Corporate Headquarters
3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010
(213) 382-2200
www.hanmifinancial.com
Advancing Our Vision
Hanmi Financial 2006 Annual Report
Hanmi Bank is a wholly owned subsidiary of Hanmi Financial Corporation
(Nasdaq: HAFC). One of the leading community banks serving the multi-
ethnic customers of California, Hanmi Bank provides high quality individual,
corporate and institutional financial services.
At year-end 2006, your bank had total assets of $3.73 billion and 22 full service
offices in Los Angeles, Orange, San Francisco, Santa Clara and San Diego counties.
Hanmi continues to pursue long-term profitable growth while adapting to changing
market conditions. Through contributions from you – our shareholders, customers and
employees – we are advancing our vision.
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
562-658-0100
Woo Young Choung
FVP & Manager
Downtown Branch
950 South Los Angeles Street
Los Angeles, CA 90015
213-347-6051
Thomas J. Kim, SVP & Manager
Fashion District Branch
726 East 12th Street
Suite 211
Los Angeles, CA 90021
213-743-5850
Judy Lee
FVP & Manager
Fullerton Branch
5245 Beach Boulevard
Buena Park, CA 90621
714-232-7600
Hye Ja Shin, FVP & Manager
Garden Grove Branch
9820 Garden Grove Boulevard
Garden Grove, CA 92844
714-590-6900
Ine Ja Kim , SVP & Manager
Gardena Branch
2001 West Redondo Beach
Boulevard
Gardena, CA 90247
310-965-9400
Thomas Oh, SVP & Manager
Irvine Branch
14474 Culver Drive
Suite D
Irvine, CA 92604
949-262-2500
Meehye J. Lee, FVP & Manager
Koreatown Galleria Branch
3250 West Olympic Boulevard
Suite 200
Los Angeles, CA 90006
323-730-4830
Kyung Mi Choi, FVP & Manager
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, CA 90006
213-385-2244
Elaine E. Chung
SVP & Manager
Mid-Olympic Branch
3099 West Olympic Boulevard
Los Angeles, CA 90006
213-252-6340
Dongin Kim, FVP & Manager
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, CA 90019
323-370-2800
Helen Kim
SVP & District Leader
Rowland Heights Branch
18720 East Colima Road
Rowland Heights, CA 91748
626-432-1400
Sook R. Park, SVP & Manager
San Diego Branch
4637 Convoy Street
Suite 101
San Diego, CA 92111
858-467-4800
Young Hoon Oh
FVP & Manager
San Francisco Branch
1469 Webster Street
San Francisco, CA 94115
415-749-7600
Yeong Nam Kim
FVP & Manager
Silicon Valley Branch
2765 El Camino Real
Santa Clara, CA 95051
408-260-3400
Philip Whang, FVP & Manager
South Cerritos Branch
11900 South Street
Suite 109
Cerritos, CA 90703
562-467-7400
Ho Il Min, FVP & Manager
Torrance Branch
2370 Crenshaw Boulevard
Suite H
Torrance, CA 90501
310-781-1200
Sun Young Park, FVP & Manager
Design: bloch+coulter Design Group www.blochcoulter.com
Van Nuys Branch
14427 Sherman Way
Van Nuys, CA 91405
818-449-3120
Sun Ae Choi, FVP & Manager
Vermont Branch
933 South Vermont Avenue
Los Angeles, CA 90006
213-252-6380
Don Bae Lee, FVP & Manager
West Garden Grove Branch
9122 Garden Grove Boulevard
Garden Grove, CA 92844
714-741-4420
Michelle Kwon, FVP & Manager
West Torrance Branch
21838 Hawthorne Boulevard
Torrance, CA 90503
310-241-4280
Suk Jin Yoon, FVP & Manager
Western Branch
120 South Western Avenue
Los Angeles, CA 90004
213-427-5751
Sharon Im, FVP & Manager
Wilshire Branch
3660 Wilshire Boulevard
Suite 103
Los Angeles, CA 90010
213-427-5757
Commercial Loan Department
3660 Wilshire Boulevard
Suite 1050
Los Angeles, CA 90010
213-637-4792
Hassan Bouayad
SVP & Chief Lending Officer
Residential Mortgage Center
928 South Western Avenue
Suite 260
Los Angeles, CA 90006
213-252-6490
Janette K. Mah, SVP & Manager
Consumer Loan Center
3099 West Olympic Boulevard
Los Angeles, CA 90006
213-252-6400
Jennifer Nam, FVP & Manager
International Finance
3660 Wilshire Boulevard
Suite 103
Los Angeles, CA 90010
213-427-5680
Seong Hoon Hong
FVP & Manager
SBA Loan Department
3327 Wilshire Boulevard
Los Angeles, CA 90010
213-427-5722
James Kim, SVP & Manager
Atlanta LPO
3585 Peachtree Industrial
Boulevard, Suite 144
Duluth, GA 30096
678-990-5002
Chicago LPO
6200 North Hiawatha
Suite 235
Chicago, IL 60646
773-202-1116
Dallas LPO
2711 LBJ Freeway
Suite 114
Farmers Branch, TX 75234
469-522-0009
Denver LPO
3033 South Parker Road
Suite 340
Aurora, CO 80014
303-752-4600
Northern California LPO
39899 Balentine Drive
Suite 200
Newark, CA 94560
510-438-6870
Northwest Region LPO No. 1
33110 Pacific Highway South
Suite 4
Federal Way, WA 98003
253-952-7766
Northwest Region LPO No. 2
3500 108th Avenue Northeast
Suite 280
Bellevue, WA 98004
425-454-0178
Virginia LPO
7535 Little River Turnpike
Suite 200B
Annandale, VA 22003
703-914-1001
Financial Highlights
(Amounts in thousands, except per share amounts)
2006
2005
2004
2003
2002
For the Year
Net interest income before provision
for credit losses
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
3,725.2
3,414.3
3,104.2
1,787.1
1,457.3
$ 153,760
$ 26,116
$ 9,488
$ 75,954
$ 65,649
$ 138,830
$ 24,669
$ 5,713
$ 69,133
$ 58,229
$ 102,937
$ 21,624
$ 4,587
$ 66,566
$ 36,700
$ 56,621
$ 15,397
$ 4,625
$ 39,325
$ 19,213
$ 47,971
$ 13,485
$ 7,719
$ 38,333
$ 17,030
$3,725,243
$2,837,390
$2,944,715
$ 487,117
$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
$ 1.33
$ 0.24
$ 9.93
$ 1.17
$ 0.20
$ 8.77
$ 0.84
$ 0.20
$ 8.11
$ 0.67
$ 0.20
$ 4.92
$ 0.60
$ –
$ 4.47
3.93%
0.65%
1.14%
55.41%
8.34%
11.94%
1.30%
15.08%
4.78%
0.50%
0.96%
40.11%
9.85%
12.28%
1.82%
14.33%
2,944.7
2,826.1
2,528.8
1,445.8
1,284.0
4.31%
0.27%
1.00%
51.54%
8.78%
11.80%
1.37%
12.51%
4.83%
0.41%
1.00%
40.86%
9.06%
11.98%
1.79%
13.94%
2,837.4
2,469.1
2,234.8
1,248.4
975.2
3.68%
0.68%
1.06%
51.31%
7.75%
11.09%
1.18%
14.51%
65.65
58.23
36.70
19.21
17.03
02 03 04 05 06
02 03 04 05 06
02 03 04 05 06
02 03 04 05 06
Total Assets
(dollars in millions)
Total Deposits
(dollars in millions)
Net Loans
(dollars in millions)
Net Income
(dollars in millions)
To Our Shareholders
Over the past year, Hanmi Financial Corporation and Hanmi Bank set new
performance records and realized many successes. Yet 2006 was most gratifying to us
as a year for putting our strategic plans into motion.
Our goal is to transform Hanmi into a regional bank serving multi-ethnic communities and
mainstream markets in multiple states. The plans we have made toward that end are gaining
momentum – momentum made possible by the foundation we have built at Hanmi over the
past few years.
2006 Highlights. We completed a number of initiatives during 2006, including filling final
management team positions and organizing our branch network into six districts. This new
structure enables us to take a more effective, marketing-oriented approach to managing our
22 branches. Further, it enables us to better instill a competitive spirit throughout our branch
network, to take advantage of individual creativity, energy and innovation.
02
Earnings Per Share
2006
2005
2004
$ 1.33
$ 1.17
$ 0.84
We also furthered our staff-wide team-building efforts, which are aimed at increasing our ability
to recruit and retain the best employees in the banking business.
In 2006, the key challenges entailed intense market competition on the pricing of both loans
and deposits. Through vigilant expense control and a growing loan portfolio, we delivered
another year of record income and record earnings per share. Although we anticipate sustained
competition for loans and deposits in 2007, our credit quality remains excellent, and our efficiency
ratio continues to improve. We believe our liquidity will allow us to maintain our desired level of
asset sensitivity while achieving further growth in the loan portfolio.
2007 Goals. Among our key goals for the coming months is to expand our business on many
fronts. We are adding new products and services. These comprise traditional banking offerings
as well as more comprehensive financial planning services such as wealth management and
insurance protections. We are implementing new technologies, such as mobile banking, and
enhancing our Internet banking to make our services more accessible. We are unhindered by any
limitations on our ability to expand our branch network and will continue to open new branches
and loan production offices to better serve our customers and to extend our geographic reach.
We will reach out to new markets, including other ethnic communities as well as second- and
third-generation Korean-Americans. And we continue to grow with our core customers. As they
transform their companies from small businesses to mid-market players, we provide the more
sophisticated services they expect.
Long-term Vision. We are focused on the vital next steps in advancing our strategic plan,
with the full understanding that our longer term goal is to meet all of our customers’ financial
needs and to grow with them. Their needs will continue to evolve. The economy will continually
change. Markets will cycle. As we adapt and thrive in our changing economic environments and
in our ever-more-diverse communities, we will strive to continue to build value in the organization.
We have put our strategic plans in motion. We know that advancing our vision will draw on
valuable contributions from all of you – our shareholders, our customers and our employees.
We thank you for your continued involvement and look forward to sharing our future
accomplishments with you.
Richard B.C. Lee
Chairman of the Board
Sung Won Sohn, Ph.D.
President and Chief Executive Officer
Advancing Our Vision: Products
At Hanmi, we continue to expand our products and services by introducing
innovative new products, developing next generation products, improving
existing products, and adapting proven offerings from mainstream banking
to meet our core customers’ specialized needs.
Through our history, Hanmi has worked diligently to understand and meet the needs of our
Korean-American and other ethnic customers. As their businesses and financial requirements
have grown, so have the products and services we offer to support their goals.
We see our product offerings continuing to broaden into the foreseeable future, starting with
services that support more comprehensive financial planning. For example, Hanmi began
offering wealth management guidance early in 2007.
A large percentage of our first-generation Korean-American customers have built successful
businesses and accumulated significant wealth over the past 25 years. Many are nearing
retirement and seeking advice on how to best transfer their businesses to their children or turn
their equity into more liquid investments. Hanmi is helping customers understand and select
their best options.
Along these same lines, we acquired the Chun Ha and AWI insurance agencies in 2007 and
are thus better positioned to offer our customers a wider range of financial products – including
the protections of life and property and casualty insurance.
04
05
Service Charges on Deposits
(dollars in millions)
2006
2005
2004
17.1
15.8
14.4
Advancing Our Vision: Technology
Hanmi is focused on introducing new delivery channels – such as mobile
banking – and upgrading our existing channels to better serve our business
customers and to position ourselves as a regional bank.
To attract new customers and sustain existing relationships, we are implementing several
technologies to make our products and services more accessible. Among those we are
prioritizing is mobile banking, which enables customers to conduct their banking transactions
over their cell phones. Similarly, we have upgraded our Telebanc service for land line phones.
Both services give customers the convenience of making account inquiries, account transfers,
merchant verification, interest rate queries, loan information requests, and loan payments
from their telephones on their schedules.
We also are providing wider coverage for our customers by expanding our ATM network. In
addition to installing additional Hanmi ATMs, we are increasing our ATM-sharing alliances with
other banks. Currently we share ATM networks with other Korean-American community banks.
Our business customers soon will also benefit from Hanmi’s remote capture. The service allows
retailers and other business owners to record deposits directly from their premises, eliminating
the time and energy currently spent making in-person deposits at their local branch.
06
07
Number of ATM/Debit Card Transactions
2006
2005
2004
2,274,086
1,776,326
982,146
Advancing Our Vision: Expansion
Geographical expansion is a key strategy for us to both defend and extend our
existing markets. We are looking to cities with large and increasing Korean-
American and other immigrant populations for our future growth.
The 2000 U.S. Census found that five of the ten cities with the largest Korean-American
populations are located in Southern California. Hanmi Bank already has a strong presence in
those communities. Now we are looking to expand through three key means.
The first is to ensure that our branch network adequately serves our current base and reaches
new customers. Among the Korean-American community banks, Hanmi Bank has the most
branches in Southern California. We plan to expand our presence throughout California and
other states, with a number of new branches coming online in 2007.
The second component in our expansion strategy is to open loan production offices (LPOs) in
markets with substantial Korean-American populations. This approach enables us to test new
markets with minimal start-up and operation costs. With nine LPOs in seven states, we are
considering opening additional LPOs this year in New York, Florida and/or Texas.
Third, we continue to consider acquisitions as a means to grow and diversify our regional
concentration. Given the optimal opportunity, we will be ready to act.
08
09
Number of Branches and LPOs
2006
2005
2004
31
27
24
Advancing Our Vision: Diversification
To transform Hanmi from a community bank into a regional bank, we must
diversify and expand our key constituencies. To do so, we are reaching out to
other ethnic groups, new generations and added financial markets.
Hanmi has built a firm foundation as the community bank of choice for Southern California’s
first-generation Korean-American entrepreneurs. Growing into a regional bank depends on our
ability to extend our services to three additional, related markets.
Targeting other ethnic markets is a good fit for Hanmi, and already nearly half of our new loan
production comes from non-Korean customers. We are recruiting and training personnel who
can provide the language and cultural considerations necessary in serving Chinese, Middle
Eastern and Indian customers, among others.
In addition to building businesses, our core customers have started families in our
communities. We are working to sustain banking relationships with their children and
grandchildren as well. Hanmi is well-positioned to serve these younger entrepreneurs,
and we continue to introduce new technologies, products and services in order to
compete with mainstream banks for their business.
Many of our core customers have been successful in turning their small businesses into
mid-sized business – those with revenues between $10 million and $100 million. Hanmi,
too, is growing to provide the more sophisticated financial services that these middle
market customers require.
10
Non-Korean Loan Origination*
(dollars in millions)
*Data was collected from funded loan list, using only surnames.
2006
2005
2004
665
548
339
11
Corporate Information
Officers
Sung Won Sohn, Ph.D.
President and
Chief Executive Officer
Director
Kurt M. Wegleitner
Executive Vice President and
Chief Credit Officer
Michael J. Winiarski
Senior Vice President and
Chief Financial Officer
Board of Directors
Richard B.C. Lee
Chairman of the Board
President
B.C. Textiles, Inc.
I Joon Ahn
Former Chairman of the Board
Kraig Kupiec
Chief Financial Officer
Chief Operating Officer
Managing Member
KWK Management LLC
Joon Hyung Lee
Former Chairman of the Board
President
Root-3 Corporation
Chang Kyu Park, Pharm.D.
Former Chairman of the Board
Principal Pharmacist
Serrano Medical Center Pharmacy
Won R. Yoon, M.D.
Former Chairman of the Board
Chief Surgeon
Olympic Medical Center
M. Christian Mitchell
Retired Partner
Deloitte & Touche
Joseph K. Rho
Former Chairman of the Board
Principal
J & S Investment
William J. Ruh
Executive Vice President
Castle Creek Capital LLC
Stuart S. Ahn
(Hanmi Bank Director)
President
Chief Executive Officer
Sunnyland Development, Inc.
Ki Tae Hong
(Hanmi Bank Director)
President and
Chief Executive Officer
Pacom International, Inc.
Jacob D. Lee
(Hanmi Bank Director)
Chief Operating Officer and
General Counsel
HYI
Left to right: Joon Hyung Lee, Ki Tae Hong, Jacob D. Lee, Chang Kyu Park, Pharm.D., I Joon Ahn, Richard B.C. Lee,
Sung Won Sohn, Ph.D., M. Christian Mitchell, Joseph K. Rho, Kraig Kupiec, Won R. Yoon, M.D., William J. Ruh, Stuart S. Ahn
12
Independent Public
Accountants
Registrar and
Transfer Agent
Website
Stock Listing
www.hanmifinancial.com
Nasdaq
KPMG, LLP
Los Angeles, California
U.S. Stock Transfer
Corporation
Glendale, California
Ticker symbol for
common stock “HAFC”
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
FORM 10-K
or
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From
To
Commission file number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
(Address of Principal Executive Offices)
95-4788120
(I.R.S. Employer Identification No.)
90010
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.001 Par Value
Name of Each Exchange on Which Registered
The NASDAQ Global Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
No ¥
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes n
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes n
No ¥
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ¥
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. n
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.
Accelerated Filer n
Large Accelerated Filer ¥
Non-Accelerated Filer n
No n
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes n
As of June 30, 2006, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately
$793,388,000. For purposes of the foregoing calculation only, in addition to affiliated companies, all directors and officers of the Registrant
have been deemed affiliates.
Number of shares of common stock of the Registrant outstanding as of February 14, 2007 was 49,193,917 shares.
Documents Incorporated By Reference Herein: Registrant’s Definitive Proxy Statement for its Annual Meeting of Stockholders,
which will be filed within 120 days of the fiscal year ended December 31, 2006, is incorporated by reference into Part III of this report.
No ¥
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2006
Hanmi Financial Corporation
Table of Contents
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Signatures
Exhibit Index
Page
1
13
13
14
15
15
15
17
19
40
40
40
40
43
43
43
43
43
43
43
44
45
46
47
48
49
50
84
85
FORWARD-LOOKING STATEMENTS
Some of the statements under “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this Form 10-K constitute forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you
can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable
terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those
expressed or implied by the forward-looking statement. For a discussion of some of the factors that might cause such a difference,
see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Interest Rate Risk Management” and “— Liquidity and Capital Resources.” We undertake no obligation to update these forward-
looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as
required by law.
PART I
Item 1. Business
General
Hanmi Financial Corporation (“Hanmi Financial,” “we” or “us”) is
a Delaware corporation incorporated on March 14, 2000 pur-
suant to a Plan of Reorganization and Agreement of Merger to
be the holding company for Hanmi Bank (the “Bank”). Hanmi
Financial became the holding company for the Bank in June
2000 and is subject to the Bank Holding Company Act of 1956,
as amended (“BHCA”). Hanmi Financial also elected financial
holding company status under the BHCA in 2000. Our principal
office is located at 3660 Wilshire Boulevard, Penthouse Suite A,
Los Angeles, California 90010, and our telephone number is
(213) 382-2200.
Hanmi Bank, our primary subsidiary, was incorporated under
the laws of the State of California on August 24, 1981 and was
licensed by the California Department of Financial Institutions
(“DFI”) on December 15, 1982. The Bank’s deposit accounts
are insured under the Federal Deposit Insurance Act (“FDI Act”)
up to applicable limits thereof, and the Bank is a member of the
Federal Reserve System. The Bank’s headquarters is located at
3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles,
California 90010.
Hanmi Bank is a community bank conducting general business
banking, with its primary market encompassing the Korean-A-
merican community as well as other communities in the multi-
ethnic population of Los Angeles, Orange, San Diego, San Fran-
cisco 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 communi-
ties. At December 31, 2006, the Bank had 22 full-service
branch offices in California and nine loan production offices
in California, Colorado, Georgia, Illinois, Texas, Virginia and
Washington.
Our revenues are derived primarily from interest on our loan and securities portfolios and service charges on deposit accounts. A
summary of revenues for the periods indicated follows:
(Dollars in thousands)
2006
2005
2004
Year Ended December 31,
Interest and Fees on Loans
Interest on Investments
Other Interest Income
Service Charges on Deposit Accounts
Other Non-Interest Income
$239,075
80.8% $180,845
78.2% $117,999
19,710
1,404
17,134
18,470
6.7%
0.5%
5.8%
6.2%
18,507
1,589
15,782
14,600
8.0%
0.7%
6.8%
6.3%
17,372
183
14,441
11,770
72.9%
10.7%
0.1%
8.9%
7.4%
1
Total Revenues
$295,793
100.0% $231,323
100.0% $161,765
100.0%
Business Acquisitions
Commercial Loans
In 2004, Hanmi Financial completed the acquisition of Pacific
Union Bank (“PUB”), Los Angeles, California, and PUB was
merged with Hanmi Bank.
Effective January 3, 2007, Hanmi Financial acquired two full-
service insurance agencies, Chun-Ha Insurance Services, Inc.
(“Chun-Ha”) and All World Insurance Services, Inc. (“AWI”),
Garden Grove, California, as wholly-owned subsidiaries. The
acquisition is not expected to have a significant effect on our
financial position or results of operations.
Market Area
Hanmi Bank historically has provided its banking services
through its branch network, located primarily in the Koreatown
area of Los Angeles, to a wide variety of small- to medium-sized
businesses. In recent years, it has expanded its service areas
through de novo branching to Orange County, Santa Clara and
San Diego and through acquisition to San Francisco and Seat-
tle. Throughout the Bank’s service area, competition is intense
for both loans and deposits. While the market for banking
services is dominated by a few nationwide banks with many
offices operating over a wide geographic area, savings banks,
thrift and loan associations, credit unions, mortgage compa-
nies, insurance companies and other lending institutions, the
Bank’s primary competitors are relatively smaller community
banks that focus their marketing efforts on Korean-American
businesses in the Bank’s service areas. Substantially all of our
assets are located in, and substantially all of our revenues are
derived from clients located within, the State of California.
In 2005 and 2006, the Bank opened loan production offices in
Atlanta, Chicago, Dallas, Denver and Annandale. These offices
will expand our geographic coverage by providing commercial
and industrial, real estate and Small Business Administration
(“SBA”) loans. The Bank also has loan production offices in Los
Angeles, California; the San Jose, California metropolitan area;
and the Seattle, Washington metropolitan area. We plan to
continue to expand our business services by opening additional
loan production offices in selected locations throughout the
United States. The Bank is a preferred SBA lender in the
following SBA districts: California (Los Angeles, Santa Ana,
San Diego, Fresno, San Francisco and Sacramento), Portland,
Seattle, Anchorage, Denver, Texas (Dallas and Houston), Illinois,
Georgia, Florida, Virginia, Washington, D.C., Maryland, New
Jersey and New York.
2
Lending Activities
Hanmi Bank originates loans for its own portfolio and for sale in
the secondary market. Lending activities include commercial
loans, SBA guaranteed loans, loans secured by real estate
(commercial mortgage loans, real estate construction loans
and residential mortgage loans) and consumer loans.
Hanmi Bank offers commercial
loans for intermediate and
short-term credit. Commercial loans may be unsecured, par-
tially secured or fully secured. The majority of the origination of
commercial loans is in Los Angeles and Orange Counties, and
loan maturities are normally 12 to 60 months. Hanmi Bank
requires a credit underwriting before considering any extension
of credit. The Bank finances primarily small and middle market
businesses in a wide spectrum of industries. Commercial and
industrial loans consist of credit lines for operating needs, loans
for equipment purchases and working capital, and various other
business purposes. As compared to consumer lending, com-
mercial lending entails significant additional risks. These loans
typically involve larger loan balances, are generally dependent
on the business’s cash flow and may be subject to adverse
conditions in the general economy or in a specific industry.
Short-term business loans generally are intended to finance
current operations and typically provide for periodic principal
payments, with interest payable monthly. Term loans normally
provide for floating interest rates, with monthly payments of
both principal and interest.
In general, it is the intent of Hanmi Bank to take collateral
whenever possible, regardless of the loan purpose(s). Collateral
may include liens on inventory, accounts receivable, fixtures and
equipment, leasehold improvements and real estate. When real
estate is the primary collateral, the Bank obtains formal apprais-
als in accordance with applicable regulations to support the
value of the real estate collateral. Typically, Hanmi Bank requires
all principals of a business to be co-obligors on all loan instru-
ments and all significant stockholders of corporations to exe-
cute a specific debt guaranty. All borrowers must demonstrate
the ability to service and repay not only their obligations to
Hanmi Bank debt, but also all outstanding business debt,
without liquidating the collateral, based on historical earnings
or reliable projections.
SBA Guaranteed Loans
Hanmi Bank originates loans qualifying for guarantees issued by
the United States SBA, an independent agency of the Federal
government. The SBA guarantees on such loans currently
range from 75 percent to 85 percent of the principal and
accrued interest. Under certain circumstances, the guarantee
of principal and interest may be less than 75 percent. In general,
the guaranteed percentage is less than 75 percent for loans
over $1.3 million. Hanmi Bank typically requires that SBA loans
be secured by business assets and by a first or second deed of
trust on any available real property. When the loan is secured by
a first deed of trust on real property, the Bank obtains appraisals
in accordance with applicable regulations. SBA loans have
terms ranging from five to twenty years depending on the
use of the proceeds. To qualify for a SBA loan, a borrower
must demonstrate the capacity to service and repay the loan,
without liquidating the collateral, on the basis of historical earn-
ings or reliable projections.
Hanmi Bank generally sells to unrelated third parties a substan-
tial amount of the guaranteed portion of the SBA guaranteed
loans that it originates. During the fourth quarter of 2006, the
Bank began selling the unguaranteed portion of SBA loans.
When Hanmi Bank sells a SBA loan, it may be obligated to
repurchase the loan (for a period of 90 days after the sale) if the
loan fails to comply with certain representations and warranties
given by the Bank. The Bank is also obligated to repurchase the
loan (before 120 days past due) if the loan is past due. Hanmi
Bank retains the obligation to service the SBA loans, for which it
receives servicing fees. The unsold portions of the SBA loans
that remain owned by Hanmi Bank are included in Loans
Receivable on the Consolidated Statements of Financial Con-
dition. As of December 31, 2006, Hanmi Bank had $171.6 mil-
lion in SBA loans in its portfolio, and was servicing $236.0 million
of SBA loans sold to investors.
Loans Secured by Real Estate
Real estate lending involves risks associated with the potential
decline in the value of the underlying real estate collateral and
the cash flow from income-producing properties. Declines in
real estate values and cash flows can be caused by a number of
factors, including adversity in general economic conditions,
rising interest rates, changes in tax and other laws and regu-
lations affecting the holding of real estate, environmental con-
ditions, governmental and other use restrictions, development
of competitive properties and increasing vacancy rates. When
real estate values decline, Hanmi Bank’s real estate depen-
dence increases the risk of loss both in Hanmi Bank’s loan
portfolio and any holdings of other real estate owned as a result
of foreclosures on loans.
