2003 and 2002, net current tax payable of $5.0 million and $876,000 were included in other liabilities in the Consolidated Statements of Financial Condition. A reconciliation of the difference between the Federal statutory income tax rate and the effective tax rate as of December 31 is shown in the following table: Statutory tax rate State taxes, net of Federal tax benefits Other 2003 2002 2001 35.0% 35.0% 35.0% 6.6 (2.3) 2.4 (2.8) 4.9 (1.0) 39.3% 34.6% 38.9% (8) SHAREHOLDERS’ EQUITY The Bank adopted a Stock Option Plan (the “Plan”) in 1992, which was replaced by the Hanmi Financial Corporation Year 2000 Stock Option Plan, under which options to purchase shares of the Company’s common stock may be granted to key employees. The Plan pro- vides that the option price shall not be less than the fair value of the Company’s stock on the effective date of the grant. Generally, options will vest over five years. No option may be granted with a term of more than ten years. The following is a summary of the transactions under the stock option plan described above: Years Ended December 31, 2003 2002 2001 Weighted Average Exercise Price Number of Shares Per Share Weighted Average Exercise Price Per Share Number of Shares Weighted Average Exercise Price Per Share Number of Shares 1,068,506 $10.64 1,199,168 $12.89 505,411 $13.27 — 40,000 (247,977) (110,497) — 17.50 9.05 13.98 107,255 40,000 (222,022) (55,895) 11.82 15.50 6.62 14.02 310,485 468,000 (71,378) (13,350) 7.90 15.33 10.04 12.42 Options outstanding, beginning of year Pro rata effect on options, due to stock dividend and stock split Options granted Options exercised Options cancelled/expired Options outstanding, end of year 750,032 $11.04 1,068,506 $10.64 1,199,168 $12.89 Options exercisable, end of year 327,577 $10.52 385,684 $ 9.32 379,613 $ 7.60 Exercise Prices $ 6.82 7.78 8.12 14.07 17.50 Options Outstanding Options Exercisable Number Outstanding 15,792 357,084 8,130 329,026 40,000 750,032 Weighted Average Remaining Contractual Life 5.2 years 6.7 5.6 7.6 7.5 7.1 years Number Outstanding 15,792 173,964 — 124,487 13,334 327,577 The number and price per share of outstanding options have not been adjusted to reflect the 2002 stock divi- dend (See Note 10). 56 page (9) REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary— actions by regulators that, if undertaken, could have a direct material effect on the Company’s consoli- dated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quanti- tative measures of the assets, liabilities and certain off-balance sheet items as calculated under regula- tory accounting practices. The capital amounts and classification are also subject to qualitative judg- ments by the regulators about components, risk- weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital (as defined in the regu- lations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2003 and 2002, the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2003, the most recent notification from the Federal Reserve Board categorized the Bank as “well capitalized,” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification which management believes have changed the institution’s category. The capital ratios of the Company and the Bank at December 31 are as follows: (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Actual Minimum Regulatory Requirement Minimum To Be Categorized as Well Capitalized As of December 31, 2003: Total capital (to risk-weighted assets): Company Bank Tier I capital (to risk-weighted assets): Company Bank Tier I capital (to average assets): Company Bank As of December 31, 2002: Total capital (to risk-weighted assets): Company Bank Tier I capital (to risk-weighted assets): Company Bank Tier I capital (to average assets): Company Bank $151,336 150,547 11.13% 11.09 $108,757 108,630 8.00% 8.00 $135,788 N/A 10.00% 136,602 135,813 10.05 10.00 136,602 135,813 7.80 7.75 54,379 54,315 70,088 70,067 4.00 4.00 4.00 4.00 81,473 87,584 N/A 6.00 N/A 5.00 $132,162 129,914 12.14% 11.94 $ 87,092 87,045 8.00% 8.00 $108,806 N/A 10.00% 119,893 117,645 11.01 10.81 119,893 117,645 8.50 8.34 43,558 43,532 56,420 56,424 4.00 4.00 4.00 4.00 65,298 70,531 N/A 6.00 N/A 5.00 The average reserve balances required to be maintained with the Federal Reserve Bank were approximately $1.5 million as of December 31, 2003 and 2002. 