hanmi financial
2005 annual report
you’re on our mind
Hanmi Bank is a wholly owned subsidiary of Hanmi Financial
Corporation (Nasdaq: HAFC). A leading multi-ethnic 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 nurturing enduring relationships
with you — our shareholders, customers and employees. By always
keeping you in mind, we are continually building a better bank.
At year-end 2005, your bank had total assets of $3.4 billion
and 22 full-service offices in Los Angeles, Orange, San Francisco,
Santa Clara and San Diego counties.
Design: bloch+coulter Design Group www.blochcoulter.com
Hanmi Financial
Financial Highlights
(Amounts in thousands, except per share amounts)
2005
2004
2003
2002
2001
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
3414.3
3104.2
1787.1
1457.3
1159.4
2826.1
2528.8
1445.8
1284.0
1042.4
$ 136,996
$ 24,669
$ 7,547
$ 69,133
$ 58,229
$ 101,749
$ 21,624
$ 5,775
$ 66,566
$ 36,700
$ 56,621
$ 15,397
$ 4,625
$ 39,325
$ 19,213
$ 47,971
$ 13,485
$ 7,719
$ 38,333
$ 17,030
$ 43,688
$ 12,799
$ 4,454
$ 32,028
$ 16,810
$3,414,252
$2,469,080
$2,826,114
$ 426,777
$3,104,188
$2,234,842
$2,528,807
$ 399,910
$1,787,139
$1,248,399
$1,445,835
$ 139,467
$1,457,313
$ 975,154
$1,283,979
$ 124,468
$1,159,416
$ 781,718
$1,042,353
$ 104,873
$ 1.17
$ 0.20
$ 8.77
$ 0.84
$ 0.20
$ 8.11
$ 0.67
$ 0.20
$ 4.92
$ 0.60
$ –
$ 4.47
$ 0.60
$ –
$ 3.83
4.77%
0.41%
1.00%
40.86%
9.06%
11.80%
1.79%
13.94%
4.26%
0.27%
1.00%
51.54%
8.78%
11.80%
1.37%
12.51%
2469.1
2234.8
1248.4
975.2
781.7
3.68%
0.68%
1.06%
51.31%
7.75%
11.09%
1.18%
14.51%
3.93%
0.65%
1.14%
55.41%
8.34%
11.94%
1.30%
15.08%
4.25%
0.63%
1.19%
52.40%
8.76%
12.75%
1.53%
17.56%
58.2
36.7
19.2
17.0
16.8
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
Total Assets
(dollars in millions)
Total Deposits
(dollars in millions)
Net Loans
(dollars in millions)
Net Income
(dollars in millions)
1
To Our Shareholders
Last year was by far the most successful in Hanmi’s history. It also marked a crucial turning point in Hanmi’s
development. To best explain how the year’s accomplishments and challenges fit within our strategic plan, this
letter will recap 2005’s highlights, summarize our expectations for 2006 and outline our aspirations for the next
five to ten years.
2005 Highlights
Hanmi again posted a record-breaking year. At December 31, 2005, assets were an unprecedented $3.41 billion,
compared to $3.10 billion at the end of 2004. Net income for the year was a record $58.2 million, up from $36.7
million the year prior. We saw a year-over-year improvement in net interest margin, to 4.77 percent in 2005 from
4.26 percent for 2004. And earnings per share were $1.17 (diluted) as compared to $0.84 (diluted) in 2004.
These results demonstrate the core strengths of our operations and are credited, in good part, to our timely
and efficient integration of Hanmi Bank and Pacific Union Bank following our April 2004 merger. We believe
we have fully realized the operating efficiencies afforded by our merger and that the combined strengths of our
operations will continue to serve us well in the future.
During 2005 we assembled a management team that has the experience, energy and ability to achieve our
defined milestones. We introduced an Incentive Compensation Plan (ICP) for our branch managers and
senior management that rewards performance and excellence. In addition to institutionalizing best-practices
performance throughout our organization, the ICP is designed to promote stronger growth in loan originations
and the gathering of less costly deposits. We expanded our loan production capabilities with the opening of three
new loan production offices out of state.
We tackled challenges during 2005 specific to our market. These included growing competition, which
increased pricing pressures on both loans and deposits and created a greater demand for experienced employees.
We have taken steps to counteract these market forces and enter 2006 with considerable optimism.
2006 Outlook
Our confidence stems from the fundamental and systemic adjustments we have made at Hanmi over the past
18 months – and our planned extension of those programs deeper into the organization. For example, the ICP
and training programs now apply to loan officers as well as senior management. We are rolling out sales and
service training, and continue to make staff retention a priority. The marketing and product development team
we recruited in 2005 is spearheading vital new programs for us. And we plan to open additional out-of-state
loan production offices this year.
We continue to make significant improvements in our operations as well. In January we reorganized our
structure into six districts. Each is headed by a proven leader, and all support our more sales-focused culture.
Hanmi will benefit from the competition among the districts, and the structure enables us to incorporate
greater budget accountability.
As for market trends, we anticipate that interest rates will continue to inch up over the coming year. We could
see growing stress on the real estate market and a deceleration in economic growth. These are normal and
predictable market trends, and we have positioned ourselves well to manage their effects on our operations.
4
2
Future Growth
Hanmi is becoming a leading regional commercial bank and, as such, we are growing our products and services
to meet our customers’ financial needs. They require more sophisticated banking services, and instead of turning
to major banks, they should find those services at Hanmi. We are increasing our middle-market lending and
offering additional lending products.
To make our current and potential customers aware of our broader range of products and services, we will
increase our sales and marketing efforts. We are implementing a Customer Relationship Management system to
increase and measure our success. And we are training employees at all levels to advise customers on the banking
products that will best meet their objectives. To make sure our customers continue to turn to Hanmi for their
commercial banking needs, we will focus on providing excellent customer service. Through every contact with
the bank, our customers will know that they are being served by the best in the business.
Hanmi is becoming a leading regional commercial bank and, as such,
we are growing our products and services to meet our customers’ financial
needs. They require more sophisticated banking services, and instead of
turning to major banks, they should find those services at Hanmi.
Our accomplishments, our abilities and our aspirations in 2005, 2006 and beyond are geared toward building
value in the organization. All we do is undertaken with you – our shareholders, our customers and our
employees – in mind. We thank you for your continued support and look forward to sharing our future
accomplishments with you.
Sincerely,
Joon Hyung Lee
Chairman of the Board
Sung Won Sohn
President and Chief Executive Officer
3
you’re on our mind
Our
customers
are the
foundation for
all we do
Jung Hak Son Hassan M. Bouayad
Chief Lending Officer
District Leader
Suki Murayama
District Leader
4
entrepreneurial spirit
From our inception, we have focused on serving the Korean-American community. Beyond
being a natural fit for our founders, the Korean-American demographic has long demonstrated
attributes attractive to bankers. Among all U.S. ethnic groups, Korean-Americans boast the
highest rate of entrepreneurship: One of every eight owns his or her own business. They also
sustain a savings rate that is one of the highest among all U.S. residents.
Over the past five years, the Korean-American market has
delivered a 29 percent compounded annual growth rate (CAGR)
in loans and a 23 percent CAGR in deposits. As the business
ownership and savings rates within our community generate
increased wealth, our customers demand more sophisticated
products and services.
extensive reach
Of the 2.2 million Korean-Americans in the United States, 40 percent reside in California.
Hanmi Bank has the most extensive branch network in the region to serve them. Moreover, we
have leveraged our expertise to reach out to other ethnic groups, including those of Iranian and
Indian descent. Currently more than 40 percent of our loans are from the non-Korean-American
market. We will continue this trend by adding more loan production offices in ethnic communities.
Our resources and infrastructure – specifically $3.41 billion in assets, a network of 22 branch
offices and command of the highest share of the Korean-American market – give us a significant
competitive advantage over our peers.
established relationships
Our infrastructure also is impressive in that it is so well established. We, as the marriage of
Hanmi Bank and Pacific Union Bank, are the oldest bank serving our community. Our branch
managers and other staff members have forged long-lasting, personal relationships with our
customers. That connectedness with our community is invaluable.
5
proven leadership
Hanmi Financial is honored and proud to have leaders at all levels of the organization.
These professionals include our CEO, Dr. Sung Won Sohn. Our senior management
team possesses many years of experience in Korean-American and major U.S. banks,
and the vision to accomplish our strategic goals. We have branch managers who have
served us well for 20 years or more, and among our newer employees are individuals
whose ideas and energy are inspirational to all.
We believe that rewarding excellence multiplies excellence.
Nurturing and recognizing our employees’ performance opens
up channels for new ideas, innovative products and services,
and opportunities for growth that our customers clearly count
as a differentiating factor between us and our competitors.
reinforced excellence
Employee capabilities go far toward establishing us as the bank of choice among our
current and targeted customers. To sustain, expand and encourage those capabilities, we
introduced two new programs in 2005. One is our Incentive Compensation Plan, which
rewards strong performance and productivity. The other is internal training to arm our
staff with the tools they need to excel in their jobs. Courses range from fundamental
skills such as using computer software to cross-selling and team selling.
incomparable talent
We believe we have the best talent in the market. To recruit, improve and retain such
highly qualified people, we continue to develop career paths and to tailor opportunities
that will help our employees attain their professional and personal goals.
6
you’re on our mind
Our
people
make
all the
difference
Greg Kim
Chief of Operations
J. Han Park
District Leader
7
you’re on our mind
Our
service
will be
our
trademark
Helen Kim
Ae Cha Kim
Steve Choe
District Leader Chief of Banking Services District Leader
8
customer-driven approach
Hanmi Financial’s vision is “Meeting all of our customers’ financial needs and growing with
them.” Our commitment to that vision mandates that we provide the best possible customer
service. We are dedicated to ensuring that our products and services are tailored to the needs and
sensibilities of the people we serve.
We operate in a fiercely competitive marketplace. We believe
our success depends on delivering the best possible service to our
customers. While intangible, our trademark service will ensure that
we build long-term and sustainable value for our shareholders,
customers and employees.
To set new standards, we pay close attention to each and every customer who visits our branches.
We are training our branch managers, loan officers and tellers on how to best address their
customers’ needs. Earlier this year, we reorganized our branching groups into six districts,
headed by executives who have proven their excellence through more than 70 combined years of
service to the bank.
streamlined operations
We have centralized our back-office support functions so that district and branch managers have
more time to build relationships with their customers, market our products and services, and
increase our employees’ skills. To measure and enhance the effectiveness of our services, we soon
will implement a Customer Relationship Management (CRM) system.
At Hanmi, we believe the success of our business rests fundamentally on loyalty, confidence and
trust – and that those qualities must exist between our customers and all of us and across the
levels of our organization.
9
diversified portfolio
Hanmi Bank began as a community commercial bank and has built core competencies
around serving ethnic markets’ financial needs. The recent years of record low interest rates
and exponentially growing property values have enabled us to grow and prosper in real
estate lending. We expect growth in the sector to slow as interest rates rise and property
value appreciation decelerates. To ensure continued success for our business, and sustained
shareholder value, we are working to expand the commercial and industrial lending portion
of the business, emphasizing cash flow. Changing the mix of our lending portfolio will add
balance and diversify risk.
We operate in a fiercely competitive marketplace for
customers. We are committed to making decisions that ensure
robust business today while simultaneously building value for
tomorrow and beyond.
balanced approach
“Balanced” is a word we use to describe our operating philosophy as well as our portfolio. We
continue to closely monitor and manage our credit quality. As a result, we have a reputation
in our community for having high-quality assets. We are known among our peers for
management tenets that ensure long-term quality and returns.
insightful management
Our management team knows first-hand the cycles that the economy follows. They are vigilant
in monitoring the signs of coming change. While market risks cannot be fully mitigated, would-
be surprises can be anticipated and diffused. Given our balanced approach and insightful team,
we look forward to the challenges and opportunities of our ever-changing marketplace.
10
you’re on our mind
Our
asset
quality
remains
superior
Kurt M. Wegleitner
Chief Credit Officer
Eunice U. Lim
Deputy Chief Credit Officer
11
you’re on our mind
Our
strategy
guides
every
decision
Michael J. Winiarski
Chief Financial Officer
Sung Won Sohn
President &
Chief Executive Officer
12
forward looking
From our inception through 2003, we focused on growth. We grew steadily and were the
largest Korean-American bank before we acquired Pacific Union Bank, our market’s oldest
bank. Our first years of growth gave us infrastructure, momentum and recognition. Those
assets will serve us well as we have added profitability to our growth focus.
Ethnic banks in Southern California have traditionally focused
on serving their customers’ real estate needs. When those
customers wanted more sophisticated services, they often
moved to major U.S. banks. We want to be the “go-to” bank for
the ethnic groups we serve.
pragmatic process
We are the market leader because we have made changes. Yet making changes is not
necessarily the same thing as taking risks. We have carefully weighed our options along the
way, and our decisions have followed a carefully conceived business strategy, a strategy that
guides us today.
In 2005, we completed the integration of Pacific Union Bank and realized significant
economies of scale. We solidified our management team. We made keeping the industry’s
best talent one of our priorities, and stabilized our workforce. And we have worked
diligently to instill cultural changes throughout our organization that will ensure
continuous compliance with government regulations.
The pieces are in place. Hanmi Financial is poised to execute on a number of plans
designed to definitively differentiate our bank from our competition; to complete our
transformation into a regional commercial bank; and to realize the upside potential we
have worked for a quarter of a century to create.
13
next steps on our strategic path
All of us at Hanmi Financial are excited about the future of our organization, our bank
and our business. We believe we have solidified the requisite components for success –
a strong customer base, incomparable employees, customer-driven services, excellent
asset quality and a strategic business model. We are now leveraging their collective
strengths to make Hanmi Bank the “go-to” regional commercial bank for ethnic groups
in California. Our broad plans include the operating philosophies outlined below.
We have a well thought-out strategic plan. However, new
opportunities and innovative developments will determine our
actual course. We remain flexible, so we can quickly adapt to
changes, and proactive, so that we can manage challenges
before they arise. At the same time, we will remain disciplined,
persistently pursuing our vision.
future growth will be both organic and external
We have the necessary critical mass to grow our business from within, which is an incred-
ible strength. Our strong balance sheet gives us the capacity to fund the development of
new products and new internal systems necessary to support continuing growth. At the
same time, we command the resources to enable us to make acquisitions given the perfect
opportunity. We are conservative, yet growth oriented, and will make the decisions that
add the most value to our business as we move forward.
we will upgrade existing products and introduce new ones
Our stated vision is to meet all of our customers’ financial needs and grow with them.
To do so, we will expand our product offerings and be more proactive in counseling our
customers in their financial matters. While we will be stretching our boundaries in this
endeavor, we will be offering tried-and-true products.
14
we will emphasize sales and service
We are the oldest and largest bank in our market. Our connections with our community
run deep, and we are in a position now to expand those relationships.
we will explore expansion into other markets
We plan to open additional new loan production offices in 2006. We will add more
branches to our already extensive network in California and potentially in other large
multi-ethnic communities across the country. And we have the option of becoming a larger
player in facilitating investments and other banking activities between customers in the
United States and Korea. Hanmi Financial possesses numerous options for expanding its
business – options we will keep open.
One difference between us and our competitors is that we are willing – indeed, eager –
to position ourselves to clear even higher bars in the future. In fact, we are raising those bars
ourselves. We are implementing strategies to diversify our portfolio when others are not.
We are basing compensation on performance measures even in the face of a talent shortage
in our marketplace. Our approach is different than our competitors’, but we believe rewarding
excellence is the right way to do business. We are examining operations and procedures
throughout our organization and institutionalizing best practices. That, too, is the right way
to do business.
We are doing all of these things because when you conduct business in the most
impeccable and service-oriented manner, your customers are satisfied. They refer
additional customers. Your employees are proud of their work and their contribution
to their community. They recruit like-minded professionals. Your shareholders realize
a favorable return on their investments, and they continue to support your endeavors.
We are pursuing the best business practices because all of you – shareholders, customers
and employees – are on our mind.
15
Hanmi Financial
Corporate Information
Independent Public
Accountants
KPMG, LLP
Los Angeles, California
Registrar and
Transfer Agent
U.S. Stock Transfer
Corporation
Glendale, California
Website
Stock Listing
www.hanmifinancial.com
Nasdaq
Ticker symbol for
common stock “HAFC”
Left to right:
Joseph K. Rho
Dr. Chang Kyu Park
M. Christian Mitchell
Dr. Sung Won Sohn
Kraig Kupiec
Joon Hyung Lee
I Joon Ahn
Dr. Won R. Yoon
Richard B. C. Lee
William J. Ruh
Executive Vice President
Castle Creek Capital LLC
Dr. Sung Won Sohn
President and
Chief Executive Officer
Dr. Won R. Yoon
Former Chairman of the Board
Chief Surgeon
Olympic Medical Center
In memoriam
We note with regret the passing
of our colleague, Ung Kyun Ahn,
distinguished member and former
Chairman of Hanmi’s Board of
Directors.
Officers
Dr. Sung Won Sohn
President and
Chief Executive Officer
Michael J. Winiarski
Senior Vice President and
Chief Financial Officer
Kurt M. Wegleitner
Executive Vice President and
Chief Credit Officer
Board of Directors
Joon Hyung Lee
Chairman of the Board
President
Root-3 Corporation
Richard B.C. Lee
Vice Chairman of the Board
President
B.C. Textiles, Inc.
I Joon Ahn
Former Chairman of the Board
Kraig Kupiec
Managing Member
Shoreline Trading Group
M. Christian Mitchell
Former Partner
Deloitte & Touche
Dr. Chang Kyu Park
Former Chairman of the Board
Principal Pharmacist
Serrano Medical Center
Pharmacy
Joseph K. Rho
Former Chairman of the Board
Principal
J & S Investment
16
Hanmi Financial
Table of Contents
Selected Financial Data
Management’s Discussion & Analysis of Financial Condition & Results of Operations
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Branch Offices
18
22
43
44
46
47
48
50
52
74
Hanmi Financial
Selected Financial Data
The following table presents selected historical financial infor-
mation, including per share information as adjusted for the
stock dividends and stock splits declared by us. This selected
historical financial data should be read in conjunction with our
consolidated financial statements and the notes thereto
appearing elsewhere in this Report and the information con-
tained in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The selected historical
financial data as of and for each of the years in the five years
ended December 31, 2005 is derived from our audited finan-
cial statements. In the opinion of management, the informa-
tion presented reflects all adjustments, including normal and
recurring accruals, considered necessary for a fair presenta-
tion of the results of such periods.
(Dollars in Thousands, Except for Per Share Data)
2005
2004
2003
2002
2001
As of and for the Year Ended December 31,
$
99,0
62,
$
34,366
32,6
$
,4
20,96
$
69,36
2,345
$
0,49
2,90
2,399
66,566
59,65
22,95
36,00
$
56,62
5,60
20,022
39,325
3,63
2,425
9,23
4,9
4,00
2,204
3,333
26,042
9,02
,030
$
Summary Statement of Income Data:
Interest income
Interest expense
Net interest income before
provision for credit losses
Provision for credit losses
Non-interest income
Non-interest expenses
Income before income taxes
Income taxes
Net income
Summary Statement of
Financial Condition Data:
Cash and cash equivalents
Total securities
Loans receivable, net (1)
Total assets
Total deposits
Total liabilities
Total shareholders’ equity
Tangible equity
Average net loans
Average securities
Average interest-earning assets
Average total assets
Average deposits
Average interest-bearing liabilities
Average shareholders’ equity
Average tangible equity
$
$
$
$
36,996
5,395
32,26
69,33
94,64
36,455
5,229
63,4
443,92
2,469,00
3,44,252
2,26,4
2,9,45
426,
209,02
2,359,439
4,964
2,,564
3,249,90
2,632,254
2,046,22
4,3
9,52
2,64
4,93
2,234,42
3,04,
2,52,0
2,04,2
399,90
,9
,92,534
425,53
2,3,42
2,60,0
2,29,24
,6,6
293,33
43,262
Per Share Data:
Earnings per share – basic
Earnings per share – diluted
Book value per share (2)
Tangible book value per share (3)
Cash dividends per share
Common shares outstanding
$
.
$
.
$
.
$
4.30
0.20
$
4,65,9
$
0.
$
0.4
$
.
$
3.62
0.20
$
49,330,04
6,6
32,990
43,6
,400
,253
32,02
2,53
0,03
6,0
$
,205
23,9
,
,59,46
,042,353
,054,543
04,3
02,69
0,4
235,034
,029,046
,00,2
9,392
36,94
95,40
93,42
$
0.6
$
0.60
$
3.3
$
3.5
$
–
2,35,660
$
62,595
44,66
,24,399
,,39
,445,35
,64,62
39,46
3,424
,03,65
39,635
,53,20
,623,24
,46,564
,05,249
32,369
30,252
$
0.6
$
0.6
$
4.92
$
4.5
0.20
$
2,326,20
$
$
22,2
29,54
95,54
,45,33
,23,99
,332,45
24,46
22,304
2,625
244,65
,222,050
,30,5
,64,562
54,5
2,92
0,62
$
0.62
$
0.60
$
4.4
$
4.39
–
$
2,30,66
As of and for the Year Ended December 31,
(Dollars in Thousands, Except for Per Share Data)
2005
2004
2003
2002
2001
Selected Performance Ratios:
Return on average assets (4)
Return on average shareholders’ equity (5)
Return on average tangible equity (6)
Net interest spread (7)
Net interest margin (8)
Efficiency ratio (9)
Dividend payout ratio (10)
Average shareholders’ equity to average total assets
.9%
3.94%
29.33%
3.9%
4.%
40.6%
6.95%
2.6%
.3%
2.5%
25.62%
3.0%
4.26%
5.54%
22.99%
0.9%
.%
4.5%
4.5%
3.06%
3.6%
5.3%
29.4%
.5%
.30%
5.0%
5.3%
3.%
3.93%
55.4%
–
.53%
.56%
.99%
2.9%
4.25%
52.40%
–
.63%
.0%
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:
9.%
9.06%
.93%
.%
.0%
.5%
.50%
.34%
.6%
.6%
.03%
0.96%
0.93%
0.5%
0.05%
0.00%
.0%
0.%
.%
.59%
2.04%
.9%
.9%
.0%
.3%
.09%
2.4%
.94%
2.%
2.5%
Non-performing loans to total gross loans (11)
Non-performing assets to total assets (12)
Net loan charge-offs to average total gross loans
Allowance for loan losses to total gross loans
Allowance for loan losses to non-performing loans
0.4%
0.30%
0.2%
.00%
246.40%
0.2%
0.9%
0.9%
.00%
3.49%
0.6%
0.4%
0.29%
.06%
54.3%
0.65%
0.44%
0.2%
.4%
3.%
0.63%
0.43%
0.45%
.9%
.2%
(1) Loans are net of deferred fees and related direct costs.