Commercial Mortgage Loans
Hanmi Bank offers commercial real estate loans. These loans
are generally collateralized by first deeds of trust. For these
commercial mortgage loans, the Bank obtains formal apprais-
als in accordance with applicable regulations to support the
value of the real estate collateral. All appraisal reports on com-
mercial mortgage loans are reviewed by an appraisal review
officer. The review generally covers an examination of the
appraiser’s assumptions and methods that were used to derive
a value for the property, as well as compliance with the Uniform
Standards of Professional Appraisal Practice (the “USPAP”).
Hanmi Bank also considers the cash flow from the business.
The majority of the properties securing these loans are located
in Los Angeles and Orange Counties.
Hanmi Bank’s commercial real estate loans are principally
secured by investor-owned commercial buildings and owner-
occupied commercial and industrial buildings. Generally, these
types of loans are made for a period of up to seven years, with
monthly payments based upon a portion of the principal plus
accrued interest, and with a loan-to-value ratio of 65 percent or
less, using an adjustable rate indexed to the prime rate appear-
ing in the West Coast edition of The Wall Street Journal (“WSJ
Prime Rate”) or Hanmi Bank’s prime rate (“Bank Prime Rate”),
as adjusted from time to time. Hanmi Bank also offers fixed-rate
commercial real estate loans, including hybrid-fixed rate loans
that are fixed for one to five years and convert to adjustable rate
loans for the remaining term. Amortization schedules for com-
mercial real estate loans generally do not exceed 25 years.
Payments on loans secured by investor-owned and owner-
occupied properties are often dependent upon successful
operation or management of the properties. Repayment of
such loans may be subject to a greater extent to the risk of
adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways,
including limiting the size of such loans and strictly scrutinizing
the property securing the loan. The Bank seeks to manage
these risks in a variety of ways, including vacancy and interest
rate hike sensitivity analysis at the time of loan origination and
quarterly risk assessment of the total commercial real estate
secured loan portfolio that includes most recent industry trends.
When possible, the Bank also obtains corporate or individual
guarantees from financially capable parties. Representatives of
the Bank visit all of the properties securing the Bank’s real estate
loans before the loans are approved. The Bank requires title
insurance insuring the status of its lien on all of the real estate
secured loans when a first or second trust deed on the real
estate is taken as collateral. The Bank also requires the bor-
rower to maintain fire insurance, extended coverage casualty
insurance and, if the property is in a flood zone, flood insurance,
in an amount equal to the outstanding loan balance, subject to
applicable laws that may limit the amount of hazard insurance a
lender can require to replace such improvements. We cannot
assure that these procedures will protect against losses on
loans secured by real property.
Real Estate Construction Loans
Hanmi Bank finances the construction of multifamily,
low-
income housing, commercial and industrial properties within
its market area. The future condition of the local economy could
negatively affect the collateral values of such loans. The Bank’s
construction loans typically have the following characteristics:
(cid:129) maturities of two years or less;
(cid:129) a floating rate of interest based on the Bank Prime Rate or a
nationally recognized index such as the WSJ Prime Rate;
3
(cid:129) minimum cash equity of 35 percent of project cost;
(cid:129) reserve of anticipated interest costs during construction or
advance of fees;
(cid:129) first lien position on the underlying real estate;
(cid:129) loan-to-value ratios generally not exceeding 65 percent; and
Consumer Loans
(cid:129) recourse against the borrower or a guarantor in the event of
default.
Hanmi Bank does, on a case-by-case basis, commit to making
permanent loans on the property with loan conditions that
command strong project stability and debt service coverage.
Construction loans involve additional risks compared to loans
secured by existing improved real property. These include the
following:
(cid:129) the uncertain value of the project prior to completion;
(cid:129) the inherent uncertainty in estimating construction costs,
which are often beyond the borrower’s control;
(cid:129) construction delays and cost overruns;
(cid:129) possible difficulties encountered in connection with municipal
or other governmental regulations during construction; and
(cid:129) the difficulty in accurately evaluating the market value of the
completed project.
As a result of these uncertainties, construction lending often
involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather
than the ability of the borrower or guarantor to repay principal
and interest. If Hanmi Bank is forced to foreclose on a project
prior to or at completion due to a default, there can be no
assurance that Hanmi Bank will be able to recover all of the
unpaid balance of, or accrued interest on, the loans as well as
the related foreclosure and holding costs. In addition, Hanmi
Bank may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminable
time. Hanmi Bank has underwriting procedures
period of
designed to identify what it believes to be acceptable levels
of risk in construction lending. Among other things, qualified
and bonded third parties are engaged to provide progress
reports and recommendations for construction disbursements.
No assurance can be given that these procedures will prevent
losses arising from the risks described above.
Residential Mortgage Loans
4
Hanmi Bank originates fixed-rate and variable-rate mortgage
loans secured by one- to four-family properties with amortiza-
tion schedules of 15 to 30 years and maturities of up to 30 years.
The loan fees charged, interest rates and other provisions of the
Bank’s residential
loans are determined by an analysis of the
Bank’s cost of funds, cost of origination, cost of servicing, risk
factors and portfolio needs. The Bank may sell some of the
mortgage loans that it originates to secondary market partic-
ipants. The typical turn-around time from origination to sale is
between 30 and 90 days. The interest rate and the price of the
loan are typically agreed to prior to the loan origination.
Consumer loans are extended for a variety of purposes. Most
are for the purchase of automobiles. Other consumer loans
include secured and unsecured personal loans, home improve-
ment loans, home equity lines of credit (“HELOC’s”), overdraft
protection loans, unsecured lines of credit and credit cards.
Management assesses the borrower’s creditworthiness and
ability to repay the debt through a review of credit history
and ratings, verification of employment and other income,
review of debt-to-income ratios and other measures of repay-
ment ability. Although creditworthiness of the applicant is of
primary importance, the underwriting process also includes a
comparison of the value of the collateral, if any, to the proposed
loan amount. Most of Hanmi Bank’s loans to individuals are
repayable on an installment basis.
Any repossessed collateral for a defaulted consumer loan may
not provide an adequate source of repayment of the outstand-
ing loan balance, because the collateral is more likely to suffer
damage, loss or depreciation. The remaining deficiency often
does not warrant further collection efforts against the borrower
beyond obtaining a deficiency judgment. In addition, the col-
lection of loans to individuals is dependent on the borrower’s
continuing financial stability, and thus is more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, various Federal and state laws,
including bankruptcy and insolvency laws, often limit
the
amount that the lender can recover on loans to individuals.
Loans to individuals may also give rise to claims and defenses
by a consumer borrower against the lender on these loans, and
a borrower may be able to assert against any assignee of the
note these claims and defenses that the borrower has against
the seller of the underlying collateral.
Off-Balance Sheet Commitments
As part of its service to its small- to medium-sized business
customers, Hanmi Bank from time to time issues formal com-
mitments and lines of credit. These commitments can be either
secured or unsecured. They may be in the form of revolving lines
of credit for seasonal working capital needs or may take the
form of commercial letters of credit or standby letters of credit.
letters of credit facilitate import trade. Standby
Commercial
letters of credit are conditional commitments issued by Hanmi
Bank to guarantee the performance of a customer to a third
party.
Lending Procedures and Loan Limits
Loan applications may be approved by the Board of Directors’
Loan Committee, or by Hanmi Bank’s management or lending
officers to the extent of their lending authority. Individual lending
authority is granted to the Chief Credit Officer, the Deputy Chief
Credit Officer and the Senior Credit Officer. In early 2006, the
Bank granted lending authority to certain additional officers
including Branch Managers and the line managers to whom
they report. Loans for which direct and indirect borrower liability
exceeds an individual’s lending authority are referred to Hanmi
Bank’s Management Credit Committee and, for those in excess
of the Management Credit Committee’s approval limits, to the
Board of Directors’ Loan Committee.
At December 31, 2006, Hanmi Bank’s authorized legal lending
limits for loans to one borrower were $56.5 million for unsecured
loans plus an additional $37.6 million for specific secured loans.
Legal lending limits are calculated in conformance with Califor-
nia law, which prohibits a bank from lending to any one indi-
vidual or entity or its related interests an aggregate amount that
exceeds 15 percent of primary capital plus the allowance for
loan losses on an unsecured basis, plus an additional 10 per-
cent on a secured basis. Hanmi Bank’s primary capital plus
allowance for loan losses at December 31, 2006 totaled
$376.4 million.
Hanmi Bank seeks to mitigate the risks inherent in its loan
portfolio by adhering to certain underwriting practices. The
review of each loan application includes analysis of the appli-
cant’s experience, prior credit history, income level, cash flow,
financial condition, tax returns, cash flow projections, and the
value of any collateral to secure the loan, based upon reports of
independent appraisers and/or audits of accounts receivable or
inventory pledged as security. In the case of real estate loans
over a specified amount, the review of collateral value includes
an appraisal
report prepared by an independent Bank-
approved appraiser. All appraisal reports on commercial real
property secured loans are reviewed by an Appraisal Review
Officer. The review generally covers an examination of the
appraiser’s assumptions and methods that were used to derive
a value for the property, as well as compliance with the USPAP.
Allowance for Loan Losses, Allowance for Off-Balance
Sheet Items and Provision for Credit Losses
Hanmi Bank maintains an allowance for loan losses at a level
considered by management to be adequate to cover the inher-
ent risks of loss associated with its loan portfolio under pre-
vailing economic conditions. In addition, the Bank maintains an
allowance for off-balance sheet items associated with unfunded
commitments and letters of credit, which is included in Other
Liabilities on the Consolidated Statements of Financial
Condition.
Hanmi Bank follows the “Interagency Policy Statement on the
Allowance for Loan and Lease Losses” and analyzes the allow-
ance for loan losses on a quarterly 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 DFI and/or the
Board of Governors of the Federal Reserve System (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.
Deposits
We raise funds primarily through Hanmi Bank’s network of
branches. The Bank attracts deposits by offering a wide variety
of transaction and term accounts and personalized customer
service. Accounts offered include business and personal
checking accounts, savings accounts, negotiable order of with-
drawal (“NOW”) accounts, money market accounts and certif-
icates of deposit.
Website
We maintain an Internet website at www.hanmi.com. We make
available free of charge on the website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and any amendments thereto, as soon as rea-
sonably practicable after we file such reports with the Securities
and Exchange Commission (“SEC” or “the Commission”). None
of the information on or hyperlinked from our website is incor-
porated into this Annual Report on Form 10-K.
Employees
As of December 31, 2006, we had 589 full-time equivalent
employees. Our employees are not represented by a union or
covered by a collective bargaining agreement.
Insurance
We maintain financial
insur-
ance at levels deemed adequate by management to protect
Hanmi Financial from certain damages.
institution bond and commercial
Competition
The banking and financial services industry in California gen-
erally, and in Hanmi Bank’s market areas specifically, are highly
competitive. The increasingly competitive environment faced by
banks is a result primarily of changes in laws and regulation,
changes in technology and product delivery systems, new
competitors in the market, and the accelerating pace of con-
solidation among financial service providers. We compete for
loans, deposits and customers with other commercial banks,
savings institutions, securities and brokerage companies, mort-
gage companies, real estate investment trusts, insurance com-
panies, finance companies, money market funds, credit unions
and other non-bank financial service providers. Some of these
competitors are larger in total assets and capitalization, have
greater access to capital markets, including foreign-ownership,
and/or offer a broader range of financial services.
Among the advantages that the major banks have over Hanmi
Bank is their ability to finance extensive advertising campaigns
and to allocate their investment assets to regions of highest
yield and demand. Many of the major commercial banks oper-
ating in Hanmi Bank’s service areas offer specific services (for
instance, trust services) that are not offered directly by Hanmi
5
Bank. By virtue of their greater total capitalization, these banks
also have substantially higher lending limits than Hanmi Bank
does.
The recent trend has been for other institutions, including bro-
kerage firms, credit card companies and retail establishments,
to offer banking services to consumers, including money mar-
ket funds with check access and cash advances on credit card
accounts. In addition, other entities (both public and private)
seeking to raise capital through the issuance and sale of debt or
equity securities compete with banks in the acquisition of
deposits.
Hanmi Bank’s major competitors are relatively smaller commu-
nity banks that focus their marketing efforts on Korean-Amer-
ican businesses in Hanmi Bank’s service areas. Amongst these
banks, Hanmi Bank is the largest, with a loan portfolio that is
67.3 percent larger than its nearest competitor’s loan portfolio,
and a deposit portfolio that is 68.1 percent larger than its
nearest competitor’s deposit portfolio. These banks compete
for loans primarily through the interest rates and fees they
charge and the convenience and quality of service they provide
to borrowers. The principal bases of competition for deposits
are the interest rate paid, convenience and service.
In order to compete with other financial institutions in its service
area, Hanmi Bank relies principally upon local promotional
activity, including advertising in the local media, personal con-
tacts, direct mail and specialized services. The Bank’s promo-
tional activities emphasize the advantages of dealing with a
locally owned and headquartered institution attuned to the
particular needs of the community.
Economic Conditions, Government Policies, Legislation
and Regulation
Our profitability, like that of most financial institutions, is primarily
dependent on interest rate differentials. In general, the differ-
ence between the interest rates paid by us on interest-bearing
liabilities, such as deposits and other borrowings, and the
interest rates received by us on our interest-earning assets,
such as loans extended to our customers and securities held in
our investment portfolio, will comprise the major portion of our
earnings. These rates are highly sensitive to many factors that
are beyond our control, such as inflation, recession and unem-
ployment, and the impact that future changes in domestic and
foreign economic conditions might have on us cannot be
predicted.
6
Our business is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory
agencies, particularly the FRB. The FRB implements national
monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in
U.S. Government securities, by adjusting the required level of
reserves for depository institutions subject to its reserve require-
ments, and by varying the target federal funds and discount
rates applicable to borrowings by depository institutions. The
actions of the FRB in these areas influence the growth of bank
loans, investments and deposits and also affect interest earned
on interest-earning assets and interest paid on interest-bearing
liabilities. The nature and impact on us of any future changes in
monetary and fiscal policies cannot be predicted.
From time to time, federal and state legislation is enacted which
may have the effect of materially increasing the cost of doing
business, limiting or expanding permissible activities, or affect-
ing the competitive balance between banks and other financial
services providers, such as recent federal legislation permitting
affiliations among commercial banks, insurance companies and
securities firms. We cannot predict whether or when any poten-
tial legislation will be enacted, and if enacted, the effect that it, or
any implementing regulations, would have on our financial
condition or results of operations. In addition, the outcome of
any investigations initiated by state authorities or litigation rais-
ing issues may result in necessary changes in our operations,
additional regulation and increased compliance costs.
Supervision and Regulation
General
We are extensively regulated under both Federal and certain
state laws. Regulation and supervision by the federal and state
banking agencies is intended primarily for the protection of
depositors and the Deposit Insurance Fund (“DIF”) adminis-
tered by the Federal Deposit Insurance Corporation (“FDIC”),
and not for the benefit of stockholders. Set forth below is a
summary description of the key laws and regulations that relate
to our operations. These descriptions are qualified in their
entirety by reference to the applicable laws and regulations.
Hanmi Financial
As a financial holding company, we are subject to regulation and
examination by the FRB under the BHCA. We are required to file
with the FRB periodic reports and such additional information
as the FRB may require.
The FRB may require us to terminate an activity or terminate
control of, liquidate or divest certain subsidiaries, affiliates or
investments if the FRB believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of our banking subsidiary. The
FRB also has the authority to regulate provisions of certain bank
holding company debt, including the authority to impose inter-
est ceilings and reserve requirements on such debt. Under
certain circumstances, we must file written notice and obtain
FRB approval prior to purchasing or redeeming our equity
securities. Further, we are required by the FRB to maintain
certain levels of capital. See “Capital Standards.”
We are required to obtain prior FRB approval for the acquisition
of more than five percent of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank
or bank holding company. Prior FRB approval is also required
for the merger or consolidation of a bank holding company with
another bank holding company. Similar state banking agency
approvals may also be required. Certain competitive, manage-
ment, financial and other factors are considered by the bank
regulatory agencies in granting these approvals.
We are prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect owner-
ship or control of more than five percent of the outstanding
voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or
furnishing services to subsidiaries. However, subject to prior
notice or FRB approval, we may engage in any, or acquire
shares of companies engaged in, those non-banking activities
that the FRB deems to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto. We may make acquisitions and engage in these
non-banking and certain other activities without prior FRB
approval pursuant
to our election as a financial holding
company.
FRB regulations require that each bank holding company serve
as a source of financial and managerial strength to its subsidiary
bank(s) and commit resources as necessary to support each
subsidiary bank. A bank holding company’s failure to meet its
obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the FRB to be an unsafe
and unsound banking practice or a violation of FRB regulations
or both. The FRB’s bank holding company rating system
emphasizes risk management and evaluation of the potential
impact of non-depository entities on safety and soundness.
We are also a bank holding company within the meaning of the
California Financial Code. As such, Hanmi Financial and our
subsidiary are subject to examination by, and may be required
to file reports with, the DFI.
Financial Holding Status
In order to elect or retain financial holding company status, our
depository institution subsidiary must be well-capitalized, well-
managed, and, except in limited circumstances, in satisfactory
compliance with the Community Reinvestment Act (“CRA”).
Failure to sustain compliance with these requirements or cor-
rect any non-compliance within a fixed time period could lead to
divestiture of subsidiary banks or require us to conform all of our
activities to those permissible for a bank holding company. We
elected financial holding company status in 2000.
As a bank holding company that has elected to be a financial
holding company, we may affiliate with securities firms and
insurance companies and engage in other activities, without
prior FRB notice or approval, that are determined to be financial
in nature or are incidental or complementary to activities that are
financial in nature. “Financial in nature” activities include:
(cid:129) lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities;
(cid:129) providing any device or other instrumentality for transferring
money or other financial assets;
(cid:129) arranging, effecting or facilitating financial transactions for the
account of third parties;
(cid:129) securities underwriting;
(cid:129) dealing and market making;
(cid:129) sponsoring mutual funds and investment companies;
(cid:129) insurance underwriting and agency sales;
(cid:129) merchant banking investments; and
(cid:129) activities that the FRB, in consultation with the Secretary of
the Treasury, determines from time to time to be so closely
related to banking or managing or controlling banks as to be a
proper incident thereto.
The Bank
As a California chartered bank that is a member of the Federal
Reserve, we are subject to primary supervision, periodic exam-
ination and regulation by the DFI and the FRB through the
Federal Reserve Bank of San Francisco, as well as certain
regulations promulgated by the FDIC. If, as a result of an
examination of the Bank, the FRB or DFI determines that the
financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of our bank-
ing operations are unsatisfactory or that the Bank is violating or
has violated any law or regulation, various remedies are avail-
able to the FRB, including the power to require affirmative action
to correct any conditions resulting from any violation or practice;
enter into informal non-public or formal public memoranda of
understanding or written agreements with the Bank to take
corrective action; issue an administrative order that can be
judicially enforced; enjoin “unsafe or unsound” practices; direct
an increase in capital; restrict our growth; assess civil monetary
penalties; and remove officers and directors. Ultimately, the DFI
could take possession and close and liquidate the Bank.
The DFI also possesses broad powers to take corrective and
other supervisory actions to resolve the problems of California
state-chartered banks. These enforcement powers include
cease and desist orders, the imposition of fines, the ability to
take possession of a bank and the ability to close and liquidate a
bank.
7
Changes, such as the following, in Federal or state banking laws
or the regulations, policies or guidance of the Federal or state
banking agencies could have a material adverse impact on us,
the Bank and our operations:
(cid:129) In December 2006, the Federal banking agencies issued final
guidance to reinforce sound risk management practices for
bank holding companies and banks in commercial real estate
(“CRE”) loans which establishes CRE concentration thresh-
olds as criteria for examiners to identify CRE concentration
that may warrant further analysis. The implementation of
these guidelines could result in increased reserves and cap-
ital costs for banks with “CRE concentration.” As of Decem-
ber 31, 2006, the Bank’s CRE portfolio would not meet the
definition of CRE concentration as set forth in the guidelines.
(cid:129) In September 2006, the Federal banking agencies issued
final guidance on alternative residential mortgage products
that allow borrowers to defer repayment of principal and
sometimes interest, including “interest-only” mortgage loans,
and “payment option” adjustable rate mortgages where a
borrower has flexible payment options, including payments
that have the potential
for negative amortization. While
acknowledging that innovations in mortgage lending can
benefit some consumers, the final guidance states that man-
agement should (1) assess a borrower’s ability to repay the
loan, including any principal balances added through nega-
tive amortization, at the fully indexed rate that would apply
after the introductory period, (2) recognize that certain non-
traditional mortgages are untested in a stressed environment
and warrant strong risk management standards as well as
appropriate capital and loan loss reserves, and (3) ensure that
borrowers have sufficient information to clearly understand
loan terms and associated risks prior to making a product or
payment choice. The Bank believes its products and disclo-
sures are in conformance with the requirements of the
guidance.
(cid:129) Pursuant to the Financial Services Regulatory Relief Act of
2006, the SEC and the FRB have released, as Regulation R,
joint proposed rules expected to be finalized by midyear to
implement exceptions provided for in the Gramm-Leach-
Bliley Act for bank securities activities which banks may
conduct without registering with the SEC as securities bro-
kers or moving such activities to a broker-dealer affiliate. The
proposed Regulation R “push out” rules exceptions would
allow a bank, subject to certain conditions, to continue to
conduct securities transactions for customers as part of the
bank’s trust and fiduciary, custodial and deposit “sweep”
functions, and to refer customers to a securities broker-
dealer pursuant to a networking arrangement with the bro-
ker-dealer. The proposed rules, if adopted, are not expected
to have a material effect on the current securities activities
which the Bank now conducts for customers.
Because California permits commercial banks chartered by the
state to engage in any activity permissible for national banks,
the Bank may form subsidiaries to engage in the many so-called
“non-banking” activities
“closely related to banking” or
commonly conducted by national banks in operating subsid-
iaries, and may conduct certain “financial activities” in a sub-
sidiary to the same extent as may a national bank. However, in
order to form a financial subsidiary, the Bank must be “well-
capitalized,” “well-managed” and in satisfactory compliance
with the CRA. Further, the Bank must exclude from its assets
and equity all equity investments, including retained earnings, in
a financial subsidiary. The assets of the subsidiary may not be
consolidated with the Bank’s assets. The Bank must also have
policies and procedures to assess financial subsidiary risk and
protect the Bank from such risks and potential
liabilities and
would be subject to the same capital deduction, risk manage-
ment and affiliate transaction rules as applicable to national
banks. Generally, a financial subsidiary is permitted to engage in
activities that are “financial in nature” or incidental thereto, even
though they are not permissible for the national bank to conduct
directly within the Bank. The definition of “financial
in nature”
includes, among other items, underwriting, dealing in or making
a market
for example, distributing
including,
shares of mutual funds. The subsidiary may not, however, under
present law, engage as principal
in underwriting insurance
(other than credit life insurance), issue annuities or engage in
real estate brokerage or in merchant banking activities. Chun-
Ha and AWI are financial subsidiaries of Hanmi Financial.
in securities,
Federal Home Loan Bank (“FHLB”) System
The Bank is a member of the FHLB of San Francisco. Among
other benefits, each FHLB serves as a reserve or central bank
for its members within its assigned region. Each FHLB is
financed primarily from the sale of consolidated obligations of
the FHLB system. Each FHLB makes available loans or
advances to its members in compliance with the policies and
procedures established by the Board of Directors of the indi-
vidual FHLB. As a FHLB member, we are required to own a
certain amount of capital stock in the FHLB. At December 31,
2006, we were in compliance with the stock requirements.
Interstate Banking and Branching
Subject to certain size limitations under the Riegle-Neal Inter-
state Banking Act, bank holding companies and banks have the
ability to acquire and merge with banks in other states; and,
subject to certain state restrictions, banks may also acquire or
establish new branches outside their home states. Interstate
branches are subject to certain laws of the states in which they
are located. Competition may increase further as banks branch
across state lines and enter new markets.
The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addressed accounting over-
sight and corporate governance matters, and, among other
things:
(cid:129) required executive certification of financial presentations;
8
(cid:129) increased requirements for board audit committees and their
members;
(cid:129) enhanced disclosure of controls and procedures and internal
control over financial reporting;
(cid:129) enhanced controls on, and reporting of, insider trading; and
(cid:129) increased penalties for financial crimes and forfeiture of exec-
utive bonuses in certain circumstances.
The legislation and its implementing regulations have resulted in
increased costs of compliance, including certain outside pro-
fessional costs. To date, these costs have not had a material
impact on our operations.
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of
income to Hanmi Financial, which is a legal entity separate
and distinct from the Bank. A FRB policy statement on the
payment of cash dividends states that a bank holding company
should pay cash dividends only to the extent that the holding
company’s net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is
consistent with the holding company’s capital needs, asset
quality and overall financial condition. The FRB also indicated
that it would be inappropriate for a company experiencing
serious financial problems to borrow funds to pay dividends.
Furthermore, under the Federal prompt corrective action reg-
ulations, the FRB may prohibit a bank holding company from
paying any dividends if the holding company’s bank subsidiary
is classified as “undercapitalized.” See “Capital Standards”
below.
The Bank is subject to various statutory and regulatory restric-
tions on its ability to pay dividends. Under such restrictions, the
amount available for payment of dividends to Hanmi Financial
by the Bank totaled $131.0 million at December 31, 2006. In
addition, the Bank’s regulators have the authority to prohibit the
Bank from paying dividends, depending upon the Bank’s finan-
cial condition, if such payment is deemed to constitute an
unsafe or unsound practice.
Capital Standards
The Federal banking agencies have adopted risk-based min-
imum capital guidelines for bank holding companies and banks
that are intended to provide a measure of capital that reflects
the degree of risk associated with a banking organization’s
operations for both transactions reported on the balance sheet
as assets and transactions which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items
are multiplied by one of several risk adjustment percentages,
which range from zero percent for assets with low credit risk,
such as certain U.S. Treasury securities, to 100 percent for
assets with relatively high credit risk, such as business loans.
Under the capital guidelines, a banking organization’s total
capital is divided into tiers. “Tier I capital” consists of (1) common
equity, (2) qualifying non-cumulative perpetual preferred stock,
(3) a limited amount of qualifying cumulative perpetual preferred
stock and (4) minority interests in the equity accounts of con-
solidated subsidiaries (including trust-preferred securities), less
goodwill and certain other intangible assets. Qualifying Tier I
capital may consist of trust-preferred securities, subject to the
FRB’s final rule adopted March 4, 2005, which changed the
criteria and quantitative limits for inclusion of restricted core
capital elements in Tier I capital. “Tier II capital” consists of
hybrid capital instruments, perpetual debt, mandatory convert-
ible debt securities, a limited amount of subordinated debt,
preferred stock and trust-preferred securities that do not qualify
as Tier I capital, a limited amount of the allowance for loan and
lease losses and a limited amount of unrealized holding gains on
equity securities. “Tier III capital” consists of qualifying unse-
cured subordinated debt. The sum of Tier II and Tier III capital
may not exceed the amount of Tier I capital.
The risk-based capital guidelines require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8.0 percent and
a minimum ratio of Tier 1 capital to risk-adjusted assets of
4.0 percent. In addition to the risk-based guidelines, Federal
banking regulators require banking organizations to maintain a
minimum amount of Tier 1 capital to total assets, referred to as
the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3.0 percent.