57 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) EARNINGS PER SHARE The Company declared a 12% stock dividend on February 28, 2001 and a 3-for-2 stock split on August 16, 2001. The Company declared 9% stock dividend on February 20, 2002. The following is a reconciliation of the numerators and denominators (adjusted for the 12% stock dividend and 3-for-2 split in 2001 and 9% stock dividend in 2002) of the basic and diluted per share computations for the years ended December 31, 2003, 2002 and 2001: Income (Numerator) Weighted Average Shares (Denominator) Per Share Amount (dollars in thousands, except per share data) 2003: Basic EPS—Income available to common shareholders Effect of dilutive securities—Options $19,213 Diluted EPS—Income available to common shareholders $19,213 2002: Basic EPS—Income available to common shareholders Effect of dilutive securities—Options $17,030 Diluted EPS—Income available to common shareholders $17,030 2001: Basic EPS—Income available to common shareholders Effect of dilutive securities—Options $16,810 Diluted EPS—Income available to common shareholders $16,810 14,046,354 284,659 14,331,013 13,823,785 329,461 14,153,246 13,679,654 245,648 13,925,302 $ 1.37 (0.03) $ 1.34 $ 1.23 (0.03) $ 1.20 $ 1.23 (0.02) $ 1.21 (11) RETIREMENT PLAN The Company has a profit sharing and a section 401(k) plan for the benefit of substantially all of its employ- ees. Contributions to the profit sharing plan are deter- mined by the board of directors. No contributions were made in 2003, 2002 and 2001. The Company matches 75% of participant contribu- tions to the 401(k) plan up to 8% of each 401(k) plan participant’s annual compensation. The Company made contributions to the 401(k) plan for the years ended December 31, 2003, 2002 and 2001 of approxi- mately $553,000, $524,000 and $484,000, respectively. In December 2001, the Company purchased a single premium life insurance policy covering certain officers of the Company. The Company is the beneficiary under the policy. In the event of the death of a covered officer, the Company will receive the specified insurance bene- fit. The estate of the officer will be paid an amount based on recent compensation and length of service. (12) DERIVATIVE FINANCIAL INSTRUMENTS During December 31, 2003, the Company entered into four interest rate swap agreements, wherein the Company received fixed rates of 5.77%, 6.37%, 6.51% and 6.76% at quarterly intervals, and paid Prime-based floating rates, at quarterly intervals on a total notional amount of $60 million. All the four swap agreements mature in 2008. These swaps were designated as hedges for accounting purposes. 58 page As of December 31, 2003, the fair value of the interest rate swaps was in a favorable position of $253,000. A total of $165,000, net of tax, is included in other comprehensive income. The fair value of the interest rate swap is included in other assets in the accompa- nying consolidated statements of financial condition. Income of $35,000 related to hedge ineffectiveness was recognized in 2003. (13) COMMITMENTS AND CONTINGENCIES The Company leases its premises under noncancelable operating leases. At December 31, 2003, future mini- mum rental commitments under these leases and other operating leases are as follows: Year (dollars in thousands) 2004 2005 2006 2007 2008 Amount $2,214 2,066 1,657 1,421 1,336 $8,694 Rental expenses recorded under such leases in 2003, 2002 and 2001 amounted to approximately $2.0 mil- lion, $1.8 million and $1.7 million, respectively. In the normal course of business, the Company is involved in various legal claims. Management has reviewed all legal claims against the Company with outside legal counsel and has taken into consideration the views of such counsel as to the outcome of the claims. In management’s opinion, the final disposition of all such claims will not have a material adverse effect on the financial position and results of opera- tions of the Company. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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 statements of financial condition. 