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hanmi financial
corporate headquarters
3660 Wilshire Boulevard
Penthouse Suite a
Los Angeles, California 90010
(213) 382-2200
www.hanmifinancial.com
www.hanmibank.com
Annual Report 2008
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 and
corporate financial services.
Corporate Headquarters
3660 Wilshire Boulevard
Penthouse Suite a
Los Angeles, California 90010
213.382.2200
Beverly Hills Branch
9300 Wilshire Boulevard, Suite 101
Beverly Hills, California 90212
310.724.7800
Cerritos Branch
11754 East Artesia Boulevard
Artesia, California 90701
562.658.0100
Diamond Bar Branch
1101 Brea Canyon Road, Suite a-1
Diamond Bar, California 91789
909.348.6600
Downtown Branch
950 South Los Angeles Street
Los Angeles, California 90015
213.347.6051
Fashion District Branch
726 East 12th Street, Suite 211
Los Angeles, California 90021
213.743.5850
Fullerton Branch
5245 Beach Boulevard
Buena Park, California 90621
714.232.7600
Garden Grove Branch
9820 Garden Grove Boulevard
Garden Grove, California 92844
714.590.6900
Gardena Branch
2001 West Redondo Beach Boulevard
Gardena, California 90247
310.965.9400
Irvine Branch
14474 Culver Drive, Suite d
Irvine, California 92604
949.262.2500
branch offices
Koreatown Galleria Branch
3250 West Olympic Boulevard
Suite 200
Los Angeles, California 90006
323.730.4830
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, California 90006
213.385.2244
Mid-Olympic Branch
3099 West Olympic Boulevard
Los Angeles, California 90006
213.385.1234
Northridge Branch
10180 Reseda Boulevard
Northridge, California 91324
818.709.3300
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, California 90019
323.370.2800
Rancho Cucamonga Branch
9759 Baseline Road
Rancho Cucamonga, California 91730
909.919.7599
Rowland Heights Branch
18720 East Colima Road
Rowland Heights, California 91748
626.435.1400
San Diego Branch
4637 Convoy Street, Suite 101
San Diego, California 92111
858.467.4800
San Francisco Branch
1469 Webster Street
San Francisco, California 94115
415.749.7600
Silicon Valley Branch
2765 El Camino Real
Santa Clara, California 95051
408.260.3400
South Cerritos Branch
11900 South Street, Suite 109
Cerritos, California 90703
562.467.7400
Torrance Branch
2370 Crenshaw Boulevard, Suite h
Torrance, California 90501
310.781.1200
Van Nuys Branch
14427 Sherman Way
Van Nuys, California 91405
818.779.3120
Vermont Branch
933 South Vermont Avenue
Los Angeles, California 90006
213.252.6380
West Garden Grove Branch
9122 Garden Grove Boulevard
Garden Grove, California 92844
714.741.4420
West Torrance Branch
21838 Hawthorne Boulevard
Torrance, California 90503
310.214.4280
Western Branch
120 South Western Avenue
Los Angeles, California 90004
213.427.5751
Wilshire Branch
3660 Wilshire Boulevard, Suite 103
Los Angeles, California 90010
213.427.5757
Commercial Loan Department
3660 Wilshire Boulevard, Suite 1050
Los Angeles, California 90010
213.637.4792
Consumer Loan Center
3660 Wilshire Boulevard, Suite 424
Los Angeles, California 90010
213.252.6400
International Finance
933 S. Vermont Avenue, 2nd Floor
Los Angeles, California 90006
213-427-5680
SBA Loan Department
3660 Wilshire Boulevard, Suite 116
Los Angeles, California 90010
213.427.5722
1
Design: bloch+coulter Design Group, www.blochcoulter.com
financial highlights
(Dollars in Thousands, Except for Per Share Data)
2008
2007
2006
2005
2004
For the Year
Net Interest Income Before
Provision for Credit Losses
Provision for Credit Losses
Non-Interest Income
Non-Interest Expense
Net Income (Loss):
At Year End
Total Assets
Net Loans
Total Deposits
$ 134,401
$ 151,786
$ 153,243
$ 138,091
$ 102,902
75,676
32,149
38,323
40,006
194,322
189,929
7,173
36,963
77,313
5,395
31,450
70,201
2,907
26,211
66,566
$ (102,093) $ (60,762) $ 65,350 $ 57,801 $ 36,680
3,875,816
3,983,657
3,725,243
3,414,252
3,104,188
3,291,125
3,241,097
2,837,390
2,469,080
2,234,842
3,070,080
3,001,699
2,944,715
2,826,114
2,528,807
Total Stockholders’ Equity
263,915
370,556
486,370
426,329
399,890
Per Share Data:
Earnings (Loss) Per Share – Basic
Earnings (Loss) Per Share – Diluted
Cash Dividends Per Share
Book Value Per Share
$ (2.23) $ (1.27) $ 1.34 $ 1.18
$ 0.87
$ (2.23) $ (1.27) $ 1.32 $ 1.16
$ 0.84
$ 0.09 $ 0.24
$ 0.24 $ 0.20
$ 0.20
$ 5.75 $ 8.08
$ 9.91 $ 8.76
$ 8.11
Financial Ratios
Net Interest Margin
Non-Performing Loans to Total Gross Loans
Allowance for Loan Losses to Total Gross Loans
Efficiency Ratio
Return on Average Assets
3.68%
3.62%
2.11%
116.67%
(2.64%)
4.34%
1.66%
1.33%
99.03%
(1.56%)
Return on Average Stockholders’ Equity
(31.56%)
(12.33%)
4.77%
0.50%
0.96%
40.65%
1.81%
14.26%
4.81%
0.41%
1.00%
41.41%
1.78%
13.83%
4.31%
0.27%
1.00%
51.56%
1.37%
12.51%
Selected Capital Ratios:
Total Capital to Total Risk-Weighted Assets:
Hanmi Financial
Hanmi Bank
10.79%
10.70%
10.65%
10.59%
12.55%
12.28%
12.04%
11.98%
11.98%
11.80%
Tier 1 Capital to Total Risk-Weighted Assets:
Hanmi Financial
Hanmi Bank
Tier 1 Capital to Average Total Assets:
Hanmi Financial
Hanmi Bank
9.52%
9.44%
8.93%
8.85%
9.40%
9.34%
8.52%
8.47%
11.58%
11.31%
11.03%
10.96%
10.93%
10.75%
10.08%
9.85%
9.11%
9.06%
8.93%
8.78%
1
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shareholders
In 2008, thE SoFtEnIng EConomY thAt FIRSt bECAmE EvIDEnt In lAtE 2007 took
A toll on hAnmI’S FInAnCIAl RESultS AS A gRowIng numbER oF boRRowERS
hAD tRoublE mEEtIng thEIR oblIgAtIonS. hIghER DElInquEnCY RAtIoS AnD An
InCREASE In non-PERFoRmIng loAnS nECESSItAtED InCREASES In thE PRovISIon
FoR CREDIt loSSES AnD A YEAR-EnD AllowAnCE FoR loAn loSSES thAt wAS thE
hIghESt In thE bAnk’S hIStoRY.
Last year’s disappointing operating results in turn put
Second only to credit monitoring and risk management
pressure on the price of our common stock, to such a
is liquidity, for we clearly need to strengthen our deposit
degree that in the second quarter we were forced to take
base. Although at year end total deposits were essentially
a substantial goodwill impairment charge that resulted in
unchanged from the prior year, we saw a decline in
a net loss for the year. On a positive note, the impairment
core deposits, which are the foundation of our business.
charge was a non-cash item and thus had no effect on
Among the best sources of reasonably priced core deposits
the Bank’s tangible equity or its regulatory capital ratios.
are the liquid assets of existing and prospective customers;
Because we have now written off all the goodwill on
accordingly, we must re-establish Hanmi as Southern
the balance sheet, most of which dated from the 2004
California’s pre-eminent community bank serving the
acquisition of Pacific Union Bank, there will be no more
needs of small and mid-sized businesses.
such charges.
This in turn will require that we address the matter of
We expect that the two greatest challenges we faced in
confidence, for community banking is built on trust.
2008 — improving credit quality and enhancing liquidity
Hanmi has to some degree lost sight of its roots and
— will again be at the forefront in 2009. Accordingly,
perhaps on occasion taken its customers for granted. We
our focus in 2009 will be on improving the credit profile
need to bring back the vitality that drew them to the Bank
of the existing portfolio, rebuilding our deposit base,
in the first place. We need to reaffirm our commitment to
and regaining the confidence of our customers. All
providing the very best in customer service.
are essential if we are to return Hanmi to the level of
profitability it has enjoyed in the past.
Despite the uncertainties that prevail in today’s
marketplace, we are confident that Hanmi will emerge
Success will require, foremost, that we address the
from the current recession a stronger and better
unacceptably high default and charge-off ratios that we,
company. We have almost $4 billion in assets and a
like so many others, experienced last year. Accordingly,
respected brand name that together provide a solid
we have further strengthened our risk management
foundation on which to establish a new period of
and credit monitoring procedures, and, in what is an
growth. With the most extensive branch network of any
ongoing process, we are working hard to identify and
Korean-American bank in California — and with loyal
appropriately classifying all questionable loans. Moreover,
and experienced employees — we are ideally positioned
we remain diligent in provisioning for credit losses where
to meet the growing needs of our target market.
appropriate, for we believe that the key to minimizing
Furthermore, with staff reductions that have measurably
future loan losses is the early identification and resolution
improved operating efficiencies and a reinvigorated
of potential problems.
2
Board of Directors that is working closely with the new
management team, we seek to lead the way in a changing
marketplace and ensure that Hanmi maintains its premier
position among Korean-American banks.
In summary, beyond demonstrating that credit issues are
under control and that the future of the Bank is secure, we
need to return to the corporate culture that served Hanmi
so well in the past. In particular, we need to make it clear
that the customer is our most important constituent, for we
firmly believe that in best serving our customers we will best
serve the interests of our shareholders. This is our mandate
for 2009.
With the knowledge that ultimately we will be judged
on our ability to return the Bank to a sustainable level of
profitability, we thank you — our customers, shareholders,
and employees — for your patience and continuing support
in what promises to be another challenging year. We look
forward to keeping you apprised of our progress.
Sincerely,
Jay S. Yoo
President and Chief Executive Officer
Joseph K. Rho
Chairman of the Board of Directors
Jay S. Yoo, Joseph K. Rho
Joseph K. Rho, Jay S. Yoo
John (Jack) A. Hall, I Joon Ahn, Joseph K. Rho, Joon Hyung Lee, Jay S. Yoo, Paul Seon-Hong Kim (not present: Richard B. C. Lee)
officers
Jay S. Yoo
President and
Chief Executive Officer
Brian E. Cho
Executive Vice President and
Chief Financial Officer
John Park
Executive Vice President and
Chief Credit Officer
corporate information
board of Directors
Joseph K. Rho
Chairman of the Board
Principal
J & S Investment
I Joon Ahn
Former Chairman of the Board
John ( Jack) A. Hall
Paul Seon-Hong Kim
Joon Hyung Lee
Former Chairman of the Board
President
Root-3 Corporation
Richard B.C. Lee
Former Chairman of the Board
Independent Public Accountant
KPMG, LLP
Los Angeles, California
Registrar and transfer Agent
Computershare
website
www.hanmifinancial.com
www.hanmibank.com
Stock listing
Nasdaq
Ticker symbol for
common stock “HAFC”
4
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, 2008
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, $0.001 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 n
Smaller reporting company n
Accelerated filer ¥
Non-accelerated filer n
(Do not check if a smaller reporting company)
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 30, 2008, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $194,704,000.
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 March 1, 2009 was 45,901,549 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, 2008, is incorporated by reference into Part III of this report.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
HANMI FINANCIAL CORPORATION
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
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
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Selected Financial Data
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
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits, Financial Statement Schedules
PART IV
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Signatures
Exhibit Index
Page
1
2
20
27
28
29
29
29
31
33
60
60
60
60
63
63
63
63
63
63
64
65
66
67
68
69
70
71
115
116
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
(cid:129) regulatory restrictions on the Bank’s ability to pay divi-
dends to us and on our ability to make payments on
Hanmi Financial obligations;
(cid:129) significant reliance on loans secured by real estate and the
associated vulnerability to downturns in the local real
estate market, natural disasters and other variables
impacting the value of real estate;
(cid:129) failure to attract or retain our key employees;
(cid:129) failure to maintain our status as a financial holding
company;
(cid:129) adequacy of our allowance for loan losses;
(cid:129) credit quality and the effect of credit quality on our
provision for credit losses and allowance for loan losses;
(cid:129) failure to manage our future growth or successfully inte-
grate acquisitions;
(cid:129) volatility and disruption in financial, credit and securities
markets, and the price of our common stock;
(cid:129) deterioration in the financial markets that may result in
other-than-temporary impairment charges relating to our
securities portfolio;
(cid:129) competition in our primary market areas;
(cid:129) demographic changes in our primary market areas; and
(cid:129) significant government
regulations,
legislation and
potential changes thereto.
For additional information concerning risks we face, see
“Item 1A. Risk Factors,” “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations —
Interest Rate Risk Management” and “— Liquidity and Cap-
ital Resources.” We undertake no obligation to update these
forward-looking statements to reflect events or circum-
stances that occur after the date on which such statements
were made, except as required by law.
“will,”
“should,”
Some of the statements under “Item 1. Business,” “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this Form 10-K
constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). In some cases, you can
identify forward-looking statements by terminology such as
“may,”
“plans,”
“intends,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” or “continue,” or the negative of such terms and
other comparable terminology. Although we believe that
the expectations reflected in the forward-looking state-
ments are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. These state-
ments involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance or achievements to differ from those
expressed or implied by the forward-looking statement
because of:
“expects,”
“could,”
(cid:129) failure to maintain adequate levels of capital and liquidity
to support our operations;
(cid:129) a significant number of our customers failing to perform
under their loans and other terms of credit agreements;
(cid:129) the effect of regulatory orders we have entered into and
potential future supervisory action against us or Hanmi
Bank (the “Bank”);
(cid:129) fluctuations in interest rates and a decline in the level of
our interest rate spread;
(cid:129) failure to attract or retain deposits;
(cid:129) sources of liquidity available to us and to the Bank
becoming limited or our potential inability to access
sufficient sources of liquidity when needed or the require-
ment that we obtain government waivers to do so;
(cid:129) adverse changes in domestic or global financial markets,
economic conditions or business conditions;
1
PART I
Item 1. Business
General
Hanmi Financial Corporation (“Hanmi Financial,” “we,”
“us” or “our”) is a Delaware corporation incorporated on
March 14, 2000 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 Depart-
ment 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, Cal-
ifornia 90010.
The Bank is a community bank conducting general business
banking, with its primary market encompassing the Kore-
an-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. At December 31, 2008, the Bank
maintained a branch network of 26 full-service branch
offices in California and 7 loan production offices (“LPO’s”)
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
agencies that offer a complete line of insurance products,
including life, commercial, automobile, health, and prop-
erty and casualty.
The Bank’s revenues are derived primarily from interest and fees on our loans, interest and dividends on our securities
portfolio, and service charges on deposit accounts. A summary of revenues for the periods indicated follows:
(Dollars in Thousands)
2008
2007
2006
Year Ended December 31,
Interest and Fees on Loans
Interest and Dividends on
Investments
Other Interest Income
Service Charges on Deposit
Accounts
Other Non-Interest Income
$223,942
82.8%
$261,992
81.6%
$239,075
80.5%
14,032
209
18,463
13,686
5.2%
0.1%
6.8%
5.1%
17,867
1,037
18,061
21,945
5.6%
0.3%
5.6%
6.9%
19,710
1,404
17,134
19,829
6.6%
0.5%
5.8%
6.6%
Total Revenues
$270,332
100.0%
$320,902
100.0%
$297,152
100.0%
Market Area
The Bank historically has provided its banking services
through its branch network to a wide variety of small- to
medium-sized businesses. 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, industrial banks, 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, California.
2
In 2008, the Bank opened two full-service branch offices in
Beverly Hills and Northridge. In 2007, the Bank opened
two full-service branch offices in Fullerton and Rancho
Cucamonga.
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 resi-
dential property), commercial and industrial loans (com-
mercial term loans, commercial lines of credit, SBA loans
and international trade finance), and consumer loans.
Real Estate Loans
and the
Real estate lending involves risks associated with the poten-
tial decline in the value of the underlying real estate col-
lateral
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 proper-
ties 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
commercial real estate loans, the Bank generally obtains
formal appraisals in accordance 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
Appraisal Practice (the “USPAP”). The Bank first looks to
cash flow from the borrower to repay the loan and then to
cash flow from other sources. 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 commercial and industrial buildings.
Generally, these types of loans are made for a period of
up to seven years based on a longer amortization period.
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-
occupied properties are often dependent upon successful
operation or management of the properties. Repayment of
such loans may be subject to a greater extent to the risk of
adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways,
including limiting the size of such loans 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. Rep-
resentatives 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 outstand-
ing 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
3
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
command strong project stability and debt service coverage.
Construction loans involve additional risks compared to
loans secured by existing improved real property. These
include the following:
(cid:129) the uncertain value of the project prior to completion;
(cid:129) the inherent uncertainty in estimating construction costs,
which are often beyond the borrower’s control;
(cid:129) construction delays and cost overruns;
(cid:129) possible difficulties encountered in connection with
municipal or other governmental regulations during
construction; and
(cid:129) the difficulty in accurately evaluating the market value of
the completed project.
Because of these uncertainties, construction lending often
involves the disbursement of substantial funds with repay-
ment 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 recom-
mendations for construction disbursements. No assurance
can be given that these procedures will prevent losses arising
from the risks described above.
Residential Property
The Bank originates fixed-rate and variable-rate mortgage
loans secured by one- to four-family properties with amor-
tization 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 equip-
ment purchases and working capital, and various other
business purposes.
As compared to consumer lending, commercial lending
entails significant 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 principal pay-
ment at maturity, 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). Col-
lateral may include liens on inventory, accounts receivable,
fixtures and equipment, leasehold improvements and real
4
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
stockholders of corporations to execute a specific debt
guaranty. All borrowers must demonstrate the ability to
service and repay not only their obligations to the Bank
debt, but also all outstanding business debt, without liqui-
dating the collateral, based on historical earnings or reliable
projections.
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 Con-
solidated Balance Sheets. As of December 31, 2008, the
Bank had $178.4 million of SBA loans in its portfolio, and
was servicing $228.6 million of SBA loans sold to investors.
Commercial Term Loans
International Trade Finance
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 acquisitions, 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 operations. 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 U.S. SBA, an independent agency of the Federal
Government. The SBA guarantees on such loans currently
range from 75 percent to 85 percent of the principal. The
Bank typically requires that SBA loans be secured by busi-
ness 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 generally obtains
appraisals in accordance with applicable regulations. SBA
loans have terms ranging from 5 to 20 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 normally sells to unrelated third parties a sub-
stantial amount of the guaranteed portion of the SBA loans
that it originates. During the fourth quarter of 2007 and
2006, the Bank also sold the unguaranteed portion of some
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 Cal-
ifornia-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, overdraft protection loans, unsecured lines of credit
and credit cards. Management assesses the borrower’s cred-
itworthiness 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 creditwor-
thiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the
value of the collateral, if any, to the proposed loan amount.
Most of 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 or depreciation. The remaining
deficiency often does not warrant further collection efforts
against the borrower beyond obtaining a deficiency judg-
ment. In addition, the collection of loans to individuals is
dependent on the borrower’s continuing financial stability,
5
and thus is more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, var-
ious federal and state laws, including bankruptcy and insol-
vency 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 com-
mitments and lines of credit. These commitments can be
either secured or unsecured. They may be in the form of
revolving lines of credit for seasonal working capital needs
or may take the form of commercial letters of credit or
standby letters of credit. Commercial letters of credit facil-
itate import trade. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the perfor-
mance of a customer to a third party.
Lending Procedures and Loan Limits
Loan applications may be approved by the Board of Direc-
tors’ 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 and certain additional officers, including District
Leaders. 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 Com-
mittee’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 stockholders’ equity plus the allowance for
loan losses, capital notes and any debentures, plus an addi-
tional 10 percent on a secured basis. At December 31, 2008,
the Bank’s authorized legal lending limits for loans to one
borrower were $56.9 million for unsecured loans plus an
additional $37.9 million for specific secured loans. How-
ever, 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 pro-
jections, 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 pre-
pared by an independent Bank-approved appraiser. All
appraisal reports on commercial real property secured loans
are reviewed by an Appraisal Review Officer. The review
generally covers an examination of the appraiser’s assump-
tions and methods that were used to derive a value for the
property, as well as compliance with the USPAP.
Allowance for Loan Losses, Allowance for Off-Balance
Sheet Items and Provision for Credit Losses
The Bank maintains an allowance for loan losses at a level
considered 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 associ-
ated with unfunded commitments and letters of credit,
which is included in other liabilities on the Consolidated
Balance Sheets.
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 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 through a pro-
vision for credit losses based upon their assessment of the
information available to them at
their
examinations.
the time of
Deposits
The Bank raises funds primarily through its network of
branches and broker deposits. 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.
6
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”). None of the information on or hyperlinked from
our website is incorporated into this Annual Report on
Form 10-K (“Report”). These reports and other informa-
tion on file can be inspected and copied at the public
reference facilities of the SEC at 100 F Street, N.E.,
Washington D.C., 20549. The public may obtain informa-
tion on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains
a website that contains the reports, proxy and information
statements and other information we file with them. The
address of the site is www.sec.gov.
Employees
As of December 31, 2008, the Bank had 513 full-time
employees and 15 part-time employees and Chun-Ha and
All World had 33 full-time employees and 2 part-time
employees. Our employees 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 Financial 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 environ-
ment faced by banks is primarily the result 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, securities
and brokerage companies, mortgage companies, real estate
investment trusts, insurance companies, finance companies,
money market funds, credit unions and other non-bank
financial service providers. Some of these competitors are
larger in total assets and capitalization, have greater access
to capital markets, including foreign-ownership, and/or
offer a broader range of financial services.