As of December 31, 2006, the regulatory capital guidelines and
the actual capital ratios for Hanmi Financial and the Bank were
as follows:
Requirement
Actual as of
December 31, 2006
Adequately
Capitalized
Well
Capitalized
Hanmi
Bank
Hanmi
Financial
Total Risk-Based
Capital Ratio
Tier 1 Risk-Based
Capital Ratio
Tier 1 Leverage
Capital Ratio
8.0%
10.0% 12.28% 12.55%
4.0%
6.0% 11.31% 11.58%
4.0%
5.0% 9.85% 10.08%
The current risk-based capital guidelines are based upon the
1988 capital accord of the International Basel Committee on
Banking Supervision. A new international accord, referred to as
Basel II, which emphasizes internal assessment of credit, mar-
ket and operational risk, supervisory assessment and market
discipline in determining minimum capital requirements, cur-
rently becomes mandatory outside the U.S. in 2008. In October
2006, the U.S. federal banking agencies issued a notice of
proposed rulemaking for comment to implement Basel II for
9
U.S. banks with certain differences from the international Basel II
framework and which would not be fully in effect for U.S. banks
until 2012. Further, the U.S. banking agencies propose to retain
the minimum leverage requirement and prompt corrective
action regulatory standards. In December 2006, the federal
banking agencies issued another notice of proposed rulemak-
ing for comment, referred to as Basel
IA, which proposed
alternative capital requirements for smaller U.S. banks that
may be negatively impacted competitively by certain provisions
of Basel II. Additional guidance on Basel II issued in February
2007 stated the agencies’ expectation that to determine the
extent to which banks should hold capital in excess of regula-
tory minimum levels, examiners would examine the combined
implications of a bank’s compliance with qualification require-
ments for regulatory risk-based capital standards, the quality
and results of the bank’s internal capital adequacy assessment
process, and the examiners’ assessment of the bank’s risk
profile and capital position. At this time, the impact that pro-
posed changes in capital requirements may have on the cost
and availability of different types of credit and the compliance
cost of implementing Basel II or Basel IA, as applicable, are
uncertain.
The federal banking agencies possess broad power under the
FDI Act to take “prompt corrective action” to resolve the prob-
lems of insured depository institutions that fall within any under-
capitalized category. In addition, the federal banking agencies
have adopted non-capital safety and soundness standards
relating to: (i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) asset quality and growth, (v) earnings, (vi) risk management,
and (vii) compensation and benefits.
formula and factors to be considered by the FDIC in calculating
the FDIC reserve ratio, assessments and dividends, and a one-
time aggregate assessment credit for depository institutions in
existence on December 31, 1996 (or their successors) which
paid assessments to recapitalize the insurance funds after the
banking crises of the late 1980s and early 1990s. The FDIC
issued final regulations, effective January 1, 2007, implement-
ing the provisions of FDIRA and, in February 2007, issued for
comment guidelines, including business line concentrations
and risk of failure and severity of loss in the event of failure to
be used by the FDIC for possibly raising premiums by up to 0.50
basis points for large banks with $10 billion or more in assets.
The FDIC may terminate a depository institution’s deposit insur-
ance upon a finding by the FDIC that the institution’s financial
condition is unsafe or unsound or that the institution has
engaged in unsafe or unsound practices that pose a risk to
the DIF or they may prejudice the interests of the bank’s depos-
itors. The termination of deposit insurance for the Bank also
result in the revocation of the Bank’s charter by the DFI.
All FDIC-insured depository institutions must also pay an annual
assessment to provide funds for the payment of interest on
bonds issued by the Financing Corporation, a Federal corpo-
ration chartered under the authority of the Federal Housing
Finance Board. The bonds, commonly referred to as FICO
bonds, were issued to capitalize the Federal Savings and Loan
Insurance Corporation. The FICO assessment rate for the fourth
quarter of fiscal 2006 was 1.24 basis points for each $100 of
assessable deposits. The FICO assessments are adjusted
quarterly to reflect changes in the assessment bases of the
FDIC’s insurance funds and do not vary depending on a depos-
itory institution’s capitalization or supervisory evaluations.
Premiums for Deposit Insurance
Through the DIF, the FDIC insures our customer deposits up to
prescribed limits for each depositor. The amount of FDIC
assessments paid by each DIF member institution is based
on its relative risk of default as measured by regulatory capital
ratios and other factors. Specifically, the assessment rate is
based on the institution’s capitalization risk category and super-
visory subgroup category. An institution’s capitalization risk
category is based on the FDIC’s determination of whether
the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution’s supervisory sub-
group category is based on the FDIC’s assessment of the
financial condition of the institution and the probability that
FDIC intervention or other corrective action will be required.
Extensions of Credit to Insiders and Transactions with
Affiliates
The Federal Reserve Act and FRB Regulation O place limita-
tions and conditions on loans or extensions of credit to:
(cid:129) a bank’s or bank holding company’s executive officers, direc-
tors and principal shareholders (i.e., in most cases, those
persons who own, control or have power to vote more than
10 percent of any class of voting securities);
(cid:129) any company controlled by any such executive officer, direc-
tor or shareholder; or
(cid:129) any political or campaign committee controlled by such
executive officer, director or principal shareholder.
10
The assessment rate currently ranges from zero to 27 cents per
$100 of domestic deposits. The FDIC may increase or decrease
the assessment rate schedule on a semi-annual basis. Due
principally to continued growth in deposits, the BIF is nearing its
minimum ratio of 1.25 percent of insured deposits as mandated
by law. The Federal Deposit Insurance Reform Act of 2006
(“FDIRA”) provided, among other things, for changes in the
Loans and leases extended to any of the above persons must
comply with the loan-to-one-borrower limits, require prior full
board approval when aggregate extensions of credit to the
person exceed specified amounts, must be made on substan-
tially the same terms (including interest rates and collateral) as,
and follow credit-underwriting procedures that are not less
stringent than, those prevailing at the time for comparable
transactions with non-insiders, and must not involve more than
the normal risk of repayment or present other unfavorable
features. In addition, Regulation O provides that the aggregate
limit on extensions of credit to all insiders of a bank as a group
cannot exceed the bank’s unimpaired capital and unimpaired
surplus. Regulation O also prohibits a bank from paying an
overdraft on an account of an executive officer or director,
except pursuant to a written pre-authorized interest-bearing
extension of credit plan that specifies a method of repayment or
a written pre-authorized transfer of funds from another account
of the officer or director at the bank.
The Bank also is subject to certain restrictions imposed by
Federal Reserve Act Sections 23A and 23B and FRB Regula-
tion W on any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, any affiliates, the
purchase of, or investments in, stock or other securities thereof,
the taking of such securities as collateral for loans, and the
purchase of assets of any affiliates. Such restrictions prevent
any affiliates from borrowing from the Bank unless the loans are
secured by marketable obligations of designated amounts.
Further, such secured loans and investments to or in any affiliate
are limited, individually, to 10.0 percent of our capital and
surplus (as defined by Federal regulations), and such secured
loans and investments are limited, in the aggregate, to 20.0 per-
cent of our capital and surplus. Some of the entities included in
the definition of an affiliate are parent companies, sister banks,
sponsored and advised companies, investment companies
whereby the Bank’s affiliate serves as investment advisor,
and financial subsidiaries of the Bank. Additional restrictions
on transactions with affiliates may be imposed on us under the
prompt corrective action provisions of Federal
law and the
supervisory authority of the Federal and state banking agencies.
USA PATRIOT Act
The USA PATRIOT Act of 2001 and its implementing regulations
significantly expanded the anti-money laundering and financial
transparency laws. Under the USA PATRIOT Act, financial insti-
tutions are required to establish and maintain anti-money laun-
dering programs, which include:
(cid:129) the establishment of a customer identification program;
(cid:129) the development of
internal policies, procedures, and
controls;
(cid:129) the designation of a compliance officer;
(cid:129) an ongoing employee training program; and
(cid:129) an independent audit function to test the programs.
The Bank has adopted comprehensive policies and procedures
to address the requirements of the USA PATRIOT Act. Material
deficiencies in anti-money laundering compliance can result in
public enforcement actions by the banking agencies, including
the imposition of civil money penalties and supervisory restric-
tions on growth and expansion. Such enforcement actions
could have serious reputation consequences for Hanmi Finan-
cial and the Bank.
Consumer Laws
Examination and enforcement by the bank regulatory agencies
for non-compliance with consumer protection laws and their
implementing regulations have become more intense in nature.
The Bank is subject to many Federal consumer protection
statutes and regulations, some of which are discussed below.
The Home Ownership and Equal Protection Act of 1994
(“HOEPA”) requires extra disclosures and consumer protections
to borrowers for certain lending practices. The term “predatory
lending,” much like the terms “safety and soundness” and
“unfair and deceptive practices,” is far-reaching and covers a
potentially broad range of behavior. As such, it does not lend
itself to a concise or a comprehensive definition. Typically,
predatory lending involves at least one, and perhaps all three,
of the following elements:
(cid:129) making unaffordable loans based on the assets of the bor-
rower rather than on the borrower’s ability to repay an obli-
gation (“asset-based lending”);
(cid:129) inducing a borrower to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced
(“loan flipping”); and/or
(cid:129) engaging in fraud or deception to conceal the true nature of
the loan obligation from an unsuspecting or unsophisticated
borrower.
Regulatory and banking agency guidelines aimed at curbing
predatory lending significantly widen the pool of high cost home
secured loans covered by HOEPA. In addition, the regulations
bar certain refinances within a year with another loan subject to
HOEPA by the same lender or loan servicer. Lenders also will be
presumed to have violated the law — which says loans should
not be made to people unable to repay them — unless they
document that the borrower has the ability to repay. Lenders
that violate the rules face cancellation of loans and penalties
equal to the finance charges paid. We do not expect these rules
and potential state action in this area to have a material impact
on our financial condition or results of operation.
Privacy policies are required by Federal banking regulations that
institutions to dis-
limit the ability of banks and other financial
close non-public information about consumers to non-affiliated
third parties. Pursuant to those rules, financial institutions must
provide:
11
(cid:129) initial notices to customers about
their privacy policies,
describing the conditions under which they may disclose
non-public personal information to non-affiliated third parties
and affiliates;
(cid:129) annual notices of their privacy policies to current customers;
and
(cid:129) a reasonable method for customers to “opt out” of disclo-
sures to non-affiliated third parties.
These privacy protections affect how consumer information is
transmitted through diversified financial companies and con-
veyed to outside vendors.
In addition, state laws may impose more restrictive limitations
on the ability of financial institution to disclose such information.
California has adopted such a privacy law that among other
things generally provides that customers must “opt in” before
information may be disclosed to certain non-affiliated third
parties.
firms to help deter identity theft,
The Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act (“FACT Act”), requires finan-
cial
including developing
appropriate fraud response programs, and gives consumers
more control of their credit data. It also reauthorizes a Federal
ban on state laws that interfere with corporate credit granting
and marketing practices. In connection with FACT Act, financial
institution regulatory agencies proposed rules that would pro-
hibit an institution from using certain information about a con-
sumer it received from an affiliate to make a solicitation to the
consumer, unless the consumer has been notified and given a
chance to opt out of such solicitations. A consumer’s election to
opt out would be applicable for at least five years.
The Check Clearing for the 21st Century Act (“Check 21”)
facilitates check truncation and electronic check exchange
by authorizing a new negotiable instrument called a “substitute
check,” which is the legal equivalent of an original check. Check
21 does not require banks to create substitute checks or accept
checks electronically; however, it does require banks to accept
a legally equivalent substitute check in place of an original. In
addition to its issuance of regulations governing substitute
checks, the Federal Reserve has issued final rules governing
the treatment of remotely created checks (sometimes referred
to as “demand drafts”) and electronic check conversion trans-
actions (involving checks that are converted to electronic trans-
actions by merchants and other payees).
The Equal Credit Opportunity Act (“ECOA”) generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited cir-
cumstances), receipt of income from public assistance pro-
grams, or good faith exercise of any rights under the Consumer
Credit Protection Act.
12
The Truth in Lending Act (“TILA”) is designed to ensure that
credit terms are disclosed in a meaningful way so that con-
sumers may compare credit terms more readily and knowl-
edgeably. As a result of the TILA, all creditors must use the same
credit terminology to express rates and payments, including the
the amount
annual percentage rate,
financed, the total of payments and the payment schedule,
among other things.
the finance charge,
The Fair Housing Act (“FH Act”) regulates many practices,
including making it unlawful for any lender to discriminate in
its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap
or familial status. A number of lending practices have been
found by the courts to be, or may be considered, illegal under
the FH Act, including some that are not specifically mentioned in
the FH Act itself.
The CRA is intended to encourage insured depository institu-
tions, while operating safely and soundly, to help meet the credit
needs of their communities. The CRA specifically directs the
Federal regulatory agencies, in examining insured depository
institutions, to assess a bank’s record of helping meet the credit
needs of its entire community, including low- and moderate-
income neighborhoods, consistent with safe and sound bank-
ing practices. The CRA further requires the agencies to take a
institution’s record of meeting its community credit
financial
needs into account when evaluating applications for, among
other things, domestic branches, mergers or acquisitions, or
holding company formations. The agencies use the CRA
assessment factors in order to provide a rating to the financial
institution. The ratings range from a high of “outstanding” to a
low of “substantial non-compliance.” In its last examination for
CRA compliance, as of August 30, 2004, the Bank was rated
“Satisfactory.”
The Home Mortgage Disclosure Act (“HMDA”) grew out of
public concern over credit shortages in certain urban neigh-
borhoods and provides public information that will help show
institutions are serving the housing credit
whether financial
needs of the neighborhoods and communities in which they
are located. The HMDA also includes a “fair lending” aspect that
requires the collection and disclosure of data about applicant
and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimina-
tion statutes. The Federal Reserve Board amended regulations
issued under HMDA to require the reporting for 2004 of certain
pricing data with respect to higher priced mortgage loans. The
expanded 2004 HMDA data is being reviewed by Federal
banking agencies and others from a fair lending perspective.
We do not expect that the HMDA data reported by the Bank for
2005 will raise material issues regarding the Bank’s compliance
with the fair lending laws.
The Real Estate Settlement Procedures Act (“RESPA”) requires
lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements. Also, RESPA pro-
hibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts. Penalties under
the above laws may include fines, reimbursements and other
penalties.
The National Flood Insurance Act (“NFIA”) requires homes in
flood-prone areas with mortgages from a federally regulated
lender to have flood insurance. Hurricane Katrina focused
awareness on this requirement. Lenders are required to provide
notice to borrowers of special flood hazard areas and require
such coverage before making, increasing, extending or renew-
ing such loans. Financial institutions that demonstrate a pattern
and practice of lax compliance are subject to the issuance of
cease and desist orders and the imposition of per loan civil
money penalties, up to a maximum fine, which currently is
$125,000. Fine payments are remitted to the Federal Emer-
gency Management Agency for deposit into the National Flood
Mitigation Fund.
Due to heightened regulatory concern related to compliance
with HOEPA, privacy laws and regulations, FACT, Check 21,
ECOA, TILA, FH Act, CRA, HMDA, RESPA and NFIA generally,
the Bank may incur additional compliance costs or be required
to expend additional funds for CRA investments.
Regulation of Subsidiaries
Non-bank subsidiaries are subject to additional or separate
regulation and supervision by other state, Federal and self-
regulatory bodies. Chun-Ha and AWI are subject to the licens-
ing and supervisory authority of the California Commissioner of
Insurance.
Item 1A. Risk Factors
In addition to other factors set forth herein, below is a discussion
of certain factors that may affect our financial operations and
should be considered in evaluating us:
Our Southern California business focus and economic con-
ditions in Southern California could adversely affect our oper-
ations. The Bank’s operations are located primarily in Los
Angeles and Orange counties. Because of this geographic
concentration, our results depend largely upon economic con-
ditions in these areas. Deterioration in economic conditions in
the Bank’s market area, or a significant natural or man-made
disaster in these market areas, could have a material adverse
effect on the quality of the Bank’s loan portfolio, the demand for
its products and services and on its overall financial condition
and results of operations.
Our concentrations in commercial real estate loans located
primarily in Southern California could have adverse effects on
credit quality. Approximately 33.5 percent of the Bank’s loan
portfolio consists of commercial real estate and construction
loans, primarily in Southern California. As a result of this con-
centration, a deterioration of the Southern California commer-
cial real estate market could have adverse consequences for
the Bank. Among the factors that could contribute to such a
decline are general economic conditions in Southern California,
interest rates and local market construction and sales activity.
rates.
Our earnings are affected by changing interest
Changes in interest rates affect the level of loans, deposits
and investments, the credit profile of existing loans, the rates
received on loans and securities and the rates paid on deposits
and borrowings. Significant fluctuations in interest rates may
have a material adverse effect on our financial condition and
results of operations.
We are subject to government regulations that could limit or
restrict our activities, which in turn could adversely affect our
operations. The financial services industry is subject to exten-
sive Federal and state supervision and regulation. Significant
new laws, changes in existing laws, or repeals of existing laws
may cause our results to differ materially. Further, Federal mon-
etary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit conditions and a
material change in these conditions could have a material
adverse affect on our
financial condition and results of
operations.
Competition may adversely affect our performance. The
banking and financial services businesses in our market areas
are highly competitive. We face competition in attracting depos-
its, in making loans and attracting and retaining employees. The
increasingly competitive environment is a result of changes in
regulation, changes in technology and product delivery sys-
tems, new competitors in the market, and the pace of consol-
idation among financial services providers. Our results in the
future may differ depending upon the nature and level of
competition.
If a significant number of borrowers, guarantors or related
parties fail to perform as required by the terms of their loans,
we could sustain losses. A significant source of risk arises
from the possibility that losses will be sustained because bor-
rowers, guarantors or related parties may fail to perform in
accordance with the terms of their loans. We have adopted
underwriting and credit monitoring procedures and credit pol-
icies, including the establishment and review of the allowance
for loan losses, that management believes are appropriate to
limit this risk by assessing the likelihood of non-performance,
tracking loan performance and diversifying our credit portfolio.
These policies and procedures, however, may not prevent
unexpected losses that could have a material adverse effect
on our financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
13
Item 2. Properties
Hanmi Financial’s principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California. The office is
leased pursuant to a five-year term, which expires on November 30, 2008.
The following table sets forth information about our offices:
Office
Type of Office
Address
City/State
Owned/
Leased
Corporate Headquarters
Headquarters(1)
Cerritos Branch
Downtown Branch
Fashion District Branch
Garden Grove Branch
Gardena Branch
Irvine Branch
Koreatown Galleria Branch
Branch
Branch
Branch
Branch
Branch
Branch
Branch
Koreatown Plaza Branch
Mid-Olympic Branch
Olympic Branch
Rowland Heights Branch
San Diego Branch
San Francisco Branch
Silicon Valley Branch
South Cerritos Branch
Torrance Branch
Van Nuys Branch
Vermont Branch
West Garden Grove Branch
West Torrance Branch
Western Branch
Wilshire Branch
Commercial Loan Department
SBA Loan Department
Atlanta LPO
Chicago LPO
Dallas LPO
Denver LPO
Northern California LPO
Northwest Region LPO No. 1
Northwest Region LPO No. 2
Virginia LPO
Branch(2)
Branch(3)
Branch(4)
Branch
Branch
Branch
Branch
Branch
Branch
Branch
Branch(5)
Branch
Branch
Branch
Main Branch(6)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
Loan Office(1)
3660 Wilshire Boulevard,
Penthouse Suite A
11754 East Artesia Boulevard
950 South Los Angeles Street
726 East 12th Street, Suite 211
9820 Garden Grove Boulevard
2001 West Redondo Beach Boulevard
14474 Culver Drive, Suite D
3250 West Olympic Boulevard,
Suite 200
928 South Western Avenue, Suite 260
3099 West Olympic Boulevard
3737 West Olympic Boulevard
18720 East Colima Road
4637 Convoy Street, Suite 101
1491 Webster Street
2765 El Camino Real
11900 South Street, Suite 109
2370 Crenshaw Boulevard, Suite H
14427 Sherman Way
933 South Vermont Avenue
9122 Garden Grove Boulevard
21838 Hawthorne Boulevard
120 South Western Avenue
3660 Wilshire Boulevard, Suite 103
3660 Wilshire Boulevard, Suite 1050
3327 Wilshire Boulevard
3585 Peachtree Industrial Boulevard,
Suite 144
6200 North Hiawatha, Suite 235
2711 LBJ Freeway, Suite 114
3033 South Parker Road, Suite 340
39899 Balentine Drive, Suite 200
33110 Pacific Highway South, Suite 4
3500 108th Avenue Northeast,
Suite 280
7535 Little River Turnpike, Suite 200B
Los Angeles, CA
Leased
Artesia, CA
Los Angeles, CA
Los Angeles, CA
Garden Grove, CA
Gardena, CA
Irvine, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Rowland Heights, CA
San Diego, CA
San Francisco, CA
Santa Clara, CA
Cerritos, CA
Torrance, CA
Van Nuys, CA
Los Angeles, CA
Garden Grove, CA
Torrance, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Duluth, GA
Chicago, IL
Farmers Branch, TX
Aurora, CO
Newark, CA
Federal Way, WA
Bellevue, WA
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Annandale, VA
Leased
14
(1) Deposits are not accepted at this facility.
(2) Residential Mortgage Center is also located at this facility.
(3) Auto Loan Center and Consumer Loan Center are also located at this facility.
(4) Training Facility is also located at this facility.
(5) Administrative offices are also located at this facility.
(6) International Finance Department is also located at this facility.
Hanmi Financial and Hanmi Bank consider their present facilities to be sufficient for their current operations.
Item 3. Legal Proceedings
From time to time, Hanmi Financial and Hanmi Bank are parties
to litigation that arises in the ordinary course of business, such
as claims to enforce liens, claims involving the origination and
servicing of loans, and other issues related to the business of
Hanmi Financial and Hanmi Bank. In the opinion of manage-
ment, the resolution of any such issues would not have a
material adverse impact on the financial condition, results of
operations, or liquidity of Hanmi Financial or Hanmi Bank.
Item 4. Submission of Matters to a Vote of Security
Holders
During the fourth quarter of 2006, no matters were submitted to
stockholders for a vote.
Item 5. Market for Registrant’s Common Equity,
Dividends
PART II
The amount and timing of dividends will be determined by
Hanmi Financial’s Board of Directors and substantially depend
upon the earnings and financial condition of Hanmi Financial.
The ability of Hanmi Financial to obtain funds for the payment of
dividends and for other cash requirements is largely dependent
on the amount of dividends that may be declared by Hanmi
Bank.
The power of the board of directors of a state chartered bank,
such as Hanmi Bank, to declare a cash dividend is limited by
statutory and regulatory restrictions that restrict the amount
available for cash dividends depending upon the earnings,
financial condition and cash needs of the bank, as well as
general business conditions. See “Item 1. Business — Divi-
dends and Other Transfers of Funds.”
Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information
The following table sets forth, for the periods indicated, the high
and low trading prices of Hanmi Financial’s common stock for
the last two years as reported by NASDAQ under the symbol
“HAFC.”
High
Low
Cash Dividend
2006:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2005:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$22.88
$20.00
$20.46
$19.95
$20.42
$19.72
$17.90
$19.19
$18.89
$18.13
$17.09
$17.04
$16.51
$16.27
$14.05
$15.62
$0.06 per share
$0.06 per share
$0.06 per share
$0.06 per share
$0.05 per share
$0.05 per share
$0.05 per share
$0.05 per share
Hanmi Financial had 344 registered stockholders of record as of
February 14, 2007.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information as of December 31, 2006 relating to equity compensation plans of Hanmi Financial
pursuant to which grants of options, restricted stock awards or other rights to acquire shares may be granted from time to time.
Equity Compensation Plans Approved By Security Holders
Equity Compensation Plans Not Approved By Security
Holders
Total Equity Compensation Plans
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
(a)
1,755,813
678,502(1)
2,434,315
(b)
$15.31
$13.45
$14.79
2,206,092
15
—
2,206,092
(1) Composed of: a) stock options granted to Chief Executive Officer to purchase 350,000 shares of common stock at an exercise price of $17.165 per share with vesting in
equal annual installments of 16.66%, subject to accelerated vesting upon certain corporate transactions, and expiring no later than November 3, 2014; and
b) remaining stock warrants issued to affiliates of Castle Creek Financial LLC (for services rendered in connection with the placement of Hanmi Financial’s equity
securities) to purchase a total of 328,502 shares of common stock at an exercise price of $9.50 per share.
Performance Graph
Set forth below is a graph comparing stockholder return on Hanmi Financial’s common stock valued on the market price of common
stock with the cumulative total returns for companies on an indexed basis of a $100 investment in Hanmi Financial common stock,
the NASDAQ Composite» (U.S.) Index and the Standard and Poors (“S&P) 500 Financials Index. The performance graph shall not be
deemed incorporated by reference to any general statement incorporating by reference this Annual Report into any filing under the
Security Act of 1933 or under the Exchange Act, except to the extent that we specifically incorporate this information by reference,
and shall not otherwise be deemed filed under such Acts.
Comparison of Cumulative Total Return on $100 Investment
Among Hanmi Financial, NASDAQ Composite » (U.S.) Index and S&P 500 Financials Index
Comparative Return
S
R
A
L
L
O
D
350
300
250
200
150
100
50
0
Hanmi Financial
NASDAQ Composite
S&P 500 Financials
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
Index
Hanmi Financial
NASDAQ Composite
S&P 500 Financials
Symbol
HAFC
+IXIC
S5FINL
2001
2002
2003
2004
2005
2006
100.00
100.00
100.00
125.24
68.47
83.58
148.62
102.71
106.92
270.18
111.53
115.72
268.53
113.06
120.03
338.74
123.82
139.43
December 31,
16
Item 6. Selected Financial Data
The following table presents selected historical financial
information, including per share information as adjusted for the stock
dividends and stock splits declared by 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 contained in “Item 7.
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, 2006 is derived from our audited financial statements. In the
opinion of management, the information presented reflects all adjustments, including normal and recurring accruals, considered
necessary for a fair presentation of the results of such periods.
