Hanmi Financial Annual Report 2007 H a n m i F i n a n c i a l A n n u a l R e p o r t 2 0 0 7 Corporate Headquarters 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010 (213) 382-2200 www.hanmifinancial.com leading the way for twenty-five years 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. branch offices Corporate Headquarters 3660 Wilshire Blvd. Penthouse Suite A Los Angeles, CA 90010 213-382-2200 Beverly Hills Branch 9300 Wilshire Blvd. Suite 101 Beverly Hills, CA 90212 310-724-7800 Jin Young Kim FVP & Manager Cerritos Branch 11754 East Artesia Blvd. Artesia, CA 90701 562-658-0100 Woo Young Choung SVP & Manager Downtown Branch 950 South Los Angeles Street Los Angeles, CA 90015 213-347-6051 Thomas Kim SVP & Manager Fashion District Branch 726 East 12th Street Suite 211 Los Angeles, CA 90021 213-743-5850 Judy Lee SVP & Manager Fullerton Branch 5245 Beach Blvd. Buena Park, CA 90621 714-232-7600 Hye Ja Shin FVP & Manager Garden Grove Branch 9820 Garden Grove Blvd. Garden Grove, CA 92844 714-590-6900 Ine Ja Kim SVP & Manager Gardena Branch 2001 West Redondo Beach Blvd. Gardena, CA 90247 310-965-9400 Sung Hee Shin FVP & Manager Irvine Branch 14474 Culver Drive Suite D Irvine, CA 92604 949-262-2500 Meehye Lee FVP & Manager Koreatown Galleria Branch 3250 West Olympic Blvd. 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 Chung SVP & Manager Mid-Olympic Branch 3099 West Olympic Blvd. Los Angeles, CA 90006 213-385-1234 Dongin Kim SVP & Manager Olympic Branch 3737 West Olympic Blvd. Los Angeles, CA 90019 323-370-2800 Helen Kim SVP & District Leader Rancho Cucamonga Branch 9759 Baseline Road Rancho Cucamonga, CA 91730 909-919-7599 Eunice Lee FVP & Manager Rowland Heights Branch 18720 East Colima Road Rowland Heights, CA 91748 626-435-1400 Sook Ran Park SVP & Manager San Diego Branch 4637 Convoy Street Suite 101 San Diego, CA 92111 858-467-4800 Young Hoon Oh SVP & Manager San Francisco Branch 1469 Webster Street San Francisco, CA 94115 415-749-7600 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 SVP & Manager Design: bloch+coulter Design Group www.blochcoulter.com Torrance Branch 2370 Crenshaw Blvd. Suite H Torrance, CA 90501 310-781-1200 Sun Young Park SVP & Manager Van Nuys Branch 14427 Sherman Way Van Nuys, CA 91405 818-779-3120 Sun Ae Choi FVP & Manager Vermont Branch 933 South Vermont Avenue Los Angeles, CA 90006 213-252-6380 Don Bae Lee SVP & Manager West Garden Grove Branch 9122 Garden Grove Blvd. Garden Grove, CA 92844 714-741-4420 Michelle Kwon FVP & Manager West Torrance Branch 21838 Hawthorne Blvd. Ground Floor Torrance, CA 90503 310-214-4280 Jae Ho Lee FVP & Manager Western Branch 120 South Western Avenue Los Angeles, CA 90004 213-427-5751 Sharon Im FVP & Manager Wilshire Branch 3660 Wilshire Blvd. Suite 103 Los Angeles, CA 90010 213-427-5757 Suk Jin Yoon SVP & Manager Commercial Loan Department 3660 Wilshire Blvd. Suites 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 Blvd. 2nd Floor Los Angeles, CA 90006 213-252-6400 Jennifer Nam SVP & Manager International Finance 3660 Wilshire Blvd. Suite 116 Los Angeles, CA 90010 213-427-5680 Seong Hoon Hong FVP & Manager International Trade 933 South Vermont Ave. 2nd Floor Los Angeles, CA 90006 213-252-6755 Soo Kyung Kim FVP & Manager SBA Loan Department 3327 Wilshire Blvd. Los Angeles, CA 90010 213-427-5657 James Kim SVP & Manager Atlanta LPO 3585 Peachtree Industrial Blvd. Suite 144 Duluth, GA 30096 678-990-5002 Chicago LPO 6200 North Hiawatha Suite 235 Chicago, IL 60646 773-202-1117 Dallas LPO 2711 LBJ Freeway Suite 114 Farmers Branch, TX 75234 469-522-0012 Denver LPO 2851 S. Parker Rd. #150 Aurora, CO 80014 303-752-4600 Northern California LPO 39899 Balentine Drive Suite 200 Newark, CA 94560 510-438-6870 Northwest Region LPO 500 108th Avenue Northeast Suite 280 Bellevue, WA 98001 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) 2007 2006 2005 2004 2003 For the Year Net interest income before provision for credit losses Service charges and fee income Other operating income Noninterest expenses Net income (loss) At Year End Total assets Net loans Total deposits Stockholders’ equity Per Common Share Net income (loss) – 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 Total capital to total risk-weighted assets* Tier 1 capital to total risk-weighted capital* Return on average assets Return on average stockholders’ equity * Hanmi Bank ratio $ 152,203 $ 27,130 $ 12,876 $ 189,929 $ (60,250) $ 153,760 $ 26,116 $ 10,847 $ 77,313 $ 65,649 $ 138,830 $ 24,669 $ 6,781 $ 70,201 $ 58,229 $ 102,937 $ 21,624 $ 5,347 $ 66,566 $ 36,700 $ 56,621 $ 15,397 $ 4,625 $ 39,325 $ 19,213 $3,983,746 $3,241,097 $3,001,699 $ 371,545 $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 $ (1.27) $ 0.24 $ 8.10 $ 1.33 $ 0.24 $ 9.93 $ 1.17 $ 0.20 $ 8.77 $ 0.84 $ 0.20 $ 8.11 $ 0.67 $ 0.20 $ 4.92 4.36% 4.78% 4.83% 4.31% 3.68% 1.66% 0.50% 0.41% 0.27% 0.68% 1.33% 98.81% 0.96% 40.54% 1.00% 40.86% 1.00% 51.54% 1.06% 51.31% 10.59% 12.28% 11.98% 11.80% 11.09% 9.34% (1.56%) 11.31% 1.82% 10.96% 1.79% 10.75% 1.37% 10.00% 1.18% (12.28%) 14.33% 13.94% 12.51% 14.51% 1 to our shareholders Last year was among the most challenging in Hanmi’s twenty-five-year history, for although our core business remained strong, a softening economy and an intensely competitive marketplace took a toll on our financial performance. An abnormally high provision for credit losses substantially reduced operating income, and a significant fourth- quarter non-cash impairment charge against goodwill resulted in a net loss for the year. Due to increasing credit losses in the financial markets, the market value of many banks, including Hanmi, has declined significantly. As a consequence of this decline in market value, we had to assess the current value of our goodwill, primarily based on the trading price of our stock at year end. Although the goodwill impairment charge had a significant effect on our 2007 net income, we believe the core strength of our Company remains intact. Additionally, this charge does not affect the Company’s tangible equity or its liquidity position. Further, our regulatory capital ratios are unaffected by this impairment charge, with all ratios in excess of that necessary to be considered a “well- capitalized” institution. 2 Richard B.C. Lee , Chung Hoon Youk to our shareholders In response to the challenging environment and our disappointing results in 2007, we are rebuilding our management team and returning our focus to our core competency – meeting the diverse and growing needs of small and medium-sized businesses. It is in serving this market that we have established Hanmi as the largest Korean-American bank in the country, and it is in renewing our commitment to this market that we shall continue to prosper and grow. Going forward, we are focused on improving credit quality, increasing profitability, and entering new regional markets with significant populations of Hanmi’s traditional customers. In the near term, credit quality is our most important focus. Excluding the impact of the goodwill impairment charge, the increase in the provision for credit losses had the most significant impact on our profitability. To reverse this trend, we have tightened credit policies and initiated procedures designed to facilitate early identification and mitigation of potential weaknesses in performing loans. It is to be expected, however, that in the near term the success of our efforts will hinge considerably on the direction of the economy and its effect on the businesses of our borrowers. Last year’s 42-basis-point compression in net interest margin, largely driven by stiffer competition for both loans and deposits, was further aggravated by the Federal Reserve Bank’s 100-basis- point cut in short-term rates in the last four months of 2007. To help mitigate the impact of competition, we are expanding our deposit gathering efforts through our existing branches and by the addition this year of three new branches in Southern California. We are focused on increasing core deposits and decreasing our overall cost of funds. It is said that in adversity lies oppor- tunity, and in that spirit we face 2008 with considerable optimism and the expectation of greatly improved performance. We are determined, moreover, that this not come at the expense of credit quality. Above all, we seek stability – stability in our asset base, stability in operating results, and stability in the various financial metrics on which we are judged. We take this occasion to thank all those – customers, employees, and shareholders – who have contributed to Hanmi’s success. Be assured that we value your continued support and remain committed to maintaining Hanmi Bank as the leading Korean- American bank in the nation. Sincerely, Chung Hoon Youk Interim President and Chief Executive Officer Richard B. C. Lee Chairman of the Board of Directors 3 corporate information officers Chung Hoon Youk Chief Credit Officer Interim President and Chief Executive Officer Brian E. Cho Executive 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 Left to right: Won R. Yoon, Joon Hyung Lee, Ki Tae Hong, I Joon Ahn, Chang Kyu Park, Jacob D. Lee, Richard B.C. Lee, Mark K. Mason, Joseph K. Rho (Not present: Stuart S. Ahn) Ki Tae Hong President & CEO Pacom International, Inc Joon Hyung Lee Former Chairman of the Board President Root-3 Corporation Mark K. Mason Financial consultant Chang Kyu Park Former Chairman of the Board Principal Pharmacist Serrano Medical Center Pharmacy Joseph K. Rho Former Chairman of the Board Principal J & S Investment Won R. Yoon Former Chairman of the Board Chief Surgeon Olympic Medical Center Stuart S. Ahn (Hanmi Bank Director) President Sunnyland Development, Inc. Jacob D. Lee (Hanmi Bank Director) Chief Operating Officer & General Counsel HYI 4 independent public accountant KPMG, LLP Los Angeles, California registrar and transfer agent Computershare website www.hanmifinancial.com stock listing Nasdaq Ticker symbol for common stock “HAFC” UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2007 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 NASDAQ “Global Select Market” Securities Registered Pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes n No ¥ 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 ¥ No n 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. ¥ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n (Do not check if a smaller reporting company) Smaller reporting company n Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes n No ¥ As of June 29, 2007, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $684,296,000. 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 21, 2008 was 45,865,941 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, 2007, is incorporated by reference into Part III of this report. Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2007 HANMI FINANCIAL CORPORATION Forward-Looking Statements 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 Selected Financial Data Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Item 12. Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2007 and 2006 Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 Notes to Consolidated Financial Statements Signatures Exhibit Index Page 1 1 12 14 15 16 16 16 20 22 44 44 44 44 47 47 47 47 47 47 47 48 49 50 51 52 53 54 87 88 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 Sec- tion 27A of the Securities Act of 1933, as amended, and Sec- tion 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by ter- minology 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 expecta- tions 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 state- ment because of: (cid:129) changes in our borrowers’ performance on loans; (cid:129) changes in the commercial and consumer real estate markets; (cid:129) changes in our costs of operation, compliance and expansion; (cid:129) changes in the economy, including inflation; (cid:129) changes in government interest rate policies; (cid:129) changes in laws or the regulatory environment; (cid:129) changes in the equity and debt securities markets; and (cid:129) acts of terrorism or natural disasters such as earthquakes or floods. For a discussion of these factors as well as some of the other factors that might cause such differences, see “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Finan- cial Condition and Results of Operations — Interest Rate Risk Man- agement” 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 pursuant 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, is a state chartered bank incorporated under the laws of the State of California on August 24, 1981, and 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. 1 The Bank is a community bank conducting general business banking, with its primary market encompassing the Korean-American community as well as other communities in the multi-ethnic pop- ulations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San Francisco Bay area, and the Silicon Valley area in Santa Clara County. 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. At December 31, 2007, the Bank maintained a branch network of 24 full-service branch offices in California and eight loan production offices in California, Colorado, Georgia, Illinois, Texas, Virginia and Washington. Our other subsidiaries are Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All World”), which were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance brokerages that offer a complete line insurance products, including life, commercial, automobile, of health, and property and casualty. The Bank’s 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) 2007 2006 2005 Year Ended December 31, Interest and Fees on Loans Interest on Investments Other Interest Income Service Charges on Deposit Accounts Other Non-Interest Income $261,992 17,867 1,037 18,061 21,945 81.6% 5.6% 0.3% 5.6% 6.9% $239,075 19,710 1,404 17,134 19,829 80.5% 6.6% 0.5% 5.8% 6.6% $180,845 18,507 1,589 15,782 15,668 77.8% 8.0% 0.7% 6.8% 6.7% Total Revenues $320,902 100.0% $297,152 100.0% $232,391 100.0% Market Area The 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, San Bernardino County, the Silicon Valley area in Santa Clara County, and San Diego County, and through acquisition to the San Francisco Bay area and the Seattle, Washington metropolitan area. Throughout the Bank’s service areas, 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 asso- ciations, credit unions, mortgage companies, 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 2007, the Bank opened two full-service branch offices in Fullerton, California and Rancho Cucamonga, 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 produc- tion offices in selected locations throughout the United States. The Bank is a preferred SBA lender in the following SBA districts: (Los Angeles, Santa Ana, San Diego, Fresno, California 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. Lending Activities The Bank originates loans for its own portfolio and for sale in the secondary market. Lending activities include real estate loans (commercial property, construction and residential property), loans (commercial term loans, com- commercial and industrial mercial lines of credit, SBA loans and international trade finance), and consumer loans. Real Estate Loans 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 regulations affecting the holding of real estate, environmental conditions, governmental and other use restrictions, development of competitive properties and increasing vacancy rates. When real estate values decline, the Bank’s real estate dependence increases the risk of loss both in the Bank’s loan portfolio and any holdings of other real estate owned because of foreclosures on loans. Commercial Property The Bank offers commercial real estate loans. These loans are generally collateralized by first deeds of trust. For these commer- cial mortgage loans, the Bank obtains formal appraisals in accor- dance with applicable regulations to support the value of the real estate collateral. All appraisal reports on commercial 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 2 Appraisal Practice (the “USPAP”). The Bank first looks to cash flow from the borrower to repay the loan and then to cash flow from the business. The majority of the properties securing these loans are located in Los Angeles County and Orange County. The Bank’s commercial real estate loans are principally secured by investor-owned commercial buildings and owner-occupied com- mercial and industrial buildings. Generally, these types of loans are made for a period of up to seven years. Monthly payments are based upon a portion of the principal plus accrued interest. These loans usually have a loan-to-value ratio of 65 percent or less, using an adjustable rate indexed to the prime rate appearing in the West Coast edition of The Wall Street Journal (“WSJ Prime Rate”) or the Bank’s prime rate (“Bank Prime Rate”), as adjusted from time to time. The 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 commercial real estate loans generally do not exceed 25 years. Payments on loans secured by investor-owned and owner-occu- pied 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 in relation to the market value of the property and strictly scrutinizing the property securing the loan. The Bank manages 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 trust deed on the real estate is taken as collateral. The Bank also requires the borrower 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. Construction The 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 the WSJ Prime Rate; (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 (cid:129) recourse against the borrower or a guarantor in the event of default. The Bank does, on a case-by-case basis, commit to making permanent loans on the property with loan conditions that com- mand strong project stability and debt service coverage. Con- struction 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. Because 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 the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the 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, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period. The Bank has underwriting procedures 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 rec- ommendations for construction disbursements. No assurance can 3 be given that these procedures will prevent losses arising from the risks described above. debt, without liquidating the collateral, based on historical earnings or reliable projections. Residential Property Commercial Term Loans The Bank originates fixed-rate and variable-rate mortgage loans secured by one- to four-family properties with amortization 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 participants. 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. Commercial and Industrial Loans The Bank offers commercial loans for intermediate and short-term credit. Commercial loans may be unsecured, partially secured or fully secured. The majority of the origination of commercial loans is in Los Angeles County and Orange County, and loan maturities are normally 12 to 60 months. The 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, commercial lending entails sig- nificant additional risks. These loans typically involve larger loan balances, are generally dependent on the cash flow of the business 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 the 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 appraisals in accordance with applicable regulations to support the value of the real estate collateral. Typically, the Bank requires all principals of a business to be co-obligors on all loan instruments and all significant stockhold- ers of corporations to execute a specific debt guaranty. All bor- rowers must demonstrate the ability to service and repay not only their obligations to the Bank debt, but also all outstanding business The Bank finances small and middle-market businesses in a wide spectrum of industries throughout California. The Bank offers term loans for a variety of needs, including loans for working capital, purchases of equipment, machinery or inventory, business acqui- sitions, renovation of facilities, and refinancing of existing business- related debts. These loans have repayment terms of up to seven years. Commercial Lines of Credit The Bank offers lines of credit for a variety of short-term needs, including lines of credit for working capital, account receivable and inventory financing, and other purposes related to business oper- ations. Commercial lines of credit usually have a term of 12 months or less. SBA Loans The Bank originates loans qualifying for guarantees issued by the United States SBA, an independent agency of the Federal gov- ernment. 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 inter- est may be less than 75 percent. In general, the guaranteed percentage is less than 75 percent for loans over $1.3 million. The 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, based on historical earnings or reliable projections. The Bank generally sells to unrelated third parties a substantial amount of the guaranteed portion of the SBA guaranteed loans that it originates. During the fourth quarter of 2007 and 2006, the Bank also sold the unguaranteed portion of some SBA loans. When the Bank sells a SBA loan, it has a right to repurchase the loan if the loan defaults. If the Bank repurchases a loan, the Bank will make a demand for guarantee purchase to the SBA. The Bank retains the right to service the SBA loans, for which it receives servicing fees. The unsold portions of the SBA loans that remain owned by the Bank are included in loans receivable on the Consolidated Balance Sheets. As of December 31, 2007, the 4 Bank had $118.5 million of SBA loans in its portfolio, and was servicing $258.5 million of SBA loans sold to investors. International Trade Finance The Bank offers a variety of international finance and trade services and products, including letters of credit, import financing (trust receipt financing and bankers’ acceptances) and export financing. Although most of our trade finance activities are related to trade with Asian countries, all of our loans are made to companies domiciled in the United States. A substantial portion of this business involves California-based customers engaged in import activities. Consumer Loans Consumer loans are extended for a variety of purposes, including automobile loans, secured and unsecured personal loans, home improvement loans, home equity lines of credit (“HELOCs”), 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 repayment ability. Although creditworthiness of the applicant is of primary impor- tance, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Most of the 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 outstanding 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 collection of loans to indi- viduals 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, the Bank from time to time issues formal commitments 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 com- mercial letters of credit or standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by the 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 the 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, Senior Credit Officers and 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 the 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. Legal lending limits are calculated in conformance with the California Financial Code, which prohibits a bank from lending to any one individual or entity or its related interests on an unsecured basis any amount that exceeds 15 percent of the sum of shareholders’ equity plus the allowance for loan losses, capital notes and any debentures, plus an additional 10 percent on a secured basis. At December 31, 2007, the Bank’s authorized legal lending limits for loans to one borrower were $56.6 million for unsecured loans plus an additional $37.8 million for specific secured loans. However, the Bank has established internal loan limits that are lower than the legal lending limits. The 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 applicant’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 exam- ination of the appraiser’s assumptions and methods that were used to derive a value for the property, as well as compliance with the USPAP. 