Among the advantages that the major banks have over the
Bank is their ability to finance extensive advertising cam-
paigns and to allocate their investment assets to the regions
with the 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.
The recent trend has been for other institutions, including
brokerage firms, credit card companies and retail establish-
ments, 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 for the acquisition of deposits.
in the Bank’s
The Bank’s major competitors are relatively smaller com-
munity banks that focus their marketing efforts on Kore-
an-American businesses
service areas.
Amongst these banks, the Bank is the largest, with a loan
portfolio that is 59.4 percent larger than its nearest com-
petitor’s loan portfolio, and a deposit portfolio that is
58.4 percent larger than its nearest competitor’s deposit
portfolio. These banks compete for loans primarily through
the interest rates and fees they charge and the convenience
and quality of service they provide to borrowers. The
competition for deposits is primarily based on the interest
rate paid and the convenience and quality of service.
In order to compete with other financial institutions in its
service area, the Bank relies principally upon local promo-
tional activity, including advertising in the local media,
personal contacts, direct mail and specialized services.
The Bank’s promotional activities emphasize the advan-
tages of dealing with a locally owned and headquartered
the
institution attuned to the particular needs of
community.
Economic Developments, Legislation and Regulatory
Initiatives
Our profitability, like that of most financial institutions, is
primarily dependent on interest rate differentials. In gen-
eral, the difference between the interest rates paid by us on
interest-bearing liabilities, such as deposits and other
7
borrowings, and the interest rates received by us on our
interest-earning assets, such as loans extended to our cus-
tomers 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 eco-
nomic 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 imple-
ments national monetary policies (with objectives such as
curbing inflation and combating recession) through its
open-market operations in U.S. Government securities,
by adjusting the required level of reserves for depository
institutions subject to its reserve requirements, and by
varying the target federal funds and discount rates appli-
cable 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
that 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 services providers, such as recent federal
legislation permitting affiliations among commercial banks,
insurance companies and securities firms. We cannot pre-
dict whether or when any potential
legislation will be
enacted, and if enacted, the effect that it, or any imple-
menting 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 oper-
ations, additional regulation and increased compliance
costs.
Negative developments beginning in the latter half of 2007
in the sub-prime mortgage market and the securitization
markets for such loans and other factors have resulted in
uncertainty in the financial markets in general and a related
general economic downturn, which continued through
2008 and are anticipated to continue throughout 2009.
Dramatic declines in the housing market, with decreasing
home prices and increasing delinquencies and foreclosures,
have negatively impacted the credit performance of mort-
gage and residential construction loans and resulted in
significant write-downs of assets by many financial insti-
tutions. In addition, the values of real estate collateral
supporting many commercial as well as residential loans
have declined and may continue to decline. General down-
ward economic trends, reduced availability of commercial
credit and increasing unemployment have negatively
impacted the credit performance of commercial and con-
sumer credit, resulting in additional write-downs. Concerns
over the stability of the financial markets and the economy
have resulted in decreased lending by financial institutions
to their customers and to each other. This market turmoil
and tightening of credit has led to increased commercial and
consumer delinquencies,
lack of customer confidence,
increased market volatility and widespread reduction in
general business activity. Competition among depository
institutions for deposits has increased significantly. Bank
and bank holding company stock prices have been signif-
icantly negatively affected, as has the ability of banks and
bank holding companies to raise capital or borrow in the
debt markets compared to recent years. The bank regulatory
agencies have been very aggressive in responding to con-
cerns and trends identified in examinations, and this has
resulted in the increased issuance of formal and informal
enforcement orders and other supervisory actions requiring
that institutions take action to address credit quality, liquid-
ity and risk management, and capital adequacy, as well as
other safety and soundness concerns.
On October 3, 2008, the Emergency Economic Stabiliza-
tion Act of 2008 (the “EESA”) was enacted to restore
confidence and stabilize the volatility in the U.S. banking
system and to encourage financial institutions to increase
their lending to customers and to each other. Initially
introduced as
the Troubled Asset Relief Program
(“TARP”), the EESA authorized the U.S. Department
of the Treasury (the “Treasury”) to purchase from financial
institutions and their holding companies up to $700 billion
in mortgage loans, mortgage-related securities and certain
including debt and equity
other financial
securities issued by financial institutions and their holding
companies in a troubled asset relief program. Initially,
$350 billion, or half of the $700 billion, was made imme-
diately available to the Treasury. On January 15, 2009, the
remaining $350 billion was released to the Treasury.
instruments,
On October 14, 2008, the Treasury announced its intention
to inject capital into nine large U.S. financial institutions
under the TARP Capital Purchase Program (the “TARP
8
CPP”), and since has injected capital into many other
institutions. The Treasury initially allocated
financial
$250 billion towards the TARP CPP. We have filed an
application for TARP CPP funds, which remains pending
with the Treasury. Under the terms of the TARP CPP, if
Hanmi Financial enters into a Securities Purchase Agree-
ment with the Treasury to sell to the Treasury preferred
stock and warrants, we would be prohibited from increasing
dividends on our common stock, and from making certain
repurchases of equity securities, including our common
stock, without the Treasury’s consent. Furthermore, as long
as the preferred stock issued to the Treasury under the
TARP CPP is outstanding, dividend payments and repur-
chases or redemptions relating to certain equity securities,
including common stock, are prohibited until all accrued
and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
In order to participate in the TARP CPP, financial insti-
tutions were also required to adopt certain standards for
executive compensation and corporate governance. These
standards generally applied to the Chief Executive Officer,
Chief Financial Officer and the three next most highly
compensated senior executive officers. The standards
include: 1) ensuring that incentive compensation for senior
executives does not encourage unnecessary and excessive
risks that threaten the value of the financial institution;
2) required clawback of any bonus or incentive compensa-
tion paid to a senior executive based on statements of
earnings, gains or other criteria that are later proven to
be materially inaccurate; 3) prohibition on making golden
parachute payments to senior executives; and 4) agreement
not to deduct for tax purposes executive compensation in
excess of $500,000 for each senior executive. If Hanmi
Financial were to receive TARP CPP funds, we would be
required to comply with these requirements and addition-
ally other requirements adopted in the new legislation as
discussed below.
The bank regulatory agencies, the Treasury and the Office
of Special Inspector General, also created by the EESA,
have issued guidance and requests to the financial institu-
tions that participate in the TARP CPP to document their
plans and use of TARP CPP funds and their plans for
addressing the executive compensation requirements asso-
ciated with the TARP CPP.
On February 10, 2009, the Treasury and the federal bank
regulatory agencies announced in a Joint Statement a new
Financial Stability Plan, which would include additional
capital support for banks under a Capital Assistance Pro-
gram, a public-private investment fund to address existing
bank loan portfolios and expanded funding for the FRB’s
pending Term Asset-Backed Securities Loan Facility to
restart lending and the securitization markets.
On February 17, 2009, the American Recovery and Rein-
vestment Act of 2009 (“ARRA”) was signed into law by
President Obama. The ARRA includes a wide variety of
programs intended to stimulate the economy and provide
for extensive infrastructure, energy, health and education
needs. In addition, the ARRA imposes certain new exec-
utive compensation and corporate expenditure limits on all
current and future TARP recipients, including us, until the
institution has repaid the Treasury, which is now permitted
under the ARRA without penalty and without the need to
raise new capital, subject to the Treasury’s consultation with
the recipient’s appropriate regulatory agency.
The executive compensation standards are more stringent
than those currently in effect under the TARP CPP or those
previously proposed by the Treasury. The new standards
include (but are not limited to): (i) prohibitions on bonuses,
retention awards and other incentive compensation, other
than restricted stock grants which do not fully vest during
the TARP period up to one-third of an employee’s total
annual compensation; (ii) prohibitions on golden parachute
payments for departure from a company; (iii) an expanded
clawback of bonuses, retention awards and incentive com-
pensation if payment is based on materially inaccurate
statements of earnings, revenues, gains or other criteria;
(iv) prohibitions on compensation plans that encourage
manipulation of reported earnings; (v) retroactive review
of bonuses, retention awards and other compensation pre-
viously provided by TARP recipients if found by the Trea-
sury to be inconsistent with the purposes of the TARP or
otherwise contrary to public interest; (vi) required estab-
lishment of a company-wide policy regarding “excessive or
luxury expenditures;” and (vii) inclusion in a participant’s
proxy statements for annual shareholder meetings of a non-
binding “Say on Pay” shareholder vote on the compensation
of executives.
On February 23, 2008, the Treasury and the federal bank
regulatory agencies issued a Joint Statement providing
further guidance with respect to the Capital Assistance
Program (“CAP”) announced on February 10, 2009,
including: (i) that the CAP will be initiated on February 25,
2009 and will include “stress test” assessments of major
banks and that should the “stress test” indicate that an
9
additional capital buffer is warranted, institutions will have
an opportunity to turn first to private sources of capital;
otherwise the temporary capital buffer will be made avail-
able from the government; (ii) such additional government
capital will be in the form of mandatory convertible pre-
ferred shares, which would be converted into common
equity shares only as needed over time to keep banks in
a well-capitalized position and can be retired under
improved financial conditions before the conversion
becomes mandatory; and (iii) previous capital injections
under the TARP CPP will also be eligible to be exchanged
for the mandatory convertible preferred shares. The con-
version of preferred shares to common equity shares would
enable institutions to maintain or enhance the quality of
their capital by increasing their tangible common equity
capital ratios; however, such conversions would necessarily
dilute the interests of existing shareholders.
On February 25, 2009, the first day the CAP program was
initiated, the Treasury released the actual terms of the
program, stating that the purpose of the CAP is to restore
confidence throughout the financial system that the nation’s
largest banking institutions have a sufficient capital cushion
against larger than expected future losses, should they occur
due to more a more severe economic environment, and to
support lending to creditworthy borrowers. Under the CAP
terms, eligible U.S. banking institutions with assets in excess
of $100 billion on a consolidated basis are required to
participate in coordinated supervisory assessments, which
are forward-looking “stress test” assessments to evaluate the
capital needs of the institution under a more challenging
economic environment. Should this assessment indicate the
need for the bank to establish an additional capital buffer to
withstand more stressful conditions, these larger institu-
tions may access the CAP immediately as a means to
establish any necessary additional buffer or they may delay
the CAP funding for six months to raise the capital pri-
vately. Eligible U.S. banking institutions with assets below
$100 billion may also obtain capital from the CAP. The
CAP program does not replace the TARP CPP, but is an
additional program to the TARP CPP, and is open to
eligible institutions regardless of whether they participated
in the TARP CPP. The deadline to apply to the CAP is
May 25, 2009. Recipients of capital under the CAP will be
subject to the same executive compensation requirements as
if they had received the TARP CPP.
The EESA also increased Federal Deposit Insurance Cor-
poration (“FDIC”) deposit insurance on most accounts
from $100,000 to $250,000 through the end of 2009. In
addition, the FDIC has implemented two temporary
liquidity programs to: (i) provide deposit insurance for
the full amount of most noninterest-bearing transaction
accounts (the “Transaction Account Guarantee”) through
the end of 2009; and (ii) guarantee certain unsecured debt of
financial institutions and their holding companies through
June 2012 under a temporary liquidity guarantee program
(the
the
“TLGP”).
“Debt Guarantee Program”
and together
Hanmi Financial and the Bank did not elect to opt out of
the Debt Guarantee Program. The FDIC charges “systemic
risk special assessments” to depository institutions that
participate in the TLGP. The FDIC has recently proposed
that Congress give the FDIC expanded authority to charge
fees to those holding companies that benefit directly and
indirectly from the FDIC guarantees.
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 pro-
tection of depositors and the Deposit Insurance Fund
(“DIF”) administered by the 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 refer-
ence to the applicable laws and regulations.
From time to time, federal and state legislation is enacted
that 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 services providers. Several proposals for
legislation that could substantially intensify the regulation
of the financial services industry (including a possible com-
prehensive overhaul of the financial institutions regulatory
system) are expected to be introduced and possibly enacted
in the new Congress in response to the current economic
downturn and financial industry instability. Other legisla-
tive and regulatory initiatives that could affect us and the
Bank and the banking industry in general are pending, and
additional initiatives may be proposed or introduced, before
the Congress, the California legislature and other govern-
mental bodies in the future. Such proposals, if enacted, may
further alter the structure, regulation and competitive rela-
tionship among financial institutions, and may subject us
and the Bank to increased regulation, disclosure and
10
reporting requirements. In addition, the various bank reg-
ulatory agencies often adopt new rules, regulations and
policies to implement and enforce existing legislation. It
cannot be predicted whether, or in what form, any such
legislation or regulations or changes in policies may be
enacted or the extent to which the business of the Bank
would be affected thereby.
Hanmi Financial
As a bank and financial holding company, we are subject to
regulation and examination by the FRB under the BHCA.
Accordingly, 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 “Cap-
ital Standards.”
(cid:129) require that bank holding companies serve as a source of
financial and managerial strength to subsidiary banks and
commit resources as necessary to support each subsidiary
bank. A bank holding company’s failure to meet its
obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the FRB to be an
unsafe and unsound banking practice or a violation of
FRB regulations, or both.
(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 sub-
sidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any bank
subsidiary.
(cid:129) take formal or informal enforcement action or issue other
supervisory directives and assess civil money penalties for
non-compliance under certain circumstances.
(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) limit or prohibit and require FRB prior approval of the
payment of dividends.
(cid:129) require financial holding companies to divest non-bank-
ing activities or subsidiary banks if they fail to meet
certain financial holding company standards.
(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.
A bank holding company is required to file with the FRB
annual reports and other information regarding its business
operations and those of its non-banking subsidiaries. It is
also subject to supervision and examination by the FRB.
Examinations are designed to inform the FRB of the
financial condition and nature of the operations of the bank
holding company and its subsidiaries and to monitor com-
pliance with the BHCA and other laws affecting the oper-
ations of bank holding companies. To determine whether
potential weaknesses in the condition or operations of bank
holding companies might pose a risk to the safety and
soundness of their subsidiary banks, examinations focus on
whether a bank holding company has adequate systems and
internal controls in place to manage the risks inherent in its
business, including credit risk, interest rate risk, market risk
(for example, from changes in value of portfolio instruments
and foreign currency), liquidity risk, operational risk, legal
risk and reputation risk.
Bank holding companies may be subject to potential
enforcement actions by the FRB for unsafe or unsound
practices in conducting their businesses or for violations of
any law, rule, regulation or any condition imposed in writ-
ing by the FRB. Enforcement actions may include the
issuance of cease and desist orders, the imposition of civil
money penalties, the requirement to meet and maintain
specific capital levels for any capital measure, the issuance of
directives to increase capital, formal and informal agree-
ments, or removal and prohibition orders against officers or
directors and other “institution-affiliated” parties.
Bank holding companies are also subject to capital main-
tenance requirements on a consolidated basis that are par-
allel to those required for banks. See “Capital Standards”
below. Further, a bank holding company is required to serve
as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in
an unsafe or unsound manner. In addition, it is the FRB’s
view that, in serving as a source of strength to its subsidiary
banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adver-
sity and should maintain financial flexibility and capital-
raising capacity to obtain additional resources for assisting
11
its subsidiary banks. A bank holding company’s failure to
meet its source-of-strength obligations may constitute an
unsafe and unsound practice or a violation of the FRB’s
regulations, or both.
maintain a minimum Tier 1 leverage ratio and tangible
stockholder’s equity to total tangible assets ratio of not less
than 8.0 percent; and (ix) restrictions on the payment of
dividends without the Regulators’ prior approval.
The source-of-strength doctrine most directly affects bank
holding companies where a bank holding company’s sub-
sidiary bank fails to maintain adequate capital levels. In such
a situation, the subsidiary bank will be required by the
bank’s federal regulator to take “prompt corrective action.”
The prompt corrective action regulatory framework is dis-
cussed in “Prompt Corrective Action Regulations” below.
Under the prompt corrective action regulations, the sub-
sidiary bank will be required to submit to its federal reg-
ulator a capital restoration plan and to comply with the plan.
Each parent company that controls the subsidiary bank will
be required to provide assurances of compliance by the bank
with the capital restoration plan. However, the aggregate
liability of such parent companies will not exceed the lesser
of (i) five percent of the bank’s total assets at the time it
became undercapitalized and (ii) the amount necessary to
bring the bank into compliance with the plan. Failure to
restore capital under a capital restoration plan can result in
the bank’s being placed into receivership if it becomes
critically undercapitalized. A bank subject to prompt cor-
rective action also may affect its parent bank holding com-
pany in other ways. These include possible restrictions or
prohibitions on dividends to the parent bank holding com-
pany by the bank; subordinated debt payments to the
parent; and other transactions between the bank and the
holding company. In addition, the regulators may impose
restrictions on the ability of the holding company itself to
pay dividends; require divestiture of holding company affil-
iates that pose a significant risk to the bank; or require
divestiture of the undercapitalized subsidiary bank.
recent
On October 8, 2008, the Bank entered into an informal
supervisory agreement (a memorandum of understanding
(the “MOU”)) with the FRB and the DFI (collectively, the
“Regulators”) to address certain issues raised in the Bank’s
regulatory examination by the DFI on
most
March 10, 2008. Certain of the issues to be addressed by
management under the terms of the MOU relate to the
following, among others: (i) Board and senior management
maintenance and succession planning; (ii) Board oversight
and education; (iii) Board assessment and enhancement;
(iv) loan policies and procedures; (v) allowance for loan
losses policies and procedures; (vi) liquidity and funds
management policies; (vii) strategic planning; (viii) capital
the Bank
maintenance,
including a requirement
that
Separately, Hanmi Financial has committed to the FRB
that it will adopt a consolidated capital plan to augment and
maintain a sufficient consolidated capital position. In addi-
tion, Hanmi Financial has agreed that it will not (i) declare
or pay any dividends or make any payments on its trust
preferred securities or any other capital distributions with-
out the prior written consent of the FRB, and (ii) incur,
increase or renew any existing debt or purchase, redeem or
otherwise acquire any of its capital stock without the prior
written consent of the FRB.
A bank holding company is generally required to give the
FRB prior notice of any redemption or repurchase of its
own equity securities, if the consideration to be paid,
together with the consideration paid for any repurchases
in the preceding year, is equal to 10 percent or more of the
company’s consolidated net worth.
A bank holding company is also required to obtain FRB
approval before acquiring, directly or indirectly, ownership
or control of any voting shares of any bank if it would
thereby directly or indirectly own or control more than five
percent of the voting stock of that bank, unless it already
owns a majority of the voting stock. Prior approval from the
FRB is also required in connection with the acquisition of
control of a bank or another bank holding company, or
business combinations with another bank holding company.
Subject to certain prior notice or FRB approval require-
ments, bank holding companies may engage directly or
indirectly through a subsidiary in any, or acquire shares of
companies engaged in, those non-banking activities deter-
mined 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 also broader securities, insurance, merchant
banking and other activities that are determined to be
“financial in nature” or are incidental or complementary
to activities that are financial in nature and do not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally 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”), Chun-Ha and All World qualify as financial
12
subsidiaries under the GLBA. Under the GLBA, in order
to elect and retain financial holding company status, all
depository institution subsidiaries of a bank holding com-
pany must be well capitalized, well managed, and, except in
limited circumstances, be in satisfactory compliance with
the Community Reinvestment Act (“CRA”). Failure to
sustain compliance 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.
We have agreed with the FRB to take certain corrective
action pursuant to these GLBA requirements.
Hanmi Financial is also a bank holding company within the
meaning of Section 3700 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 SEC under the
Exchange Act. As such, we are subject to the information,
proxy solicitation, insider trading, corporate governance,
and other requirements and restrictions of the Exchange
Act.
The Sarbanes-Oxley Act of 2002
We are subject to the accounting oversight and corporate
governance requirements of the Sarbanes-Oxley Act of
2002, 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 inter-
nal control over financial reporting;
(cid:129) enhanced controls on,
and reporting of,
insider
trading; and
(cid:129) increased penalties for financial crimes and forfeiture of
executive bonuses in certain circumstances.
The Bank
As a California commercial bank whose deposits are insured
by the FDIC, the Bank is subject to regulation, supervision
and regular examination by the DFI and by the FRB. As a
member bank, the Bank is a stockholder of the Federal
Reserve Bank of San Francisco. Specific federal and state
laws and regulations that are applicable to banks regulate,
among other things, the scope of their business, their
investments, their reserves against deposits, the timing of
the availability of deposited funds, their activities relating to
dividends, investments, loans, the nature and amount of and
collateral for certain loans, borrowings, capital require-
ments, certain check-clearing activities, branching, and
mergers and acquisitions. Supervision, examination and
enforcement actions by these agencies are generally
intended to protect depositors, creditors, borrowers and
the DIF and generally is not intended for the protection
of stockholders.
If, as a result of an examination, 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 result-
ing from any violation or practice;
(cid:129) direct an increase in capital or establish specific minimum
capital ratios;
(cid:129) restrict the Bank’s growth geographically, by products and
services or by mergers and acquisitions;
(cid:129) enter into informal non-public or formal public memo-
randa 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.
As discussed above, on October 8, 2008, the Bank entered
into a MOU with the Regulators to address certain issues
raised in the Bank’s most recent regulatory examination by
the DFI on March 10, 2008.
Permissible Activities and Subsidiaries
Under the California Financial Code, California banks
have all the powers of a California corporation, subject
to the general limitation of state bank powers under the
FDI Act to those permissible for national banks. California
banks may engage in the “commercial banking business,”
which generally encompasses lending, deposit-taking and
13
all other kinds of banking business in which banks, includ-
ing national banks, customarily engage in the United States.
Further, California banks may form subsidiaries to engage
in the many so-called “closely related to banking” or “non-
banking” activities commonly conducted by national banks
in operating subsidiaries. Federal law prohibits the Bank
and its subsidiaries from engaging in any banking activities
in which a national bank cannot engage, unless the activity
is found by the FDIC not to pose a significant risk to the
DIF. This prohibition does not extend to those activities in
which the Bank (or a subsidiary of the Bank) is authorized
under state law to engage as agent, advisor, custodian,
administrator or trustee for its customer.