(2) Total shareholders’ equity divided by common shares outstanding.
(3) Tangible equity divided by common shares outstanding.
(4) Net income divided by average total assets.
(5) Net income divided by average shareholders’ equity.
(6) Net income divided by average tangible equity.
(7) Average yield earned on interest-earning assets less average rate paid on interest-
bearing liabilities.
(8) Net interest income before provision for credit losses divided by average interest-
earning assets.
(9) Total non-interest expenses divided by the sum of net interest income before
provision for credit losses and total non-interest income.
(10) Dividends declared per share divided by basic earnings per share.
(11) Non-performing loans consist of non-accrual loans, loans past due 90 days or
more and restructured loans.
(2) Non-performing assets consist of non-performing loans (see footnote (11) above)
and other real estate owned.
9
Hanmi Financial
Selected Financial Data
Non-GAAP Financial Measures
Return on Average Tangible Equity
Return on average tangible equity is supplemental financial
information determined by a method other than in accordance
with accounting principles generally accepted in the United
States of America (“GAAP”). This non-GAAP measure is used
by management in the analysis of Hanmi Financial’s perfor-
mance. Average tangible equity is calculated by subtracting
average goodwill and average core deposit intangible assets
from average shareholders’ equity. Banking and financial insti-
tution regulators also exclude goodwill and intangibles from
shareholders’ equity when assessing the capital adequacy of a
financial institution. Management believes the presentation of
this financial measure excluding the impact of these items pro-
vides useful supplemental information that is essential to a
proper understanding of the financial results of Hanmi
Financial, as it provides a method to assess management’s suc-
cess in utilizing tangible capital. This disclosure should not be
viewed as a substitution for results determined in accordance
with GAAP, nor is it necessarily comparable to non-GAAP
performance measures that may be presented by other com-
panies.
The following table reconciles this non-GAAP performance
measure to the GAAP performance measure for the periods
indicated:
(Dollars in Thousands)
2005
2004
Years Ended December 31,
2003
2002
2001
Average shareholders’ equity
Less average goodwill and core deposit intangible assets
Average tangible equity
Return on average shareholders’ equity
Effect of average goodwill and
core deposit intangible assets
Return on average tangible equity
$4,3
(29,26)
$9,52
3.94%
$293,33
(50,05)
$43,262
2.5%
$32,369
(2,)
$30,252
4.5%
$2,92
(2,65)
$0,62
5.0%
5.39%
29.33%
3.%
25.62%
0.24%
4.5%
0.30%
5.3%
$95,40
(2,33)
$93,42
.56%
0.43%
.99%
20
Tangible Book Value Per Share
Tangible book value per share is supplemental financial informa-
tion determined by a method other than in accordance with
GAAP. This non-GAAP measure is used by management in
the analysis of Hanmi Financial’s performance. Tangible book
value per share is calculated by subtracting goodwill and core
deposit intangible assets from total shareholders’ equity and divid-
ing the difference by the number of shares of common stock out-
standing. Management believes the presentation of this financial
measure excluding the impact of these items provides
useful supplemental information that is essential to a proper
understanding of the financial results of Hanmi Financial, as it
provides a method to assess management’s success in utilizing
tangible capital. This disclosure should not be viewed as a sub-
stitution for results determined in accordance with GAAP, nor
is it necessarily comparable to non-GAAP performance mea-
sures that may be presented by other companies.
The following table reconciles this non-GAAP performance
measure to the GAAP performance measure for the periods
indicated:
(Dollars in Thousands)
2005
2004
Years Ended December 31,
2003
2002
2001
Total shareholders’ equity
Less average goodwill and core deposit intangible assets
Tangible equity
Book value per share
Effect of goodwill and core deposit intangible assets
Tangible book value per share
$426,
(2,49)
$209,02
$.
(4.4)
$4.30
$399,90
(22,9)
$,9
$.
(4.49)
$3.62
$39,46
(2,043)
$3,424
$4.92
(0.0)
$4.5
$24,46
(2,64)
$22,304
$4.4
(0.0)
$4.39
$04,3
(2,4)
$02,69
$3.3
(0.0)
$3.5
2
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
This discussion presents management’s analysis of the financial
condition and results of operations as of and for the years
ended December 31, 2005, 2004 and 2003. This discussion
should be read in conjunction with our consolidated financial
statements and the notes related thereto presented elsewhere
in this report.
This discussion and analysis contains forward-looking state-
ments that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in such forward-
looking statements because of certain factors discussed
elsewhere in this report.
Critical Accounting Policies
We have established various accounting policies that govern
the application of accounting principles generally accepted in
the United States of America in the preparation of our finan-
cial statements. Our significant accounting policies are
described in the “Notes to Consolidated Financial Statements.”
Certain accounting policies require us to make significant esti-
mates and assumptions that have a material impact on the
carrying value of certain assets and liabilities, and we consider
these critical accounting policies. We use estimates and
assumptions based on historical experience and other factors
that we believe to be reasonable under the circumstances.
Actual results could differ significantly from these estimates
and assumptions, which could have a material impact on the
carrying value of assets and liabilities at the balance sheet dates
and our results of operations for the reporting periods.
Management has discussed the development and selection of
these critical accounting policies with the Audit Committee of
Hanmi Financial’s Board of Directors.
During the year ended December 31, 2004, in accordance
with Statement of Financial Accounting Standards (“SFAS”)
No. 141, “Business Combinations” (“SFAS No. 141”), the purchase
of Pacific Union Bank (“PUB”) required significant estimates
and assumptions. We engaged outside experts, including
appraisers, to assist in estimating the fair values of certain
assets acquired, particularly the loan portfolio, core deposit
intangible asset and fixed assets. The Bank used market data
regarding securities market prices and interest rates to esti-
mate the fair values of financial assets, including the securities
portfolio, deposits and borrowings. We also evaluated long-
lived assets for impairment and recorded any necessary adjust-
ments. In accordance with Emerging Issues Task Force Issue
No. 95-3, “Recognition of Liabilities in Connection With a Purchase
Business Combination,” we recognized liabilities assumed for
costs to involuntarily terminate employees of PUB and costs
to exit activities of PUB under an exit plan approved by Hanmi
Bank’s Board of Directors.
We believe the allowance for loan losses and allowance for
off-balance sheet items are critical accounting policies that
require significant estimates and assumptions that are particu-
larly susceptible to significant change in the preparation of our
financial statements. See “Financial Condition – Allowance for
Loan Losses and Allowance for Off-Balance Sheet Items,”
“Results of Operations – Provision for Credit Losses” and
“Notes to Consolidated Financial Statements, Note 1 –
Summary of Significant Accounting Policies” for a description
of the methodology used to determine the allowance for loan
losses and allowance for off-balance sheet items.
Overview
On April 30, 2004, we completed the merger with PUB.
Therefore, operating results for the year ended December 31,
2004 include eight months of operations of the combined
entity and reflect an increase in average total assets from $2.67
billion for the year ended December 31, 2004 to $3.25 billion
for the year ended December 31, 2005.
Over the last two years, we have experienced significant
growth in assets and deposits. Total assets increased to
$3,414.3 million at December 31, 2005 from $3,104.2 million
and $1,787.1 million at December 31, 2004 and 2003, respec-
tively. Net loans increased to $2,469.1 million at December
31, 2005 from $2,234.8 million and $1,248.4 million at
December 31, 2004 and 2003, respectively. Total deposits
increased to $2,826.1 million at December 3, 2005 from
$2,528.8 million and $1,445.8 million at December 31, 2004
and 2003, respectively. Our asset growth was mainly due to
the acquisition of PUB, which had assets of $1.2 billion, and
also was attributable to loan production during the period.
For the year ended December 31, 2005, net income was $58.2
million, representing an increase of $21.5 million, or 58.7
percent, from $36.7 million for the year ended December 31,
2004. This resulted in basic earnings per share of $1.18 and
$0.87 for the years ended December 31, 2005 and 2004,
respectively, and diluted earnings per share of $1.17 and $0.84
for the same years. Our primary source of revenue is net
interest income, which is the difference between interest and
fees derived from earning assets and interest paid on liabilities
incurred to fund those assets. Net interest income is affected
by changes in the volume of interest-earning assets and inter-
est-bearing liabilities. It also is affected by changes in yields
earned on interest-earning assets and rates paid on interest-
bearing liabilities. The increase in net income for 2005 was
attributable to increases in net interest margin and average
interest-earning assets. Net interest income increased due to
a 23.2 percent increase in volume of gross loans. The average
interest rate paid on interest-bearing liabilities increased by
111 basis points while the average interest rate earned on
interest-earning assets increased by 130 basis points. As a
result, net interest spread increased by 19 basis points from
3.70 percent in 2004 to 3.89 percent in 2005.
22
Results of Operations
Net Interest Income and Net Interest Margin
Our earnings depend largely upon the difference between the
interest income received from our loan portfolio and other
interest-earning assets and the interest paid on deposits and
borrowings. The difference is “net interest income.” The dif-
ference between the yield earned on interest-earning assets
and the cost of interest-bearing liabilities is “net interest
spread.” Net interest income, when expressed as a percentage
of average total interest-earning assets, is referred to as the
net interest margin. Net interest income is affected by the
change in the level and mix of interest-earning assets and
interest-bearing liabilities, referred to as volume changes. Our
net interest income also is affected by changes in the yields
earned on assets and rates paid on liabilities, referred to as
rate changes. Interest rates charged on loans are affected prin-
cipally 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 conditions
and other factors beyond our control, such as Federal eco-
nomic policies, the general supply of money in the economy,
income tax policies, governmental budgetary matters and the
actions of the FRS.
For the years ended December 31, 2005 and 2004, net interest
income was $137.0 million and $101.7 million, respectively.
The net interest spread and net interest margin for the year
ended December 31, 2005 were 3.89 percent and 4.77 per-
cent, respectively, compared to 3.70 percent and 4.26 per-
cent, respectively, for the year ended December 31, 2004.
For the years ended December 31, 2004 and 2003, net interest
income was $101.7 million and $56.6 million, respectively.
The net interest spread and net interest margin for the year
ended December 31, 2004 were 3.70 percent and 4.26 per-
cent, respectively, compared to 3.06 percent and 3.68 per-
cent, respectively, for the year ended December 31, 2003.
Average interest-earning assets increased 20.3 percent to
$2,871.6 million in 2005 from $2,387.4 million in 2004.
Average gross loans increased 23.2 percent to $2,382.2 mil-
lion in 2005 from $1,933.8 million in 2004, and average
investment securities decreased 1.5 percent to $419.0 million
in 2005 from $425.5 million in 2004. Total loan interest
income increased by 53.2 percent in 2005 on an annual basis
due to the increase in average gross loans outstanding and the
increase in the average yield on loans from 6.04 percent in
2004 to 7.51 percent in 2005. The average interest rate
charged on loans increased 147 basis points, reflecting the
For the year ended December 31, 2004, net income was $36.7
million, representing an increase of $17.5 million, or 91.0
percent, from $19.2 million for the year ended December 31,
2003. This resulted in basic earnings per share of $0.87 and
$0.68 for the years ended December 31, 2004 and 2003,
respectively, and diluted earnings per share of $0.84 and $0.67
for the same years. The increase in net income for 2004 was
attributable to increases in net interest margin and average
interest-earning assets. Net interest income increased due to
a 73.1 percent increase in volume of gross loans. The average
interest rate paid on interest-bearing liabilities decreased by
four basis points while the average interest rate earned
increased by 60 basis points. As a result, net interest spread
increased by 64 basis points from 3.06 percent in 2003 to 3.70
percent in 2004.
Our results of operations are significantly affected by the pro-
vision for credit losses. The provision for credit losses was
$5.4 million, $2.9 million and $5.7 million in 2005, 2004 and
2003, respectively, reflecting changes in the balance and credit
quality of the loan portfolio.
We also generated substantial non-interest income from ser-
vice charges on deposit accounts, charges and fees from inter-
national trade finance, and gains on sales of loans. For the year
ended December 31, 2005, non-interest income was $32.2
million, an increase of $4.8 million, or 17.6 percent, over
2004 non-interest income of $27.4 million. For the year ended
December 31, 2004, non-interest income was $27.4 million,
an increase of $7.4 million, or 36.8 percent, over 2003 non-
interest income of $20.0 million. The increases in both years
resulted primarily from the merger with PUB and expansion
in the Bank’s loan and deposit portfolios.
Non-interest expenses consist primarily of employee compen-
sation and benefits, occupancy and equipment expenses and
data processing expenses. For the year ended December 31,
2005, non-interest expenses were $69.1 million, an increase of
$2.6 million, or 3.9 percent, over 2004 non-interest expenses
of $66.6 million. For the year ended December 31, 2004,
non-interest expenses were $66.6 million, an increase of $27.3
million, or 69.3 percent, over 2003 non-interest expenses of
$39.3 million. In both years, the increases were primarily the
result of the merger with PUB. The efficiency ratio improved
to 40.86 percent in 2005 compared to 51.54 percent in 2004
as the Bank achieved greater operating efficiencies after com-
pleting the integration of PUB’s operations into the Bank’s,
whereas 2004 non-interest expenses included the cost of
parallel operations and non-recurring expenses associated
with the merger. In 2004, the efficiency ratio increased slightly
to 51.54 percent compared to 51.31 percent in 2003 because
of non-recurring expenses associated with the merger.
23
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
Average interest-earning assets increased 55.1 percent to
$2,387.4 million in 2004 from $1,538.8 million in 2003.
Average gross loans increased 73.1 percent to $1,933.8 million
in 2004 from $1,117.0 million in 2003 and average investment
securities increased 12.1 percent to $425.5 million in 2004
from $379.6 million in 2003. Total loan interest income
increased by 81.1 percent in 2004 on an annual basis due to the
increase in average gross loans outstanding and the increase in
average yield on loans from 5.78 percent in 2003 to 6.04 per-
cent in 2004. The average interest rate charged on loans
increased 26 basis points, reflecting the average WSJ Prime Rate
increase of 22 basis points from 4.12 percent in 2003 to 4.34
percent in 2004. The yield on average interest-earning assets
increased from 5.03 percent in 2003 to 5.63 percent in 2004,
an increase of 60 basis points, reflecting a shift in the mix of
interest-earning assets from 72.3 percent loans, 24.9 percent
securities and 2.8 percent other interest-earning assets in 2003
to 81.0 percent loans, 17.8 percent securities and 1.2 percent
other interest-earning assets in 2004.
The majority of interest-earning assets growth was funded by
a $713.2 million, or 50.3 percent, increase in average total
deposits. Total average interest-bearing liabilities grew by 59.6
percent to $1,687.7 million in 2004 compared to $1,057.2
million in 2003. The average interest rate paid for interest-
bearing liabilities decreased by four basis points from 1.97
percent in 2003 to 1.93 percent in 2004. As a result of the
increases in the yield on interest-earning assets and cost of
interest-bearing liabilities, the net interest spread increased to
3.74 percent in 2004 compared to 3.09 percent in 2003.
increase in the WSJ Prime Rate of 185 basis points from 4.34
percent in 2004 to 6.19 percent in 2005. The yield on average
interest-earning assets increased from 5.63 percent in 2004 to
6.93 percent in 2005, an increase of 130 basis points, reflecting
a shift in the mix of interest-earning assets from 81.0 percent
loans, 17.8 percent securities and 1.2 percent other interest-
earning assets in 2004 to 83.0 percent loans, 14.6 percent
securities and 2.4 percent other interest-earning assets in 2005.
The majority of interest-earning assets growth was funded by
a $502.5 million, or 23.6 percent, increase in average total
deposits. Total average interest-bearing liabilities grew by 21.2
percent to $2,046.2 million in 2005 compared to $1,687.7
million in 2004. The average interest rate paid for interest-
bearing liabilities increased by 111 basis points from 1.93 percent
in 2004 to 3.04 percent in 2005 due to competitive pricing. As a
result of the increases in the yield on interest-earning assets and
cost of interest-bearing liabilities, the net interest spread increased
to 3.89 percent in 2005 compared to 3.70 percent in 2004.
The 2005 net interest spread reflects the increase in the average
balance of Federal funds sold, which are highly liquid but have
a relatively low yield, from $12.8 million in 2004 to $46.8
million in 2005. The average yield on Federal funds sold was
3.40 percent and 1.43 percent in 2005 and 2004, respectively.
In the second half of 2005, the Bank increased its rates on
certificates of deposit to maintain relationships with valued
customers and fund loan growth. In 2005, loan production
increased 32.2 percent over 2004 levels. This trend was par-
ticularly evident in the second quarter of 2005 and continued
throughout the second half of the year, during which production
was 37.4 percent higher than 2004 levels. However, because of
the flat yield curve (long-term interest rates were unusually low
relative to short-term rates, approaching an briefly falling below
short-term rates) and strong competition, the Bank experienced
a high level of loan payoffs because management was unwilling
to match the aggressive pricing on five- to seven-year fixed-rate
loans offered to our customers by certain competitors.
24
The following tables show the average balances of assets, lia-
bilities 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 liabil-
ities; and the net interest spread and the net interest margin
for the periods indicated.
For the Year Ended December 31,
2005
Interest
Income/
Expense
Average
Balance
Average
Yield/
Rate
Average
Balance
2004
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
2003
Interest
Income/
Expense
Average
Yield/
Rate
$ 2,32,230 $ 9,0
3,22
4,66
.5% $ ,933,6 $ 6,
3,05
0,32
6.4%
6.04% $ ,6,952 $ 64,505
,42
6.59%
33,596
5.%
6.9%
02,03
24,
23,5
46,99
–
24
4,002
0,2
,0
,59
–
5
3.90%
4.25%
4.0%
3.40%
–
2.34%
90,336
264,29
5,04
2,2
–
30
3,34
0,26
6
3
–
6
3.3%
3.%
4.6%
.43%
–
.99%
0,465
25,54
6,003
2,44
4,30
6
2,395
,32
23
2
225
–
3.40%
3.02%
4.55%
.2%
.5%
–
2,,564
99,0
6.93%
2,3,42
34,366
5.63%
,53,20
,4
5.03%
92,245
(22,9)
30,2
3,626
$ 3,249,90
6,064
(2,22)
22,452
23,29
$ 2,60,0
52,06
(3,)
45,54
4,394
$ ,623,24
$ 539,6
3,6
2,964
2,30
2.40% $ 466,0
3,59
.54%
,09
,90
.3% $
.36%
20,69
9,00
2,54
,94
.24%
.95%
959,904
242,996
65,42
3,94
,4
,99
3.33%
2.93%
4.9%
6,555
253,4
223,0
0,966
5,44
6,349
.9%
2.3%
2.4%
36,0
302,65
63,3
,45
,354
,549
.92%
2.43%
2.45%
2,046,22
62,
3.04%
,6,6
32,6
.93%
,05,249
20,96
.9%
5,509
33,64
5,50
2,3,3
4,3
$ 3,249,90
665,6
23,4
69,00
2,3,3
293,33
422,453
,43
433,596
,490,45
32,369
$ 2,60,0
$ ,623,24
$ 36,996
$ 0,49
$ 56,62
3.9%
4.%
3.0%
4.26%
3.06%
3.6%
(Dollars in Thousands)
Assets
Interest-earning assets:
Gross loans, net (1)
Municipal securities (2)
Obligations of other
U.S. Government
agencies
Other debt securities
Equity securities
Federal funds sold
Term Federal funds sold
Interest-earning deposits
Total interest-
earning assets
Non-interest-earning assets:
Cash and cash equivalents
Allowance for loan losses
Other assets
Total non-interest-
earning assets
Total assets
Liabilities and
Shareholders’ Equity
Interest-bearing liabilities:
Deposits:
Money market
checking
Savings
Time deposits of
$100,000 or more
Other time deposits
Other borrowed funds
Total interest-bearing
liabilities
Non-interest-bearing
liabilities:
Demand deposits
Other liabilities
Total non-interest-
bearing liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Net interest spread (3)
Net interest margin (4)
(1) Loans are net of deferred fees and related direct costs. Loan fees have been
(3) Represents the average yield earned on interest-earning assets less the average
included in the calculation of interest income. Loan fees were $5.6 million,
$6.0 million and $3.2 million for the years ended December 31, 2005,
2004 and 2003, respectively.
(2) Yields on tax-exempt income have been computed on a tax-equivalent
basis, using a tax rate of 35 percent.
rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
25
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The following table sets forth, for the periods indicated, the
dollar amount of changes in interest earned and paid for inter-
est-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 relationship of the absolute dollar amount of the changes
in each:
(In Thousands)
Interest Income:
Gross loans, net
Municipal securities
Obligations of other U.S.
Government agencies
Other debt securities
Equity securities
Federal funds sold
Term Federal funds sold
Interest-earning deposits
Total interest income
Interest Expense:
Money market checking
Savings
Time deposits of $00,000 or more
Other time deposits
Other borrowed funds
Total interest expense
Change in net interest income
$
For the Year Ended December 31,
2005 vs. 2004
Increases (Decreases)
Due to Change in
2004 vs. 2003
Increases (Decreases)
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
$
30,3
6
$
3,9
(54)
$
62,200
0
$
49,22
,56
$
3,094
$
52,306
,594
4
(929)
40
930
–
(2)
3,349
,403
92
,35
(24)
(,966)
,63
23,66
5
939
(0)
46
–
33,392
3,463
24
2,633
,94
3,536
2,2
,5
62
0
39
,406
–
()
64,4
4,66
340
2,0
,00
,50
29,494
35,24
25
(335)
429
(26)
(2)
6
5,35
4,9
564
4,060
(,03)
4,522
2,234
39,4
$
$
$
$
254
2,25
4
32
(3)
–
5,54
,323
(66)
(509)
(3)
2
(43)
5,9
99
,940
443
(94)
(225)
6
56,949
5,54
(04)
3,55
(,940)
4,00
,2
45,2
$
Provision for Credit Losses
Non-Interest Income
For the year ended December 31, 2005, the provision for credit
losses was $5.4 million, compared to $2.9 million for the year
ended December 31, 2004, an increase of 85.6 percent. The
allowance for loan losses remained at 1.00 percent of total
gross loans at December 31, 2005 and 2004, with the increase
in the dollar amount allowed for credit losses due to an
increase in loan volume. This was primarily due to the overall
decrease in historical loss factors on pass grade loans, while
non-performing assets increased from $6.1 million, or 0.27
percent of gross loans, to $10.1 million, or 0.41% of gross
loans, as of December 31, 2004. The $235.2 million, or 10.4
percent, increase in the loan portfolio and the $4.1 million, or
68.5 percent, increase in non-performing assets required the
provision to increase to $5.4 million in 2005 from $2.9
million in 2004 to maintain the necessary allowance level.