As of and for the Year Ended December 31,
(Dollars in thousands, except for per share data)
2006
2005
2004
2003
2002
Summary Statement of Income:
Interest Income
Interest Expense
Net Interest Income Before Provision for
Credit Losses
Provision for Credit Losses
Non-Interest Income
Non-Interest Expenses
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Summary Statement of Financial Condition:
Cash and Cash Equivalents
Total Investment Securities
Loans Receivable, Net(1)
Total Assets
Total Deposits
Total Liabilities
Total Shareholders’ Equity
Tangible Equity
Average Net Loans
Average Investment Securities
Average Interest-Earning Assets
Average Total Assets
Average Deposits
Average Borrowings
Average Interest-Bearing Liabilities
Average Shareholders’ Equity
Average Tangible Equity
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
$
260,189
106,429
$
200,941
62,111
$
135,554
32,617
$
77,417
20,796
$
69,316
21,345
$
$
153,760
7,173
35,604
75,954
106,237
40,588
138,830
5,395
30,382
69,133
94,684
36,455
102,937
2,907
26,211
66,566
59,675
22,975
56,621
5,680
20,022
39,325
31,638
12,425
47,971
4,800
21,204
38,333
26,042
9,012
65,649
$
58,229
$
36,700
$
19,213
$
17,030
138,501
391,579
2,837,390
3,725,243
2,944,715
3,238,126
487,117
273,159
2,721,229
414,672
3,214,761
3,602,181
2,881,448
221,347
2,367,389
458,227
242,362
$
163,477
443,912
2,469,080
3,414,252
2,826,114
2,987,475
426,777
209,028
2,359,439
418,750
2,871,564
3,249,190
2,632,254
165,482
2,046,227
417,813
198,527
$
127,164
418,973
2,234,842
3,104,188
2,528,807
2,704,278
399,910
178,791
1,912,534
425,537
2,387,412
2,670,701
2,129,724
223,780
1,687,688
293,313
143,262
$
62,595
414,616
1,248,399
1,787,139
1,445,835
1,647,672
139,467
137,424
1,103,765
379,635
1,538,820
1,623,214
1,416,564
63,138
1,057,249
132,369
130,252
$
122,772
279,548
975,154
1,457,313
1,283,979
1,332,845
124,468
122,304
882,625
244,675
1,222,050
1,308,885
1,164,562
21,847
854,858
112,927
110,762
$
$
$
$
$
1.34
1.33
9.93
5.57
0.24
49,076,613
$
$
$
$
$
1.18
1.17
8.77
4.30
0.20
48,658,798
$
$
$
$
$
0.87
0.84
8.11
3.62
0.20
49,330,704
$
$
$
$
$
0.68
0.67
4.92
4.85
0.20
28,326,820
$
$
$
$
$
0.62
0.60
4.47
4.39
—
27,830,866
17
As of and for the Year Ended December 31,
2006
2005
2004
2003
2002
1.82%
14.33%
27.09%
3.59%
4.78%
40.11%
17.91%
12.72%
1.79%
13.94%
29.33%
3.96%
4.83%
40.86%
16.95%
12.86%
1.37%
12.51%
25.62%
3.75%
4.31%
51.54%
22.99%
10.98%
1.18%
14.51%
14.75%
3.06%
3.68%
51.31%
29.41%
8.15%
1.30%
15.08%
15.38%
3.17%
3.93%
55.41%
—
8.63%
12.55%
12.28%
12.04%
11.98%
11.98%
11.80%
11.13%
11.09%
12.14%
11.94%
11.58%
11.31%
11.03%
10.96%
10.93%
10.75%
10.05%
10.00%
11.01%
10.81%
10.08%
9.85%
9.11%
9.06%
8.93%
8.78%
7.80%
7.75%
8.50%
8.34%
0.50%
0.38%
0.17%
0.96%
0.65%
0.44%
0.28%
1.14%
193.86% 246.40% 377.49% 154.13% 173.81%
0.68%
0.48%
0.29%
1.06%
0.27%
0.19%
0.19%
1.00%
0.41%
0.30%
0.12%
1.00%
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
Selected Capital Ratios:
Total Capital to Total Risk-Weighted Assets:
Hanmi Financial
Hanmi Bank
Tier 1 Capital to Total Risk-Weighted Assets:
Hanmi Financial
Hanmi Bank
Tier 1 Capital to Average Total Assets:
Hanmi Financial
Hanmi Bank
Selected Asset Quality Ratios:
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
(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.
(12) Non-performing assets consist of non-performing loans and other real estate owned.
18
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
institution 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
information that is essential to
provides useful supplemental
a proper understanding of the financial results of Hanmi Finan-
cial, as it provides a method to assess management’s success
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 perfor-
mance measures that may be presented by other companies.
The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
Year Ended December 31,
(Dollars in thousands)
2006
2005
2004
2003
2002
Average Shareholders’ Equity
$ 458,227
$ 417,813
$ 293,313
$132,369
$112,927
Less Average Goodwill and Core Deposit Intangible Assets
(215,865)
(219,286)
(150,051)
(2,117)
(2,165)
Average Tangible Equity
$ 242,362
$ 198,527
$ 143,262
$130,252
$110,762
Return on Average Shareholders’ Equity
14.33%
13.94%
12.51%
14.51%
15.08%
Effect of Average Goodwill and Core Deposit Intangible
Assets
12.76%
15.39%
13.11%
0.24%
0.30%
Return on Average Tangible Equity
27.09%
29.33%
25.62% 14.75% 15.38%
Tangible Book Value Per Share
Tangible book value per share is supplemental financial
infor-
mation 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 dividing
the difference by the number of shares of common stock
outstanding. Management believes the presentation of this
financial measure excluding the impact of these items provides
information that is essential to a proper
useful supplemental
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
substitution for results determined in accordance with GAAP,
nor is it necessarily comparable to non-GAAP performance
measures that may be presented by other companies.
The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
(Dollars in thousands, except per share amounts)
2006
2005
2004
2003
2002
Total Shareholders’ Equity
$ 487,117
$ 426,777
$ 399,910
$139,467
$124,468
Less Goodwill and Core Deposit Intangible Assets
(213,958)
(217,749)
(221,119)
(2,043)
(2,164)
December 31,
Tangible Equity
Book Value Per Share
Effect of Goodwill and Core Deposit Intangible Assets
Tangible Book Value Per Share
$ 273,159
$ 209,028
$ 178,791
$137,424
$122,304
$
$
9.93
$
8.77
$
8.11
$
4.92
$
4.47
19
(4.36)
(4.47)
(4.49)
(0.07)
(0.08)
5.57
$
4.30
$
3.62
$
4.85
$
4.39
Item 7. Management’s Discussion and 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, 2006, 2005 and 2004. 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 else-
where in this report. See “Item 1A. Risk Factors.”
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 financial
statements. Our significant accounting policies are described in
the “Notes to Consolidated Financial Statements.” Certain
accounting policies require us to make significant estimates
and assumptions that have a material impact on the carrying
value of certain assets and liabilities, and we consider these
critical accounting policies. 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 opera-
tions 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.
Allowance for Loan Losses — We believe the allowance for loan
losses and allowance for off-balance sheet items are critical
require significant estimates and
accounting policies that
assumptions that are particularly susceptible to significant
change in the preparation of our financial statements. Our
allowance for loan loss methodologies incorporate a variety
of risk considerations, both quantitative and qualitative,
in
establishing an allowance for loan loss that management
believes is appropriate at each reporting date. Quantitative
factors include our historical
loss experiences on ten seg-
mented loan pools by risk rating, delinquency and charge-off
trends, collateral values, changes in non-performing loans, and
other factors. Qualitative factors include the general economic
environment in our markets, delinquency and charge-off trends,
and the change in non-performing loans. Concentration of
credit, change of lending management and staff, quality of loan
review system, and change in interest rate are other qualitative
factors that are considered in our methodologies. See “Finan-
cial Condition — Allowance for Loan Losses and Allowance for
Off-Balance Sheet Items,” “Results of Operations — Provision
for Credit Losses” and “Notes to Consolidated Financial State-
ments, Note 1 — Summary of Significant Accounting Policies”
for additional information on methodologies used to determine
the allowance for loan losses and allowance for off-balance
sheet items.
Loan Sales — We routinely sell SBA and residential mortgage
loans to secondary market investors. When SBA guaranteed
loans are sold, we generally retain the right to service these
loans and we may retain residual and other interests, which are
considered retained interests in the sold loans. The gain on sale
recorded on these loans depends, in part, on our allocation of
the previous carrying amount of the loans to the retained
interests. Previous carrying amounts are allocated in proportion
to the relative fair values of the loans sold and the interests
retained. The fair values of retained interests are estimated
based upon the present value of the associated expected future
cash flows taking into consideration future prepayment rates,
discount rates, expected credit losses and other factors that
impact the value of the retained interests.
We may also record loan servicing assets when the benefits of
servicing are expected to be more than adequate compensa-
tion to a servicer. We determine whether the benefits of ser-
vicing are expected to be more than adequate compensation to
a servicer by discounting all of the future net cash flows asso-
ciated with the contractual rights and obligations of the servic-
ing agreement. The expected future net cash flows are
discounted at a rate equal to the return that would adequately
compensate a substitute servicer for performing the servicing.
In addition to the anticipated rate of loan prepayments and
discount rates, other assumptions (such as the cost to service
the underlying loans, foreclosure costs, ancillary income and
float rates) are also used in determining the value of the loan
servicing assets. Loan servicing assets are discussed in more
detail in “Notes to Consolidated Financial Statements, Note 1 —
Summary of Significant Accounting Policies” and “Note 6 —
Loan Servicing Asset” presented elsewhere herein.
Overview
Over the last two years, we have experienced significant growth
in assets and deposits. During this same period, interest rates
have increased, increasing our net interest margin, while com-
petitive pricing pressures have depressed our net interest mar-
gin. Total assets increased to $3,725.2 million at December 31,
2006 from $3,414.3 million and $3,104.2 million at Decem-
ber 31, 2005 and 2004, respectively. Net loans increased to
$2,837.4 million at December 31, 2006 from $2,469.1 million
and $2,234.8 million at December 31, 2005 and 2004, respec-
tively. Total deposits increased to $2,944.7 million at Decem-
ber 31, 2006 from $2,826.1 million and $2,528.8 million at
December 31, 2005 and 2004, respectively.
On April 30, 2004, we completed the merger with PUB, which
had assets of $1.2 billion. Therefore, operating results for the
year ended December 31, 2004 include eight months of
20
operations of the combined entity and the trends in earnings
from 2004 to 2005 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.
interest income of $30.4 million. For the year ended Decem-
ber 31, 2005, non-interest
income was $30.4 million, an
increase of $4.2 million, or 15.9 percent, over 2004 non-interest
income of $26.2 million.
For the year ended December 31, 2006, net income was
$65.6 million, representing an increase of $7.4 million, or
12.7 percent, from $58.2 million for the year ended Decem-
ber 31, 2005. This resulted in basic earnings per share of $1.34
and $1.18 for the years ended December 31, 2006 and 2005,
respectively, and diluted earnings per share of $1.33 and $1.17
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 2006 was
primarily attributable to an increase in average interest-earning
assets. Net interest income increased by 10.8 percent from
2005 to 2006, which was primarily attributable to a 15.4 percent
increase in the volume of average gross loans. At the same time,
the average interest rate paid on interest-bearing liabilities
increased by 146 basis points while the average interest rate
earned on interest-earning assets increased by 109 basis
points. As a result, the net interest spread decreased by 37 basis
points from 3.96 percent in 2005 to 3.59 percent in 2006.
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 Decem-
ber 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. 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 the volume of average 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 132 basis
points. As a result, the net interest spread increased by 21 basis
points from 3.75 percent in 2004 to 3.96 percent in 2005.
Our results of operations are significantly affected by the pro-
vision for credit losses. The provision for credit losses was
$7.2 million, $5.4 million and $2.9 million in 2006, 2005 and
2004, respectively, reflecting changes in the balance and credit
quality of the loan portfolio.
We also generated substantial non-interest income from service
charges on deposit accounts, charges and fees from interna-
tional trade finance, and gains on sales of loans. For the year
ended December 31, 2006, non-interest income was $35.6 mil-
lion, an increase of $5.2 million, or 17.2 percent, over 2005 non-
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,
2006, non-interest expenses were $76.0 million, an increase of
$6.8 million, or 9.9 percent, over 2005 non-interest expenses of
$69.1 million. In 2006, the increase was primarily the result of
higher compensation and an increase in total assets. Although
non-interest expenses increased from the prior year, the effi-
ciency ratio improved slightly to 40.11 percent compared to
40.86 percent in 2005. This improvement is attributable to
greater operating efficiencies arising from economies of scale.
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. This increase
was primarily the result of the merger with PUB. The efficiency
ratio improved to 40.86 percent in 2005 compared to 51.54 per-
cent in 2004 as the Bank achieved greater operating efficiencies
after completing 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.
Results of Operations
Net Interest Income, Net Interest Spread 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 differ-
ence between the yield earned on interest-earning assets and
the cost of interest-bearing liabilities is “net interest spread.” Net
interest income, when expressed as a percentage of average
total interest-earning assets, is referred to as the “net interest
margin.”
Net interest income is affected by the change in the level and
mix of interest-earning assets and interest-bearing liabilities,
referred to as “volume changes.” Our net interest income also is
affected by changes in the yields earned on interest-earning
assets and rates paid on interest-bearing liabilities, referred to
as “rate changes.” Interest rates charged on loans are affected
principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. Those
factors are, 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 FRB.
21
The following table shows the average balances of assets, liabilities and shareholders’ equity; the amount of interest income and
interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net
interest spread and the net interest margin for the periods indicated.
(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
Year Ended December 31,
2006
2005
2004
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
$2,747,922 $239,075
3,087
72,694
8.70% $2,382,230 $180,845
3,122
74,166
4.25%
7.59% $1,933,761 $117,999
3,015
70,372
4.21%
6.10%
4.28%
122,503
219,475
24,684
27,410
41
32
5,148
10,120
1,354
1,402
2
1
4.20% 102,703
4.61% 241,881
23,571
5.49%
46,799
5.11%
4.88%
—
214
4.04%
4,002
10,271
1,107
1,589
—
5
90,336
3.90%
4.25% 264,829
15,041
4.70%
12,772
3.40%
—
—
301
2.34%
3,374
10,261
716
183
—
6
3.73%
3.87%
4.76%
1.43%
—
1.99%
Total Interest-Earning Assets
3,214,761
260,189
8.09% 2,871,564
200,941
7.00% 2,387,412
135,554
5.68%
Noninterest-Earning Assets:
Cash and Cash Equivalents
Allowance for Loan Losses
Other Assets
Total Noninterest-Earning Assets
93,535
(26,693)
320,578
387,420
92,245
(22,791)
308,172
377,626
76,064
(21,227)
228,452
283,289
Total Assets
$3,602,181
$3,249,190
$2,670,701
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Deposits:
Savings
Money Market Checking and NOW
Accounts
Time Deposits of $100,000 or More
Other Time Deposits
FHLB Advances and Other Borrowings
Junior Subordinated Debentures
$ 107,811
1,853
1.72% $ 138,167
2,130
1.54% $ 131,589
1,790
1.36%
471,780
1,286,202
280,249
138,941
82,406
14,539
64,184
12,460
6,977
6,416
3.08% 539,678
4.99% 959,904
4.45% 242,996
83,076
5.02%
82,406
7.79%
12,964
31,984
7,114
3,017
4,902
2.40% 466,880
3.33% 611,555
2.93% 253,884
3.63% 141,374
82,406
5.95%
8,098
10,966
5,414
3,305
3,044
1.73%
1.79%
2.13%
2.34%
3.69%
Total Interest-Bearing Liabilities
2,367,389
106,429
4.50% 2,046,227
62,111
3.04% 1,687,688
32,617
1.93%
Noninterest-Bearing Liabilities:
Demand Deposits
Other Liabilities
735,406
41,159
Total Noninterest-Bearing Liabilities
776,565
Total Liabilities
Shareholders’ Equity
3,143,954
458,227
Total Liabilities and Shareholders’ Equity
$3,602,181
751,509
33,641
785,150
2,831,377
417,813
$3,249,190
665,816
23,884
689,700
2,377,388
293,313
$2,670,701
Net Interest Income
Net Interest Spread(3)
Net Interest Margin(4)
$153,760
$138,830
$102,937
3.59%
4.78%
3.96%
4.83%
3.75%
4.31%
22
(1) Loans are net of deferred fees and related direct costs. Loan fees have been included in the calculation of interest income. Loan fees were $4.8 million, $6.3 million and
$6.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.
(2) Tax-exempt income, computed on a tax-equivalent basis using an effective marginal rate of 35 percent, was $4.7 million, $4.8 million and $4.6 million for the years
ended December 31, 2006, 2005 and 2004, respectively. Yields on tax-exempt income were 6.53 percent, 6.48 percent and 6.59 percent for the years ended
December 31, 2006, 2005 and 2004, respectively.
(3) Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning
assets and interest-bearing liabilities and the amount of change attributable to changes in average daily balances (volume) or
changes in average daily interest rates (rate). The variances attributable to both the volume and rate changes have been allocated to
volume and rate changes in proportion to the 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
Year Ended December 31,
2006 vs. 2005
Increase (Decrease)
Due to Change in
2005 vs. 2004
Increase (Decrease)
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
$29,839
$28,391
$58,230
$30,620
$32,226
$62,846
(63)
816
(994)
54
(807)
2
(10)
28
330
843
193
620
—
6
(35)
1,146
(151)
247
(187)
2
(4)
161
477
(929)
401
930
—
(2)
(54)
151
939
(10)
476
—
1
107
628
10
391
1,406
—
(1)
Total Interest Income
28,837
30,411
59,248
31,658
33,729
65,387
Interest Expense:
Savings
(503)
226
(277)
Money Market Checking and NOW Accounts
(1,773)
3,348
1,575
Time Deposits of $100,000 or More
13,068
19,132
32,200
Other Time Deposits
FHLB Advances and Other Borrowings
Junior Subordinated Debentures
1,220
2,524
—
4,126
1,436
1,514
5,346
3,960
1,514
92
1,403
8,385
(241)
(1,685)
—
248
3,463
340
4,866
12,633
21,018
1,941
1,397
1,858
1,700
(288)
1,858
Total Interest Expense
14,536
29,782
44,318
7,954
21,540
29,494
Change in Net Interest Income
$14,301
$
629
$14,930
$23,704
$12,189
$35,893
For the years ended December 31, 2006 and 2005, net interest
income was $153.8 million and $138.8 million, respectively. The
net interest spread and net interest margin for the year ended
December 31, 2006 were 3.59 percent and 4.78 percent,
respectively, compared to 3.96 percent and 4.83 percent,
respectively, for the year ended December 31, 2005.
For the years ended December 31, 2005 and 2004, net interest
income was $138.8 million and $102.9 million, respectively. The
net interest spread and net interest margin for the year ended
December 31, 2005 were 3.96 percent and 4.83 percent,
respectively, compared to 3.75 percent and 4.31 percent,
respectively, for the year ended December 31, 2004.
Average interest-earning assets increased 12.0 percent to
$3,214.8 million in 2006 from $2,871.6 million in 2005. Average
gross loans increased 15.4 percent to $2,747.9 million in 2006
from $2,382.2 million in 2005, and average investment secu-
rities decreased 1.0 percent to $414.7 million in 2006 from
$418.8 million in 2005. Total loan interest income increased by
32.2 percent in 2006 due to the increase in average gross loans
outstanding and the increase in the average yield on loans from
7.59 percent in 2005 to 8.70 percent in 2006. The average
interest rate charged on loans increased 111 basis points,
reflecting the increase in the annual average WSJ Prime Rate
of 182 basis points from 6.14 percent in 2005 to 7.96 percent in
2006. The yield on average interest-earning assets increased
from 7.00 percent in 2005 to 8.09 percent in 2006, an increase
of 109 basis points, reflecting a continued shift in the mix of
average interest-earning assets from 83.0 percent
loans,
14.6 percent securities and 2.4 percent other interest-earning
assets in 2005 to 85.5 percent loans, 12.9 percent securities
and 1.6 percent other interest-earning assets in 2006.
The majority of interest-earning assets growth in 2006 was
funded by a $249.2 million, or 9.5 percent, increase in average
total deposits. Total average interest-bearing liabilities grew by
23
$321.2 million, or 15.7 percent to $2,367.4 million in 2006
compared to $2,046.2 million in 2005. The average interest
rate paid for interest-bearing liabilities increased by 146 basis
points from 3.04 percent in 2005 to 4.50 percent in 2006 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 decreased to 3.59 percent in 2006
compared to 3.96 percent in 2005.
Short-term interest rates rose in the first half of 2006, as the FRB
increased the targeted Federal funds rate from 4.25 percent as
of December 31, 2005 to 5.25 percent by July 3, 2006, through
a series of four 25 basis-point increases. During this period,
long-term rates increased more slowly, with the yields on ten-
year U.S. Treasury bonds increasing from 4.39 percent as of
December 31, 2005 to a peak of 5.25 percent as of June 28,
2006, before decreasing again to 4.71 percent as of Decem-
ber 31, 2006, and the yield curve was inverted, that is, long-
term rates exceeded short-term rates, for much of 2006. In this
environment, and particularly in the first half of 2006, there was
heavy demand among our customers for longer-term fixed-rate
loans. This competitive environment placed pressure on loan
portfolio yields, which flattened and,
in the fourth quarter,
declined slightly, as customers demanded more favorable pric-
ing for both fixed-rate and floating-rate loans.
Interest rates on time deposits rose as customers, anticipating
continued rate increases, demanded higher rates during the
first half of the year. During this period, the Bank faced strong
competitive pressures from established and newly organized
banks serving its target market. During the second half of 2006,
these competitive pressures lessened, as market participants
made greater use of borrowings to control their costs of funds
and customer expectations regarding continued rate increases
changed. Nevertheless, the Bank’s cost of time deposits con-
tinued to rise, as certificates of deposit, which have an average
maturity of approximately five months, continued to re-price.
The Bank was able to more effectively control its cost of savings,
NOW and money market accounts, but experienced declines in
their balances as customers shifted funds to higher-rate
accounts.
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 million in 2005
from $1,933.8 million in 2004, and average investment secu-
rities decreased 1.6 percent to $418.8 million in 2005 from
$425.5 million in 2004. Total loan interest income increased by
53.3 percent in 2005 due to the increase in average gross loans
outstanding and the increase in the average yield on loans from
6.10 percent in 2004 to 7.59 percent in 2005. The average
interest rate charged on loans increased 149 basis points,
reflecting the increase in the WSJ Prime Rate of 180 basis
points from 4.34 percent in 2004 to 6.14 percent in 2005. The
yield on average interest-earning assets increased from
5.68 percent in 2004 to 7.00 percent in 2005, an increase of
132 basis points, reflecting a shift in the mix of average 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 in 2005 was
funded by a $502.5 million, or 23.6 percent, increase in average
total deposits. Total average interest-bearing liabilities grew by
to $2,046.2 million in 2005 compared to
21.2 percent
$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 3.96 percent in 2005 compared to
3.75 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 per-
cent over 2004 levels. This trend was particularly 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 and 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.
Provision for Credit Losses
For the year ended December 31, 2006, the provision for credit
losses was $7.2 million, compared to $5.4 million for the year
ended December 31, 2005, an increase of 33.0 percent. The
allowance for loan losses was 0.96 percent and 1.00 percent of
total gross loans at December 31, 2006 and 2005, respectively,
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 $10.1 million, or
0.41 percent of gross loans, as of December 31, 2005 to
$14.2 million, or 0.50 percent of gross loans, as of Decem-
ber 31, 2006. The $368.3 million, or 14.9 percent, increase in
the loan portfolio and the $4.1 million, or 40.3 percent, increase
in non-performing assets required the provision to increase to
$7.2 million in 2006 from $5.4 million in 2005 to maintain the
necessary allowance level.
24
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-perform-
ing assets increased from $6.1 million, or 0.27 percent of gross
loans, as of December 31, 2004 to $10.1 million, or 0.41 percent
of gross loans, as of December 31, 2005. 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.
Non-Interest Income
The following table sets forth the various components of non-
interest income for the years indicated:
(In thousands)
2006
2005
2004
Year Ended December 31,
Service Charges on
Deposit Accounts
Trade Finance Fees
Remittance Fees
$17,134
$15,782
$14,441
4,567
2,056
4,269
2,122
4,044
1,653
Other Service Charges and
Fees
2,359
2,496
1,486
Bank-Owned Life
Insurance Income
Increase in Fair Value of
Derivatives
Other Income
Gain on Sales of Loans
Gain on Sales of Securities
879
845
1,074
616
6,917
1,105
625
3,021
731
232
493
2,997
Available for Sale
2
117
134
Total Non-Interest
Income
$35,604
$30,382
$26,211
We earn non-interest income from three major sources: service
charges on deposit accounts, fees generated from international
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, 2006, non-interest
income was $35.6 million, an increase of 17.2 percent from
$30.4 million for the year ended December 31, 2005. The
increase in non-interest income is primarily due to
overall
expansion in the Bank’s loan and deposit portfolios.
Service charges on deposit accounts increased $1.4 million, or
in 2006 compared to 2005 and increased
8.6 percent,
$1.3 million, or 9.3 percent, in 2005 compared to 2004. Service
charge income on deposit accounts increased in 2006 and
2005 due to an increase in the number of accounts and an
increase in demand deposit
transaction volume. Average
demand deposits decreased by 2.1 percent to $735.4 million
in 2006 from $751.5 million in 2005 and increased by 12.9 per-
cent to $751.5 million in 2005 from $665.8 million in 2004.
Service charges are constantly reviewed to maximize service
charge income while still maintaining a competitive position.
Fees generated from international trade finance increased by
7.0 percent from $4.3 million in 2005 to $4.6 million in 2006 and
increased 5.6 percent from $4.0 million in 2004 to $4.3 million in
2005. The increase was primarily due to the PUB merger. Trade
finance fees relate primarily to import and export letters of credit.
Remittance fees decreased 3.1 percent and increased 28.4 per-
cent in 2006 and 2005, respectively, to $2.1 million in 2006 from
$2.1 million in 2005 and $1.7 million in 2004. The slight
decrease in 2006 reflects slightly lower volumes compared to
the prior year. The 2005 increase reflects increased volume
derived from Hanmi Bank’s close relationship with Korea
Exchange Bank, a stockholder of Hanmi Financial.
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 the Standard &
Poor’s 500 Index or a basket of Asian currencies. As explained
in “Notes to Consolidated Financial Statements, Note 16 —
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 increases in the
fair value of the swaps of $1.1 million, $1.1 million and $232,000
recorded in non-interest income in 2006, 2005 and 2004,
respectively, are partially offset by changes in the fair value of
the embedded derivatives recorded in non-interest expenses.
See “Non-Interest Expenses.”
Gain on sales of loans was $6.9 million in 2006, compared to
$3.0 million in each of 2005 and 2004, representing increases of
129.0 percent and 0.8 percent for the years ended Decem-
ber 31, 2006 and 2005, respectively. The increase in gain on
sales of loans resulted from increased sales activity in SBA
loans, which was primarily due to increased loan production
and sales efforts, including the sale of some of the unguaran-
teed portions of SBA loans. The guaranteed portion of a sub-
stantial percentage of SBA loans is sold in the secondary
markets, and servicing rights are retained. During 2006, there
were $131.0 million of SBA loans sold, compared to $50.6 mil-
lion in 2005 and $51.3 million in 2004. 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.