In addition, under the GLBA, the Bank may engage in
expanded financial activities through specially qualified
“financial subsidiaries” to the same extent as a national
bank. In order to form a financial subsidiary, the Bank
must be and remain well-capitalized and well-managed and
in satisfactory compliance with the CRA, and would be
subject to the same capital deduction, risk management and
affiliate transaction rules that apply to financial subsidiaries
of national banks. Generally, a financial subsidiary is per-
mitted to engage in activities, as may a financial holding
company, that are “financial in nature” or incidental thereto,
even though they are not permissible for the national bank
to conduct directly within the bank. However, a bank
financial subsidiary may not engage as principal in under-
writing insurance (other than credit life insurance), issue
annuities, or engage in real estate development or invest-
ment or merchant banking. Presently, the Bank has no
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 affiliate. The
FRB’s final Regulation R provides exceptions for network-
ing 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 securities, including sweep accounts to money market
funds, and with related trust, fiduciary, custodial and safe-
keeping needs. The final rules, which became effective in
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. Each
FHLB makes available loans or advances to its members
in compliance with the policies and procedures established
by the Board of Directors of the individual FHLB. Each
member of the FHLB of San Francisco is required to own
stock in an amount equal to the greater of (i) a membership
stock requirement with an initial cap of $25 million
(100 percent of “membership asset value” as defined), or
(ii) an activity based stock requirement (based on percent-
age of outstanding advances). At December 31, 2008, the
Bank was in compliance with the FHLB’s stock ownership
requirement and our investment in FHLB capital stock
totaled $30.7 million. The FHLB recently announced that
it would not pay any dividends on its capital stock in the first
quarter of 2009, and there can be no assurance that the
FHLB will pay dividends at the same rate it has paid in the
past, or that it will pay any dividends in the future.
Federal Reserve System
The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking and non-personal
time deposits). At December 31, 2008, the Bank was in
compliance with these requirements.
Capital Standards
At December 31, 2008, Hanmi Financial and the Bank’s
capital ratios exceed the minimum percentage requirements
to be deemed “well capitalized” institutions. See “Notes to
14
Consolidated Financial Statements, Note 14 — Regulatory
Matters.”
Hanmi Financial and the Bank are subject to capital ade-
quacy guidelines that incorporate both risk-based and lever-
age capital requirements. These capital adequacy guidelines
define capital in terms of “core capital elements,” or Tier 1
capital, and “supplemental capital elements,” or Tier 2
capital. Tier 1 capital is generally defined as the sum of
the core capital elements less goodwill and certain other
deductions, notably the unrealized net gains or losses (after
tax adjustments) on available-for-sale investment securities
carried at fair value. The following items are included as
core capital elements: (i) common shareholders’ equity;
(ii) qualifying non-cumulative perpetual preferred stock
and related surplus,
including trust preferred securities
(but not in excess of 25 percent of Tier 1 capital); and
(iii) minority interests in the equity accounts of consolidated
subsidiaries. If Hanmi Financial were to receive TARP
CPP funds, they would also count as Tier 1 capital. Sup-
plementary capital elements include: (i) allowance for loan
and lease losses (but not more than 1.25 percent of an
institution’s risk-weighted assets); (ii) perpetual preferred
stock and related surplus not qualifying as core capital;
(iii) hybrid capital instruments, perpetual debt and man-
datory convertible debt instruments; and (iv) term subor-
dinated debt and intermediate-term preferred stock and
related surplus. The maximum amount of supplemental
capital elements that qualifies as Tier 2 capital is limited to
100 percent of Tier 1 capital.
The minimum required ratio of qualifying total capital to
total risk-weighted assets, or the total risk-based capital
ratio, is 8.0 percent, at least one-half of which must be in the
form of Tier 1 capital, and the minimum required ratio of
Tier 1 capital to total risk-weighted assets, or the Tier 1
risk-based capital ratio, is 4.0 percent. Risk-based capital
ratios are calculated to provide a measure of capital that
reflects the degree of risk associated with a banking organ-
ization’s operations for both transactions reported on the
balance sheet as assets, and transactions, such as letters of
credit and recourse arrangements, which are recorded as
off-balance sheet items. Under the risk-based capital guide-
lines, the nominal dollar amounts of assets and credit-
equivalent amounts of off-balance sheet items are multi-
plied by one of several risk adjustment percentages, which
range from 0 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets
with relatively high credit risk, such as business loans.
15
The risk-based capital requirements also take into account
concentrations of credit (i.e., relatively large proportions of
loans involving one borrower, industry, location, collateral
or loan type) and the risks of “non-traditional” activities
(those that have not customarily been part of the banking
business). The regulations require institutions with high or
inordinate levels of risk to operate with higher minimum
capital standards and authorize the regulators to review an
institution’s management of such risks in assessing an
institution’s capital adequacy. The risk-based capital regu-
lations also include exposure to interest rate risk as a factor
that the regulators will consider in evaluating a bank’s
capital adequacy. Interest rate risk is the exposure of a
bank’s current and future earnings and equity capital arising
from adverse movements in interest rates. While interest
rate risk is inherent in a bank’s role as financial intermediary,
it introduces volatility to bank earnings and to the economic
value of the institution. Bank holding companies and banks
engaged in significant trading activity (trading assets con-
stituting 10 percent or more of total assets, or $1 billion or
more) may also be subject to the market risk capital guide-
lines and be required to incorporate additional market and
interest rate risk components into their risk-based capital
standards. Neither Hanmi Financial nor the Bank is cur-
rently subject to the market risk capital rules.
Hanmi Financial and the Bank are also required to main-
tain a leverage capital ratio designed to supplement the risk-
based capital guidelines. Banks and bank holding compa-
nies that have received the highest rating of the five cat-
egories used by regulators to rate banks and that are not
anticipating or experiencing any significant growth must
maintain a ratio of Tier 1 capital (net of all intangibles) to
adjusted total assets of at least 3.0 percent. All other insti-
tutions are required to maintain a leverage ratio of at least
100 to 200 basis points above the 3.0 percent minimum, for
a minimum of 4.0 percent to 5.0 percent. Pursuant to
federal regulations, banks must maintain capital levels com-
mensurate with the level of risk to which they are exposed,
including the volume and severity of problem loans. Federal
regulators may, however, set higher capital requirements
when a bank’s particular circumstances warrant. As of
December 31, 2008, the Bank’s leverage capital ratio was
8.85 percent, and Hanmi Financial’s leverage capital ratio
was 8.93 percent, both ratios exceeding regulatory
minimums.
As of December 31, 2008, the regulatory capital guidelines
and the actual capital ratios for Hanmi Financial and the
Bank were as follows:
Regulatory Capital
Guidelines
Actual
Adequately
Capitalized
Well
Capitalized
Hanmi
Bank
Hanmi
Financial
Total Risk-Based
Capital Ratio
Tier 1 Risk-Based
Capital Ratio
Tier 1 Leverage Ratio
8.00% 10.00% 10.70% 10.79%
4.00%
4.00%
6.00% 9.44% 9.52%
5.00% 8.85% 8.93%
The terms of the MOU included a requirement that the
Bank maintain a minimum Tier 1 leverage ratio and tan-
gible stockholder’s equity to total tangible assets ratio of not
less than 8.0 percent. As of December 31, 2008, the Bank
had a Tier 1 leverage ratio of 8.85 percent and a tangible
stockholder’s equity to total tangible assets ratio of 8.68 per-
cent, both above the required 8.0 percent level.
The current risk-based capital guidelines that apply to
Hanmi Financial and the Bank are based upon the 1988
capital accord of the International Basel Committee on
Banking Supervision, a committee of central banks and
bank supervisors/regulators from the major industrialized
countries that develops broad policy guidelines for use by
each country’s supervisors in determining the supervisory
policies they apply. 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 require-
ments, became mandatory for large or “core” international
banks outside the United States in 2008 (total assets of
$250 billion or more or consolidated foreign exposures of
$10 billion or more); is optional for others, and if adopted,
must first be complied with in a “parallel run” for two years
along with the existing Basel I standards. In January 2009,
the Basel Committee proposed to reconsider regulatory
capital
and risk-management
requirements and additional disclosures in the final new
accord in response to recent worldwide developments.
supervisory
standards,
In July 2008, the U.S. federal banking agencies issued a
proposed rule that would give banking organizations that
do not use the Basel II advanced approaches the option to
implement a new risk-based capital framework. This frame-
work would adopt the standardized approach of Basel II for
credit risk, the basic indicator approach of Basel II for
operational risk, and related disclosure requirements. While
16
the
this proposed rule generally parallels
relevant
approaches under Basel II, it diverges where U.S. markets
have unique characteristics and risk profiles, most notably
with respect to risk weighting residential mortgage expo-
sures. A definitive final rule has not been issued. The
U.S. banking agencies have indicated, however, that they
will retain the minimum leverage requirement for all
U.S. banks.
Prompt Corrective Action Regulations
Federal law requires each federal banking agency to take
prompt corrective action when a bank falls below one or
more prescribed minimum capital ratios. The federal bank-
ing agencies have, by regulation, defined the following five
capital categories:
(cid:129) “Well Capitalized” — Total risk-based capital ratio of
10.0 percent, Tier 1 risk-based capital ratio of 6.0 percent,
and leverage capital ratio of 5.0 percent, and not subject to
any order or written directive by any regulatory authority
to meet and maintain a specific capital level for any capital
measure;
(cid:129) “Adequately Capitalized” — Total risk-based capital ratio
of 8.0 percent, Tier 1 risk-based capital ratio of 4.0 per-
cent, and leverage capital ratio of 4.0 percent (or 3.0 per-
cent if the institution receives the highest rating from its
primary regulator);
(cid:129) “Undercapitalized” — Total risk-based capital ratio of less
than 8.0 percent, Tier 1 risk-based capital ratio of less
than 4.0 percent, or leverage capital ratio of less than
4.0 percent (or 3.0 percent if the institution receives the
highest rating from its primary regulator);
(cid:129) “Significantly Undercapitalized” — Total risk-based capi-
tal ratio of less than 6.0 percent, Tier 1 risk-based capital
ratio of less than 3.0 percent, or leverage capital ratio of
less than 3.0 percent; and
(cid:129) “Critically Undercapitalized” — Tangible equity to total
assets of less than 2.0 percent.
A bank may be treated as though it were in the next lower
capital category if, after notice and the opportunity for a
hearing, the appropriate federal agency finds an unsafe or
unsound condition or practice so warrants, but no bank may
be treated as “critically undercapitalized” unless its actual
capital ratio warrants such treatment.
Undercapitalized banks are required to submit capital res-
toration plans and, during any period of capital inadequacy,
may not pay dividends or make other capital distributions,
are subject to asset growth and expansion restrictions and
may not be able to accept brokered deposits. At each
successively lower capital category, banks are subject to
increased restrictions on operations.
The federal banking agencies have also adopted non-capital
safety and soundness standards to assist examiners in iden-
tifying and addressing potential safety and soundness con-
cerns before capital becomes impaired. The guidelines 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 man-
agement, and (vii) compensation and benefits. In general,
the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. If
an institution fails to meet safety and soundness standards,
the appropriate federal banking agency may require the
institution to submit a compliance plan and institute
enforcement proceedings if an acceptable compliance plan
is not submitted or the deficiency is not corrected.
FDIC Deposit Insurance
The FDIC is an independent federal agency that insures
deposits, up to prescribed statutory limits, of federally
insured banks and savings institutions and safeguards the
safety and soundness of the banking and savings industries.
The FDIC insures our customer deposits through the DIF
up to prescribed limits for each depositor. Pursuant to the
EESA, the maximum deposit insurance amount has been
increased from $100,000 to $250,000 through the end of
2009. 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. Pursuant to the Federal Deposit Insurance Reform
Act of 2005, the FDIC is authorized to set the reserve ratio
for the DIF annually at between 1.15 percent and 1.50 per-
cent of estimated insured deposits. The FDIC may increase
or decrease the assessment rate schedule on a semi-annual
basis. In an effort to restore capitalization levels and to
ensure the DIF will adequately cover projected losses from
future bank failures, the FDIC, in October 2008, proposed
a rule to alter the way in which it differentiates for risk in the
risk-based assessment system and to revise deposit insur-
ance assessment rates, including base assessment rates. First
quarter 2009 assessment rates were increased to between 12
and 50 cents for every $100 of domestic deposits, with most
banks paying between 12 and 14 cents.
On February 27, 2009, the FDIC approved an interim rule
to institute a one-time special assessment of 20 cents per
$100 in domestic deposits to restore the DIF reserves
depleted by recent bank failures. The interim rule addi-
tionally reserves the right of the FDIC to charge an addi-
tional up-to-10 basis point special premium at a later point
if the DIF reserves continue to fall. The FDIC also
approved an increase in regular premium rates for the
second quarter of 2009. For most banks, this will be
between 12 to 16 basis points per $100 of domestic deposits.
Premiums for the rest of 2009 have not yet been set.
Additionally, by participating in the transaction account
guarantee program under the TLGP, banks temporarily
become subject to an additional assessment on deposits in
excess of $250,000 in certain transaction accounts and
additionally for assessments from 50 basis points to
100 basis points per annum depending on the initial matu-
rity of the debt. Further, all FDIC-insured institutions are
required to pay assessments to the FDIC to fund interest
payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the Federal Government estab-
lished to recapitalize the predecessor to the DIF. The FICO
assessment rates, which are determined quarterly, averaged
0.0113 percent of insured deposits in fiscal 2008. These
assessments will continue until the FICO bonds mature in
2017.
The FDIC may terminate a depository institution’s deposit
insurance 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 the bank’s
depositors. The termination of deposit insurance for a bank
would also result in the revocation of the bank’s charter by
the DFI.
Loans-to-One-Borrower
With certain limited exceptions, the maximum amount that
a California bank may lend to any borrower at any one time
(including the obligations to the bank of certain related
entities of the borrower) may not exceed 25 percent (and
unsecured loans may not exceed 15 percent) of the bank’s
stockholders’ equity, allowance for loan losses, and any
capital notes and debentures of the bank.
17
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 stockholders (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 stockholder; or
(cid:129) any political or campaign committee controlled by such
executive officer, director or principal stockholder.
(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 affiliates in the
the Bank’s capital and
aggregate to 20 percent of
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 non-affiliated parties.
Additional restrictions on transactions with affiliates may
be imposed on the Bank under the FDI Act’s prompt
corrective action regulations and the supervisory authority
of the federal and state banking agencies discussed above.
Such loans and leases:
Dividends
(cid:129) must comply with loan-to-one-borrower limits;
(cid:129) require prior full board approval when aggregate exten-
sions 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-underwrit-
ing 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 and
advised companies, financial subsidiaries and investment
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;
Holders of Hanmi Financial common stock and preferred
stock are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available
therefore under the laws of the State of Delaware. Delaware
corporations such as Hanmi Financial may make distribu-
tions to their stockholders out of their surplus, or out of
their net profits for the fiscal year in which the dividend is
declared and for the preceding fiscal year. However, divi-
dends may not be paid out of a corporation’s net profits if,
after the payment of the dividend, the corporation’s capital
would be less than the capital represented by the issued and
outstanding stock of all classes having a preference upon the
distribution of assets.
The FRB has advised bank holding companies that it
believes that payment of cash dividends in excess of current
earnings from operations is inappropriate and may be cause
for supervisory action. As a result of this policy, banks and
their holding companies may find it difficult to pay divi-
dends out of retained earnings from historical periods prior
to the most recent fiscal year or to take advantage of
earnings generated by extraordinary items such as sales of
buildings or other large assets in order to generate profits to
enable payment of future dividends. In a February 2009
guidance letter, the FRB directed that a bank holding
company should inform the FRB if it is planning to pay
a dividend that exceeds earnings for a given quarter or that
could affect the bank’s capital position in an adverse way.
Further, the FRB’s position that holding companies are
expected to provide a source of managerial and financial
strength to their subsidiary banks potentially restricts a bank
holding company’s ability to pay dividends. Hanmi
18
Financial has agreed with the FRB that it will not declare or
pay any dividends or make any payments on its trust pre-
ferred securities or any other capital distributions without
the prior written consent of the FRB.
The Bank is a legal entity that is separate and distinct from
its holding company. Hanmi Financial receives income
through dividends paid by the Bank. Subject to the regu-
latory restrictions described below, future cash dividends by
the Bank will depend upon management’s assessment of
future capital requirements, contractual restrictions and
other factors.
The powers of the Board of Directors of the Bank to declare
a cash dividend to its holding company is subject to Cal-
ifornia law, which restricts the amount available for cash
dividends to the lesser of a bank’s retained earnings or net
income for its last three fiscal years (less any distributions to
shareholders made during such period). Where the above
test is not met, cash dividends may still be paid, with the
prior approval of the DFI, in an amount not exceeding the
greatest of: 1) retained earnings of the bank; 2) the net
income of the bank for its last fiscal year; or 3) the net
income of the bank for its current fiscal year. There are no
retained earnings available for cash dividends to Hanmi
Financial immediately after December 31, 2008 due to the
Bank’s retained deficit of $53.5 million as of December 31,
2008 and a net loss for both its current and last fiscal years.
See “Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securi-
ties — Dividends” for a further discussion of restrictions on
the Bank’s ability to pay dividends to Hanmi Financial.
Bank regulators also have authority to prohibit a bank from
engaging in business practices considered to be unsafe or
unsound. It is possible, depending upon the financial con-
dition of a bank and other factors, that regulators could
assert that the payment of dividends or other payments
might, under certain circumstances, be an unsafe or
unsound practice, even if technically permissible.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy Act (“BSA”) is a disclosure law that
forms the basis of the Federal Government’s framework to
prevent and detect money laundering and to deter other
criminal enterprises. Under the BSA, financial institutions
such as the Bank are required to maintain certain records
and file certain reports regarding domestic currency trans-
transportations of currency.
actions and cross-border
Among other requirements, the BSA requires financial
institutions to report imports and exports of currency in
the amount of $10,000 or more and, in general, all cash
transactions of $10,000 or more. The Bank has established a
BSA compliance policy under which, among other precau-
tions, the Bank keeps currency transaction reports to doc-
ument cash transactions in excess of $10,000 or in multiples
totaling more than $10,000 during one business day, mon-
itors certain potentially suspicious transactions such as the
exchange of a large number of small denomination bills for
large denomination bills, and scrutinizes electronic funds
transfers for BSA compliance. The BSA also requires that
financial institutions report to relevant law enforcement
agencies any suspicious transactions potentially involving
violations of law.
The USA PATRIOTAct and its implementing regulations
significantly expanded the anti-money laundering and
financial transparency laws in response to the terrorist
attacks in September 2001. The Bank has adopted addi-
tional comprehensive policies and procedures to address the
requirements of the USA PATRIOT Act. Material defi-
ciencies in anti-money laundering compliance can result in
public enforcement actions by the banking agencies, includ-
ing the imposition of civil money penalties and supervisory
restrictions on growth and expansion. Such enforcement
actions could also have serious reputation consequences for
us and the Bank.
Consumer Laws
The Bank and Hanmi Financial are subject to many federal
and state consumer protection laws and regulations pro-
hibiting unfair or fraudulent business practices, untrue or
misleading advertising and unfair competition, including:
(cid:129) The Home Ownership and Equity Protection Act of
1994 requires extra disclosures and consumer protections
to borrowers from certain lending practices, such as
practices deemed to be “predatory lending.”
(cid:129) Privacy policies are required by federal and state banking
laws and regulations that limit the ability of banks and
other financial institutions to disclose non-public infor-
mation about consumers to non-affiliated third parties.
The federal bank regulatory agencies have adopted cus-
tomer information security guidelines for safeguarding
confidential, personal customer information. The guide-
lines require each financial institution, under the super-
vision and ongoing oversight of its Board of Directors or
an appropriate committee thereof, to create, implement
and maintain a comprehensive written information
19
security program designed to ensure the security and
confidentiality of customer information, protect against
any anticipated threats or hazards to the security or
integrity of such information, and protect against unau-
thorized access or use of such information that could
in substantial harm or inconvenience to any
result
customer.
(cid:129) The Fair Credit Reporting Act, as amended by the Fair
and Accurate Credit Transactions Act, requires financial
firms to help deter identity theft, including developing
appropriate fraud response programs, and gives consum-
ers more control of their credit data.
(cid:129) The Equal Credit Opportunity Act 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 programs, or good faith exercise of any rights
under the Consumer Credit Protection Act.
(cid:129) The Truth in Lending Act 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 regulates many lending practices,
including making it unlawful for any lender to discrim-
inate 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 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, consistent 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 applications
for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. In its most
recently released public reports, from September 2008,
the Bank received an “outstanding” rating.
(cid:129) The Home Mortgage Disclosure Act 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 pat-
terns and enforcing anti-discrimination statutes.
(cid:129) The Real Estate Settlement Procedures Act requires
lenders to provide borrowers with disclosures regarding
the nature and cost of real estate settlements and prohibits
certain abusive practices, such as kickbacks.
(cid:129) The National Flood Insurance Act requires homes in
flood-prone areas with mortgages from a federally reg-
ulated lender to have flood insurance.
(cid:129) The Americans with Disabilities Act, in conjunction with
similar California legislation, requires employers with 15
or more employees and all businesses operating “com-
mercial facilities” or “public accommodations” to accom-
modate disabled employees and customers.
These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits,
making loans, collecting loans and providing other services.
Failure to comply with these laws and regulations can
subject the Bank to various penalties, including, but not
limited to, enforcement actions, injunctions, fines or crim-
inal penalties, punitive damages to consumers, and the loss
of certain contractual rights.
Regulation of Subsidiaries
Non-bank subsidiaries are subject to additional or separate
regulation and supervision by other state, federal and self-
regulatory bodies. Chun-Ha and 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 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 pros-
pects 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
adversely impact our financial condition, business opera-
tions and results of operations.