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 repre- sented 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 receiv- able; inventory; property, plant and equipment; and income-producing or borrower-occupied properties. At December 31, 2003 and 2002, the Bank had com- mitments to extend credit of approximately $253.7 million and $197.3 million, obligations under standby letters of credit of approximately $34.4 million and $22.1 million, commercial letters of credit of approxi- mately $34.3 and $21.3 million and commitments for credit card loans of approximately $3.8 million and $3.5 million, respectively. In 2003, the Company obtained an additional line of credit of $5 million. Total credit lines for borrowing amounted to $67 million at December 31, 2003. 59 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by the Company 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 the Company 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: (dollars in thousands) Assets: Cash and cash equivalents Federal Reserve Bank stock Federal Home Loan Bank stock Securities held to maturity Securities available for sale Loans receivable, net Loans held for sale Accrued interest receivable Servicing assets Interest rate swaps Liabilities: Noninterest-bearing deposits Interest-bearing deposits Other borrowed funds Treasury, tax and loan remittances Accrued interest payable The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is 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. FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK The carrying amounts approximate fair value as the stock may be resold to the issuer at carrying value. SECURITIES The fair value of securities is generally obtained from market bids for similar or identical securities, or obtained from independent securities brokers or dealers. December 31, 2003 December 31, 2002 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 62,595 2,935 7,420 1,334 413,288 1,226,300 25,501 6,686 2,388 253 475,100 977,670 181,393 3,104 4,403 $122,772 2,945 1,634 7,542 272,006 961,599 12,540 5,533 2,065 — 412,060 871,919 34,450 3,347 3,385 $122,772 2,945 1,634 7,596 272,006 968,269 12,540 5,533 2,065 — 412,060 878,971 34,450 3,347 3,385 $ 62,595 2,935 7,420 1,328 413,288 1,221,560 25,454 6,686 2,364 253 475,100 970,735 179,895 3,104 4,403 LOANS Fair values are estimated for portfolios of loans with similar financial characteristics, primarily fixed- and adjustable-rate interest terms. The fair values of fixed- rate mortgage loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed-rate loans, as well as anticipated repayment schedules. The fair value of adjustable-rate commercial loans is based on the esti- mated discounted cash flows utilizing the discount rates that approximate the pricing of loans collateral- ized by similar commercial properties. The fair value of non-performing loans at December 31, 2003 and 2002 was not estimated because it is not practicable to reasonably assess the credit adjustment that would be applied in the marketplace for such loans. The esti- mated fair value is net of allowance for loan losses. The carrying amount of accrued interest receivable approximates its fair value. 60 page DEPOSITS Statements of Operations The fair value of nonmaturity deposits is the amount payable on demand at the reporting date. Nonmaturity deposits include noninterest-bearing demand deposits, savings accounts, super NOW accounts and money market demand accounts. Discounted cash flows have been used to value term deposits such as certificates of deposit. The discount rate used is based on interest rates currently being offered by the Bank on compara- ble deposits as to amount and term. The carrying amount of accrued interest payable approximates its fair value. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The carrying amounts approximate fair value due to the short-term nature of these instruments. OTHER BORROWED FUNDS Discounted cash flows have been used to value other borrowed funds. LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT The fair value of loan commitments and standby let- ters of credit is based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans. The fair value of loan commitments and standby letters of credit is immaterial at December 31, 2003 and 2002. (dollars in thousands) Years Ended December 31, 2003 2002 Equity in earnings of Hanmi Bank Other expenses, net $19,578 (365) $17,371 (341) Net income $19,213 $17,030 Statements of Cash Flows Years Ended December 31, (dollars in thousands) 2003 2002 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used in operating activities: Earnings of Hanmi Bank (Increase) decrease in $ 19,213 $ 17,030 (19,578) (17,371) receivable from Hanmi Bank Increase in other assets Increase in liabilities (231) (1,968) 1,065 368 (11) 6 Net cash provided by (used in) operating activities (1,499) 22 Cash flows from investing activities: Dividends received from Hanmi Bank Purchase of investment in Pacific International Bank 2,300 (161) 2,139 — — — (15) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Net cash provided by investing activities Cash flows from financing activities: Proceeds from issuance of common stock Cash dividends 3,141 (4,220) 1,469 (7) Net cash provided by (used in) financing activities Net (decrease) increase in cash Cash, beginning of year (1,079) (439) 1,893 1,462 1,484 409 Cash, end of year $ 1,454 $ 1,893 Statements of Financial Condition (dollars in thousands) Assets: Cash Receivable from Hanmi Bank Investment in Pacific International Bank Investment in Hanmi Bank Other assets Total assets Liabilities Shareholders’ equity Total liabilities and shareholders’ equity December 31, 2003 2002 $ 1,454 231 $ 1,893 — 511 138,678 1,081 350 122,221 11 $141,955 $124,475 $ 2,488 139,467 $ 6 124,469 $141,955 $124,475 61 page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data follows: (dollars in thousands, except share amounts) Mar. 31, Jun. 30, Sep. 30, Dec. 31, 2003: Net interest income Provision for credit losses Net income Basic earnings per share Diluted earnings per share 2002: Net interest income Provision for credit losses Net income Basic earnings per share Diluted earnings per share (17) BUSINESS COMBINATION $12,146 1,180 4,240 0.30 0.30 $11,334 1,050 4,123 .30 .29 $13,868 1,500 4,953 0.35 0.35 $11,820 1,050 2,974 .22 .21 $14,449 1,700 4,945 0.35 0.34 $12,805 1,050 5,141 .37 .37 $16,502 1,300 5,075 0.36 0.35 $12,303 1,650 4,792 .34 .33 On December 22, 2003, the Company entered into a definitive agreement to acquire Pacific Union Bank (“PUB”), a commercial bank with assets of approximately $1.1 billion for an aggregate purchase price estimated at $295 million. Under the agreement, the Company will acquire all the outstanding shares of PUB for $164.5 million cash plus a quantity of Hanmi Financial shares specified in the agreement. The number of shares to be exchanged is subject to a “collar” set forth in the agreement and is based upon the volume-weighted market value of Hanmi Financial shares for the five business days prior to the closing date, which is expected to be in the second quar- ter of 2004. PUB commenced its operations in September 1974 and is a California state-chartered bank headquartered in the Koreatown area of Los Angeles, with twelve branches in Koreatown, downtown Los Angeles, Cerritos, Garden Grove, Gardena, Rowland Heights, San Francisco, San Jose and Torrance, California, as well as a loan production office in Seattle, Washington. It operates a general business bank, offering services similar to those offered by Hanmi Bank. The acquisition is subject to approval by the shareholders and regulators of both Hanmi Financial and PUB. 62 page INDEPENDENT AUDITORS’ REPORT The Board of Directors Hanmi Financial Corporation: We have audited the accompanying consolidated statements of financial condition of Hanmi Financial Corporation and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of oper- ations, changes in shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of Hanmi Financial Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hanmi Financial Corporation and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Los Angeles, California January 25, 2004 63 page MARKET PRICE OF COMMON STOCK The following table sets forth, for the periods