5 Allowance for Loan Losses, Allowance for Off-Balance Sheet Items and Provision for Credit Losses The Bank maintains an allowance for loan losses at a level con- sidered by management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing 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 Con- solidated Balance Sheets. The Bank follows the “Interagency Policy Statement on the Allow- ance 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 DFI and/or the Board of Governors of the Federal Reserve System (the “FRB”) may 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 The Bank raises funds primarily through its 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 withdrawal (“NOW”) accounts, money market accounts and certificates 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 reasonably 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 incorpo- rated into this Annual Report on Form 10-K. Employees As of December 31, 2007, the Bank had 612 full-time employees and 15 part-time employees and Chun-Ha and All World had 31 full-time employees and 1 part-time employee. Our employ- ees are not represented by a union or covered by a collective bargaining agreement. We believe that our employee relations are satisfactory. Insurance We maintain financial institution bond and commercial insurance at levels deemed adequate by management to protect Hanmi Finan- cial from certain litigation and other losses. Competition The banking and financial services industry in California generally, and in the 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 consolidation among financial service providers. We compete for loans, deposits and customers with other commercial banks, savings institutions, secu- rities and brokerage companies, mortgage companies, real estate investment finance companies, insurance 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. trusts, Among the advantages that the major banks have over the 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 operating in the Bank’s service areas offer specific services (for instance, trust services) that are not offered directly by the Bank. By virtue of their greater total capitalization, these banks also have substantially higher lending limits than the 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 market 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. The Bank’s major competitors are relatively smaller community banks that focus their marketing efforts on Korean-American businesses in the Bank’s service areas. Amongst these banks, the Bank is the largest, with a loan portfolio that is 41.8 percent larger than its nearest competitor’s loan portfolio, and a deposit portfolio that is 60.6 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 conve- nience and quality of service they provide to borrowers. The principal bases of competition for deposits are the interest rate paid, convenience and service. 6 In order to compete with other financial institutions in its service area, the Bank relies principally upon local promotional activity, including advertising in the local media, personal contacts, direct mail and specialized services. The Bank’s promotional 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, Legisla- tion and Regulation Our profitability, like that of most financial institutions, is primarily dependent on interest rate differentials. In general, the difference 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 unemployment, and the impact that future changes in domestic and foreign economic conditions might have on us cannot be predicted. 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. Govern- ment securities, by adjusting the required level of reserves for depository institutions subject to its reserve requirements, 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 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 affecting the competitive balance between banks and other financial ser- vices providers, such as recent Federal legislation permitting affil- insurance companies and iations among commercial banks, securities firms. We cannot predict whether or when any potential 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 raising 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”) administered 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 bank and financial holding company, we are subject to regulation and examination by the FRB under the BHCA. Accord- ingly, we are subject to the FRB’s authority to: (cid:129) require periodic reports and such additional information as the FRB may require. (cid:129) require us to maintain certain levels of capital. See “Capital Standards.” (cid:129) require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and com- mit 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. (cid:129) terminate an activity or terminate control of or 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 any bank subsidiary. (cid:129) regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem our securities in certain situations. (cid:129) approve acquisitions and mergers with other banks or savings institutions and consider certain competitive, management, financial and other factors in granting these approvals. Similar California and other state banking agency approvals may also be required. 7 Non-Banking and Financial Activities (cid:129) increased penalties for financial crimes and forfeiture of exec- Subject to certain prior notice or FRB approval requirements, bank holding companies may engage in any, or acquire shares of companies engaged in, those non-banking activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Hanmi Financial may engage in these non-banking activities and broader securities, insurance, merchant banking and other activities that are determined to be “financial in nature” or are incidental or com- plementary to activities that are financial in nature without prior FRB approval pursuant to its election to become a financial holding company. Pursuant to the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), in order to elect and retain financial holding company status, all depository institution subsidiaries of a bank holding company must be well capitalized, well managed, and, except in limited circumstances, be in satisfactory compliance with the Community Reinvestment Act (“CRA”). Failure to sustain compli- ance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. Chun-Ha and All World qualify as financial subsidiaries under the GLBA. Hanmi Financial is also a bank holding company within the meaning of the California Financial Code. As such, Hanmi Financial and its subsidiaries are subject to examination by, and may be required to file reports with, the DFI. Securities Registration Our securities are registered with the Securities and Exchange Commission (“SEC”) under the Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are subject to the information, proxy solicitation, insider trading, corporate gover- nance, and other requirements and restrictions of the Exchange Act. The Sarbanes-Oxley Act We are subject to the accounting oversight and corporate gov- the Sarbanes-Oxley Act of 2002, ernance requirements of including: (cid:129) required executive certification of financial presentations; (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 utive bonuses in certain circumstances. The Bank As a California chartered bank, the Bank is subject to primary supervision, periodic examination, and regulation by the DFI and by the FRB as the Bank’s primary federal regulator. As a member bank, the Bank is a stockholder of the Federal Reserve Bank of San Francisco (the “Reserve Bank”). If, as a result of an examina- tion, the DFI or the FRB should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DFI and the FRB, and separately the FDIC as insurer of the Bank’s deposits, have residual authority to: (cid:129) require affirmative action to correct any conditions resulting from any violation or practice; (cid:129) direct an increase in capital; (cid:129) restrict the Bank’s growth geographically, by products and services or by mergers and acquisitions; (cid:129) enter into informal nonpublic or formal public memoranda of understanding or written agreements; enjoin unsafe and unsound practices and issue cease and desist orders to take corrective action; (cid:129) remove officers and directors and assess civil monetary penalties; and (cid:129) take possession and close and liquidate the Bank. Permissible Activities and Subsidiaries California law permits state chartered commercial banks to engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “non-banking” activities commonly con- ducted by national banks in operating subsidiaries, and, further, pursuant to the GLBA, the Bank may conduct certain “financial” activities in a subsidiary to the same extent as may a national bank, provided the Bank is and remains “well-capitalized,” “well-man- aged” and in satisfactory compliance with the CRA. Presently, none of the Bank’s subsidiaries are financial subsidiaries. In September, 2007, the SEC and the FRB finalized joint rules required by the Financial Services Regulatory Relief Act of 2006 to implement exceptions provided in the GLBA for securities activities that banks may conduct without registering with the SEC as a securities broker or moving such activities to a broker-dealer 8 affiliate. The FRB’s final Regulation R provides exceptions for networking arrangements with third party broker-dealers and authorizes compensation for bank employees who refer and assist retail and high net worth bank customers with their secu- rities, including sweep accounts to money market funds, and with related trust, fiduciary, custodial and safekeeping needs. The final rules, which will not be effective until 2009, are not expected to have a material effect on the current securities activities that the Bank currently conducts for customers. Interstate Banking and Branching Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, bank holding companies and banks generally have the ability to acquire or 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. The Bank presently has no interstate branches. Federal Home Loan Bank System The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco. Among other benefits, each Federal Home Loan Bank (“FHLB”) serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Federal Reserve System The FRB requires all depository institutions to maintain noninter- est-bearing reserves at specified levels against their transaction accounts (primarily checking and non-personal time deposits). At December 31, 2007, the Bank was in compliance with these requirements. Dividends and Other Transfers of Funds Dividends from the Bank constitute the principal source of income to Hanmi Financial. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends without the prior approval of the DFI or the FRB. In addition, the banking agencies have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. 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 “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividends” for a further discussion of restric- tions on the Bank’s ability to pay dividends to Hanmi Financial. Capital Standards At December 31, 2007, Hanmi Financial and the Bank’s capital ratios exceed the minimum percentage requirements for “well capitalized” institutions. See “Notes to Consolidated Financial State- ments, Note 14 — Regulatory Matters.” The Federal banking agencies have adopted risk-based minimum 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 transac- tions that are recorded as off-balance sheet items. The risk-based capital ratio is determined by classifying assets and certain off- balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories per- ceived as representing greater risk. Under the capital guidelines, a is divided into tiers. “Tier 1 banking organization’s total capital capital” includes common equity and trust-preferred securities, subject to certain criteria and quantitative limits. The risk-based capital guidelines require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. An institution’s risk-based capital, leverage capital and tangible capital ratios together determine the institution’s capital classifica- tion. An institution is treated as well capitalized if its total capital to risk-weighted assets ratio is 10.0 percent or more; its Tier 1 capital to risk-weighted assets ratio is 6.0 percent or more; and its Tier 1 capital to adjusted total average assets ratio is 5.0 percent or more. As of December 31, 2007, the regulatory capital guidelines and the actual capital ratios for Hanmi Financial and the Bank were as follows: Requirement Actual as of December 31, 2007 Adequately Capitalized Well Capitalized Hanmi Bank Hanmi Financial Total Risk-Based Capital Ratio 8.0% 10.0% 10.59% 10.65% Tier 1 Risk-Based Capital Ratio Tier 1 Leverage Capital 4.0% 6.0% 9.34% 9.40% Ratio 4.0% 5.0% 8.47% 8.52% The current risk-based capital guidelines are based upon the 1988 capital accord of the International Basel Committee on Banking 9 Supervision. A new international accord, referred to as Basel II, which emphasizes internal assessment of credit, market and operational risk, supervisory assessment and market discipline in determining minimum capital requirements, currently becomes mandatory for large international banks outside the U.S. in 2008, is optional for others, and must be complied with in a “parallel run” for two years along with the existing Basel I standards. A separate rule is expected to be released and issued in final by the Federal regulatory agencies in 2008, which will offer U.S. banks that will not adopt Basel II an alternative “standardized approach under Basel II” option and address concerns that the Basel II framework may offer significant competitive advantages for the largest U.S. and international banks. The U.S. banking agencies have indicated, however, that they will retain the minimum leverage requirement for all U.S. banks. Further proposals and revisions to the Basel II framework may also occur in response to recent adverse liquidity and securitization market developments. The FDI Act gives the Federal banking agencies the additional broad authority to take “prompt corrective action” to resolve the insured depository institutions that fall within any problems of undercapitalized category, including requiring the submission of an acceptable capital restoration plan. The Federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guide- lines set forth operational and managerial 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) compen- sation and benefits. FDIC Insurance Through the Deposit Insurance Fund (“DIF”), the FDIC insures the Bank’s customer deposits up to prescribed limits for each depos- itor. 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 supervisory factors. The FDIC may increase or decrease the assessment rate schedule on a semi- annual basis. The Federal Deposit Insurance Reform Act of 2006 (“FDIRA”) and implementing regulations provide for changes in the formula and factors to be considered by the FDIC in calculating the FDIC reserve ratio, assessments and dividends, including business line concentrations and risk of failure and severity of loss in the event of failure. It is unclear whether the FDIC may need to increase assessments in the near term or longer term to address the risks and costs of any increase in bank failures. The FDIC may terminate a depository institution’s deposit insur- ance upon a finding 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 that may prejudice the interest of a bank’s depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank’s charter by the DFI. Extensions of Credit to Insiders and Transactions with Affiliates The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to: (cid:129) a bank or bank holding company’s executive officers, directors 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, director or shareholder; or (cid:129) any political or campaign committee controlled by such exec- utive officer, director or principal shareholder. Such loans and leases: (cid:129) must comply with loan-to-one-borrower limits; (cid:129) require prior full board approval when aggregate extensions of credit to the person exceed specified amounts; (cid:129) must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; (cid:129) must not involve more than the normal risk of repayment or present other unfavorable features; and (cid:129) in the aggregate limit not exceed the bank’s unimpaired capital and unimpaired surplus. California has laws and the DFI has regulations that adopt and apply Regulation O to the Bank. The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and FRB Regulation 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. Affiliates include parent holding companies, sister banks, sponsored financial subsidiaries and investment and advised companies, 10 companies where the Bank’s affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally: (cid:129) prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts; (cid:129) limit such loans and investments to or in any affiliate individually to 10 percent of the Bank’s capital and surplus; (cid:129) limit such loans and investments to all affiliate in the aggregate to 20 percent of the Bank’s capital and surplus; and (cid:129) require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the Bank as those prevailing for comparable transactions with nonaffiliated parties. Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDI Act prompt corrective action provisions and the supervisory authority of the Federal and state banking agencies. USA PATRIOT Act and Anti-Money Laundering Compliance The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws, including the Bank Secrecy Act. 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 enforce- ment actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have serious reputation consequences for Hanmi Financial and the Bank. Consumer Laws The Bank and Hanmi Financial are subject to many Federal and state consumer protection laws and regulations prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition, including: (cid:129) The Home Ownership and Equity Protection Act of 1994 (“HOEPA), which requires extra disclosures and consumer protections to borrowers from certain lending practices, such as practices deemed to be “predatory lending.” (cid:129) Privacy policies required by Federal and state banking laws and regulations, which limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. (cid:129) The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (“the FACT Act”), which requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and gives consumers more control of their credit data. (cid:129) The Equal Credit Opportunity Act (“ECOA”), which 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 circumstances), receipt of income from public assistance pro- grams, or good faith exercise of any rights under the Consumer Credit Protection Act. (cid:129) The Truth in Lending Act (“TILA”), which requires that credit terms be disclosed in a meaningful and consistent way so that consumers may compare credit terms more readily and knowledgeably. (cid:129) The Fair Housing Act, which regulates many lending 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. (cid:129) The CRA, which requires insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities; 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, consis- tent with safe and sound banking practices and further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating appli- cations for, among other things, domestic branches, mergers or acquisitions, or holding company formations. In its last exam- ination for CRA compliance, as of October 10, 2006, the Bank was rated “Outstanding.” (cid:129) The Home Mortgage Disclosure Act (“HMDA”), which 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 enforc- ing anti-discrimination statutes. (cid:129) The Real Estate Settlement Procedures Act (“RESPA”), which requires lenders to provide borrowers with disclosures regard- ing the nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks. (cid:129) The National Flood Insurance Act, which requires homes in flood-prone areas with mortgages from a federally regulated lender to have flood insurance. 11 Regulation of Subsidiaries Non-bank subsidiaries are subject to additional or separate reg- ulation and supervision by other state, Federal and self-regulatory bodies. Chun-Ha and All World are subject to the licensing and supervisory authority of the California Commissioner of Insurance. Item 1A. Risk Factors Together with the other information on the risks we face and our management of risk contained in this Annual Report or in our other SEC filings, the following presents significant risks that may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also impair our business operations and results. Changes in economic conditions could materially hurt our business. Our business is directly affected by changes in eco- legislative and regulatory nomic conditions, changes and changes in government monetary and fiscal policies and inflation, all of which are beyond our control. Deterioration in economic conditions could result in the following consequences: including finance, (cid:129) problem assets and foreclosures may increase; (cid:129) demand for our products and services may decline; (cid:129) low cost or non-interest bearing deposits may decrease; and (cid:129) collateral for loans made by us, especially real estate, may decline in value. Recent negative developments in the financial industry and U.S. and global credit markets may affect our operations and results. Negative developments in the latter half of 2007 in the subprime mortgage market and the securitization markets for such loans have resulted in uncertainty in the financial markets generally and the expectation of a general economic downturn beginning in 2008. Commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased signifi- cantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue. Bank and bank holding company stock prices have been negatively affected as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets com- pared to recent years. As a result, there is a potential for new Federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the impact of new legislation in response to those developments could negatively affect our operations by restricting our business operations, including our ability to originate or sell loans, and adversely affect our financial performance. Our Southern California business focus and economic con- ditions in Southern California could adversely affect our operations. The Bank’s operations are located primarily in Los Angeles and Orange counties. Because of this geographic con- centration, our results depend largely upon economic conditions 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 30.7 percent of the Bank’s loan portfolio consists of commercial real estate and con- struction loans, primarily in Southern California. Because of this concentration, a deterioration of the Southern California com- mercial 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. Our earnings are affected by changing interest rates. Changes in interest rates affect the level of loans, deposits and investments, the credit profile of existing loans, the rates received on loans and securities and the rates paid on deposits and bor- rowings. Significant fluctuations in interest rates may have a mate- rial adverse effect on our financial condition and results of operations. If we cannot attract deposits, our growth may be inhibited. Our ability to increase our asset base depends in large part on our ability to attract additional deposits at favorable rates. We seek additional deposits by offering deposit products that are compet- itive with those offered by other financial institutions in our mar- kets. We cannot assure you that these efforts will be successful. We must manage our funding resources to enable us to meet our ongoing operations costs and our deposit and Liquidity is essen- borrowing obligations as they come due. tial to our business and any inability to raise funds could have a substantial negative effect on our liquidity. Sources of funds to meet our operating needs and obligations include deposits; interest and 12 fee income on loans and other products and services; earnings on our investment securities portfolio; revenue from the sale or securitization of loans; new capital infusions and borrowings, such as from the Federal Home Loan Banks. Adverse regulatory developments or a decline in our financial condition or a decline in financial market conditions generally, such as the recent turmoil faced by depository financial institutions in the domestic and worldwide credit markets, could have a significant impact on our ability to meet our liquidity needs, including our ability to attract deposits in an increasingly competitive environment. We may not be able to pay dividends in the future. A substantial source of Hanmi Financial’s income from which we pay Hanmi Financial obligations and distribute dividends to our stock- holders is from the receipt of dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. As a result of our net loss for 2007 after the goodwill impairment charge and the increased provision for credit losses, the Bank must obtain the prior approval of the DFI and the FRB in order to pay dividends to Hanmi Financial. In the event the Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our outstanding common stock. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for a further discussion of restrictions on the Bank’s ability to pay dividends to Hanmi Financial. Our operations may require us to raise additional capital in the future, but that capital may not be available or may not be on terms acceptable to us when it is needed. We are required by Federal regulatory authorities to maintain adequate levels of capital to support our operations. We believe that our existing capital resources will satisfy our capital requirements for the foreseeable future and will be sufficient to offset any problem assets. However, should our asset quality erode and require significant additional provision, resulting in consistent net operating losses at the Bank, our capital levels will decline and we will need to raise capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accord- ingly, we cannot be certain of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. The short-term and long-term impact of the new Basel II capital standards and the forthcoming new capital rules to be proposed for non-Basel II U.S. banks is uncertain. As a result of the recent deterioration in the global credit markets and the potential impact of increased liquidity risk and interest rate risk, it is unclear what the short-term impact of the implementation Basel II may be or what impact a pending alternative standardized approach to Basel II option for non-Basel II U.S. banks may have on the cost and availability of different types of credit and the implementing the new capital potential compliance costs of standards. We are subject to government regulations that could limit or restrict our activities, which in turn could adversely affect our operations. The financial services industry is subject to extensive Federal and state supervision and regulation. Signif- icant 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 deposits, in making loans and attracting and retaining employees. The increas- ingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, new com- petitors in the market, and the pace of consolidation 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 borrowers, 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 policies, 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. As described herein, the Bank substan- tially increased its provision for credit losses in 2007, as compared to 2006 and 2005, as a result of increases in historical loss factors, increased charge-offs and migration of more loans into more adverse risk categories. Failure to manage our growth may adversely affect our financial performance and profitability performance. Our depend on our ability to manage our recent and possible future 13 growth. Future acquisitions and our continued growth may present operating, integration and other issues that could have a material adverse effect on our business, financial condition, results of operations and cash flows. We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve custom- ers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficien- cies in our operations. Many of our competitors have substantially improvements. We greater resources to invest in technological may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. We rely on communications, information, operating and financial control systems technology from third-party ser- vice providers, and we may suffer an interruption in those systems. We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including our internet banking services and data processing systems. Any failure or interruption of these services or systems or breaches in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan orig- ination systems. The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend sub- stantial resources, if at all. Negative publicity could damage our reputation. Repu- tation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regu- latory consequences. Negative public opinion could result from our actual or perceived conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Our stock price can be volatile due to many factors. Our stock price can fluctuate widely in response to a variety of factors, in addition to those described above, including: (cid:129) recommendations by securities analysts; (cid:129) operating and stock price performance of other companies that investors deem comparable to us; (cid:129) news reports relating to trends, concerns and other issues in the financial services industry; (cid:129) new technology used, or services offered, by our competitors; (cid:129) natural disasters, such as earthquakes; and (cid:129) geopolitical conditions such as acts or threats of terrorism or military conflicts. Item 1B. Unresolved Staff Comments None. 14 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 Corporate Headquarters Cerritos Branch Downtown Branch Fashion District Branch Fullerton Branch Garden Grove Branch Gardena Branch Irvine Branch Koreatown Galleria Branch Koreatown Plaza Branch Mid-Olympic Branch Olympic Branch Rancho Cucamonga 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 Virginia LPO Chun-Ha Insurance Services Chun-Ha Insurance Services All World Insurance Services Headquarters(1) Branch Branch Branch Branch Branch Branch Branch Branch Branch(2) Branch(3) Branch(4) Branch 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) Headquarters(1) Insurance Office(1) Headquarters(1) 3660 Wilshire Boulevard, Penthouse Suite A 11754 East Artesia Boulevard 950 South Los Angeles Street 726 East 12th Street, Suite 211 5245 Beach Boulevard 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 9759 Baseline Road 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 3500 108th Avenue Northeast, Suite 280 7535 Little River Turnpike, Suite 200B 12912 Brookhurst Street, Suite 480 3225 Wilshire Boulevard, Suite 1806 12912 Brookhurst Street, Suite 480 Los Angeles, CA Artesia, CA Los Angeles, CA Los Angeles, CA Buena Park, CA Garden Grove, CA Gardena, CA Irvine, CA Los Angeles, CA Los Angeles, CA Los Angeles, CA Los Angeles, CA Rancho Cucamonga, 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 Bellevue, WA Annandale, VA Garden Grove, CA Los Angeles, CA Garden Grove, CA Owned/ Leased Leased Leased Leased Leased Leased Owned Leased Leased Leased Leased Owned Owned Leased Leased Leased Leased Leased Leased Leased Leased Owned Owned Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased (1) Deposits are not accepted at this facility. (5) Administrative offices are also located at this facility. (2) Residential Mortgage Center is also located at this facility. (6) International Finance Department 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. Hanmi Financial and its subsidiaries consider their present facilities to be sufficient for their current operations. 15 Item 3. Legal Proceedings From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and ser- vicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 2007, no matters were submitted to stockholders for a vote. PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Pur- chases 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 2007: Fourth Quarter Third Quarter Second Quarter First Quarter 2006: Fourth Quarter Third Quarter Second Quarter First Quarter Holders $16.70 $17.39 $19.50 $23.18 $22.88 $20.00 $20.46 $19.95 $ 8.39 $14.04 $15.74 $18.58 $18.89 $18.13 $17.09 $17.04 $0.06 per share $0.06 per share $0.06 per share $0.06 per share $0.06 per share $0.06 per share $0.06 per share $0.06 per share Hanmi Financial had 347 registered stockholders of record as of February 7, 2008. Dividends The ability of Hanmi Financial to pay dividends to our shareholders is directly dependent on the ability of the Bank to pay dividends to us. Section 642 of the California Financial Code provides that neither a California state-chartered bank nor a majority-owned subsidiary of a bank can pay dividends to its shareholders in an amount which exceeds the lesser of (a) the retained earnings of the bank or (b) the net income of the bank for its last three fiscal years, in each case less the amount of any previous distributions made during such period. As a result of the net loss incurred by the Bank in 2007, the Bank is currently not able to pay dividends to Hanmi Financial under Section 642. However, Financial Code Section 643 provides, alternatively, that, notwithstanding the foregoing restric- tion, dividends in an amount not exceeding the greatest of (a) the retained earnings of the bank; (b) the net income of the bank for its last fiscal year or (c) the net income of the bank for its current fiscal year may be declared with the prior approval of the California Commissioner of Financial Institutions. The Bank had retained earnings of $52.8 million as of December 31, 2007. Similarly, the net loss for 2007 requires prior FRB approval of bank dividends in 2008 to Hanmi Financial. FRB Regulation H Sec- tion 208.5 provides that the Bank must obtain FRB approval to declare and pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years. The Bank will seek prior approval from the DFI and the FRB to pay cash dividends to Hanmi Financial. There can be no assurance when or if these approvals would be granted, or that, even if granted, the Board of Directors will continue to authorize cash dividends to our shareholders. 16 Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes information as of December 31, 2007 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. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Equity Compensation Plans Approved By Security Holders Equity Compensation Plans Not Approved By Security Holders Total Equity Compensation Plans (a) 1,472,766 — 1,472,766 (b) $15.33 $ — $15.33 2,879,000 — 2,879,000 17 Performance Graph The following graph shows a comparison of stockholder return on Hanmi Financial’s common stock with the cumulative total returns for: 1) the NASDAQ Composite» (U.S.) Index; 2) the Standard and Poors (“S&P”) 500 Financials Index; and 3) the SNL Bank $1B-$5B Index, which was compiled by SNL Financial LC of Charlottesville, Virginia. The SNL Bank $1B-$5B Index was added to the graph this year to enhance comparisons of Hanmi Financial’s performance to other companies with similar market capitalizations. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance. 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 Securities 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. e u l a V x e d n I $400 $350 $300 $250 $200 $150 $100 $50 $0 TOTAL RETURN PERFORMANCE Hanmi Financial NASDAQ Composite S&P 500 Financials SNL Bank $1B-$5B Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Index Hanmi Financial NASDAQ Composite S&P 500 Financials SNL Bank $1B-$5B December 31, Symbol 2002 2003 2004 2005 2006 2007 HAFC ^IXIC S5FINL $100.00 $100.00 $100.00 — $100.00 $121.24 $150.01 $127.92 $135.99 $223.44 $162.89 $138.45 $167.83 $224.61 $165.13 $143.61 $164.97 $286.92 $180.85 $166.82 $190.90 $111.66 $198.60 $132.05 $139.06 18 Purchases of Equity Securities by the Issuer and Affiliated Purchasers On April 25, 2006, the Board of Directors of Hanmi Financial authorized the repurchase of up to $50.0 million of common stock. The following are details on repurchases under this program for the fourth quarter of 2007: Period Repurchases from October 1, 2007 to October 31, 2007 Repurchases from November 1, 2007 to November 30, 2007 Repurchases from December 1, 2007 to December 31, 2007 Total ISSUER PURCHASES OF EQUITY SECURITIES (a )Total Number of Shares (or Units) Purchased (b) Average Price Paid per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs 2,000 $16.57 2,000 $11,074,000 1,060,400 $ 9.62 1,060,400 82,000 1,144,400 $ 9.34 $ 9.62 82,000 1,144,400 $ $ 798,000 29,000 19 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, 2007 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. (Dollars in thousands, except for per share data) 2007 2006 2005 2004 2003 As of and for the Year Ended December 31, SUMMARY STATEMENTS OF OPERATIONS: Interest Income Interest Expense Net Interest Income Before Provision for Credit Losses Provision for Credit Losses Non-Interest Income Non-Interest Expenses Income (Loss) Before Provision for Income Taxes Provision for Income Taxes NET INCOME (LOSS) SUMMARY BALANCE SHEETS: Cash and Cash Equivalents Total Investment Securities Net Loans(1) Total Assets Total Deposits Total Liabilities Total Stockholders’ 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 Stockholders’ Equity Average Tangible Equity PER SHARE DATA: Earnings (Loss) Per Share — Basic Earnings (Loss) Per Share — Diluted Book Value Per Share(2) Tangible Book Value Per Share(3) Cash Dividends Per Share Common Shares Outstanding $ $ $ $ 280,896 128,693 152,203 38,323 40,006 189,929 (36,043) 24,477 260,189 106,429 153,760 7,173 36,963 77,313 106,237 40,588 (60,520) $ 65,649 122,398 350,457 3,241,097 3,983,746 3,001,699 3,612,201 371,545 257,537 3,049,775 368,144 3,494,758 3,882,891 2,989,806 355,819 2,643,296 492,637 275,036 $ 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 $ $ $ 200,941 62,111 138,830 5,395 31,450 70,201 94,684 36,455 58,229 163,477 443,912 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 $ $ $ 135,554 32,617 102,937 2,907 26,211 66,566 59,675 22,975 36,700 127,164 418,973 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 $ $ $ 77,417 20,796 56,621 5,680 20,022 39,325 31,638 12,425 19,213 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 $ $ $ $ $ (1.27) (1.27) 8.10 5.62 0.24 45,860,941 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 (1) Loans receivable, net of allowance for loan losses and deferred (2) Total stockholders’ equity divided by common shares loan fees, and loans held for sale. outstanding. (3) Tangible equity divided by common shares outstanding. 20 SELECTED PERFORMANCE RATIOS: Return on Average Assets(4) Return on Average Stockholders’ Equity(5) Return on Average Tangible Equity (6) Net Interest Spread(7) Net Interest Margin(8) Efficiency Ratio(9) Dividend Payout Ratio(10) Average Stockholders’ 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 As of and for the Year Ended December 31, 2007 2006 2005 2004 2003 (1.56)% 1.82% 1.79% 1.37% 1.18% (12.28)% 14.33% 13.94% 12.51% 14.51% (22.00)% 27.09% 29.33% 25.62% 14.75% 3.17% 3.59% 3.96% 3.75% 3.06% 4.36% 4.78% 4.83% 4.31% 3.68% 98.81% 40.54% 40.86% 51.54% 51.31% (18.90)% 17.91% 16.95% 22.99% 29.41% 12.69% 12.72% 12.86% 10.98% 8.15% 10.65% 12.55% 12.04% 11.98% 11.13% 10.59% 12.28% 11.98% 11.80% 11.09% 9.40% 11.58% 11.03% 10.93% 10.05% 9.34% 11.31% 10.96% 10.75% 10.00% 8.52% 10.08% 9.11% 8.93% 7.80% 8.47% 9.85% 9.06% 8.78% 7.75% 1.66% 0.50% 0.41% 0.27% 0.68% 1.37% 0.38% 0.30% 0.19% 0.48% 0.73% 0.17% 0.12% 0.19% 0.29% 1.33% 0.96% 1.00% 1.00% 1.06% 80.05% 193.86% 246.40% 377.49% 154.13% (4) Net income (loss) divided by average total assets. (5) Net income (loss) divided by average stockholders’ equity. (6) Net income (loss) 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. Non-GAAP Financial Measures Return on Average Tangible Equity Return on average tangible equity is supplemental financial infor- mation determined by a method other than in accordance with U.S. generally accepted accounting principles (“GAAP”). This non- GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Average tangible equity is calculated by subtracting average goodwill and average other intangible assets from average stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from (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 (loss) 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. stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substi- tution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. 21 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) 2007 2006 2005 2004 2003 Average Stockholders’ Equity Less Average Goodwill and Average Other Intangible Assets $ 492,637 (217,601) $ 458,227 (215,865) $ 417,813 (219,286) $ 293,313 (150,051) $132,369 (2,117) Average Tangible Equity $ 275,036 $ 242,362 $ 198,527 $ 143,262 $130,252 Return on Average Stockholders’ Equity Effect of Average Goodwill and Average Other Intangible Assets (12.28)% 14.33% 13.94% 12.51% 14.51% (9.72)% 12.76% 15.39% 13.11% 0.24% Return on Average Tangible Equity (22.00)% 27.09% 29.33% 25.62% 14.75% Tangible Book Value Per Share Tangible book value per share is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total stockholders’ equity and dividing the difference by the num- ber of shares of common stock outstanding. Management believes information that the presentation of this financial measure excluding the impact of these items provides useful supplemental is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a 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: December 31, (Dollars in thousands, except per share amounts) 2007 2006 2005 2004 2003 Total Stockholders’ Equity Less Goodwill and Other Intangible Assets $ 371,545 (114,008) $ 487,117 (213,958) $ 426,777 (217,749) $ 399,910 (221,119) $139,467 (2,043) Tangible Equity $ 257,537 $ 273,159 $ 209,028 $ 178,791 $137,424 Book Value Per Share Effect of Goodwill and Other Intangible Assets Tangible Book Value Per Share $ $ 8.10 (2.48) 5.62 $ $ 9.93 (4.36) 5.57 $ $ 8.77 (4.47) 4.30 $ $ 8.11 (4.49) 3.62 $ $ 4.92 (0.07) 4.85 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, 2007, 2006 and 2005. 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 statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking state- ments because of certain factors discussed elsewhere in this Report. See “Item 1A. Risk Factors.” Critical Accounting Policies We have established various accounting policies that govern the application of GAAP in the preparation of our consolidated financial statements. Our significant accounting policies are described in the “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.” Certain accounting policies require us to make significant estimates and assumptions that have impact on the carrying value of certain assets and a material 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 circum- stances. Actual results could differ significantly from these estimates impact on the and assumptions, which could have a material 22 carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors. Allowance for Loan Losses We believe the allowance for loan losses and allowance for off- balance sheet items are critical accounting policies that require significant estimates and assumptions that are particularly suscep- tible to significant change in the preparation of our financial state- ments. 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 segmented loan pools by risk trends, collateral values, rating, delinquency and charge-off 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-per- forming loans. Concentration of credit, change of lending man- agement and staff, quality of loan review system, and change in interest rate are other qualitative factors that are considered in our methodologies. See “Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items,” “Results of Operations — Provision for Credit Losses” and “Notes to Consoli- dated Financial Statements, 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. We may record loan servicing assets when the benefits of servicing are expected to be more than adequate compensation to a servicer. We deter- mine whether the benefits of servicing are expected to be more than adequate compensation to a servicer by discounting all of the future net cash flows associated with the contractual rights and obligations of the servicing 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 Sig- nificant Accounting Policies” and “Note 4 — Servicing Assets” pre- sented elsewhere herein. Goodwill We have goodwill, which represents the excess of purchase price over the fair value of net assets acquired, because of various business acquisitions. As of December 31, 2007 and 2006, goodwill was $107.1 million and $207.6 million, respectively, which resulted primarily from the acquisition of Pacific Union Bank (“PUB”) in 2004. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill must 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 (at any time during the year, but at the same time each year), or more frequently if events or circumstances change, such as adverse changes in the business climate, that would more likely than not reduce the reporting unit’s fair value below its carrying amount. During our annual assessment of goodwill during the fourth quarter loss on goodwill of of 2007, we recognized an impairment $102.9 million based on the decline in the market value of our common stock, which we believe reflects, in part, recent turmoil in the financial markets that has adversely affected the market value of the common stock of many banks. Goodwill is discussed in more detail in “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” and “Note 6 — Goodwill” presented elsewhere herein. Overview In 2007, total assets increased 6.9 percent, reflecting the weak- ening economy, compared to increases of 9.1 percent and 10.0 percent in 2006 and 2005. Total assets increased to $3,983.7 million at December 31, 2007 from $3,725.2 million and $3,414.3 million at December 31, 2006 and 2005, respec- tively. Net loans increased to $3,241.1 million at December 31, 2007 from $2,837.4 million and $2,469.1 million at December 31, 2006 and 2005, increased to $3,001.7 million at December 31, 2007 from $2,944.7 million and $2,826.1 million at December 31, 2006 and 2005, respectively. respectively. Total deposits Effective January 2, 2007, we completed the acquisitions of Chun- Ha and All World, which had combined total assets of $3.9 million on the date of acquisition. The acquisitions were accounted for as 23 purchases, so the operating results and assets and liabilities of Chun-Ha and All World are included from the acquisition date. portfolio until the Bank’s credit risk profile returns to a normalized level. For the year ended December 31, 2007, we recognized a net loss of $60.5 million, as compared with net income of $65.6 million for the year ended December 31, 2006. Such loss in 2007 was mainly caused by a goodwill impairment charge of $102.9 million occa- sioned by the decline in the market value of our common stock that reflects, in part, recent turmoil in the financial markets. If we measure our operating results from our continuing operations without this impairment charge on a non-GAAP basis (as shown in the table below), we realized net income of $42.4 million, as compared with $65.6 million in 2006. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess our results from our core banking operations. (Dollars in thousands, except per share data) GAAP Net Loss Impairment Loss on Goodwill Dilutive Securities — Options and Warrants Non-GAAP Net Income, Excluding Impairment Loss on Goodwill Year Ended December 31, 2007 Income (Loss) (Numerator) Weighted- Average Shares (Denominator) Per Share Amount $ (60,520) 47,787,213 $(1.27) 102,891 306,504 $ 2.15 $ 42,371 48,093,717 $ 0.88 The largest factor affecting our 2007 operating results was a $38.3 million provision for credit losses, which increased from $7.2 million and $5.4 million in 2006 and 2005, respectively. In the last quarter of 2007, the economic conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquency and defaults experienced by the Bank were substantially higher than historical levels. In response, the Bank has tightened its credit standards and significantly expanded its level of loan portfolio monitoring activities beyond the normal portfolio monitoring to attempt to identify potential weaknesses in performing loans. For loans with identified weaknesses, we have created individual action plans to mitigate, to the extent possible, such weaknesses. This effort resulted, in part, in additional down- grades in the classification of loans, primarily to “special mention.” For non-performing loans, we have enhanced our collection efforts, increased workout and collection personnel and created individual action plans to maximize, to the extent possible, col- lections on such loans. We will continue our monitoring of the loan 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 interest-bearing liabilities. It also is affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. Despite the growth in loans, net interest income in 2007 was essentially flat at $152.2 million compared to $153.8 million in 2006 due to compression in the net interest margin that was caused by the FRB lowering short-term interest rates and intense competition for loans and deposits in our niche markets. The Bank’s net interest margin was 4.36 percent in 2007, compared to 4.78 percent a year ago. We generated substantial non-interest income from service charges on deposit accounts, charges and fees from international trade finance, and gains on sales of loans. For the year ended December 31, 2007, non-interest income was $40.0 million, an increase of $3.0 million, or 8.2 percent, over the 2006 non- interest income of $37.0 million. Such increase was mainly caused by an increase in insurance commissions from the operation of two insurance companies acquired in January 2007. For the year ended December 31, 2005, non-interest income was $31.5 million. Non-interest expenses consist primarily of employee compensa- tion and benefits, occupancy and equipment expenses and data processing expenses. For the year ended December 31, 2007, non-interest expenses, excluding the goodwill impairment charge, were $87.0 million (as shown in the table below), an increase of $9.7 million, or 12.6 percent, over the 2006 non-interest expenses of $77.3 million. In 2007, the increase was primarily the result of $1.7 million of separation expenses for the retirement of our former Chief Executive Officer and additional operating expenses from two insurance companies acquired in January 2007. Our efficiency ratio, excluding the goodwill impairment charge, was 45.28 percent in 2007 (as shown in the table below), compared to 40.54 percent and 40.86 percent, in 2006 and 2005, respectively. Management believes the presentation of these financial measures excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess our results from our core banking operations. 24 Year Ended December 31, (In thousands) 2007 2006 2005 GAAP Total Non-Interest Expenses Deduct — Impairment Loss on $ 189,929 $77,313 $70,201 Goodwill (102,891) — — 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.” Non-GAAP Total Non-Interest Expenses GAAP Efficiency Ratio Effect of Impairment Loss on Goodwill $ 87,038 $77,313 $70,201 98.81% 40.54% 40.86% (53.53)% — — Non-GAAP Efficiency Ratio 45.28% 40.54% 40.86% 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 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 economic policies, the general supply of money in the economy, income tax policies, governmental budgetary matters and the actions of the FRB. 25 The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. (Dollars in thousands) ASSETS Interest-Earning Assets: Gross Loans, Net(1) Municipal Securities(2) Obligations of Other U.S. Government Agencies Other Debt Securities Equity Securities Federal Funds Sold Term Federal Funds Sold Interest-Earning Deposits Total Interest-Earning Assets Noninterest-Earning Assets: Cash and Cash Equivalents Allowance for Loan Losses Other Assets Total Noninterest-Earning Assets Year Ended December 31, 2007 2006 2005 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate $3,080,544 $261,992 3,055 4,963 8,436 1,413 1,032 5 — 280,896 71,937 116,701 179,506 26,228 19,746 96 — 3,494,758 8.50% $2,747,922 $239,075 3,087 72,694 4.25% 5,148 122,503 4.25% 10,120 219,475 4.70% 1,354 24,684 5.39% 1,402 27,410 5.23% 2 41 5.21% 1 32 — 260,189 8.04% 3,214,761 8.70% $2,382,230 $180,845 3,122 4.25% 74,166 4,002 102,703 4.20% 10,271 241,881 4.61% 1,107 23,571 5.49% 1,589 46,799 5.11% — — 4.88% 4.04% 5 214 200,941 8.09% 2,871,564 7.59% 4.21% 3.90% 4.25% 4.70% 3.40% — 2.34% 7.00% 92,148 (30,769) 326,754 388,133 93,535 (26,693) 320,578 387,420 92,245 (22,791) 308,172 377,626 Total Assets $3,882,891 $3,602,181 $3,249,190 LIABILITIES AND STOCKHOLDERS’ 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 $ 97,173 452,825 1,430,603 306,876 273,413 82,406 2,004 15,446 75,516 15,134 13,949 6,644 2.06% $ 107,811 3.41% 471,780 5.28% 1,286,202 280,249 4.93% 138,941 5.10% 82,406 8.06% 1,853 14,539 64,184 12,460 6,977 6,416 1.72% $ 138,167 539,678 3.08% 959,904 4.99% 242,996 4.45% 83,076 5.02% 82,406 7.79% 2,130 12,964 31,984 7,114 3,017 4,902 1.54% 2.40% 3.33% 2.93% 3.63% 5.95% Total Interest-Bearing Liabilities 2,643,296 128,693 4.87% 2,367,389 106,429 4.50% 2,046,227 62,111 3.04% Noninterest-Bearing Liabilities: Demand Deposits Other Liabilities Total Noninterest-Bearing Liabilities Total Liabilities Stockholders’ Equity Total Liabilities and Stockholders’ Equity Net Interest Income Net Interest Spread(3) Net Interest Margin(4) (1) Loans are net of deferred fees and related direct costs. Loan fees have been included in the calculation of interest income. Loan fees were $2.7 million, $4.8 million and $6.3 million for the years ended December 31, 2007, 2006 and 2005, respectively. (2) Tax-exempt income, computed on a tax-equivalent basis using an effective marginal rate of 35 percent, was $4.7 million, $4.7 million and $4.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. Yields on tax-exempt income 26 702,329 44,629 746,958 3,390,254 492,637 $3,882,891 735,406 41,159 776,565 3,143,954 458,227 $3,602,181 751,509 33,641 785,150 2,831,377 417,813 $3,249,190 $152,203 $153,760 $138,830 3.17% 4.36% 3.59% 4.78% 3.96% 4.83% were 6.53 percent, 6.53 percent and 6.48 percent for the years ended December 31, 2007, 2006 and 2005, 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 inter- est-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: Year Ended December 31, 2007 vs. 2006 Increase (Decrease) Due to Change in 2006 vs. 2005 Increase (Decrease) Due to Change in Volume Rate Total Volume Rate Total 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 $28,391 (32) (246) (1,875) 83 (400) 3 (1) $ (5,474) — 61 191 (24) 30 — — $22,917 (32) (185) (1,684) 59 (370) 3 (1) $29,839 (63) 816 (994) 54 (807) 2 (10) $28,391 28 330 843 193 620 — 6 $58,230 (35) 1,146 (151) 247 (187) 2 (4) Total Interest Income 25,923 (5,216) 20,707 28,837 30,411 59,248 Interest Expense: 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 Total Interest Expense (196) (601) 7,481 1,244 6,860 — 14,788 347 1,508 3,851 1,430 112 228 7,476 151 907 11,332 2,674 6,972 228 (503) (1,773) 13,068 1,220 2,524 — 226 3,348 19,132 4,126 1,436 1,514 (277) 1,575 32,200 5,346 3,960 1,514 22,264 14,536 29,782 44,318 Change in Net Interest Income $11,135 $(12,692) $ (1,557) $14,301 $ 629 $14,930 For the years ended December 31, 2007 and 2006, net interest income was $152.2 million and $153.8 million, respectively. The net interest spread and net interest margin for the year ended December 31, 2007 were 3.17 percent and 4.36 percent, respectively, compared to 3.59 percent and 4.78 percent, respec- tively, for the year ended December 31, 2006 and 3.96 percent and 4.83 percent, respectively, for the year ended December 31, 2005. Average loans were $3.08 billion in 2007, as compared with $2.75 billion in 2006 and $2.38 billion in 2005, representing increases of 12.1 percent and 15.4 percent in 2007 and 2006, respectively. Average interest-earning assets were $3.49 billion in 2007, as compared with $3.21 billion in 2006 and $2.87 billion in 2005, representing increases of 8.7 percent and 12.0 percent in 2007 and 2006, respectively. In 2007, the majority of interest- earning assets growth was funded by a $108.4 million increase in average total deposits and a $134.5 million increase in FHLB advances and other borrowings. In 2006, the growth was funded primarily by a $249.2 million increase in average total deposits and a $55.9 million increase in FHLB advances and other borrowings. Total average interest-bearing liabilities grew by $275.9 million and $321.2 million, respectively, in 2007 and 2006. The average yield on interest-earning assets slightly decreased to 8.04 percent in 2007, after a 109 basis point increase in 2006 to 8.09 percent from 7.00 percent in 2005. The strong competition for deposits in our local markets accelerated our average cost on interest-bearing liabilities to 4.87 percent in 2007, compared to 4.50 percent in 2006 and 3.04 percent in 2005, despite the FRB lowering rates by 100 basis points since September 2007. As a result, interest income grew 8.0 percent to $280.9 million for 2007, but was outpaced by a 20.9 percent increase in interest expense to $128.7 million. In 2006, interest income increased by 27 29.5 percent to $260.2 million from $200.9 million in 2005, but was outpaced by a 71.4 percent increase in interest expense to $106.4 million in 2006 from $62.1 million in 2005. Our net interest income in 2007 was slightly lower at $152.2 million, compared to $153.8 million in 2006, as the modest growth in average interest-earning assets was offset by the FRB’s lowering of rates. In 2006, net interest income increased by 10.8 percent to $153.8 million from $138.8 million in 2005, due primarily to a 12.0 percent increase in average interest-earning assets. Provision for Credit Losses For the year ended December 31, 2007, the provision for credit losses was $38.3 million, compared to $7.2 million for the year ended December 31, 2006. The allowance for loan losses was 1.33 percent and 0.96 percent of total gross loans at December 31, 2007 and 2006, respectively. The increase in the provision for credit losses is attributable to increases in the loan portfolio, net charge- offs, non-performing loans and criticized and classified loans. The loan portfolio increased $403.7 million, or 14.2 percent, from $2,837.4 million at December 31, 2006 to $3,241.1 million at December 31, 2007. Net charge-offs increased $18.1 million, or 394.3 percent, from $4.6 million for the year ended December 31, 2006 to $22.6 million for the year ended December 31, 2007. Non-performing loans increased from $14.2 million, or 0.50 per- cent of total gross loans, as of December 31, 2006 to $54.5 million, or 1.66 percent of total gross loans, as of December 31, 2007. The $403.7 million, or 14.2 percent, increase in the loan portfolio and the $40.3 million, or 283.3 percent, increase in non-performing loans required the provision to increase to $38.3 million in 2007 from $7.2 million in 2006 to maintain the necessary allowance level. 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 loans increased from $10.1 million, or 0.41 percent of total gross loans, as of December 31, 2005 to $14.2 million, or 0.50 percent of total gross loans, as of December 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 loans required the provision to increase to $7.2 million in 2006 from $5.4 million in 2005 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) Year Ended December 31, 2007 2006 2005 Service Charges on Deposit Accounts Insurance Commissions $18,061 4,954 $17,134 770 $15,782 651 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 Other Real Estate Owned Gain on Sales of Securities Available for Sale Other-Than-Temporary Impairment Loss on Securities 4,493 2,049 2,527 933 683 1,702 5,452 226 — (1,074) 4,567 2,056 2,359 879 1,074 1,157 6,917 48 2 — 4,269 2,122 2,496 845 1,105 1,042 3,021 — 117 — Total Non-Interest Income $40,006 $36,963 $31,450 We earn non-interest income from four major sources: service charges on deposit accounts, insurance commissions, fees gener- ated from international trade finance and gain on sales of loans. For the year ended December 31, 2007, non-interest income was $40.0 million, an increase of 8.2 percent from $37.0 million for the year ended December 31, 2006. The overall increase in non- interest income for 2007 is primarily due to expansion in the Bank’s loan and deposit portfolios and higher insurance commissions due to the acquisition of two insurance agencies in January 2007, partially offset by lower gain on sales of loans and an other-than-temporary impairment loss on securities. For the year ended December 31, 2006, non-interest income was $37.0 million, an increase of 17.5 percent from $31.5 million for the year ended December 31, 2005. The overall increase in non-interest income for 2006 is primarily due to expansion in the Bank’s loan and deposit portfolios. Service charges on deposit accounts increased $927,000, or 5.4 percent, in 2007 compared to 2006 and increased $1.4 million, or 8.6 percent, in 2006 compared to 2005. Service charge income on deposit accounts increased in 2007 and 2006 due to an increase in the number of accounts and an increase in demand deposit transaction volume. Average demand deposits decreased by 4.5 percent to $702.3 million in 2007 from $735.4 million in 2006 and decreased by 2.1 percent to $735.4 million in 2006 from $751.5 million in 2005. Insurance commissions increased $4.2 million, or 543.4 percent, in 2007 compared to 2006 and increased $119,000, or 18.3 per- Insurance commissions cent, in 2006 compared to 2005. 28 increased in 2007 due to the acquisition of two insurance agencies in January 2007. down the value of the CRA preferred securities to their estimated fair value. Fees generated from international trade finance decreased by 1.6 percent from $4.6 million in 2006 to $4.5 million in 2007 and increased by 7.0 percent from $4.3 million in 2005 to $4.6 million in 2006. The decrease in 2007 is attributable primarily to decreased export letter of credit volume. The increase in 2006 is attributable primarily to increased export letter of credit volume and fee increases. Trade finance fees relate primarily to import and export letters of credit. 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, the Bank offered certificates of deposit tied to either the Standard & Poor’s 500 Index or a basket of Asian currencies. The Bank entered into swap transac- tions 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 $683,000, $1.1 million and $1.1 million recorded in non-interest income in 2007, 2006 and 2005, respectively, are partially offset by changes in the fair value of the embedded derivatives recorded in non-interest expenses. loans was $5.5 million in 2007, compared to Gain on sales of $6.9 million in 2006 and $3.0 million in 2005, representing a decrease of 21.2 percent for the year ended December 31, 2007 and an increase of 129.0 percent for the year ended Decem- ber 31, 2006. In 2007, the decrease in gain on sales of loans resulted from lower premiums, which decreased to 4.3 percent in 2007 compared to 5.3 percent in 2006. In 2006, 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 unguaranteed portions of SBA loans. Generally, the guaranteed portion of a substantial per- centage of SBA loans is sold in the secondary markets, and servicing rights are retained. During 2007, there were $116.6 million of SBA loans sold, compared to $110.7 million in 2006 and $50.6 million in 2005. We periodically evaluate our investments for other-than-temporary impairment. We have investments in Community Reinvestment Act (“CRA”) preferred securities with an aggregate par value of $2.0 mil- lion as of December 31, 2007 and 2006. During the fourth quarter of 2007, based on an evaluation of the length of time and extent to which the estimated fair value of the CRA preferred securities had been less than their carrying value, and the financial condition and the issuers, we recorded an oth- near-term prospects of er-than-temporary impairment charge of $1.1 million to write Non-Interest Expenses The following table sets forth the breakdown of non-interest expenses for the years indicated: Year Ended December 31, (In thousands) 2007 2006 2005 Salaries and Employee Benefits Occupancy and Equipment Data Processing Advertising and Promotion Supplies and Communications Professional Fees Amortization of Other Intangible Assets Decrease in Fair Value of Embedded Option Other Operating Expenses Merger-Related Expenses Impairment Loss on Goodwill $ 47,036 10,494 6,390 3,630 2,592 2,468 $40,512 9,643 5,857 2,997 2,391 1,910 $36,839 9,413 4,844 2,913 2,556 2,201 2,324 2,379 2,785 233 11,871 — 102,891 582 11,042 — — 748 8,411 (509) — Total Non-Interest Expenses $189,929 $77,313 $70,201 For the year ended December 31, 2007, non-interest expenses were $189.9 million, an increase of $112.6 million, or 145.7 per- cent, from $77.3 million for the year ended December 31, 2006. The increase in 2007 was primarily the result of an impairment loss on goodwill of $102.9 million. The remaining increase in 2007 was due to increases in compensation, occupancy and equipment expenses, and other operating expenses, as well as non-interest expenses of $3.6 million attributable to Chun-Ha and All World and $1.3 million attributable to the two new branches that opened during 2007. For the year ended December 31, 2006, non-interest expenses were $77.3 million, an increase of $7.1 million, or 10.1 percent, from $70.2 million for the year ended December 31, 2005. The increase in 2006 was primarily the result of higher compensation. Salaries and employee benefits expenses for 2007 increased $6.5 million, or 16.1 percent, to $47.0 million from $40.5 million for 2006. 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. The increase in 2007 was due to $2.4 million attributable to Chun-Ha and All World, $1.7 million of separation expenses for our former Chief Executive Officer’s retirement, $521,000 attributable to the two new branches that opened during 2007, $370,000 of additional share-based compensation reflecting stock options granted, annual salary increases and an increase in the 29 average number of employees. Average headcount was 623, 589 and 535 in 2007, 2006 and 2005, respectively, representing increases of 5.8 percent, 10.1 percent and 6.4 percent, respectively, over the prior years. The increase in 2006 was due primarily to annual salary increases, additional share-based compensation reflecting stock options granted and an increase in the average number of employees. and equipment expenses Occupancy and equipment expenses for 2007 increased $851,000, or 8.8 percent, to $10.5 million from $9.6 million for 2006. Occupancy for 2006 increased $230,000, or 2.4 percent, to $9.6 million from $9.4 million for 2005. The increase in 2007 was due to $476,000 attributable to the two new branches that opened during 2007, $194,000 attributable to Chun-Ha and All World, and additional office space leased. The increase in 2006 was due to additional office space leased. Other operating expenses were $11.9 million for 2007, com- pared to $11.0 million for 2006, representing an increase of $829,000, or 7.5 percent. The increase is primarily attributable to an increase in the amortization of loan servicing assets. Other operating expenses were $11.0 million for 2006, compared to $8.4 million for 2005, representing an increase of $2.6 million, or 31.3 percent. The increase is primarily attributable to a $534,000 operating loss related to an international trade transaction, amor- tization 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. During our annual assessment of goodwill during the fourth quarter of 2007, we concluded that we had an impairment of goodwill based on the decline in the market value of our common in the stock, which we believe reflects, in part, recent turmoil financial markets that has adversely affected the market value of the common stock of many banks. The fair value was determined based on a weighted distribution of values derived from three different approaches: market approach, market capitalization approach, and income approach. Based on this assessment, we concluded that $102.9 million of the related goodwill was impaired and was required to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2007. As of December 31, 2007 and 2006, goodwill was $107.1 million and $207.6 million, respectively, which resulted primarily from the acquisition of PUB in 2004. Income Taxes representing an effective tax rate of 67.9 percent, compared to income taxes of $40.6 million recognized on pre-tax income of $106.2 million, representing an effective tax rate of 38.2 percent, for 2006, and 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. The effective tax rate for 2007 includes a $102.9 million impairment loss on goodwill, which is not deduct- ible for tax purposes. During 2007, we made investments in various tax credit funds totaling $5.8 million and recognized $775,000 of income tax credits earned from qualified low-income housing investments. We recognized an income tax credit of $659,000 for the tax year 2006 from $4.8 million in such investments and recognized an income tax credit of $673,000 for the tax year 2005 from $5.9 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 “tem- porary 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, 2007 and 2006, we had net deferred tax assets of $18.5 million and $13.1 million, respectively. Financial Condition Loan Portfolio Total gross loans increased by $419.1 million, or 14.6 percent, in 2007. Total gross loans represented 82.5 percent of total assets at December 31, 2007, compared with 77.0 percent and 73.2 per- cent at December 31, 2006 and 2005, respectively. income taxes of For the year ended December 31, 2007, $24.5 million were recognized on pre-tax losses of $36.0 million, loans were $2,094.7 million and Commercial and industrial $1,726.4 million at December 31, 2007 and 2006, respectively, 30 loan portfolio. Commercial representing 63.7 percent and 60.2 percent, respectively, of the loans include term loans and total 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, business 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 temporary working capital and/or import/export financing. These borrowers are well diver- sified as to industry, location and their current and target markets. respectively, Real estate loans were $1,101.9 million and $1,041.4 million at representing December 31, 2007 and 2006, 33.5 percent and 36.3 percent, respectively, of the total loan portfolio. Real estate loans are extended to finance the purchase and/or improvement of commercial real estate and residential property. The properties generally are investor-owned, but may be for user-owned purposes. Underwriting guidelines include, among other things, 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. 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) Total Real Estate Loans Commercial and Industrial Loans: Commercial Term Loans Commercial Lines of Credit International Loans SBA Loans(2) Amount of Loans Outstanding as of December 31, 2007 2006 2005 2004 2003 $ 795,675 215,857 90,375 $ 757,428 202,207 81,758 $ 733,650 152,080 88,442 $ 783,539 92,521 80,786 $ 397,853 43,047 58,477 1,101,907 1,041,393 974,172 956,846 499,377 1,599,853 256,978 119,360 118,528 1,202,612 225,630 126,561 171,631 945,210 224,271 106,520 155,491 754,108 201,940 95,936 166,285 433,398 120,856 65,040 91,717 Total Commercial and Industrial Loans 2,094,719 1,726,434 1,431,492 1,218,269 711,011 Consumer Loans(3) Total Gross Loans (1) As of December 31, 2007, 2006, 2005, 2004 and 2003, loans held for sale totaling $310,000, $630,000, $0, $0 and $0, respectively, were included at the lower of cost or fair value. (2) As of December 31, 2007, 2006, 2005, 2004 and 2003, loans held for sale totaling $6.0 million, $23.2 million, $0, $3.9 million and 90,449 100,121 92,154 87,526 54,878 $3,287,075 $2,867,948 $2,497,818 $2,262,641 $1,265,266 $25.5 million, respectively, were included at the lower of cost or market. (3) Consumer loans includes HELOCs. 31 The following table sets forth the percentage distribution of loans in each category as of the dates indicated: Percentage Distribution of Loans as of December 31, 2007 2006 2005 2004 2003 Real Estate Loans: Commercial Property Construction Residential Property Total Real Estate Loans Commercial and Industrial Loans: Commercial Term Loans Commercial Lines of Credit International Loans SBA Loans 24.2% 26.4% 29.4% 34.6% 31.4% 3.4% 6.1% 6.6% 4.7% 3.5% 2.7% 7.1% 2.8% 4.1% 3.6% 33.5% 36.3% 39.0% 42.3% 39.5% 48.7% 41.9% 37.8% 33.3% 34.3% 9.6% 9.0% 7.8% 5.1% 4.3% 3.6% 7.2% 6.2% 3.6% 7.9% 4.4% 6.0% 8.9% 4.3% 7.3% Total Commercial and Industrial Loans 63.7% 60.2% 57.3% 53.8% 56.2% Consumer Loans Total Gross Loans 2.8% 3.5% 3.7% 3.9% 4.3% 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, 2007 2006 $524,349 52,544 48,071 18,622 $578,347 65,158 48,289 17,031 $643,586 $708,825 32 The table below shows the maturity distribution and repricing intervals of outstanding loans as of December 31, 2007. 