We may be subject to further regulatory action. On
October 8, 2008, the members of the Board of Directors
20
recent
(the “Board”) of the Bank entered into a MOU with the
Regulators to address certain issues raised in the Bank’s
most
regulatory examination by the DFI on
March 10, 2008. Certain of the issues to be addressed by
management under the terms of the memorandum of
understanding relate to the following, among others:
(i) Board and senior management maintenance and suc-
cession planning; (ii) Board oversight and education;
(iii) Board assessment and enhancement; (iv) loan policies
and procedures; (v) allowance for loan losses policies and
procedures; (vi) liquidity and funds management policies;
(vii) strategic planning; (viii) capital maintenance, including
a requirement that the Bank maintain a minimum Tier 1
leverage ratio and tangible stockholder’s equity to total
tangible assets ratio of not less than 8.0 percent; and
(ix) restrictions on the payment of dividends without the
Regulators’ prior approval. In addition, Hanmi Financial
has committed to the FRB that it will adopt a consolidated
capital plan to augment and maintain a sufficient consol-
idated capital position. The Bank is required to regularly
keep our Regulators informed of its progress in complying
with the provisions of the MOU. If we fail to comply with
the terms of the MOU or any other regulatory orders or
agreements we have entered into, or the Regulators believe
that further enforcement action against us is necessary, we
may be subject to further requirements to take corrective
action, face further regulation and intervention and addi-
tional constraints on our business operations, any of which
could have a material adverse effect on our results of
operations, financial condition and business.
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 ade-
quate levels of capital to support our operations. As part of
the MOU we entered into, we agreed that the Bank would
maintain a minimum Tier 1 leverage ratio and tangible
stockholder’s equity to total tangible assets ratio of not less
than 8.0 percent. We have also committed to the FRB to
adopt a consolidated capital plan to augment and maintain a
sufficient capital position. Our existing capital resources
may not satisfy our capital requirements for the foreseeable
future and may not be sufficient to offset any problem
assets. Further, should our asset quality erode and require
significant additional provision for credit losses, resulting in
consistent net operating losses at the Bank, our capital levels
will decline and we will need to raise capital to maintain our
well-capitalized status and satisfy our agreements with the
Regulators.
to
be
deemed well-capitalized
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.
Accordingly, 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 continue as a going concern could be materially impaired.
Although both Hanmi Financial and the Bank met the
requirements
at
December 31, 2008, there can be no assurance that we will
continue to be deemed well-capitalized. We have applied to
participate in the TARP CPP for an investment of up to
$105 million from the Treasury, but we are still waiting a
final decision from the Treasury as to whether we will be
able to participate in this program. If we cannot raise
additional capital through the TARP CPP or other sources
when needed, our results of operations and financial con-
dition could be materially and adversely affected. In addi-
tion, if we were to raise additional capital through the
issuance of additional shares, our stock price could be
adversely affected, depending on the terms of any shares
we were to issue.
Difficult economic and market conditions have adversely
affected our industry. Dramatic declines in the housing
market, with decreasing home prices and increasing delin-
quencies and foreclosures, have negatively impacted the
credit performance of mortgage and construction loans
and resulted in significant write-downs of assets by many
financial institutions. General downward economic trends,
reduced availability of commercial credit and increasing
unemployment have negatively impacted the credit perfor-
mance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of
the financial markets and the economy have resulted in
decreased lending by financial institutions to their custom-
ers and to each other. This market turmoil and tightening of
credit has led to increased commercial and consumer defi-
ciencies, lack of customer confidence, increased market
volatility and widespread reduction in general business
activity. Financial institutions have experienced decreased
access to deposits and borrowings. The resulting economic
pressure on consumers and businesses and the lack of
confidence in the financial markets may adversely affect
our business, financial condition, results of operations and
stock price. We do not expect that the difficult conditions in
the financial markets are likely to improve in the near
21
future. A worsening of these conditions would likely exac-
erbate the adverse effects of these difficult market condi-
tions on us and others in the financial institutions industry.
In particular, we may face the following risks in connection
with these events:
(cid:129) We potentially face increased regulation of our industry.
Compliance with such regulation may increase our costs
and limit our ability to pursue business opportunities.
(cid:129) The process we use to estimate losses inherent in our
credit exposure requires difficult, subjective and complex
judgments, including forecasts of economic conditions
and how these economic conditions might impair the
ability of our borrowers to repay their loans. The level of
uncertainty
conditions may
adversely affect the accuracy of our estimates, which
may, in turn, impact the reliability of the process.
concerning
economic
(cid:129) We may be required to pay significantly higher FDIC
premiums because market developments have signifi-
cantly depleted the insurance fund of the FDIC and
reduced the ratio of reserves to insured deposits.
(cid:129) Our liquidity could be negatively impacted by an inability
to access the capital markets, unforeseen or extraordinary
demands on cash, or regulatory restrictions, which could,
among other things, materially and adversely affect our
business, results of operations and financial condition.
If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not
experience an adverse effect, which may be material, on
our ability to access capital and on our business, financial
condition and results of operations. Recent legislative and
regulatory initiatives to address difficult market and eco-
nomic conditions may not stabilize the U.S. banking sys-
tem. On October 3, 2008, President Bush signed into law
the EESA and on February 17, 2009, President Obama
signed the ARRA in response to the current crisis in the
financial sector. The Treasury and banking regulators are
implementing a number of programs under this legislation
to address capital and liquidity issues in the banking system.
There can be no assurance, however, as to the actual impact
that the EESA and the ARRA will have on the financial
including the extreme levels of volatility and
markets,
limited credit availability currently being experienced.
The failure of the EESA and the ARRA to help stabilize
the financial markets and a continuation or worsening of
current financial market conditions could materially and
adversely affect our business, financial condition, results of
operations, access to capital and credit or the value of our
securities.
and
financial
described
condition. As
U.S. and international financial markets and economic con-
ditions could adversely affect our liquidity, results of oper-
in
ations
“Management’s Discussion and Analysis of Financial Condi-
tion and Results of Operations — Recent Developments,” glo-
bal capital markets and economic conditions continue to be
adversely affected and the resulting disruption has been
particularly acute in the financial sector. Although Hanmi
Financial remains well capitalized, our capital ratios have
been adversely affected and the cost and availability of funds
may be adversely affected by illiquid credit markets and the
demand for our products and services may decline as our
borrowers and customers realize the impact of an economic
slowdown and recession. In addition, the severity and
duration of these adverse conditions is unknown and
may exacerbate our exposure to credit risk and adversely
affect the ability of borrowers to perform under the terms of
their lending arrangements with us. Accordingly, continued
turbulence in the U.S. and international markets and econ-
omy may adversely affect our liquidity, financial condition,
results of operations and profitability.
We have recently experienced significant changes in our key
management. Our President and Chief Executive Officer
joined us in June 2008, our Chief Financial Officer joined
us in December 2007 and our Chief Credit Officer joined
us in September 2008. Our success depends in large part on
our ability to attract key people who are qualified and have
knowledge and experience in the banking industry in our
markets and to retain those people to successfully imple-
ment our business objectives. The unexpected loss of ser-
vices of one or more of our key personnel or the inability to
maintain consistent personnel in management could have a
material adverse impact on our business and results of
operations.
We may be required to make additional provisions for credit
losses and charge off additional loans in the future, which
could adversely affect our results of operations and capital
levels. During the year ended December 31, 2008, we
recorded a $75.7 million provision for credit losses and
charged off $48.2 million in loans, net of $2.2 million in
recoveries. There has been a general slowdown in the
economy and in particular, in the housing market in areas
of Southern California where a majority of our loan cus-
tomers are based. This slowdown reflects declining prices
and excess inventories of homes to be sold, which has
22
contributed to a financial strain on homebuilders and sup-
pliers, as well as an overall decrease in the collateral value of
real estate securing loans. As of December 31, 2008, we had
$1.2 billion in commercial real estate, construction and
residential property loans. Continuing deterioration in
the real estate market generally and in the residential
property and construction segment in particular could result
in additional loan charge-offs and provisions for credit
losses in the future, which could have an adverse effect
on our net income and capital levels.
Our allowance for loan losses may not be adequate to cover
actual losses. A significant source of risk arises from the
possibility that we could sustain losses because borrowers,
guarantors and related parties may fail to perform in accor-
dance with the terms of their loans. The underwriting and
credit monitoring policies and procedures that we have
adopted to address this risk may not prevent unexpected
losses that could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. We maintain an allowance for loan losses to provide
for loan defaults and non-performance. The allowance is
also appropriately increased for new loan growth. While we
believe that our allowance for loan losses is adequate to
cover anticipated losses, we cannot assure you that we will
not increase the allowance for loan losses further or that our
regulators will not require us to increase this allowance.
Liquidity risk could impair our ability to fund operations
and jeopardize our financial condition. Liquidity is essen-
tial to our business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources
could have a material adverse effect on our liquidity. Our
access to funding sources in amounts adequate to finance
our activities could be impaired by factors that affect us
specifically or the financial services industry in general.
Factors that could detrimentally impact our access to liquid-
ity sources include a decrease in the level of our business
activity due to a market downturn or adverse regulatory
action against us. Our ability to acquire deposits or borrow
could also be impaired by factors that are not specific to us,
such as a severe disruption of the financial markets or
negative views and expectations about the prospects for
the financial services industry as a whole as the recent
turmoil faced by banking organizations in the domestic
and worldwide credit markets deteriorates.
Brokered deposits may be difficult for us to retain or replace
at attractive rates as they mature. Our financial flexibility
could be severely constrained if we are unable to renew our
wholesale funding or if adequate financing is not available
in the future at acceptable rates of interest. We may not have
sufficient liquidity to continue to fund new loan origina-
tions, and we may need to liquidate loans or other assets
unexpectedly in order to repay obligations as they mature.
In addition, a depository institution that is not well cap-
italized is generally prohibited from accepting brokered
deposits and offering interest rates on deposits “significantly
higher” than the prevailing rate in its market. A depository
institution that is adequately capitalized may accept bro-
kered deposits if it obtains the prior approval of the FDIC.
Changes in economic conditions could materially hurt our
business. Our business is directly affected by changes in
economic conditions, including finance, legislative and reg-
ulatory 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:
(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.
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 geo-
graphic concentration, our results depend largely upon
economic conditions in these areas. Deterioration in eco-
nomic conditions in the Bank’s market areas, 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 concentration in commercial real estate loans located
primarily in Southern California could have adverse effects
on credit quality. As of December 31, 2008, the Bank’s
loan portfolio included commercial real estate and con-
struction loans, primarily in Southern California, totaling
$1,087.8 million, or 32.3 percent of total gross loans.
Because of this concentration, a deterioration of the South-
ern California commercial real estate market could have
adverse consequences for the Bank. Among the factors that
could contribute to such a decline are general economic
23
conditions in Southern California, interest rates and local
market construction and sales activity.
Our concentration in commercial and industrial loans could
have adverse effects on credit quality. As of December 31,
2008, the Bank’s loan portfolio included commercial and
industrial loans, primarily in Southern California, totaling
$2,099.7 million, or 62.4 percent of total gross loans.
Because of this concentration, a deterioration of the South-
ern California economy could affect the ability of borrow-
ers, guarantors and related parties to perform in accordance
with the terms of their loans, which could have adverse
consequences for the Bank.
Our concentrations of loans in certain industries could have
adverse effects on credit quality. As of December 31, 2008,
the Bank’s loan portfolio included loans to: 1) lessors of
non-residential buildings
totaling $450.2 million, or
13.4 percent of total gross loans; 2) borrowers in the
accommodation industry totaling $444.9 million, or
13.2 percent of total gross loans; and 3) gas stations totaling
$381.0 million, or 11.3 percent of total gross loans. Most of
these loans are in Southern California. Because of these
concentrations of loans in specific industries, a deterioration
of the Southern California economy overall, and specifically
within these industries, could affect the ability of borrowers,
guarantors and related parties to perform in accordance
with the terms of their loans, which could have adverse
consequences for the Bank.
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 diver-
sifying 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 sub-
stantially increased its provision for credit losses in 2008 and
2007, as compared to previous years, as a result of increases
in historical loss factors, increased charge-offs and migra-
tion of more loans into more adverse risk categories.
Our loan portfolio is predominantly secured by real estate
and thus we have a higher degree of risk from a downturn in
our real estate markets. A downturn in our real estate
markets could hurt our business because many of our loans
are secured by real estate. Real estate values and real estate
markets are generally affected by changes in national,
regional or local economic conditions, fluctuations in inter-
est rates and the availability of loans to potential purchasers,
changes in tax laws and other governmental statutes, reg-
ulations and policies and acts of nature, such as earthquakes
and national disasters particular to California. Substantially
all of our real estate collateral is located in California. If real
estate values continue to further decline, the value of real
estate collateral securing our loans could be significantly
reduced. Our ability to recover on defaulted loans by fore-
closing and selling the real estate collateral would then be
diminished and we would be more likely to suffer losses on
defaulted loans.
We are exposed to risk of environmental liabilities with
In the course
respect to properties to which we take title.
of our business, we may foreclose and take title to real estate,
and could be subject to environmental
liabilities with
respect to these properties. We may be held liable to a
governmental entity or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental contami-
nation, or may be required to investigate or clean-up haz-
ardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or reme-
diation activities could be substantial. In addition, if we are
the owner or former owner of a contaminated site, we may
be subject to common law claims by third parties based on
damages and costs resulting from environmental contam-
ination emanating from the property. If we become subject
to significant environmental liabilities, our business, finan-
cial condition, results of operations and prospects could be
adversely affected.
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 borrowings. Significant fluctuations in interest
rates may have a material adverse effect on our financial
condition and results of operations. The current historically
low interest rate environment resulted by the response to
the financial market crisis and the global economic reces-
sion in 2008 may affect our operating earnings negatively.
24
We must manage our funding resources to enable us to meet
our ongoing operations costs and our deposit and borrowing
obligations as they come due. Liquidity is essential 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 depos-
its; interest and 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 FHLB. Adverse
regulatory developments or a decline in our financial con-
dition 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,
or a decline in the financial condition of the FHLB, could
have a significant impact on our ability to meet our liquidity
needs, including our ability to attract deposits in an increas-
ingly competitive environment. We cannot forecast if or
when market liquidity conditions will improve from current
stresses, although it is our expectation that the existing
turmoil in the financial and credit markets may continue to
affect its performance at least throughout 2009.
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 of Basel II may be or what impact a
pending alternative standardized approach to the Basel II
option for non-Basel II U.S. banks may have on the cost and
availability of different types of credit and the potential
compliance costs of implementing the new capital 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. Sig-
nificant new laws, changes in existing laws, or repeals of
existing laws may cause our results to differ materially.
Further, federal monetary policy, particularly as imple-
mented 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, making loans, and attracting and retain-
ing employees. The increasingly competitive environment is
a result of changes in regulation, changes in technology and
product delivery systems, new competitors 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.
Hanmi Bank is currently restricted from paying dividends to
Hanmi Financial and Hanmi Financial is restricted from
paying dividends to stockholders and from making any
payments on its trust preferred securities. The primary
source of Hanmi Financial’s income from which we pay
Hanmi Financial obligations and distribute dividends to
our stockholders is from the receipt of dividends from the
Bank. The availability of dividends from the Bank is limited
by various statutes and regulations. The Bank currently has
deficit retained earnings and has suffered net losses in 2007
and 2008, largely caused by goodwill impairments. As a
result, the California Financial Code does not provide
authority for the Bank to declare a dividend to Hanmi
Financial, with or without Commissioner approval. In
addition, the Bank is prohibited from paying dividends
to Hanmi Financial unless it receives prior regulatory
approval. See “Item 7 — Management’s Discussion and Anal-
ysis of Financial Condition and Results of Operations. Liquid-
ity and Capital Resources.” Furthermore, Hanmi Financial
has agreed that it will not pay any dividends or make any
payments on our outstanding $82.4 million of trust pre-
ferred securities or any other capital distributions without
the prior written consent of the FRB. We began to defer
interest payment on our trust preferred securities commenc-
ing with the interest payment that was due on January 15,
2009. If we defer interest payments for more than 20
consecutive quarters under any of our outstanding trust
preferred instruments, then we would be in default under
such trust preferred arrangements and the amounts due
under the agreements pursuant to which we issued our trust
preferred securities would be immediately due and payable.
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.
We continually encounter technological change, and we may
have fewer resources than many of our competitors to con-
tinue to invest in technological improvements. The finan-
cial services industry is undergoing rapid technological
changes, with frequent introductions of new technology-
driven products and services. The effective use of
25
technology increases efficiency and enables financial insti-
tutions to better serve customers 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
efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological
improvements. We may not be able to effectively implement
new technology-driven products and services or be success-
ful
in marketing these products and services to our
customers.
We rely on communications, information, operating and
financial control systems technology from third-party service
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 origination
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 substantial resources, if at all.
Negative publicity could damage our reputation. Reputa-
tion 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 regulatory consequences.
Negative public opinion could result from our actual or
perceived conduct in any number of activities, including
lending practices, corporate governance, regulatory com-
pliance, 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.
The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate
widely because of a number of factors, many of which
are outside our control. In addition, the stock market is
subject to fluctuations in the share prices and trading
volumes that affect the market prices of the shares of many
could
companies. These broad market
adversely affect the market price of our common stock.
Among the factors that could affect our stock price are:
fluctuations
(cid:129) actual or anticipated quarterly fluctuations in our oper-
ating results and financial condition;
(cid:129) changes in revenue or earnings estimates or publication of
research reports and recommendations by financial
analysts;
(cid:129) failure to meet analysts’ revenue or earnings estimates;
(cid:129) speculation in the press or investment community;
(cid:129) strategic actions by us or our competitors, such as acqui-
sitions or restructurings;
(cid:129) actions by institutional stockholders;
(cid:129) fluctuations in the stock price and operating results of our
competitors;
(cid:129) general market conditions and, in particular, develop-
ments related to market conditions for the financial ser-
vices industry;
(cid:129) proposed or adopted legislative or regulatory changes or
developments;
(cid:129) anticipated or pending investigations, proceedings or
litigation that involve or affect us; or
(cid:129) domestic and international economic factors unrelated to
our performance.
The stock market and, in particular, the market for financial
institution stocks, has experienced significant volatility
recently. As a result, the market price of our common stock
may be volatile. In addition, the trading volume in our
common stock may fluctuate more than usual and cause
significant price variations to occur. The trading price of the
shares of our common stock and the value of our other
securities will depend on many factors, which may change
from time to time, including, without limitation, our finan-
cial condition, performance, creditworthiness and pros-
pects,
future sales of our equity or equity-related
securities, and other factors identified above in “Cautionary
Note Regarding Forward-Looking Statements.” Current levels
of market volatility are unprecedented. The capital and
credit markets have been experiencing volatility and dis-
ruption for more than a year. In recent months, the volatility
and disruption has reached unprecedented levels. In some
cases, the markets have produced downward pressure on
26
stock prices and credit availability for certain issuers without
regard to those issuers’ underlying financial strength. A
significant decline in our stock price could result in sub-
stantial losses for individual stockholders and could lead to
costly and disruptive securities litigation and potential
Inc.
delisting from The NASDAQ Stock Market,
(“Nasdaq”).
Anti-takeover provisions and state and federal law may
limit the ability of another party to acquire us, which could
cause our stock price to decline. Various provisions of our
certificate of incorporation and by-laws could delay or
prevent a third-party from acquiring us, even if doing so
might be beneficial to our stockholders. These provisions
provide for, among other things, a classified board of
directors, supermajority voting approval for certain actions,
limitation on large stockholders taking certain actions and
the authorization to issue “blank check” preferred stock by
action of the Board of Directors acting alone, thus without
obtaining stockholder approval. The Bank Holding Com-
pany Act of 1956, as amended, and the Change in Bank
Control Act of 1978, as amended, together with federal
regulations, require that, depending on the particular cir-
cumstances, either FRB approval must be obtained or
notice must be furnished to the FRB and not disapproved
prior to any person or entity acquiring “control” of a state
member bank, such as the Bank. These provisions may
prevent a merger or acquisition that would be attractive to
stockholders and could limit the price investors would be
willing to pay in the future for our common stock.
We may face other risks. From time to time, we detail
other risks with respect to our business and/or financial
results in our filings with the SEC.
Item 1B. Unresolved Staff Comments
None.
27
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, 2013.
The following table sets forth information about our offices as of December 31, 2008:
Office
Address
City/State
Corporate Headquarters (1)
Branches:
Beverly Hills Branch
Cerritos — Artesia Branch
Cerritos — South Branch
Downtown — Los Angeles Branch
Fashion District Branch
Fullerton — Beach Branch
Garden Grove — Brookhurst Branch
Garden Grove — Magnolia Branch
Gardena Branch
Irvine Branch
Koreatown Galleria Branch
Koreatown Plaza Branch
Northridge Branch
Olympic Branch (2)
Olympic — Kingsley Branch
Rancho Cucamonga Branch
Rowland Heights Branch
San Diego Branch
San Francisco Branch
Silicon Valley Branch
Torrance — Crenshaw Branch
Torrance — Del Amo Mall Branch
Van Nuys Branch
Vermont Branch (3)
Western Branch
Wilshire — Hobart Branch
Departments:
Commercial Loan Department (1)
Consumer Loan Center (1)
Insurance Department (1)
International Finance Department (1)
SBA Loan Center (1)
LPO’s and Subsidiaries:
Atlanta LPO (1)
Chicago LPO (1)
Dallas LPO (1)
Denver LPO (1)
Northwest Region LPO (1)
Virginia LPO (1)
Chun-Ha/All World (1)
Chun-Ha (1)
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, CA
9300 Wilshire Boulevard, Suite 101
11754 East Artesia Boulevard
11900 South Street, Suite 109
950 South Los Angeles Street
726 East 12th Street, Suite 211
5245 Beach Boulevard
9820 Garden Grove Boulevard
9122 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
10180 Reseda Boulevard
3737 West Olympic Boulevard
3099 West Olympic Boulevard
9759 Baseline Road
18720 East Colima Road
4637 Convoy Street, Suite 101
1469 Webster Street
2765 El Camino Real
2370 Crenshaw Boulevard, Suite H
21838 Hawthorne Boulevard
14427 Sherman Way
933 South Vermont Avenue
120 South Western Avenue
3660 Wilshire Boulevard, Suite 103
Beverly Hills, CA
Artesia, CA
Cerritos, CA
Los Angeles, CA
Los Angeles, CA
Buena Park, CA
Garden Grove, CA
Garden Grove, CA
Gardena, CA
Irvine, CA
Los Angeles, CA
Los Angeles, CA
Northridge, CA
Los Angeles, CA
Los Angeles, CA
Rancho Cucamonga, CA
Rowland Heights, CA
San Diego, CA
San Francisco, CA
Santa Clara, CA
Torrance, CA
Torrance, CA
Van Nuys, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
3660 Wilshire Boulevard, Suite 1050
3099 West Olympic Boulevard, Second Floor
3660 Wilshire Boulevard, Suite 424
933 South Vermont Avenue, 2nd Floor
3660 Wilshire Boulevard, Suite 116
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
3585 Peachtree Industrial Boulevard, Suite 144 Duluth, GA
Chicago, IL
6200 North Hiawatha, Suite 235
Farmers Branch, TX
2711 LBJ Freeway, Suite 114
Aurora, CO
3033 South Parker Road, Suite 340
Bellevue, WA
3500 108th Avenue Northeast, Suite 280
Annandale, VA
7535 Little River Turnpike, Suite 200B
Garden Grove, CA
12912 Brookhurst Street, Suite 480
Los Angeles, CA
3225 Wilshire Boulevard, Suite 1806
(1) Deposits are not accepted at this facility.