Since 2001, we have refined our credit management process
and instituted a more comprehensive risk rating system. For
the year ended December 31, 2004, the provision for credit
losses was $2.9 million, compared to $5.7 million for the year
ended December 31, 2003, a decrease of 48.8 percent.
The following table sets forth the various components of non-
interest income for the years indicated:
(In Thousands)
2005
2004
2003
For the Year Ended December 31,
Service charges on
deposit accounts
Trade finance fees
Remittance fees
Other service charges
and fees
Bank-owned life
insurance income
Increase in fair value
of derivatives
Other income
Gain on sales of loans
Gain on sales of securities
available for sale
Total non-interest income
$ 5,2
4,269
2,22
$ 4,44
4,044
,653
$ 0,339
2,
952
2,496
,46
,29
45
3
499
,05
2,459
3,02
232
,6
2,99
35
40
2,5
$ 32,26
34
$ 2,399
,094
$ 20,022
26
We earn non-interest income from three major sources: ser-
vice charges on deposit accounts, fees generated from inter-
national trade finance and gain on sales of loans. Non-interest
income has become a significant part of revenue in the past
several years. For the year ended December 31, 2005, non-
interest income was $32.2 million, an increase of 17.6 percent
from $27.4 million for the year ended December 31, 2004.
The increase was primarily a result of the merger with PUB
and expansion in the Bank’s loan and deposit portfolios.
Service charges on deposit accounts increased $1.3 million, or
9.3 percent, in 2005 compared to 2004 and increased $4.1
million, or 39.7 percent, in 2004 compared to 2003. Service
charge income on deposit accounts increased with the higher
deposit volume and number of accounts as a result of the PUB
merger and expansion in the Bank’s deposit portfolio. Average
demand deposits increased by 12.9 percent to $751.5 million in
2005 from $665.8 million in 2004 and increased by 57.6 per-
cent to $665.8 million in 2004 from $422.5 million in 2003.
Service charges are constantly reviewed to maximize service
charge income while still maintaining a competitive position.
Fees generated from international trade finance increased by
5.6 percent from $4.0 million in 2004 to $4.3 million in 2005
and increased 40.1 percent from $2.9 million in 2003 to $4.0
million in 2004. The increase was primarily due to the PUB
merger. Trade finance fees relate primarily to import and
export letters of credit.
Remittance fees increased 28.4 percent and 73.6 percent in
2005 and 2004, respectively, to $2.1 million in 2005 from $1.7
million in 2004 and $952,000 in 2003. The 2005 increase
reflects increased volume derived from Hanmi Bank’s close
relationship with Korea Exchange Bank, a stockholder of
Hanmi Financial, and the 2004 increase reflects increased vol-
ume resulting from the merger with PUB.
Other charges and fees increased $1.0 million, or 68.0 per-
cent, in 2005, from $1.5 million in the prior year to $2.5
million, and increased $270,000, or 22.2 percent, in 2004,
from $1.2 million in the prior year to $1.5 million. The
increase in 2005 was caused by higher loan prepayment fees as
prepayment activity increased in response to increasing inter-
est rates and the flat yield curve environment. The increase in
2004 was caused primarily by increased activity associated
with the merger with PUB.
The changes in the fair value of derivatives are caused primarily
by movements in the indexes to which interest rates on certain
certificates of deposit are tied. In 2005 and 2004, the Bank
offered certificates of deposit tied to either of the Standard &
Poor’s 500 Index and a basket of Asian currencies. As explained
in “Notes to Consolidated Financial Statements, Note 15 –
Derivatives,” the Bank entered into swap transactions to hedge
the market risk associated with such certificates of deposit. The
swaps and the related derivatives embedded in the certificates
of deposit are accounted for at fair value. The increase in the fair
value of the swaps of $1.1 million and $232,000 recorded in
non-interest income in 2005 and 2004, respectively, are
partially offset by changes in the fair value of the embedded
derivatives recorded in non-interest expenses.
Other income increased $778,000, or 46.3 percent, to $2.5
million in 2005 from $1.7 million in 2004, compared to an
increase of $841,000, or 100.1 percent, to $1.7 million in
2004 from $840,000 in 2003. The increase in other income
over these years is mainly due to an increase in sales commissions
from mutual funds and insurance products and, in 2004, an
increase in credit card fee income. As a part of our continuing
effort to expand non-interest income, we introduced non-depos-
itory products, such as life insurance, mutual funds and annuities,
to customers in December 2001. During 2005, we generated
income of $749,000 from this activity, which represented a 61.4
percent increase from $464,000 earned in 2004.
Gain on sales of loans was $3.0 million in 2005, compared to $3.0
million and $2.2 million in 2004 and 2003, respectively, repre-
senting increases of 0.8 percent and 38.9 percent for the years
ended December 31, 2005 and 2004, respectively. The increase
in gain on sales of loans resulted from increased sales activity
in SBA loans, which was primarily due to the acquisition of
PUB. The guaranteed portion of a substantial percentage of
SBA loans is sold in the secondary markets, and servicing
rights are retained. During 2005, there were $50.6 million of
SBA loans sold, compared to $51.3 million in 2004 and $32.9
in 2003. The lower premiums earned in 2005 reflect a greater
use of brokers to refer loan applications, which causes a higher
cost to originate loans, compared to retail originations
through the branch network.
Gain on sales of securities available for sale decreased by 87.8
percent from $1.1 million in 2003 to $134,000 in 2004. Gain
on sales of securities was $117,000 in 2005. In 2003, we sold
$45.1 million of securities, recognizing premiums of 2.43 per-
cent over their carrying value. In 2004, we sold $53.1 million
of securities, primarily securities from PUB’s portfolio, in
order to reposition the balance sheet. Securities sales activity
was limited to $11.4 million in 2005, and gains on sales of
securities were nominal in amount in 2004 and 2005.
2
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
Non-Interest Expenses
The following table sets forth the breakdown of non-interest
expenses for the years indicated:
(In Thousands)
2005
2004
2003
For the Year Ended December 31,
Salaries and employee
benefits
Occupancy and equipment
Data processing
Advertising and promotion
Supplies and
communications
Professional fees
Amortization of core
deposit intangible
Decrease in fair value of
embedded option
Other operating expense
Merger-related expenses
Total non-interest expenses
$ 36,39
,9
4,44
2,93
$ 33,540
,09
4,540
3,00
$ 2,24
5,9
3,00
,635
2,556
2,20
2,433
2,06
,496
,6
2,5
,2
2
4
,
(509)
$ 69,33
–
,96
2,053
$ 66,566
–
5,44
–
$ 39,325
For the year ended December 31, 2005, non-interest expenses
were $69.1 million, an increase of $2.6 million, or 3.9 per-
cent, from $66.6 million for the year ended December 31,
2004. For the year ended December 31, 2004, non-interest
expenses were $66.6 million, an increase of $27.2 million, or
69.3 percent, from $39.3 million for the year ended December
31, 2003. The increases in both years were primarily due to
the PUB merger, which closed on April 30, 2004.
Salaries and employee benefits expenses for 2005 increased
$3.3 million, or 9.8 percent, to $36.8 million from $33.5 mil-
lion for 2004 and, for 2004, increased $12.3 million, or 58.1
percent, to $33.5 million from $21.2 million for 2003. These
increases were due primarily to increases in the average num-
ber of employees following the acquisition of PUB. Average
headcount was 535 and 503 in 2005 and 2004, respectively,
representing increases of 6.4 percent and 36.5 percent,
respectively, over the prior years. Assets per employee were
$6.2 million at December 31, 2005, compared to $5.8 million
at December 31, 2004, an increase of 6.2 percent, which
reflects the greater operating efficiencies achieved following
the merger with PUB.
Occupancy and equipment expenses for 2005 increased
$880,000, or 10.9 percent, to $9.0 million compared to $8.1
million for 2004 and, for 2004, increased $2.9 million, or 55.8
percent, to $8.1 million compared to $5.2 million for 2003.
These increases were mainly due to the acquisition of twelve
former PUB branches in April 2004, which increased the
branch network to 27 facilities. Following the closure of four
branches in October 2004 and an additional branch closure in
January 2005, the Bank now operates 22 branches, the same
as the average number of branches for the year ended
December 31, 2004.
Data processing expense for 2005 increased $304,000, or 6.7
percent, to $4.8 million from $4.5 million for 2004 as a result
of a 12.9 percent increase in average demand deposits, a 28.5
percent increase in average deposits, and a 23.2 percent
increase in average loans outstanding. Data processing expense
for 2004 increased $1.5 million, or 47.4 percent, to $4.5 mil-
lion from $3.1 million for 2003. In 2004, average demand
deposits increased 57.6 percent, average deposits increased
47.3 percent, and average loans outstanding increased 73.1
percent compared to 2003. In 2004, additional expense was
incurred because of the need to operate parallel systems until
the conversion of the Bank’s core data processing systems.
Advertising and promotion expense decreased from $3.0 million
for 2004 to $2.9 million for 2005, a decrease of $88,000, or 2.9
percent. In 2004, Hanmi Bank conducted print, radio and televi-
sion campaigns and distributed various promotional items to pub-
licize its merger with PUB and attract and retain customers, and
advertising and promotion expense increased $1.4 million, or
83.5 percent, to $3.0 million from $1.6 million in 2003.
Supplies and communication expenses increased $123,000, or
5.1 percent, to $2.6 million in 2005 from $2.4 million in
2004. Supplies and communication expenses increased
$937,000, or 62.6 percent, to $2.4 million in 2004 from $1.5
million in 2003 because of the merger with PUB.
Professional fees were $2.2 million in 2005, representing an
increase of $133,000, or 6.4 percent, compared to $2.1 mil-
lion in 2004. The increase was caused primarily by increased
regulatory compliance consulting fees. Professional fees
were $2.1 million in 2004, representing an increase of
$901,000, or 62.6 percent, compared to $1.2 million for
2003. The increase was caused primarily by consulting fees
related to the integration with PUB and data processing sys-
tem conversions.
Core deposit premium amortization increased to $2.8 million
in 2005 compared to $1.9 million in 2004 and $121,000 in
2003. The increase is attributable to the acquisition of PUB.
Other operating expenses were $7.8 million for 2005, com-
pared to $9.0 million for 2004, representing a decrease of
$1.2 million, or 13.2 percent. The decreases are primarily
attributable to a $1.2 million decrease in loan referral fees
from 2004 to 2005. Other operating expenses were $9.0 mil-
lion for 2004, compared to $5.4 million for 2003, represent-
ing an increase of $3.5 million, or 65.5 percent. The increases
are primarily attributable to additional operating expenses
associated with the acquisition of PUB.
2
During the year ended December 31, 2004, restructuring
charges totaling $2.1 million were recorded in connection
with the acquisition of PUB, consisting of employee severance
and retention bonuses, leasehold termination costs, and fixed
asset impairment charges associated with planned branch clo-
sures. In 2004, $975,000 of restructuring costs was recognized
related to retention bonuses paid to former PUB employees.
Such costs are treated as period costs and are recognized in
the period services are rendered. In 2005, $509,000 of
restructuring charges was reversed, as severance payments
were lower than anticipated.
Income Taxes
For the year ended December 31, 2005, income taxes of $36.5
million were recognized on pre-tax income of $94.7 million,
representing an effective tax rate of 38.5 percent, compared
to income taxes of $23.0 million recognized on pre-tax
income of $59.7 million, representing an effective tax rate of
38.5 percent, for 2004, and income taxes of $12.4 million
recognized on pre-tax income of $31.6 million, representing
an effective tax rate of 39.3 percent, for 2003.
We have made investments in various tax credit funds totaling
$6.9 million as of December 31, 2005 and recognized
$673,000 of income tax credits earned from qualified low-
income housing investments in 2005. We recognized an
income tax credit of $723,000 for the tax year 2004 from $5.3
million in such investments. We intend to continue to make
such investments as part of an effort to lower the effective tax
rate and to meet our community reinvestment obligations
under the CRA.
As indicated in “Notes to Consolidated Financial Statements,
Note 10 – Income Taxes,” income taxes are 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 different years for income tax purposes than in the financial
statements. These differences in the years that income and
expenses are recognized cause “temporary differences.”
Most of our temporary differences involve recognizing more
expenses in our financial statements than we have been
allowed to deduct for taxes, and therefore we normally have
a net deferred tax asset. At December 31, 2005, we had net
deferred tax assets of $9.7 million.
Financial Condition
Loan Portfolio
Total gross loans increased by $235.2 million, or 10.4 percent,
in 2005. Total gross loans represented 73.2 percent of total
assets at December 31, 2005 compared with 72.9 percent and
70.8 percent at December 31, 2004 and 2003, respectively.
Commercial and industrial loans were $1,431.5 million and
$1,218.3 million at December 31, 2005 and 2004, respectively,
representing 57.3 percent and 53.8 percent, respectively, of
the total loan portfolio. Commercial loans include term loans
and revolving lines of credit. Term loans typically have a matu-
rity of three to five years and are extended to finance the
purchase of business entities, owner-occupied commercial
property, business equipment, leasehold improvements or for
permanent working capital. SBA guaranteed loans usually have
a longer maturity (5 to 20 years). Lines of credit, in general,
are extended on an annual basis to businesses that need tem-
porary working capital and/or import/export financing.
These borrowers are well diversified as to industry, location
and their current and target markets. We manage the portfolio
to avoid concentration in any of the areas mentioned.
Real estate loans were $974.2 million and $956.8 million at
December 31, 2005 and 2004, respectively, representing 39.0
percent and 42.3 percent, respectively, of the total loan port-
folio. Real estate loans are extended to finance the purchase
and/or improvement of commercial real estate and residential
property. The properties generally are investor-owned, but
may be for user-owned purposes. Underwriting guidelines
include, among other things, review of appraised value, limita-
tions 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.
Overall, loan production increased 32.2 percent in 2005 com-
pared to 2004, as the Bank’s customer base continued to
expand and collateral values continued to increase, although
at a slower pace than in past years. However, loan portfolio
growth was restricted by a high level of loan payoffs caused by
the flat yield curve that obtained throughout much of 2005
and aggressive pricing of five- to seven-year fixed-rate com-
mercial real estate loans by certain competitors, which eroded
the Bank’s portfolio of commercial real estate loans tied to the
prime rate.
The shift in the mix of the loan portfolio in 2005 reflects man-
agement’s intent to emphasize commercial and industrial
lending, while continuing to grow the commercial real estate
portfolio at a prudent pace commensurate with the Bank’s
rigorous underwriting standards and asset/liability manage-
ment and profitability objectives.
29
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The following table sets forth the amount of total loans
outstanding in each category as of the dates indicated:
(In Thousands)
Real Estate Loans:
Commercial property
Construction
Residential property ()
Total real estate loans
Commercial and Industrial Loans:
Commercial term loans
Commercial lines of credit
SBA loans (2)
International loans
Total commercial and
industrial loans
Consumer Loans
Total gross loans
2005
2004
2003
2002
2001
Amount Outstanding as of December 31,
$
$
33,650
52,00
,442
94,2
945,20
224,2
55,49
06,520
$
3,539
92,52
0,6
956,46
54,0
20,940
66,25
95,936
$
39,53
43,04
5,4
499,3
433,39
20,56
9,
65,040
,43,492
92,54
2,49,
$
,2,269
,526
2,262,64
,0
54,
,265,266
$
$
$
24,465
39,23
4,9
3,593
346,522
,304
66,443
42,64
52,90
44,46
9,99
$
$
9,529
33,6
49,333
2,40
20,05
9,304
60,053
34,506
42,920
3,645
93,045
(1) As of December 31, 2005, loans held for sale totaling $1.1 million were
(2) As of December 31, 2004, loans held for sale totaling $3.9 million were
included at the lower of cost or market.
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:
Percentage Distribution of Loans as of December 31,
2005
2004
2003
2002
2001
29.3%
6.09%
3.54%
39.00%
3.4%
8.98%
6.23%
4.26%
5.3%
3.69%
00.00%
34.63%
4.09%
3.5%
42.29%
33.33%
8.92%
7.35%
4.24%
53.4%
3.%
00.00%
3.44%
3.40%
4.63%
39.4%
2.%
3.9%
4.4%
3.5%
34.25%
9.55%
.25%
5.4%
56.9%
4.34%
00.00%
35.04%
11.86%
6.2%
4.3%
5.93%
4.49%
00.00%
25.03%
4.24%
6.22%
35.49%
35.31%
12.40%
.5%
4.35%
59.63%
4.%
00.00%
Real Estate Loans:
Commercial property
Construction
Residential property
Total real estate loans
Commercial and Industrial Loans:
Commercial term loans
Commercial lines of credit
SBA loans
International loans
Total commercial and
industrial loans
Consumer Loans
Total gross loans
The following table shows the distribution of undisbursed loan
commitments as of the dates indicated:
(In Thousands)
December 31,
2005
2004
Commitments to extend credit
Commercial letters of credit
Standby letters of credit
Unused credit card lines
Total undisbursed loan commitments
$ 555,36
5,036
42,6
4,92
$ 6,432
$ 36,0
49,699
4,90
4,324
$ 49,632
30
The table below shows the maturity distribution and repricing
intervals of outstanding loans as of December 31, 2005. 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 includes
non-accrual loans of $10.1 million.
(In Thousands)
Real Estate Loans:
Commercial property
Construction
Residential property
Total real estate loans
Commercial and Industrial Loans:
Commercial term loans
Commercial lines of credit
SBA loans
International loans
Total commercial and industrial loans
Consumer Loans
Total gross loans
Loans with predetermined interest rates
Loans with variable interest rates
Within
One Year
After One
But Within
Five Years
After
Five Years
Total
$
$
$
$
59,64
52,00
36,5
,52
25,209
224,2
55,49
06,520
,3,49
3,29
2,2,294
5,25
2,02,09
$
$
$
$
6,05
–
2,95
69,900
34,64
–
–
–
34,64
53,94
5,605
5,605
–
$
$
$
$
6,29
–
49,462
25,60
5,23
–
–
–
5,23
922
2,99
200,49
,00
$
$
$
$
33,650
52,00
,442
94,2
945,20
224,2
55,49
06,520
,43,492
92,54
2,49,
44,669
2,023,49
As of December 31, 2005, there were $258.3 million of loans
outstanding, or 10.34 percent of total gross loans outstanding,
to borrowers who were involved in the accommodation/
hospitality industry. There was no other concentration of loans
to any one type of industry exceeding 10 percent of total
gross loans.
Non-Performing Assets
Non-performing assets consist of loans on non-accrual status, loans
90 days or more past due and still accruing interest, loans restruc-
tured 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 collection. Loans may be restructured by manage-
ment when a borrower has experienced some change in financial
status, causing an inability to meet the original repayment terms,
and where we believe the borrower eventually will overcome
those circumstances and repay the loan in full. OREO consists
of properties acquired by foreclosure or similar means that
management intends to offer for sale.
Management’s classification of a loan as non-accrual is an indica-
tion that there is reasonable doubt as to the full collectibility of
principal or interest on the loan; at this point, we stop recognizing
income from the interest on the loan and reverse any uncollected
interest that had been accrued but unpaid. These loans may or
may not be collateralized, but collection efforts are continu-
ously pursued.
Non-performing loans, which made up all non-performing
assets, were $10.1 million at December 31, 2005, compared
to $6.0 million and $8.7 million at December 31, 2004 and
2003, respectively, representing a 68.5 percent increase in
2005 and a 30.6 percent decrease in 2004. Total gross loans
increased by 10.5 percent in 2005 over 2004 and 78.8 percent
in 2004 over 2003. As a result, the ratio of non-performing
assets to total gross loans increased to 0.41 percent at
December 31, 2005 from 0.27 percent at December 31, 2004,
and decreased to 0.27 percent at December 31, 2004 from
0.68 percent at December 31, 2003. As of December 31, 2005
and 2004, we had no OREO.
Except for non-performing loans set forth below and loans
disclosed as impaired, our management is not aware of any
loans as of December 31, 2005 for which known credit prob-
lems of the borrower would cause serious doubts as to the
ability of such borrowers to comply with their present loan
repayment terms, or any known events that would result in
the loan being designated as non-performing at some future
date. Our management cannot, however, predict the extent to
which a deterioration in general economic conditions, real
estate values, increases in general rates of interest, or changes
in the financial condition or business of borrower may
adversely affect a borrower’s ability to pay.
3
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The following table provides information with respect to the
components of non-performing assets as of December 31 for
the years indicated:
(Dollars in Thousands)
Non-Accrual Loans:
Real estate loans:
Commercial property
Residential property
Commercial and industrial loans
Consumer loans
Total non-accrual loans
Loans 90 Days or More Past Due and Still
Accruing (As to Principal or Interest):
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)
Total non-performing loans
Other real estate owned
Total non-performing assets
Troubled debt restructurings
Non-performing loans as a percentage of total gross loans
Non-performing assets as a percentage of total assets
Allowance for Loan Losses and Allowance for
Off-Balance Sheet Items
Provisions to the allowance for loan losses are made quarterly
to recognize probable loan losses. The quarterly provision is
based on the allowance need, which is calculated using a for-
mula designed to provide adequate allowances for anticipated
losses. The formula is composed of various components. The
2005
2004
2003
2002
2001
$
–
44
9,54
4
0,22
$
–
2
5,50
4
5,06
$
52
,26
6,39
53
,04
$
–
2
5,522
49
5,5
$
,3
30
2,25
94
4,22
–
–
–
9
9
0,3
–
$ 0,3
$
642
0.4%
0.30%
$
$
–
–
69
39
20
6,04
–
6,04
,22
0.2%
0.9%
55
–
–
–
55
,66
–
,66
49
0.6%
0.4%
$
$
356
26
–
–
6
6,45
–
6,45
–
0.65%
0.44%
$
$
602
–
–
9
5,00
–
5,00
–
0.63%
0.43%
$
$
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 per-
centages applied to loans deemed to be of a higher risk. These
percentages are determined based on the prior loss history by
type of loan, adjusted for current economic factors.
(Dollars in Thousands)
Allowance for Loan
Losses Applicable To
Real Estate Loans:
Commercial property
Construction
Residential property ()
Total real estate loans
Commercial and
industrial loans
Consumer loans
Unallocated
Total
(1) Loans held for sale excluded.