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 $54.3 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 International Loans SBA Loans Within One Year After One But Within Five Years After Five Years Total $ 390,407 215,857 22,881 $245,020 — 40,656 $160,248 — 26,838 $ 795,675 215,857 90,375 629,145 285,676 187,086 1,101,907 875,340 256,978 119,360 108,413 325,428 — — 1,338 399,085 — — 8,777 1,599,853 256,978 119,360 118,528 Total Commercial and Industrial Loans 1,360,091 326,766 407,862 2,094,719 Consumer Loans Total Gross Loans Loans With Predetermined Interest Rates Loans With Variable Interest Rates As of December 31, 2007, there were $389.7 million of loans, or total gross loans, to borrowers who were 11.9 percent of involved in the and $336.9 million of loans, or 10.2 percent of total gross loans, to borrowers operating gasoline stations. There was no other con- centration of industry exceeding ten loans to any one type of percent of total gross loans outstanding. accommodation/hospitality industry, Non-Performing Assets loans on non-accrual status, Non-performing assets consist of 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 collateralized and in the process of collection. Loans may be restructured by manage- ment when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower eventually will overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means that man- agement intends to offer for sale. 33 61,538 28,862 49 90,449 $2,050,774 $641,304 $594,997 $3,287,075 $ 117,175 $1,933,599 $619,110 $ 22,194 $590,680 $ 4,317 $1,326,965 $1,960,110 Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, we stop recognizing income from the interest on the loan and reverse any uncollected interest that had been accrued but unpaid. These loans may or may not be collateralized, but collection efforts are continuously pursued. Non-performing loans were $54.5 million at December 31, 2007, compared to $14.2 million and $10.1 million at December 31, 2006 and 2005, respectively, representing a 283.3 percent increase in 2007 and a 40.3 percent increase in 2006. Total gross loans increased by 14.6 percent in 2007 over 2006 and 14.8 percent in 2006 over 2005. As a result, the ratio of non-performing loans to total gross loans increased to 1.66 percent at December 31, 2007 from 0.50 percent at December 31, 2006, and increased to 0.50 percent at December 31, 2006 from 0.41 percent at Decem- ber 31, 2005. As of December 31, 2007, we had $287,000 of OREO. There was no OREO as of December 31, 2006. Except for non-performing loans set forth below and loans dis- closed as impaired, our management is not aware of any loans as of December 31, 2007 and 2006 for which known credit prob- lems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. Our manage- ment 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 Construction Residential Property Commercial and Industrial Loans Consumer Loans Total Non-Accrual Loans Loans 90 Days or More Past Due and Still Accruing (as to Principal or Interest): Real Estate Loans: Commercial Property Commercial and Industrial Loans Consumer Loans Total Loans 90 Days or More Past Due and Still Accruing (as to Principal or Interest) Total Non-Performing Loans Other Real Estate Owned Total Non-Performing Assets Non-Performing Loans as a Percentage of Total Gross Loans Non-Performing Assets as a Percentage of Total Assets Non-accrual loans at December 31, 2007 included a $17.0 million construction loan for low-income housing that is fully collateralized and participated in by the local government. The downgrade of this loan relates to project cost overruns and construction delays. Despite these setbacks, we anticipate the project being completed and our loan being repaid without a loss to the Bank. December 31, 2007 2006 2005 2004 2003 $ 2,684 24,118 1,490 25,729 231 $ 246 — — 13,862 105 $ — $ — $ 527 — 1,126 6,398 53 — 112 5,510 184 — 474 9,574 74 54,252 14,213 10,122 5,806 8,104 — 150 77 227 — — 2 2 — — 9 9 — 169 39 557 — — 208 557 54,479 287 14,215 — 10,131 — 6,014 — 8,661 — $54,766 $14,215 $10,131 $6,014 $8,661 1.66% 1.37% 0.50% 0.38% 0.41% 0.27% 0.68% 0.30% 0.19% 0.48% 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 alloca- tions 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. 34 (Dollars in thousands) 2007 2006 2005 2004 2003 December 31, Allowance for Loan Losses Applicable To Real Estate Loans: Commercial Property Construction Residential Property(1) Total Real Estate Loans Commercial and Industrial Loans(1) Consumer Loans Unallocated Allowance Amount Loans Receivable Allowance Amount Loans Receivable Allowance Amount Loans Receivable Allowance Amount Loans Receivable Allowance Amount Loans Receivable $ 2,269 $ 795,675 $ 2,101 $ 757,428 $ 2,043 $ 733,650 $ 1,854 $ 783,539 $ 3,478 215,857 32 90,065 586 19 202,207 81,128 475 19 152,080 87,377 349 155 92,521 80,786 5,779 1,101,597 2,706 1,040,763 2,537 973,107 2,358 956,846 191 992 374 $ 397,853 43,047 427 36,011 2,088,694 23,099 1,703,194 21,035 1,431,492 19,051 1,214,419 11,376 1,821 — 90,449 — 1,752 — 100,121 — 1,391 — 92,154 — 1,293 — 87,526 — 846 135 58,477 499,377 685,557 54,878 — Total $43,611 $3,280,740 $27,557 $2,844,078 $24,963 $2,496,753 $22,702 $2,258,791 $13,349 $1,239,812 (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 eco- nomic cycle, particularly in Southern California, which manage- ment cannot completely predict, will influence credit quality. It is possible that future economic or other factors will adversely affect the Bank’s borrowers. As a result, we may sustain loan losses in any particular period that are sizable in relation to the allowance, or exceed the allowance. In addition, our asset quality may deteriorate through a number of possible factors, including rapid growth, failure to maintain or enforce appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, and failure to identify and monitor potential problem loans. The allowance for loan losses and allowance for off-balance sheet items are maintained at levels that are believed to be adequate by management to absorb estimated probable loan losses inherent in the loan portfolio. The adequacy of the 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 experi- ence, 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 deter- mining the adequacy of the allowance for loan losses and allow- ance for off-balance sheet items. Our loss migration analysis tracks a certain number of quarters of loan loss history to determine losses by classification category (i.e., “pass,” “special historical mention,” “substandard” and “doubtful”) for each loan type, except certain loans (automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances, unused commitments and off-balance sheet exposures, such as letters of credit. The individual loan review analysis is the other 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 performance trends within specific portfolio segments and individual concentrations of credit. The allowance for loan losses increased by $16.1 million, or 58.3 percent, to $43.6 million at December 31, 2007 as com- pared with $27.6 million at December 31, 2006. The increase in the allowance for loan losses in 2007 was due primarily to the increased migration of loans into more adverse risk rating cate- gories and the increase in the overall loan portfolio. See “Provision for Credit Losses.” In addition, the allowance reflects higher esti- mated loss severity arising from a softening economy, partially offset by our better collateral coverage on impaired loans and the presence of guarantees. 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 the qualitative factors. The ratio of the allowance for loan losses to total gross loans substantially improved to 1.33 percent at the end of 2007 as compared with 0.96 percent and 1.00 percent at December 31, 2006 and 2005, respectively, primarily due to the overall increase of historical loss factors and classified loans. The Bank also recorded in other liabilities an allowance for off- 35 balance sheet exposure, primarily unfunded loan commitments, of $1.8 million and $2.1 million at December 31, 2007 and 2006, respectively. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these reserves are adequate for losses inherent in the loan portfolio and off-balance sheet exposure at December 31, 2007 and 2006. (Dollars in thousands) Allowance for Loan Losses: Balance at Beginning of Year 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, 2007 and 2006. As of and For The Year Ended December 31, 2007 2006 2005 2004 2003 $ 27,557 $ 24,963 $ 22,702 $ 13,349 $ 11,254 Allowance for Loan Losses from 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 Balance at End of Year Allowance for Off-Balance Sheet Items: Balance at Beginning of Year Provision Charged to Operating Expenses Balance at End of Year Ratios: Net Loan Charge-Offs to Average Total Gross Loans Net Loan Charge-Offs to Total Gross Loans at End of Period Allowance for Loan Losses to Average Total Gross Loans Allowance for Loan Losses to Total Gross Loans at End of Period Net Loan Charge-Offs to Allowance for Loan Losses Net Loan Charge-Offs to Provision Charged to Operating Expenses Allowance for Loan Losses to Non-Performing Loans Balances: Average Total Gross Loans Outstanding During Period Total Gross Loans Outstanding at End of Period Non-Performing Loans at End of Period 36 $ $ $ — 22,255 1,075 23,330 — — 494 202 696 22,634 38,688 — 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 4,423 21 6 859 322 1,208 3,215 5,310 43,611 $ 27,557 $ 24,963 $ 22,702 $ 13,349 2,130 $ (365) 2,130 $ — 1,800 $ 330 1,385 $ 415 1,765 $ 2,130 $ 2,130 $ 1,800 $ 0.17% 0.16% 1.00% 0.96% 16.62% 0.12% 0.11% 1.05% 1.00% 11.23% 0.19% 0.16% 1.17% 1.00% 16.32% 0.73% 0.69% 1.41% 1.33% 51.90% 58.50% 80.05% 63.84% 193.86% 55.36% 246.40% 148.68% 377.55% 60.55% 154.13% $3,082,671 $2,751,565 $2,386,575 $1,938,422 $1,119,860 $3,287,075 $2,867,948 $2,497,818 $2,262,641 $1,265,266 8,661 $ 14,215 $ 10,131 $ 54,479 $ 6,014 $ 1,015 370 1,385 0.29% 0.25% 1.20% 1.06% 24.08% Investment Portfolio As of December 31, 2007, the investment portfolio was com- posed primarily of mortgage-backed securities, U.S. Government agency securities (“Agencies”), municipal bonds, collateralized mortgage obligations and corporate bonds. Investment securities available for sale were 99.7 percent, 99.8 percent and 99.8 percent of the total investment portfolio as of December 31, 2007, 2006 and 2005, respectively. Most of the securities held by us carried fixed interest rates. Other than holdings of Agencies, there were no investments in securities of any one issuer exceeding 10 percent of stockholders’ equity as of December 31, 2007, 2006 or 2005. We maintain an investment portfolio primarily for liquidity pur- poses. As of December 31, 2007, securities available for sale were $349.5 million, or 8.8 percent of total assets, compared to $390.6 million, or 10.5 percent of total assets, as of December 31, In 2007 and 2006, we purchased $45.0 million and 2006. $9.7 million, respectively, of Agencies, corporate bonds and mortgage-backed securities 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: U.S. Government Agency Securities Mortgage-Backed Securities Municipal Bonds Collateralized Mortgage Obligations Corporate Bonds Other Securities Investment Portfolio as of December 31, 2007 2006 2005 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ $ 694 246 940 $ $ 694 247 941 $ $ 693 274 967 $ $ 693 276 969 $ $ 692 357 692 359 $ 1,049 $ 1,051 $104,893 99,332 69,907 51,881 18,295 3,925 $105,089 99,198 71,751 51,418 18,226 3,835 $119,768 123,614 69,966 67,605 8,090 4,999 $118,244 121,608 71,710 66,113 7,887 5,050 $129,589 149,311 71,536 83,068 8,235 4,999 $127,813 147,268 73,220 81,456 8,053 5,053 Total Securities Available for Sale $348,233 $349,517 $394,042 $390,612 $446,738 $442,863 The following table summarizes the maturity and/or repricing schedule for investment securities and their weighted-average yield as of December 31, 2007: 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 U.S. Government Agency Securities Mortgage-Backed Securities(1) Municipal Bonds(2) Collateralized Mortgage Obligations(1) Corporate Bonds Other Securities $ 61,942 28,971 — 19,629 — 3,835 $114,377 4.26% 4.98% — 4.29% — 7.12% 4.54% $ 43,147 36,518 2,844 28,772 18,226 — $129,507 4.74% 4.84% 5.01% 4.31% 5.04% — 4.72% $ — 33,955 9,757 3,017 — — $46,729 — 4.91% 6.26% 4.38% — — 5.16% $ — — 59,844 — — — $59,844 — — 6.39% — — — 6.39% (1) Mortgage-backed securities and collateralized mortgage obli- gations have contractual maturities through 2037. 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. 37 Deposits Total deposits at December 31, 2007, 2006 and 2005 were $3,001.7 million, $2,944.7 million and $2,826.1 million, respec- tively, representing an increase of $57.0 million, or 1.9 percent, in 2007 and $118.6 million, or 4.2 percent, in 2006. At Decem- ber 31, 2007, 2006 and 2005, total time deposits outstanding were $1,782.5 million, $1,678.8 million and $1,439.8 million, respectively, representing 59.4 percent, 57.0 percent and 50.9 percent, respectively, of total deposits. This growth reflects the shift away from low-yielding accounts that normally occurs as interest rates rise and depositors take advantage of the greater interest rate differentials available in the market. Demand deposits and money market accounts decreased by $40.5 million, or 3.5 percent, in 2007 and $98.2 million, or 7.8 percent, in 2006. Core deposits (defined as demand, money market and savings deposits) decreased by $46.7 million, or 3.7 percent, to $1,219.7 million as of December 31, 2007 from $1,265.9 million as of December 31, 2006, as depositors shifted funds into higher yielding certificates of deposit. At December 31, 2007, noninterest-bearing demand deposits represented 22.7 per- cent of total deposits compared to 24.7 percent at December 31, 2006. Average deposits for the years ended December 31, 2007, 2006 and 2005 were $2,989.8 million, $2,881.4 million and $2,632.3 million, respectively. Average deposits grew by 3.8 per- cent in 2007 and 9.5 percent in 2006. We accept brokered deposits on a selective basis at prudent interest rates to augment deposit growth. There were $31.8 mil- lion and $3.3 million of brokered deposits as of December 31, 2007 and 2006, respectively. We also had $200.0 million of state time deposits over $100,000 with a weighted-average interest rate of 3.62 percent and 5.16 percent as of December 31, 2007 and 2006, respectively. The table below summarizes the distribution of average deposits and the average rates paid for the periods indicated: (Dollars in thousands) Demand, Noninterest-Bearing Savings Money Market Checking and NOW Accounts Time Deposits of $100,000 or More Other Time Deposits Total Deposits Year Ended December 31, 2007 2006 2005 Average Balance $ 702,329 97,173 452,825 1,430,603 306,876 $2,989,806 Average Rate — 2.06% 3.41% 5.28% 4.93% Average Balance $ 735,406 107,811 471,780 1,286,202 280,249 $2,881,448 Average Rate — 1.72% 3.08% 4.99% 4.45% Average Balance $ 751,509 138,167 539,678 959,904 242,996 $2,632,254 Average Rate — 1.54% 2.40% 3.33% 2.93% The table below summarizes the maturity of time deposits of $100,000 or more at December 31 for the years indicated: (Dollars in thousands) Three Months or Less Over Three Months Through Six Months Over Six Months Through Twelve Months Over Twelve Months December 31, 2007 2006 2005 $ 958,917 289,293 188,890 4,583 $ 689,309 414,687 274,402 4,960 $ 587,251 248,338 321,714 4,647 $1,441,683 $1,383,358 $1,161,950 38 FHLB Advances and Other Borrowings Interest Rate Risk Management FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight Federal funds. At December 31, 2007, advances from the FHLB were $432.7 million, an increase of $264.6 million, or 157.4 percent, from the December 31, 2006 balance of $168.1 million. During 2007 and 2006, advances from the FHLB were utilized to fund loans due to favorable rates. Junior Subordinated Debentures During the first half of 2004, we issued two junior subordinated notes bearing interest at the three-month London InterBank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the three- month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of which were used to finance the purchase of PUB, totaled $82.4 million at December 31, 2007 and 2006. Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful manage- ment 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 tech- niques used to quantify interest rate risk exposure. 39 The following table shows the status of our gap position as of December 31, 2007: (Dollars in thousands) Assets Cash Federal Funds Sold Securities: Fixed Rate Floating Rate Loans: Fixed Rate Floating Rate Non-Accrual Deferred Loan Fees and Allowance for Loan Losses Federal Reserve Bank and Federal Home Loan Bank Stock 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 $ — $ 16,500 16,150 5,133 35,867 1,693,610 — — — — — $ — — $ — — $105,898 — — $ 105,898 16,500 72,744 — 84,151 52,986 — — — 24,521 129,507 16,407 106,681 3,835 — — 325,082 25,375 619,109 148,448 — — — — 590,679 7,973 — — 33,479 7,467 — 1,329,806 — 1,903,017 54,252 (45,978) 33,479 236,315 54,252 (45,978) — 204,327 Total Assets $1,767,260 $ 234,402 $ 913,471 $750,114 $318,499 $3,983,746 Liabilities and Stockholders’ 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 Stockholders’ Equity $ 42,550 13,749 65,181 $ 137,147 33,099 125,737 $ 329,152 37,597 145,117 $171,433 8,654 109,771 $ — $ 680,282 93,099 — 445,806 — 1,141,570 54 364,500 82,406 — — 631,433 — 105,000 — — — 9,340 — 13,084 — — — — 1,782,458 115 54 — — 487,164 — 4,580 82,406 — — 40,932 — 40,932 371,545 — 371,545 Total Liabilities and Stockholders’ Equity $1,710,010 $1,032,416 $ 534,290 $294,553 $412,477 $3,983,746 Repricing Gap Cumulative Repricing Gap Cumulative Repricing Gap as a Percentage of Total Assets Cumulative Repricing Gap as a Percentage of Interest- $ $ 57,250 57,250 $ (798,014) $ (740,764) $ 379,181 $(361,583) $455,561 $ 93,978 1.44% (18.59)% (9.08)% 2.36% $ (93,978) $ $ — $ — Earning Assets 1.58% (20.39)% (9.95)% 2.59% — — — — — The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same 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, 2007, the cumulative repricing gap as a percentage of interest-earning assets in the less than three month period was 1.58 percent. This decrease from the previous year’s figure of 29.26 percent was caused primarily by increases of $329.5 million and $363.6 million in fixed rate certificates of deposit and FHLB advances and other borrowings, respectively, 40 with maturities of less than three months. The cumulative repricing percentage in the less than twelve month period also moved lower, reaching (20.39) percent. This was a decrease from the previous year’s figure of (2.56) percent. The decrease was caused primarily by increases of $105.2 million and $423.6 million in fixed rate certificates of deposit and FHLB advances and other bor- rowings, respectively, with maturities of less than twelve months. 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) 2007 2006 2007 2006 Cumulative Repricing Gap $57,250 $970,441 $(740,764) $(85,051) Percentage of Total Assets Percentage of Interest- Earning Assets 1.44% 26.05% (18.59)% (2.28)% 1.58% 29.26% (20.39)% (2.56)% The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines. To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjust- ment in interest rates reflected below. Rate Shock Table Percentage Changes Change in Amount Change in Interest Rate Net Interest Income Economic Value of Equity 200% 100% (100)% (200)% (Dollars in Thousands) 3.55% 1.78% (1.86)% (3.84)% (18.92)% (9.80)% 10.48% 21.55% Net Interest Income $ 5,169 $ 2,586 $(2,707) $(5,588) Economic Value of Equity $(101,438) $ (52,565) $ 56,200 $ 115,576 The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replace- ment 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 prof- itability. The Bank’s liquidity consists primarily of available cash positions, Federal funds sold and short-term investments catego- rized as available for sale securities, which can be disposed of without significant capital losses in the ordinary course of business, funds lines, plus borrowing capacities, which include Federal repurchase agreements and FHLB advances. Therefore, mainte- nance of high quality loans and securities that can be used for collateral in repurchase agreements or other secured borrowings is important feature of our liquidity management. 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 appropriate 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 deposits can tighten the liquidity position. Several ratios are reviewed on a daily, monthly and quarterly basis to manage the liquidity position and to preempt any liquidity crisis. 41 Specific statistics, which include the loans-to-assets ratio, off-bal- ance sheet items and dependence on non-core deposits, foreign deposits, lines of credit and liquid assets, are reviewed regularly for liquidity management purposes. Liquidity Ratios Core Deposits/Total Assets Short-Term Non-Core Funding/Total Assets Net Loans/Total Assets Investments/Deposits Loans and Investments/Deposits Off-Balance Sheet Items/Total Assets December 31, 2007 2006 2005 26.9% 30.1% 35.3% 54.8% 46.0% 41.8% 79.8% 76.6% 72.4% 13.6% 15.9% 18.9% 122.0% 112.2% 106.3% 15.8% 19.0% 18.5% The net loans to total assets ratio increased to 79.8 percent as of December 31, 2007, compared to 76.6 percent at December 31, 2006. The ratio of loans and investments to deposits increased to 122.0 percent as the Bank made use of short-term borrowings to fund a portion of loan portfolio growth. Off-balance sheet items as a percentage of total assets decreased at December 31, 2006 to 15.8 percent, compared to 19.0 percent at December 31, 2006, and the total amount decreased to $643.6 million at December 31, 2007 from $708.8 million at December 31, 2006. The decrease was primarily due to a $54.0 million decrease 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 54.8 percent at December 31, 2007, compared to 46.0 percent at December 31, 2006. Foreign deposits are U.S.-based deposits made by foreign cus- tomers. 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, 2007, 2006 and 2005, foreign deposits were $331.2 million, $325.4 million and $294.3 million, respectively. As of December 31, 2007, we maintained a total of $186.0 million 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 borrowings from the FHLB. We are eligible to borrow up of 25 percent of our total assets from the FHLB. As of December 31, 2007, 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 Arrangements For a discussion of off-balance sheet arrangements, see “Item 1. Business — Off-Balance Sheet Commitments.” Contractual Obligations Our contractual obligations as of December 31, 2007 are as follows: Contractual Obligations Time Deposits Commitments to Extend Credit FHLB Advances and Other Borrowings Junior Subordinated Debentures Standby Letters of Credit Operating Lease Obligations More Than One Year and Less Than Three Years More Than Three Years and Less Than Five Years $ 4,313 — 13,084 — 4,328 5,509 (In thousands) $5,027 — — — — 2,684 More Than Five Years $ 115 — 4,580 82,406 100 5,179 Less Than One Year $1,773,057 524,349 469,500 — 43,643 2,906 Total $1,782,512 524,349 487,164 82,406 48,071 16,278 Total Contractual Obligations $2,813,455 $27,234 $7,711 $92,380 $2,940,780 Recently Issued Accounting Standards SFAS No. 160, “Non-Controlling Interest in Consolidated Financial Statements — an Amendment of ARB No. 51” — In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, which requires that a non-controlling interest in a subsidiary (i.e., minority interest) be reported in the equity section 42 of the consolidated balance sheet instead of being reported as a liability or in the mezzanine section between debt and equity. It also requires that the consolidated statement of operations include net income attributable to both the parent and non-controlling interest of a consolidated subsidiary. A disclosure must be made on the face of the consolidated statement of operations of the net income attributable to the parent and to the non-controlling interest. In addition, regardless of whether the parent purchases additional ownership interest, sells a portion of its ownership interest in a subsidiary or the subsidiary participates in a transaction that changes the parent’s ownership interest, as long as the parent retains controlling interest, the transaction is considered an equity transaction. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. We are currently assessing the impact that the adoption of SFAS No. 160 will have on our financial position and results of operations. SFAS No. 141(R), “Business Combinations” — In December 2007, the FASB issued SFAS No. 141(R), which revises SFAS No. 141 and changes multiple aspects of the accounting for business combinations. Under the guidance in SFAS No. 141(R), the acquisition method must be used, which requires the acquirer to recognize most identifiable assets acquired, liabilities assumed and non-controlling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the non- controlling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earn- ings, while contingent consideration classified as equity is not to be remeasured. Costs such as transaction costs are to be excluded from acquisition accounting, generally leading to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recog- nized as post-acquisition costs. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently assessing the impact that the adoption of SFAS No. 141(R) will have on our financial position and results of operations. SAB No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” — On November 5, 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109. Previously, SAB No. 105, “Application of Accounting Principles to Loan Commitments,” stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB No. 109 supersedes SAB No. 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB No. 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB No. 109 retains that view. SAB No. 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB No. 109 did not have a material impact on our financial condition or results of operations. EITF Issue No. 06-10, “Accounting for Collateral Assignment Split- Dollar Life Insurance Agreements” — In March 2007, the FASB ratified EITF Issue No. 06-10, which provides guidance for deter- mining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset based on the the collateral assignment agreement. EITF Issue terms of No. 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 06-10 did not have a material impact on our financial condition or results of operations. SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” — In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year after November 15, 2007. We are required to and plan to adopt the provisions of SFAS No. 159 beginning in the first quarter of 2008. The adoption of SFAS No. 159 did not have a material impact on our financial condition or results of operations. SFAS No. 157, “Fair Value Measurements” — In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. The adoption of SFAS No. 157 did not have a material impact on our financial condition or results of operations. issued for statements EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life the FASB’s Insurance Arrangements” — In September 2006, 43 if that Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-4, which requires the recognition of a liability related to the postre- tirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” or Accounting Principles Board Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented; or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The disclosures are required in fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 06-4 did not have a material impact on our financial condition or results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures regarding market risks in the Bank’s portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “— Liquidity 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 50 through 84. 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, 2007, Hanmi Financial carried out an eval- uation, under the supervision and with the participation of Hanmi Financial’s management, including Hanmi Financial’s Chief Execu- tive Officer and Chief Financial Officer, of the effectiveness of the 44 design and operation of Hanmi Financial’s disclosure controls and procedures and internal controls over financial reporting pursuant to Securities and Exchange Commission (“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 pro- vide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for exter- nal purposes in accordance with generally accepted accounting principles. During the quarter ended December 31, 2007, there have been no changes in Hanmi Financial’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Hanmi Financial’s internal control over financial reporting. Disclosure controls and procedures are defined in SEC rules as controls and other procedures designed to ensure that informa- tion 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 Financial’s disclosure controls and procedures were designed to ensure that material information related to Hanmi Financial, including subsidiaries, is including the Chief Executive made known to management, Officer and Chief Financial Officer, in a timely manner. KPMG LLP, the independent registered public accounting firm that audited and reported on the consolidated financial statements of Hanmi Financial and subsidiaries, has issued a report on Hanmi Financial’s internal control over financial reporting as of Decem- ber 31, 2007. The report expresses an unqualified opinion on the effectiveness of Hanmi Financial’s internal control over financial reporting as of December 31, 2007. Management’s Report on Internal Control Over Finan- cial Reporting Management of Hanmi Financial Corporation (“Hanmi Financial”) is responsible for establishing and maintaining adequate internal control over financial reporting pursuant to the rules and regula- tions of the Securities and Exchange Commission. Hanmi Finan- cial’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted Based on this assessment, management determined that, as of December 31, 2007, Hanmi Financial maintained effective internal control over financial reporting. accounting principles. includes those written policies and procedures that: Internal control over financial reporting (cid:129) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (cid:129) provide reasonable assurance that transactions are recorded as financial statements in necessary to permit preparation of 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 autho- rizations 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 compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Hanmi Financial’s inter- nal control over financial reporting as of December 31, 2007. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control-Inte- grated Framework issued by the Committee of Sponsoring Orga- the Treadway Commission. Management’s nizations of assessment included an evaluation of the design of Hanmi Finan- cial’s internal control over financial reporting and testing of the its internal control over financial operational effectiveness of its assessment reporting. Management reviewed the results of with the Audit Committee of our Board of Directors. 45 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Hanmi Financial Corporation: We have audited Hanmi Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Frame- work issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Hanmi Financial Corporation’s management is responsible for maintaining effective internal con- trol over financial reporting and for its assessment of the effec- tiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audits included obtaining an understanding of inter- nal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and oper- ating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted account- ing principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are financial recorded as necessary to permit preparation of 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 man- agement and directors of the company; and (3) provide reason- able assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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 compliance with the policies or procedures may deteriorate. In our opinion, Hanmi Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Spon- soring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hanmi Financial Corporation as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Los Angeles, California February 29, 2008 46 Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance Except as hereinafter noted, the information concerning directors 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 Meet- ing of Stockholders, which will be filed with the Commission within 120 days after the close of Hanmi Financial’s fiscal year. Audit Committee Financial Expert Mark K. Mason was appointed to the Audit Committee of the Board of Directors as of May 23, 2007. The Board has determined that Mr. Mason meets the independence standards 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 Judith Kim, Associate General Counsel, 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 incorporated by reference from the section entitled “Executive Compensation” of Hanmi Financial’s Definitive Proxy Statement for the Annual Meet- ing 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 Stock- holders and Management” in Hanmi Financial’s Definitive Proxy Statement for the Annual Meeting of Stockholders and is incor- porated herein by reference. Item 13. Certain Relationships and Related Transac- tions, and Director Independence Information concerning certain relationships and related transac- tions and director independence is incorporated by reference from the section entitled “Certain Relationships and Related Trans- actions” 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 accountants’ fees and services is incorporated by reference from the section entitled “Independent Accountants” 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. 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 omit- ted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. (3) The Exhibits required to be filed with this Report are listed in the Exhibit Index included herein at page 88. 47 HANMI FINANCIAL CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2007 and 2006 Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 Notes to Consolidated Financial Statements Page 49 50 51 52 53 54 48 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Hanmi Financial Corporation: We have audited the accompanying consolidated balance sheets of Hanmi Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments are free of material misstatement. An audit includes exam- ining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanmi Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hanmi Financial Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee the Treadway Commission of Sponsoring Organizations of (COSO), and our report dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP Los Angeles, California February 29, 2008 49 Hanmi Financial Corporation and Subsidiaries Consolidated Balance Sheets ASSETS (Dollars in thousands) Cash and Due From Banks Federal Funds Sold Cash and Cash Equivalents Term Federal Funds Sold Securities Held to Maturity, at Amortized Cost (Fair Value: 2007 — $941; 2006 — $969) Securities Available for Sale, at Fair Value Loans Receivable, Net of Allowance for Loan Losses of $43,611 and $27,557 at December 31, 2007 and 2006, Respectively Loans Held for Sale, at the Lower of Cost or Fair Value Customers’ Liability on Acceptances Premises and Equipment, Net Accrued Interest Receivable Other Real Estate Owned Deferred Income Taxes Servicing Assets Goodwill Other Intangible Assets Federal Reserve Bank Stock, at Cost Federal Home Loan Bank Stock, at Cost Bank-Owned Life Insurance Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ 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 STOCKHOLDERS’ EQUITY: Common Stock, $.001 Par Value; Authorized 200,000,000 Shares; Issued 50,493,441 Shares (45,860,941 Shares Outstanding) and 50,239,613 Shares (49,076,613 Shares Outstanding) at December 31, 2007 and 2006, Respectively Additional Paid-In Capital Unearned Compensation Accumulated Other Comprehensive Income (Loss) — Unrealized Gain (Loss) on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes of $527 and ($1,450) at December 31, 2007 and 2006, Respectively Retained Earnings Less Treasury Stock, at Cost; 4,632,500 Shares and 1,163,000 Shares at December 31, 2007 and 2006, Respectively Total Stockholders’ Equity December 31, 2007 2006 $ 105,898 16,500 122,398 — 940 349,517 3,234,762 6,335 5,387 20,800 17,500 287 18,470 4,336 107,100 6,908 11,733 21,746 24,525 31,002 $ 97,501 41,000 138,501 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 $3,983,746 $3,725,243 $ 680,282 $ 728,347 93,099 445,806 1,441,683 340,829 3,001,699 21,828 5,387 487,164 82,406 13,717 3,612,201 50 348,073 (245) 275 93,404 441,557 (70,012) 371,545 99,255 438,267 1,383,358 295,488 2,944,715 22,582 8,403 169,037 82,406 10,983 3,238,126 50 344,810 — (3,200) 165,498 507,158 (20,041) 487,117 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $3,983,746 $3,725,243 See Accompanying Notes to Consolidated Financial Statements. 50 Hanmi Financial Corporation and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except per share data) 2007 2006 2005 Year Ended December 31, INTEREST AND DIVIDEND INCOME: Interest and Fees on Loans Taxable Interest on Investments Tax-Exempt Interest on Investments Dividends on FHLB and FRB Stock Interest on Federal Funds Sold Interest on Term Federal Funds Sold Total Interest and Dividend 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 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES NON-INTEREST INCOME: Service Charges on Deposit Accounts Insurance Commissions 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 Other Real Estate Owned Gain on Sales of Securities Available for Sale Other-Than-Temporary Impairment Loss on Securities Total Non-Interest Income NON-INTEREST EXPENSES: Salaries and Employee Benefits Occupancy and Equipment Data Processing Advertising and Promotion Supplies and Communications Professional Fees Amortization of Other Intangible Assets Decrease in Fair Value of Embedded Options Other Operating Expenses Merger-Related Expenses Impairment Loss on Goodwill Total Non-Interest Expenses INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES Provision for Income Taxes NET INCOME (LOSS) EARNINGS (LOSS) PER SHARE: Basic Diluted WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic Diluted DIVIDENDS DECLARED PER SHARE $ $ $ $ 261,992 13,399 3,055 1,413 1,032 5 280,896 108,100 13,949 6,644 128,693 152,203 38,323 113,880 18,061 4,954 4,493 2,049 2,527 933 683 1,702 5,452 226 — (1,074) 40,006 47,036 10,494 6,390 3,630 2,592 2,468 2,324 233 11,871 — 102,891 189,929 (36,043) 24,477 (60,520) (1.27) (1.27) 47,787,213 47,787,213 0.24 $ $ 239,075 15,2690 3,087 1,354 1,402 2 260,189 93,036 6,977 6,416 106,429 153,760 7,173 146,587 17,134 770 4,567 2,056 2,359 879 1,074 1,157 6,917 48 2 — 36,963 40,512 9,643 5,857 2,997 2,391 1,910 2,379 582 11,042 — — 77,313 106,237 40,588 65,649 1.34 1.33 $ $ $ 48,850,221 49,435,128 0.24 $ $ $ $ $ 180,845 14,278 3,122 1,107 1,589 — 200,941 54,192 3,017 4,902 62,111 138,830 5,395 133,435 15,782 651 4,269 2,122 2,496 845 1,105 1,042 3,021 — 117 — 31,450 36,839 9,413 4,844 2,913 2,556 2,201 2,785 748 8,411 (509) — 70,201 94,684 36,455 58,229 1.18 1.17 49,174,885 49,942,356 0.20 $ See Accompanying Notes to Consolidated Financial Statements. 51 6 1 5 2 , , 0 1 9 9 9 3 $ — 5 6 6 9 2 7 ) 3 1 8 9 ( , ) 1 4 0 0 2 ( , 9 2 2 8 5 , ) 8 1 4 5 ( , 1 1 8 2 5 , , 7 7 7 6 2 4 ) 6 5 6 ( 4 3 2 3 5 5 3 , 1 2 5 1 , 1 6 6 ) 5 0 8 1 1 ( , 9 4 6 5 6 , 3 8 1 1 , 2 3 8 6 6 , , 7 1 1 7 8 4 8 9 1 2 , 4 6 1 1 , 1 9 8 1 , — 7 1 3 ) 4 7 5 1 1 ( , ) 1 7 9 9 4 ( , ) 2 5 5 2 ( , ) 0 2 5 0 6 ( , 5 7 4 3 , ) 5 4 0 7 5 ( , — — — — — — — — ) 1 4 0 0 2 ( , — — — — — ) 3 1 8 9 ( , 9 2 2 8 5 , — — — — — — — — ) 8 1 4 5 ( , ) 1 4 0 0 2 ( , 0 1 3 2 1 1 , ) 3 8 3 4 ( , — — — — — — — — — — — — ) 6 5 6 ( ) 5 0 8 1 1 ( , 9 4 6 5 6 , — — — — — — — — 3 8 1 1 , ) 1 4 0 0 2 ( , 8 9 4 5 6 1 , ) 0 0 2 3 ( , — — — — — — — — — ) 1 7 9 9 4 ( , — — — — — — — ) 4 7 5 1 1 ( , ) 0 2 5 0 6 ( , — — — — — — — — — — 5 7 4 3 , — — — — — — — 5 6 6 ) 5 1 8 1 ( , ) 0 5 1 1 ( , — 0 5 1 1 , — — — — — — — — — 1 1 — — — — — — ) 6 5 2 ( 5 1 5 2 , 5 1 8 1 , — 9 2 7 — — — — — ) 6 1 9 ( 3 5 5 3 , 1 2 5 1 , — 1 6 6 1 9 9 9 3 3 , — — 8 9 1 2 , 4 6 1 1 , 0 8 8 1 , 6 5 2 7 1 3 — — ) 2 5 5 2 ( , 0 1 8 4 4 3 , — — 1 — — — — — — — 0 5 — — — — — — — — 0 5 — — — — — — — — — — — — 4 9 0 1 9 3 , , 0 0 0 0 0 1 , ) 0 0 0 3 6 1 1 ( , — — — — — , ) 0 0 0 3 6 1 1 ( , — — — — — — , 8 9 7 8 5 6 8 4 , , ) 0 0 0 3 6 1 1 ( , — — — — — — 4 9 0 1 9 3 , , 0 0 0 0 0 1 , 4 0 7 0 3 3 9 4 , , 8 9 7 1 2 8 9 4 , — — — — — — — 5 1 8 7 1 4 , — — — — — — — — — — — — — — — 5 1 8 7 1 4 , — — 1 8 1 2 0 1 , 7 4 6 2 3 1 , — 0 0 0 9 1 , — — — — — — , 3 1 6 6 7 0 9 4 , , ) 0 0 0 3 6 1 1 ( , , ) 0 0 5 9 6 4 3 ( , , ) 0 0 5 9 6 4 3 ( , — — — — — — , 3 1 6 9 3 2 0 5 , — — — — — — 1 8 1 2 0 1 , 7 4 6 2 3 1 , — 0 0 0 9 1 , , 1 4 4 3 9 4 0 5 , . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N g n i y n a p m o c c A e e S , 5 4 5 1 7 3 $ , ) 2 1 0 0 7 ( $ 4 0 4 3 9 , $ 5 7 2 $ ) 5 4 2 ( $ , 3 7 0 8 4 3 $ 0 5 $ , 1 4 9 0 6 8 5 4 , , ) 0 0 5 2 3 6 4 ( , $ 4 9 8 3 6 , $ 5 3 0 1 , $ $ , 2 3 9 4 3 3 $ 9 4 $ , 4 0 7 0 3 3 9 4 , l a t o T y t i u q E ’ s r e d l o h k c o t S , k c o t S t s o C t a y r u s a e r T d e n i a t e R s g n i n r a E ) s s o L ( e m o c n I d e n r a e n U n o i t a s n e p m o C n i - d i a P l a t i p a C k c o t S g n i d n a t s t u O s e r a h S n o m m o C d n a d e u s s I y r u s a e r T d n a d e u s s I g n i d n a t s t u O r e h t O d e t a l u m u c c A e v i s n e h e r p m o C y t i u q E ’ s r e d l o h k c o t S l a n o i t i d d A t e N s e r a h S s s o r G s e r a h S s e r a h S f o r e b m u N — k c o t S n o m m o C e m o c n I e v i s n e h e r p m o C d n a y t i u q E l ’ s r e d o h k c o t S n i s e g n a h C f o s t n e m e t a t S s e i r a i d i s b u S d n a n o i t a r o p r o C l a i c n a n i F i m n a H d e t a d i l o s n o C s n o i t p O k c o t S f o e s i c r e x E m o r f t i f e n e B x a T n o i t a s n e p m o C d e n r a e n U f o n o i t a z i t r o m A e s a h c r u p e R k c o t S 5 0 0 2 , 1 Y R A U N A J T A E C N A L A B s n o i t p O k c o t S f o s e s i c r e x E d r a w A k c o t S d e t c i r t s e R ) s d n a s u o h t n i s r a l l o D ( : e m o c n I e v i s n e h e r p m o C e m o c n I t e N i i s d n e d v D h s a C l , e a S r o f l e b a l i a v A s e i t i r u c e S n o i n a G d e z i l a e r n U n i e g n a h C x a T f o t e N , s p a w S e t a R t s e r e t n I d n a s p i r t S l y n O - t s e r e t n I e m o c n I e v i s n e h e r p m o C l a t o T 5 0 0 2 , 1 3 R E B M E C E D T A E C N A L A B n o i t a s n e p m o C d e s a B - e r a h S — s d n u F t i d e r C x a T — t n e m t s u d A j t n e m t s u d A j l e v i t a u m u C l e v i t a u m u C s t n a r r a W k c o t S d n a s n o i t p O k c o t S f o s e s i c r e x E s n o i t p O k c o t S f o e s i c r e x E m o r f t i f e n e B x a T e s n e p x E n o i t a s n e p m o C d e s a B - e r a h S 52 : e m o c n I e v i s n e h e r p m o C e m o c n I t e N i i s d n e d v D h s a C l , e a S r o f l e b a l i a v A s e i t i r u c e S n o i n a G d e z i l a e r n U n i e g n a h C x a T f o t e N , s p a w S e t a R t s e r e t n I d n a s p i r t S l y n O - t s e r e t n I s t n a r r a W k c o t S d n a s n o i t p O k c o t S f o s e s i c r e x E e s n e p x E n o i t a s n e p m o C d e s a B - e r a h S 6 0 0 2 , 1 3 R E B M E C E D T A E C N A L A B s n o i t i s i u q c A s s e n i s u B r o f d e u s s I s e r a h S s n o i t p O k c o t S f o e s i c r e x E m o r f t i f e n e B x a T s d r a w A k c o t S d e t c i r t s e R e m o c n I e v i s n e h e r p m o C l a t o T k c o t S n o m m o C s t n a r r a W k c o t S f o f o e s a h c r u p e R e s a h c r u p e R : s s o L e v i s n e h e r p m o C s s o L t e N i i s d n e d v D h s a C l , e a S r o f l e b a l i a v A s e i t i r u c e S n o i n a G d e z i l a e r n U n i e g n a h C x a T f o t e N , s p a w S e t a R t s e r e t n I d n a s p i r t S l y n O - t s e r e t n I 7 0 0 2 , 1 3 R E B M E C E D T A E C N A L A B s s o L e v i s n e h e r p m o C l a t o T Hanmi Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: Year Ended December 31, 2007 2006 2005 $ (60,520) $ 65,649 $ 58,229 Depreciation and Amortization of Premises and Equipment Amortization of Premiums and Accretion of Discounts on Investments, Net Amortization of Other Intangible Assets 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 Other-Than-Temporary Impairment Loss on Securities Increase in Fair Value of Derivatives Decrease in Fair Value of Embedded Options Gain on Sales of Loans Gain on Sales of Other Real Estate Owned Loss on Sales of Premises and Equipment Impairment Loss on Goodwill Excess Tax Benefit from Exercises of Stock Options Deferred Tax Benefit Origination of Loans Held for Sale Proceeds from Sales of Loans Held for Sale Increase in Accrued Interest Receivable (Increase) Decrease in Servicing Assets, Net Increase in Cash Surrender Value of Bank-Owned Life Insurance Increase in Other Assets Increase (Decrease) in Accrued Interest Payable Increase (Decrease) in Other Liabilities Other, Net Net Cash Provided By Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Redemption of Federal Reserve Bank Stock Proceeds from Matured Term Federal Funds Sold Proceeds from Matured or Called Securities Available for Sale Proceeds from Sales of Securities Available for Sale Proceeds from Sales of Other Real Estate Owned 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 Premises and Equipment Business Acquisitions, Net of Cash Acquired Net Cash Used In Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Deposits Proceeds from Exercises of Stock Options and Stock Warrants Excess Tax Benefit from Exercises of Stock Options Stock Issued for Business Acquisitions Cash Paid to Acquire Treasury Stock Cash Paid to Repurchase Stock Warrants Cash Dividends Paid 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 at Beginning of Year 2,953 218 2,324 1,891 38,323 (708) — 1,074 (683) 233 (5,452) (226) 22 102,891 (193) (14,618) (108,639) 131,626 (581) 243 (933) (4,040) (754) 3,034 6,165 93,650 — 5,000 89,958 — 1,306 (459,930) — (7,849) (44,980) (3,682) (4,121) (424,298) 56,984 1,164 193 2,198 (49,971) (2,552) (11,574) — (443) 318,546 314,545 (16,103) 138,501 2,924 264 2,379 1,521 7,173 (641) (2) — (1,074) 582 (6,917) (48) 96 — (598) (2,942) (154,608) 138,720 (2,799) (669) (879) (11,424) 10,671 (1,298) 2,236 48,316 617 — 56,729 5,005 593 (352,678) (5,000) (311) (9,663) (2,237) — (306,945) 118,601 3,553 598 — — — (11,805) 130,000 (5,420) (1,874) 233,653 (24,976) 163,477 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 68,944 — — 89,885 11,360 — (242,088) — (2,264) (132,700) (3,831) — (279,638) 297,307 2,516 — — (20,041) — (9,813) 7,411 (30,246) (127) 247,007 36,313 127,164 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 122,398 $ 138,501 $ 163,477 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 $ 129,447 $ 38,232 $ $ 1,367 3,030 $ 117,100 $ 45,869 $ $ 541 2,941 $ 41,266 $ 37,650 $ $ — 2,433 See Accompanying Notes to Consolidated Financial Statements. 53 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Note 1 — Summary of Significant Accounting Policies The accounting and reporting policies of Hanmi Financial Corporation and subsidiaries conform to U.S. generally accepted accounting principles. 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,” “us” or “our”) and our wholly owned subsidiaries, Hanmi Bank (the “Bank”), Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All World”). Intercompany transactions and balances are eliminated in consolidation. 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 Korean-American community as well as other communities in the multi-ethnic populations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San Francisco Bay area, and the Silicon Valley area in Santa Clara County. 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. As of December 31, 2007, the Bank maintained a branch network of 24 full-service branch offices in California and eight loan production offices in California, Colorado, Georgia, Illinois, Texas, Virginia and Washington. Our other subsidiaries, Chun-Ha and All World, were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance brokerages that offer a complete line of insurance products, including life, commercial, automobile, health, and property and casualty. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, overnight Federal funds sold, all of which have original or purchased maturities of less than 90 days. Securities Securities are classified into three categories and accounted for as follows: 1. Securities that we have the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at amortized cost; 2. Securities that are bought and held principally for the purpose of selling them in the near future are classified as “trading securities” and reported at fair value. Unrealized gains and losses are recognized in earnings; and 3. Securities not classified as held-to-maturity or trading securities are classified as “available for sale” and reported at fair value. Unrealized gains and losses are reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss), net of income taxes. Accreted discounts and amortized premiums on investment securities are included in interest income using the effective interest method 54 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) 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 carried at cost and is included in other assets on the Consolidated Balance Sheets. As of December 31, 2007 and 2006, its carrying value was $511,000. We monitor the investment for impairment and make appropriate reductions in carrying value when necessary. 