(2) Training Facility is also located at this facility.
(3) Administrative offices are also located at this facility.
28
Owned/
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
As of December 31, 2008, our consolidated investment in
premises and equipment, net of accumulated depreciation
and amortization, totaled $20.3 million. Our total occu-
pancy expense, exclusive of
furniture and equipment
expense, was $5.2 million for the year ended December 31,
2008. Hanmi Financial and its subsidiaries consider their
present facilities to be sufficient for their current operations.
the origination and servicing of loans, and other issues
related to the business of Hanmi Financial and its subsid-
iaries. 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 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
Item 4. Submission of Matters to a Vote of Security
Holders
During the fourth quarter of 2008, no matters were sub-
mitted 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
2008:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2007:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
$ 5.19
$ 6.77
$ 7.79
$ 9.82
$16.70
$17.39
$19.50
$23.18
$ 1.65
$ 4.65
$ 5.20
$ 6.80
$ 8.39
$14.04
$15.74
$18.58
—
—
$0.03 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 339 registered stockholders of record
as of March 1, 2009.
Dividends
Hanmi Financial has agreed with the FRB that it will not
pay any cash dividends to its stockholders without prior
consent of the FRB. Hanmi Bank is also required to seek
prior approval from the Regulators to pay cash dividends to
Hanmi Financial. The ability of Hanmi Financial to pay
dividends to its stockholders is also directly dependent on
the ability of the Bank to pay dividends to us. Section 642 of
the California Financial Code provides that neither a Cal-
a majority-owned
ifornia
state-chartered bank nor
29
subsidiary of a bank can pay dividends to its stockholders
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 restriction, 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 Com-
missioner of Financial Institutions. The Bank had a
retained deficit of $53.5 million as of December 31, 2008.
Due to the net losses for 2008 and 2007, FRB approval is
required for payment of bank dividends to Hanmi Financial
in 2008. FRB Regulation H Section 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. On August 29, 2008, we announced the suspension of
our quarterly cash dividend. As a result of entering into the
MOU and further agreements we have entered into with
the FRB, we are required to obtain regulatory approval
prior to the Bank or Hanmi Financial declaring any div-
idends to its respective shareholders.
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 stockholders.
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 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 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.
TOTAL RETURN PERFORMANCE
Hanmi Financial
NASDAQ Composite
S&P 500 Financials
SNL Bank $1B-$5B
e
u
l
a
V
x
e
d
n
I
$300
$250
$200
$150
$100
$50
$0
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Index
Hanmi Financial
Nasdaq Composite
S&P 500 Financials
SNL Bank $1B-$5B
December 31,
Symbol
2003
2004
2005
2006
2007
2008
HAFC
^IXIC
S5FINL
$100.00
$100.00
$100.00
— $100.00
$183.81
$108.59
$110.70
$123.42
$184.73
$110.08
$117.38
$121.31
$235.52
$120.56
$139.94
$140.38
$ 92.62
$132.39
$114.55
$102.26
$23.10
$78.72
$52.43
$84.81
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of 2008, there were no purchases of equity securities. As of December 31, 2008, there was no
current plan authorizing purchases of equity securities.
30
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, 2008 is derived from our audited financial
statements. In the opinion of management, the information presented reflects all adjustments, including normal and
recurring accruals, considered necessary for a fair presentation of the results of such periods.
As of and for the Year Ended December 31,
(Dollars in thousands, except for per share data)
2008
2007
2006
2005
2004
SUMMARY STATEMENTS OF OPERATIONS:
Interest and Dividend Income
Interest Expense
Net Interest Income Before Provision for Credit Losses
Provision for Credit Losses
Non-Interest Income
Non-Interest Expense
Income (Loss) Before Provision (Benefit) for Income
Taxes
Provision (Benefit) for Income Taxes
$
$
238,183
103,782
134,401
75,676
32,149
194,322
$
280,896
129,110
151,786
38,323
40,006
189,929
(103,448)
(1,355)
(36,460)
24,302
260,189
106,946
153,243
7,173
36,963
77,313
105,720
40,370
NET INCOME (LOSS)
$ (102,093)
$
(60,762)
$
65,350
$
$
$
200,941
62,850
138,091
5,395
31,450
70,201
93,945
36,144
57,801
163,477
443,912
2,469,080
3,414,252
2,826,114
2,987,923
426,329
208,580
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
32,652
102,902
2,907
26,211
66,566
59,640
22,960
36,680
127,164
418,973
2,234,842
3,104,188
2,528,807
2,704,298
399,890
178,771
1,912,534
425,537
2,387,412
2,670,701
2,129,724
223,780
1,687,688
293,313
143,262
$
215,188
197,876
3,291,125
3,875,816
3,070,080
3,611,901
263,915
258,965
3,276,142
271,802
3,653,720
3,866,856
2,913,171
591,930
2,874,470
323,462
264,490
$
122,398
350,457
3,241,097
3,983,657
3,001,699
3,613,101
370,556
256,548
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
3,238,873
486,370
272,412
2,721,229
414,672
3,214,761
3,602,181
2,881,448
221,347
2,367,389
458,227
242,362
(2.23)
$
(2.23)
$
5.75
$
5.64
$
0.09
$
45,905,549
(1.27)
$
(1.27)
$
8.08
$
5.59
$
0.24
$
45,860,941
$
$
$
$
$
1.34
1.32
9.91
5.55
0.24
49,076,613
1.18
$
1.16
$
8.76
$
4.29
$
0.20
$
48,658,798
0.87
$
0.84
$
8.11
$
3.62
$
0.20
$
49,330,704
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 (1)
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
(1) Loans receivable, net of allowance for loan losses and deferred loan fees, and
(3) Tangible equity divided by common shares outstanding.
loans held for sale.
(2) Total stockholders’ equity divided by common shares outstanding.
31
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,
2008
2007
2006
2005
2004
1.78%
1.37%
(2.64)% (1.56)% 1.81%
(31.56)% (12.33)% 14.26% 13.83% 12.51%
(38.60)% (22.09)% 26.96% 29.11% 25.60%
3.75%
3.57%
4.31%
4.77%
116.67% 99.03% 40.65% 41.41% 51.56%
(4.05)% (18.11)% 18.02% 16.84% 26.90%
8.36% 12.69% 12.72% 12.86% 10.98%
2.91%
3.68%
3.93%
4.81%
3.16%
4.34%
10.79% 10.65% 12.55% 12.04% 11.98%
10.70% 10.59% 12.28% 11.98% 11.80%
9.52%
9.44%
9.40% 11.58% 11.03% 10.93%
9.34% 11.31% 10.96% 10.75%
8.93%
8.85%
8.52% 10.08%
9.85%
8.47%
9.11%
9.06%
8.93%
8.78%
0.27%
0.50%
3.62%
0.19%
0.38%
3.17%
0.19%
0.17%
1.38%
2.11%
1.00%
0.96%
58.23% 80.05% 193.86% 246.40% 377.49%
0.41%
0.30%
0.12%
1.00%
1.66%
1.37%
0.73%
1.33%
(4) Net income (loss) divided by average total assets.
(9) Total non-interest expense divided by the sum of net interest income before
(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.
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.
(8) Net interest income before provision for credit losses divided by average
(12) Non-performing assets consist of non-performing loans and other real estate
interest-earning assets.
owned.
Non-GAAP Financial Measures
Return on Average Tangible Equity
Return on average tangible equity is supplemental financial
information determined by a method other than in accor-
dance with U.S. generally accepted accounting principles
(“GAAP”). This non-GAAP measure is used by manage-
ment 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 reg-
ulators also exclude goodwill and other intangible assets
from stockholders’ equity when assessing the capital ade-
quacy 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 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.
32
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)
2008
2007
2006
2005
2004
Average Stockholders’ Equity
Less Average Goodwill and Average Other
Intangible Assets
$323,462
$ 492,637
$ 458,227
$ 417,813
$ 293,313
(58,972)
(217,601)
(215,865)
(219,286)
(150,051)
Average Tangible Equity
$264,490
$ 275,036
$ 242,362
$ 198,527
$ 143,262
Return on Average Stockholders’ Equity
Effect of Average Goodwill and Average Other
Intangible Assets
(31.56)%
(12.33)%
14.26%
13.83%
12.51%
(7.04)%
(9.76)%
12.70%
15.28%
13.09%
Return on Average Tangible Equity
(38.60%)
(22.09%)
26.96%
29.11%
25.60%
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 number of shares of common stock outstanding. Management believes the presentation of this financial
measure excluding the impact of these items provides useful supplemental information that is essential to a proper
understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing
tangible capital. This disclosure should not be viewed as a 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)
2008
2007
2006
2005
2004
Total Stockholders’ Equity
Less Goodwill and Other Intangible Assets
$263,915
(4,950)
$ 370,556
(114,008)
$ 486,370
(213,958)
$ 426,329
(217,749)
$ 399,890
(221,119)
Tangible Equity
$258,965
$ 256,548
$ 272,412
$ 208,580
$ 178,771
Book Value Per Share
Effect of Goodwill and Other Intangible Assets
Tangible Book Value Per Share
$
$
5.75
(0.11)
5.64
$
$
8.08
(2.49)
5.59
$
$
9.91
(4.36)
5.55
$
$
8.76
(4.47)
4.29
$
$
8.11
(4.49)
3.62
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
statements because of certain factors discussed elsewhere in
this Report. See “Item 1A. Risk Factors.”
This discussion presents management’s analysis of the
financial condition and results of operations as of and for
the years ended December 31, 2008, 2007 and 2006. This
discussion should be read in conjunction with our Consol-
idated 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
Critical Accounting Policies
We have established various accounting policies that govern
the application of GAAP in the preparation of our con-
solidated 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
33
significant estimates and assumptions that have a material
impact on the carrying value of certain assets and liabilities,
and we consider these critical accounting policies. We use
estimates and assumptions based on historical experience
and other factors that we believe to be reasonable under the
circumstances. Actual results could differ significantly from
these estimates and assumptions, which could have a mate-
rial impact on the carrying value of assets and liabilities at
the balance sheet dates and our results of operations for the
reporting periods. Management has discussed the develop-
ment and selection of these critical accounting policies with
the Audit Committee of Hanmi Financial’s Board of
Directors.
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 under-
lying 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
and
“Note 4 — Loans” presented elsewhere herein.
of Significant Accounting Policies”
Allowance for Loan Losses
Goodwill
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 par-
ticularly susceptible to significant change in the preparation
of our financial statements. Our allowance for loan loss
methodologies incorporate a variety of risk considerations,
both quantitative and qualitative, in establishing an allow-
ance for loan loss that management believes is appropriate
at each reporting date. Quantitative factors include our
historical loss experiences on 10 segmented loan pools by
risk rating, delinquency and charge-off trends, collateral
values, changes in non-performing loans, and other factors.
Qualitative factors include the general economic environ-
ment in our markets, delinquency and charge-off trends,
and the change in non-performing loans. Concentration of
credit, change of lending management and staff, quality of
loan review system, and change in interest rate are other
qualitative factors that are considered in our methodologies.
See “Financial Condition — Allowance for Loan Losses and
Allowance for Off-Balance Sheet Items,” “Results of Opera-
tions — Provision for Credit Losses” and “Notes to Consoli-
dated Financial Statements, Note 1 — Summary of Significant
Accounting Policies” for additional information on method-
ologies used to determine the allowance for loan losses and
allowance for off-balance sheet items.
Loan Sales
We normally 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 record a loan servicing asset when the benefits of
servicing are expected to be more than adequate compen-
sation to a servicer, which is determined by discounting all
Goodwill represents the excess of purchase price over the
fair value of net assets acquired. As of December 31, 2008,
there was no remaining goodwill. As of December 31, 2007,
goodwill was $107.1 million, which resulted primarily from
the acquisition of Pacific Union Bank (“PUB”) in 2004. In
accordance with Statement of Financial Accounting Stan-
dards (“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 oper-
ations. SFAS No. 142 prohibits the amortization of good-
will, 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 assessments of goodwill during the second
quarter of 2008 and the fourth quarter of 2007, we recog-
nized impairment losses on goodwill of $107.4 million and
$102.9 million, respectively, occasioned by the decline in
the market value of our common stock that 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.
Investment Securities
The classification and accounting for investment securities
are discussed in more detail in “Notes to Consolidated Financial
34
Statements, Note 1 — Summary of Significant Accounting Pol-
icies” presented elsewhere herein. Under SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Secu-
rities,” investment securities generally must be classified as
held-to-maturity, available-for-sale or trading. The appro-
priate classification is based partially on our ability to hold the
securities to maturity and largely on management’s inten-
tions with respect to either holding or selling the securities.
The classification of investment securities is significant since
it directly impacts the accounting for unrealized gains and
losses on securities. Unrealized gains and losses on trading
securities flow directly through earnings during the periods
in which they arise. Investment securities that are classified as
held-to-maturity are recorded at amortized cost. Unrealized
gains and losses on available-for-sale securities are recorded
as a separate component of stockholders’ equity (accumulated
other comprehensive income or loss) and do not affect
earnings until realized or are deemed to be other-than-
temporarily impaired.
The fair values of investment securities are generally deter-
mined by reference to the average of at least two quoted
market prices obtained from independent external brokers
or independent external pricing service providers who have
experience in valuing these securities. In obtaining such
valuation information from third parties, we have evaluated
the methodologies used to develop the resulting fair values.
We perform a monthly analysis on the broker quotes
received from third parties to ensure that the prices repre-
sent a reasonable estimate of the fair value. The procedures
include, but are not limited to, initial and on-going review
of third party pricing methodologies, review of pricing
trends, and monitoring of trading volumes. We ensure
whether prices received from independent brokers represent
a reasonable estimate of fair value through the use of
internal and external cash flow models developed based
on spreads, and when available, market indices. As a result
of this analysis, if it is determined that there is a more
appropriate fair value based upon the available market data,
the price received from the third party is adjusted accord-
ingly. Prices from third-party pricing services are often
unavailable for securities that are rarely traded or are traded
only in privately negotiated transactions. As a result, certain
securities are priced via independent broker quotations that
utilize inputs that may be difficult to corroborate with
observable market based data. Additionally, the majority
of these independent broker quotations are non-binding.
We are obligated to assess, at each reporting date, whether
there is an other-than-temporary impairment (“OTTI”) to
our investment securities. Such impairment must be rec-
ognized in current earnings rather than in other compre-
hensive
income. The determination of other-than-
temporary impairment is a subjective process, requiring
the use of judgments and assumptions. We examine all
individual securities that are in an unrealized loss position at
each reporting date for other-than-temporary impairment.
Specific investment-related factors we examine to assess
impairment include the nature of the investment, severity
and duration of the loss, the probability that we will be
unable to collect all amounts due, an analysis of the issuers
of the securities and whether 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
evaluate whether the creditworthiness of the issuer calls the
realization of contractual cash flows into question. We
reexamine our financial resources, intent and overall ability
to hold the securities until their fair values recover. Man-
agement does not believe that there are any investment
securities, other than those identified in the current and
previous periods, that are deemed other-than-temporarily
impaired as of December 31, 2008 and 2007. Investment
securities are discussed in more detail in “Notes to Consol-
idated Financial Statements, Note 3 — Securities” presented
elsewhere herein.
Income Taxes
We provide for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabil-
ities are recognized for the future tax consequences attrib-
utable 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, 2008 and 2007, no
valuation allowance was required. Income taxes are dis-
cussed in more detail in “Notes to Consolidated Financial
Statements, Note 1 — Summary of Significant Accounting
Policies” and “Note 11 — Income Taxes” presented elsewhere
herein.
35
Executive Overview
The focus of our business has been on commercial and real
estate lending. Since the second half of 2007, the economic
conditions in the markets in which our borrowers operate
continued to deteriorate and the levels of loan delinquency
and defaults that we experienced were substantially higher
than historical levels. As a result, we have had to make
substantial provisions for credit losses in 2007 and 2008,
which adversely affected our earnings. We believe that our
results of operations will continue to be adversely affected if
economic conditions, particularly in California, continue to
deteriorate. Following our most recent safety and soundness
exam, we entered into a MOU with the Regulators whereby
we have agreed to take certain corrective actions and main-
tain certain levels of capital.
Starting in the fourth quarter of 2007, we expanded our
portfolio monitoring activities in an attempt to identify
problematic loans. For non-performing loans, we enhanced
our collection efforts, increased workout and collection
personnel and created individual action plans to maximize,
to the extent possible, collections on such loans. We have
also made significant changes in two critical areas. First, we
have enhanced our policies and procedures regarding the
monitoring of loans to be more stringent and make it more
difficult to allow exceptions from our loan policy. Second,
we strengthened and centralized the loan underwriting and
approval processes, including centralizing the credit under-
writing function at two locations, created a central moni-
toring mechanism to monitor all
loans, and increased
resources in the Bank’s departments responsible for address-
ing problem assets.
Complementing these initiatives is a program to improve
our organizational structure and streamline our operations.
Our goal is to reduce costs and gain greater operating
efficiencies. During the third quarter of 2008, we reduced
our headcount by approximately 10 percent. The headcount
reduction was across all of our operations, but the majority
was in marketing. As of December 31, 2008, we had
559 full-time equivalent employees as compared to
655 full-time equivalent employees as of December 31,
2007.
In 2008, total assets decreased 2.7 percent, reflecting the
weakening economy and our new strategy of focusing on
asset quality over growth, compared to increases of 6.9 per-
cent and 9.1 percent in 2007 and 2006. Total assets were
$3,875.8 million at December 31, 2008 as compared to
$3,983.7 million and $3,725.2 million at December 31,
2007 and 2006, respectively. Net loans were $3,291.1 mil-
lion at December 31, 2008 as compared to $3,241.1 million
and $2,837.4 million at December 31, 2007 and 2006,
respectively. Total deposits were $3,070.1 million at
December 31, 2008 as compared to $3,001.7 million and
$2,944.7 million at December 31, 2007 and 2006,
respectively.
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 purchases, so the operating results of
Chun-Ha and All World are included from the acquisition
date.
For the years ended December 31, 2008 and 2007, we
recognized net losses of $102.1 million and $60.8 million,
respectively, as compared with net income of $65.4 million
for the year ended December 31, 2006. Such losses in 2008
and 2007 were mainly caused by goodwill impairment
charges of $107.4 million and $102.9 million, respectively,
occasioned by the decline in the market value of our com-
mon stock that reflects, in part, recent turmoil in the
financial markets, and provisions for credit
losses of
$75.7 million and $38.3 million, respectively. For the years
ended December 31, 2008 and 2007, our diluted loss per
share was ($2.23) and ($1.27), respectively, as compared to
diluted earnings per share of $1.32 for the year ended
December 31, 2006. If we measure our operating results
from our continuing operations excluding the impact of the
goodwill impairment charges, we realized non-GAAP net
income of $5.3 million and $42.1 million for the years
ended December 31, 2008 and 2007, respectively, as com-
pared with $65.4 million for the year ended December 31,
2006.
Non-GAAP net income is supplemental financial infor-
mation determined by a method other than in accordance
with GAAP. This non-GAAP measure is used by man-
agement in the analysis of Hanmi Financial’s performance.
Non-GAAP net income is calculated by adding the impair-
ment loss on goodwill and GAAP net income (loss)
together. Management believes the presentation of this
financial measure excluding the impact of the goodwill
impairment charges provides useful supplemental informa-
tion that is essential to a proper understanding of the
financial results of Hanmi Financial, as it provides a method
to assess the results from our core banking operations. This
disclosure should not be viewed as a substitution for results
36
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 perfor-
mance measure to the GAAP performance measure for
the periods indicated:
GAAP Net Loss
Impairment Loss on Goodwill
Year Ended December 31,
2008
2007
(In thousands)
$(102,093)
107,393
$ (60,762)
102,891
Non-GAAP Net Income, Excluding Impairment Loss on
Goodwill
$
5,300
$ 42,129
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 depos-
its and borrowings. The difference is “net interest income.”
The difference between the yield earned on interest-earning
assets and the cost of interest-bearing liabilities is “net
interest spread.” Net interest income, when expressed as
a percentage of average total interest-earning assets, is
referred to as the “net interest margin.”
Net interest income is affected by the change in the level
and mix of interest-earning assets and interest-bearing
liabilities, referred to as “volume changes.” Our net interest
income also is affected by changes in the yields earned on
interest-earning assets and rates paid on interest-bearing
liabilities, referred to as “rate changes.” Interest rates
charged on loans are affected principally by the demand
for such loans, the supply of money available for lending
purposes and competitive factors. Those factors are affected
by general economic conditions and other factors beyond
our control, such as federal economic policies, the general
supply of money in the economy, income tax policies,
governmental budgetary matters and the actions of the
FRB.