25
Non-Interest Expenses
The following table sets forth the breakdown of non-interest
expenses for the years indicated:
Year Ended December 31,
(In thousands)
2006
2005
2004
Salaries and Employee
Benefits
$40,512
$36,839
$33,540
Occupancy and Equipment
10,130
Data Processing
Advertising and Promotion
Supplies and
Communications
Professional Fees
Amortization of Core
Deposit Intangible
4,939
2,997
2,391
1,910
8,978
4,844
2,913
2,556
2,201
8,098
4,540
3,001
2,433
2,068
2,379
2,785
1,872
Decrease in Fair Value of
Embedded Option
582
Other Operating Expenses
10,114
Merger-Related Expenses
—
748
7,778
(509)
—
8,961
2,053
Total Non-Interest
Expenses
$75,954
$69,133
$66,566
For the year ended December 31, 2006, non-interest expenses
were $76.0 million, an increase of $6.8 million, or 9.9 percent,
from $69.1 million for the year ended December 31, 2005. For
the year ended December 31, 2005, non-interest expenses
were $69.1 million, an increase of $2.6 million, or 3.9 percent,
from $66.6 million for the year ended December 31, 2004. The
increase in 2006 was primarily the result of higher compensa-
tion and an increase in total assets. The increase in 2005 was
primarily due to the PUB merger, which closed on April 30,
2004.
Salaries and employee benefits expenses for 2006 increased
$3.7 million, or 10.0 percent, to $40.5 million from $36.8 million
for 2005. Salaries and employee benefits expenses for 2005
increased $3.3 million, or 9.8 percent, to $36.8 million from
$33.5 million for 2004. These increases were due primarily to
annual salary increases, additional share-based compensation
reflecting stock options granted and an increase in the average
number of employees. Average headcount was 589, 535 and
503 in 2006, 2005 and 2004,
representing
increases of 10.1 percent, 6.4 percent and 36.5 percent,
respectively, over the prior years. Assets per employee were
$6.3 million at December 31, 2006, compared to $6.2 million
and $5.8 million at December 31, 2005 and December 31,
2004, respectively, representing increases of 1.6 percent and
6.9 percent, respectively. The improvement in 2005 reflects the
greater operating efficiencies achieved following the merger
respectively,
26
with PUB. The efficiencies were substantially achieved by
March 2005.
Occupancy and equipment expenses for 2006 increased
$1.1 million, or 12.8 percent, to $10.1 million from $9.0 million
for 2005. Occupancy and equipment expenses for 2005
increased $880,000, or 10.9 percent, to $9.0 million compared
to $8.1 million for 2004. The increase in 2006 was due to
additional office space leased. The increase in 2005 was mainly
due to the acquisition of 12 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.
Data processing expense for 2006 increased $95,000, or
2.0 percent, to $4.9 million as a result of expenses associated
with a 9.5 percent increase in average deposits and a 15.4 per-
cent increase in average loans outstanding. 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 28.5 per-
cent increase in average deposits and a 23.2 percent increase
in average loans outstanding. 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.
Professional fees were $1.9 million in 2006, representing a
decrease of $291,000, or 13.2 percent, compared to $2.2 mil-
lion in 2005. Professional fees were $2.2 million in 2005, rep-
resenting an increase of $133,000, or 6.4 percent, compared to
$2.1 million in 2004. The decrease in 2006 was caused primarily
by higher regulatory compliance consulting fees in 2005.
Other operating expenses were $10.1 million for 2006, com-
pared to $7.8 million for 2005, representing an increase of
$2.3 million, or 30.0 percent. The increase is primarily attribut-
able to a $534,000 operating loss related to an international
trade transaction, amortization expense of $879,000 related to
the termination in the fourth quarter of 2005 of interest rate
swaps that had unrealized losses aggregating $2.1 million, and
a $355,000 impairment charge to adjust the loan servicing
asset to fair value. Other operating expenses were $7.8 million
for 2005, compared 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.
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 closures.
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
In 2005, $509,000 of
the period services are rendered.
restructuring charges was reversed, as severance payments
were lower than anticipated.
assets at December 31, 2006 compared with 73.2 percent and
72.9 percent at December 31, 2005 and 2004, respectively.
Income Taxes
For the year ended December 31, 2006, income taxes of
$40.6 million were recognized on pre-tax income of $106.2 mil-
lion, representing an effective tax rate of 38.2 percent, com-
pared to income taxes of $36.5 million recognized on pre-tax
income of $94.7 million, representing an effective tax rate of
38.5 percent, for 2005, and 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.
In addition, we have made investments in various tax credit
funds totaling $6.5 million as of December 31, 2006 and rec-
ognized $659,000 of income tax credits earned from qualified
low-income housing investments in 2006. We recognized an
income tax credit of $673,000 for the tax year 2005 from
$6.9 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 11 — 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, 2006 and 2005, we
had net deferred tax assets of $13.1 million and $9.7 million,
respectively.
Financial Condition
Loan Portfolio
Total gross loans increased by $370.1 million, or 14.8 percent,
in 2006. Total gross loans represented 77.0 percent of total
Commercial and industrial
loans were $1,726.4 million and
$1,431.5 million at December 31, 2006 and 2005, respectively,
representing 60.2 percent and 57.3 percent, respectively, of the
total loan portfolio. Commercial loans include term loans and
revolving lines of credit. Term loans typically have a maturity of
three to five years and are extended to finance the purchase of
business entities, owner-occupied commercial property, busi-
ness equipment, leasehold improvements or for permanent
working capital. SBA guaranteed loans usually have a longer
maturity (five to twenty years). Lines of credit, in general, are
extended on an annual basis to businesses that need tempo-
rary working capital and/or import/export financing. These bor-
rowers 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.
respectively,
Real estate loans were $1,041.4 million and $974.2 million at
December 31, 2006 and 2005,
representing
36.3 percent and 39.0 percent, respectively, of the total loan
portfolio. Real estate loans are extended to finance the pur-
chase and/or improvement of commercial real estate and res-
idential property. The properties generally are investor-owned,
but may be for user-owned purposes. Underwriting guidelines
include, among other things, an appraisal in conformity with the
USPAP, limitations on loan-to-value ratios, and minimum cash
flow requirements to service debt. The majority of the properties
taken as collateral are located in Southern California.
Overall, new loan production increased 7.6 percent in 2006
compared to 2005, 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
or inverted yield curve that obtained throughout most of 2005
and 2006. In addition, aggressive pricing of five- to seven-year
fixed-rate commercial real estate loans by certain competitors
eroded the Bank’s portfolio of commercial real estate loans tied
to the prime rate.
The continued shift in the mix of the loan portfolio in 2005 and
2006 reflects management’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 man-
agement and profitability objectives.
27
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(1)
Amount of Loans Outstanding as of December 31,
2006
2005
2004
2003
2002
$ 757,428
$ 733,650
$ 783,539
$ 397,853
$284,465
202,207
152,080
81,758
88,442
92,521
80,786
43,047
58,477
39,237
47,891
Total Real Estate Loans
1,041,393
974,172
956,846
499,377
371,593
Commercial and Industrial Loans:
Commercial Term Loans
Commercial Lines of Credit
SBA Loans(2)
International Loans
1,202,612
225,630
171,631
126,561
945,210
224,271
155,491
106,520
754,108
201,940
166,285
95,936
433,398
346,522
120,856
117,304
91,717
65,040
66,443
42,641
Total Commercial and Industrial Loans
1,726,434
1,431,492
1,218,269
711,011
572,910
Consumer Loans(3)
100,121
92,154
87,526
54,878
44,416
Total Gross Loans
$2,867,948
$2,497,818
$2,262,641
$1,265,266
$988,919
(1) As of December 31, 2006 and 2005, loans held for sale totaling $630,000 and $1.1 million, respectively, were included at the lower of cost or fair value.
(2) As of December 31, 2006, 2005, 2004, 2003 and 2002, loans held for sale totaling $23.2 million, $0, $3.9 million, $25.5 million and $12.5 million, respectively,
were included at the lower of cost or market.
(3) Consumer loans includes HELOCs.
The following table sets forth the percentage distribution of loans in each category as of the dates indicated:
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
Percentage Distribution of Loans
as of December 31,
2006
2005
2004
2003
2002
26.4%
29.4%
34.6%
31.4%
28.8%
7.1%
2.8%
6.1%
3.5%
4.1%
3.6%
3.4%
4.7%
4.0%
4.8%
36.3%
39.0%
42.3%
39.5%
37.6%
41.9%
37.8%
33.3%
34.3%
7.9%
6.0%
4.4%
9.0%
6.2%
4.3%
8.9%
7.3%
4.3%
9.6%
7.2%
5.1%
35.0%
11.9%
6.7%
4.3%
Total Commercial and Industrial Loans
60.2%
57.3%
53.8%
56.2%
57.9%
28
Consumer Loans
3.5%
3.7%
3.9%
4.3%
4.5%
Total Gross Loans
100.0% 100.0% 100.0% 100.0% 100.0%
The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
(In thousands)
Commitments to Extend Credit
Commercial Letters of Credit
Standby Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
December 31,
2006
2005
$578,347
$555,736
65,158
48,289
17,031
58,036
42,768
14,892
$708,825
$671,432
The table below shows the maturity distribution and repricing intervals of outstanding loans as of December 31, 2006. In addition,
the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or
predetermined interest rates. The table includes non-accrual loans of $14.2 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
Within
One Year
After One
But Within
Five Years
After
Five Years
Total
$ 503,372
$143,462
$110,594
$ 757,428
202,207
24,816
—
—
33,546
23,396
202,207
81,758
730,395
177,008
133,990
1,041,393
894,040
225,630
159,395
126,561
185,956
122,616
1,202,612
—
872
—
—
11,364
—
225,630
171,631
126,561
Total Commercial and Industrial Loans
1,405,626
186,828
133,980
1,726,434
Consumer Loans
60,725
39,396
—
100,121
Total Gross Loans
$2,196,746
$403,232
$267,970
$2,867,948
Loans With Predetermined Interest Rates
$
69,784
$385,870
$267,970
$ 723,624
Loans With Variable Interest Rates
$2,126,962
$ 17,362
$
— $2,144,324
As of December 31, 2006, there were $357.0 million of loans
outstanding, or 12.4 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 ten percent of total gross loans
outstanding.
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
restructured where the terms of repayment have been renego-
tiated 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 col-
lateralized and in the process of collection. Loans may be
restructured by management when a borrower has experi-
enced 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
indication that there is reasonable doubt as to the full collect-
ibility of principal or interest on the loan; at this point, we stop
29
recognizing income from the interest on the loan and reverse
any uncollected interest that had been accrued but unpaid.
These loans may or may not be collateralized, but collection
efforts are continuously pursued.
Non-performing loans, which made up all non-performing
assets, were $14.2 million at December 31, 2006, compared
to $10.1 million and $6.0 million at December 31, 2005 and
2004, respectively, representing a 40.3 percent increase in
2006 and a 68.5 percent increase in 2005. Total gross loans
increased by 14.8 percent in 2006 over 2005 and 10.4 percent
in 2005 over 2004. As a result, the ratio of non-performing
assets to total gross loans increased to 0.50 percent at Decem-
ber 31, 2006 from 0.41 percent at December 31, 2005, and
increased to 0.41 percent at December 31, 2005 from
0.27 percent at December 31, 2004. As of December 31,
2006 and 2005, 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, 2006 and 2005 for which known
credit problems of the borrower would cause serious doubts as
to the ability of such borrowers to comply with their present loan
repayment terms, or any known events that would result in the
loan being designated as non-performing at some future date.
Our management cannot, however, predict the extent to which
a deterioration in general economic conditions, real estate
values, increases in general rates of interest, or changes in
the financial condition or business of borrower may adversely
affect a borrower’s ability to pay.
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-Performing Loans:
Non-Accrual Loans:
Real Estate Loans:
Commercial Property
Residential Property
Commercial and Industrial Loans
Consumer Loans
December 31,
2006
2005
2004
2003
2002
$
246
$
— $ —
$ 527
$ —
—
13,862
105
474
9,574
74
112
5,510
184
1,126
6,398
53
287
5,522
49
Total Non-Accrual Loans
14,213
10,122
5,806
8,104
5,858
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
30
Total Non-Performing Assets
—
—
—
2
2
—
—
—
9
9
—
—
169
39
557
—
—
—
356
261
—
—
208
557
617
14,215
10,131
6,014
8,661
6,475
—
—
—
—
—
$14,215
$10,131
$6,014
$8,661
$6,475
Troubled Debt Restructurings
$ 3,310
$
642
$1,227
$ 491
$ —
Non-Performing Loans as a Percentage of Total Gross Loans
Non-Performing Assets as a Percentage of Total Assets
0.50%
0.38%
0.41%
0.30%
0.27%
0.19%
0.68%
0.48%
0.65%
0.44%
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 formula designed to provide adequate allowances for losses inherent in the
portfolio. The formula is made up of various components. The allowance is first determined by assigning reserve ratios for all loans.
All loans that are classified are then assigned certain allocations according to type with larger percentages applied to loans deemed
to be of a higher risk. These percentages are determined based on the prior loss history by type of loan, adjusted for current
economic factors.
2006
2005
December 31,
2004
2003
2002
Allowance for Loan
Losses Applicable To
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Real Estate Loans:
(Dollars in thousands)
Commercial Property
$ 2,101 $ 757,428 $ 2,043 $ 733,650 $ 1,854 $ 783,539 $
374 $ 397,853 $
337 $284,465
Construction
Residential Property(1)
586
19
202,207
81,128
475
19
152,080
87,377
349
155
92,521
80,786
427
191
43,047
58,477
267
149
39,237
47,891
Total Real Estate
Loans
Commercial and Industrial
Loans(1)
2,706
1,040,763
2,537
973,107
2,358
956,846
992
499,377
753
371,593
23,099
1,703,194
21,035
1,431,492
19,051
1,214,419
11,376
685,557
9,773
560,370
Consumer Loans
1,752
100,121
1,391
92,154
1,293
87,526
Unallocated
—
—
—
—
—
—
846
135
54,878
—
652
76
44,416
—
Total
$27,557 $2,844,078 $24,963 $2,496,753 $22,702 $2,258,791 $13,349 $1,239,812 $11,254 $976,379
(1) Loans held for sale excluded.
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 man-
agement 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 ade-
quate 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
allowances 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 other factors, the estimates involve
the amounts and timing of expected future cash flows and fair
value of collateral on impaired loans, estimated losses on loans
based on historical loss experience, various qualitative factors,
and uncertainties in estimating losses and inherent risks in the
various credit portfolios, which may be subject to substantial
change.
On a quarterly basis, we utilize a classification migration model
and individual
loan review analysis tools as starting points for
determining the adequacy of the allowance for loan losses and
allowance for off-balance sheet items. Our loss migration anal-
ysis tracks twelve quarters of loan losses to determine historical
loss experience in every classification category (i.e., pass, spe-
cial mention, substandard and doubtful) for each loan type,
except consumer loans (auto, mortgage and credit cards),
which are analyzed as homogeneous loan pools. These calcu-
lated loss factors are then applied to outstanding loan balances,
unused commitments and off-balance sheet exposures, such
as letters of credit. The individual
loan review analysis is the
other part of the allowance allocation process, applying specific
monitoring policies and procedures in analyzing the existing
loan portfolios. Further allowance assignments are made based
on general and specific economic conditions, as well as per-
formance trends within specific portfolio segments and individ-
ual concentrations of credit.
The allowance for loan losses was $27.6 million at Decem-
ber 31, 2006, compared to $25.0 million at December 31, 2005.
The increase in the allowance for loan losses in 2006 was due
primarily to increased specific allowances for impaired loans
and an increase in the qualitative adjustments due to changes in
31
the qualitative factors. The ratio of the allowance for loan losses
to total gross loans was 0.96 percent and 1.00 percent at
December 31, 2006 and 2005, primarily due to the overall
loss factors on pass grade loans. In
decrease of historical
addition, the allowance reflects lower estimated loss severity
arising from better collateral coverage on impaired loans and
the presence of guarantees. The allowance for off-balance
sheet items was $2.1 million at December 31, 2006 and 2005.
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 periodic 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, 2006.
(Dollars in thousands)
Allowance for Loan Losses:
Balance — Beginning of Year
As of and for the Year Ended December 31,
2006
2005
2004
2003
2002
$
24,963
$
22,702
$
13,349
$
11,254
$ 9,408
Allowance for Loan Losses — PUB Acquisition
—
—
10,566
—
—
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 on Loans Previously Charged Off
Net Loan Charge-Offs
Provision Charged to Operating Expenses
—
5,333
796
6,129
406
—
957
187
1,550
4,579
7,173
—
4,371
827
5,198
—
—
2,193
201
2,394
2,804
5,065
—
5,004
481
5,485
—
—
1,702
78
1,780
3,705
2,492
198
3,687
538
—
3,213
358
4,423
3,571
21
6
859
322
1,208
—
—
871
105
976
3,215
2,595
5,310
4,441
Balance — End of Year
$
27,557
$
24,963
$
22,702
$
13,349
$ 11,254
Allowance for Off-Balance Sheet Items:
Balance — Beginning of Year
Provision Charged to Operating Expenses
Balance — End of Year
Ratios:
$
$
2,130
$
1,800
$
1,385
$
1,015
$
—
330
415
370
656
359
2,130
$
2,130
$
1,800
$
1,385
$ 1,015
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
0.17%
0.16%
1.00%
0.96%
0.12%
0.11%
1.05%
1.00%
0.19%
0.16%
1.17%
1.00%
0.29%
0.25%
1.20%
1.06%
0.29%
0.26%
1.26%
1.14%
16.62%
11.23%
16.32%
24.08%
23.06%
32
Expenses
Allowance for Loan Losses to Non-Performing Loans
63.84%
55.36%
193.86%
246.40%
148.68%
377.55%
60.55%
58.43%
154.13% 173.81%
Balances:
Average Total Gross Loans Outstanding During Period
$2,751,565
$2,386,575
$1,938,422
$1,119,860
$895,394
Total Gross Loans Outstanding at End of Period
Non-Performing Loans at End of Period
$2,867,948
14,215
$
$2,497,818
10,131
$
$2,262,641
6,014
$
$1,265,266
8,661
$
$988,919
$ 6,475
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 represented
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 mention and
below. 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:
(cid:129) reviewing the adversely graded, delinquent or otherwise
questionable loans;
(cid:129) generating an estimate of the loss potential in each such loan;
(cid:129) adjusting a qualitative factor for industry, economic or other
external factors; and
(cid:129) 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 sub-
stantial in relation to the size of the allowance.
Investment Portfolio
As of December 31, 2006, the investment portfolio was com-
posed primarily of mortgage-backed securities, U.S. Govern-
ment agency securities (“Agencies”), municipal bonds,
collateralized mortgage obligations and corporate bonds.
Investment securities available for sale were 99.8 percent of the
total investment portfolio as of December 31, 2006 and 2005.
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 share-
holders’ equity as of December 31, 2006, 2005 or 2004.
We maintain an investment portfolio primarily for liquidity pur-
poses. As of December 31, 2006, securities available for sale
were $390.6 million, or 10.5 percent of total assets, compared
to $442.9 million, or 13.0 percent of total assets, as of Decem-
ber 31, 2005. In 2006 and 2005, we purchased $9.7 million and
$132.7 million, respectively, of securities, primarily mortgage-
backed securities and Agencies, to replenish the portfolio for
principal repayments in the form of calls, prepayments and
scheduled amortization and to maintain 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:
(In thousands)
Securities Held to Maturity:
Municipal Bonds
Mortgage-Backed Securities
Total Securities Held to Maturity
Securities Available for Sale:
Investment Portfolio as of December 31,
2006
2005
2004
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
$
693
274
$
693
276
$
692
357
$
692
359
$
691
399
691
402
967
$
969
$ 1,049
$ 1,051
$ 1,090
$ 1,093
Mortgage-Backed Securities
$123,614
$121,608
$149,311
$147,268
$148,706
$149,174
U.S. Government Agency Securities
119,768
118,244
129,589
127,813
Municipal Bonds
Collateralized Mortgage Obligations
Corporate Bonds
Other Securities
69,966
67,605
8,090
4,999
71,710
66,113
7,887
5,050
71,536
83,068
8,235
4,999
73,220
81,456
8,053
5,053
89,345
71,771
93,172
8,380
4,437
89,677
73,616
92,539
8,444
4,433
33
Total Securities Available for Sale
$394,042
$390,612
$446,738
$442,863
$415,811
$417,883
The following table summarizes the maturity and/or repricing schedule for investment securities and their weighted-average yield as
of December 31, 2006:
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)
$ 43,043
4.43% $ 40,845
4.80% $32,117
4.87% $ 5,877
5.24%
U.S. Government Agency Securities
Municipal Bonds(2)
Collateralized Mortgage Obligations(1)
Corporate Bonds
Other Securities
39,599
4.17%
78,644
4.36%
—
—
—
—
—
—
2,124
4.91%
8,669
6.22%
61,610
6.34%
18,926
4.22%
41,936
4.44%
5,252
4.33%
—
—
7,887
4.53%
5,050
6.75%
—
—
—
—
—
—
—
—
—
—
—
—
$106,618
4.40% $171,436
4.50% $46,038
5.06% $67,487
6.24%
(1) Mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2036. The above table is based on the expected prepayment
schedule.
(2) The yield on municipal bonds has been computed on a tax-equivalent basis, using an effective marginal rate of 35 percent.
Deposits
Total deposits at December 31, 2006, 2005 and 2004 were
$2,944.7 million, $2,826.1 million and $2,528.8 million, respec-
tively, representing an increase of $118.6 million, or 4.2 percent,
in 2005. At
in 2006 and $297.3 million, or 11.8 percent,
December 31, 2006, 2005 and 2004, total time deposits out-
standing were $1,678.8 million, $1,439.8 million and
$1,031.7 million,
representing 57.0 percent,
50.9 percent and 40.8 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.
respectively,
Demand deposits and money market accounts decreased by
$98.2 million, or 7.8 percent, in 2006 and $78.5 million, or
5.8 percent,
in 2005. Core deposits (defined as demand,
money market and savings deposits) decreased $120.5 million,
or 8.7 percent, to $1,265.9 million as of December 31, 2006
from $1,386.4 million as of December 31, 2005, as depositors
shifted funds into higher yielding certificates of deposit. At
December 31, 2006, noninterest-bearing demand deposits
represented 24.7 percent of
total deposits compared to
26.1 percent at December 31, 2005.
Average deposits for the years ended December 31, 2006,
2005 and 2004 were $2,881.4 million, $2,632.3 million and
$2,129.7 million,
respectively. Average deposits grew by
9.5 percent in 2006 and 23.6 percent in 2005.
We accept brokered deposits on a selective basis at prudent
interest rates to augment deposit growth. There were $3.3 mil-
lion and $7.4 million of brokered deposits as of December 31,
2006 and 2005, respectively. We also had $200.0 million of
state time deposits over $100,000 with a weighted-average
interest rate of 5.16 percent and 3.87 percent as of Decem-
ber 31, 2006 and 2005, respectively.
The table below summarizes the distribution of average deposits and the average rates paid for the periods indicated:
(Dollars in thousands)
Year Ended December 31,
2006
2005
2004
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Demand, Noninterest-Bearing
$ 735,406
—
$ 751,509
—
$ 665,816
—
Savings
107,811
1.72%
138,167
1.54%
131,589
1.36%
Money Market Checking and NOW Accounts
471,780
3.08%
539,678
2.40%
466,880
1.73%
34
Time Deposits of $100,000 or More
1,286,202
4.99%
959,904
3.33%
611,555
1.79%
Other Time Deposits
Total Deposits
280,249
4.45%
242,996
2.93%
253,884
2.13%
$2,881,448
$2,632,254
$2,129,724
The table below summarizes the maturity of time deposits of
$100,000 or more at December 31 of the years indicated:
December 31,
(Dollars in thousands)
2006
2005
2004
Three Months or Less
$ 689,309 $ 587,251 $378,205
Over Three Months
Through Six Months
414,687
248,338
232,231
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, 2006 and 2005.
Over Six Months
Through Twelve
Months
274,402
321,714
131,775
Interest Rate Risk Management
Over Twelve Months
4,960
4,647
14,369
$1,383,358 $1,161,950 $756,580
FHLB Advances and Other Borrowings
FHLB advances and other borrowings mostly take the form of
advances from the FHLB of San Francisco and overnight Fed-
eral funds.
At December 31, 2006, advances from the FHLB were
$168.1 million, an increase of $124.6 million, or 286.2 percent,
from the December 31, 2005 balance of $43.5 million. During
2006, the Bank borrowed $130.0 million from the FHLB for
terms of 12 to 24 months to allow it to fund fixed-rate loans, but
maintain the desired level of asset sensitivity.
interest
Interest rate risk indicates our exposure to market interest rate
rates directly and
fluctuations. The movement of
inversely affects the economic value of fixed-income assets,
which is the present value of future cash flow discounted by the
current interest rate; under the same conditions, the higher the
current interest rate, the higher the denominator of discounting.
Interest rate risk management is intended to decrease or
increase the level of our exposure to market interest rates.
The level of interest rate risk can be managed through such
means as the changing of gap positions and the volume of
fixed-income assets. For successful management of interest
rate risk, we use various methods to measure existing and
future interest rate risk exposures, giving effect to historical
attrition rates of core deposits. In addition to regular reports
used in business operations, repricing gap analysis, stress
testing and simulation modeling are the main measurement
techniques used to quantify interest rate risk exposure.
35
The following table shows the status of our gap position as of December 31, 2006:
(Dollars in thousands)
Assets
Cash
Federal Funds Sold
Term Federal Funds Sold
Federal Reserve Bank and Federal Home
Loan Bank Stock
Securities:
Fixed Rate
Floating Rate
Loans:
Fixed Rate
Floating Rate
Non-Accrual
Deferred Loan Fees and Allowance
for Loan Losses
Other Assets
Less
Than
Three
Months
After
Three
Months
But Within
One Year
After One
Year But
Within
Five Years
After
Five Years
Non-
Interest-
Sensitive
Total
$
— $
— $
— $
— $ 97,501
$
97,501
41,000
5,000
—
6,906
9,850
—
—
—
—
—
—
—
—
24,922
55,309
171,437
113,524
3,325
26,178
5,050
41,199
1,884,321
45,894
20,798
385,868
204,027
267,969
3,659
—
—
—
—
—
—
—
41,000
5,000
24,922
347,176
44,403
740,930
2,112,805
14,213
14,213
—
—
—
—
—
23,592
—
—
—
—
—
(30,558)
6,515
297,744
(30,558)
327,851
Total Assets
$1,988,276
$ 148,918
$787,510
$421,639
$ 378,900
$3,725,243
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand Deposits
Savings
Money Market Checking and NOW
Accounts
Time Deposits:
Fixed Rate
Floating Rate
FHLB Advances and Other
Borrowings
Junior Subordinated Debentures
Other Liabilities
Shareholders’ Equity
Total Liabilities and
$
43,944
$ 147,184
$353,240
$183,979
$
— $ 728,347
13,027
31,258
44,375
10,595
65,322
125,238
142,165
105,542
812,061
855,730
10,768
146
—
—
141
—
929
82,406
—
—
45,000
118,252
4,856
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
41,968
487,117
99,255
438,267
1,678,700
146
169,037
82,406
41,968
487,117
Shareholders’ Equity
$1,017,835
$ 1,204,410
$668,800
$305,113
$ 529,085
$3,725,243
Repricing Gap
$ 970,441
$(1,055,492)
$118,710
$116,526
$(150,185)
36
Cumulative Repricing Gap
$ 970,441
$
(85,051)
$ 33,659
$150,185
$
Cumulative Repricing Gap as a
Percentage of Total Assets
Cumulative Repricing Gap as a
26.05%
(2.28)%
0.90%
4.03%
Percentage of Interest-Earning Assets
29.26%
(2.56)%
1.01%
4.53%
—
—
—
The repricing gap analysis measures the static timing of repric-
ing risk of assets and liabilities (i.e., a point-in-time analysis
measuring the difference between assets maturing or repricing
in a period and liabilities maturing or repricing within the same
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, money market checking and
NOW accounts) are assigned to categories based on expected
decay rates.