2005
2004
December 31,
2003
2002
2001
Allowance
Amount
Total
Loans
Allowance
Amount
Total
Loans
Allowance
Amount
Total
Loans
Allowance
Amount
Total
Loans
Allowance Total
Loans
Amount
$ 2,043 $ 33,650
52,00
,3
93,0
45
9
2,53
$ ,54 $ 3,539 $
349
55
2,35
92,52
0,6
956,46
34 $ 39,53 $ 33 $ 24,465 $ ,0 $ 9,336
63 33,6
42
25 49,526
9
,529 2,40
992
26 39,23
49 4,9
53 3,593
43,04
5,4
499,3
2,035 ,43,492
92,54
,39
–
–
$ 24,963 $ 2,496,53
9,05 ,24,49
,526
,293
–
–
,02 45,93
65,55
3 3,645
54,
69
–
–
$ 22,02 $ 2,25,9 $ 3,349 $ ,239,2 $ ,254 $ 96,39 $ 9,40 $ ,09
9,3 560,30
652 44,46
6
–
,36
46
35
32
of the allowance allocation process, applying specific monitor-
ing policies and procedures in analyzing the existing loan
portfolios. Further allowance assignments are made based on
general and specific economic conditions, as well as perfor-
mance trends within specific portfolio segments and individual
concentrations of credit.
The allowance for loan losses was $25.0 million at December
31, 2005, compared to $22.7 million at December 31, 2004.
The increase in the allowance for loan losses in 2005 was due
primarily to increased specific reserves for impaired loans and
an increase in the qualitative adjustments due to changes in
the qualitative factors. The ratio of the allowance for loan
losses to total gross loans was 1.00 percent at December 31,
2005 and 2004, primarily due to the overall decrease of his-
torical loss factors on pass grade loans. The loan loss estima-
tion, based on historical losses, and specific allocations of the
allowance are performed on a quarterly basis. The allowance
for off-balance sheet items was $2.1 million at December 31,
2005, compared to $1.8 million at December 31, 2004.
The loan loss estimation, based on historical losses, and spe-
cific allocations of the allowance are performed on a quarterly
basis. Adjustments to allowance allocations for specific seg-
ments of the loan portfolio may be made as a result thereof,
based on the accuracy of forecasted loss amounts and other
loan- or policy-related issues.
The 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, we may sustain loan losses in any particular period that
are sizable in relation to the allowance, or exceed the allowance.
In addition, our asset quality may deteriorate 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.
The allowance for loan losses and allowance for off-balance
sheet items are maintained at levels that are believed to be
adequate by management to absorb estimated probable loan
losses inherent in the loan portfolio. The adequacy of the
allowance and the reserve is determined through periodic
evaluations of the loan portfolio and other pertinent factors,
which are inherently subjective as the process calls for various
significant estimates and assumptions. Among others, the esti-
mates 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, we utilize a classification migration
model and individual loan review analysis tools as starting
points for determining the allowance for loan loss and reserve
for credit loss adequacy. Our loss migration analysis tracks
twelve quarters of loan losses to determine historical loss
experience in every classification category (i.e., pass, special
mention, substandard and doubtful) for each loan type, except
consumer loans (auto, mortgage and credit cards), which are
analyzed as homogeneous loan pools. These calculated loss fac-
tors 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 part
33
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
We determine the appropriate overall allowance for loan
losses and allowance for off-balance sheet items based on the
analysis described above, taking into account management’s
judgment. The allowance methodology is reviewed on a peri-
odic basis and modified as appropriate. Based on this analysis,
including the aforementioned factors, we believe that the
allowance for loan losses and allowance for off-balance sheet
items are adequate as of December 31, 2005.
(Dollars in Thousands)
2005
2004
2003
2002
2001
As of and for the Year Ended December 31,
$
22,02
$
3,349
$
,254
$
9,40
$
,26
–
0,566
–
–
–
Allowance for Loan Losses:
Balance at beginning of year
Allowance for loan losses –
PUB acquisition
Actual charge-offs:
Real estate loans:
Commercial property
Commercial and industrial loans
Consumer loans
Total charge-offs
Recoveries on loans
previously charged off:
Real estate loans:
Commercial property
Residential property
Commercial and industrial loans
Consumer loans
Total recoveries
Net loan charge-offs
Provision charged to operating expenses
Balance at end of year
Allowance for Off-Balance Sheet Items:
Balance at beginning of year
Provision charged to operating expenses
Balance at end of year
$
$
$
Ratios:
Net loan charge-offs to average
total gross loans
Net loan charge-offs to total gross
loans at end of period
Allowance for loan losses to average
total gross loans
Allowance for loan losses to total gross
loans at end of period
Net loan charge-offs to allowance
for loan losses
Net loan charge-offs to provision
charged to operating expenses
Allowance for loan losses to
non-performing loans
Balances:
Average total gross loans outstanding
during period
Total gross loans outstanding at
end of period
Non-performing loans at end of period
–
4,3
2
5,9
–
–
2,93
20
2,394
2,04
5,065
24,963
,00
330
2,30
0.2%
0.%
.05%
.00%
$
$
$
–
5,004
4
5,45
–
–
,02
,0
3,05
2,492
22,02
,35
45
,00
0.9%
0.6%
.%
.00%
$
$
$
.23%
6.32%
55.36%
4.6%
9
3,6
53
4,423
2
6
59
322
,20
3,25
5,30
3,349
,05
30
,35
0.29%
0.25%
.9%
.06%
24.0%
60.55%
$
$
$
–
3,23
35
3,5
–
–
05
96
2,595
4,44
,254
656
359
,05
0.29%
0.26%
.26%
.4%
$
$
$
–
3,2
324
4,06
23
–
30
24
94
3,32
,444
9,40
00
(44)
656
0.46%
0.42%
.32%
.9%
23.06%
35.20%
5.43%
229.36%
246.40%
3.55%
54.3%
3.%
.2%
$
$
$
2,32,230
2,49,
0,3
$
$
$
,933,6
2,262,64
6,04
$
$
$
,6,952
,265,266
,66
$
$
$
93,22
9,99
6,45
$
$
$
3,33
93,045
5,00
34
We concentrate the majority of our earning assets in loans. In
all forms of lending, there are inherent risks. We concentrate
the preponderance of our loan portfolio in either commercial
loans or real estate loans. A small part of the portfolio is rep-
resented by installment loans primarily for the purchase of
automobiles.
While we believe that our underwriting criteria are prudent,
outside factors can adversely impact credit quality.
A portion of the portfolio is represented by loans guaranteed
by the SBA, which further reduces the potential for loss. We
also utilize credit review in an effort to maintain loan quality.
Loans are reviewed throughout the year with special attention
given to new loans and those that are classified special men-
tion and worse. In addition to our internal grading system,
loans criticized by this credit review are downgraded with
appropriate allowance added if required.
As indicated above, we formally assess 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 adequate to
absorb probable losses, no assurance can be given that we will
not sustain losses in any given period, which could be substan-
tial in relation to the size of the allowance.
Investment Portfolio
As of December 31, 2005, the investment portfolio was com-
posed primarily of mortgage-backed securities, U.S.
Government agency securities (“Agencies”), collateralized
mortgage obligations, municipal bonds and corporate bonds.
Investment securities available for sale were 99.8 percent and
99.7 percent of the total investment portfolio as of December
31, 2005 and 2004, respectively. Most of the securities held by
us carried fixed interest rates. Other than holdings of
Agencies, there were no investments in securities of any one
issuer exceeding 10 percent of shareholders’ equity as of
December 31, 2005, 2004 or 2003.
We maintain an investment portfolio primarily for liquidity
purposes. As of December 31, 2005, the investment portfolio
balance was $446.7 million, or 13.1 percent of total assets,
compared to $415.8 million, or 13.4 percent of total assets as
of December 31, 2004. During 2005, we purchased $132.7
million of securities, primarily mortgage-backed and Agencies,
to replenish the portfolio for principal repayments in the form
of calls, prepayments and scheduled amortization and to main-
tain an asset mix consistent with our strategic direction.
The following table summarizes the amortized cost, fair value
and distribution of investment securities as of the dates
indicated:
Investment Portfolio as of December 31,
2005
2004
2003
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In Thousands)
Held to Maturity:
Municipal bonds
Mortgage-backed securities
Total held to maturity
$
$
692
35
,049
$
$
692
359
,05
$
$
69
399
,090
$
$
69
402
,093
$
$
690
63
,32
$
$
69
645
,334
Available for Sale:
Mortgage-backed securities
U.S. Government agency securities
Collateralized mortgage obligations
Municipal bonds
Corporate bonds
Other securities
Total available for sale
$ 49,3
29,59
3,06
,536
,235
4,999
$ 446,3
$ 4,26
2,3
,456
3,220
,053
5,053
$ 442,63
$ 4,06
9,345
93,2
,
,30
4,43
$ 45,
$ 49,4
9,6
92,539
3,66
,444
4,433
$ 4,3
$ ,39
0,45
25,49
60,4
3,64
5,055
$ 42,92
$ ,44
,426
24,096
6,403
3,903
4,96
$ 43,2
35
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The following table summarizes the maturity and/or repricing
schedule for investment securities and their weighted-average
yield as of December 31, 2005:
Within One Year
After One But
Within Five Years
After Five But
Within Ten Years
After Ten Years
(Dollars in Thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Mortgage-backed securities (1)
U.S. Government agency
securities
Collateralized mortgage
obligations ()
Municipal bonds (2)
Corporate bonds
Other securities
$ 55,50
3.94%
$ 45,23
4.56%
$ 4,224
4.3%
$ 5,656
5.5%
4,2
3.20%
2,93
4.32%
–
–
–
–
5,95
20
–
5,053
$ 9,62
3.0%
.2%
–
6.5%
3.93%
5,95
,40
,053
–
$ 225,525
4.25%
4.94%
4.36%
–
4.36%
,646
,09
–
–
$ 56,959
4.64%
6.9%
–
–
4.93%
–
64,45
–
–
$ 69,0
–
6.30%
–
–
6.2%
(1) Mortgage-backed securities and collateralized mortgage obligations have
(2) The yield on municipal bonds has been computed on a tax-equivalent basis, using
contractual maturities through 2035. The above table is based on the expected
prepayment schedule.
an effective marginal rate of 35 percent.
Deposits
Total deposits at December 31, 2005, 2004 and 2003 were
$2,826.1 million, $2,528.8 million and $1,445.8 million,
respectively, representing an increase of $297.3 million, or 11.8
percent, in 2005 and $1,083.0 million, or 74.9 percent, in 2004.
At December 31, 2005, 2004 and 2003, total time deposits
outstanding were $1,439.8 million, $1,031.7 million and $667.8
million, respectively, representing 50.9 percent, 40.8 percent and
46.2 percent, respectively, of total deposits. This growth reflects
the shift away from low-yielding accounts that normally occurs as
interest rates rise and depositors take advantage of the greater
interest rate differentials available in the market.
Demand deposits and money market accounts decreased by
$78.5 million, or 5.8 percent, in 2005 and increased by $662.1
million, or 97.2 percent, in 2004. Core deposits (defined as
demand, money market and savings deposits) decreased
$110.7 million, or 7.4 percent, to $1,386.4 million as of
December 31, 2005 from $1,497.1 million as of December 31,
2004, as depositors shifted funds into higher yielding certifi-
cates of deposit. At December 3, 2005, non-interest-bearing
demand deposits represented 26. percent of total deposits
compared to 2.9 percent at December 31, 2004.
Average deposits for the years ended December 31, 2005,
2004 and 2003 were $2,632.3 million, $2,129.7 million and
$1,416.6 million, respectively. Average deposits grew by 23.6
percent in 2005 and 50.3 percent in 2004.
We accept brokered deposits on a selective basis at prudent
interest rates to augment deposit growth. There were $7.4
million and $40.0 million of brokered deposits as of December
31, 2005 and 2004, respectively. We also had $200.0 million of
state time deposits over $100,000 with a weighted-average
interest rate of 3.87 percent and 2.08 percent as of December
31, 2005 and 2004, respectively.
36
The table below summarizes the distribution of average deposits
and the average rates paid for the periods indicated:
2005
2004
2003
For the Year Ended December 31,
(Dollars In Thousands)
Demand, non-interest-bearing
Money market checking
Savings
Time deposits of $00,000 or more
Other time deposits
Total deposits
Average
Balance
$ 5,509
539,6
3,6
959,904
242,996
$ 2,632,254
Average
Rate
Average
Balance
2.40%
.54%
3.33%
2.93%
$ 665,6
466,0
3,59
6,555
253,4
$ 2,29,24
Average
Rate
.3%
.36%
.9%
2.3%
Average
Balance
$ 422,453
20,69
9,00
36,0
302,65
$ ,46,564
Average
Rate
.24%
.95%
.92%
2.43%
The table below summarizes the maturity of time deposits in
denominations of $100,000 or greater at December 31 of the
years indicated:
December 31,
(Dollars in Thousands)
2005
2004
2003
Three months or less
Over three months
through six months
Over six months through
twelve months
Over twelve months
$ 5,25
$ 3,205
$ 26,24
24,33
232,23
5,034
32,4
4,64
$ ,6,950
3,5
4,369
$ 56,50
52,5
,2
$ 3,944
Borrowings
Our borrowings mostly take the form of advances from the
Federal Home Loan Bank of San Francisco (“FHLB”), over-
night Federal funds, and junior subordinated debt associated
with trust preferred securities.
At December 31, 2005, advances from the FHLB were $43.5
million, a decrease of $22.8 million, or 34.4 percent, from the
December 31, 2004 balance of $66.4 million. In 2005, we used
liquidity available from the growth of the portfolio of certifi-
cates of deposit to pay down borrowings to the extent it was
cost-effective to do so.
During the first half of 2004, we issued two junior subordi-
nated notes bearing interest at three-month London InterBank
Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million
and one junior subordinated note bearing interest at three-month
LIBOR plus 2.63 percent totaling $20.6 million. Our out-
standing subordinated debentures related to these offerings,
the proceeds of which were used to finance the purchase of PUB,
totaled $82.4 million at December 31, 2005.
Interest Rate Risk Management
Interest rate risk indicates our exposure to market interest rate
fluctuations. The movement of interest rates directly and
inversely affects the economic value of fixed-income assets,
which is the present value of future cash flow discounted by the
current interest rate; under the same conditions, the higher the
current interest rate, the higher the denominator of discounting.
Interest rate risk management is intended to decrease or
increase the level of our exposure to market interest rates. The
level of interest rate risk can be managed through such means
as the changing of gap positions and the volume of fixed-income
assets. For successful management of interest rate risk, we use
various methods to measure existing and future interest rate
risk exposures. In addition to regular reports used in business
operations, repricing gap analysis, stress testing and simulation
modeling are the main measurement techniques used to quantify
interest rate risk exposure.
3
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The following table shows the most recent status of our gap
position.
(Dollars In Thousands)
Assets
Cash
Federal funds sold
Securities purchased under
agreements to resell
FRB and FHLB stock
Securities:
Fixed rate
Floating rate
Loans:
Fixed rate
Floating rate
Non-accrual
Deferred loan fees and allowance
35,5
,952,655
–
Less Than
Three Months
After
Three
But Within
One Year
After One
Year But
Within
Five Years
After
Five Years
Non-
Interest-
Sensitive
Total
$
–
40,000
20,000
–
,23
6,
$
$
–
–
–
–
–
–
–
–
29,339
–
4,69
3,02
–
225,52
36,26
5,69
04,
–
$
–
–
$ 03,4
–
$ 03,4
40,000
–
24,5
26,62
,03
63,96
–
–
–
–
–
–
20,000
24,5
392,60
5,052
–
–
0,22
46,62
2,00,56
0,22
for loan losses
Other assets
Total assets
–
–
$ 2,066,36
–
22,3
$ 06,249
–
–
$ 542,35
–
6,944
$ 330,352
(2,224)
23,539
$ 36,94
(2,224)
33,96
$ 3,44,252
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand deposits
Savings
Money market checking
Time deposits:
Fixed rate
Floating rate
Other borrowed funds
Junior subordinated debentures
Other liabilities
Shareholders’ equity
Total liabilities and
$
2,459
6,43
0,20
$ 92,446
39,93
4,24
$ 40,09
5,453
223,55
$
66,66
,25
5,42
$
–
–
–
$ 3,6
2,54
526,
00,402
4,955
2,03
82,406
–
–
52,925
–
5,000
–
–
–
,332
–
33,4
–
–
–
3
–
5,
–
–
–
–
–
–
–
32,624
426,
,290,96
4,955
46,33
2,406
32,624
426,
shareholders’ equity
$ ,093,
$ 94,55
$ 3,44
$ 3,06
$ 459,40
$ 3,44,252
Repricing gap
Cumulative repricing gap
Cumulative repricing gap as a
percentage of total assets
Cumulative repricing gap as a
percentage of interest-earning assets
$ 92,60
$ 92,60
$ (,309)
94,299
$
$ (96,09)
$ (101,798)
$ 92,25
90,4
$
$
$
(90,4)
–
2.49%
2.6%
(2.9%)
2.65%
32.25%
3.3%
(3.3%)
3.00%
–
–
The repricing gap analysis measures the static timing of repricing
risk of assets and liabilities, i.e., a point-in-time analysis measur-
ing the difference between assets maturing or repricing in
a period and liabilities maturing or repricing within the same
time period. Assets are assigned to maturity and repricing
categories based on their expected repayment or repricing
dates, and liabilities are assigned based on their repricing or
maturity dates. Core deposits that have no maturity dates
(demand deposits, savings and money market checking) are
assigned to categories based on expected decay rates.
On December 31, 2005, the cumulative repricing gap as a
percentage of interest-earning assets in the less-than-three
month period was 32.25 percent. This was a large decrease
from the previous year’s figure of 46.00 percent. The decrease
3
was primarily caused by a shift in the mix of the loan portfolio
into fixed-rate loans, funded primarily by certificates of
deposit, as the mix of the deposits portfolio shifted away from
core deposits and the balance of loans linked to the prime rate
decreased $48.6 million. The cumulative repricing percentage
in the three-to-twelve month period also moved significantly
lower, reaching 3.13 percent. 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 (10.30)
percent. The floating gap position in the less-than-one year
period was 7.00 percent.
The following table summarizes the status of the gap position
as of the dates indicated.
Less Than Three Months
December 31,
Less Than Twelve Months
December 31,
(Dollars in Thousands)
2005
2004
2005
2004
Cumulative
repricing gap
$ 92,60 $ ,24,50 $ 94,299 $ 45,6
Percentage of
total assets
Percentage of
interest-
earning assets
2.49%
4.06%
2.6%
4.53%
32.25%
46.00%
3.3%
6.29%
The spread between interest income on interest-earning assets
and interest expense on interest-bearing liabilities is the prin-
cipal component of net interest income, and interest rate
changes substantially affect our financial performance. We
emphasize capital protection through stable earnings rather
than maximizing yield. In order to achieve stable earnings, we
prudently manage our assets and liabilities and closely moni-
tor the percentage changes in net interest income and equity
value in relation to limits established within our guidelines.
To supplement traditional gap analysis, we perform simulation
modeling to estimate the potential effects of interest rate
changes. The following table summarizes one of the stress
simulations performed to forecast the impact of changing
interest rates on net interest income and the market value of
interest-earning assets and interest-bearing liabilities reflected
on our balance sheet. This sensitivity analysis is compared to
policy limits, which specify the maximum tolerance level for
net interest income exposure over a one-year horizon, given
the basis point adjustment in interest rates reflected below.
Rate Shock Table
(Dollars in Thousands)
Percentage Changes
Change in Amount
Change in
Interest Rate
200%
00%
(00%)
(200%)
Net
Interest
Income
4.%
.3%
(.42%)
(4.9%)
Economic
Value of
Equity
Net
Interest
Income
Economic
Value of
Equity
(.%) $ 22,6 $ (3,522)
(4.66%) $ ,3 $ (20,43)
5.4% $ (,394) $ 22,565
0.54% $ (22,96) $ 46,234
In the above stress simulation, for a 00 basis point decline in
interest rates, we may be exposed to a 7.42 percent decline in
net interest income and a 5.14 percent increase in the eco-
nomic value of equity. For a 100 basis point increase in interest
rates, net interest income may increase by 7.37 percent, but the
economic value of equity may decrease by 4.66 percent. For a
200 basis point increase in interest rates, net interest income
may increase by 14.78 percent, but the economic value of
equity may decrease by 8.78 percent. For a 200 basis point
decrease in interest rates, net interest income may decrease by
14.91 percent, but the economic value of equity may increase
by 10.54 percent. All projected changes remained well within
internal policy guidelines at December 31, 2005.
The estimated sensitivity does not necessarily represent our
forecast and the results may not be indicative of actual change
to our net interest income. These estimates are based upon a
number of assumptions including: the nature and timing of
interest rate levels including yield curve shape, prepayments on
loans and securities, pricing strategies on loans and deposits,
and replacement of asset and liability cash flows. While the
assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature
of these conditions, including how customer preferences or
competitor influences might change.
39
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
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
profitability. The Bank’s major liquidity on the asset side stems
from available cash positions, Federal funds sold and short-
term investments categorized as available for sale securities,
which can be disposed of without significant capital losses in
the ordinary business cycle. Liquidity sources on the liability
side come from borrowing capacities, which include Federal
funds lines, repurchase agreements, and Federal Home Loan
Bank advances. Thus, maintenance of high quality loans and
securities that can be used for collateral in repurchase agree-
ments or other secured borrowings is another important fea-
ture 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. In addi-
tion, 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 liquidity position and to preempt any liquidity
crisis. Six specific statistics, which include the loans-to-assets
ratio, off-balance sheet items and dependence on non-core
deposits, foreign deposits, lines of credit and liquid assets, are
reviewed regularly for liquidity management purposes. In
2005, the mix of the deposits portfolio shifted towards time
deposits, and strong growth in certificates of deposit offset a
decline in core deposits.
December 31,
2005
2004
2003
3%
35%
42%
%
2%
9%
5%
4%
33%
23%
2%
20%
6%
40%
45%
20%
0%
30%
Liquidity Ratios:
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
Net loans/total assets
Investments/deposits
Loans and investments/
deposits
Off-balance sheet items/
total assets
The net loans to total assets ratio remained at 72 percent as of
December 31, 2005. Despite fluctuations during the year, net
loans grew at approximately the same rate as assets. During
the year, the ratio of net loans to total assets generally was in
the range of 71 percent to 74 percent. The investments to
deposits ratio decreased to 19 percent as of December 31,
2005, while the ratio of loans and investments to deposits
decreased to 106 percent. Off-balance sheet items as a per-
centage of total assets increased at December 31, 2005 to 18
percent from 15 percent at December 31, 2004, and the total
amount increased to $671.4 million at December 31, 2005
from $479.6 million at December 31, 2004. The increase was
primarily due to a $188.0 million increase in unused loan
commitments. During the year, the percentage of off-balance
sheet items to total assets generally ranged from 15 percent to
percent. The ratios of short-term non-core funding to total
assets and short-term investments to short-term non-core
funding dependence were 42 percent and 18 percent, respec-
tively, at December 31, 2005, compared to 33 percent and 23
percent, respectively, at December 31, 2004.