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. Loans Held for Sale Loans originated and intended for sale in the secondary market, primarily Small Business Administration (“SBA”) loans, 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 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 to interest income using the interest method over the contractual lives of the loans, adjusted for prepayments. Accretion of discounts and deferred loan fees is discontinued when loans are placed on non-accrual status. Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual 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. 55 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) 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 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 renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO”). Loans are generally placed on non-accrual status when they become 90 days past due unless management believes the loan is adequately collateralized and in the process of collection. 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. 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. 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. The 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 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. 56 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) Other Real Estate Owned Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation 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 Statement of Financial Accounting Standards (“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. 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. 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 accumulated other comprehensive income (loss). 57 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) Goodwill We have goodwill, which represents the excess of purchase price over the fair value of net assets acquired, because of various business acquisitions. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill must 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 (at any time during the year, but at the same time each year), or more frequently if events or circumstances change, such as adverse changes in the business climate, that would more likely than not reduce the reporting unit’s fair value below its carrying amount. The 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. The fair value of the reporting unit was derived based on a weighted distribution of values derived from three different approaches: market approach, market capitalization approach, and income approach. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed. Other Intangible Assets Other intangible assets consists of a core deposit intangible (“CDI”) and acquired intangible assets arising from acquisitions, including non- compete agreements, trade names, carrier relationships, and client/insured relationships. We amortize the CDI balance using an accelerated method over eight years. The acquired intangible assets were initially measured at fair value and then are amortized on the straight-line method over their estimated useful lives. As required by SFAS No. 142, we evaluated the useful lives assigned to other intangible assets and determined that no change was necessary and amortization expense was not adjusted for the year ended December 31, 2007. As required by SFAS No. 142, other intangible assets are assessed for impairment or recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The other intangible assets recoverability analysis is consistent with our policy for assessing impairment of long- lived assets. Federal Reserve Bank Stock The Bank is a member of the Federal Reserve Bank of San Francisco (“FRB”) and is required to maintain stock in the FRB based on a specified ratio relative to the Bank’s capital. FRB stock is carried at cost and may be sold back to the FRB at its carrying value. FRB stock is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends received are reported as dividend income. Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and is required to own common stock in the FHLB based upon the Bank’s balance of residential mortgage loans and outstanding FHLB advances. FHLB stock is carried at cost and may be 58 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) sold back to the FHLB at its carrying value. FHLB stock is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends received are reported as dividend income. Derivative Instruments We account for derivatives in accordance with the provisions of 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 (loss) 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 (loss) will be reclassified into income as earnings are impacted by the variability in the cash flows of the hedged item. If the hedging instrument is terminated early, the derivative is removed from the balance sheet. Accounting for the adjustments to the hedged asset or liability or adjustments to accumulated other comprehensive income (loss) 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. Bank-Owned Life Insurance We have purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due, if any, that are probable at settlement. 59 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) Affordable Housing Investments The Bank has invested in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout California. The partnership interests are accounted for utilizing the equity method of accounting. The costs of the investments are being amortized on a straight-line method over the life of related tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture with interest. Such investments are recorded in other assets in the accompanying Consolidated Balance Sheets. Junior Subordinated Debentures We have established three statutory business trusts that are wholly-owned subsidiaries of Hanmi Financial: Hanmi Capital Trust I, Hanmi Capital Trust II and Hanmi Capital Trust III (collectively, “the Trusts”). 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 losses from the variable interest entity’s activities, or is entitled to receive a majority of the entity’s expected residual returns, or both. The Trusts are not consolidated and junior subordinated debt represents liabilities of 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. As of December 31, 2007 and 2006, no valuation allowance was required. 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 (“APB”) 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. Prior to the adoption of SFAS No. 123(R), we applied APB No. 25 to account for share-based awards. The reported net income and earnings per share for the year ended December 31, 2005 has been presented below to reflect the impact had we been required to 60 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) recognize compensation cost based on the fair value at the grant date for stock options, as required under SFAS No. 123(R). The pro forma amounts are as follows: (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) 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 Net Income — Pro Forma Earnings Per Share — As Reported: Basic Diluted Earnings Per Share — Pro Forma: Basic Diluted Year Ended December 31, 2005 $58,229 409 (1,214) $57,424 $ 1.18 $ 1.17 $ 1.17 $ 1.15 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 stockholders’ 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 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 stockholders’ equity on the Consolidated Balance Sheets. 61 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 1 — Summary of Significant Accounting Policies (Continued) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications were made to the prior year’s presentation to conform to the current year’s presentation. Note 2 — Securities The following is a summary of securities held to maturity: (In thousands) December 31, 2007: Municipal Bonds Mortgage-Backed Securities December 31, 2006: Municipal Bonds Mortgage-Backed Securities Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value $694 246 $940 $693 274 $967 $— 1 $ 1 $— 2 $ 2 $— — $— $— — $— $694 247 $941 $693 276 $969 62 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 2 — Securities (Continued) The following is a summary of securities available for sale: (In thousands) December 31, 2007: U.S. Government Agency Securities Mortgage-Backed Securities Municipal Bonds Collateralized Mortgage Obligations Corporate Bonds Other December 31, 2006: U.S. Government Agency Securities Mortgage-Backed Securities Municipal Bonds Collateralized Mortgage Obligations Corporate Bonds Other Amortized Cost $104,893 99,332 69,907 51,881 18,295 3,925 $348,233 $119,768 123,614 69,966 67,605 8,090 4,999 $394,042 Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value $ 277 533 1,867 128 43 — $2,848 $ — 179 1,795 — — 172 $2,146 $ 81 667 23 591 112 90 $1,564 $1,524 2,185 51 1,492 203 121 $5,576 $105,089 99,198 71,751 51,418 18,226 3,835 $349,517 $118,244 121,608 71,710 66,113 7,887 5,050 $390,612 The amortized cost and estimated fair value of investment securities at December 31, 2007, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2037, 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 $ 65,898 64,033 8,877 58,212 99,332 51,881 $ 65,777 64,217 9,063 59,844 99,198 51,418 $348,233 $349,517 $ — — 694 — 246 — $940 $ — — 694 — 247 — $941 We periodically evaluate our investments for other-than-temporary impairment. We have investments in Community Reinvestment Act (“CRA”) preferred securities with an aggregate par value of $2.0 million as of December 31, 2007 and 2006. During the fourth quarter of 2007, based on an evaluation of the length of time and extent to which the estimated fair value of the CRA preferred securities had been 63 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 2 — Securities (Continued) less than their carrying value, and the financial condition and near-term prospects of the issuers, we recorded an other-than-temporary impairment charge of $1.1 million to write down the value of the CRA preferred securities to their estimated fair value. Gross unrealized losses on investment securities available for sale and the estimated 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, 2007 and 2006: (In thousands) Available for Sale — December 31, 2007: U.S. Government Agency Securities Mortgage-Backed Securities Municipal Bonds Collateralized Mortgage Obligations Corporate Bonds Other Available for Sale — December 31, 2006: U.S. Government Agency Securities Mortgage-Backed Securities Municipal Bonds Collateralized Mortgage Obligations Corporate Bonds Other Holding Period Less than 12 Months 12 Months or More Total Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value $ — 31 — — — — $ 31 $ 21 121 3 98 — — $243 $ — 5,319 — — — — $ 5,319 $ 9,979 19,442 961 7,196 — — $37,578 $ 81 636 23 591 112 90 $ 46,895 42,143 2,910 40,167 7,834 2,910 $ 81 667 23 591 112 90 $ 46,895 47,462 2,910 40,167 7,834 2,910 $1,533 $142,859 $1,564 $148,178 $1,503 2,064 48 1,394 203 121 $5,333 $108,265 87,966 4,290 58,917 7,887 2,879 $270,204 $1,524 2,185 51 1,492 203 121 $5,576 $118,244 107,408 5,251 66,113 7,887 2,879 $307,782 The impairment losses described previously are not included in the table above as the impairment loss was recorded. All other individual securities that have been in a continuous unrealized loss position for 12 months or longer at December 31, 2007 and 2006 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status at December 31, 2007 and 2006. 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, 2007 and 2006 are not other- than-temporarily impaired, and therefore, no additional impairment charges as of December 31, 2007 and 2006 are warranted. Securities with carrying values of $240.4 million and $282.5 million as of December 31, 2007 and 2006, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 64 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 2 — Securities (Continued) There were $0, $2,000 and $117,000 in net realized gains on sales of securities available for sale during the years ended December 31, 2007, 2006 and 2005, respectively. In 2007, $2.7 million ($2.0 million, net of tax) of unrealized gains arose during the year and were included in comprehensive income. 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. Note 3 — Loans Receivable Loans receivable consisted of the following: (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 International Loans SBA Loans Total Commercial and Industrial Loans Consumer Loans Total Gross Loans Allowance for Loans Losses Deferred Loan Fees Loans Receivable, Net December 31, 2007 2006 $ 795,675 215,857 90,065 $ 757,428 202,207 81,128 1,101,597 1,040,763 1,599,853 256,978 119,360 112,503 2,088,694 90,449 3,280,740 (43,611) (2,367) 1,202,612 225,630 126,561 148,391 1,703,194 100,121 2,844,078 (27,557) (3,001) $3,234,762 $2,813,520 65 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 3 — Loans Receivable (Continued) 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, 2007 2006 2005 (In thousands) Balance at Beginning of Year Provision Charged to Operating Expense Loans Charged Off Recoveries Allowance for Loan Losses $ 27,557 38,688 (23,330) 696 Allowance for Off- Balance Sheet Items $2,130 (365) — — Allowance for Loan Losses $24,963 7,173 (6,129) 1,550 Balance at End of Year $ 43,611 $1,765 $27,557 The following is a summary of interest foregone on impaired loans for the periods indicated: Allowance for Off- Balance Sheet Items $2,130 — — — $2,130 Allowance for Loan Losses $22,702 5,065 (5,198) 2,394 $24,963 Allowance for Off- Balance Sheet Items $1,800 330 — — $2,130 (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 Average Total Recorded Investment in Impaired Loans Year Ended December 31, 2007 2006 2005 $ 4,672 (3,705) $ 967 $ 1,726 (1,146) $ 580 $ 957 (603) $ 354 As of and for the Year Ended December 31, 2007 2006 2005 $ 38,930 15,202 (11,829) $ 42,303 $ 61,249 $10,616 3,868 (6,731) $ 7,753 $19,287 $ 7,548 3,235 (4,991) $ 5,792 $14,340 There were no commitments to lend additional funds to borrowers whose loans are included above. Loans on non-accrual status totaled $54.3 million and $14.2 million at December 31, 2007 and 2006, respectively. Loans past due 90 days or more and still accruing interest totaled $227,000 and $2,000 at December 31, 2007 and 2006, respectively. There were no restructured loans at December 31, 2007 and 2006. 66 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 4 — Servicing Assets Changes in servicing assets were as follows: (In thousands) Balance at Beginning of Year Additions Valuation Write-Down Amortization Balance at End of Year December 31, 2007 2006 $ 4,579 1,821 (18) (2,046) $ 4,336 $ 3,910 2,331 (355) (1,307) $ 4,579 At December 31, 2007 and 2006, we serviced loans sold to unaffiliated parties in the amounts of $258.5 million and $236.0 million, respectively. All of the loans being serviced were SBA loans. Note 5 — 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, 2007 2006 $ 6,120 8,433 13,783 10,141 862 39,339 (18,539) $ 6,120 8,210 12,202 8,403 862 35,797 (15,722) $ 20,800 $ 20,075 Depreciation and amortization expense totaled $3.0 million, $2.9 million and $2.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. 67 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 6 — Goodwill As of December 31, 2007 and 2006, goodwill totaled $107.1 million and $207.6 million, respectively. The change in goodwill during the year is as follows: (In thousands) Balance at Beginning of Year Acquired Goodwill Impairment Loss on Goodwill Balance at End of Year Acquired Goodwill As of and for the Years Ended December 31, 2007 2006 $ 207,646 2,345 (102,891) $ 107,100 $209,058 (1,412) — $207,646 In January 2007, the acquisitions of Chun-Ha and All World resulted in the recognition of goodwill aggregating $2.3 million. In 2006, goodwill decreased by $1.4 million due to a tax refund related to the acquisition of Pacific Union Bank (“PUB”). Impairment Loss on Goodwill During our annual assessment of goodwill during the fourth quarter of 2007, we concluded that we had an impairment of goodwill based on the decline in the market value of our common stock, which we believe reflects, in part, recent turmoil in the financial markets that has adversely affected the market value of the common stock of many banks. The fair value was determined based on a weighted distribution of values derived from three different approaches: market approach, market capitalization approach, and income approach. We concluded that $102.9 million of the goodwill was impaired and was required to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2007. Note 7 — Other Intangible Assets Other intangible assets were as follows: (In thousands) Other Intangible Assets: Core Deposit Intangible Trade Names Client/Insured Relationships Non-Compete Agreements Carrier Relationships Total Other Intangible Assets Amortization Period 8 years 20 years 10 years 5 years 15 years December 31, 2007 December 31, 2006 Gross Carrying Amount $11,385 970 770 600 580 $14,305 Accumulated Amortization $(7,113) (48) (77) (120) (39) $(7,397) Gross Carrying Amount $11,385 — — — — $11,385 Accumulated Amortization $(5,073) — — — — $(5,073) The weighted-average amortization period for other intangible assets is 9.1 years. The total amortization expense for other intangible assets was $2.3 million, $2.4 million and $2.8 million during the years ended December 31, 2007, 2006 and 2005, respectively. 68 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 7 — Other Intangible Assets (Continued) Estimated future amortization expense related to other intangible assets for each of the next five years is as follows: Year Ending December 31, (In thousands) 2008 2009 2010 2011 2012 Amount $1,959 $1,568 $1,149 $ 700 $ 198 As of December 31, 2007 and 2006, management is not aware of any circumstances that would indicate impairment of other intangible assets. There were no impairment charges recorded through earnings in 2007 or 2006. Note 8 — Deposits Time deposits by maturity were as follows: (In thousands) Less Than Three Months After Three Months to Six Months After Six Months to Twelve Months After Twelve Months Total Time Deposits December 31, 2007 2006 $1,141,872 379,806 251,352 9,482 $ 811,211 516,473 340,856 10,306 $1,782,512 $1,678,846 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: Year Ending December 31, (In thousands) 2008 2009 2010 2011 2012 Amount $ — $8,720 $ 620 $ — 4 $ 69 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 8 — Deposits (Continued) 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, 2007 2006 2005 $ 2,004 15,446 75,516 15,134 $108,100 $ 1,853 14,539 64,184 12,460 $93,036 $ 2,130 12,964 31,984 7,114 $54,192 Total deposits reclassified to loans due to overdrafts at December 31, 2007 and 2006 were $6.3 million and $4.3 million, respectively. Note 9 — FHLB Advances and Other Borrowings FHLB advances and other borrowings consisted of the following: (In thousands) FHLB Advances Federal Funds Purchased Note Issued to U.S. Treasury Total FHLB Advances and Other Borrowings December 31, 2007 2006 $432,664 50,000 4,500 $487,164 $168,107 — 930 $169,037 FHLB advances represent collateralized obligations with the FHLB. The following is a summary of contractual maturities pertaining to FHLB advances: Year (In thousands) 2008 2009 2010 2011 2012 Thereafter Weighted- Average Interest Rate 4.72% 5.63% 4.44% — — 5.27% Amount $415,000 6,000 7,084 — — 4,580 $432,664 70 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 9 — FHLB Advances and Other Borrowings (Continued) All of the FHLB advances had fixed interest rates. The following is financial data pertaining to FHLB advances: (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 Year Ended December 31, 2007 4.73% 5.11% 2006 5.20% 5.02% 2005 4.33% 3.70% $237,733 $432,664 $123,295 $168,250 $ 74,437 $100,700 We have pledged investment securities available for sale and loans receivable with carrying values of $10.0 million and $1,278.6 million, respectively, as collateral with the FHLB for this borrowing facility. The total borrowing capacity available from the collateral that has been pledged is $714.6 million, of which $281.8 million remained available as of December 31, 2007. For the years ended December 31, 2007, 2006 and 2005, interest expense on FHLB advances and other borrowings totaled $13.9 million, $7.0 million and $3.0 million, respectively, and the weighted-average interest rates were 5.10 percent, 5.02 percent and 3.63 percent, respectively. Total credit lines for borrowing amounted to $186.0 million and $158.0 million at December 31, 2007 and 2006, respectively. As of December 31, 2007, $50.0 million was borrowed under these credit lines. At December 31, 2006, 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, 2007 and 2006. For the years ended December 31, 2007, 2006 and 2005, interest expense on the junior subordinated debentures totaled $6.6 million, $6.4 million and $4.9 million, respectively, and the weighted-average interest rates were 8.06 percent, 7.79 percent and 5.95 percent, respectively. Note 11 — Income Taxes In June 2006, the FASB issued Interpretation No. 48, “Accounting 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 financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to betaken on a tax return. Under FIN No. 48, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. 71 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 11 — Income Taxes (Continued) We adopted the provisions of FIN No. 48 on January 1, 2007, and there was no material effect on the consolidated financial statements as of the date of adoption. Because of the implementation, there was no cumulative effect related to adopting FIN No. 48. However, certain amounts have been reclassified in the Consolidated Balance Sheets in order to comply with the requirements of FIN No. 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (In thousands) Unrecognized Tax Benefits at January 1, 2007 Gross Increases for Tax Positions of Prior Years Gross Decreases for Tax Positions of Prior Years Increases in Tax Positions for Current Year Settlements Lapse in Statute of Limitations Unrecognized Tax Benefits at December 31, 2007 $ 794 40 — 198 — — $1,032 The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is $141,000 as of December 31, 2007 and $115,000 as of January 1, 2007. During 2007, we accrued interest of $52,000 for uncertain tax benefits. As of December 31, 2007, the total amount of accrued interest related to uncertain tax positions, net of Federal tax benefit, is $96,000. We account for interest and penalties related to uncertain tax positions as part of our provision for Federal and state income taxes. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. Unrecognized tax benefits primarily include state exposures from California Enterprise Zone interest deductions and income tax treatment for prior business acquisition costs. We believe that it is reasonably possible that certain remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2008 because of a lapse of the statute of limitations. We anticipate an insignificant net change in the unrecognized tax benefits related to prior business acquisition costs, which will increase due to additional unrecognized tax benefits and decrease due to the lapse of the statute of limitations during 2008. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2004 through 2006. Hanmi Financial Corporation and its subsidiaries’ state income tax returns are open to audit under the statute of limitations by various state tax authorities for the years ended December 31, 2003 through 2006. We are currently not under any audit by the Internal Revenue Service or state tax authorities. 72 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 11 — Income Taxes (Continued) A summary of the provision for income taxes is as follows: (In thousands) Current Expense: Federal State Deferred Expense: Federal State Provision for Income Taxes Deferred tax assets and liabilities 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 Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps Other Total Deferred Tax Liabilities Net Deferred Tax Assets Year Ended December 31, 2007 2006 2005 $ 30,209 8,886 $34,471 9,059 $29,779 9,383 39,095 43,530 39,162 (10,791) (3,827) (14,618) (2,222) (720) (2,942) (2,350) (357) (2,707) $ 24,477 $40,588 $36,455 December 31, 2007 2006 $20,800 1,729 1,594 — 2,133 $13,608 1,288 2,672 1,450 637 26,256 19,655 (5,464) (527) (1,795) (7,786) (5,329) — (1,262) (6,591) $18,470 $13,064 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. 