On December 31, 2006, the cumulative repricing gap as a
percentage of interest-earning assets in the less-than-three
month period was 29.26 percent. This decrease from the pre-
vious year’s figure of 32.25 percent was caused primarily by a
shift in the mix of the loan portfolio into fixed-rate loans, which
increased $324.3 million, or 77.8 percent, partially offset by a
decrease of $45.7 million, or 11.6 percent, in fixed-rate invest-
ments, funded primarily by certificates of deposit, as the mix of
the deposits portfolio shifted away from core deposits and the
loans linked to the prime rate increased only
balance of
$42.2 million, or 2.0 percent. The cumulative repricing percent-
age in the less than twelve month period also moved lower,
reaching (2.56) percent. This was a decrease from the previous
year’s figure of 3.13 percent. The decrease was caused by an
increase of $394.5 million in fixed-rate time deposits maturing
within one year, offset by a decrease of $148.8 million in floating
rate time deposits maturing within one year. 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 5.09 percent asset-sensitive, compared to 10.30 percent
and 20.01 percent as of December 31, 2005 and 2004, respec-
tively. The floating gap position in the less than twelve months
period was 0.54 percent
liability-sensitive, compared to
7.00 percent and 19.30 percent asset-sensitive as of Decem-
ber 31, 2005 and 2004, respectively.
The following table summarizes the status of the cumulative gap
position as of the dates indicated.
Less Than
Three Months
December 31,
Less Than
Twelve Months
December 31,
(Dollars in thousands)
2006
2005
2006
2005
Cumulative
Repricing Gap
$970,441 $972,608 $(85,051) $94,299
Percentage of
Total Assets
Percentage of
Interest-Earning
Assets
26.05% 28.49% (2.28)% 2.76%
29.26% 32.25% (2.56)% 3.13%
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
monitor the percentage changes in net interest income and
equity value in relation to limits established within our guidelines.
To supplement traditional gap analysis, we perform simulation
modeling to estimate the potential effects of
interest rate
changes. The following table summarizes one of the stress
simulations performed to forecast the impact of changing inter-
est rates on net interest income and the market value of interest-
earning assets and interest-bearing liabilities reflected on our
balance sheet (i.e., an instantaneous parallel shift in the yield
curve of the magnitude indicated). This sensitivity analysis is
compared to policy limits, which specify the maximum toler-
ance level for net interest income exposure over a one-year
horizon, given the basis point adjustment in interest rates
reflected below.
Rate Shock Table
Percentage Changes
Change in Amount
Change in
Interest Rate
Net
Interest
Income
Economic
Value of
Equity
Net
Interest
Income
Economic
Value of
Equity
(Dollars in thousands)
200%
100%
(100%)
(200%)
13.07%
(9.80)% $ 20,632
$(47,657)
6.52%
(5.14)% $ 10,287
$(24,886)
(6.55)%
5.55%
$(10,337)
$ 26,845
(13.15)% 11.39%
$(20,759)
$ 55,089
The estimated sensitivity does not necessarily represent our
forecast and the results may not be indicative of actual changes
to our net interest income. These estimates are based upon a
number of assumptions including: the nature and timing of
interest rate levels including yield curve shape, prepayments
on loans and securities, pricing strategies on loans and depos-
its, 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.
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 liquidity consists primarily of available
cash positions, Federal funds sold and short-term investments
categorized as available for sale securities, which can be dis-
posed of without significant capital losses in the ordinary course
of business, plus borrowing capacities, which include Federal
37
funds lines, repurchase agreements and FHLB advances.
Therefore, maintenance of high quality loans and securities that
can be used for collateral in repurchase agreements or other
secured borrowings is important
liquidity
management.
feature of our
The maintenance of a proper level of liquid assets is critical for
both the liquidity and the profitability of the Bank. Since the
primary purpose of the investment portfolio is to ensure the
Bank has adequate liquidity, management maintains appropri-
ate levels of liquid assets to avoid exposure to higher than
necessary liquidity risk. Liquidity risk may increase 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. A heavy
and sudden increase in cash demands for loans and/or depos-
its 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. 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.
December 31,
Liquidity Ratios
2006
2005
2004
Core Deposits/Total Assets
30.1%
35.3%
41.1%
Short-Term Non-Core
Funding/Total Assets
46.0%
41.8%
33.2%
Net Loans/Total Assets
76.6%
72.4%
71.9%
Investments/Deposits
15.9%
18.9%
20.4%
Loans and
Investments/Deposits
112.2% 106.3% 108.5%
borrowings with maturities of one to two years to fund a portion
of loan portfolio growth. Off-balance sheet items as a percent-
age of total assets increased at December 31, 2006 to 19.2 per-
cent, compared to 18.5 percent at December 31, 2005, and the
total amount increased to $708.8 million at December 31, 2006
from $671.4 million at December 31, 2005. The increase was
primarily due to a $21.5 million increase in commitments to
extend credit. During the year, the percentage of off-balance
sheet items to total assets generally ranged from 18 percent to
20 percent. The ratio of short-term non-core funding to total
assets was 46.0 percent at December 31, 2006, compared to
41.8 percent at December 31, 2005.
Foreign deposits are U.S.-based deposits made by foreign
customers. Foreign deposit risk deals with dependency on
foreign deposits that could adversely affect the Bank’s liquidity.
These liabilities are assumed to be volatile because of the
variability of social, political and environmental conditions in
foreign countries. As of December 31, 2006, 2005 and 2004,
foreign deposits deposits were $325.4 million, $294.3 million
and 297.4 million, respectively.
As of December 31, 2006, we maintained a total of $158.0 mil-
lion in credit lines secured by us to meet our liquidity needs. 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 bor-
rowings from the FHLB. We are eligible to borrow up of 25 per-
cent of our total assets from the FHLB.
As of December 31, 2006, there were no material commitments
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.
Off-Balance Sheet
Items/Total Assets
19.0%
18.5%
15.0%
Off-Balance Sheet Arrangements
The net loans to total assets ratio increased to 76.6 percent as
of December 31, 2006, compared to 72.4 percent at Decem-
ber 31, 2005. The ratio of loans and investments to deposits
increased to 112.2 percent as the Bank made use of
For a discussion of off-balance sheet arrangements, see
“Item 1. Business — Small Business Administration Guaran-
teed Loans” and “Item 1. Business — Off-Balance Sheet
Commitments.”
38
Contractual Obligations
Our contractual obligations as of December 31, 2006 are as follows:
Contractual Obligations
Time Deposits
Commitments to Extend Credit
Long-Term Debt Obligations
Standby Letters of Credit
Operating Lease Obligations
More Than
One Year
and Less
Than Three
Years
Less Than
One Year
$1,667,937
$ 4,972
578,347
45,000
47,709
4,093
—
111,000
312
5,917
More Than
Three Years
and Less
Than Five
Years
(In thousands)
$ 5,796
—
7,252
—
3,443
More
Than Five
Years
Total
$
141
$1,678,846
—
87,262
268
6,068
578,347
250,514
48,289
19,521
Total Contractual Obligations
$2,343,086
$122,201
$16,491
$93,739
$2,575,517
Recently Issued Accounting Standards
In September 2006, the SEC issued Staff Accounting Bulletin
(“SAB”) No. 108, “Considering the Effects of Prior Year Mis-
statements when Quantifying Misstatements in Current Year
Financial Statements.” SAB No. 108 specifies how the carry-
over or reversal of prior year unrecorded financial statement
misstatements should be considered in quantifying a current
year misstatement. SAB No. 108 requires an approach that
considers the amount by which the current year Consolidated
Statement of Income is misstated (“rollover approach”) and an
approach that considers the cumulative amount by which the
current year Consolidated Statement of Financial Condition is
misstated (“iron curtain approach”). Prior to the issuance of
SAB No. 108, either the rollover or iron curtain approach was
acceptable for assessing the materiality of financial statement
misstatements.
Initial application of SAB No. 108 allows registrants to elect not
to restate prior periods but to reflect the initial application in their
annual financial statements covering the first fiscal year ending
after November 15, 2006. The cumulative effect of the initial
application should be reported in the carrying amounts of
assets and liabilities as of the beginning of that fiscal year
and the offsetting adjustment, net of tax, should be made to
the opening balance of retained earnings for that year. Regis-
trants are required to disclose the nature and amount of each
item, when and how each error being corrected arose, and the
fact that the errors were previously considered immaterial.
We adopted the provisions of SAB No. 108 effective as of
January 1, 2006. In the fourth quarter of 2006, as part of
management’s review of the operating results of tax credit
partnership investments, we determined that our share of
losses from certain of these investments had not been properly
recorded, due to oversight, in accordance with GAAP for the
years 2003 to 2005. In accordance with the transition provisions
of SAB No. 108, we recorded a net $656,000 cumulative
adjustment to retained earnings as of January 1, 2006.
We have concluded that these adjustments are immaterial to
prior years’ consolidated financial statements under our previ-
ous method of assessing materiality, and therefore have
the transition provisions of
elected, as permitted under
SAB No. 108, to reflect the effect of these adjustments in
opening assets and liabilities as of January 1, 2006, with the
offsetting adjustment reflected as a cumulative effect adjust-
ment to opening retained earnings as of January 1, 2006.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 157, “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. The Statement is effective for financial state-
ments issued for fiscal years beginning after November 15,
2007, and interim periods within that fiscal year. We are cur-
rently assessing the impact that the adoption of SFAS No. 157
will have on our financial condition and results of operations.
financial
In June 2006, the FASB issued Interpretation No. 48, “Account-
ing for Uncertainty in Income Taxes — an Interpretation of FASB
Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise’s
accordance with
statements
SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48
prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. We will
be required to adopt FIN No. 48 in the first quarter of 2007. We
do not expect the adoption of FIN No. 48 will have a material
effect on our financial condition or results of operations.
in
In March 2006, the FASB issued SFAS No. 156, “Accounting for
Servicing of Financial Assets,” which amends the guidance in
SFAS No. 140. SFAS No. 156 requires that an entity separately
recognize a servicing asset or a servicing liability when it under-
takes an obligation to service a financial asset under a servicing
contract in certain situations. Such servicing assets or servicing
labilities are required to be measured initially at fair value, if
39
practicable. SFAS No. 156 also allows an entity to measure its
servicing assets and servicing liabilities subsequently using
either the amortization method, which existed under SFAS
No. 140, or
the fair value measurement method. SFAS
No. 156 will be effective in the fiscal year beginning January 1,
2007. We do not expect the adoption of SFAS No. 156 to have a
material
results of
operations.
financial condition or
impact on our
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.” This Statement:
(cid:129) permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that oth-
erwise would require bifurcation;
(cid:129) clarifies which interest-only strips and principal-only strips are
not subject to SFAS No. 133;
(cid:129) establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
instruments that contain an
derivatives or hybrid financial
embedded derivative requiring bifurcation;
(cid:129) clarifies that concentrations of credit risk in the form of sub-
ordinations are not embedded derivatives; and
(cid:129) amends SFAS No. 140 to eliminate the prohibition on a qualified
special purpose entity from holding a derivative financial instru-
ment that pertains to a beneficial interest other than another
derivative 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. We are currently assessing
the impact that the adoption of SFAS No. 155 will have on our
financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
For quantitative and qualitative disclosures regarding market
risks in Hanmi Bank’s portfolio, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Interest Rate Risk Management‘ and “— Liquid-
ity and Capital Resources.”
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed as a part of this
Report are set forth on pages 52 through 91.
40
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2006, Hanmi Financial carried out an
evaluation, under the supervision and with the participation of
Hanmi Financial’s management, including Hanmi Financial’s
Chief Executive Officer and Chief Financial Officer, of the effec-
tiveness of the design and operation of Hanmi Financial’s dis-
closure controls and procedures and internal controls over
financial reporting pursuant to Securities and Exchange Com-
mission (“SEC”) rules. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that:
(cid:129) Hanmi Financial’s disclosure controls and procedures were
effective as of the end of the period covered by this report in
timely alerting them to material information relating to Hanmi
Financial that is required to be included in Hanmi Financial’s
periodic SEC filings; and
(cid:129) Hanmi Financial’s internal controls over financial reporting
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.
During the quarter ended December 31, 2006, there have been
no significant changes in Hanmi Financial’s internal controls
over financial reporting or in other factors that could significantly
affect these controls subsequent to the evaluation date.
Disclosure controls and procedures are defined in SEC rules as
controls and other procedures designed to ensure that infor-
mation required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Hanmi Finan-
cial’s disclosure controls and procedures were designed to
ensure that material
information related to Hanmi Financial,
including subsidiaries, is made known to management, includ-
ing the Chief Executive Officer and Chief Financial Officer, in a
timely manner.
Management’s Report on Internal Control Over Financial
Reporting
Management of Hanmi Financial Corporation (“Hanmi Finan-
cial”) is responsible for establishing and maintaining adequate
internal control over financial reporting pursuant to the rules and
regulations of the Securities and Exchange Commission. Hanmi
Financial’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reli-
ability of financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. Internal control
over financial reporting includes those written policies and
procedures that:
(cid:129) 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;
(cid:129) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles;
(cid:129) provide reasonable assurance that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of
the
company; and
(cid:129) 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 financial
reporting may not prevent or detect misstatements. Also, pro-
jections 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
internal control over financial reporting as of December 31, 2006.
Management based this assessment on criteria for effective
internal control over financial reporting described in Internal Con-
trol-Integrated Framework issued by the Committee of Sponsor-
ing 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, 2006, Hanmi Financial maintained effective inter-
nal control over financial reporting.
KPMG LLP, the independent registered public accounting firm
that audited and reported on the consolidated financial state-
ments of Hanmi Financial, has issued a report on manage-
ment’s assessment of Hanmi Financial’s internal control over
reporting as of December 31, 2006. The report
financial
expresses unqualified opinions on management’s assessment
and on the effectiveness of Hanmi Financial’s internal control
over financial reporting as of December 31, 2006.
41
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) maintained effective
internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control-Inte-
grated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Com-
pany’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 Com-
pany’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 effec-
tive internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understand-
ing of internal control over financial reporting, evaluating man-
agement’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circum-
stances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a pro-
cess 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 dispo-
sitions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to per-
mit 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 regard-
ing 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, pro-
jections 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.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organiza-
tions 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,
2006, based on criteria established in Internal Control-Inte-
grated 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, 2006
and 2005, 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, 2006, and our report dated March 1,
2007 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Los Angeles, California
March 1, 2007
42
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Except as hereinafter noted, the information concerning direc-
tors and officers of Hanmi Financial is incorporated by reference
from the sections entitled “The Board of Directors and Executive
Officers” and “Section 16(a) Beneficial Ownership Reporting
Compliance” of Hanmi Financial’s Definitive Proxy Statement for
the Annual Meeting of Stockholders, which will be filed with the
Commission within 120 days after the close of Hanmi Finan-
cial’s fiscal year.
Audit Committee Financial Expert
M. Christian Mitchell was appointed to the Audit Committee of
the Board of Directors as of April 11, 2004. The Board has
determined that Mr. Mitchell meets the independence stan-
dards required by NASDAQ and is a “financial expert” within the
meaning of the current rules of the SEC.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to our principal executive officer, principal financial and
accounting officer, controller and other persons performing
similar functions. It will be provided to any stockholder without
charge, upon the written request of that stockholder. Such
requests should be addressed to Justine Roe, General Coun-
sel, Hanmi Financial Corporation, 3660 Wilshire Boulevard,
Penthouse Suite A, Los Angeles, California 90010. It is also
available on our website at www.hanmi.com.
Item 11. Executive Compensation
Information concerning executive compensation is incorpo-
rated by reference from the section entitled “Executive
Compensation” of Hanmi Financial’s Definitive Proxy Statement
for the Annual Meeting of Stockholders, which will be filed with
the Commission within 120 days after the close of Hanmi
Financial’s fiscal year.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters will
appear under the caption “Beneficial Ownership of Principal
Stockholders and Management” in Hanmi Financial’s Definitive
Proxy Statement for the Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Information concerning certain relationships and related trans-
actions is incorporated by reference from the section entitled
“Certain Relationships and Related Transactions” of Hanmi
Financial’s Definitive Proxy Statement for the Annual Meeting
of Stockholders, which will be filed with the Commission within
120 days after the close of Hanmi Financial’s fiscal year.
Item 14. Principal Accounting Fees and Services
Information concerning Hanmi Financial’s principal accoun-
tants’ fees and services is incorporated by reference from the
section entitled “Independent Accountants” of Hanmi Finan-
cial’s Definitive Proxy Statement for the Annual Meeting of
Stockholders, which will be filed with the Commission within
120 days after the close of Hanmi Financial’s fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules
(1) The Financial Statements required to be filed here-
under are listed in the Index to Consolidated Financial
Statements on page 52 of this Report.
(2) All Financial Statement Schedules have been
omitted as the required information is inapplicable or has
been included in the Notes to Consolidated Financial
Statements.
43
(3) The Exhibits required to be filed with this Report
are listed in the Exhibit Index included herein at page 93.
Hanmi Financial Corporation and Subsidiary
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the Years Ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Page
45
46
47
48
49
50
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 sub-
sidiary as of December 31, 2006 and 2005, 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, 2006.
These consolidated financial statements are the responsibility of
the Hanmi Financial Corporation’s management. Our respon-
sibility 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
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evalu-
ating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
December 31, 2006 and 2005, and the results of their opera-
tions and their cash flows for each of the years in the three-year
period ended December 31, 2006, in conformity with U.S. gen-
erally 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 con-
trol over financial reporting as of December 31, 2006, 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 1,
2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control
over financial reporting.
As discussed in Note 1 to the accompanying consolidated
financial statements, effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards
No. 123R, Share-Based Payment.
/s/ KPMG LLP
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial posi-
tion of Hanmi Financial Corporation and subsidiary as of
Los Angeles, California
March 1, 2007
45
Hanmi Financial Corporation and Subsidiary
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
Term Federal Funds Sold
Securities Held to Maturity, at Amortized Cost (Fair Value: 2006 — $969; 2005 — $1,051)
Securities Available for Sale, at Fair Value
Loans Receivable, Net of Allowance for Loan Losses of $27,557 and $24,963 at December 31, 2006 and 2005,
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
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
Bank-Owned Life Insurance
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-Bearing
Interest-Bearing:
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
Total Deposits
Accrued Interest Payable
Acceptances Outstanding
FHLB Advances and Other Borrowings
Junior Subordinated Debentures
Other Liabilities
Total Liabilities
Commitments and Contingencies (Notes 18 and 19)
Shareholders’ Equity:
Common Stock, $.001 Par Value; Authorized 200,000,000 Shares; Issued 50,239,613 Shares
(49,076,613 Shares Outstanding) and 49,821,798 Shares (48,658,798 Shares Outstanding) at
December 31, 2006 and 2005, Respectively
Additional Paid-In Capital
Unearned Compensation
Accumulated Other Comprehensive Loss — Unrealized Loss on Securities Available for Sale, Interest-Only
Strips and Interest Rate Swaps, Net of Income Taxes of ($1,450) and ($1,671) at December 31, 2006 and
2005, Respectively
46
Retained Earnings
Less Treasury Stock, at Cost; 1,163,000 Shares at December 31, 2006 and 2005
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See Accompanying Notes to Consolidated Financial Statements.
December 31,
2006
2005
$
97,501
41,000
$ 103,477
60,000
138,501
5,000
967
390,612
2,813,520
23,870
8,403
20,075
16,919
13,064
4,579
207,646
6,312
11,733
13,189
23,592
27,261
163,477
—
1,049
442,863
2,468,015
1,065
8,432
20,784
14,120
9,651
3,910
209,058
8,691
12,350
12,237
22,713
15,837
$3,725,243
$3,414,252
$ 728,347
$ 738,618
99,255
438,267
1,383,358
295,488
2,944,715
22,582
8,403
169,037
82,406
10,983
121,574
526,171
1,161,950
277,801
2,826,114
11,911
8,432
46,331
82,406
12,281
3,238,126
2,987,475
50
344,810
—
(3,200)
165,498
507,158
(20,041)
50
339,991
(1,150)
(4,383)
112,310
446,818
(20,041)
487,117
426,777
$3,725,243
$3,414,252
Hanmi Financial Corporation and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, Except Per Share Data)
Interest Income:
Interest and Fees on Loans
Interest on Investments
Interest on Federal Funds Sold
Interest on Term Federal Funds Sold
Total Interest Income
Interest Expense:
Interest on Deposits
Interest on FHLB Advances and Other Borrowings
Interest on Junior Subordinated Debentures
Total Interest Expense
Net Interest Income Before Provision for Credit Losses
Provision for Credit Losses
Year Ended December 31,
2006
2005
2004
$
239,075
19,710
1,402
2
$
180,845
18,507
1,589
—
$
117,999
17,372
183
—
260,189
200,941
135,554
93,036
6,977
6,416
54,192
3,017
4,902
26,268
3,305
3,044
106,429
62,111
32,617
153,760
7,173
138,830
5,395
102,937
2,907
Net Interest Income After Provision for Credit Losses
146,587
133,435
100,030
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
17,134
4,567
2,056
2,359
879
1,074
616
6,917
2
15,782
4,269
2,122
2,496
845
1,105
625
3,021
117
14,441
4,044
1,653
1,486
731
232
493
2,997
134
Total Non-Interest Income
35,604
30,382
26,211
Non-Interest Expenses:
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 Options
Other Operating Expenses
Merger-Related Expenses
40,512
10,130
4,939
2,997
2,391
1,910
2,379
582
10,114
—
36,839
8,978
4,844
2,913
2,556
2,201
2,785
748
7,778
(509)
33,540
8,098
4,540
3,001
2,433
2,068
1,872
—
8,961
2,053
Total Non-Interest Expenses
75,954
69,133
66,566
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Earnings Per Share:
Basic
Diluted
Weighted-Average Shares Outstanding:
Basic
Diluted
Dividends Declared Per Share
106,237
40,588
65,649
1.34
1.33
$
$
$
$
$
$
94,684
36,455
58,229
1.18
1.17
$
$
$
59,675
22,975
36,700
0.87
0.84
47
48,850,221
49,435,128
0.24
$
49,174,885
49,942,356
0.20
$
42,268,964
43,517,257
0.20
$
See Accompanying Notes to Consolidated Financial Statements.
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48
Year Ended December 31,
2006
2005
2004
$ 65,649
$ 58,229
$
36,700
Hanmi Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment
Amortization of Premiums and Accretion of Discounts on Investments, Net
Amortization of Core Deposit Intangible
Share-Based Compensation Expense
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
Loss on Sales of Premises and Equipment
Excess Tax Benefit from Exercises of Stock Options
Deferred Tax (Benefit) Expense
Origination of Loans Held for Sale
Proceeds from Sales of Loans Held for Sale
(Increase) Decrease in Accrued Interest Receivable
Increase in Servicing Asset
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
Other, Net
2,924
264
2,379
1,521
7,173
(641)
(2)
(1,074)
582
(6,917)
22
(598)
(2,942)
(154,608)
138,720
(2,799)
(669)
(879)
(11,424)
10,671
(1,298)
2,855
2,704
565
2,785
665
5,395
(362)
(117)
(1,105)
748
(3,021)
34
729
(2,707)
(61,709)
67,515
(4,091)
(64)
(845)
(2,015)
4,811
188
612
Net Cash Provided By Operating Activities
48,909
68,944
Cash Flows from Investing Activities:
Proceeds from Redemption of Federal Reserve Bank Stock
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
Net Increase in Loans Receivable
Purchase of Term Federal Funds Sold
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
617
—
56,729
—
5,005
(352,678)
(5,000)
(311)
(9,663)
—
(2,237)
—
—
—
89,885
—
11,360
(242,088)
—
(2,264)
(132,700)
—
(3,831)
—
2,447
3,246
1,872
—
2,907
(497)
(134)
(232)
—
(2,997)
15
—
694
(53,855)
54,311
155
(1,482)
(731)
2,399
(444)
(11,285)
4,645
37,734
—
5,031
120,389
239
53,063
(120,651)
—
(9,884)
(22,384)
(10,000)
(2,049)
(63,498)
Net Cash Used In Investing Activities
(307,538)
(279,638)
(49,744)
Cash Flows from Financing Activities:
Increase in Deposits
Issuance of Junior Subordinated Debentures
Proceeds from Exercises of Stock Options and Stock Warrants
Excess Tax Benefit from Exercises of Stock Options
Stock Issued Through Private Placement
Cash Dividends Paid
Cash Paid to Acquire Treasury Stock
Proceeds from Long-Term FHLB Advances and Other Borrowings
Repayment of Long-Term FHLB Advances and Other Borrowings
Net Change in Short-Term FHLB Advances and Other Borrowings
Net Cash Provided By Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents — Beginning of Year
118,601
—
3,553
598
—
(11,805)
—
130,000
(5,420)
(1,874)
297,307
—
2,516
—
—
(9,813)
(20,041)
7,411
(30,246)
(127)
233,653
247,007
(24,976)
163,477
36,313
127,164
146,273
82,406
3,425
—
71,710
(7,740)
—
66,363
(148,400)
(137,458)
76,579
64,569
62,595
Cash and Cash Equivalents — End of Year
$ 138,501
$ 163,477
$ 127,164
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
$ 117,100
$ 45,869
$
$
541
2,941
$ 41,266
$ 37,650
$
$
—
2,433
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.
49
$
$
$
$
29,920
25,400
—
2,467
$ 1,383,782
(104,383)
(156,750)
(1,059,151)
$
63,498
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Note 1 — Summary of Significant Accounting Policies
The accounting and reporting policies of Hanmi Financial Corporation and subsidiary conform to accounting principles generally
accepted in the United States of America. 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 transactions 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 its 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 activities, 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, 2006, 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, overnight Federal funds sold and securities purchased under resale
agreements, all of which have original or purchased 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.
Federal Home Loan Bank Stock
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
50
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
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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 Compre-
hensive 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.
We assess, at each reporting date, whether there is an “other-than-temporary” impairment to our investment securities. We
examine all individual securities that are in an unrealized loss position at each reporting date for “other-than-temporary” impairment.