37
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
Year Ended December 31,
2008
2007
2006
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
$3,332,133 $223,942
2,717
2,813
6,574
1,918
166
43
10
63,918
65,440
142,444
38,516
8,934
1,913
422
6.72% $3,080,544 $261,992
3,055
71,937
4.25%
4,963
116,701
4.30%
8,436
179,506
4.62%
1,413
26,228
4.98%
1,032
19,746
1.86%
5
96
2.25%
— —
—
2.37%
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
8.70%
4.25%
4.20%
4.61%
5.49%
5.11%
4.88%
4.04%
Total Interest-Earning Assets
3,653,720
238,183
6.52% 3,494,758
280,896
8.04% 3,214,761
260,189
8.09%
Noninterest-Earning Assets:
Cash and Cash Equivalents
Allowance for Loan Losses
Other Assets
Total Noninterest-Earning Assets
88,679
(55,991)
180,448
213,136
92,148
(30,769)
326,754
388,133
93,535
(26,693)
320,578
387,420
Total Assets
$3,866,856
$3,882,891
$3,602,181
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
Federal Home Loan Bank Advances and Other Borrowings
Junior Subordinated Debentures
$
89,866
618,779
1,045,968
527,927
509,524
82,406
2,093
19,909
43,598
18,753
14,373
5,056
97,173
2.33% $
3.22%
452,825
4.17% 1,430,603
306,876
3.55%
273,413
2.82%
82,406
6.14%
2,004
15,446
75,516
15,551
13,949
6,644
2.06% $ 107,811
3.41%
471,780
5.28% 1,286,202
280,249
5.07%
138,941
5.10%
82,406
8.06%
1,853
14,539
64,184
12,977
6,977
6,416
1.72%
3.08%
4.99%
4.63%
5.02%
7.79%
Total Interest-Bearing Liabilities
2,874,470
103,782
3.61% 2,643,296
129,110
4.88% 2,367,389
106,946
4.52%
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) Average balances for loans include non-accrual loans and net of deferred fees
and related direct costs. Loan fees have been included in the calculation of
interest income. Loan fees were $2.4 million, $2.7 million and $4.8 million for
the years ended December 31, 2008, 2007 and 2006, respectively.
(2) Tax-exempt income, computed on a tax-equivalent basis using an effective
marginal rate of 35 percent, was $4.2 million, $4.7 million and $4.7 million
for the years ended December 31, 2008, 2007 and 2006, respectively. Yields on
630,631
38,293
668,924
3,543,394
323,462
$3,866,856
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
$134,401
$151,786
$153,243
2.91%
3.68%
3.16%
4.34%
3.57%
4.77%
tax-exempt income were 6.54 percent, 6.53 percent and 6.53 percent for the
years ended December 31, 2008, 2007 and 2006, respectively.
(3) Represents the average yield earned on interest-earning assets less the average
rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
38
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.
Year Ended December 31,
2008 vs. 2007
Increase (Decrease)
Due to Change in
2007 vs. 2006
Increase (Decrease)
Due to Change in
(In thousands)
Volume
Rate
Total
Volume
Rate
Total
Interest and Dividend Income:
Gross Loans, Net
Municipal Securities
Obligations of Other U.S. Government Agencies
Other Debt Securities
Equity Securities
Federal Funds Sold
Term Federal Funds Sold
Interest-Earning Deposits
$ 20,139
(341)
(2,202)
(1,713)
619
(398)
43
10
$(58,189)
3
52
(149)
(114)
(468)
(5)
—
$(38,050)
(338)
(2,150)
(1,862)
505
(866)
38
10
$28,385
(30)
(249)
(1,877)
84
(401)
3
—
$ (5,468)
(2)
64
193
(25)
31
—
(1)
$22,917
(32)
(185)
(1,684)
59
(370)
3
(1)
Total Interest and Dividend Income
16,157
(58,870)
(42,713)
25,915
(5,208)
20,707
Interest Expense:
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
Federal Home Loan Bank Advances and Other
Borrowings
Junior Subordinated Debentures
Total Interest Expense
(158)
5,382
(17,907)
8,835
247
(919)
(14,011)
(5,633)
89
4,463
(31,918)
3,202
(8,073)
(1,588)
424
(1,588)
8,497
—
4,649
(195)
(601)
7,481
1,291
6,858
—
346
1,508
3,851
1,283
114
228
151
907
11,332
2,574
6,972
228
(29,977)
(25,328)
14,834
7,330
22,164
Change in Net Interest Income
$ 11,508
$(28,893)
$(17,385)
$11,081
$(12,538)
$ (1,457)
For the years ended December 31, 2008 and 2007, net
interest income was $134.4 million and $151.8 million,
respectively. The net interest spread and net interest margin
for the year ended December 31, 2008 were 2.91 percent
and 3.68 percent, respectively, compared to 3.16 percent
and 4.34 percent, respectively, for the year ended Decem-
ber 31, 2007 and 3.57 percent and 4.77 percent, respectively,
for the year ended December 31, 2006.
Average loans were $3.33 billion in 2008, as compared with
$3.08 billion in 2007 and $2.75 billion in 2006, representing
increases of 8.2 percent and 12.1 percent in 2008 and 2007,
respectively. Average interest-earning assets were $3.65 bil-
lion in 2008, as compared with $3.49 billion in 2007 and
$3.21 billion in 2006, representing increases of 4.5 percent
and 8.7 percent in 2008 and 2007, respectively. In 2008, the
majority of interest-earning assets growth was funded by a
$236.1 million increase in FHLB advances and other bor-
rowings. In 2007, the growth was funded primarily by
$108.4 million increase in average total deposits and a
$134.5 million increase in FHLB advances and other bor-
rowings. Total average interest-bearing liabilities grew by
$231.2 million and $275.9 million, respectively, in 2008 and
2007.
The average yield on interest-earning assets decreased by
152 basis points to 6.52 percent in 2008, after a five basis
point decrease in 2007 to 8.04 percent from 8.09 percent in
2006. The average cost on interest-bearing liabilities
decreased to 3.61 percent in 2008, compared to 4.88 percent
39
in 2007 and 4.52 percent in 2006. As a result, interest income
decreased 15.2 percent to $238.2 million for 2008 from
$280.9 million in 2007 and interest expense decreased
19.6 percent to $103.8 million from $129.1 million in
2007. In 2007, interest income increased by 8.0 percent to
$280.9 million from $260.2 million in 2006, but was out-
paced by a 20.7 percent increase in interest expense to
$129.1 million in 2007 from $106.9 million in 2006.
In 2008, net interest income decreased by 11.5 percent to
$134.4 million, compared to $151.8 million in 2007, as the
growth in average interest-earning assets was offset by the
FRB’s lowering of rates. In 2007, net interest income
decreased by 1.0 percent to $151.8 million from $153.2 mil-
lion in 2006, due primarily to the FRB’s lowering of rates.
Provision for Credit Losses
For the year ended December 31, 2008, the provision for
credit losses was $75.7 million, compared to $38.3 million
for the year ended December 31, 2007. The increase in the
provision for credit losses is attributable to increases in net
charge-offs, non-performing loans and criticized and clas-
sified loans. Net charge-offs increased $23.3 million, or
103.1 percent, from $22.6 million for the year ended
December 31, 2007 to $46.0 million for the year ended
December 31, 2008. Non-performing loans increased from
$54.5 million, or 1.66 percent of total gross loans, as of
December 31, 2007 to $121.9 million, or 3.62 percent of
total gross loans, as of December 31, 2008.
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 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 gross loan portfolio
increased $419.1 million,
from
$2,868.0 million at December 31, 2006 to $3,287.1 million
at December 31, 2007. Net charge-offs increased $18.1 mil-
lion, 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 percent 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.
14.6 percent,
or
Non-Interest Income
The following table sets forth the various components of
non-interest income for the years indicated:
(In thousands)
Service Charges on Deposit Accounts
Insurance Commissions
Trade Finance Fees
Other Service Charges and Fees
Remittance Fees
Bank-Owned Life Insurance Income
Gain on Sales of Loans
Gain on Sales of Securities Available for
Sale
Other-Than-Temporary Impairment Loss
on Securities
Other Income
Year Ended December 31,
2008
2007
2006
$18,463
5,067
3,088
2,365
2,194
952
765
$18,061
4,954
4,493
2,527
2,049
933
5,452
$17,134
770
4,567
2,359
2,056
879
6,917
77
—
2
(3,115)
2,293
(1,074)
2,611
—
2,279
Total Non-Interest Income
$32,149
$40,006
$36,963
We earn non-interest income from four major sources:
service charges on deposit accounts, insurance commissions,
fees generated from international trade finance and gain on
sales of loans. For the year ended December 31, 2008, non-
interest income was $32.1 million, a decrease of 19.6 percent
from $40.0 million for the year ended December 31, 2007.
The decrease in non-interest income for 2008 is primarily
due to lower gain on sales of loans, an increase in OTTI loss
on securities, and lower trade finance fee income. 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 expan-
sion in the Bank’s loan and deposit portfolios and higher
insurance commissions due to the acquisition of two insur-
ance agencies in January 2007, partially offset by lower gain
on sales of loans and an OTTI loss on securities
Service charges on deposit accounts increased $402,000, or
2.2 percent, in 2008 compared to 2007 and increased
$927,000, or 5.4 percent, in 2007 compared to 2006. Ser-
vice charge income on deposit accounts increased in 2008
and 2007 due to increase in demand deposit transaction
volume. Average demand deposits decreased by 10.2 percent
to $630.6 million in 2008 from $702.3 million in 2007 and
decreased by 4.5 percent to $702.3 million in 2007 from
$735.4 million in 2006.
40
Insurance commissions increased $113,000, or 2.3 percent,
in 2008 compared to 2007 and increased $4.2 million, or
543.4 percent, in 2007 compared to 2006. Insurance com-
missions increased in 2007 due to the acquisition of two
insurance agencies in January 2007.
Fees generated from international trade finance decreased
by 31.3 percent from $4.5 million in 2007 to $3.1 million in
2008 and decreased by 1.6 percent from $4.6 million in
2006 to $4.5 million in 2007. The decrease in 2008 is due
primarily to depressed international trading activities in this
recessionary economy. The decrease in 2007 is attributable
primarily to decreased export letter of credit volume. Trade
finance fees relate primarily to import and export letters of
credit.
Gain on sales of loans was $765,000 in 2008, compared to
$5.5 million in 2007 and $6.9 million in 2006, representing
a decrease of 86.0 percent for the year ended December 31,
2008 and a decrease of 21.2 percent for the year ended
December 31, 2007. In 2008, the decrease in gain on sales of
loans was due to a depressed secondary market for SBA
loans. 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. During 2008, there
were $23.3 million of SBA loans sold, compared to
$116.6 million in 2007 and $110.7 million in 2006.
We periodically evaluate our investments for OTTI. Dur-
ing 2008, we recorded an OTTI charge of $3.1 million,
which consisted of an impairment loss of $2.4 million on a
Lehman Brothers corporate bond, and an impairment loss
of $705,000 on a CRA equity fund investment. During
2007, we recorded an OTTI charge of $1.1 million to write
down the value of an investment in CRA preferred secu-
rities to their estimated fair value.
Non-Interest Expense
The following table sets forth the breakdown of non-inter-
est expense for the years indicated:
Year Ended December 31,
(In thousands)
2008
2007
2006
Salaries and Employee Benefits
Occupancy and Equipment
Data Processing
Professional Fees
Advertising and Promotion
Supplies and Communications
Amortization of Other Intangible
Assets
Impairment Loss on Goodwill
Other Operating Expenses
$ 42,209
11,158
5,799
3,539
3,518
2,518
1,958
107,393
16,230
$ 47,036
10,494
6,390
2,468
3,630
2,592
2,324
102,891
12,104
$40,512
9,643
5,857
1,910
2,997
2,391
2,379
—
11,624
Total Non-Interest Expense
$194,322
$189,929
$77,313
For the year ended December 31, 2008, non-interest
expense was $194.3 million, an increase of $4.4 million,
or 2.3 percent, from $189.9 million for the year ended
December 31, 2007. The increase in 2008 was primarily the
result of an increase of $4.5 million in impairment loss on
goodwill, an increase of $4.1 million in other operating
expenses and $1.4 million attributable to the two new
branches opened during the year, partially offset by a
decrease of $4.8 million in salaries and employee benefits.
For the year ended December 31, 2007, non-interest
expense was $189.9 million, an increase of $112.6 million,
or 145.7 percent, 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 expense
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.
Salaries and employee benefits expense for 2008 decreased
$4.8 million, or 10.3 percent, to $42.2 million from
$47.0 million for 2007. The decrease was primarily due
to a previously announced staff reduction during the third
quarter of 2008 and a lower bonus accrual, offset by
$544,000 attributable to the two new branches that opened
during 2008. Average headcount was 606 and 623 in 2008
and 2007, respectively, representing a decrease of 2.7 percent
over the prior year. Salaries and employee benefits expense
for 2007 increased $6.5 million, or 16.1 percent, to
41
$47.0 million from $40.5 million for 2006. 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 average number of employees. Aver-
age headcount was 623 and 589 in 2007 and 2006, respec-
tively, representing an increase of 5.8 percent over the prior
year.
Occupancy and equipment expenses for 2008 increased
$664,000, or 6.3 percent, to $11.2 million from $10.5 mil-
lion for 2007. The increase was due to $456,000 attributable
to the two new branches that opened during 2008. Occu-
for 2007 increased
pancy and equipment expenses
$851,000, or 8.8 percent, to $10.5 million from $9.6 million
for 2006. The increase 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.
Professional
fees for 2008 increased $1.1 million, or
43.4 percent, to $3.5 million from $2.5 million for 2007.
Professional fees for 2007 increased $558,000, or 29.2 per-
cent, to $2.5 million from $1.9 million for 2006. The
increases for both years were due primarily to additional
professional fees incurred for credit, legal and valuation
services.
Other operating expenses were $16.2 million for 2008,
compared to $12.1 million for 2007, representing an
increase of $4.1 million, or 34.1 percent. The increase
was due primarily to a $3.1 million increase in FDIC
assessments due to the utilization of a one-time assessment
credit received from the FDIC during 2007, which offset
the assessments, $1.1 million in losses related to a derivative
transaction to which Lehman Brothers Finance, S.A. was a
party, and $965,000 of severance expense for four directors
who retired during 2008. Other operating expenses were
$12.1 million for 2007, compared to $11.6 million for 2006,
representing an increase of $480,000, or 4.1 percent. The
increase is primarily attributable to an increase in the
amortization of loan servicing assets.
During our assessments of goodwill during the second
quarter of 2008 and the fourth quarter of 2007, we con-
cluded 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 and the increase in our
provision for credit losses. The fair value was determined
based on a weighted distribution of values derived from
three different approaches: market approach, market cap-
italization approach, and income approach. Based on these
assessments, we concluded that the related goodwill was
impaired and $107.4 million and $102.9 million was
required to be expensed as non-cash charges to continuing
operations during the second quarter of 2008 and the fourth
quarter of 2007, respectively. As of December 31, 2008 and
2007, goodwill was $0 and $107.1 million, respectively.
Income Taxes
For the year ended December 31, 2008, a tax benefit of
$1.4 million was recognized on pre-tax losses of $103.4 mil-
lion, representing an effective tax rate of 1.3 percent, com-
pared to income taxes of $24.3 million recognized on pre-
tax losses of $36.5 million, representing an effective tax rate
of 66.7 percent, for 2007, and income taxes of $40.6 million
recognized on pre-tax income of $106.2 million, represent-
ing an effective tax rate of 38.2 percent, for 2006. The
effective tax rates for 2008 and 2007 include impairment
losses on goodwill of $107.4 million and $102.9 million,
respectively, which are not deductible for tax purposes.
During 2008, we made investments in various tax credit
funds totaling $6.1 million and recognized $908,000 of
income tax credits earned from qualified low-income hous-
ing investments. We recognized an income tax credit of
$775,000 for the tax year 2007 from $5.8 million in such
investments and recognized an income tax credit of
$659,000 for the tax year 2006 from $4.8 million in such
investments. We intend to continue to make such invest-
ments 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
42
income and expenses are recognized cause “temporary
differences.”
Most of our temporary differences involve recognizing
more expenses in our financial statements than we have
been allowed to deduct for taxes, and therefore we normally
have a net deferred tax asset. At December 31, 2008 and
2007, we had net deferred tax assets of $29.5 million and
$18.5 million, respectively.
Financial Condition
Investment Portfolio
As of December 31, 2008, the investment portfolio was
composed primarily
of mortgage-backed securities,
U.S. Government agency securities, municipal bonds, col-
lateralized mortgage obligations and corporate bonds.
Investment securities available for sale were 99.5 percent,
99.7 percent and 99.8 percent of the total investment
portfolio as of December 31, 2008, 2007 and 2006, respec-
tively. Most of the securities held carried fixed interest rates.
Other than holdings of U.S. Government agency securities,
there were no investments in securities of any one issuer
exceeding 10 percent of stockholders’ equity as of Decem-
ber 31, 2008, 2007 or 2006.
We maintain an investment portfolio primarily for liquidity
purposes. As of December 31, 2008, securities available for
sale were $197.0 million, or 5.1 percent of total assets,
compared to $349.5 million, or 8.8 percent of total assets, as
of December 31, 2007. In 2008 and 2007, we purchased
$25.4 million and $45.0 million, respectively, of U.S. Gov-
ernment agency securities, 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:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Equity Securities
Corporate Bonds
Investment Portfolio as of December 31,
2008
2007
2006
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
695
215
910
$
$
695
215
910
$
$
694
246
940
$
$
694
247
941
$
$
693
274
967
$
$
693
276
969
$ 77,515
58,987
36,204
17,580
4,684
511
355
$ 78,860
58,313
36,162
17,700
4,958
804
169
$ 99,332
69,907
51,881
104,893
3,925
—
18,295
$ 99,198
71,751
51,418
105,089
3,835
—
18,226
$123,614
69,966
67,605
119,768
4,999
—
8,090
$121,608
71,710
66,113
118,244
5,050
—
7,887
Total Securities Available for Sale
$195,836
$196,966
$348,233
$349,517
$394,042
$390,612
43
The following table summarizes the contractual maturity schedule for investment securities, at amortized cost, and their
weighted-average yield as of December 31, 2008:
Within
One Year
After One Year
But Within
Five Years
After Five Years
But Within
Ten Years
After
Ten Years
(Dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Mortgage-Backed Securities
Municipal Bonds (1)
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Equity Securities
Corporate Bonds
$
536
—
11,143
2,999
4,684
—
355
—
4.21% $15,457
3,116
4.05% 21,734
4.19% 14,581
—
2.85%
—
—
—
7.88%
4.00% $24,990
7,778
5.05%
2,961
4.17%
—
3.37%
—
—
—
—
—
—
4.72% $36,747
6.45% 48,788
366
3.99%
—
—
—
—
511
—
—
—
5.04%
6.52%
4.32%
—
—
—
—
$19,717
3.86% $54,888
3.96% $35,729
5.04% $86,412
5.84%
(1) The yield on municipal bonds has been computed on a tax-equivalent basis,
using an effective marginal rate of 35 percent.
Loan Portfolio
Total gross loans increased by $76.3 million, or 2.3 percent,
in 2008 and increased by $419.1 million, or 14.6 percent, in
2007. Total gross loans represented 86.8 percent of total
assets at December 31, 2008, compared with 82.5 percent
and 77.0 percent at December 31, 2007 and 2006,
respectively.
Commercial and industrial loans were $2,099.7 million and
$2,094.7 million at December 31, 2008 and 2007, respec-
tively, representing 62.4 percent and 63.7 percent, respec-
tively, of total gross loans. Commercial loans include term
loans and revolving lines of credit. Term loans typically have
a maturity of three to five years and are extended to finance
the purchase of business entities, owner-occupied commer-
cial property, business equipment, leasehold improvements
or for permanent working capital. SBA guaranteed loans
usually have a longer maturity (5 to 20 years). Lines of
credit, in general, are extended on an annual basis to busi-
nesses that need temporary working capital and/or import/
export financing. These borrowers are well diversified as to
industry, location and their current and target markets.
Real estate loans were $1,180.1 million and $1,101.9 million
at December 31, 2008 and 2007, respectively, representing
35.1 percent and 33.5 percent, respectively, of total gross
loans. Real estate loans are extended to finance the purchase
and/or improvement of commercial real estate and residen-
tial property. The properties generally are investor-owned,
but may be for user-owned purposes. Underwriting guide-
lines include, among other things, an appraisal in confor-
mity 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.
44
The following table sets forth the amount of total loans outstanding in each category as of the dates indicated:
(In thousands)
Real Estate Loans:
Commercial Property
Construction
Residential Property(1)
Amount of Loans Outstanding as of December 31,
2008
2007
2006
2005
2004
$ 908,970
178,783
92,361
$ 795,675
215,857
90,375
$ 757,428
202,207
81,758
$ 733,650
152,080
88,442
$ 783,539
92,521
80,786
Total Real Estate Loans
1,180,114
1,101,907
1,041,393
974,172
956,846
Commercial and Industrial Loans:
Commercial Term Loans
Commercial Lines of Credit
SBA Loans(2)
International Loans
1,611,449
214,699
178,399
95,185
1,599,853
256,978
118,528
119,360
1,202,612
225,630
171,631
126,561
945,210
224,271
155,491
106,520
754,108
201,940
166,285
95,936
Total Commercial and Industrial Loans
2,099,732
2,094,719
1,726,434
1,431,492
1,218,269
Consumer Loans(3)
Total Gross Loans
83,525
90,449
100,121
92,154
87,526
$3,363,371
$3,287,075
$2,867,948
$2,497,818
$2,262,641
(1) As of December 31, 2008, 2007, 2006, 2005 and 2004, residential mortgage
loans held for sale totaling $0, $310,000, $630,000, $1.1 million and $0,
respectively, were included at the lower of cost or fair value.
(2) As of December 31, 2008, 2007, 2006, 2005 and 2004, SBA loans held for sale
totaling $37.4 million, $6.0 million, $23.2 million, $0 and $3.9 million,
respectively, were included at the lower of cost or fair value.