Foreign deposit risk deals with dependency on foreign deposits
that could adversely affect the Bank’s liquidity. These liabilities
are assumed to be volatile in accordance with the variability
of social, political and environmental conditions in foreign
countries. On a quarterly basis, the Bank monitors foreign
deposits and Brazilian deposits separately, and exposures to both
categories remained well within the Bank’s internal guidelines.
There were increases to the lines of credit secured by us to
meet our liquidity needs. As of December 31, 2005, we main-
tained a total of $154.0 million in credit lines. In addition, we
maintained eight master repurchase agreements, all of which
can furnish liquidity to us in consideration of bond collateral.
We also can meet our liquidity needs through borrowings
from the FHLB. We are eligible to borrow up of 25 percent of
our total assets from the FHLB.
As of December 31, 2005, there were no material commit-
ments for capital expenditures. We raise capital in the form of
deposits, borrowings (primarily FHLB advances and junior
subordinated debentures) and equity, and expect to continue
to rely upon deposits as the primary source of capital.
06%
09%
6%
Off-Balance Sheet Arrangements
%
5%
%
For a discussion of off-balance sheet arrangements,
see “Item 1. Business – Small Business Administration
Guaranteed Loans” and “Item 1. Business – Off-Balance Sheet
Commitments” in the Company’s Annual Report on Form
10-K for the year ended December 31, 2005.
40
Contractual Obligations
Our contractual obligations as of December 31, 2005 are as
follows:
Contractual Obligations (In Thousands)
Time deposits
Long-term debt obligations
Operating lease obligations
Total contractual obligations
Less Than
One Year
,422,9
5,000
2,50
,430,55
$
$
More Than
One Year and
Less Than
Three Years
More Than
Three Years
and Less Than
Five Years
More Than
Five Years
$
$
,06
20,000
4,36
32,443
$
$
9,405
3,4
2,45
25,23
$
$
23
,522
5,44
93,243
Total
$ ,440,690
25,933
4,45
,5,46
$
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued a revision to SFAS No. 123R (Revised),
“Share-Based Payment” (“SFAS No. 123R”). This Statement addresses
the accounting for share-based payment transactions in which a
company receives employee services in exchange for either equity
instruments of the company or liabilities that are based on the fair
value of the company’s equity instruments or that may be settled
by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for share-based compensation
transactions using the intrinsic method that is currently used and
requires that such transactions be accounted for using a fair value-
based method and recognized as expense in the Consolidated
Statement of Income. This Statement replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees.” In addition, this Statement amends
SFAS No. 95, “Statement of Cash Flows,” to require that excess tax
benefits be reported as a financing cash inflow rather than as a
reduction of taxes paid. This Statement is effective for Hanmi
Financial as of January 1, 2006. We have elected to use the
modified prospective method to adopt SFAS No. 123R.
As a result of the adoption of SFAS No. 123R, we estimate that
we will recognize additional compensation expense of approxi-
mately $894,000, net of taxes, or $.02 per diluted share, for the
full year 2006. Estimated future levels of compensation expense
recognized related to stock based awards would be impacted by
new awards, modifications to awards, or cancellation of awards
after the adoption of SFAS No. 123R.
In February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and SFAS No. 140” (“SFAS No. 155”). This
Statement:
• permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that oth-
erwise would require bifurcation;
• clarifies which interest-only strips and principal-only
strips are not subject to SFAS No. 133;
• establishes a requirement to evaluate interests in securi-
tized financial assets to identify interests that are free-
standing derivatives or hybrid financial instruments that
contain an embedded derivative requiring bifurcation;
• clarifies that concentrations of credit risks in the form of
subordinations are not embedded derivatives; and
• amends SFAS No. 140 to eliminate the prohibition on a
QSPE from holding a derivative financial instrument that
pertains to a beneficial interest other than another deriva-
tive financial instrument.
SFAS No. 155 is effective for all financial instruments acquired
or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. Early adoption of this state-
ment is allowed. We have not determined the financial impact
of the adoption of SFAS No. 155 or whether we will adopt
SFAS No. 155 in 2006.
4
Hanmi Financial
Management’s Discussion & Analysis of Financial Condition and Results of Operations
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS No. 154 replaces
Accounting Principles Board (“APB”) Opinion No. 20,
“Accounting Changes,” and FASB Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements (an Amendment
of APB Opinion No. 28).” SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application as
the required method for reporting a change in accounting
principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when
retrospective application is impracticable. The reporting of a
correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154
is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 31, 2005. We
will adopt this pronouncement beginning in fiscal year 2006.
SFAS No. 154 is not expected to have a material impact on
our financial position or results of operations.
In March 2004, the FASB issued Emerging Issues Task Force
(“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments” (“EITF No.
03-1”). This EITF describes a model involving three steps:
(1) determine whether an investment is impaired; (2) deter-
mine whether the impairment is other-than-temporary; and
(3) recognize any impairment loss in earnings. The EITF also
requires several additional disclosures for cost-method invest-
ments. In September 2004, the FASB approved the deferral of
the effective date for EITF No. 03-1 pending reconsideration
of implementation guidance relating to debt securities that are
impaired solely due to market interest rate fluctuation.
On November 3, 2005, FASB Staff Position (“FSP”) FAS Nos.
115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments,” was issued. This FSP
nullifies certain requirements of EITF No. 03-1 and supersedes
EITF Topic No. D-44, “Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair
Value.” This FSP nullified the requirements of paragraphs 10 to 18
of EITF No. 03-1, carried forward the requirements of para-
graphs and 9 of EITF No. 03-1 with respect to cost-method
investments, and carried forward the disclosure requirements
included in paragraphs 21 and 22 of EITF No. 03-1 and related
examples. The guidance in this FSP is applicable to reporting
periods beginning after December 15, 2005. Adoption is not
expected to have a material impact on our financial position,
results of operations or related disclosures.
In December 2003, the American Institute of Certified Public
Accountants (“AICPA”) released Statement of Position 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for dif-
ferences between contractual cash flows and cash flows
expected to be collected from an investor’s initial investment
in loans or debt securities acquired in a transfer if those
differences are attributable to credit quality. SOP 03-3 is effec-
tive for loans acquired in fiscal years beginning after December
15, 2004. Adoption in 2005 did not have a material impact on
our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchange
of Non-Monetary Assets, an Amendment of APB Opinion No. 29,
‘Accounting for Non-Monetary Transactions’” (“SFAS No. 153”).
SFAS No. 153 is based on the principle that exchange of non-
monetary assets should be measured based on the fair market
value of the assets exchanged. SFAS No. 153 eliminates the
exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial sub-
stance. SFAS No. 153 is effective for non-monetary asset
exchanges in fiscal periods beginning after June 15, 2005. We
are currently assessing the provisions of SFAS No. 153 and its
impact on our financial position and results of operations.
Quantitative and Qualitative Disclosures
About Market Risk
For quantitative and qualitative disclosures regarding market
risks in Hanmi Bank’s portfolio, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations
– Interest Rate Risk Management” and “– Liquidity and Capital
Resources.”
42
Management’s Report on Internal Control Over Financial Reporting
Management of Hanmi Financial Corporation (“Hanmi
Financial”) is responsible for establishing and maintaining
adequate internal control over financial reporting pursuant to
the rules and regulations of the Securities and Exchange
Commission. Hanmi Financial’s internal control over financial
reporting is a process designed to provide reasonable assur-
ance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
purposes in accordance with U.S. generally accepted account-
ing principles. Internal control over financial reporting
includes those written policies and procedures that:
• pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dis-
positions of the assets of the company;
• provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted
accounting principles;
• provide reasonable assurance that receipts and expendi-
tures of the company are being made only in accordance
with authorizations of management and directors of the
company; and
• provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over finan-
cial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of com-
pliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Hanmi Financial’s inter-
nal control over financial reporting as of December 31, 2005.
Management based this assessment on criteria for effective internal
control over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s
assessment included an evaluation of the design of Hanmi
Financial’s internal control over financial reporting and testing of
the operational effectiveness of its internal control over financial
reporting. Management reviewed the results of its assessment with
the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of
December 31, 2005, Hanmi Financial maintained effective
internal control over financial reporting.
KPMG LLP, the independent registered public accounting
firm that audited and reported on the consolidated financial
statements of Hanmi Financial, has issued a report on manage-
ment’s assessment of Hanmi Financial’s internal control over
financial reporting as of December 31, 2005. The report
expresses unqualified opinions on management’s assessment
and on the effectiveness of Hanmi Financial’s internal control
over financial reporting as of December 31, 2005.
43
Hanmi Financial
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control
Over Financial Reporting included in Item 9A, that Hanmi
Financial Corporation and subsidiary (the Company) main-
tained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of The Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other pro-
cedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projec-
tions of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the consolidated statements of financial condition of Hanmi
Financial Corporation and subsidiary as of December 31, 2005
and 2004, and the related consolidated statements of income,
changes in shareholders’ equity and comprehensive income,
and cash flows for each of the years in the three-year period
ended December 31, 2005, and our report dated March 15,
2006 expressed an unqualified opinion on those consolidated
financial statements.
Los Angeles, California
March 15, 2006
44
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited the accompanying consolidated statements
of financial condition of Hanmi Financial Corporation and
subsidiary as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders’
equity and comprehensive income, and cash flows for each of
the years in the three-year period ended December 31, 2005.
These consolidated financial statements are the responsibility
of the 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 the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the finan-
cial 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 financial
position of Hanmi Financial Corporation and subsidiary as of
December 31, 2005 and 2004, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the effectiveness of Hanmi Financial Corporation’s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated
March 15, 2006 expressed an unqualified opinion on manage-
ment’s assessment of, and the effective operation of, internal
control over financial reporting.
Los Angeles, California
March 15, 2006
45
Hanmi Financial
Consolidated Statements of Financial Condition
(Dollars in Thousands)
Assets
Cash and due from banks
Federal funds sold and securities purchased under agreements to resell
$
Cash and cash equivalents
Federal Reserve Bank stock
Federal Home Loan Bank stock
Securities held to maturity, at amortized cost (fair value: 2005 – $1,051;
2004 – $1,093)
Securities available for sale, at fair value
Loans receivable, net of allowance for loan losses of $24,963 and $22,702
at December 31, 2005 and 2004, respectively
Loans held for sale, at the lower of cost or fair value
Customers’ liability on acceptances
Premises and equipment, net
Accrued interest receivable
Deferred income taxes
Servicing asset
Goodwill
Core deposit intangible
Bank-owned life insurance
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing
Interest-bearing:
Savings
Money market checking
Time deposits of $100,000 or more
Other time deposits
Total deposits
Accrued interest payable
Acceptances outstanding
Other borrowed funds
Junior subordinated debentures
Other liabilities
Total liabilities
Commitments and contingencies (Notes 16 and 17)
Shareholders’ equity:
Common stock, $.001 par value; authorized 200,000,000 shares;
49,821,798 shares and 49,330,704 shares issued at December 31, 2005
and 2004, respectively
Additional paid-in capital
Unearned compensation
Accumulated other comprehensive income (loss) – unrealized gain
(loss) on securities available for sale, interest-only strips and
interest rate swaps, net of income taxes of ($1,671) and $744 at
December 3, 2005 and 2004, respectively
Retained earnings
Less treasury stock, at cost; 1,163,000 shares and 0 shares at
December 31, 2005 and 2004, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements
December 31,
2005
2004
03,4
60,000
63,4
2,350
2,23
,049
442,63
2,46,05
,065
,432
20,4
4,20
9,65
3,90
209,05
,69
22,3
5,3
$ 3,44,252
$
55,64
2,000
2,64
2,099
9,62
,090
4,3
2,230,992
3,50
4,59
9,69
0,029
5,009
3,46
209,643
,46
2,6
5,0
$ 3,04,
$
3,6
$
29,53
2,54
526,
,6,950
2,0
2,26,4
,9
,432
46,33
2,406
2,2
2,9,45
50
339,99
(,50)
(4,33)
2,30
446,
53,62
63,662
56,50
25,20
2,52,0
,00
4,59
69,293
2,406
2,093
2,04,2
49
334,932
–
,035
63,94
399,90
(20,04)
426,
$ 3,44,252
–
399,90
$ 3,04,
46
Hanmi Financial
Consolidated Statements of Income
(Dollars in Thousands, Except Per Share Data)
2005
2004
2003
Years Ended December 31,
Interest Income:
Interest and fees on loans
Interest on investments
Interest on term Federal funds sold
Interest on Federal funds sold
Total interest income
Interest Expense:
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Non-Interest Income:
Service charges on deposit accounts
Trade finance fees
Remittance fees
Other service charges and fees
Bank-owned life insurance income
Increase in fair value of derivatives
Other income
Gain on sales of loans
Gain on sales of securities available for sale
Total non-interest income
Non-Interest Expenses:
Salaries and employee benefits
Occupancy and equipment
Data processing
Advertising and promotion
Supplies and communication
Professional fees
Amortization of core deposit intangible
Decrease in fair value of embedded options
Other operating expense
Merger-related expenses
Total non-interest expenses
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
Dividends declared per share
See accompanying notes to consolidated financial statements
4
$
$
$
$
$
9,0
,50
–
,59
99,0
54,92
,99
62,
36,996
5,395
3,60
5,2
4,269
2,22
2,496
45
,05
2,459
3,02
32,26
36,39
,9
4,44
2,93
2,556
2,20
2,5
4
,
(509)
69,33
94,64
36,455
5,229
.
.
$
$
$
$
6,
,32
–
3
34,366
26,26
6,349
32,6
0,49
2,90
9,42
4,44
4,044
,653
,46
3
232
,6
2,99
34
2,399
33,540
,09
4,540
3,00
2,433
2,06
,2
–
,96
2,053
66,566
59,65
22,95
36,00
0.
0.4
$
$
$
$
64,505
2,40
225
2
,4
9,24
,549
20,96
56,62
5,60
50,94
0,339
2,
952
,29
499
35
40
2,5
,094
20,022
2,24
5,9
3,00
,635
,496
,6
2
–
5,44
–
39,325
3,63
2,425
9,23
0.6
0.6
49,4,5
49,942,356
0 .20
42,26,964
43,5,25
0.20
$
2,092,0
2,662,026
0.20
$
Hanmi Financial
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
Years Ended December 31, 2005, 2004 and 2003
Common Stock – Number of Shares
(Dollars in Thousands)
Balance – December 31, 2002
Stock options exercised
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2003
Stock options exercised
Warrants exercised
Stock issued through private placement
Stock issued in PUB acquisition
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2004
Stock options exercised
Restricted stock award
Amortization of unearned compensation
Tax benefit from exercise of stock options
Stock repurchase
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2005
See accompanying notes to consolidated financial statements
Gross Shares
Issued and
Outstanding
2,30,66
495,954
–
–
–
2,326,20
60,56
20,000
,94,654
2,4,654
–
–
–
49,330,04
39,094
00,000
–
–
–
–
–
–
Treasury
Shares
Net Shares
Issued and
Outstanding
2,30,66
495,954
–
–
–
2,326,20
60,56
20,000
,94,654
2,4,654
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(,63,000)
–
49,330,04
39,094
00,000
–
–
(,63,000)
–
–
–
–
–
49,2,9
(,63,000)
4,65,9
$
50
$ 339,99
$
(,50)
$
(4,33)
$ 2,30
$
(20,04)
$ 426,
4
Common
Stock
$
2
$
Additional
Paid-in
Capital
99,92
3,4
Unearned
Compensation
$
Years Ended December 31, 2005, 2004 and 2003
Shareholders’ Equity
Accumulated
Other
Comprehensive
Income
$
2,05
$
22,40
$
Treasury
Stock,
at Cost
Total
Shareholders’
Equity
$ 24,46
–
–
–
–
2
–
2
–
49
–
–
–
–
–
–
–
–
–
03,06
3,234
90
,02
56,3
334,932
2,55
,5
29
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(,5)
665
(,9)
36
35,95
Retained
Earnings
–
(5,636)
9,23
–
–
–
–
–
–
–
–
–
–
–
–
(,9)
36,00
63,94
(9,3)
5,229
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
649
,035
(5,4)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(20,04)
3,4
(5,636)
9,23
(,9)
,494
39,46
3,235
90
,0
56,50
(,9)
36,00
649
3,349
399,90
2,56
–
665
29
(20,04)
(9,3)
5,229
(5,4)
52,
Years Ended December 31, 2005, 2004 and 2003
Common Stock – Number of Shares
Gross Shares
Issued and
Outstanding
2,30,66
495,954
Treasury
Shares
Net Shares
Issued and
Outstanding
2,30,66
495,954
2,326,20
60,56
20,000
,94,654
2,4,654
49,330,04
39,094
00,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,326,20
60,56
20,000
,94,654
2,4,654
49,330,04
39,094
00,000
–
–
–
–
–
–
–
–
–
–
–
(,63,000)
(,63,000)
(Dollars in Thousands)
Balance – December 31, 2002
Stock options exercised
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2003
Stock options exercised
Warrants exercised
Stock issued through private placement
Stock issued in PUB acquisition
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2004
Stock options exercised
Restricted stock award
Amortization of unearned compensation
Tax benefit from exercise of stock options
Stock repurchase
Cash dividends
Comprehensive income:
Net income
Change in unrealized gain on securities
available for sale, interest-only strips and
interest rate swaps, net of tax
Total comprehensive income
Balance – December 31, 2005
See accompanying notes to consolidated financial statements
Years Ended December 31, 2005, 2004 and 2003
Treasury
Stock,
at Cost
$
Shareholders’ Equity
Accumulated
Other
Comprehensive
Income
$
2,05
–
–
–
$
Retained
Earnings
22,40
–
(5,636)
9,23
(,9)
–
$
Common
Stock
2
–
–
–
–
2
–
2
–
–
–
49
–
–
–
–
–
–
–
Additional
Paid-in
Capital
$
99,92
3,4
–
Unearned
Compensation
–
$
–
–
–
–
03,06
3,234
90
,02
56,3
–
–
–
334,932
2,55
,5
–
29
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(,5)
665
–
–
–
–
–
36
–
–
–
–
–
–
649
,035
–
–
–
–
–
–
–
35,95
–
–
–
–
(,9)
36,00
–
63,94
–
–
–
–
–
(9,3)
5,229
(5,4)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(20,04)
–
–
–
Total
Shareholders’
Equity
$ 24,46
3,4
(5,636)
9,23
(,9)
,494
39,46
3,235
90
,0
56,50
(,9)
36,00
649
3,349
399,90
2,56
–
665
29
(20,04)
(9,3)
5,229
(5,4)
52,
$ 426,
49,2,9
(,63,000)
4,65,9
$
50
$ 339,99
$
(,50)
$
(4,33)
$ 2,30
$
(20,04)
49
Hanmi Financial
Consolidated Statements of Cash Flows
(In Thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization of premises and equipment
Amortization of premiums and discounts on investments
Amortization of core deposit intangible
Amortization of unearned compensation
Provision for credit losses
Federal Reserve Bank and
Federal Home Loan Bank stock dividends
Gain on sales of securities available for sale
Increase in fair value of derivatives
Decrease in fair value of embedded options
Gain on sales of loans
Gain on sales of other real estate owned
Loss on sales of premises and equipment
Tax benefit from exercise of stock options
Deferred tax (benefit) expense
Origination of loans held for sale
Proceeds from sales of loans held for sale
Change in:
(Increase) decrease in accrued interest receivable
Increase in cash surrender value of
bank-owned life insurance
(Increase) decrease in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in other liabilities
Net cash and cash equivalents provided by
operating activities
Cash Flows from Investing Activities:
Proceeds from matured term federal funds sold
Proceeds from sales of Federal Home Loan Bank Stock
Proceeds from matured or called securities available for sale
Proceeds from matured or called securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from sales of other real estate owned
Net increase in loans receivable
Purchases of Federal Reserve Bank and
Federal Home Loan Bank stock
Purchases of securities available for sale
Purchases of bank-owned life insurance
Purchases of premises and equipment
Acquisition of Pacific Union Bank, net of cash acquired
Net cash and cash equivalents used in investing activities
Years Ended December 31,
2005
2004
2003
$
5,229
$
36,00
$
9,23
2,04
565
2,5
665
5,395
(362)
()
(,05)
4
(3,02)
–
34
29
(2,0)
(6,09)
6,55
(4,09)
(45)
(5,34)
4,
4,06
2,44
3,246
,2
–
2,90
(49)
(34)
(232)
–
(2,99)
–
5
–
694
(53,55)
54,3
55
(3)
,02
(444)
(2,5)
,55
2
22
–
5,60
(0)
(,094)
(35)
–
(2,5)
(2)
6
–
(2,069)
(45,5)
35,00
(,53)
(500)
(,32)
,0
5,506
6,944
3,34
3,5
–
–
9,5
–
,360
–
(242,0)
(2,264)
(32,00)
–
(3,3)
–
(29,63)
–
5,03
20,39
239
53,063
–
(20,65)
(9,4)
(22,34)
(0,000)
(2,049)
(63,49)
(49,44)
30,000
–
0,346
6,24
45,05
204
(265,64)
(5,669)
(35,2)
–
(2,03)
–
(39,44)
50
(In Thousands)
Cash Flows from Financing Activities:
Increase in deposits
Issuance of junior subordinated debentures
Proceeds from exercises of stock options
Proceeds from exercises of stock warrants
Stock issued through private placement
Cash paid to acquire treasury stock
Cash dividends paid
(Decrease) increase in other borrowed funds
Net cash and cash equivalents provided by financing activities
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
Accrued dividend
Reconciliation of Acquisition of Pacific Union Bank, Net of Cash Acquired:
Fair value of assets acquired
Cash and cash equivalents acquired
Non-cash financing of purchase price and liabilities assumed:
Issuance of common stock
Liabilities assumed
Acquisition of Pacific Union Bank, net of cash acquired
See accompanying notes to consolidated financial statements
$
$
$
$
$
$
$
$
$
$
Years Ended December 31,
2005
2004
2003
29,30
–
2,56
–
–
(20,04)
(9,3)
(22,962)
24,00
36,33
2,64
63,4
4,266
3,650
–
2,433
46,23
2,406
3,235
90
,0
–
(,40)
(29,495)
6,59
64,569
62,595
6,56
–
3,4
–
–
–
(4,220)
45,202
305,99
(60,)
22,2
$
$
$
$
$
2,64
$
62,595
29,920
25,400
–
2,46
$
$
$
$
9,
9,469
22
,46
–
–
–
–
–
$ ,33,2
$
(04,33) $
(56,50) $
(,059,5) $
$
63,49
$
–
–
–
–
–
5
Hanmi Financial
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Federal Home Loan Bank Stock
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 significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial
statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of
Hanmi Financial Corporation (“Hanmi Financial”, “we” or
“us”) and our wholly owned subsidiary, Hanmi Bank (the
“Bank”), after elimination of all material intercompany trans-
actions and balances.