Specific investment level factors we examine to assess impairment include the severity and duration of the loss, an analysis of the
issuers of the securities and if there has been any cause for default on the securities and any change in the rating of the securities by
the various rating agencies. Additionally, we reexamine the financial resources and overall ability the Bank has and the intent
management has to hold the securities until their fair values recover. 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 investment is
included in Other Assets on the Consolidated Statements of Financial Condition and is carried at cost. As of December 31, 2006
and 2005, its carrying value was $511,000. We monitor the investment for impairment and make appropriate reductions in carrying
value when necessary.
Derivative Instruments
We account for derivatives in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities, as amended.” Under SFAS No. 133, all derivatives are recognized on
the balance sheet at their fair values. On the date the derivative contract is entered into, we designate the derivative as a fair value
hedge or a cash flow hedge. Fair value hedges include hedges of the fair value of a recognized asset, liability or a firm commitment.
Cash flow hedges include hedges of the variability of cash flows to be received or paid related to a recognized asset, liability or a
forecasted transaction. Changes in the fair value of derivatives designated as fair value hedges, along with the change in fair value on
the hedged asset, liability or firm commitment 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.
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.
51
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
If the hedging instrument is terminated early, the derivative is removed from the balance sheet. Accounting for the adjustments 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.
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 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
servicing fee for the estimated life of the loan, calculated using the same assumptions as noted above. Such interest-only strips are
accounted for at their estimated fair value, with unrealized gains or losses recorded as adjustments to Other Comprehensive
Income.
Servicing Assets
Servicing assets are recorded at the lower of amortized cost or fair value in accordance with the provisions of SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The fair values of servicing assets
represent either the price paid if purchased, or the allocated carrying amounts based on relative values when retained in a sale.
Servicing assets are amortized in proportion to, and over the period of, estimated net servicing income. The fair value of servicing
assets is determined based on the present value of estimated net future cash flows related to contractually specified servicing fees.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or market value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Loan Interest Income and Fees
52
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 purchased loans are accreted or amortized
lives of the loans, adjusted for prepayments. Accretion of
to interest income using the interest method over the contractual
discounts and deferred loan fees is discontinued when loans are placed on non-accrual status.
Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in
doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due.
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual
circumstances surrounding the loan’s delinquency. When an asset is placed on non-accrual status, previously accrued but unpaid
interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received,
except when the ultimate collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual
assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest
income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual.
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 commercial, consumer, 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 delinquent, 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 management 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 adjustment 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.
53
Hanmi Bank follows the “Interagency Policy Statement on the Allowance for Loan and Lease Losses” and analyzes the allowance
for loan losses on a quarterly 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
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
Institutions (“DFI”) and/or the Board of Governors of the Federal Reserve System 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 various classes of assets. The ranges of
useful lives for the principal classes of assets are as follows:
Buildings and Improvements
Furniture and Equipment
Leasehold Improvements
Software
Impairment of Long-Lived Assets
10 to 30 Years
Two to Seven Years
Term of Lease or Useful Life, Whichever is Shorter
Three Years
We account for long-lived assets in accordance with the provisions 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 undiscounted 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 carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, amounted to $207.6 million and
$209.1 million as of December 31, 2006 and 2005, respectively. We adopted SFAS No. 142, “Goodwill and Other Intangible
Assets,” effective January 1, 2002. SFAS No. 142 requires that goodwill be recorded at the reporting unit level. Reporting units are
defined as an operating segment. 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, 2006 and 2005, management is unaware of any
circumstances that would indicate a potential impairment of goodwill.
Core Deposit Intangible
54
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, 2006. As required by SFAS No. 142, the CDI balance is
assessed for impairment or recoverability whenever events or changes in circumstances indicate the carrying 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, 2006 and 2005, management is not aware of any circumstances that would indicate impairment of
the CDI asset, and no impairment charges were recorded through earnings in 2006.
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
As of December 31, 2006 and 2005, the gross carrying amount of the CDI balance totaled $13.8 million and the related
accumulated amortization totaled $7.5 million and $5.1 million, respectively. The total amortization expense on the CDI balance was
$2,379,000, $2,785,000 and $1,872,000 during the years ended December 31, 2006, 2005 and 2004, respectively. Estimated
future amortization expense of the CDI balance is as follows: $2,039,000 in 2007; $1,675,000 in 2008; $1,284,000 in 2009;
$865,000 in 2010; $416,000 in 2011; and $34,000 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 securities 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.
Share-Based Compensation
We adopted SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 using the “modified prospective” method. Under this
method, awards that are granted, modified or settled after December 31, 2005 are measured and accounted for in accordance with
SFAS No. 123(R). Also under this method, expense is recognized for services attributed to the current period for unvested awards
that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123,
“Accounting for Stock-Based Compensation.” Prior to the adoption of SFAS No. 123(R), we accounted for stock compensation
under the intrinsic value method permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Accordingly, we previously recognized no compensation cost for employee stock options
that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.
55
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123 in 2005 and 2004:
(Dollars in thousands, Except Per Share Data)
Net Income — As Reported
Add — Share-Based Employee Compensation Expense Included in Reported Net Income, Net of
Related Tax Effects (Restricted Stock Award)
Year Ended December 31,
2005
2004
$58,229
$36,700
409
—
Deduct — Total Share-Based Employee Compensation Expense Determined Under Fair Value-Based
Method for All Awards Subject to SFAS No. 123, Net of Related Tax Effects
(1,214)
(408)
Net Income — Pro Forma
Earnings Per Share — As Reported:
Basic
Diluted
Earnings Per Share — Pro Forma:
Basic
Diluted
$57,424
$36,292
$ 1.18
$ 1.17
$ 0.87
$ 0.84
$ 1.17
$ 1.15
$ 0.86
$ 0.83
In November 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 123R-3, “Transition Election
Related to Accounting for the Tax Effects of the Share-Based Payment Awards” (“FAS 123R-3”). We have adopted the alternative
transition method prescribed by FAS 123R-3 and concluded that we have no pool of tax benefits as of the adoption date of
SFAS No. 123(R).
SFAS No. 123(R) requires that cash flows resulting from the realization of excess tax benefits recognized on awards that were fully
vested at the time of adoption of SFAS No. 123(R) be classified as a financing cash inflow and an operating cash outflow in the
Consolidated Statements of Cash Flows. Before the adoption of SFAS No. 123(R), we presented all tax benefits realized from the
exercise of stock options as an operating cash inflow.
In addition, SFAS No. 123(R) requires that any unearned compensation related to awards granted prior to the adoption of
SFAS No. 123(R) be eliminated against the appropriate equity accounts. As a result, the presentation of Shareholders’ Equity was
revised to reflect the transfer of the balance previously reported in Unearned Compensation to Additional Paid-In Capital.
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
56
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.
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
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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.
Reclassifications
Certain reclassifications were made to the prior year’s presentation 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 consideration 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:
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 137,414 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 $12.53, 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
(Dollars in Thousands;
Except Share Prices)
10,908,821
(5,537,431)
5,371,390
2.312
12,418,654
$
$
12.53
155,606
1,063
164,562
57
3,320
145
$
324,696
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 2 — Business Combination (Continued)
The purchase price was allocated based on the fair values of the assets acquired and liabilities assumed:
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
(In thousands)
$110,683
(1,489)
376
5,459
13,137
15
(264)
(789)
(1,711)
(7,948)
207,227
$324,696
As of December 31, 2006, the carrying amount of goodwill from the PUB acquisition was $205.8 million compared to $207.2 million
at December 31, 2005, a decrease of $1.5 million. The decrease was due to a tax refund related to the acquisition of PUB.
58
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 2 — Business Combination (Continued)
The fair value of PUB net assets acquired was as follows:
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
(In thousands)
$
27,483
76,900
6,256
157,905
865,743
11,668
3,498
205,815
13,137
12,888
$1,381,293
$ 936,699
105,789
14,109
$1,056,597
$ 324,696
The core deposit intangible is being amortized using an accelerated method over eight years. None of the goodwill balance 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 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 remaining balance of $509,000 was reversed in 2005.
Certain costs (primarily PUB employee severance, data processing contract termination costs, and the costs of vacating duplicative
branches within PUB’s network) were recognized as liabilities assumed in the business combination or impairments 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, $95,000, $834,000 and $2,444,000 was utilized and charged
against the related liability in 2006, 2005 and 2004, respectively, and $1,142,000 was reversed in 2005.
59
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 2 — Business Combination (Continued)
We incurred the following merger-related costs for the years ended December 31, 2005 and 2004:
(In thousands)
Merger-Related Costs — 2005:
Reversal of Merger-Related Costs
Total Merger-Related Costs — 2005
Merger-Related Costs — 2004:
Employee Termination Costs
Contract Termination Costs
Leasehold Termination Costs
Asset Impairments
Total Merger-Related Costs — 2004
Expensed
(Credited)
Included in
Cost of
Acquisition
$ (509)
$(1,142)
$ (509)
$(1,142)
$1,364
$ 1,425
—
348
341
1,828
1,262
—
$2,053
$ 4,515
Note 3 — Securities Purchased Under Agreements to Resell
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 dealers who arrange the transactions. In
the event that the fair value of the securities decreases below the carrying amount of the related reverse repurchase agreement, the
counterparties are required to designate an equivalent value of additional securities in the name of Hanmi Financial.
The following is a summary of the securities purchased under agreements to resell:
(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
December 31,
2006
2005
$
— $20,000
$ 6,164
$13,137
$30,000
$25,000
5.09%
3.38%
60
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 4 — Securities
The following is a summary of securities held to maturity:
(In thousands)
December 31, 2006:
Municipal Bonds
Mortgage-Backed Securities
December 31, 2005:
Municipal Bonds
Mortgage-Backed Securities
The following is a summary of securities available for sale:
(In thousands)
December 31, 2006:
Mortgage-Backed Securities
U.S. Government Agency Securities
Municipal Bonds
Collateralized Mortgage Obligations
Corporate Bonds
Other
December 31, 2005:
Mortgage-Backed Securities
U.S. Government Agency Securities
Municipal Bonds
Collateralized Mortgage Obligations
Corporate Bonds
Other
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
$ 693
274
$ 967
$ 692
357
$1,049
$—
2
$ 2
$—
2
$ 2
$ —
$ 693
—
276
$ —
$ 969
$ —
$ 692
—
359
$ —
$1,051
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
$123,614
$ 179
$2,185
$121,608
119,768
—
1,524
118,244
69,966
67,605
8,090
4,999
1,795
—
—
172
51
1,492
203
121
71,710
66,113
7,887
5,050
$394,042
$2,146
$5,576
$390,612
$149,311
$ 144
$2,187
$147,268
129,589
—
1,776
127,813
71,536
83,068
8,235
4,999
1,758
3
—
156
74
1,615
182
102
73,220
81,456
8,053
5,053
$446,738
$2,061
$5,936
$442,863
61
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 4 — Securities (Continued)
The amortized cost and estimated fair value of investment securities at December 31, 2006, by contractual maturity, are shown
below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2036,
expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(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
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$ 44,942
$ 44,649
$ —
$ —
90,049
7,834
59,998
88,656
7,976
61,610
202,823
202,891
123,614
121,608
67,605
66,113
191,219
187,721
—
693
—
693
274
—
274
—
693
—
693
276
—
276
$394,042
$390,612
$967
$969
62
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 4 — Securities (Continued)
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, 2006
and 2005:
(In thousands)
Available for Sale — December 31, 2006:
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
Mortgage-Backed Securities
$ 121
$ 19,442
$2,064
$ 87,966
$2,185
$107,408
U.S. Government Agency Securities
Municipal Bonds
Collateralized Mortgage Obligations
Corporate Bonds
Other
21
3
98
—
—
9,979
1,503
108,265
1,524
118,244
961
48
4,290
51
5,251
7,196
1,394
58,917
1,492
66,113
—
—
203
121
7,887
2,879
203
121
7,887
2,879
$ 243
$ 37,578
$5,333
$270,204
$5,576
$307,782
Available for Sale — December 31, 2005:
Mortgage-Backed Securities
$ 922
$ 78,891
$1,265
$ 40,364
$2,187
$119,255
U.S. Government Agency Securities
1,682
112,931
Municipal Bonds
Collateralized Mortgage Obligations
Corporate Bonds
Other
31
383
106
21
4,126
94
43
9,882
2,353
1,776
122,813
74
6,479
29,281
1,232
42,988
1,615
72,269
5,102
979
76
81
2,951
1,919
182
102
8,053
2,898
$3,145
$231,310
$2,791
$100,457
$5,936
$331,767
All individual securities that have been in a continuous unrealized loss position for 12 months or longer at December 31, 2006 and
2005 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, 2006 and 2005. 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 management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or
longer as of December 31, 2006 and 2005 are not other-than-temporarily impaired, and therefore, no impairment charges as of
December 31, 2006 and 2005 are warranted.
Securities with carrying values of $282.5 million and $279.7 million as of December 31, 2006 and 2005, respectively, were pledged
to secure public deposits and for other purposes as required or permitted by law.
There were $2,000, $117,000 and $134,000 in net realized gains on sales of securities available for sale during the years ended
December 31, 2006, 2005 and 2004, respectively. In 2006, $254,000 ($184,000, net of tax) of unrealized losses arose during the
year and were included in comprehensive income and $4,000 ($3,000, net of tax) of previously unrealized gains were realized in
earnings. In 2005, $3.6 million ($2.6 million, net of tax) of unrealized losses arose during the year and were included in
comprehensive 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.
63
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
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 and Industrial Loans
Consumer Loans
Total Gross Loans
Allowance for Loans Losses
Deferred Loan Fees
Loans Receivable, Net
2006
2005
$ 757,428
$ 733,650
202,207
152,080
81,128
87,377
1,040,763
973,107
1,202,612
225,630
148,391
126,561
945,210
224,271
155,491
106,520
1,703,194
1,431,492
100,121
92,154
2,844,078
2,496,753
(27,557)
(3,001)
(24,963)
(3,775)
$2,813,520
$2,468,015
Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows:
As of and for the Year Ended December 31,
2006
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
2005
Allowance
for Off-
Balance
Sheet
Items
2004
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
Total
Total
Allowance
for Loan
Losses
Total
(In thousands)
Balance — Beginning of Year
$24,963 $2,130 $27,093 $22,702 $1,800 $24,502 $13,349 $1,385 $14,734
Allowance for Loan Losses Acquired in
PUB Acquisition
—
—
—
—
—
— 10,566
— 10,566
Provision Charged to Operating
Expense
Loans Charged Off
64
Recoveries
7,173
(6,129)
1,550
— 7,173
5,065
330
5,395
2,492
415
2,907
— (6,130)
(5,198)
— (5,198)
(5,485)
— (5,485)
— 1,551
2,394
— 2,394
1,780
— 1,780
Balance — End of Year
$27,557 $2,130 $29,687 $24,963 $2,130 $27,093 $22,702 $1,800 $24,502
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 5 — Loans Receivable and Allowance for Loan Losses (Continued)
The following is a summary of interest foregone on impaired loans for the periods indicated:
(In thousands)
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
The following table provides information on impaired loans for the periods indicated:
(In thousands)
Recorded Investment With Related Allowance
Recorded Investment With No Related Allowance
Allowance on Impaired Loans
Net Recorded Investment in Impaired Loans
Year Ended December 31,
2006
2005
2004
$ 1,726
$ 957
$ 678
(1,146)
(603)
(350)
$ 580
$ 354
$ 328
As of and for the
Year Ended December 31,
2006
2005
2004
$10,616
$ 7,548
$ 4,391
3,868
3,235
3,262
(6,731)
(4,991)
(3,039)
$ 7,753
$ 5,792
$ 4,614
Average Total Recorded Investment in Impaired Loans
$19,287
$14,340
$ 9,850
There were no commitments to lend additional funds to borrowers whose loans are included above.
Loans on non-accrual status totaled $14.2 million and $10.1 million at December 31, 2006 and 2005, respectively. Loans past due
90 days or more and still accruing interest totaled $2,000 and $9,000 at December 31, 2006 and 2005, respectively. Restructured
loans totaled $5.5 million and $4.0 million at December 31, 2006 and 2005, respectively.
The following is an analysis of all loans to officers and directors 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)
Outstanding Balance — Beginning of Year
Credit Granted, Including Renewals
Repayments
Outstanding Balance — End of Year
December 31,
2006
2005
$ 850
$1,552
—
—
(811)
(702)
$ 39
$ 850
Income from these loans totaled $72,000, $81,000 and $4,000 for the years ended December 31, 2006, 2005 and 2004,
respectively, and is reflected in the accompanying Consolidated Statements of Income.
65
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 6 — Servicing Asset
Changes in loan servicing rights, net of amortization, were as follows:
(In thousands)
Balance — Beginning of Year
Additions
Valuation Write-Down
Amortization
Balance — End of Year
December 31,
2006
2005
$ 3,910
$ 3,846
2,331
1,150
(355)
—
(1,307)
(1,086)
$ 4,579
$ 3,910
At December 31, 2006 and 2005, we serviced loans sold to unaffiliated parties in the amounts of $236.0 million and $180.9 million,
respectively. All of the loans being serviced were SBA loans.
Note 7 — 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,
2006
2005
$ 6,120
$ 6,120
8,210
7,804
12,202
12,095
8,403
862
7,924
387
35,797
34,330
(15,722)
(13,546)
$ 20,075
$ 20,784
Depreciation and amortization expense totaled $2,924,000, $2,704,000 and $2,447,000 for the years ended December 31, 2006,
2005 and 2004, respectively.
Note 8 — Deposits
Time deposits by maturity were as follows:
(In thousands)
66
Less Than Three Months
After Three Months to Six Months
After Six Months to Twelve Months
After Twelve Months
Total Time Deposits
December 31,
2006
2005
$ 811,211
$ 701,140
516,473
340,856
10,306
314,151
407,689
16,771
$1,678,846
$1,439,751
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 8 — Deposits (Continued)
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: $2,255,000 in 2007; $8,457,000 in 2008; $56,000 in 2009; $0 in 2010; and $4,000
in 2011.
A summary of interest expense on deposits was as follows for the periods indicated:
(In thousands)
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
Total Interest Expense on Deposits
Year Ended December 31,
2006
2005
2004
$ 1,853
$ 2,130
$ 1,790
14,539
12,964
8,098
64,184
12,460
31,984
10,966
7,114
5,414
$93,036
$54,192
$26,268
Total deposits reclassified to loans due to overdrafts at December 31, 2006 and 2005 were $4.3 million and $3.7 million,
respectively.
Note 9 — FHLB Advances and Other Borrowings
FHLB advances and other borrowings consisted of the following:
(In thousands)
FHLB Advances
Note Issued to U.S. Treasury
Total FHLB Advances and Other Borrowings
December 31,
2006
2005
$168,107
$43,527
930
2,804
$169,037
$46,331
FHLB advances represent collateralized obligations with the FHLB of San Francisco. A summary of contractual maturities follows:
Year
2007
2008
2009
2010
2011
Thereafter
Amount
Weighted-Average
Interest Rate
(In thousands)
$ 45,000
105,000
6,000
7,252
—
4,855
4.75%
5.42%
5.63%
4.44%
—
5.27%
$168,107
67
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 9 — FHLB Advances and Other Borrowings (Continued)
Financial data pertaining to FHLB advances were as follows:
(Dollars in thousands)
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
All of the FHLB advances had fixed interest rates.
Year Ended December 31,
2006
2005
2004
5.20%
5.02%
4.33%
3.70%
4.12%
2.23%
$123,295
$ 74,437
$137,827
$168,250
$100,700
$261,000
We have pledged investment securities available for sale and loans receivable with carrying values of $53.3 million and
$284.8 million, respectively, as collateral with the FHLB for this borrowing facility. The total borrowing capacity available from
the collateral that has been pledged is $240.7 million, of which $72.6 million remained available as of December 31, 2006.
For the years ended December 31, 2006, 2005 and 2004, interest expense on FHLB advances and other borrowings totaled
$7.0 million, $3.0 million and $3.3 million, respectively, and the weighted-average interest rates were 5.02 percent, 3.63 percent and
2.14 percent, respectively.
In 2006, we increased our lines of credit by $4.0 million. Total credit lines for borrowing amounted to $158.0 million and
$154.0 million at December 31, 2006 and 2005, respectively. As of December 31, 2006 and 2005, there were no borrowings
under these credit lines.
Note 10 — 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 securities have a floating rate, which resets quarterly. Under the terms of the
transactions, the securities will mature in 2034 and are redeemable, in whole or in part, without penalty, at the option of Hanmi
Financial after five years. The outstanding subordinated debentures related to these offerings, the proceeds of which financed the
purchase of PUB, totaled $82.4 million at December 31, 2006 and 2005.
For the years ended December 31, 2006, 2005 and 2004, interest expense on the junior subordinated debentures totaled
$6.4 million, $4.9 million and $3.0 million, respectively, and the weighted-average interest rates were 7.79 percent, 5.95 percent and
3.69 percent, respectively.
68
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 11 — Income Taxes
A summary of income taxes for the years ended December 31, 2006, 2005 and 2004 follows:
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Income Taxes
2006
2005
2004
$34,471
$29,779
$16,010
9,059
9,383
6,271
43,530
39,162
22,281
(2,222)
(2,350)
1,032
(720)
(357)
(338)
(2,942)
(2,707)
694
$40,588
$36,455
$22,975
As of December 31, 2006 and 2005, the Federal and state deferred tax assets were 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
Other
Total Deferred Tax Liabilities
Net Deferred Tax Assets
2006
2005
$13,608
$12,419
1,288
2,672
1,450
637
591
2,928
1,671
59
19,655
17,668
(5,329)
(1,262)
(6,497)
(1,520)
(6,591)
(8,017)
$13,064
$ 9,651
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.
69
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 11 — Income Taxes (Continued)
A reconciliation of the difference between the Federal statutory income tax rate and the effective tax rate as of December 31 is
shown in the following table:
Statutory Tax Rate
State Taxes, Net of Federal Tax Benefits
Tax-Exempt Municipal Securities
Reversal of Valuation Allowance
Other
Effective Tax Rate
2006
2005
2004
35.0%
35.0%
35.0%
5.8%
6.2%
(1.0)%
(1.2)%
—
—
(1.6)%
(1.5)%
6.5%
(1.8)%
(0.7)%
(0.5)%
38.2%
38.5%
38.5%
At December 31, 2006 and 2005, net current taxes payable of $1.0 million and $2.3 million, respectively, were included in Other
Liabilities in the Consolidated Statements of Financial Condition.
Note 12 — Employee Share-Based Compensation
At December 31, 2006, we had two stock incentive plans, the Year 2000 Stock Option Plan, which provides for the granting of non-
qualified and incentive stock options and restricted stock awards to employees (including officers and directors), and our 2004 CEO
Stock Option Plan, which provides for the grant of stock options to our Chief Executive Officer.
Year 2000 Stock Option Plan
Under the Year 2000 Stock Option Plan, we may grant options for up to 5,430,742 shares of common stock. As of December 31,
2006, 2,206,092 shares were still available for issuance.
All stock options granted under the Year 2000 Stock Option Plan have an exercise price equal to the fair market value of the
underlying common stock on the date of grant. Stock options granted under the Year 2000 Stock Option Plan generally vest based
on five years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for
accelerated vesting if there is a change in control (as defined in the Year 2000 Stock Option Plan). New shares of common stock may
be issued or treasury shares may be utilized upon the exercise of stock options.
For the years ended December 31, 2006, 2005 and 2004, the estimated weighted-average fair value per share of options granted
under the Year 2000 Stock Option Plan was as follows:
Year Ended December 31,
2006
2005
2004
Estimated Weighted-Average Fair Value Per Share of Options Granted
$6.23
$4.96
$3.55
70
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 12 — Employee Share-Based Compensation (Continued)
The estimated weighted-average fair value per share of options granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Weighted-Average Assumptions:
Dividend Yield
Expected Volatility
Expected Term
Risk-Free Interest Rate
Year Ended December 31,
2006
2005
2004
1.26%
1.18%
1.48%
34.79%
32.62%
33.04%
4.6 years
4.1 years
4.0 years
4.85%
4.13%
2.75%
Expected volatility is determined based on the historical daily volatility of our stock price over a period equal to the expected term of
the options granted. The expected term of the options represents the period of time that options granted are expected to be
outstanding based primarily on the historical exercise behavior associated with previous option grants. The risk-free interest rate is
based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
The following information under the Year 2000 Stock Option Plan is presented for the years ended December 31, 2006, 2005 and
2004.
(In thousands)
Grant Date Fair Value of Options Granted
Fair Value of Options Vested
Total Intrinsic Value of Options Exercised(1)
Cash Received from Options Exercised
Actual Tax Benefit Realized from Tax Deductions on Options Exercised
Year Ended December 31,
2006
2005
2004
$5,940
$ 672
$1,582
$ 695
$ 905
$ 691
$2,874
$4,487
$9,758
$2,032
$2,093
$1,703
$ 661
$ 729
$ —
(1)
Intrinsic value represents the difference between the closing stock price on the exercise date and the exercise price, multiplied by the number of options.
The following is a summary of the transactions under the Year 2000 Stock Option Plan for the years ended December 31, 2006,
2005 and 2004:
2006
2005
2004
Number
of
Shares
Weighted-Average
Exercise Price
Per Share
Number
of
Shares
Weighted-Average
Exercise Price
Per Share
Number
of
Shares
Weighted-Average
Exercise Price
Per Share
Options Outstanding — Beginning of Year
1,173,712
$10.55 1,618,836
$ 9.33 1,500,064
Options Granted
953,000
$19.17
135,554
$17.10
791,000
Options Assumed in PUB Acquisition
—
$ —
—
$ — 137,414
Options Exercised
Options Forfeited
Options Expired
(257,759)
(111,540)
$ 7.88
(391,094)
$ 6.44
(670,576)
$15.39
(189,584)
$13.26
(139,066)
(1,600)
$14.03
—
$ —
—
$ 5.52
$13.51
$ 5.11
$ 4.82
$ 9.61
$ —
71
Options Outstanding — End of Year
1,755,813
$15.31 1,173,712
$10.55 1,618,836
$ 9.33
Options Exercisable — End of Year
471,903
$ 8.55
520,602
$ 7.00
487,242
$ 6.10
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 12 — Employee Share-Based Compensation (Continued)
The following is a summary of the transactions for non-vested stock options under the Year 2000 Stock Option Plan for the years
ended December 31, 2006, 2005 and 2004:
2006
2005
2004
Weighted-Average
Grant Date
Fair Value
Per Share
Number
of Shares
Weighted-Average
Grant Date
Fair Value
Per Share
Number
of Shares
Weighted-Average
Grant Date
Fair Value
Per Share
Number
of Shares
653,110
953,000
(210,660)
(111,540)
$3.68 1,131,594
$2.93
844,910
$6.23
135,554
$4.96
791,000
$3.30
(424,454)
$2.13
(365,250)
$4.90
(189,584)
$3.62
(139,066)
$1.89
$3.55
$1.89
$2.83
Non-Vested Options Outstanding —
Beginning of Year
Options Granted
Options Vested
Options Forfeited
Non-Vested Options Outstanding —
End of Year
1,283,910
$5.53
653,110
$3.68 1,131,594
$2.93
For the year ended December 31, 2006, compensation expense of $742,000 for the Year 2000 Stock Option Plan was recognized
in the Consolidated Statements of Income. As of December 31, 2006, the total compensation cost not yet recognized under the
Year 2000 Stock Option Plan was $5.9 million with a weighted-average recognition period of 3.6 years.