73 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 11 — Income Taxes (Continued) A reconciliation of the difference between the Federal statutory income tax rate and the effective tax rate is as follows: Federal Statutory Income Tax Rate State Taxes, Net of Federal Tax Benefits Tax-Exempt Municipal Securities Other Impairment Loss on Goodwill Effective Tax Rate Year Ended December 31, 2007 2006 2005 (35.0)% 35.0% 35.0% 9.1% 5.8% 6.2% (3.0)% (1.0)% (1.2)% (3.1)% (1.6)% (1.5)% — — 67.9% 38.2% 38.5% At December 31, 2007, net current taxes receivable of $5.6 million were included in other assets in the Consolidated Balance Sheets. At December 31, 2006, net current taxes payable of $1.0 million were included in other liabilities in the Consolidated Balance Sheets. Note 12 — Employee Share-Based Compensation At December 31, 2007, we had one incentive plan, the 2007 Equity Compensation Plan (the “Plan”), which replaced the Year 2000 Stock Option Plan. The 2004 CEO Stock Option Plan (the “CEO Plan”) was terminated on December 31, 2007. The Plan provides for grants of non-qualified and incentive stock options, restricted stock, stock appreciation rights and performance shares to non-employee directors, officers, employees and consultants of Hanmi Financial and its subsidiaries. The CEO Plan had provided for the grant of stock options and restricted stock to our former Chief Executive Officer. 2007 Equity Compensation Plan Under the Plan, we may grant equity incentive awards for up to 3,000,000 shares of common stock. As of December 31, 2007, 2,879,000 shares were still available for issuance. All stock options granted under the 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 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 Plan). New shares of common stock may be issued or treasury shares may be utilized upon the exercise of stock options. The weighted-average estimated fair value per share of options granted under the Plan was as follows: Weighted-Average Estimated Fair Value Per Share of Options Granted Year Ended December 31, 2007 2006 2005 $4.49 $6.23 $4.96 74 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 12 — Employee Share-Based Compensation (Continued) The 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, 2007 2006 2005 1.68% 1.26% 1.18% 29.98% 34.79% 32.62% 4.9 years 4.6 years 4.1 years 4.29% 4.85% 4.13% Expected volatility is determined based on the historical weekly 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 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 Plan is presented for the periods indicated: (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, 2007 2006 2005 $ 596 $1,590 $1,197 $1,145 $ 317 $5,940 $ 695 $2,874 $2,032 $ 661 $ 672 $ 905 $4,487 $2,093 $ 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 transactions under the Plan for the periods indicated: Year Ended December 31, 2007 2006 2005 Number of Shares 1,755,813 132,667 (130,647) (256,267) (28,800) Weighted- Average Exercise Price Per Share $15.31 $15.05 $ 8.76 $18.22 $16.90 Number of Shares 1,173,712 953,000 (257,759) (111,540) (1,600) Weighted- Average Exercise Price Per Share $10.55 $19.17 $ 7.88 $15.39 $14.03 Weighted- Average Exercise Price Per Share Number of Shares 1,618,836 135,554 (391,094) (189,584) $ 9.33 $17.10 $ 6.44 $13.26 — $ — Options Outstanding at Beginning of Year Options Granted Options Exercised Options Forfeited Options Expired Options Outstanding at End of Year 1,472,766 $15.33 1,755,813 $15.31 1,173,712 $10.55 Options Exercisable at End of Year 617,634 $12.48 471,903 $ 8.55 520,602 $ 7.00 75 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 12 — Employee Share-Based Compensation (Continued) The following is a summary of transactions for non-vested stock options under the Plan for the periods indicated: Year Ended December 31, 2007 2006 2005 Weighted- Average Grant Date Fair Value Per Share $5.53 $4.49 $5.21 $5.57 $5.47 Weighted- Average Grant Date Fair Value Per Share $3.68 $6.23 $3.30 $4.90 $5.53 Number of Shares 653,110 953,000 (210,660) (111,540) 1,283,910 Number of Shares 1,283,910 132,667 (305,178) (256,267) 855,132 Weighted- Average Grant Date Fair Value Per Share $2.93 $4.96 $2.13 $3.62 $3.68 Number of Shares 1,131,594 135,554 (424,454) (189,584) 653,110 Non-Vested Options Outstanding at Beginning of Year Options Granted Options Vested Options Forfeited Non-Vested Options Outstanding at End of Year For the years ended December 31, 2007, 2006 and 2005, compensation expense of $1.1 million, $742,000 and $0 for the Plan was recognized in the Consolidated Statements of Operations. As of December 31, 2007, the total compensation cost not yet recognized under the Plan was $3.9 million with a weighted-average recognition period of 2.9 years. As of December 31, 2007, stock options outstanding under the Plan were as follows: Options Outstanding Options Exercisable Exercise Price Range Number of Shares Intrinsic Value(1) Weighted- Average Exercise Price Per Share (Dollars in thousands, except per share data) Weighted- Average Remaining Contractual Life Number of Shares Intrinsic Value(1) Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life $3.27 to $4.99 $5.00 to $9.99 $10.00 to $14.99 $15.00 to $19.99 $20.00 to $21.63 128,184 121,128 338,900 653,554 231,000 $ 1,105 1,044 2,921 5,634 1,991 $ 3.89 $ 7.78 $13.51 $17.71 $21.57 2.7 years 4.8 years 6.2 years 8.3 years 8.9 years 128,184 91,128 190,100 136,222 72,000 $1,105 786 1,639 1,174 620 $ 3.89 $ 7.21 $13.51 $17.81 $21.63 2.7 years 3.1 years 6.2 years 8.1 years 8.9 years 1,472,766 $12,695 $15.33 7.2 years 617,634 $5,324 $12.48 7.2 years (1) Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $8.62 as of December 31, 2007, and the exercise price, multiplied by the number of options. 2004 CEO Stock Option Plan The CEO Plan was terminated as of December 31, 2007 and there were no additional shares available for issuance. There were no stock options granted under the 2004 CEO Stock Option Plan during the years ended December 31, 2007, 2006 and 2005. 76 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 12 — Employee Share-Based Compensation (Continued) The following is a summary of transactions under the CEO Plan for the periods indicated: Options Outstanding at Beginning of Year Options Forfeited Options Cancelled Options Outstanding at End of Year Options Exercisable at End of Year Year Ended December 31, 2007 2006 2005 Number of Shares Exercise Price Per Share Number of Shares Exercise Price Per Share Number of Shares Exercise Price Per Share 350,000 (233,334) (116,666) $17.17 $17.17 $17.17 350,000 $17.17 — $ — — $ — 350,000 $17.17 — $ — — $ — — $ — 350,000 $17.17 350,000 $17.17 — $ — 58,333 $17.17 — $ — The following is a summary of transactions for non-vested stock options under the CEO Plan for the periods indicated: Non-Vested Options Outstanding at Beginning of Year Options Forfeited Options Vested Non-Vested Options Outstanding at End of Year Year Ended December 31, 2007 2006 2005 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 291,667 (233,334) (58,333) — $4.82 $4.82 $4.82 $ — 350,000 — (58,333) 291,667 $4.82 $ — $4.82 $4.82 350,000 — — 350,000 $4.82 $ — $ — $4.82 For the years ended December 31, 2007, 2006 and 2005, compensation expense of $0, $416,000 and $0 for the CEO Plan was recognized in the Consolidated Statements of Operations. Restricted Stock Awards During 2007, 19,000 shares of restricted stock were granted to officers under the Plan. The shares vest 20 percent over the next five years on the anniversary dates of the grants. The market value of the shares awarded totaled $256,000. For the year ended December 31, 2007, compensation expense of $11,000 related to these restricted stock awards was recognized in the Consolidated Statements of Operations. In February 2005, 100,000 shares of restricted stock were granted to our former Chief Executive Officer. 20,000 of these shares vested immediately, and an additional 20,000 shares were to vest each year over the next four years on the anniversary date of the grant. Upon the former Chief Executive Officer’s retirement on December 31, 2007, all unvested restricted stock became immediately vested. The market value of the shares awarded totaled $1.8 million. For the years ended December 31, 2007, 2006 and 2005, compensation expense of $787,000, $363,000 and $665,000, respectively, related to the restricted stock award was recognized in the Consolidated Statements of Operations. 77 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 13 — Stockholders’ 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 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, 2007, 2006 and 2005, 2,000, 160,056 and 0 shares of common stock, respectively, were issued in connection with the exercise of stock warrants. In June 2007, we repurchased 324,502 stock warrants at an aggregate cash purchase price of $2.6 million and such stock warrants were then canceled. As of December 31, 2007, there were outstanding stock warrants to purchase 2,000 shares of our common stock. Repurchase of Common Stock In April 2006, our Board of Directors authorized the repurchase of up to $50.0 million of our common stock as part of our ongoing capital management program. During the year ended December 31, 2007, 3,469,500 shares of our common stock were repurchased on the open market for an aggregate purchase price of $50.0 million. There were no common stock repurchases in 2006. In August 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 issuance 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, 2007 and 2006, Hanmi Financial and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2007, 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. 78 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 14 — Regulatory Matters (Continued) The capital ratios of Hanmi Financial and Hanmi Bank at December 31, 2007 and 2006 were as follows: (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio Actual Minimum Regulatory Requirement Minimum to Be Categorized as “Well Capitalized” December 31, 2007 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, 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 $380,057 $377,613 10.65% $285,417 10.59% $285,137 N/A 8.00% 8.00% $356,422 N/A 10.00% $335,451 $333,050 9.40% $142,708 9.34% $142,569 4.00% N/A 4.00% $213,853 $335,451 $333,050 8.52% $157,513 8.47% $157,372 4.00% N/A 4.00% $196,715 N/A 6.00% N/A 5.00% $384,895 $376,422 12.55% $245,408 12.28% $245,158 8.00% N/A 8.00% $306,447 N/A 10.00% $355,186 $346,713 11.58% $122,704 11.31% $122,579 4.00% N/A 4.00% $183,868 $355,186 $346,713 10.08% $140,947 9.85% $140,827 4.00% N/A 4.00% $176,034 N/A 6.00% N/A 5.00% The average reserve balance required to be maintained with the FRB was $1.5 million as of December 31, 2007 and 2006. 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. 79 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 15 — Earnings (Loss) 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, 2007, 2006 and 2005: (Dollars in Thousands, Except Per Share Amounts) 2007: Basic EPS — Income Available to Common Shareholders Effect of Dilutive Securities — Options and Warrants Diluted EPS — Income Available to Common Shareholders 2006: Basic EPS — Income Available to Common Shareholders Effect of Dilutive Securities — Options and Warrants Diluted EPS — Income Available to Common Shareholders 2005: Basic EPS — Income Available to Common Shareholders Effect of Dilutive Securities — Options and Warrants Diluted EPS — Income Available to Common Shareholders Income (Loss) (Numerator) Weighted- Average Shares (Denominator) Per Share Amount $(60,520) — 47,787,213 — $(1.27) — $(60,520) 47,787,213 $(1.27) $ 65,649 — 48,850,221 584,907 $ 1.34 (0.01) $ 65,649 49,435,128 $ 1.33 $ 58,229 — 49,174,885 767,471 $ 1.18 (0.01) $ 58,229 49,942,356 $ 1.17 For the years ended December 31, 2007, 2006 and 2005, there were 1,493,766, 1,373,554 and 50,554 options and warrants outstanding, respectively, that were not included in the computation of diluted EPS because of a net loss or 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, 2007, 2006 and 2005 of $1.2 million, $1.0 million and $918,000, respectively. Bank-Owned Life Insurance In 2001 and 2004, we purchased single premium life insurance policies called bank-owned life insurance covering certain officers. The 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. 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, 2007 and 2006, the liability for the deferred compensation plan and interest thereon was $188,000 and $112,000, respectively. 80 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 17 — Commitments and Contingencies We lease our premises under non-cancelable operating leases. At December 31, 2007, 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, 2008 2009 2010 2011 2012 Thereafter Amount (In thousands) $ 2,906 2,864 2,645 1,494 1,190 5,179 $16,278 Rental expenses recorded under such leases in 2007, 2006 and 2005 amounted to $4.8 million, $4.1 million and $3.4 million, 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 18 — Off-Balance Sheet Commitments We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated: (In thousands) Commitments to Extend Credit Commercial Letters of Credit Standby Letters of Credit Unused Credit Card Lines Total Undisbursed Loan Commitments December 31, 2007 2006 $524,349 52,544 48,071 18,622 $578,347 65,158 48,289 17,031 $643,586 $708,825 Note 19 — 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. 81 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 19 — Fair Value of Financial Instruments (Continued) 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 LIABILITIES Noninterest-Bearing Deposits Interest-Bearing Deposits FHLB Advances, Other Borrowings and Junior Subordinated Debentures Accrued Interest Payable OFF-BALANCE SHEET ITEMS Commitments to Extend Credit Standby Letters of Credit December 31, 2007 December 31, 2006 Carrying or Contract Amount Estimated Fair Value Carrying or Contract Amount Estimated Fair Value $ 122,398 — 940 349,517 3,234,762 6,335 17,500 11,733 21,746 $ 122,398 — 941 349,517 3,232,165 6,335 17,500 11,733 21,746 $ 138,501 5,000 967 390,612 2,813,520 23,870 16,919 11,733 13,189 $ 138,501 5,000 969 390,612 2,834,864 23,870 16,919 11,733 13,189 680,282 2,321,417 680,282 2,323,199 728,347 2,216,368 728,347 2,216,757 569,570 21,828 524,349 48,071 571,913 21,828 535 147 251,443 22,582 578,347 48,289 254,058 22,582 1,786 245 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. 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 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, 2007 and 2006 was not estimated because it is not 82 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 19 — Fair Value of Financial Instruments (Continued) 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. 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. 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. Note 20 — Condensed Financial Information of Parent Company BALANCE SHEETS (In thousands) ASSETS Cash Investment in Consolidated Subsidiaries Investment in Unconsolidated Subsidiaries Other Assets Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Junior Subordinated Debentures Other Liabilities Stockholders’ Equity Total Liabilities and Stockholders’ Equity 83 December 31, 2007 2006 $ 5,296 448,657 2,986 1,032 $ 7,578 558,645 2,986 4,346 $457,971 $573,555 $ 82,406 4,020 371,545 $ 82,406 4,032 487,117 $457,971 $573,555 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 20 — Condensed Financial Information of Parent Company (Continued) STATEMENTS OF OPERATIONS (In thousands) Equity in Earnings (Losses) of Subsidiaries Other Expenses, Net Income Tax Benefit Net Income (Loss) Year Ended December 31, 2007 2006 2005 $(54,083) (10,155) 3,718 $71,375 (9,266) 3,540 $62,001 (6,133) 2,361 $(60,520) $65,649 $58,229 84 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 20 — Condensed Financial Information of Parent Company (Continued) STATEMENTS OF CASH FLOWS (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) Adjustments to Reconcile Net Income to Net Cash Used In Operating Activities: Losses (Earnings) of Subsidiaries Decrease in Receivable from Hanmi Bank Share-Based Compensation Expense (Increase) Decrease in Other Assets Increase (Decrease) in Other Liabilities Tax Benefit from Exercises of Stock Options Net Cash Used In Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Dividends Received from Hanmi Bank Business Acquisitions, Net of Cash Received Net Cash Provided By Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Exercise of Stock Options and Stock Warrants Stock Issued for Business Acquisitions Cash Paid to Acquire Treasury Stock Cash Paid to Repurchase Stock Warrants Cash Dividends Paid Net Cash Used In Financing Activities NET INCREASE (DECREASE) IN CASH Cash at Beginning of Year CASH AT END OF YEAR Year Ended December 31, 2007 2006 2005 $(60,520) $ 65,649 $ 58,229 54,083 — 1,891 3,314 (12) 317 (71,375) — 1,521 (1,255) 659 661 (62,001) 455 — (1,292) (229) 729 (927) (4,140) (4,109) 63,501 (4,121) 59,380 18,500 — 18,500 27,541 — 27,541 1,164 2,198 (49,971) (2,552) (11,574) 2,516 3,553 — — — (20,041) — — (9,813) (11,805) (60,735) (8,252) (27,338) (2,282) 7,578 6,108 1,470 (3,906) 5,376 $ 5,296 $ 7,578 $ 1,470 85 Hanmi Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 (Continued) Note 21 — 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 2007: Interest Income Interest Expense Net Interest Income Before Provision for Credit Losses Provision for Credit Losses Non-Interest Income Non-Interest Expenses Income (Loss) Before Provision for Income Taxes Provision for Income Taxes NET INCOME (LOSS) EARNINGS (LOSS) PER SHARE: Basic Diluted 2006: 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 EARNINGS PER SHARE: Basic Diluted $ 67,956 29,891 $ 69,860 31,270 $ 71,197 33,342 $ 71,883 34,190 38,065 6,132 9,987 20,969 20,951 7,896 38,590 3,023 10,692 21,490 24,769 9,446 37,855 8,464 9,526 21,249 17,668 6,580 37,693 20,704 9,801 126,221 (99,431) 555 $13,055 $15,323 $11,088 $(99,986) $ $ 0.27 0.26 $ $ 0.32 0.31 $ $ 0.23 0.23 $ $ (2.15) (2.15) $ 58,535 21,680 $ 63,906 25,509 $ 68,664 28,934 $ 69,084 30,306 36,855 2,960 8,045 17,740 24,200 9,398 38,397 900 8,668 19,797 26,368 10,428 39,730 1,682 9,172 19,861 27,359 9,762 38,778 1,631 11,078 19,915 28,310 11,000 $14,802 $15,940 $17,597 $ 17,310 $ $ 0.30 0.30 $ $ 0.33 0.32 $ $ 0.36 0.36 $ $ 0.35 0.35 Reclassifications have been made to the 2006 quarterly financial statements to conform to the current presentation. 86 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/ Chung Hoon Youk Chung Hoon Youk Interim President and Chief Executive Officer Date: February 29, 2008 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 February 29, 2008. /s/ Chung Hoon Youk Chung Hoon Youk Interim President and Chief Executive Officer (Principal Executive Officer) /s/ Richard B. C. Lee Richard B. C. Lee Chairman of the Board /s/ Ki Tae Hong Ki Tae Hong Director /s/ Mark K. Mason Mark K. Mason Director /s/ Joseph K. Rho Joseph K. Rho Director /s/ Brian E. Cho Brian E. Cho Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /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/ Won R. Yoon Won R. Yoon Director 87 HANMI FINANCIAL CORPORATION AND SUBSIDIARIES Exhibit Number EXHIBIT INDEX Document Certificate of Incorporation, As Amended (1) Bylaws (1) Certificate of Amendment to Bylaws (2) Specimen Certificate of Registrant (1) 3.1 3.2 3.3 4.1 10.1 Hanmi Financial Corporation 2007 Equity Compensation Plan (3) 10.2 10.3 10.4 10.5 14 21 23 31.1 31.2 32.1 32.2 Separation Agreement between Hanmi Financial Corporation and Dr. Sung Won Sohn, dated December 27, 2007(4) Employment Offer Letter with Brian E. Cho, executed November 1, 2007 (5) Put Option Agreement between Hanmi Financial Corporation and John M. Eggemeyer dated April 17, 2007 (6) Put Option Agreement between Hanmi Financial Corporation and William J. Ruh dated April 17, 2007 (6) Code of Ethics (7) 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 (1) 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. (2) Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on November 26, 2007. (3) Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on June 26, 2007. (4) Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on December 27, 2007. (5) Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on December 3, 2007. (6) Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the SEC on May 10, 2007. (7) 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. 88 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. branch offices Corporate Headquarters 3660 Wilshire Blvd. Penthouse Suite A Los Angeles, CA 90010 213-382-2200 Beverly Hills Branch 9300 Wilshire Blvd. Suite 101 Beverly Hills, CA 90212 310-724-7800 Jin Young Kim FVP & Manager Cerritos Branch 11754 East Artesia Blvd. Artesia, CA 90701 562-658-0100 Woo Young Choung SVP & Manager Downtown Branch 950 South Los Angeles Street Los Angeles, CA 90015 213-347-6051 Thomas Kim SVP & Manager Fashion District Branch 726 East 12th Street Suite 211 Los Angeles, CA 90021 213-743-5850 Judy Lee SVP & Manager Fullerton Branch 5245 Beach Blvd. Buena Park, CA 90621 714-232-7600 Hye Ja Shin FVP & Manager Garden Grove Branch 9820 Garden Grove Blvd. Garden Grove, CA 92844 714-590-6900 Ine Ja Kim SVP & Manager Gardena Branch 2001 West Redondo Beach Blvd. Gardena, CA 90247 310-965-9400 Sung Hee Shin FVP & Manager Irvine Branch 14474 Culver Drive Suite D Irvine, CA 92604 949-262-2500 Meehye Lee FVP & Manager Koreatown Galleria Branch 3250 West Olympic Blvd. 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 Chung SVP & Manager Mid-Olympic Branch 3099 West Olympic Blvd. Los Angeles, CA 90006 213-385-1234 Dongin Kim SVP & Manager Olympic Branch 3737 West Olympic Blvd. Los Angeles, CA 90019 323-370-2800 Helen Kim SVP & District Leader Rancho Cucamonga Branch 9759 Baseline Road Rancho Cucamonga, CA 91730 909-919-7599 Eunice Lee FVP & Manager Rowland Heights Branch 18720 East Colima Road Rowland Heights, CA 91748 626-435-1400 Sook Ran Park SVP & Manager San Diego Branch 4637 Convoy Street Suite 101 San Diego, CA 92111 858-467-4800 Young Hoon Oh SVP & Manager San Francisco Branch 1469 Webster Street San Francisco, CA 94115 415-749-7600 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 SVP & Manager Design: bloch+coulter Design Group www.blochcoulter.com Torrance Branch 2370 Crenshaw Blvd. Suite H Torrance, CA 90501 310-781-1200 Sun Young Park SVP & Manager Van Nuys Branch 14427 Sherman Way Van Nuys, CA 91405 818-779-3120 Sun Ae Choi FVP & Manager Vermont Branch 933 South Vermont Avenue Los Angeles, CA 90006 213-252-6380 Don Bae Lee SVP & Manager West Garden Grove Branch 9122 Garden Grove Blvd. Garden Grove, CA 92844 714-741-4420 Michelle Kwon FVP & Manager West Torrance Branch 21838 Hawthorne Blvd. Ground Floor Torrance, CA 90503 310-214-4280 Jae Ho Lee FVP & Manager Western Branch 120 South Western Avenue Los Angeles, CA 90004 213-427-5751 Sharon Im FVP & Manager Wilshire Branch 3660 Wilshire Blvd. Suite 103 Los Angeles, CA 90010 213-427-5757 Suk Jin Yoon SVP & Manager Commercial Loan Department 3660 Wilshire Blvd. Suites 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 Blvd. 2nd Floor Los Angeles, CA 90006 213-252-6400 Jennifer Nam SVP & Manager International Finance 3660 Wilshire Blvd. Suite 116 Los Angeles, CA 90010 213-427-5680 Seong Hoon Hong FVP & Manager International Trade 933 South Vermont Ave. 2nd Floor Los Angeles, CA 90006 213-252-6755 Soo Kyung Kim FVP & Manager SBA Loan Department 3327 Wilshire Blvd. Los Angeles, CA 90010 213-427-5657 James Kim SVP & Manager Atlanta LPO 3585 Peachtree Industrial Blvd. Suite 144 Duluth, GA 30096 678-990-5002 Chicago LPO 6200 North Hiawatha Suite 235 Chicago, IL 60646 773-202-1117 Dallas LPO 2711 LBJ Freeway Suite 114 Farmers Branch, TX 75234 469-522-0012 Denver LPO 2851 S. Parker Rd. #150 Aurora, CO 80014 303-752-4600 Northern California LPO 39899 Balentine Drive Suite 200 Newark, CA 94560 510-438-6870 Northwest Region LPO 500 108th Avenue Northeast Suite 280 Bellevue, WA 98001 425-454-0178 Virginia LPO 7535 Little River Turnpike Suite 200B Annandale, VA 22003 703-914-1001 Hanmi Financial Annual Report 2007 H a n m i F i n a n c i a l A n n u a l R e p o r t 2 0 0 7 Corporate Headquarters 3660 Wilshire Boulevard Penthouse Suite A Los Angeles, California 90010 (213) 382-2200 www.hanmifinancial.com leading the way for twenty-five years