Hanmi Financial 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 our
formation, each of the Bank’s shares was exchanged for one share
of Hanmi Financial with an equal value.
Our primary operations are related to traditional banking activ-
ities, including the acceptance of deposits and the lending and
investing of money through operation of the Bank. The Bank is
a community bank conducting general business banking with its
primary market encompassing the multi-ethnic population of
Los Angeles, Orange, San Diego, San Francisco and Santa Clara
counties. The Bank’s full-service offices are located in business
areas where many of the businesses are run by immigrants and
other minority groups. The Bank’s client base reflects the multi-
ethnic composition of these communities. The Bank is a
California state-chartered, FDIC-insured financial institution.
On April 30, 2004, we completed our acquisition of Pacific
Union Bank (“PUB”), a $1.2 billion (assets) commercial bank
headquartered in Los Angeles that also served primarily the
Korean-American community. As of December 31, 2005, the
Bank maintained a branch network of 22 locations, serving
individuals and small- to medium-sized businesses 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.
Federal Reserve Bank Stock
As a member of the Federal Reserve Bank of San Francisco
(“FRB”), the Bank is required to maintain stock in the FRB
based on a specified ratio relative to our capital. FRB stock is
carried at cost and may be sold back to the FRB at its carrying
value. Both cash and stock dividends received are reported as
dividend income.
As a member of the Federal Home Loan Bank of San Francisco
(“FHLB”), the Bank is required to own common stock in the
FHLB based upon our balance of residential mortgage loans and
outstanding FHLB advances. FHLB stock is carried at cost and
may be sold back to the FHLB at its carrying value. Both cash
and stock dividends received are reported as dividend income.
Securities
Securities are classified into three categories and accounted
for as follows:
1. Securities that we have the positive intent and ability to
hold to maturity are classified as “held-to-maturity” and
reported at amortized cost;
2. 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
3. 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 component of shareholders’ equity as Accumulated
Other Comprehensive Income, Net of Income Taxes.
Accreted discounts and amortized premiums on investment
securities are included in interest income using the effective
interest method over the remaining period to the call date or
contractual maturity and, in the case of mortgage-backed
securities and securities with call features, adjusted for anticipated
prepayments. 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 and
a new cost basis established for the security.
We also have a minority investment of 4.99 percent in a non-
publicly traded company, Pacific International Bank. The invest-
ment is included in Other Assets on the Consolidated
Statements of Financial Condition and is carried at cost. As of
December 31, 2005 and 2004, the carrying value was $511,000.
We monitor the investment for impairment and makes appro-
priate reductions in carrying value when necessary.
Derivative Instruments
We account for derivatives in accordance with the provisions
of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133). Under SFAS No. 133, all
derivatives are recognized on the balance sheet at their fair
value. On the date the derivative contract is entered into, we
designate the derivative as a fair value hedge, a cash flow hedge,
a hedge of a net investment in a foreign operation, or a non-
hedging derivative. Fair value hedges include hedges of the fair
value of a recognized asset or liability and certain foreign
52
currency hedges. Cash flow hedges include hedges of the vari-
ability of cash flows to be received or paid related to a recog-
nized asset or liability and certain foreign currency hedges.
Changes in the fair value of derivatives designated as fair value
hedges, along with the change in fair value on the hedged asset
or liability that is attributable to the hedged risk, are recorded in
current period earnings. Changes in the fair value of derivatives
designated as cash flow hedges, to the extent effective as a
hedge, are recorded in accumulated other comprehensive income
and reclassified into earnings in the period during which the
hedged item affects earnings. Changes in the fair value of deriva-
tives used to hedge our net investment in foreign subsidiaries,
to the extent effective as a hedge, are recorded in common share-
holders’ equity as a component of the cumulative translation
adjustment account within accumulated other comprehensive
income. Changes in the fair value of derivative instruments not
designated as hedging instruments and ineffective portions of
changes in the fair value of hedging instruments are recognized in
other income in the current period.
We formally document all relationships between hedging
instruments and hedged items. This documentation includes
our risk management objective and strategy for undertaking
various hedge transactions, as well as how hedge effectiveness
and ineffectiveness will be measured. This process includes
linking derivatives to specific assets and liabilities on the
balance sheet. We also formally assess, both at the hedge’s
inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge,
we discontinue hedge accounting prospectively.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective hedge, the
derivative will continue to be carried on the balance sheet at its
fair value, with changes in its fair value recognized in current
period earnings. For fair value hedges, the formerly hedged asset
or liability will no longer be adjusted for changes in fair value and
any previously recorded adjustments to the carrying value of the
hedged asset or liability will be amortized in the same manner
that the hedged item affects income. For cash flow hedges,
amounts previously recorded in Accumulated Other
Comprehensive Income will be reclassified into income as
earnings are impacted by the variability in the cash flows of
the hedged item.
If the hedging instrument is terminated early, the derivative is
removed from the balance sheet. Accounting for the adjust-
ments to the hedged asset or liability or adjustments to
Accumulated Other Comprehensive Income are the same as
described above when a derivative no longer qualifies as an
effective hedge.
53
If the hedged asset or liability is sold or extinguished, the
derivative will continue to be carried on the balance sheet at its
fair value, with changes in its fair value recognized in current
period earnings. The hedged item, including previously recorded
mark-to-market adjustments, is derecognized immediately as a
component of the gain or loss upon disposition.
Loans
We originate 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 designated as held for sale
at origination and are recorded at the lower of cost or fair value,
determined on an aggregate 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
adjustments. Upon sales of such loans, we receive 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 percent to 12 percent
and a constant prepayment rate ranging from 6 percent to 16
percent. The servicing asset is amortized in proportion to and
over the period of estimated servicing income. Management
periodically evaluates the servicing 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 contractually specified servic-
ing fee for the estimated life of the loan, calculated using the same
assumptions as noted above. Such interest-only strips are accounted
for at their estimated fair value, with unrealized gains or losses
recorded as adjustments to Other Comprehensive Income.
Loans Held for Sale
Loans originated and intended for sale in the secondary 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.
Loan Interest Income and Fees
Interest on loans is credited to income as earned and is
accrued only if deemed collectible. Direct loan origination
costs are offset by loan origination fees with the net amount
deferred and recognized over the contractual lives of the loans
in interest income as a yield adjustment using the effective
interest method. Discounts or premiums associated with pur-
chased 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.
Hanmi Financial
Notes to Consolidated Financial Statements
Loans are placed on non-accrual status when, in the opinion of
management, the full timely collection of principal or interest is
in doubt. Generally, the accrual of interest is discontinued when
principal or interest payments become more than 90 days past
due. However, in certain instances, we may place a particular loan
on non-accrual status earlier, depending upon the individual cir-
cumstances surrounding the loan’s delinquency. When an asset is
placed on non-accrual status, previously accrued but unpaid inter-
est is reversed against current income. Subsequent collections of
cash are applied as principal reductions when received, except
when the ultimate collectibility of principal is probable, in which
case interest payments are credited to income. Non-accrual assets
may be restored to accrual status when principal and interest
become current and full repayment is expected. Interest income
is recognized on the accrual basis for impaired loans not meeting
the criteria for non-accrual.
Allowance for Loan Losses
Management believes the allowance for loan losses is adequate to
provide for probable 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. Our lending is
concentrated in consumer, commercial, construction and real
estate loans in the greater Los Angeles/Orange County area.
Although management believes the level of the allowance is
adequate to absorb probable 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.
Non-performing loans are those that are not earning income,
and (1) full payment of principal and interest is no longer
anticipated, (2) principal or interest is 90 days or more delin-
quent, or (3) the loan payment or term has been restructured
in accordance with troubled debt restructure procedures. The
Bank generally places loans on non-accrual status when interest
or principal payments become 90 days or more past due unless
the outstanding principal and interest is adequately secured and,
in the opinion of management, is deemed to be in the process
of collection. When loans are placed on non-accrual status,
accrued but unpaid interest is reversed against the current year’s
income, and interest income on non-accrual loans is recorded
on a cash basis. The Bank may treat payments as interest income
or return of principal depending upon management’s opinion
of the ultimate risk of loss on the individual loan. Cash
payments are treated as interest income where management
believes the remaining principal balance is fully collectible.
Additionally, the Bank may place loans that are not 90 days
past due on non-accrual status, if management reasonably
believes the borrower will not be able to comply with the
contractual loan repayment terms and collection of principal
or interest is in question.
Loan losses are charged, and recoveries are credited, to the
allowance account. Additions to the allowance account are
charged to the provision for credit losses. The allowance for
loan losses is maintained at a level considered adequate by man-
agement to absorb probable losses in the loan portfolio. The
adequacy of the allowance is determined by management based
upon an evaluation and review of the loan portfolio, consideration
of historical loan loss experience, current economic 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 probable that all
amounts, including principal and interest, will not be collected
in accordance with the contractual terms of the loan agreement.
The amount of impairment and any subsequent changes are
recorded through the provision for credit losses as an adjust-
ment to the allowance for loan losses. Accounting standards
require that an impaired loan be measured based on:
1. the present value of the expected future cash flows,
discounted at the loan’s effective interest rate; or
2. the loan’s observable fair value; or
3. the fair value of the collateral, if the loan is collateral-
dependent.
We evaluate installment loans for impairment on a pooled basis.
These loans are considered to be smaller balance, homogeneous
loans and are evaluated on a portfolio basis considering the
projected net realizable value of the portfolio compared to the
net carrying value of the portfolio.
Hanmi Bank follows the “Interagency Policy Statement on the
Allowance for Loan and Lease Losses” and analyzes the allowance
for loan losses on a monthly basis. In addition, as an integral
part of the quarterly credit review process of the Bank, the
allowance for loan losses and allowance for off-balance sheet
items are reviewed for adequacy. The California Department
of Financial Institutions (“DFI”) and/or the FRB require the
Bank to recognize additions to the allowance for loan losses
based upon their assessment of the information available to
them at the time of their examinations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
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.
54
Estimated future amortization expense of the CDI balance is
as follows: $2,379,000 in 2006; $2,039,000 in 2007;
$1,675,000 in 2008; $1,284,000 in 2009; $865,000 in 2010;
and $450,000 thereafter.
Junior Subordinated Debentures
We have established three statutory business trusts that are
wholly owned subsidiaries of Hanmi Financial. In three separate
private placement transactions, the Trusts issued variable rate
capital securities representing undivided preferred beneficial
interests in the assets of the Trusts. Hanmi Financial is the owner
of all the beneficial interests represented by the common secu-
rities of the Trusts.
FASB Interpretation No. 46R, “Consolidation of Variable Interest
Entities (Revised December 2003) – an Interpretation of ARB No.
51,” requires that variable interest entities be consolidated by
a company if that company is subject to a majority of expected
loss from the variable interest entity’s activities or is entitled
to receive a majority of the entity’s expected residual returns
or both. Junior subordinated debt represents liabilities of the
Hanmi Financial to the Trusts.
Income Taxes
We provide 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
differences 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. A valuation allowance is provided
when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Stock-Based Compensation
Our employee stock-based compensation arrangements are
measured under the provisions of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees.”
Accordingly, compensation cost for stock options and
restricted stock awards is measured as the excess, if any, of the
quoted market price of our stock at the date of grant over the
exercise price an employee must pay to acquire the stock. No
compensation expense has been recognized for the stock
Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, amounted to $209.1 million
and $209.6 million as of December 31, 2005 and 2004, respec-
tively. We adopted SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), effective January 1, 2002. SFAS No.
142 required that goodwill be recorded at the reporting unit
level. Reporting units are defined as an operating segment. We
have identified one reporting unit – our banking operations.
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.
We ceased amortization of goodwill as of January 1, 2002.
Our impairment test is performed in two phases. The first
step involves comparing the fair value of the reporting unit
with its carrying amount, including goodwill. Fair value of the
reporting unit is estimated using two different valuation
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. This
additional procedure 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, 2005 and 2004, management is
unaware of any circumstances that would indicate a potential
impairment of goodwill.
Core Deposit Intangible
We amortize the core deposit intangible (“CDI”) balance using
an accelerated method over eight years. As required upon
adoption of SFAS No. 142, we 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, 2005. As required by SFAS No. 142,
the CDI balance is assessed for impairment or recoverability
whenever events or changes in circumstances indicate the car-
rying amount may not be recoverable. The CDI recoverability
analysis is consistent with our policy for assessing impairment
of long-lived assets. As of and for the year ended December 31,
2005 and 2004, management is not aware of any circumstances
that would indicate impairment of the CDI asset, and no
impairment charges were recorded through earnings in 2005.
As of December 31, 2005 and 2004, the gross carrying amount
of the CDI balance totaled $13.8 million and $13.8 million,
respectively, and the related accumulated amortization totaled
$5.1 million and $2.3 million, respectively. The total amorti-
zation expense on the CDI balance was $2,785,000,
$1,872,000 and $121,000 during the years ended December
31, 2005, 2004 and 2003, respectively.
55
Hanmi Financial
Notes to Consolidated Financial Statements
option plan, as stock options were granted at fair value at the
date of grant. Had compensation expense for the stock option
plan been determined based on the fair values estimated using
the Black-Scholes model at the grant dates for previous
awards, our net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
(Dollars in Thousands,
Except Per Share Amounts)
Net income – as reported
Add – stock-based employee
compensation expense
included in reported net
income, net of related tax
effects (restricted
stock award)
Deduct – total stock-based
employee compensation
expense determined
under fair value-based
method for all awards
subject to SFAS No. 23,
net of related tax effects
Net income – pro forma
Earnings per share –
as reported:
Basic
Diluted
Earnings per share –
pro forma:
Basic
Diluted
Years Ended December 31,
2005
2004
2003
$ 5,229
$ 36,00
$ 9,23
409
–
–
(,24)
$ 5,424
(40)
$ 36,292
(52)
$ ,692
$
$
$
$
.
.
.
.5
$
$
$
$
0.
0.4
0.6
0.3
$
$
$
$
0.6
0.6
0.6
0.65
The estimated weighted-average fair value of options granted was
$4.96 per share in 2005, $3.94 per share in 2004 and $3.30 per
share in 2003. The weighted-average fair value of options granted
under our fixed stock option plan was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of 1.18
percent, 1.40 percent and 0.00 percent in 2005, 2004 and 2003,
respectively; expected volatility of 32.6 percent, 32.4 percent
and 31.0 percent in 2005, 2004 and 2003; respectively; expected
lives of 4.1 years, 4.2 years and 4.5 years in 2005, 2004
and 2003, respectively; and risk-free interest rates of 4.13
percent, 2.90 percent and 1.87 percent in 2005, 2004 and
2003, respectively.
In February 2005, 100,000 shares of restricted stock were
awarded to Dr. Sung Won Sohn, our Chief Executive Officer.
20,000 of these shares vested immediately, and an additional
20,000 shares will vest each year over the next four years on
each anniversary date of the grant. The market value of the
shares awarded totaled $1,815,000. The 20,000 shares that
vested immediately were recorded as compensation expense
and the remaining 80,000 shares were recorded as unearned
compensation, a separate component of shareholders’ equity.
Unearned compensation is being amortized against income
over the four-year vesting period. For the year ended
December 31, 2005, compensation expense of $665,000 was
recognized in the Consolidated Statements of Income.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing
earnings available to common shareholders by the weighted-
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that
could share in the earnings.
Treasury Stock
We use the cost method of accounting for treasury stock. The
cost method requires us to record the reacquisition cost of
treasury stock as a deduction from shareholders’ equity on the
Consolidated Statements of Financial Condition.
Impairment of Long-Lived Assets
We account for long-lived assets in accordance with the provi-
sions of SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” 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
recoverable. 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 generated by the asset.
If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the car-
rying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the car-
rying 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued a revision to SFAS No. 123R (Revised), “Share-
Based Payment” (“SFAS No. 123R”). This Statement addresses
the accounting for share-based payment transactions in which
a company receives employee services in exchange for either
equity instruments of the company or liabilities that are based
on the fair value of the company’s equity instruments or that
may be settled by the issuance of such equity instruments.
SFAS No. 123R eliminates the ability to account for share-
based compensation transactions using the intrinsic method
that is currently used and requires that such transactions be
56
accounted for using a fair value-based method and recognized
as expense in the Consolidated Statement of Income. This
Statement replaces SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees.” In addition, this Statement amends SFAS No. 95,
“Statement of Cash Flows,” to require that excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid. This Statement is effective for Hanmi Financial
as of January 1, 2006. We have elected to use the modified
prospective method to adopt SFAS No. 123R.
As a result of the adoption of SFAS No. 123R, we estimate
that we will recognize additional compensation expense of
approximately $894,000, net of taxes, or $.02 per diluted
share, for the full year 2006. Estimated future levels of com-
pensation expense recognized related to stock based awards
would be impacted by new awards, modifications to awards,
or cancellation of awards after the adoption of SFAS
No. 123R.
In February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and SFAS No. 140” (“SFAS No. 155”). This
Statement:
• permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that oth-
erwise would require bifurcation;
• clarifies which interest-only strips and principal-only
strips are not subject to SFAS No. 133;
• establishes a requirement to evaluate interests in securi-
tized financial assets to identify interests that are free-
standing derivatives or hybrid financial instruments that
contain an embedded derivative requiring bifurcation;
• clarifies that concentrations of credit risks in the form of
subordinations are not embedded derivatives; and
• amends SFAS No. 140 to eliminate the prohibition on a
QSPE from holding a derivative financial instrument that
pertains to a beneficial interest other than another deriva-
tive financial instrument.
SFAS No. 155 is effective for all financial instruments acquired
or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. Early adoption of this state-
ment is allowed. We have not determined the financial impact
of the adoption of SFAS No. 155 or whether we will adopt
SFAS No. 155 in 2006.
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS No. 154 replaces
Accounting Principles Board (“APB”) Opinion No. 20,
“Accounting Changes,” and FASB Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements (an Amendment
of APB Opinion No. 28).” SFAS No. 154 provides guidance on
5
the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application as
the required method for reporting a change in accounting
principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when
retrospective application is impracticable. The reporting of a
correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154
is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 31, 2005. We
will adopt this pronouncement beginning in fiscal year 2006.
SFAS No. 154 is not expected to have a material impact on
our financial position or results of operations.
In March 2004, the FASB issued Emerging Issues Task Force
(“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments” (“EITF No.
03-1”). This EITF describes a model involving three steps:
(1) determine whether an investment is impaired; (2) deter-
mine whether the impairment is other-than-temporary; and
(3) recognize any impairment loss in earnings. The EITF also
requires several additional disclosures for cost-method invest-
ments. In September 2004, the FASB approved the deferral of
the effective date for EITF No. 03-1 pending reconsideration
of implementation guidance relating to debt securities that are
impaired solely due to market interest rate fluctuation.
On November 3, 2005, FASB Staff Position (“FSP”) FAS Nos.
115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments,” was issued. This FSP
nullifies certain requirements of EITF No. 03-1 and supersedes
EITF Topic No. D-44, “Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair
Value.” This FSP nullified the requirements of paragraphs 10 to 18
of EITF No. 03-1, carried forward the requirements of para-
graphs 8 and 9 of EITF No. 03-1 with respect to cost-method
investments, and carried forward the disclosure requirements
included in paragraphs 21 and 22 of EITF No. 03-1 and related
examples. The guidance in this FSP is applicable to reporting peri-
ods beginning after December 15, 2005. Adoption is not
expected to have a material impact on our financial position,
results of operations or related disclosures.
In December 2003, the American Institute of Certified Public
Accountants (“AICPA”) released Statement of Position 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows
expected to be collected from an investor’s initial investment
in loans or debt securities acquired in a transfer if those
differences are attributable to credit quality. SOP 03-3 is
effective for loans acquired in fiscal years beginning after
December 15, 2004. Adoption in 2005 did not have a material
impact on our financial position or results of operations.
Hanmi Financial
Notes to Consolidated Financial Statements
In December 2004, the FASB issued SFAS No. 153, “Exchange
of Non-Monetary Assets, an Amendment of APB Opinion No. 29,
‘Accounting for Non-Monetary Transactions’” (“SFAS No. 153”).
SFAS No. 153 is based on the principle that exchange of non-
monetary assets should be measured based on the fair market
value of the assets exchanged. SFAS No. 153 eliminates the
exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial
substance. SFAS No. 153 is effective for non-monetary asset
exchanges in fiscal periods beginning after June 15, 2005.
Adoption is not expected to have a material impact on our
financial position or results of operations.
Reclassifications
Certain reclassifications were made to the prior year’s presen-
tation to conform to the current year’s presentation.
Note 2 – Business Combination
On April 30, 2004, we completed our acquisition of PUB and
merged PUB with Hanmi Bank. We paid $164.6 million in cash
to acquire 5,537,431 of the PUB shares owned by Korea
Exchange Bank. All of the remaining PUB shares were
converted in the acquisition into shares of Hanmi Financial’s
common stock based on an exchange ratio of 2.312 Hanmi
Financial shares for each PUB share.
In addition, all outstanding PUB employee stock options were
converted into 137,414 options to purchase Hanmi Financial
stock valued at $1.1 million in total. Based on Hanmi
Financial’s average price of $12.53 for the five-day trading
period from April 28 through May 4, 2004, the total consider-
ation paid for PUB was $324.6 million and resulted in the
recognition of goodwill aggregating $207.2 million.
Purchase Price and Acquisition Costs
The purchase price was as follows:
(Dollars in Thousands, Except Share Prices)
Common Stock:
Number of shares of PUB stock outstanding as of April 30, 2004
Less shares acquired for cash
Number of shares of PUB stock to be exchange for Hanmi stock
Exchange ratio
Stock issued in PUB acquisition
Multiplied by Hanmi Financial’s average stock price for the period two days before
through two days after the April 29, 2004 pricing of the merger agreement
Stock Options:
Estimated fair value of 3,44 Hanmi Financial stock options to be issued in
Exchange for 59,443 PUB outstanding stock options, calculated using the
Black-Scholes option pricing model, modified for dividends, with model
assumptions estimated as of April 30, 2004 and a Hanmi Financial stock price
of $2.53, the average stock price for the period two days before through
two days after the April 29, 2004 pricing of the merger agreement
Cash
Transaction Costs:
Cash
Stock warrants
Total purchase price
0,90,2
(5,53,43)
5,3,390
2.32
2,4,654
$
$
2.53
55,606
,063
64,562
3,320
45
324,696
$
5
The purchase price was allocated based on the fair values of
the assets acquired and liabilities assumed:
(In Thousands)
Book value of net assets acquired
Adjustments:
Adjustment to record acquired securities at estimated fair value
Adjustment to record acquired loans at estimated fair value
Adjustment to record acquired fixed assets at estimated fair value
Adjustment to record core deposit intangible asset
Adjustment to record various other assets at estimated fair value
Adjustment to record interest-bearing deposits at fair value
Adjustment to record other borrowings at fair value
Adjustment to record severance benefits associated with the elimination of positions, termination of
certain contractual obligations of PUB and other miscellaneous adjustments
Adjustment to record deferred tax liability
Adjustment to record goodwill associated with the acquisition of PUB
Total purchase price
$
0,63
(,49)
36
5,459
3,3
5
(264)
(9)
(,)
(,94)
20,22
324,696
$
As of December 31, 2005, the carrying amount of goodwill
from the PUB acquisition was $207.2 million compared to
$207.8 million at December 31, 2004, a decrease of $585,000.