As of December 31, 2006, stock options outstanding under the Year 2000 Stock Option Plan were as follows:
Options Outstanding
Options Exercisable
Exercise
Price Range
Number
of Shares
Intrinsic
Value(1)
$ 3.27 to $ 4.99
156,666
$ 2,938
$ 5.00 to $ 9.99
$10.00 to $14.99
$15.00 to $19.99
$20.00 to $21.63
141,593
434,000
735,554
288,000
2,177
3,918
3,386
259
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life
Number
of Shares
Intrinsic
Value(1)
(Dollars in thousands, Except Per Share Data)
$ 3.78
$ 7.15
$13.50
$17.93
$21.63
3.8 years
156,666
$2,938
4.3 years
141,593
7.3 years
149,533
9.2 years
9.9 years
24,111
—
2,177
1,351
133
—
Weighted-
Average
Exercise
Price Per
Share
$ 3.78
$ 7.15
$13.50
$17.03
$ —
Weighted-
Average
Remaining
Contractual
Life
3.8 years
4.3 years
7.3 years
8.3 years
—
1,755,813
$12,678
$15.31
8.0 years
471,903
$6,599
$ 8.55
6.8 years
(1)
Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $22.53 as of December 29, 2006, and the exercise
price, multiplied by the number of options.
2004 CEO Stock Option Plan
72
Under the 2004 CEO Stock Option Plan, a total of 350,000 stock options were granted to our Chief Executive Officer. As of
December 31, 2006, there were no additional shares available for issuance.
All stock options granted under the 2004 CEO Stock Option Plan have an exercise price equal to the fair market value of the
underlying common stock on the date of grant. Stock options granted under the 2004 CEO Stock Option Plan vest based on six
years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for accelerated
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 12 — Employee Share-Based Compensation (Continued)
vesting if there is a change in control (as defined in the 2004 CEO Stock Option Plan). New shares of common stock may be issued
or treasury shares may be utilized upon the exercise of stock options.
There were no stock options granted under the 2004 CEO Stock Option Plan during the years ended December 31, 2006 and 2005.
The following is a summary of the transactions under the 2004 CEO Stock Option Plan for the years ended December 31, 2006,
2005 and 2004:
2006
2005
2004
Number
of
Shares
Exercise
Price Per
Share
Number
of
Shares
Exercise
Price Per
Share
Number
of
Shares
Exercise
Price Per
Share
Options Outstanding — Beginning of Year
350,000
$17.17
350,000
$17.17
— $ —
Options Granted
— $ —
— $ — 350,000
$17.17
Options Outstanding — End of Year
350,000
$17.17
350,000
$17.17
350,000
$17.17
Options Exercisable — End of Year
58,333
$17.17
— $ —
— $ —
The following is a summary of the transactions for non-vested stock options under the 2004 CEO Stock Option Plan for the years
ended December 31, 2006, 2005 and 2004:
2006
2005
2004
Number
of
Shares
Grant Date
Fair Value
Per Share
Number
of
Shares
Grant Date
Fair Value
Per Share
Number
of
Shares
Grant Date
Fair Value
Per Share
Non-Vested Options Outstanding — Beginning of Year
350,000
$4.82
350,000
$4.82
—
Options Granted
Options Vested
—
(58,333)
$ —
$4.82
—
—
$ — 350,000
$ —
—
$ —
$4.82
$ —
Non-Vested Options Outstanding — End of Year
291,667
$4.82
350,000
$4.82
350,000
$4.82
For the year ended December 31, 2006, compensation expense of $416,000 for the 2004 CEO Stock Option Plan was recognized
in the Consolidated Statements of Income. As of December 31, 2006, the total compensation cost not yet recognized under the
2004 CEO Stock Option Plan was $1.0 million with a recognition period of 3.8 years.
As of December 31, 2006, stock options outstanding under the 2004 CEO Stock Option Plan were as follows:
Options Outstanding
Options Exercisable
Number
of Shares
Intrinsic
Value(1)
Exercise
Price Per
Share
Remaining
Contractual
Life
Number
of Shares
Intrinsic
Value(1)
Exercise
Price Per
Share
Remaining
Contractual
Life
350,000
$1,878
$17.17
7.9 years
58,333
$313
$17.17
7.9 years
(1) Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $22.53 as of December 29, 2006, and the exercise
73
(Dollars in thousands, Except Per Share Data)
price, multiplied by the number of options.
Restricted Stock Award
In February 2005, 100,000 shares of restricted stock were granted to Dr. Sung Won Sohn, our Chief Executive Officer. 20,000 of
these shares vested immediately, and an additional 20,000 shares vest each year over the next four years on the anniversary date of
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 12 — Employee Share-Based Compensation (Continued)
the grant. The market value of the shares awarded totaled $1,815,000. For the years ended December 31, 2006 and 2005,
compensation expense of $363,000 and $665,000, respectively, related to the restricted stock award was recognized in the
Consolidated Statements of Income.
Note 13 — Shareholders’ Equity
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 the
years ended December 31, 2006, 2005 and 2004, 160,056, 0 and 20,000 shares of common stock, respectively, were issued in
connection with the exercise of stock warrants. As of December 31, 2006, there were 328,502 warrants outstanding.
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 stock option plans.
Note 14 — Regulatory Matters
Hanmi Financial and the Bank are subject to various regulatory capital requirements administered by the Federal banking regulatory
agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary —
actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, Hanmi Financial and the Bank must meet specific
capital guidelines that involve quantitative 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, 2006 and
2005, Hanmi Financial and the Bank met all capital adequacy requirements to which they were subject.
As of December 31, 2006, 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.
74
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 14 — Regulatory Matters (Continued)
The capital ratios of Hanmi Financial and Hanmi Bank at December 31, 2006 and 2005 were as follows:
December 31, 2006
Total Capital (to Risk-Weighted Assets):
Hanmi Financial
Hanmi Bank
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial
Hanmi Bank
Tier 1 Capital (to Average Assets):
Hanmi Financial
Hanmi Bank
December 31, 2005
Total Capital (to Risk-Weighted Assets):
Hanmi Financial
Hanmi Bank
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial
Hanmi Bank
Tier 1 Capital (to Average Assets):
Hanmi Financial
Hanmi Bank
Actual
Minimum Regulatory
Requirement
Minimum to Be
Categorized as
“Well Capitalized”
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$384,895
12.55% $245,408
8.00%
N/A
N/A
$376,422
12.28% $245,158
8.00% $306,447
10.00%
$355,186
11.58% $122,704
4.00%
N/A
N/A
$346,713
11.31% $122,579
4.00% $183,868
6.00%
$355,186
10.08% $140,947
4.00%
N/A
N/A
$346,713
9.85% $140,827
4.00% $176,034
5.00%
$319,866
12.04% $212,617
8.00%
N/A
N/A
$318,099
11.98% $212,383
8.00% $265,478
10.00%
$292,750
11.03% $106,191
4.00%
N/A
N/A
$290,983
10.96% $106,191
4.00% $159,287
6.00%
$295,750
9.11% $128,566
4.00%
N/A
N/A
$290,983
9.06% $128,447
4.00% $160,558
5.00%
The average reserve balance required to be maintained with the FRB was $1.5 million as of December 31, 2006 and 2005.
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 informal 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 and anti-money laundering regulations. On
December 21, 2006, following a joint examination by the FRB and the DFI, the Memorandum was terminated.
75
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 15 — 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, 2006, 2005 and 2004:
(Dollars in thousands, Except Per Share Amounts)
2006:
Income
(Numerator)
Weighted-Average
Shares
(Denominator)
Per
Share
Amount
Basic EPS — Income Available to Common Shareholders
$65,649
48,850,221
$ 1.34
Effect of Dilutive Securities — Options and Warrants
—
584,907
(0.01)
Diluted EPS — Income Available to Common Shareholders
$65,649
49,435,128
$ 1.33
2005:
Basic EPS — Income Available to Common Shareholders
$58,229
49,174,885
$ 1.18
Effect of Dilutive Securities — Options and Warrants
—
767,471
(0.01)
Diluted EPS — Income Available to Common Shareholders
$58,229
49,942,356
$ 1.17
2004:
Basic EPS — Income Available to Common Shareholders
$36,700
42,268,964
$ 0.87
Effect of Dilutive Securities — Options and Warrants
—
1,248,293
(0.03)
Diluted EPS — Income Available to Common Shareholders
$36,700
43,517,257
$ 0.84
For the years ended December 31, 2006, 2005 and 2004, there were 1,373,554 options, 50,554 options and 354,000 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 16 — Employee Benefits
401(k) Plan
We have a Section 401(k) plan for the benefit of substantially all of our employees. We match 75 percent of participant contributions
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, 2006, 2005 and 2004 of $1,008,000, $918,000 and $858,000, respectively.
Bank-Owned Life Insurance
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.
76
Deferred Compensation Plan
Effective November 1, 2006, the Board of Directors approved the Hanmi Financial Corporation Deferred Compensation Plan (“the
DCP”). The DCP is a non-qualified deferred compensation program for directors and certain key employees whereby they may defer
a portion of annual compensation for payment upon retirement of the amount deferred plus a guaranteed return. The DCP is
unfunded. As of December 31, 2006, the liability for the deferred compensation plan and interest thereon was $112,000.
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 17 — Derivative Financial Instruments
Interest Rate Swap
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 quarterly 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 Prime-based floating rates, at quarterly intervals, on a total notional amount of $60.0 million. These swaps were
designated 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. For the year ended December 31, 2006, amortization expense of
$879,000 was recognized in Other Operating Expenses in the Consolidated Statement of Income.
Equity Swap
In 2004, the Bank offered a certificate of deposit (“CD”) product that paid interest tied to the movement in the Standard & Poor’s 500
Index plus 1.00 percent annual interest. Such CD’s will mature in November 2009. 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, 2006 and 2005, the fair value of the embedded option was $1,641,000
and $1,280,000, respectively, and the change in the liability during 2006 and 2005 was $361,000 and ($116,000), respectively. The
changes were recognized in earnings.
To place an economic hedge for the market risk described above, the Bank purchased an equity swap with a notional amount of
$9,340,000. As of December 31, 2006 and 2005, the fair value of the equity swap was $872,000 and $88,000, respectively, and the
change in the asset during 2006 and 2005 was $784,000 and ($111,000), respectively. The changes were recognized in earnings.
Currency Swap
In 2005, the Bank offered a CD product that paid interest based on the increase in the weighted-average value of five Asian
currencies (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. The CD’s matured in
February 2006. As of December 31, 2005, the fair value of the embedded option was $5,000, and the change in the liability during
2006 and 2005 was ($5,000) and ($415,000), respectively. The changes were recognized in earnings.
To place an economic hedge for the market risk described above, the Bank purchased a currency swap with a notional amount of
$14,274,000. The swap terminated in February 2006. As of December 31, 2005, the fair value of the currency swap was
($105,000), and the change in the asset during 2006 and 2005 was $63,000 and ($63,000), respectively. The changes were
recognized in earnings.
77
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 18 — Commitments and Contingencies
We lease our premises under non-cancelable operating leases. At December 31, 2006, future minimum annual rental commitments
under these non-cancelable operating leases, with initial or remaining terms of one year or more, is as follows:
Year Ending
December 31,
2007
2008
2009
2010
2011
Thereafter
Amount
(In thousands)
$ 4,093
3,455
2,462
2,128
1,315
6,068
$19,521
Rental expenses recorded under such leases in 2006, 2005 and 2004 amounted to $4,063,000, $3,389,000 and $3,226,000,
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.
Note 19 — Off-Balance Sheet Commitments
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated
Statements of Financial Condition. The Bank’s exposure to credit losses in the event of non-performance by the other party to
commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to
customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and income-producing or
borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates
indicated:
(In thousands)
78
Commitments to Extend Credit
Commercial Letters of Credit
Standby Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
December 31,
2006
2005
$578,347
$555,736
65,158
48,289
17,031
58,036
42,768
14,892
$708,825
$671,432
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 20 — Fair Value of Financial Instruments
The estimated fair value of financial
instruments has been determined by using available market information and appropriate
valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current
market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
(In thousands)
Assets
Cash and Cash Equivalents
Term Federal Funds Sold
Securities Held to Maturity
Securities Available for Sale
Loans Receivable, Net
Loans Held for Sale
Accrued Interest Receivable
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
Equity Swap
Liabilities
Noninterest-Bearing Deposits
Interest-Bearing Deposits
FHLB Advances, Other Borrowings and Junior Subordinated
Debentures
Accrued Interest Payable
Currency Swap
Embedded Derivative
Off-Balance Sheet Items
Commitments to Extend Credit
Standby Letters of Credit
December 31, 2006
December 31, 2005
Carrying
or Contract
Amount
Estimated
Fair Value
Carrying
or Contract
Amount
Estimated
Fair Value
$ 138,501
$ 138,501
$ 163,477
$ 163,477
5,000
967
5,000
969
—
1,049
—
1,051
390,612
390,612
442,863
442,863
2,813,520
2,834,864
2,468,015
2,460,092
23,870
16,919
11,733
13,189
872
23,870
16,919
11,733
13,189
872
1,065
14,120
12,350
12,237
88
1,074
14,120
12,350
12,237
88
728,347
728,347
738,618
738,618
2,216,368
2,216,757
2,087,496
2,087,496
251,443
254,058
128,737
129,441
22,582
22,582
11,911
11,911
—
1,641
578,347
48,289
—
1,641
1,786
245
(105)
1,280
(105)
1,280
555,736
42,768
774
217
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:
Cash and Cash Equivalents — The carrying amounts approximate fair value due to the short-term nature of these instruments.
79
Term Federal Funds Sold — The carrying amounts approximate fair value due to the short-term nature of these instruments.
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.
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
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 20 — Fair Value of Financial Instruments (Continued)
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, 2006 and
2005 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.
Accrued Interest Receivable — The carrying amount of accrued interest receivable approximates its fair value.
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.
Equity Swap — The carrying amounts of the equity swap approximate their fair value.
Deposits — The fair value of non-maturity deposits is the amount payable on demand at the reporting date. Non-maturity deposits
include noninterest-bearing demand deposits, savings accounts and money market checking. Discounted cash flows have been
used to value term deposits such as certificates of deposit. The discount rate used is based on interest rates currently being offered
by the Bank on comparable deposits as to amount and term.
Accrued Interest Payable — The carrying amount of accrued interest payable approximates its fair value.
FHLB Advances, Other Borrowings and Junior Subordinated Debentures — Discounted cash flows have been used to value
FHLB advances, other borrowings and junior subordinated debentures.
Currency Swap and Embedded Derivative — The carrying amounts of the currency swap and embedded derivative approximate
their fair value.
Commitments to Extend Credit and Standby Letters of Credit — The fair values of commitments to extend credit and standby
letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has
committed to make the loans.
80
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 21 — Condensed Financial Information of Parent Company
Statements of Financial Condition
(In thousands)
Assets
Cash
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 Shareholders’ Equity
Statements of Income
(In thousands)
Equity in Earnings of Hanmi Bank
Other Expenses, Net
Income Tax Benefit
Net Income
December 31,
2006
2005
$ 7,578
$ 1,470
558,645
505,009
2,986
4,346
2,986
3,091
$573,555
$512,556
$ 82,406
$ 82,406
4,032
3,373
487,117
426,777
$573,555
$512,556
Year Ended December 31,
2006
2005
2004
$71,375
$62,001
$39,574
(9,266)
(6,133)
(4,673)
3,540
2,361
1,799
$65,649
$58,229
$36,700
81
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 21 — Condensed Financial Information of Parent Company (Continued)
Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities:
Net Income
Adjustments to Reconcile Net Income to Net Cash Used In Operating Activities:
Earnings of Hanmi Bank
Decrease (Increase) in Receivable from Hanmi Bank
Share-Based Compensation Expense
Increase in Other Assets
Increase (Decrease) in Other Liabilities
Excess Tax Benefit from Exercises of Stock Options
Year Ended December 31,
2006
2005
2004
$ 65,649
$ 58,229
$ 36,700
(71,375)
(62,001)
(39,574)
—
1,521
(1,255)
659
661
455
—
(1,292)
(229)
729
(224)
—
(718)
132
—
Net Cash Used In Operating Activities
(4,140)
(4,109)
(3,684)
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
18,500
27,541
—
—
—
—
—
—
11,990
(80,000)
(71,710)
(2,475)
Net Cash Provided By (Used In) Investing Activities
18,500
27,541
(142,195)
Cash Flows from Financing Activities:
Issuance of Junior Subordinated Debentures
Proceeds from Exercise of Stock Options and Stock Warrants
Stock Issued Through Private Placement
Repurchase of Common Stock
Cash Dividends Paid
—
—
3,553
2,516
—
—
—
(20,041)
82,406
3,425
71,710
—
(11,805)
(9,813)
(7,740)
Net Cash (Used In) Provided By Financing Activities
(8,252)
(27,338)
149,801
Net Increase (Decrease) in Cash
Cash — Beginning of Year
Cash — End of Year
82
6,108
1,470
(3,906)
5,376
3,922
1,454
$ 7,578
$ 1,470
$
5,376
Hanmi Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004 (Continued)
Note 22 — Quarterly Financial Data (Unaudited)
Summarized quarterly financial data follows:
(Dollars in thousands; Except Per Share Amounts)
March 31
June 30
September 30
December 31
Quarter Ended
2006:
Interest Income
Interest Expense
$58,535
$63,906
$68,664
$69,084
21,680
25,509
28,934
30,306
Net Interest Income Before Provision for Credit Losses
36,855
38,397
39,730
Provision for Credit Losses
Non-Interest Income
Non-Interest Expenses
Income Before Provision for Income Taxes
Provision for Income Taxes
2,960
7,744
900
8,287
1,682
8,784
17,439
19,416
19,473
24,200
9,398
26,368
10,428
27,359
9,762
38,778
1,631
10,789
19,626
28,310
11,000
Net Income
Earnings Per Share:
Basic
Diluted
2005:
Interest Income
Interest Expense
$14,802
$15,940
$17,597
$17,310
$ 0.30
$ 0.33
$ 0.30
$ 0.32
$ 0.36
$ 0.36
$ 0.35
$ 0.35
$43,602
$48,063
$52,401
$56,875
11,347
13,462
16,831
20,471
Net Interest Income Before Provision for Credit Losses
32,255
34,601
35,570
36,404
Provision for Credit Losses
Non-Interest Income
Non-Interest Expenses
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Earnings Per Share:
Basic
Diluted
136
6,964
450
6,891
3,157
8,751
1,652
7,776
17,405
16,212
16,991
18,525
21,678
24,830
8,346
9,792
24,173
9,204
24,003
9,113
$13,332
$15,038
$14,969
$14,890
$ 0.27
$ 0.30
$ 0.27
$ 0.30
$ 0.30
$ 0.30
$ 0.31
$ 0.30
Reclassifications have been made to the 2006 and 2005 quarterly financial statements to conform to the current presentation.
83
Note 23 — Subsequent Event
Effective January 1, 2007, Hanmi Financial acquired two full-service insurance agencies, Chun Ha Insurance Services, Inc. and All
World Insurance Services, Inc., Garden Grove, California, as wholly-owned subsidiaries. The acquisition is not expected to have a
significant effect on our financial position or results of operations.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
HANMI FINANCIAL CORPORATION
By: /s/ SUNG WON SOHN, PH.D.
Sung Won Sohn, Ph.D.
President and Chief Executive Officer
Date: March 1, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated as of March 1, 2007.
/s/ Sung Won Sohn, Ph.D.
Sung Won Sohn, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael J. Winiarski
Michael J. Winiarski
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Richard B. C. Lee
Richard B. C. Lee
Chairman of the Board
/s/
I Joon Ahn
I Joon Ahn
Director
/s/ Joon Hyung Lee
Joon Hyung Lee
Director
/s/ Chang Kyu Park
Chang Kyu Park
Director
/s/ William J. Ruh
William J. Ruh
Director
84
/s/ Kraig A. Kupiec
Kraig A. Kupiec
Director
/s/ M. Christian Mitchell
M. Christian Mitchell
Director
/s/
Joseph K. Rho
Joseph K. Rho
Director
/s/ Won R. Yoon
Won R. Yoon
Director
Hanmi Financial Corporation and Subsidiary
Exhibit Index
Exhibit
Number
Document
3.1
3.2
4.1
10.1
10.2
10.3
10.4
14
21
23
31.1
31.2
32.1
32.2
Certificate of Incorporation, As Amended *
Bylaws, As Amended *
Specimen Certificate of Registrant *
Employment Agreement with Sung Won Sohn ***
Hanmi Financial Corporation Year 2000 Stock Option Plan **
Hanmi Financial Corporation 2004 CEO Stock Option Plan ****
Hanmi Financial Corporation Deferred Compensation Plan
Code of Ethics ***
Subsidiaries of the Registrant ****
Consent of KPMG LLP
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act
* Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-4 (No. 333-32770) filed with the SEC on March 20,
2000.
** Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-8 (No. 333-44320 and 44090) filed with the SEC on
August 18, 2000.
*** Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC
on March 16, 2005.
**** Previously filed and incorporated by reference herein from Hanmi Financial’s Joint Proxy Statement/Prospectus on Form S-4 filed with the SEC on February 9, 2004.
85
Hanmi Bank is a wholly owned subsidiary of Hanmi Financial Corporation
(Nasdaq: HAFC). One of the leading community banks serving the multi-
ethnic customers of California, Hanmi Bank provides high quality individual,
corporate and institutional financial services.
At year-end 2006, your bank had total assets of $3.73 billion and 22 full service
offices in Los Angeles, Orange, San Francisco, Santa Clara and San Diego counties.
Hanmi continues to pursue long-term profitable growth while adapting to changing
market conditions. Through contributions from you – our shareholders, customers and
employees – we are advancing our vision.
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
562-658-0100
Woo Young Choung
FVP & Manager
Downtown Branch
950 South Los Angeles Street
Los Angeles, CA 90015
213-347-6051
Thomas J. Kim, SVP & Manager
Fashion District Branch
726 East 12th Street
Suite 211
Los Angeles, CA 90021
213-743-5850
Judy Lee
FVP & Manager
Fullerton Branch
5245 Beach Boulevard
Buena Park, CA 90621
714-232-7600
Hye Ja Shin, FVP & Manager
Garden Grove Branch
9820 Garden Grove Boulevard
Garden Grove, CA 92844
714-590-6900
Ine Ja Kim , SVP & Manager
Gardena Branch
2001 West Redondo Beach
Boulevard
Gardena, CA 90247
310-965-9400
Thomas Oh, SVP & Manager
Irvine Branch
14474 Culver Drive
Suite D
Irvine, CA 92604
949-262-2500
Meehye J. Lee, FVP & Manager
Koreatown Galleria Branch
3250 West Olympic Boulevard
Suite 200
Los Angeles, CA 90006
323-730-4830
Kyung Mi Choi, FVP & Manager
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, CA 90006
213-385-2244
Elaine E. Chung
SVP & Manager
Mid-Olympic Branch
3099 West Olympic Boulevard
Los Angeles, CA 90006
213-252-6340
Dongin Kim, FVP & Manager
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, CA 90019
323-370-2800
Helen Kim
SVP & District Leader
Rowland Heights Branch
18720 East Colima Road
Rowland Heights, CA 91748
626-432-1400
Sook R. Park, SVP & Manager
San Diego Branch
4637 Convoy Street
Suite 101
San Diego, CA 92111
858-467-4800
Young Hoon Oh
FVP & Manager
San Francisco Branch
1469 Webster Street
San Francisco, CA 94115
415-749-7600
Yeong Nam Kim
FVP & Manager
Silicon Valley Branch
2765 El Camino Real
Santa Clara, CA 95051
408-260-3400
Philip Whang, FVP & Manager
South Cerritos Branch
11900 South Street
Suite 109
Cerritos, CA 90703
562-467-7400
Ho Il Min, FVP & Manager
Torrance Branch
2370 Crenshaw Boulevard
Suite H
Torrance, CA 90501
310-781-1200
Sun Young Park, FVP & Manager
Design: bloch+coulter Design Group www.blochcoulter.com
Van Nuys Branch
14427 Sherman Way
Van Nuys, CA 91405
818-449-3120
Sun Ae Choi, FVP & Manager
Vermont Branch
933 South Vermont Avenue
Los Angeles, CA 90006
213-252-6380
Don Bae Lee, FVP & Manager
West Garden Grove Branch
9122 Garden Grove Boulevard
Garden Grove, CA 92844
714-741-4420
Michelle Kwon, FVP & Manager
West Torrance Branch
21838 Hawthorne Boulevard
Torrance, CA 90503
310-241-4280
Suk Jin Yoon, FVP & Manager
Western Branch
120 South Western Avenue
Los Angeles, CA 90004
213-427-5751
Sharon Im, FVP & Manager
Wilshire Branch
3660 Wilshire Boulevard
Suite 103
Los Angeles, CA 90010
213-427-5757
Commercial Loan Department
3660 Wilshire Boulevard
Suite 1050
Los Angeles, CA 90010
213-637-4792
Hassan Bouayad
SVP & Chief Lending Officer
Residential Mortgage Center
928 South Western Avenue
Suite 260
Los Angeles, CA 90006
213-252-6490
Janette K. Mah, SVP & Manager
Consumer Loan Center
3099 West Olympic Boulevard
Los Angeles, CA 90006
213-252-6400
Jennifer Nam, FVP & Manager
International Finance
3660 Wilshire Boulevard
Suite 103
Los Angeles, CA 90010
213-427-5680
Seong Hoon Hong
FVP & Manager
SBA Loan Department
3327 Wilshire Boulevard
Los Angeles, CA 90010
213-427-5722
James Kim, SVP & Manager
Atlanta LPO
3585 Peachtree Industrial
Boulevard, Suite 144
Duluth, GA 30096
678-990-5002
Chicago LPO
6200 North Hiawatha
Suite 235
Chicago, IL 60646
773-202-1116
Dallas LPO
2711 LBJ Freeway
Suite 114
Farmers Branch, TX 75234
469-522-0009
Denver LPO
3033 South Parker Road
Suite 340
Aurora, CO 80014
303-752-4600
Northern California LPO
39899 Balentine Drive
Suite 200
Newark, CA 94560
510-438-6870
Northwest Region LPO No. 1
33110 Pacific Highway South
Suite 4
Federal Way, WA 98003
253-952-7766
Northwest Region LPO No. 2
3500 108th Avenue Northeast
Suite 280
Bellevue, WA 98004
425-454-0178
Virginia LPO
7535 Little River Turnpike
Suite 200B
Annandale, VA 22003
703-914-1001
Corporate Headquarters
3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010
(213) 382-2200
www.hanmifinancial.com
Advancing Our Vision
Hanmi Financial 2006 Annual Report