(3) Consumer loans include home equity lines of credit.
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,
2008
2007
2006
2005
2004
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term Loans
Commercial Lines of Credit
SBA Loans
International Loans
27.0% 24.2% 26.4% 29.4% 34.6%
4.1%
7.1%
5.3%
3.6%
2.8%
2.8%
6.1%
3.5%
6.6%
2.7%
35.1% 33.5% 36.3% 39.0% 42.3%
47.9% 48.7% 41.9% 37.8% 33.3%
8.9%
7.9%
6.4%
7.3%
6.0%
5.3%
4.3%
4.4%
2.8%
9.0%
6.2%
4.3%
7.8%
3.6%
3.6%
Total Commercial and Industrial Loans
62.4% 63.7% 60.2% 57.3% 53.8%
Consumer Loans
Total Gross Loans
2.5%
2.8%
3.5%
3.7%
3.9%
100.0% 100.0% 100.0% 100.0% 100.0%
45
The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
(In thousands)
Commitments to Extend Credit
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
December 31,
2008
2007
$386,785
47,289
29,177
16,912
$524,349
48,071
52,544
18,622
$480,163
$643,586
The table below shows the maturity distribution and repricing intervals of outstanding loans as of December 31, 2008. 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 $120.8 million.
(In thousands)
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term Loans
Commercial Lines of Credit
SBA Loans
International Loans
Within
One Year
After One
Year But
Within
Five Years
After
Five Years
Total
$ 799,795
178,783
37,422
$109,175
—
39,443
$
— $ 908,970
178,783
—
92,361
15,496
1,016,000
148,618
15,496
1,180,114
915,473
214,699
169,305
95,185
346,576
—
1,288
—
349,400
—
7,806
—
1,611,449
214,699
178,399
95,185
Total Commercial and Industrial Loans
1,394,662
347,864
357,206
2,099,732
Consumer Loans
Total Gross Loans
Loans With Predetermined Interest Rates
Loans With Variable Interest Rates
65,212
18,269
44
83,525
$2,475,874
$514,751
$372,746
$3,363,371
$ 367,434
$2,108,440
$498,685
$ 16,066
$371,973
773
$
$1,238,092
$2,125,279
As of December 31, 2008, the loan portfolio included the following concentrations of loans to one type of industry that were
greater than 10 percent of total gross loans outstanding:
Industry
Lessors of Non-Residential Buildings
Accommodation/Hospitality
Gasoline Stations
Balance as of
December 31,
2008
$450,226
$444,870
$381,036
Percentage of Total
Gross Loans Outstanding
(In thousands)
13.4%
13.2%
11.3%
There was no other concentration of loans to any one type
of industry exceeding 10 percent of total gross loans
outstanding.
Non-Performing Assets
Non-performing assets consist of loans on non-accrual
status, loans 90 days or more past due and still accruing
46
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 manage-
ment believes the loan is adequately collateralized and in the
process of collection. Loans may be restructured by man-
agement 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 even-
tually will overcome those circumstances and repay the loan
in full. OREO consists of properties acquired by foreclosure
or similar means that management intends to offer for sale.
Management’s classification of a loan as non-accrual is an
indication that there is reasonable doubt as to the full
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 col-
lateralized, but collection efforts are continuously pursued.
Non-performing loans were $121.9 million at December 31,
2008, compared to $54.5 million and $14.2 million at
December 31, 2007 and 2006, respectively, representing a
123.8 percent increase in 2008 and a 283.3 percent increase
in 2007. Total gross loans increased by 2.3 percent in 2008
over 2007 and 14.6 percent in 2007 over 2006. As a result,
the ratio of non-performing loans to total gross loans
increased to 3.62 percent at December 31, 2008 from
1.66 percent at December 31, 2007, and increased to
1.66 percent at December 31, 2007 from 0.50 percent at
December 31, 2006. As of December 31, 2008 and 2007,
we had OREO of $823,000 and $287,000, respectively.
Except for non-performing loans set forth below, our man-
agement is not aware of any loans as of December 31, 2008
and 2007 for which known credit problems of the borrower
would cause serious doubts as to the ability of such bor-
rowers to comply with their present loan repayment terms,
or any known events that would result in the loan being
designated as non-performing at some future date. Our
management cannot, however, predict the extent to which a
deterioration in general economic conditions, real estate
values, increases in general rates of interest, or changes in
the financial condition or business of borrower may
adversely affect a borrower’s ability to pay.
47
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
2008
2007
2006
2005
2004
December 31,
$
8,160
38,163
1,350
73,007
143
$ 2,684
24,118
1,490
25,729
231
$
246
—
—
13,862
105
$ — $ —
—
112
5,510
184
—
474
9,574
74
Total Non-Accrual Loans
120,823
54,252
14,213
10,122
5,806
Loans 90 Days or More Past Due and Still Accruing (as
to Principal or Interest):
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
989
86
1,075
121,898
823
150
77
227
—
2
2
—
9
9
54,479
287
14,215
—
10,131
—
169
39
208
6,014
—
$122,721
$54,766
$14,215
$10,131
$6,014
Non-Performing Loans as a Percentage of Total Gross Loans
Non-Performing Assets as a Percentage of Total Assets
3.62%
3.17%
1.66%
1.37%
0.50%
0.38%
0.41%
0.30%
0.27%
0.19%
Non-performing loans were $121.9 million at December 31,
2008, compared to $54.5 million at December 31, 2007,
representing a 123.8 percent increase. The increase was
primarily due to two large construction loans (a $25.2 million
condominium project
in Northern California and an
$11.9 million low-income housing construction project in
the Los Angeles area) and a $24.2 million commercial term
loan. Delinquent loans, which are comprised of loans past
due 30 or more days and still accruing and non-accrual loans
past due 30 or more days, were $128.5 million at Decem-
ber 31, 2008, compared to $45.1 million at December 31,
2007, representing a 184.9 percent increase. We believe that
the increases in non-performing loans and delinquent loans
are attributable primarily to a current economic recession that
is affecting some of our borrowers’ ability to honor their
commitments.
Allowance for Loan Losses and Allowance for
Off-Balance Sheet Items
Provisions to the allowance for loan losses are made quar-
terly to recognize probable loan losses. The quarterly pro-
vision is based on the allowance need, which is calculated
using a formula designed to provide adequate allowances for
losses inherent in the portfolio. The formula is made up of
various components. The allowance is first determined by
assigning reserve ratios for all loans. All loans that are
classified are then assigned certain allocations according
to type with larger percentages applied to loans deemed to
be of a higher risk. These percentages are determined based
on the prior loss history by type of loan, adjusted for current
economic factors.
48
(Dollars in thousands)
Allowance for Loan
Losses Applicable To
Real Estate Loans:
Commercial Property
Construction
Residential Property(1)
2008
2007
December 31,
2006
2005
2004
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
Allowance
Amount
Loans
Receivable
$ 5,587 $ 908,970 $ 2,269 $ 795,675 $ 2,101 $ 757,428 $ 2,043 $ 733,650 $ 1,854 $ 783,539
92,521
80,786
215,857
90,065
202,207
81,128
152,080
87,377
178,783
92,361
3,478
32
4,102
449
349
155
586
19
475
19
Total Real Estate Loans
10,138
1,180,114
5,779
1,101,597
2,706
1,040,763
2,537
973,107
2,358
956,846
Commercial and Industrial
Loans(1)
Consumer Loans
Unallocated
58,866
1,586
396
2,062,322
83,525
—
36,011
1,821
—
2,088,694
90,449
—
23,099
1,752
—
1,703,194
100,121
—
21,035
1,391
—
1,431,492
92,154
—
19,051
1,293
—
1,214,419
87,526
—
Total
$70,986 $3,325,961 $43,611 $3,280,740 $27,557 $2,844,078 $24,963 $2,496,753 $22,702 $2,258,791
(1) Loans held for sale excluded.
The allowance is based on estimates, and ultimate future
losses may vary from current estimates. Underlying trends
in the economic cycle, particularly in Southern California,
which management cannot completely predict, will influ-
ence 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 under-
writing 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 signif-
icant estimates and assumptions. Among other factors, the
estimates involve the amounts and timing of expected
future cash flows and fair value of collateral on impaired
loans, estimated losses on loans based on historical loss
experience, various qualitative factors, and uncertainties in
estimating losses and inherent risks in the various credit
portfolios, which may be subject to substantial change.
On a quarterly basis, we utilize a classification migration
model and individual loan review analysis tools as starting
points for determining the adequacy of the allowance for
loan losses and allowance for off-balance sheet items. Our
loss migration analysis tracks a certain number of quarters of
loan loss history to determine historical losses by classifi-
cation category (i.e., “pass,” “special mention,” “substan-
dard” 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 condi-
tions, as well as performance trends within specific portfolio
segments and individual concentrations of credit.
We continue to anticipate that the current national and
state economic recession will persist well throughout 2009,
due in large part to a decline in home prices and sales and
home construction activity, as well as other credit quality
problems and the high unemployment rate. Responding to
this difficult environment, we made significant changes in
two critical areas. First, we enhanced existing policies and
procedures regarding the monitoring of loans to be more
stringent and make it more difficult to allow exceptions
from our loan policy. Second, we strengthened and cen-
tralized the loan underwriting and approval processes,
49
including centralizing the credit underwriting function at
three locations, creating a central monitoring mechanism to
monitor all loans, and increasing resources in departments
of the Bank engaged in addressing problem assets.
The allowance for loan losses increased by $27.4 million, or
62.8 percent, to $71.0 million at December 31, 2008 as
compared with $43.6 million at December 31, 2007 and
increased by $16.1 million, or 58.3 percent, to $43.6 million
at December 31, 2007 as compared with $27.6 million at
December 31, 2006. The increase in the allowance for loan
losses in 2008 and 2007 was due primarily to the increased
migration of loans into more adverse risk rating categories,
increases in non-performing and delinquent loans, and the
increase in the overall loan portfolio. See “Provision for
Credit Losses.” In addition, the allowance reflects higher
estimated loss severity arising from a softening economy,
partially offset by our better collateral coverage on certain
impaired loans and the presence of guarantees. The ratio of
the allowance for loan losses to total gross loans substan-
tially increased to 2.11 percent at the end of 2008 as
at
compared with 1.33 percent and 0.96 percent
December 31, 2007 and 2006, 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-balance sheet exposure, primarily unfunded loan com-
mitments, of $4.1 million and $1.8 million at December 31,
2008 and 2007, respectively. Based on management’s eval-
uation 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, 2008 and 2007.
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 manage-
ment’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,
2008 and 2007.
50
The following table sets forth certain information regarding our allowance for loan losses and allowance for off-balance sheet
items for the periods presented.
As of and For The Year Ended December 31,
(Dollars in thousands)
2008
2007
2006
2005
2004
Allowance for Loan Losses:
Balance at Beginning of Year
Allowance for Loan Losses from PUB
Acquisition
Charge-Offs:
Real Estate Loans
Commercial and Industrial Loans
Consumer Loans
Total Charge-Offs
Recoveries on Loans Previously Charged Off:
Real Estate Loans
Commercial and Industrial Loans
Consumer Loans
Total Recoveries on Loans Previously
Charged Off
Net Loan Charge-Offs
Provision Charged to Operating Expense
Balance at End of Year
Allowance for Off-Balance Sheet Items:
Balance at Beginning of Year
Provision Charged to Operating Expense
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 Expense
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
$
43,611 $
27,557
$
24,963 $
22,702 $
13,349
—
—
—
—
10,566
15,005
31,916
1,231
48,152
—
1,979
203
2,182
45,970
73,345
199
22,255
876
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
$
$
$
70,986 $
43,611
1,765 $
2,331
2,130
(365)
4,096 $
1,765
$
$
$
27,557 $
24,963 $
22,702
2,130 $
—
1,800 $
330
2,130 $
2,130 $
1,385
415
1,800
1.38%
1.37%
0.73%
0.69%
0.17%
0.16%
0.12%
0.11%
2.13%
1.41%
1.00%
1.05%
0.19%
0.16%
1.17%
2.11%
1.33%
0.96%
1.00%
1.00%
64.76%
51.90%
16.62%
11.23%
16.32%
62.68%
58.50%
63.84%
55.36%
148.68%
58.23%
80.05%
193.86%
246.40%
377.55%
$3,334,008 $3,082,671
$2,751,565 $2,386,575 $1,938,422
$2,867,948 $2,497,818 $2,262,641
6,014
$
10,131 $
14,215 $
$3,363,371 $3,287,075
54,479
$ 121,898 $
51
Deposits
Total deposits at December 31, 2008, 2007 and 2006 were
$3,070.1 million, $3,001.7 million and $2,944.7 million,
respectively, representing an increase of $68.4 million, or
2.3 percent, in 2008 and $57.0 million, or 1.9 percent, in
2007. At December 31, 2008, 2007 and 2006, total time
deposits outstanding were $2,080.9 million, $1,782.5 mil-
lion and $1,678.8 million,
representing
67.8 percent, 59.4 percent and 57.0 percent, respectively,
of total deposits. This growth reflects an increase in broker
deposits necessitated by liquidity issues after an outflow of
core deposits.
respectively,
Demand deposits and money market accounts decreased by
$218.7 million, or 19.4 percent, in 2008 and $40.5 million,
or 3.5 percent, in 2007. Core deposits (defined as demand,
and savings deposits) decreased by
money market
$230.0 million, or 18.9 percent, to $989.2 million as of
December 31, 2008 from $1,219.7 million as of Decem-
ber 31, 2007, due to an outflow of funds in the latter part of
2008 triggered by depositors’ currency speculation over
potential future appreciation of the South Korean currency.
At December 31, 2008, noninterest-bearing demand
deposits represented 17.5 percent of total deposits com-
pared to 22.7 percent at December 31, 2007.
Average deposits for the years ended December 31, 2008,
2007 and 2006 were $2,913.2 million, $2,989.8 million and
$2,881.4 million, respectively. Average deposits decreased
by 2.6 percent in 2008 and increased by 3.8 percent in 2007.
We accept brokered deposits on a selective basis at prudent
interest rates to augment deposit growth or as a wholesale
funding source. There were $874.2 million and $31.8 mil-
lion of brokered deposits as of December 31, 2008 and
2007, respectively, with a weighted-average interest rate of
3.20 percent and 5.00 percent, respectively, which are con-
sistent with the rates paid on our retail deposits. The
increase in brokered deposits in 2008 was to offset a runoff
of customer deposits due to the loss of confidence in the
financial system because of the financial market crisis and
the aforementioned currency speculation. We also had
$200.0 million of state time deposits over $100,000 with
a weighted-average interest rate of 3.62 percent as of
December 31, 2007, which were not renewed in 2008.
On October 3, 2008, FDIC deposit insurance on most
accounts was increased from $100,000 to $250,000. This
increase is in place until the end of 2009. As of Decem-
ber 31, 2008, time deposits of $250,000 or more were
$324.0 million.
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
2008
Average
Balance
$ 630,631
89,866
Average
Rate
—
2.33%
Year Ended December 31,
2007
Average
Balance
$ 702,329
97,173
Average
Rate
—
2.06%
2006
Average
Balance
$ 735,406
107,811
Average
Rate
—
1.72%
618,779
3.22%
452,825
3.41%
471,780
3.08%
1,045,968
527,927
$2,913,171
4.17%
3.55%
2.90%
1,430,603
306,876
$2,989,806
5.28%
5.07%
3.63%
1,286,202
280,249
$2,881,448
4.99%
4.63%
3.25%
52
The table below summarizes the maturity of time deposits of $100,000 or more at December 31 for the years indicated:
(In thousands)
Three Months or Less
Over Three Months Through Six Months
Over Six Months Through Twelve Months
Over Twelve Months
Total Time Deposits of $100,000 or More
FHLB Advances and Other Borrowings
FHLB advances and other borrowings mostly take the form
of advances from the FHLB of San Francisco and overnight
federal funds. At December 31, 2008, advances from the
FHLB were $422.2 million, a decrease of $10.5 million, or
2.4 percent, from the December 31, 2007 balance of
$432.7 million. During 2008 and 2007, advances from
the FHLB were utilized to fund loans or maintain liquidity
due to favorable rates. FHLB advances at December 31,
2008 with a remaining maturity of less than one year were
$161.0 million, and the weighted-average interest rate
thereon was 1.71 percent.
Junior Subordinated Debentures
During the first half of 2004, we issued two junior subor-
dinated notes bearing interest at the three-month London
InterBank Offered Rate (“LIBOR”) plus 2.90 percent total-
ing $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
totaled
were used to finance the purchase of PUB,
$82.4 million at December 31, 2008 and 2007. In October
2008, we committed to the FRB that no interest payments
on the trust preferred securities would be made without the
prior written consent of the FRB. Therefore, in order to
December 31,
2008
2007
2006
$238,695
246,087
338,233
26,785
$ 958,917
289,293
188,890
4,583
$ 689,309
414,687
274,402
4,960
$849,800
$1,441,683
$1,383,358
preserve its capital position, Hanmi Financial’s Board of
Directors has elected to defer quarterly interest payments
on its outstanding trust preferred securities until further
notice, beginning with the interest payment that was due on
January 15, 2009. See “Item 1. Business — Supervision and
Regulation. Hanmi Financial” for further discussion.
Interest Rate Risk Management
Interest rate risk indicates our exposure to market interest
rate fluctuations. The movement of interest rates directly
and inversely affects the economic value of fixed-income
assets, which is the present value of future cash flow dis-
counted by the current interest rate; under the same con-
ditions, 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 suc-
cessful management of interest rate risk, we use various
methods to measure existing and future interest rate risk
exposures, giving effect to historical attrition rates of core
deposits. In addition to regular reports used in business
operations, repricing gap analysis, stress testing and simu-
lation modeling are the main measurement techniques used
to quantify interest rate risk exposure.
53
The following table shows the status of our gap position as of December 31, 2008:
After One
Year But
Within
Five
Years
After
Three
Months
But Within
One Year
Less
Than
Three
Months
(Dollars in thousands)
After
Five
Years
Non-
Interest-
Sensitive
Total
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 Home Loan Bank and Federal
Reserve Bank Stock
Other Assets
$
— $
130,000
— $
—
— $
—
— $ 85,188
—
—
$
85,188
130,000
41,273
3,510
26,370
—
67,248
11,790
43,455
4,230
—
—
178,346
19,530
231,115
1,898,935
—
225,703
35,100
—
498,685
106,931
—
245,306
773
— 120,823
— 1,200,809
— 2,041,739
120,823
—
—
—
—
—
25,477
—
—
—
— (72,246)
(72,246)
40,925
7,661
—
97,564
40,925
130,702
Total Assets
$2,304,833
$
312,650
$ 684,654
$342,350
$231,329
$3,875,816
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Demand Deposits
Savings
Money Market Checking and
NOW Accounts
Time Deposits:
Fixed Rate
Floating Rate
Federal Home Loan Bank Advances
and Other Borrowings
Junior Subordinated Debentures
Other Liabilities
Stockholders’ Equity
Total Liabilities and
Stockholders’ Equity
Repricing Gap
Cumulative Repricing Gap
Cumulative Repricing Gap as a
Percentage of Total Assets
Cumulative Repricing Gap as a
$
$
35,430
13,368
107,852
29,254
$ 258,846
32,704
$134,816
6,543
$
— $ 536,944
81,869
—
54,638
105,106
120,379
90,278
—
370,401
630,523
54
1,293,974
—
156,177
—
138
—
— 2,080,812
54
—
11,781
82,406
—
—
150,297
—
—
—
255,551
—
—
—
5,354
—
—
—
36,432
—
— 263,915
422,983
82,406
36,432
263,915
$ 828,200
$ 1,686,483
$ 823,657
$237,129
$300,347
$3,875,816
$1,476,633
$1,476,633
$(1,373,833) $(139,003) $105,221
$ (36,203) $ 69,018
$
102,800
$ (69,018) $
— $
$
—
—
38.10%
2.65%
(0.93)%
1.78%
—
—
Percentage of Interest-Earning Assets
40.89%
2.85%
(1.00)%
1.91%
54
The repricing gap analysis measures the static timing of
repricing risk of assets and liabilities (i.e., a point-in-time
analysis measuring the difference between assets maturing
or repricing in a period and liabilities maturing or repricing
within the same period). Assets are assigned to maturity and
repricing categories based on their expected repayment or
repricing dates, and liabilities are assigned based on their
repricing or maturity dates. Core deposits that have no
maturity dates (demand deposits, savings, money market
checking and NOW accounts) are assigned to categories
based on expected decay rates.
On December 31, 2008, the cumulative repricing gap as a
percentage of interest-earning assets in the less than three-
month period was 40.89 percent. This increase from the
previous year’s figure of 1.58 percent was caused primarily
by decreases of $511.0 million and $352.7 million in fixed
rate certificates of deposit and FHLB advances and other
borrowings, respectively, with maturities of less than three
months. The cumulative repricing percentage in the less
than twelve-month period increased to 2.85 percent. This
was an increase from the previous year’s figure of (20.39)
percent. The increase was caused primarily by an increase of
$524.2 million in fixed and floating rate loans with matu-
less than twelve months and a decrease of
rities of
$307.4 million in FHLB advances and other borrowings
with maturities of less than twelve months.
The following table summarizes the status of the cumula-
tive gap position as of the dates indicated.
Less Than
Three Months
December 31,
Less Than
Twelve Months
December 31,
(Dollars in thousands)
2008
2007
2008
2007
income and equity value in relation to limits established
within our guidelines.
To supplement traditional gap analysis, we perform simu-
lation 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 instanta-
neous parallel shift in the yield curve of the magnitude
indicated). This sensitivity analysis is compared to policy
limits, which specify the maximum tolerance level for net
interest income exposure over a one-year horizon, given the
basis point adjustment in interest rates reflected below.