The decrease was due to adjustments based on the final valu-
ation of net assets acquired.
impairment of fixed assets (primarily leasehold improvements)
associated with such branches. Of the $2,053,000 provided in
2004, $767,000 and $777,000 was utilized and charged against
the related liability in 2005 and 2004, respectively. The remain-
ing balance of $509,000 was reversed in 2005.
The fair value of PUB net assets acquired was as follows:
(In Thousands)
Assets:
Cash and due from banks
Federal fund sold
Federal home loan bank stock
Securities available for sale
Loans receivable, net of allowance
for loan losses
Premises and equipment
Accrued interest receivable
Goodwill
Core deposit intangible
Other assets
Total assets
Liabilities:
Deposits
Borrowings
Other liabilities
Total liabilities
Net assets acquired
$
2,43
6,900
6,256
5,905
65,43
,66
3,49
20,22
3,3
2,
$ ,32,05
$
936,699
05,9
5,52
$ ,05,009
$ 324,696
The core deposit intangible is being amortized using an
accelerated method over eight years. None of the goodwill bal-
ance is expected to be deductible for income tax purposes.
Merger-related costs recognized as expenses during 2004
consisted of employee retention bonuses, the costs of vacating
duplicative branches within the existing network and the
59
Certain costs (primarily PUB employee severance, data pro-
cessing contract termination costs, and the costs of vacating
duplicative branches within PUB’s network) were recognized
as liabilities assumed in the business combination or impair-
ments of fixed assets associated with such branches.
Accordingly, they have been considered part of the purchase
price of PUB and recorded as an increase in the balance of
goodwill. Of the $4,515,000 provided, $834,000 and
$2,444,000 was utilized and charged against the related liability
in 2005 and 2004, respectively, and $1,142,000 was reversed in
2005. The remaining balance of $95,000 is related to certain
lease commitments that may continue into 2009.
We incurred the following merger-related costs for the years
ended December 31, 2005 and 2004:
(In Thousands)
Merger-related costs – 2005:
Expensed
(Credited)
Included in
Cost of
Acquisition
Reversal of merger-related costs
Total merger-related
costs – 2005
$
$
(509) $ (,42)
(509) $ (,42)
Merger-related costs – 2004:
Employee termination costs
Contract termination costs
Leasehold termination costs
Asset impairments
Total merger-related
costs – 2004
$ ,364
–
34
34
$ ,425
,2
,262
–
$ 2,053
$ 4,55
Hanmi Financial
Notes to Consolidated Financial Statements
Note 3 – Securities Purchased Under Agreements
to Resell
The following is a summary of the securities purchased under
agreements to resell at December 31, 2005 and 2004:
We purchase government agency securities and/or whole
loans under agreements to resell the same securities (reverse
repurchase agreements) with primary dealers. Amounts
advanced under these agreements represent cash and cash
equivalents. Securities subject to the reverse repurchase
agreements are held in the name of Hanmi Financial by deal-
ers 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 additional
securities in the name of Hanmi Financial.
(Dollars in Thousands)
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
Note 4 – Securities
December 31,
2005
2004
$ 20,000
$ 0,000
$ 3,3
$
55
$ 25,000
$ 0,000
3.3%
2.33%
The following is a summary of the securities held to
maturity:
Note 4 – Securities
The following is a summary of the securities held to
maturity:
(In Thousands)
December 31, 2005:
Municipal bonds
Mortgage-backed securities
December 31, 2004:
Municipal bonds
Mortgage-backed securities
The following is a summary of securities available for sale:
(In Thousands)
December 31, 2005:
Mortgage-backed securities
U.S. Government agencies
Collateralized mortgage obligations
Municipal bonds
Corporate bonds
Other
December 31, 2004:
Mortgage-backed securities
U.S. Government agencies
Collateralized mortgage obligations
Municipal bonds
Corporate bonds
Other
Amortized
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Estimated
Fair Value
$
$
$
$
692
35
,049
69
399
,090
$
$
$
$
–
2
2
–
3
3
$
$
$
$
–
–
–
–
–
–
$
$
$
$
692
359
,05
69
402
,093
Amortized
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Estimated
Fair Value
$ 49,3
29,59
3,06
,536
,235
4,999
$ 446,3
$ 4,06
9,345
93,2
,
,30
4,43
$ 45,
$
$
$
$
44
–
3
,5
–
56
2,06
,04
3
236
,93
6
34
3,69
$
$
$
$
2,
,6
,65
4
2
02
5,936
546
49
69
93
2
3
,60
$ 4,26
2,3
,456
3,220
,053
5,053
$ 442,63
$ 49,4
9,6
92,539
3,66
,444
4,433
$ 4,3
60
The amortized cost and estimated fair value of investment
securities at December 3, 2005, by contractual maturity, are
shown below. Although mortgage-backed securities and
collateralized mortgage obligations have contractual maturities
through 2035, expected maturities may differ from contrac-
tual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment
penalties.
(In Thousands)
Within one year
Over one year through five years
Over five years through ten years
Over ten years
Mortgage-backed securities
Collateralized mortgage obligations
Available for Sale
Held to Maturity
Amortized
Cost
$ 5,245
29,260
,29
62,55
24,359
49,3
3,06
232,39
$ 446,3
Estimated
Fair Value
$ 5,205
2,392
,39
64,45
24,39
4,26
,456
22,24
$ 442,63
Amortized
Cost
Estimated
Fair Value
$
$
–
–
692
–
692
35
–
35
,049
$
$
–
–
692
–
692
359
–
359
,05
Gross unrealized losses on investment securities and the fair value
of the related securities, aggregated by investment category and
length of time that individual securities have been in a continuous
unrealized loss position, were as follows as of December 31,
2005 and 2004:
(In Thousands)
Available for Sale – December 31, 2005:
Mortgage-backed securities
U.S. Government agency securities
Collateralized mortgage obligations
Municipal bonds
Corporate bonds
Other
Available for Sale – December 31, 2004:
Mortgage-backed securities
U.S. Government agency securities
Collateralized mortgage obligations
Municipal bonds
Corporate bonds
Other
Less than 12 Months
Holding Period
12 Months or More
Total
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
$
$
$
$
922
,62
33
3
06
2
3,45
35
264
49
–
2
–
460
$ ,9
2,93
29,2
4,26
5,02
99
$ 23,30
$ 22,4
3,0
4,3
–
3,03
–
$ 54,53
$
$
$
$
,265
94
,232
43
6
2,9
4
605
–
93
–
3
,4
$ 40,364
9,2
42,9
2,353
2,95
,99
$ 00,45
$ 3,42
39,24
–
3,5
–
,962
$ 2,99
$
$
$
$
2,
,6
,65
4
2
02
5,936
546
69
49
93
2
3
,60
$ 9,255
22,3
2,269
6,49
,053
2,9
$ 33,6
$ 60,5
53,604
4,3
3,5
3,03
,962
$ 3,502
All individual securities that have been in a continuous unreal-
ized loss position for 12 months or longer at December 31,
2005 and 2004 had investment grade ratings upon purchase.
The issuers of these securities have not, to our knowledge,
established any cause for default on these securities and the
various rating agencies have reaffirmed these securities’ long-
term investment grade status at December 31, 2005 and 2004.
These securities have fluctuated in value since their purchase
dates as market interest rates have fluctuated. However, we have
the ability, and management intends to hold these securities
until their fair values recover to cost. Therefore, in manage-
ment’s opinion, all securities that have been in a continuous
unrealized loss position for the past 12 months or longer as of
December 31, 2005 and 2004 are not other-than-temporarily
impaired, and therefore, no impairment charges as of December
31, 2005 and 2004 are warranted.
6
Hanmi Financial
Notes to Consolidated Financial Statements
Securities with carrying values of $279.7 million and $307.5
million as of December 31, 2005 and 2004, respectively, were
pledged to secure public deposits and for other purposes as
required or permitted by law.
There were $117,000, $134,000 and $1,094,000 in net real-
ized gains on sales of securities available for sale during the years
ended December 31, 2005, 2004 and 2003, respectively. In
2005, $3.6 million ($2.6 million, net of tax) of unrealized
losses arose during the year and were included in comprehen-
sive income and $114,000 ($83,000, net of tax) of previously
unrealized gains were realized in earnings. In 2004, $983,000
($713,000, net of tax) of unrealized losses arose during the
year and were included in comprehensive income and $167,000
($122,000, net of tax) of previously unrealized losses were
realized in earnings. In 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.
Note 5 – Loans Receivable and Allowance for Loan Losses
Loans receivable consisted of the following at December 31:
(In Thousands)
Real Estate Loans:
Commercial property
Construction
Residential property
Total real
estate loans
Commercial and
Industrial Loans:
Commercial term loans
Commercial lines
of credit
SBA loans
International loans
Total commercial
loans
Consumer Loans
Total gross loans
Allowance for loans losses
Deferred loan fees
Loans receivable, net
2005
2004
$ 33,650
52,00
,3
$ 3,539
92,52
0,6
93,0
956,46
945,20
54,0
224,2
55,49
06,520
20,940
62,435
95,936
,43,492
92,54
2,496,53
(24,963)
(3,5)
$ 2,46,05
,24,49
,526
2,25,9
(22,02)
(5,09)
$ 2,230,992
Activity in the allowance for loan losses and allowance for off-
balance sheet items was as follows:
As of and for the Years Ended December 31,
2005
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
2004
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
Total
2003
Allowance
for Off-
Balance
Sheet
Items
Total
Allowance
for Loan
Losses
Total
$ 22,02 $
,00 $ 24,502 $ 3,349 $
,35 $ 4,34 $ ,254 $
,05 $ 2,269
–
5,065
(5,9)
–
330
–
–
0,566
–
0,566
–
5,395
(5,9)
2,492
(5,45)
45
–
2,90
(5,45)
5,30
(4,423)
–
30
–
–
5,60
(4,423)
2,394
–
2,394
,0
–
,0
,20
–
,20
$ 24,963 $
2,30 $ 2,093 $ 22,02 $
,00 $ 24,502 $ 3,349 $
,35 $ 4,34
(In Thousands)
Balance – beginning
of year
Allowance for loan
losses acquired in
PUB acquisition
Provision charged to
operating expense
Loans charged off
Recoveries, net of
charge-offs
Balance – end
of year
62
The following is a summary of interest foregone on impaired
loans for the years ended December 31:
(In Thousands)
2005
2004
2003
Servicing Assets
Changes in loan servicing rights, net of amortization, were as
follows:
(In Thousands)
Balance – beginning of year
Additions
Amortization
Balance – end of year
December 31,
2005
2004
$ 3,46
,50
(,06)
$ 3,90
$ 2,364
2,2
(690)
$ 3,46
At December 31, 2005 and 2004, we serviced loans sold to
unaffiliated parties in the amounts of $183.4 million and
$173.7 million, respectively. All of the loans being serviced
were SBA loans.
Note 6 – Premises and Equipment
The following is a summary of the major components of
premises and equipment:
(In Thousands)
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Software
Accumulated depreciation
and amortization
Total premises and equipment, net
December 31,
2005
2004
$ 6,20
,04
2,095
,924
3
34,330
$ 6,20
,354
,6
,45
–
32,435
(3,546)
$ 20,4
(2,44)
$ 9,69
Depreciation and amortization expense totaled $2,704,000,
$2,447,000 and $1,558,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
Note 7 – Deposits
Time deposits by maturity were as follows:
(In Thousands)
December 31,
2005
2004
Less than three months
After three months to six months
After six months to twelve months
After twelve months
Total time deposits
$ 0,40
34,5
40,69
6,
$ ,439,5
$ 534,394
29,34
4,54
33,624
$ ,03,00
For time deposits having a remaining term of more than one
year, the aggregate amount of maturities for each of the five
years following the balance sheet date are as follows: none in
2006; $7,027,000 in 2007; $1,040,000 in 2008; $9,350,000 in
2009; and $55,000 in 2010.
Interest income that would
have been recognized
had impaired loans
performed in accordance
with their original terms
Less: interest income
recognized on
impaired loans
Interest foregone on
impaired loans
$
95
$
6
$
362
(603)
(350)
(204)
$
354
$
32
$
5
The following table provides information on impaired loans
for the periods indicated:
As of and for the
Years Ended December 31,
(In Thousands)
2005
2004
2003
Recorded investment with
related allowance
$ ,54
$ 4,39
$ 5,93
Recorded investment with
no related allowance
Allowance on impaired loans
Net recorded
investment in
impaired loans
Average total recorded
investment in
impaired loans
3,235
(4,99)
3,262
(3,039)
392
(2,92)
$ 5,92
$ 4,64
$ 3,33
$ 4,340
$ 9,50
$ 6,400
There were no commitments to lend additional funds to
borrowers whose loans are included above.
Loans on non-accrual status totaled $10.1 million and $5.8
million at December 31, 2005 and 2004, respectively. Loans
past due 90 days or more and still accruing interest totaled
$9,000 and $208,000 at December 31, 2005 and 2004,
respectively. Restructured loans totaled $4.0 million and $2.6
million at December 31, 2005 and 2004, respectively.
The following is an analysis of all loans to officers and direc-
tors of Hanmi Financial and their affiliates. In the opinion of
management, all such loans were made under terms that are
consistent with our normal lending policies.
(In Thousands)
December 31,
2005
2004
Outstanding balance, beginning of year
Credit granted, including renewals
Repayments
Outstanding balance, end of year
$ ,552
–
(02)
50
$
$
5
95
(24)
$ ,552
Income from these loans totaled $,000, $0,000 and $53,000
for the years ended December 3, 2005, 2004 and 2003, respec-
tively, and is reflected in the accompanying Consolidated
Statements of Income.
63
Hanmi Financial
Notes to Consolidated Financial Statements
A summary of interest expense on deposits was as follows for
the years ended December 31, 2005, 2004 and 2003:
(In Thousands)
2005
2004
2003
Money market checking
Savings
Time deposits of $00,000
or more
Other time deposits
Total interest expense
$ 2,964
2,30
$ ,09
,90
$ 2,54
,94
3,94
,4
0,966
5,44
,45
,354
on deposits
$ 54,92
$ 26,26
$ 9,24
Total deposits reclassified to loans due to overdraft at
December 31, 2005 and 2004 were $3.7 million and $3.0
million, respectively.
Note 8 – Other Borrowed Funds
Other borrowed funds consisted of the following:
(In Thousands)
FHLB advances
Note issued to U.S. Treasury
Total other borrowed funds
December 31,
2005
2004
$ 43,52
2,04
$ 46,33
$ 66,363
2,930
$ 69,293
FHLB advances represent collateralized obligations with the
FHLB of San Francisco. A summary of contractual maturities
follows:
(In Thousands)
Year
2006
200
200
2009
200
Thereafter
Interest
Rate
3.56%
3.5%
–
5.63%
4.44%
5.2%
Amount
$ 5,000
20,000
–
6,000
,4
5,6
$ 43,52
We have pledged investment securities available for sale with
a carrying value of $279.7 million as collateral with the FHLB
for this borrowing facility. The total borrowing capacity avail-
able from the collateral that has been pledged is $1,062.3
million, of which $782.6 million remained available as of
December 31, 2005.
For the years ended December 31, 2005, 2004 and 2003,
interest expense on other borrowed funds totaled $3.0 million,
$3.3 million and $1.5 million, respectively, and the weighted-
average interest rates were 3.36 percent, 2.14 percent and
2.45 percent, respectively.
In 2005, we obtained additional lines of credit totaling $69.0
million. Total credit lines for borrowing amounted to $154.0
million at December 31, 2005. As of December 31, 2005 and
2004, there were no borrowings under these credit lines.
Note 9 – Junior Subordinated Debentures
During the first half of 2004, we issued two junior subordinated
notes bearing interest at the three-month London InterBank
Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8
million and one junior subordinated note bearing interest at the
three-month LIBOR plus 2.63 percent totaling $20.6 million.
The outstanding subordinated debentures related to these offer-
ings, the proceeds of which were used to finance the purchase
of PUB, totaled $82.4 million at December 31, 2005.
For the years ended December 31, 2005 and 2004, interest
expense on the junior subordinated debentures totaled $4.9
million and $3.0 million, respectively, and the weighted-
average interest rates were 5.94 percent and 4.41 percent,
respectively.
Note 10 – Income Taxes
A summary of income taxes for the years ended December
31, 2005, 2004 and 2003 follows:
Financial data pertaining to FHLB advances were as follows:
(Dollars in Thousands)
2005
2004
2003
Years Ended December 31,
Weighted-average interest
rate at end of year
Weighted-average interest
rate during the year
Average balance of
FHLB advances
Maximum amount
outstanding at any
month-end
4.33%
4.2%
.65%
3.0%
2.23%
2.4%
$ 4,43
$ 3,2
$ 52,5
$ 00,00
$ 26,000
$ 4,400
All of the FHLB advances had fixed interest rates.
(In Thousands)
Current:
Federal
State
Deferred:
Federal
State
Income taxes
2005
2004
2003
$ 29,9
9,383
39,162
$ 6,00
6,271
22,281
$ 0,52
3,642
14,494
(2,350)
(357)
(2,707)
1,032
(338)
694
$ 36,455 $ 22,975
(1,732)
(337)
(2,069)
$ 12,425
64
As of December 31, 2005 and 2004, the Federal and state
deferred tax assets are as follows:
(In Thousands)
Deferred tax assets:
Credit loss provision
Depreciation
State taxes
Unrealized loss on securities
available for sale, interest-only
strips and interest rate swaps
Other
Total deferred tax assets
Deferred tax liabilities:
Purchase accounting
Unrealized gain on securities
available for sale, interest-only
strips and interest rate swaps
Other
Total deferred tax liabilities
Net deferred tax assets
2005
2004
$ 2,49
59
2,92
$ ,232
6
,45
,6
59
,66
–
42
3,565
(6,49)
(,022)
–
(,520)
(,0)
$ 9,65
(44)
(90)
(,556)
$ 5,009
Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to
realize the deferred tax assets, net of the valuation allowance.
A reconciliation of the difference between the Federal statu-
tory 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
Tax-exempt
municipal securities
Reversal of valuation
allowance
Other
Effective tax rate
2005
2004
2003
35.0%
35.0%
35.0%
6.2%
6.5%
6.6%
(.2%)
(.%)
(.5%)
–
(.5%)
3.5%
(0.%)
(0.5%)
3.5%
–
(0.%)
39.3%
At December 31, 2005, net current taxes payable of $2.3
million were included in Other Liabilities in the Consolidated
Statements of Financial Condition. At December 31, 2004, net
current taxes receivable of $2.4 million were included in
Other Assets in the Consolidated Statements of Financial
Condition.
Note 11 – Shareholders’ Equity
Year 2000 Stock Option Plan
The Bank adopted a Stock Option Plan in 1992, which was
replaced by the Hanmi Financial Corporation Year 2000 Stock
Option Plan (the “Plan”), under which options to purchase
shares of Hanmi Financial common stock may be granted to
key employees and directors. The Plan provides that the option
price shall not be less than the fair value of the 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 Plan
described above for the periods indicated:
2005
2004
2003
Weighted-
Average
Exercise
Price Per
Share
9.33
.0
–
6.44
3.26
0.55
.00
$
$
$
$
$
$
$
Weighted-
Average
Exercise
Price Per
Share
5.52
3.5
5.
4.2
9.6
9.33
6.0
$
$
$
$
$
$
$
Weighted-
Average
Exercise
Price Per
Share
5.32
.5
–
4.53
6.99
5.52
5.26
Number of
Shares
2,3,02
0,000
–
(495,954)
(220,994)
,500,064
655,54
$
$
$
$
$
$
$
Number of
Shares
,500,064
9,000
13,44
(60,56)
(39,066)
,6,36
4,242
Number of
Shares
,6,36
35,554
–
(39,094)
(9,54)
,3,2
520,602
Options outstanding, beginning of year
Options granted
Options assumed in PUB acquisition
Options exercised
Options cancelled/expired
Options outstanding – end of year
Options exercisable – end of year
65
Hanmi Financial
Notes to Consolidated Financial Statements
As of December 31, 2005, stock options outstanding under
the Plan were as follows:
Exercise Price Range
$ 3.2 to $ 3.99
$ 4.00 to $ .99
$ .00 to $ .99
$ 2.00 to $ 5.99
$ 6.00 to $ 9.0
Options Outstanding
Options Exercisable
Weighted-
Average
Exercise
Price Per
Share
$
$
$
$
$
$
3.
.06
0.44
3.6
.64
0.55
Number
Outstanding
2,602
2,332
3,624
55,600
5,554
,3,2
Weighted-
Average
Remaining
Contractual
Life
4. years
5.3 years
0.4 years
.3 years
9.2 years
Weighted-
Average
Exercise
Price Per
Share
$
$
$
$
$
$
3.
.0
0.44
3.5
–
.00
Number
Outstanding
2,602
205,909
3,624
99,46
–
520,602
2004 CEO Stock Option Plan
Note 12 – Regulatory Matters
The Bank adopted the 2004 CEO Stock Option Plan (“CEO
Plan”) under which 350,000 options to purchase shares of
Hanmi Financial common stock were granted to the Chief
Executive Officer. The CEO Plan provided that the option
price on the effective date of the grant was equal to the fair
value of the stock, which was $17.17. The options will vest
over six years and expire after ten years.
Stock Warrants
In 2004, we issued stock warrants to affiliates of Castle
Creek Financial LLC for services rendered in connection
with the placement of our equity securities. Under the
terms of the warrants, the warrant holders can purchase a
total of 508,558 shares of common stock at an exercise
price of $9.50 per share. The warrants were immediately
exercisable and expire after five years. During 2005 and
2004, 0 and 20,000 shares of common stock, respectively,
were issued for the exercise of stock warrants.
Repurchase of Common Stock
On August 25, 2005, we repurchased 1,163,000 shares of our
common stock from Korea Exchange Bank for an aggregate
purchase price of $20.0 million as part of our ongoing capital
management program. Repurchased shares are held in treasury
pending use for general corporate purposes, including issuances
under our employee stock option plan.