indicated, the high and low trading prices of Hanmi Financial's com- mon stock for the last two years as reported by NASDAQ under the symbol “HAFC.” 2003 1Q 2Q 3Q 4Q 2002 1Q 2Q 3Q 4Q High Low $18.00 $18.25 $22.49 $22.74 $17.00 $18.20 $16.33 $18.05 $15.76 $15.90 $16.00 $19.29 $13.21 $16.59 $13.70 $14.25 Cash Dividend $.10 per share $.10 per share $.10 per share $.10 per share Other — — — — $.00 $.00 $.00 $.00 9% stock dividend — — — Hanmi Financial has 2,014 stockholders of record as of February 10, 2004. All share prices have been restated to reflect the 9% stock dividend declared in the first quarter of 2002. DIVIDENDS The amount and timing of dividends will be determined by Hanmi Financial's board of directors and substantially depends upon the earnings and financial condition of Hanmi Financial. The ability of Hanmi Financial to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of divi- dends which may be declared by Hanmi Bank. The power of the board of directors of a state chartered bank, such as Hanmi Bank, to declare a cash dividend is limited by statutory and regulatory restrictions which restrict the amount available for cash dividends depending upon the earnings, financial condition and cash needs of Hanmi Bank, as well as general business conditions. 64 page 2003 Contributions American Textile Association, Inc. Angelides 2006 Asia America Symphony Asia Society Asian Pacific American Legal Center California Design College CBA State Pac Eastern Korean School Good Samaritan Hospital Il Shim Association Jewish Community JTS Buddhism Broadcasting System Korean American Grocers Association of Northern California Korean American Mothers Association (KAMA) Kedren Community Mental Health Center Korea Cultural Center (KCC) Korea IT Network Korea Sports Council in USA Korean American Argentina Association Korean American Broadcasters Association Inc. Korean American Chamber of Commerce of Los Angeles Korean American Coalition Korean American Family Council Center Korean American Federation of L.A. Korean American Garment Industry Association Korean American Professional Women’s Association Korean American Volunteer Corporation Korean Apparel Manufacturers Association Korean Catholic Broadcasting Korean Chamber of Commerce of Orange County 2003 Low Income Housing Projects Korean Festival Committee of Orange County Korean Heritage Scholarship Foundation Korean Pavilion Garden Korean Typhoon Relief Fund Korean Youth & Community Center (KYCC) Kyunggi Alumnae Association L.A. Korean Reporter’s Association L.A. Country Sheriff’s K-1 Scholarship Committee Overseas Korean Trades Association of Southern California Pacific Asian Consortium in Employment Korean Marine Corps Veterans Association of Northern California San Diego Korean American Amateur Sports Association (SDKAASA) South Bay Kargo 6th Annual Scholarship Fundraiser Southern California U.S. Federation Council of Northern Koreans The Korea Daily The Korea Times L.A. The Korean American Bar Association of Southern California The Korean Veterans Association in Western Region of USA The Manna Foundation The Pacific American Volunteer Association Unification of Disabled Korean Americans Valley Korean Soccer Association West Los Angeles County Minority Business Development Center Young Nak Presbyterian Church PROJECTS DESCRIPTION Plaza De Leon Apartment, LP 20 Units Affordable Family/Senior Housing ML Shepard Manor, LP Broadway Vistas, LP Vermont City Lights, LP Apartment 90 Units Low Income Senior Housing 21 Units Low Income for Large Families 60 Units Affordable Low Income Housing for Large Families Witmer/Columbia Place, LP 43 Units Affordable Low Income Housing California Avenue Senior Housing, LP Central City Apartment, LP for Large Families 180 Units for Affordable & Low Income Housing 63 Units Affordable Low Income Housing for Seniors 65 page CORPORATE INFORMATION OFFICES Corporate Headquarters 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010 (213) 382-2200 Olympic Office 3737 West Olympic Boulevard Los Angeles, California 90019 (323) 735-3737 Helen Kim Senior Vice President & Manager Vermont Office 2610 West Olympic Boulevard Los Angeles, California 90006 (213) 384-4040 Seung