Hanmi Financial and the Bank are subject to various regulatory
capital requirements administered by the Federal banking
regulatory agencies. Failure to meet minimum capital require-
ments can initiate certain mandatory – and possibly additional
discretionary – actions by regulators that, if undertaken, could
have a direct material effect on our consolidated financial state-
ments. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Hanmi Financial and the
Bank must meet specific capital guidelines that involve quantita-
tive measures of the assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require Hanmi Financial and the Bank to
maintain minimum ratios (set forth in the table below) of Total
and Tier 1 Capital (as defined in the regulations) to Risk-
Weighted Assets (as defined), and of Tier 1 Capital (as defined)
to Average Assets (as defined). Management believes that, as
of December 31, 2005 and 2004, Hanmi Financial and the
Bank met all capital adequacy requirements to which they
were subject.
As of December 31, 2005, 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 1 Risk-
Based, and Tier 1 Leverage Ratios as set forth in the table below.
There are no conditions or events since that notification which
management believes have changed the institution’s category.
66
The capital ratios of Hanmi Financial and Hanmi Bank at
December 31, 2005 and 2004 were as follows:
(Dollars in Thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
Minimum Regulatory
Requirement
Minimum to Be Categorized as
“Well Capitalized”
December 31, 2005
Total capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier capital (to average assets):
Hanmi Financial
Hanmi Bank
December 31, 2004
Total capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier capital (to average assets):
Hanmi Financial
Hanmi Bank
$ 39,66
$ 3,099
$ 292,50
$ 290,93
$ 295,50
$ 290,93
$ 2,64
2,05
$
$ 25,2
$ 252,53
$ 25,2
$ 252,573
2.04%
.9%
$ 22,6
$ 22,33
.03%
0.96%
$ 06,9
$ 06,9
9.%
9.06%
$
2,56
$ 2,44
.9%
.0%
$ ,3
$ ,92
0.93%
0.5%
$
$
94,0
93,960
.93%
8.78%
$ 5,235
$ 5,055
.00%
.00%
4.00%
4.00%
4.00%
4.00%
.00%
.00%
4.00%
4.00%
4.00%
4.00%
N/A
$ 265,4
N/A
$ 59,2
N/A
$ 60,55
N/A
$ 234,90
N/A
$ 40,940
N/A
$ 43,
N/A
0.00%
N/A
6.00%
N/A
5.00%
N/A
0.00%
N/A
6.00%
N/A
5.00%
The average reserve balance required to be maintained with
the FRB was $1.5 million as of December 31, 2005 and 2004.
Memorandum of Understanding
On July 20, 2005, following a joint regular examination by the
FRB and the DFI, the Bank’s Board of Directors approved and
signed an infor mal memorandum of understanding
(“Memorandum”) in connection with certain deficiencies
identified by the regulators relating to the Bank’s compliance
with certain provisions of the Bank Secrecy Act (the “BSA”)
and anti-money laundering regulations. Under the terms of
the Memorandum, the Bank must comply in all material
respects with the BSA and take certain actions within various
timeframes. The Memorandum requires in part that the Bank
enhance its written programs designed to ensure and maintain
compliance with the BSA and anti-money laundering regulations,
improve documentation of its compliance with suspicious activity
reporting provisions of applicable regulations and provide regular
compliance reports to the regulators. The implementation of
these programs will include revisions of the Bank’s policies,
processes and procedures, enhancements of the Bank’s system of
internal controls for BSA compliance, retention of and support
from an increased compliance staff and improved ongoing
employee training.
Management expects additional BSA compliance expenses for
the Bank resulting from the Memorandum, although these
expenses are not anticipated to have a material financial impact
on our financial position or results of operations. The
Memorandum may also affect the timing or ability of the Bank
or Hanmi Financial to engage in or obtain regulatory approval
for certain expansionary activities.
In January 2006, the FRB completed a Target Examination of
compliance with the BSA. Management believes we have made
significant progress in achieving full compliance with the
terms of the Memorandum. In March 2006, the DFI and FRB
initiated the Bank’s annual joint regular examination for fiscal
year 2005. Management cannot predict the outcome of this
examination or whether the Memorandum will be lifted.
6
Hanmi Financial
Notes to Consolidated Financial Statements
Note 13 – Earnings Per Share
The following is a reconciliation of the numerators and
denominators of the basic and diluted per share computations
for the years ended December 31, 2005, 2004 and 2003:
(Dollars in Thousands, Except Per Share Amounts)
2005:
Basic EPS – income available to common shareholders
Effect of dilutive securities – options and warrants
Diluted EPS – income available to common shareholders
2004:
Basic EPS – income available to common shareholders
Effect of dilutive securities – options and warrants
Diluted EPS – income available to common shareholders
2003:
Basic EPS – income available to common shareholders
Effect of dilutive securities – options
Diluted EPS – income available to common shareholders
For the years ended December 31, 2005, 2004 and 2003, there
were 50,554, 354,000 and 0 options outstanding, respectively,
that were not included in the computation of diluted EPS
because their exercise price was greater than the average market
price of the common shares and, therefore, the effect would be
anti-dilutive.
Note 14 – Employee Benefits
We have a Section 401(k) plan for the benefit of substantially all
of our employees. We match 75 percent of participant contribu-
tions to the 401(k) plan up to 8 percent of each 401(k) plan
participant’s annual compensation. We made contributions to the
401(k) plan for the years ended December 31, 2005, 2004 and
2003 of $918,000, $858,000 and $553,000, respectively.
In 2001 and 2004, we purchased single premium life insurance
policies called bank-owned life insurance covering certain
officers. Hanmi Bank is the beneficiary under the policy. In the
event of the death of a covered officer, we will receive the
specified insurance benefit from the insurance carrier.
Note 15 – Derivative Financial Instruments
During 2004, to hedge interest rate risk, the Bank entered
into an interest rate swap agreement maturing in 2009,
wherein the Bank received a fixed rate of 7.29 percent at quar-
terly intervals, and paid Prime-based floating rates at quarterly
intervals on a total notional amount of $10.0 million. During
2003, to hedge interest rate risk, the Bank entered into four
interest rate swap agreements maturing in 2008, wherein the
Bank received fixed rates of 5.77 percent, 6.37 percent, 6.51
percent and 6.76 percent, at quarterly intervals, and paid
Income
(Numerator)
Weighted-
Average Shares
(Denominator)
Per Share
Amount
$
$
$
$
$
$
5,229
–
5,229
36,00
–
36,00
9,23
–
9,23
49,4,5
6,4
49,942,356
42,26,964
,24,293
43,5,25
2,092,0
569,3
2,662,026
$
$
$
$
$
$
.
(0.0)
.
0.
(0.03)
0.4
0.6
(0.0)
0.6
Prime-based floating rates, at quarterly intervals, on a total
notional amount of $60.0 million. These swaps were desig-
nated as cash flow hedges for accounting purposes.
In 2005, the Bank terminated these swaps. At such time, the
swaps were in an unfavorable position of $2,139,000. Such
amount is being amortized in amounts proportional to the
interest income associated with the hedged loan pools over
the remaining terms of the swaps or the lives of the hedged
loans, whichever is shorter. Prior to the termination of the
swaps, income of $0, $19,000 and $35,000 related to hedge
ineffectiveness was recognized for the years ended December
31, 2005, 2004 and 2003, respectively.
In 2004, the Bank offered a certificate of deposit (“CD”) prod-
uct that paid interest tied to the movement in the Standard &
Poor’s 500 Index plus 1.00 percent annual interest. The eco-
nomic characteristics and risks of the embedded option were
not clearly and closely related to the CD. Therefore, the
embedded option was separated from the CD and accounted
for separately in liabilities. As of December 31, 2005 and 2004,
the fair value of the embedded option was $1,280,000 and
$1,396,000, respectively, and the change in the liability during
2005 and 2004 was ($4,000) and $242,000, respectively. The
change was recognized in earnings.
To economically hedge the interest risk described above, the
Bank entered into an agreement to purchase an equity swap
with a notional amount of $9,340,000. As of December 31,
2005 and 2004, the fair value of the equity swap was $4,000
and $212,000, respectively, which was also equal to the change
during those years. The change was recognized in earnings.
6
In 2005, the Bank offered a CD product that pays interest based
on the increase in the weighted-average value of five Asian cur-
rencies (Korean Won, Singapore Dollar, Taiwan Dollar, Thai Baht
and Chinese Yuan) against the U.S. Dollar plus 0.25 percent
annual interest. The economic characteristics and risks of the
embedded option were not clearly and closely related to the
CD. Therefore, the embedded option was separated from the
CD and accounted for separately in liabilities. As of December
31, 2005, the fair value of the embedded option was $5,000,
and the change in the liability during 2005 was ($19,000). The
change was recognized in earnings.
To economically hedge the interest risk described above, the
Bank entered into an agreement to purchase a currency swap
with a notional amount of $14,274,000. As of December 31,
2005, the fair value of the currency swap was ($105,000), and
the change recognized in earnings for 2005 was $119,000.
Note 16 – Commitments and Contingencies
We lease our premises under non-cancelable operating leases.
At December 31, 2005, future minimum annual rental com-
mitments under these non-cancelable operating leases, with
initial or remaining terms of one year or more, is as follows:
Note 17 – Off-Balance Sheet Commitments
We are a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recog-
nized in the Consolidated Statements of Financial Condition.
The Bank’s exposure to credit losses in the event of non-per-
formance by the other party to commitments to extend credit
and standby letters of credit is represented by the contractual
notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obliga-
tions 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 neces-
sary by the Bank upon extension of credit, is based on man-
agement’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable;
inventory; property, plant and equipment; and income-pro-
ducing or borrower-occupied properties. The following table
shows the distribution of undisbursed loan commitments as of
the dates indicated:
(In Thousands)
Year Ending December 31,
2006
200
200
2009
200
Thereafter
Amount
$ 2,50
2,45
,99
,24
,3
5,44
$ 4,45
(In Thousands)
Commitments to extend credit
Commercial letters of credit
Standby letters of credit
Unused credit card lines
Total undisbursed
loan commitments
December 31,
2005
2004
$ 555,36
5,036
42,6
4,92
$ 36,0
49,699
4,90
4,324
$ 6,432
$ 49,632
Rental expenses recorded under such leases in 2005, 2004 and
2003 amounted to $3,39,000, $3,226,000 and $2,00,000,
respectively.
In the normal course of business, we are involved in various
legal claims. Management has reviewed all legal claims against
us with in-house or 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 our
financial position or results of operations.
69
Hanmi Financial
Notes to Consolidated Financial Statements
Note 18 – Fair Value of Financial Instruments
The estimated fair value of financial instruments has been deter-
mined by using available market information and appropriate
valuation methodologies. However, considerable judgment is
(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
Interest rate swaps
Equity swap
Liabilities:
Non-interest-bearing deposits
Interest-bearing deposits
Other borrowed funds and junior subordinated debentures
Accrued interest payable
Currency swap
Embedded derivative
The methods and assumptions used to estimate the fair value
of each class of financial instruments for which it is practicable
to estimate that value are explained below:
(a) Cash and cash equivalents – The carrying amounts approximate
fair value due to the short-term nature of these instruments.
(b) Federal Reserve Bank stock and Federal Home Loan Bank stock –
The carrying amounts approximate fair value as the stock may
be resold to the issuer at carrying value.
(c) 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.
required to interpret market data in order to develop estimates
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that we could realize in a
current market exchange. The use of different market assump-
tions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
December 31, 2005
December 31, 2004
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
63,4
12,350
2,23
,049
442,63
2,46,05
,065
4,20
–
4
738,618
2,087,496
128,737
11,911
(105)
1,280
$
63,4
12,350
2,23
,05
442,63
2,460,092
,04
4,20
–
4
738,618
2,087,496
129,441
11,911
(105)
1,280
$
2,64
12,099
9,62
,090
4,3
2,230,992
3,50
0,029
(293)
22
729,853
1,799,22
151,699
7,100
–
1,396
$
2,64
12,099
9,62
,093
4,3
2,229,096
4,026
0,029
(293)
22
729,853
1,799,224
153,541
7,100
–
1,396
(d) 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
estimated discounted cash flows utilizing the discount rates that
approximate the pricing of loans collateralized by similar
commercial properties. The fair value of non-performing loans
at December 31, 2005 and 2004 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
estimated fair value is net of allowance for loan losses.
0
(e) Accrued interest receivable – The carrying amount of accrued
interest receivable approximates its fair value.
(f) Deposits – The fair value of non-maturity deposits is the
amount payable on demand at the reporting date. Non-matu-
rity deposits include non-interest-bearing demand deposits,
savings accounts and money market checking. Discounted cash
flows have been used to value term deposits such as certifi-
cates of deposit. The discount rate used is based on interest
rates currently being offered by the Bank on comparable
deposits as to amount and term.
(g) Accrued interest payable – The carrying amount of accrued
interest payable approximates its fair value.
(h) Other borrowed funds and junior subordinated debentures –
Discounted cash flows have been used to value other borrowed
funds and junior subordinated debentures.
(i) Loan commitments and standby letters of credit – The fair value
of loan commitments and standby letters 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, 2005 and 2004.
(j) Interest rate swaps, equity swap, embedded derivative and currency
swap – The carrying amounts of the interest rate swaps, equity
swap, embedded derivative and currency swap approximate
their fair value.
Note 19 – Condensed financial information of
parent company
Statements of Financial Condition
(In Thousands)
Assets:
Cash
Receivable from Hanmi Bank
Investment in Hanmi Bank
Investment in unconsolidated
subsidiaries
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Liabilities:
Junior subordinated
debentures
Other liabilities
Shareholders’ equity
Total liabilities and
December 31,
2005
2004
$ ,40 $ 5,36
455
45,302
–
505,009
2,96
3,09
2,96
,99
$ 52,556 $ 45,9
$ 2,406 $ 2,406
3,602
399,90
3,33
426,
shareholders’ equity
$ 52,556 $ 45,9
Statements of Income
(In Thousands)
2005
2004
2003
Years Ended December 31,
Equity in earnings of
Hanmi Bank
Other expenses, net
Income tax benefit
Net income
$ 62,00
(6,33)
2,36
$ 5,229
$ 39,54
(4,63)
,99
$ 36,00
$ 9,5
(602)
23
$ 9,23
Hanmi Financial
Notes to Consolidated Financial Statements
Statements of Cash Flows
(In Thousands)
Cash Flows from Operating Activities:
2005
Years Ended December 31,
2004
2003
Net income
Adjustments to reconcile net income to net cash used in operating activities:
$
5,229
$
36,00
$
9,23
Earnings of Hanmi Bank
Decrease (increase) in receivable from Hanmi Bank
Increase in other assets
(Decrease) increase in other liabilities
Tax benefit from exercise of non-qualified stock options
Net cash used in operating activities
Cash Flows from Investing Activities:
Dividends received from Hanmi Bank
Capital contribution to Hanmi Bank
Acquisition of Pacific Union Bank
Purchase of investment in unconsolidated subsidiaries
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Issuance of junior subordinated debentures
Proceeds from exercise of stock options
Stock issued through private placement
Repurchase of common stock
Cash dividends paid
Net cash (used in) provided by financing activities
Net (decrease) increase in cash
Cash – beginning of year
Cash – end of year
(62,00)
455
(,292)
(229)
29
(4,09)
2,54
–
–
–
2,54
–
2,52
–
(20,04)
(9,25)
(2,33)
(3,906)
5,36
,40
$
(39,54)
(224)
()
32
–
(3,64)
,990
(0,000)
(,0)
(2,45)
(42,95)
2,406
3,425
,0
–
(,40)
49,0
3,922
,454
5,36
$
(9,5)
(23)
(,968)
,065
–
(,499)
2,300
–
–
(6)
2,39
–
3,4
–
–
(4,220)
(,09)
(439)
,93
,454
$
2
Note 20 – Quarterly Financial Data (Unaudited)
Summarized quarterly financial data follows:
(Dollars in Thousands, Except Per Share Amounts)
March 31
June 30
September 30
December 31
Quarters Ended
2005:
Interest income
Interest expense
Net interest income before provision for credit losses
Provision for credit losses
Non-interest income
Non-interest expenses
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
2004:
Interest income
Interest expense
Net interest income before provision for credit losses
Provision for credit losses
Non-interest income
Non-interest expenses
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Reclassifications have been made to the 2005 and 2004
quarterly financial statements to conform to the current
presentation.
$
$
$
$
$
$
$
$
43,209
,34
3,62
36
,35
,405
2,6
,346
3,332
0.2
0.2
2,99
5,0
6,2
900
4,905
0,364
0,469
4,03
6,36
0.22
0.22
$
$
$
$
$
$
$
$
4,60
3,462
34,45
450
,34
6,22
24,30
9,92
5,03
0.30
0.30
3,54
,44
24,030
50
6,95
,62
2,369
4,24
,545
0.
0.
$
$
$
$
$
$
$
$
5,952
6,3
35,2
3,5
9,200
6,99
24,3
9,204
4,969
0.30
0.30
39,44
9,26
29,6
–
,29
,99
,5
,09
,069
0.23
0.22
$
$
$
$
$
$
$
$
56,339
20,4
35,6
,652
,32
,525
24,003
9,3
4,90
0.3
0.30
4,0
0,6
3,023
,5
,264
9,45
,69
6,99
,00
0.24
0.23
3
Hanmi Financial
Branch Offices
Corporate Headquarters
3660 Wilshire Boulevard
Penthouse Suite a
Los Angeles, CA 90010
(213) 382-2200
Cerritos Branch
11754 East Artesia Boulevard
Artesia, CA 90701
(562) 924-8001
Woo Young Choung
First Vice President & Manager
Downtown Branch
950 South Los Angeles Street
Los Angeles, CA 90015
(213) 347-6051
Ae Cha Kim
Senior Vice President &
District Leader
Fashion District Branch
726 East 12th Street
Suite 211
Los Angeles, CA 90021
(213) 743-5850
Judy Lee
First Vice President & Manager
Garden Grove Branch
9820 Garden Grove Boulevard
Garden Grove, CA 92844
(714) 537-4040
Ine Ja Kim
Senior Vice President & Manager
Gardena Branch
2001 West Redondo Beach
Boulevard
Gardena, CA 90247
(310) 965-9400
Thomas Oh
Senior Vice President & Manager
Irvine Branch
14474 Culver Drive, Suite d
Irvine, CA 92604
(949) 262-2500
Dongin Kim
First Vice President & Manager
Koreatown Galleria Branch
3250 West Olympic
Boulevard, Suite 200
Los Angeles, CA 90006
(323) 730-4830
Kyung Mi Choi
First Vice President & Manager
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, CA 90006
(213) 252-6360
Elaine Chung
Senior Vice President & Manager
Mid-Olympic Branch
3099 West Olympic Boulevard
Los Angeles, CA 90006
(213) 252-6340
Thomas Kim
First Vice President & Manager
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, CA 90019
(323) 735-3737
Helen Kim
Senior Vice President &
District Leader
Rowland Heights Branch
18720 East Colima Road
Rowland Heights, CA 91748
(626) 854-1000
Sook Ran Park
Senior Vice President & Manager
San Diego Branch
4637 Convoy Street, Suite 101
San Diego, CA 92111
(858) 467-4800
Young Hoon Oh
First Vice President & Manager
San Francisco Branch
1491 Webster Street
San Francisco, CA 94115
(415) 776-3003
Philip Whang
First Vice President & Manager
Silicon Valley Branch
2765 El Camino Real
Santa Clara, CA 95051
(408) 260-3400
Philip Whang
First Vice President & Manager
South Cerritos Branch
11900 South Street, Suite 109
Cerritos, CA 90703
(562) 924-0700
Ho Il Min
First Vice President & Manager
Torrance Branch
2370 Crenshaw Boulevard
Suite h
Torrance, CA 90501
(310) 781-1200
Sun Young Park
First Vice President & Manager
Van Nuys Branch
14427 Sherman Way
Van Nuys, CA 91405
(818) 779-3120
Sun Ae Choi
First Vice President & Manager
Vermont Branch
933 South Vermont Avenue
Los Angeles, CA 90006
(213) 252-6380
Don Bae Lee
Senior Vice President & Manager
West Garden Grove Branch
9122 Garden Grove Boulevard
Garden Grove, CA 92844
(714) 537-4111
Michelle Kwon
First Vice President & Manager
West Torrance Branch
21838 Hawthorne Boulevard
Torrance, CA 90503
(310) 241-4280
Suk Jin Yoon
First Vice President & Manager
Western Branch
120 South Western Avenue
Los Angeles, CA 90004
(213) 388-2200
Sharon Im
First Vice President & Manager
Wilshire Branch
3660 Wilshire Boulevard
Suite 103
Los Angeles, CA 90010
(213) 427-5757
Jennifer Yun
First Vice President & Manager
Commercial Loan Department
3660 Wilshire Boulevard
Suite 1050
Los Angeles, CA 90010
(213) 427-5626
Hassan Bouayad
Senior Vice President
& Chief Lending Officer
Consumer Loan Center
3099 West Olympic Boulevard
Los Angeles, CA 90006
(213) 252-6400
Jennifer Nam
First Vice President & Manager
SBA Loan Department
3327 Wilshire Boulevard
Los Angeles, CA 90010
(213) 427-5761
James Kim
First Vice President & Manager
Northern California LPO
39899 Balentine Drive
Suite 200
Newark, CA 94560
(510) 438-6870
Jodie Park
Vice President & Manager
Seattle LPO
33110 Pacific Highway South
Suite 4
Federal Way, WA 98003
(253) 952-7766
Chicago LPO
6200 North Hiawatha
Suite 235
Chicago, IL 60646
(773) 202-1116
Sei Keun Ahn
Vice President & Manager
Atlanta LPO
3585 Peachtree
Industrial Blvd., #144
Duluth, GA 30096
(678) 990-5002
Karl Chang
Vice President & Manager
Virginia LPO
7535 Little River Turnpike
Suite 200b
Annandale, VA 22003
(703) 914-1001
Yong Jae Park
First Vice President & Manager
4
Hanmi Bank is a wholly owned subsidiary of Hanmi Financial
Corporation (Nasdaq: HAFC). A leading multi-ethnic 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 nurturing enduring relationships
with you — our shareholders, customers and employees. By always
keeping you in mind, we are continually building a better bank.
At year-end 2005, your bank had total assets of $3.4 billion
and 22 full-service offices in Los Angeles, Orange, San Francisco,
Santa Clara and San Diego counties.
Design: bloch+coulter Design Group www.blochcoulter.com
Corporate Headquarters
Wilshire Boulevard
Penthouse Suite
Los Angeles, California
() -
www.hanmifinancial.com