H. Cho Vice President & Manager Downtown Office 950 South Los Angeles Street Los Angeles, California 90015 (213) 683-0737 Ae Cha Kim Senior Vice President & Manager Garden Grove Office 9820 Garden Grove Boulevard Garden Grove, California 92844 (714) 537-4040 Ine Ja Kim Vice President & Manager Western Office 120 South Western Avenue Los Angeles, California 90004 (213) 388-2200 Jennifer Yun Vice President & Manager Wilshire Office 3660 Wilshire Boulevard, Suite 103 Los Angeles, California 90010 (213) 427-5757 Susanna H. Rivera Senior Vice President & Manager Koreatown Galleria Office 3250 West Olympic Boulevard, Suite 200 Los Angeles, California 90006 (323) 730-4830 Thomas Oh Vice President & Manager Cerritos Office 11754 East Artesia Boulevard Artesia, California 90701 (562) 924-8001 Woo Young Choung Vice President & Manager Hacienda Office 18720 East Colima Road Rowland Heights, California 91748 (626) 854-1000 Sook Ran Park Senior Vice President & Manager San Diego Office 4637 Convoy Street, Suite 101 San Diego, California 92111 (858) 467-4800 Young Hoon Oh Vice President & Manager Gardena Office 2001 West Redondo Beach Boulevard Gardena, California 90247 (310) 965-9400 Christina Komori Vice President & Manager 66 page Irvine Office 14474 Culver Drive, Suite D Irvine, California 92604 (949) 262-2500 Elaine Chung Vice President & Manager Torrance Office 2370 Crenshaw Boulevard, Suite H Torrance, California 90501 (310) 781-1200 Sun Young Park Vice President & Manager Silicon Valley Office 2765 El Camino Real Santa Clara, California 95051 (408) 260-3400 Sokphil Whang Vice President & Manager SBA Department 3660 Wilshire Boulevard Penthouse Suite F Los Angeles, California 90010 (213) 427-5761 Steve Park Senior Vice President & Manager Fashion District Office 726 East 12th Street, Suite 211 Los Angeles, California 90021 (213) 743-5850 Judy Lee Vice President & Manager Residential Mortgage Center 3660 Wilshire Boulevard Penthouse Suite G Los Angeles, California 90010 (213) 639-1778 Kenneth Kim Vice President & Manager International Finance Department 3660 Wilshire Boulevard, Suite 103 Los Angeles, California 90010 (213) 427-5686 Seong Hoon Hong Assistant Vice President & Manager Consumer Loan Center 3737 West Olympic Boulevard Los Angeles, California 90019 (323) 730-2899 Jennifer Nam Vice President & Manager Financial Asset Management Consulting 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010 (213) 427-5616 Dong Wook Kim Senior Vice President & Manager Special Industries Department 3660 Wilshire Boulevard, Suite 1050 Los Angeles, California 90010 (213) 427-5780 Hassan Bouayad Senior Vice President & Manager Commercial Loan Department 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010 (213) 427-5760 Cindy Kim Vice President & Manager CORPORATE INFORMATION (CONTINUED) OFFICERS Jae Whan Yoo President and Chief Executive Officer Michael J. Winiarski Senior Vice President and Chief Financial Officer David W. Kim Senior Vice President and Chief Administration Officer Cliff Sung Vice President and Acting Chief Credit Officer BOARD OF DIRECTORS Chang Kyu Park Chairman of the Board Principal Pharmacist Serrano Medical Center Pharmacy I Joon Ahn Former Chairman of the Board Stuart S. Ahn President Sunnyland Development, Inc. Ung Kyun Ahn Former Chairman of the Board President Ahn’s Music Inc. George S. Chey Honorary Chairman of the Board Chairman Pan International Realty, Inc. Ki Tae Hong President Pacom International Inc. Joon Hyung Lee President Root-3 Corporation Richard B.C. Lee President B.C. Textiles, Inc. M. Christian Mitchell Former Partner Deloitte & Touche Joseph K. Rho Former Chairman of the Board Principal J & S Investment Won R. Yoon Former Chairman of the Board Chief Surgeon Olympic Medical Center INDEPENDENT PUBLIC ACCOUNTANT KPMG, LLP Los Angeles, California REGISTRAR AND TRANSFER AGENT U.S. Stock Transfer Corporation Glendale, California WEBSITE www.hanmifinancial.com STOCK LISTING Nasdaq Ticker symbol for common stock “HAFC” m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D HANMI FINANCIAL Corporate Headquarters 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, CA 90010 213.382.2200 www.hanmifinancial.com