Rate Shock Table
Percentage Changes
Change in Amount
Change in
Interest Rate
Net
Interest
Income
Economic
Value of
Equity
Net
Interest
Income
Economic
Value of
Equity
(Dollars in thousands)
8.11%
200%
4.40%
100%
(100)% (11.71)%
(200)% (23.67)%
(7.69)%
(3.92)%
9.62%
18.88%
$ 9,679
$ 5,251
$(13,974)
$(28,251)
$(37,500)
$(19,127)
$ 46,957
$ 92105
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 strat-
egies on loans and deposits, and replacement of asset and
liability cash flows. While the assumptions used are based
on current economic and local market conditions, there is
no assurance as to the predictive nature of these conditions,
including how customer preferences or competitor influ-
ences might change.
Cumulative
Repricing Gap
Percentage of Total
Assets
Percentage of
Interest-Earning
Assets
$1,476,633
$57,250
$102,800
$(740,764)
38.10%
1.44%
2.65%
(18.59)%
40.89%
1.58%
2.85%
(20.39)%
Capital Resources
Liquidity and Capital Resources
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
In order to ensure adequate levels of capital, the Board
continually assesses projected sources and uses of capital in
conjunction with projected increases in assets and levels of
risk. Management considers, among other things, earnings
generated from operations, and access to capital from
financial markets through the issuance of additional secu-
rities, including common stock or notes, to meet our capital
needs. Total stockholders’ equity was $263.9 million at
55
December 31, 2008, which represented a decrease of
$106.6 million, or 28.8 percent, compared to $370.6 million
at December 31, 2007. The decrease was primarily due to a
non-cash goodwill impairment charge of $107.4 million
during 2008.
Although both Hanmi Financial and the Bank were well-
capitalized at December 31, 2008, there can be no assurance
that we will continue to be well-capitalized. We have
applied to participate in the TARP CPP for an investment
of up to $105 million from the Treasury, but we are still
waiting a final decision from the Treasury as to whether we
will be able to participate in this program. We are exploring
alternative funding arrangements for raising capital if we are
unable to participate in the TARP CPP.
Liquidity
Hanmi Financial is a company separate and apart from the
Bank that must provide for its own liquidity. Substantially
all of Hanmi Financial’s revenues are obtained from divi-
dends declared and paid by the Bank. Under applicable
California law, the Bank cannot make any distribution
(including a cash dividend) to its shareholder (Hanmi
Financial) in an amount which exceeds the lesser of:
(i) the retained earnings of the Bank or (ii) the net income
of the Bank for its last three fiscal years, less the amount of
any distributions made by the Bank to its shareholder
during such period. Notwithstanding the foregoing, with
the prior approval of the California Commissioner of
Financial Institutions, the Bank may make a distribution
(including a cash dividend) to Hanmi Financial in an
amount not exceeding the greatest of: (i) the retained
earnings of the Bank; (ii) the net income of the Bank for
its last fiscal year; or (iii) the net income of the Bank for its
current fiscal year. The Bank currently has deficit retained
earnings and has suffered net losses in 2007 and 2008. As a
result, the California Financial Code does not provide
authority for the Bank to declare a dividend to Hanmi
Financial, with or without Commissioner approval. In
addition, the Bank is prohibited by the MOU described
in “Notes to Consolidated Financial Statements, Note 14 —
Regulatory Matters” from paying dividends to Hanmi
Financial unless it receives prior regulatory approval.
Liquidity of the Bank is defined as the ability to supply cash
as quickly as needed without causing a severe deterioration in
profitability. The Bank’s liquidity consists primarily of avail-
able cash positions, federal funds sold and short-term invest-
ments categorized as available for sale securities, which can be
disposed of without significant capital losses in the ordinary
course of business, plus borrowing capacities, which include
federal funds lines, repurchase agreements, FHLB advances
and a FRB discount window line. Therefore, maintenance of
high quality loans and securities that can be used for collateral
in repurchase agreements or other secured borrowings is an
important feature of our liquidity management. Currently,
management believes that Hanmi Bank, on a stand-alone
basis, has adequate liquid assets to meet its current obliga-
tions through December 31, 2009, which include deposits
and FHLB borrowings.
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 main-
tains 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. We manage the Bank’s liquidity position primarily
through constant monitoring of cash flow projections, loan
and deposit growth trends, funding strategies and liquidity
ratios.
We are eligible to borrow up to 20 percent of our total assets
from the FHLB. We have pledged investment securities
available for sale and loans receivable as collateral with the
FHLB for this borrowing facility. As of December 31,
2008, the total borrowing capacity available from the col-
lateral that has been pledged and the remaining available
borrowing capacity were $682.7 million and $260.5 million,
respectively. As of December 31, 2007, the total borrowing
capacity available from the collateral that has been pledged
and the remaining available borrowing capacity were
$714.6 million and $281.8 million, respectively.
At December 31, 2008, the Bank’s FHLB borrowings
totaled $422.2 million, representing 10.9 percent of the
Bank’s total assets. The amount that the FHLB is willing to
advance differs based on the quality and character of qual-
ifying collateral offered by the Bank, and the advance rates
for qualifying collateral may be adjusted upwards or down-
wards by the FHLB from time to time. To the extent
deposit renewals and deposit growth are not sufficient to
fund maturing and withdrawable deposits, repay maturing
borrowings, fund existing and future loans and investment
56
securities and otherwise fund working capital needs and
capital expenditures, the Bank may utilize the remaining
borrowing capacity from its FHLB borrowing arrange-
ment. During the second quarter of 2008, the FHLB
cancelled the Bank’s $62 million unsecured line of credit
with them. This cancellation was the result of the Bank’s net
loss for the fourth quarter of 2007.
At December 31, 2008, the carrying values of investment
securities available for sale and loans pledged as collateral
with the FRB amounted to $54.0 million and $1.4 billion,
respectively. As of December 31, 2008, we had $1.07 billion
available for use through this short-term (generally not to
exceed three months) borrowing facility and there were no
borrowings. When combined with the borrowing capacity
available from the FHLB, the total contingent available line
was $1.33 billion at December 31, 2008.
In an effort to ease the credit crisis, the FRB lowered its
discount rate from 4.75 percent to 0.50 percent through
eight separate actions since December 2007, and made
modifications to previous practices to facilitate financing
for longer periods. This makes the FRB’s federal discount
window a viable source of funding given current market
conditions. We have pledged securities available for sale and
loans receivable on this short-term borrowing facility. On
December 31, 2008, we received approval for participation
in the Borrower-in-Custody Program, where a broad range
of loans may be pledged and borrowed against it through
the FRB’s federal discount window. As an additional source
of funding, we significantly increased our borrowing capac-
ity with the FRB.
As a means of augmenting our current liquidity sources, we
will consider selling some of our loans held for sale, begin-
ning with SBA loans, in an ordinary fashion, as soon as the
secondary market is normalized. We are also participating
in the FDIC’s Debt Guarantee Program, which will enable
us to issue up to two percent of our liabilities (approximately
$70.0 million) in senior unsecured debt. Given that there is
no cost involved in our participation if we do not issue debt
under the program, we believe continuing to participate in
the Debt Guarantee Program helps us to maintain a cush-
ion of extra liquidity.
During the second half of 2008, we experienced a deposit
run-off caused by the U.S. financial crisis. This deposit run-
off was further amplified by an outflow of funds triggered by
some depositors’ currency speculation over potential appre-
the South Korean currency. Our deposit
ciation of
campaign launched in December 2008, together with some
stabilization of the South Korean currency, slowed the rate
at which retail deposits decreased during the fourth quarter
of 2008.
We addressed liquidity concerns mainly through utilization
of brokered deposits during 2008. As a result, we issued new
brokered time deposits of $824.2 million during the second
half of 2008.
We also believe that the opening of a new branch, which
historically has been a vital source for garnering deposits,
will benefit us. In 2008, we opened new branches in North-
ridge and Beverly Hills. In March 2009, we opened another
branch in Diamond Bar.
We believe our branch network is well positioned to capture
business opportunities that may arise from anticipated
increases in travel by South Korean travelers to the U.S. This
anticipated increase would follow full implementation of
the Visa Waiver Program in 2009 by South Korean travelers
who may frequent Korean-American businesses in our
market areas.
Currently, management believes that Hanmi Financial, on a
stand-alone basis, has adequate liquid assets to meet its
current obligations through December 31, 2009, which are
primarily interest payments on junior subordinated deben-
tures, subject to prior approval of such payments by the
FRB. As of December 31, 2008, limitations imposed by our
regulators prohibited the Bank from providing a dividend to
Hanmi Financial. On August 29, 2008, we elected to
suspend payment of quarterly dividends on our common
stock. At December 31, 2008, Hanmi Financial’s liquid
assets, including amounts deposited with the Bank, totaled
$2.2 million, down from $5.3 million at December 31,
2007. In order to preserve its capital position, our Board of
Directors elected to defer quarterly interest payments on the
outstanding junior subordinated debentures until further
notice, beginning with the interest payment that was due on
January 15, 2009.
Current market conditions have also limited the Bank’s
liquidity sources principally to secured funding outlets, such
as the FHLB and FRB, in addition to deposits originated
through the Bank’s branch network and from brokered
deposits. There can be no assurance that actions by the
FHLB or FRB would not reduce the Bank’s borrowing
capacity or that we would be able to continue to replace
deposits at competitive rates. If the Bank’s capital ratio falls
57
below well capitalized, the Bank would need regulatory
consent before accepting brokered deposits. Over the next
12 months, approximately $1.9 billion of time deposits will
mature. There can be no assurances that we will be able to
replace these time deposits with deposits at competitive
rates. Such events could have a material adverse impact on
our results of operations and financial condition. However,
if we are unable to replace these maturing deposits with new
deposits, we believe that we have adequate liquidity
resources to fund this need with our secured funding outlets
with the FHLB and FRB.
Foreign deposits are U.S.-based deposits made by foreign
customers. Foreign deposit risk deals with dependency on
foreign deposits that could adversely affect the Bank’s
liquidity. These liabilities are assumed to be volatile because
of the variability of social, political and environmental
conditions in foreign countries. As of December 31,
2008, 2007 and 2006, foreign deposits were $182.6 million,
$331.2 million and $325.4 million, respectively.
As of December 31, 2008, there were no material commit-
ments for capital expenditures. We raise liquidity in the
form of deposits, borrowings (primarily FHLB advances
and junior subordinated debentures) and equity, and expect
to continue to rely upon deposits and FHLB borrowings as
the primary source of liquidity.
Off-Balance Sheet Arrangements
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 instru-
ments 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 on 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, was 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 commit-
ments as of the dates indicated:
Commitments to Extend Credit
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
December 31,
2008
2007
(In thousands)
$386,785
47,289
29,177
16,912
$524,349
48,071
52,544
18,622
Total Undisbursed Loan Commitments
$480,163
$643,586
Contractual Obligations
Our contractual obligations as of December 31, 2008 are as follows:
Contractual Obligations
More Than
One Year
and Less
Than Three
Years
Less Than
One Year
Time Deposits
Federal Home Loan Bank Advances and Other
$1,929,025
$151,699
Borrowings
Commitments to Extend Credit
Junior Subordinated Debentures
Standby Letters of Credit
Operating Lease Obligations
161,787
386,785
—
45,480
5,382
156,908
—
—
1,709
9,186
More Than
Three Years
and Less
Than Five
Years
(In thousands)
4
$
100,000
—
—
—
6,037
More
Than Five
Years
Total
$
138
$2,080,866
4,288
—
82,406
100
6,479
422,983
386,785
82,406
47,289
27,084
Total Contractual Obligations
$2,528,459
$319,502
$106,041
$93,411
$3,047,413
58
Recently Issued Accounting Standards
Financial Accounting Standards Board (“FASB”) Staff Position
(“FSP”) EITF 99-20-1, “Amendments to the Impairment
Guidance of Emerging Issues Task Force (“EITF”) Issue
No. 99-20” — In January 2009, the FASB issued FSP
EITF 99-20-1, which revises the other-than-temporary
impairment (“OTTI”) guidance on beneficial interests in
securitized financial assets that are within the scope of
EITF Issue No. 99-20. FSP EITF 99-20-1 amends EITF
Issue No. 99-20 to more closely align its OTTI guidance
with paragraph 16 of SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” by (1) removing
the notion of a “market participant” and (2) inserting a
“probable” concept related to the estimation of a beneficial
interest’s cash flows. FSP EITF 99-20-1 is effective pro-
spectively for interim and annual periods ending after
December 15, 2008. Retrospective application of FSP
EITF 99-20-1 is prohibited. The adoption of this guidance
did not have a material effect on our financial condition,
results of operations or cash flows.
EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Mea-
sured at Fair Value With a Third-Party Credit Enhancement”
— In September 2008, the FASB ratified EITF Issue
No. 08-5, which provides guidance for measuring liabilities
issued with an attached third-party credit enhancement
(such as a guarantee). It clarifies that the issuer of a liability
with a third-party credit enhancement (such as a guarantee)
should not include the effect of the credit enhancement in
the fair value measurement of the liability. EITF Issue 08-5
is effective for the first reporting period beginning after
December 15, 2008 and is not expected to have a significant
impact on our financial condition or results of operations.
FSP EITF 03-6-1,
“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Partici-
pating Securities” — In June 2008, the FASB issued FSP
EITF 03-6-1, which clarified that all outstanding unvested
share-based payment awards that contain rights to non-
forfeitable dividends participate in undistributed earnings
with common stockholders. Awards of this nature are
considered participating securities and the two-class
method of computing basic and diluted earnings per share
must be applied. FSP EITF 03-6-1 is effective for fiscal
years beginning after December 15, 2008 and is not
expected to have a significant impact on our financial
condition or results of operations.
SFAS No. 162, “The Hierarchy of Generally Accepted Account-
the FASB issued
ing Principles” — In May 2008,
SFAS No. 162, which identifies the sources of accounting
principles and the framework for selecting principles to be
used in the preparation of financial statements of non-
governmental entities that are presented in conformity with
GAAP. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Over-
sight Board amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity with Generally Accepted
Accounting Principles.” On September 16, 2008, the SEC
approved the amendments to AU Section 411. The adop-
tion of SFAS No. 162 did not have a significant impact on
our financial condition or results of operations.
FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” — In April 2008, the FASB issued FSP
No. FAS 142-3, which amends the factors that should be
considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible
asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP No. FAS 142-3 is intended to improve the
consistency between the useful life of a recognized intan-
gible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other GAAP. FSP No. FAS 142-3 is
effective for fiscal years beginning after December 15, 2008
and is not expected to have a significant impact on our
financial condition, results of operations or cash flows.
SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement
No. 133” — In March 2008,
the FASB issued
SFAS No. 161, which requires entities to provide greater
transparency about (a) how and why an entity uses deriv-
ative instruments, (b) how derivative instruments and
related hedge items are accounted for under SFAS No. 133
and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s
financial position, results of operations and cash flows.
SFAS No. 161 is effective for financial statements issued
for
fiscal years and interim periods beginning after
November 15, 2008 and is not expected to have a significant
impact on our financial condition or results of operations.
SFAS No. 160, “Non-Controlling Interest in Consolidated
Financial Statements — an Amendment of ARB No. 51”
— In December 2007, the FASB issued SFAS No. 160,
which requires that a non-controlling interest in a subsid-
iary (i.e., minority interest) be reported in the equity section
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
59
operations include net income attributable to both the
parent and non-controlling interest of a consolidated sub-
sidiary. In addition, regardless of whether the parent pur-
chases additional ownership interest, sells a portion of its
ownership interest in a subsidiary or the subsidiary partic-
ipates 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 and is not expected to have a
significant impact on our financial condition or results of
operations.
SFAS No. 141(R), “Business Combinations” — In December
2007, the FASB issued SFAS No. 141(R), which replaces
SFAS No. 141, “Business Combinations.” SFAS No. 141(R)
establishes principles and requirements for how an acquir-
ing company (1) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree;
(2) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
(3) determines what information to disclose to enable users
of the financial statements to evaluate the nature and
financial
combination.
the
SFAS No. 141(R) is effective for business combinations
occurring on or after the beginning of the fiscal year
beginning
2008.
SFAS No. 141(R), effective for us on January 1, 2009,
applies to all transactions or other events in which we obtain
control in one or more businesses. Management will assess
each transaction on a case-by-case basis as they occur.
after December
business
effects
15,
on
or
of
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
For quantitative and qualitative disclosures regarding mar-
ket 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 “— Li-
quidity 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 67 through 112.
Item 9. Changes in and Disagreements With Accoun-
tants on Accounting and Financial Disclosure
None.
60
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2008, Hanmi Financial carried out an
evaluation, under the supervision and with the participation
of Hanmi Financial’s management,
including Hanmi
Financial’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
Hanmi Financial’s disclosure controls and procedures and
internal controls over financial reporting pursuant to Secu-
rities 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; and
(cid:129) Hanmi Financial’s internal controls over financial report-
ing provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial
statements for external purposes in accordance with
U.S. generally accepted accounting principles.
During the quarter ended December 31, 2008, there have
been no changes in Hanmi Financial’s internal control over
financial reporting that has materially affected, or is rea-
sonably likely to materially affect, Hanmi Financial’s inter-
nal control over financial reporting.
Disclosure controls and procedures are defined in SEC
rules as controls and other procedures designed to ensure
that information 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 proce-
dures were designed to ensure that material information
related to Hanmi Financial, including subsidiaries, is made
known to management, including the Chief Executive
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 December 31, 2008. The report expresses an
unqualified opinion on the effectiveness of Hanmi Finan-
cial’s internal control over financial reporting as of Decem-
ber 31, 2008.
Management’s Report on Internal Control Over
Financial Reporting
Management of Hanmi Financial Corporation (“Hanmi
Financial”) is responsible for establishing and maintaining
adequate internal control over financial reporting pursuant
to the rules and regulations of the Securities and Exchange
Commission. Hanmi Financial’s internal control over
financial reporting is a process designed to provide reason-
able assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for
external purposes
in accordance with U.S. generally
accepted accounting principles. Internal control over finan-
cial reporting includes those written policies and procedures
that:
(cid:129) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
(cid:129) provide reasonable assurance that
transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles;
(cid:129) provide reasonable assurance that receipts and expendi-
tures of the company are being made only in accordance
with authorizations of management and directors of the
company; and
(cid:129) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or dis-
position 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 misstate-
ments. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or
that the degree of compliance with the policies or proce-
dures may deteriorate.
financial
Management assessed the effectiveness of Hanmi Finan-
cial’s internal control over financial reporting as of Decem-
ber 31, 2008. Management based this assessment on criteria
for effective internal control over
reporting
described in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s
assessment
included an evaluation of the design of Hanmi Financial’s
internal control over financial reporting and testing of the
operational effectiveness of its internal control over financial
reporting. Management reviewed the results of its assess-
ment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as
of December 31, 2008, Hanmi Financial maintained effec-
tive internal control over financial reporting.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited Hanmi Financial Corporation’s (the
Company) internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Hanmi Financial Corporation’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effective-
ness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Con-
trol Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was main-
tained in all material respects. Our audit included obtaining
an understanding of internal control over financial report-
ing, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effective-
ness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we
considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted account-
ing principles, and that receipts and expenditures of the
company are being made only in accordance with autho-
rizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or dis-
position 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 misstate-
ments. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or
that the degree of compliance with the policies or proce-
dures may deteriorate.
In our opinion, Hanmi Financial Corporation maintained,
in all material respects, effective internal control over finan-
cial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued
by the COSO 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 and subsidiaries as of December 31, 2008 and
2007, 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, 2008, and our report dated March 13,
2009 expressed an unqualified opinion on those consoli-
dated financial statements.
/s/ KPMG LLP
Los Angeles, California
March 13, 2009
62
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 Own-
ership Reporting Compliance” of Hanmi Financial’s Defin-
itive Proxy Statement
the Annual Meeting of
Stockholders, which will be filed with the SEC within
120 days after the close of Hanmi Financial’s fiscal year.
for
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 per-
sons 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 incor-
porated by reference from the section entitled “Executive
Compensation” of Hanmi Financial’s Definitive Proxy State-
ment for the Annual Meeting of Stockholders, which will
be filed with the SEC 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 bene-
ficial owners and management and related stockholder
matters will appear under the caption “Beneficial Ownership
of Principal Stockholders and Management” in Hanmi Finan-
cial’s Definitive Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Com-
pensation Plans
The following table summarizes information as of Decem-
ber 31, 2008 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
(a)
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
1,323,467
$14.05
3,000,000
—
$ —
—
1,323,467
$14.05
3,000,000
Item 13. Certain Relationships and Related Transac-
tions, and Director Independence
Information concerning certain relationships and related
transactions and director independence is incorporated by
reference from the sections entitled “Certain Relationships
and Related Transactions” and “Director Independence” of
Hanmi Financial’s Definitive Proxy Statement for the
Annual Meeting of Stockholders, which will be filed with
the SEC within 120 days after the close of Hanmi Finan-
cial’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 SEC within 120 days after the close of Hanmi Finan-
cial’s fiscal year.
63
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules
(1) The Financial Statements required to be filed
hereunder are listed in the Index to Consolidated
Financial Statements on page 67 of this Report.
(2) All Financial Statement Schedules have been
omitted as the required information is inapplicable or
has been included in the Notes to Consolidated
Financial Statements.
(3) The Exhibits required to be filed with this
Report are listed in the Exhibit Index included herein
at page 114.
64
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Years Ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Page
66
67
68
69
70
71
65
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, 2008 and 2007, and the related consol-
idated 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,
2008. These consolidated financial statements are the
responsibility of the Company’s management. Our respon-
sibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material mis-
statement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hanmi Financial Corporation and subsidiaries as
of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, 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, 2008, based
on criteria established in Internal Control-Integrated Frame-
work issued by the Committee of Sponsoring Organiza-
tions of the Treadway Commission (COSO), and our
report dated March 13, 2009 expressed an unqualified
opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 13, 2009
66
Hanmi Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Cash and Due From Banks
Federal Funds Sold
Cash and Cash Equivalents
ASSETS
Securities Held to Maturity, at Amortized Cost (Fair Value: 2008 — $910; 2007 — $941)
Securities Available for Sale, at Fair Value
Loans Receivable, Net of Allowance for Loan Losses of $70,986 and $43,611 at December 31,
2008 and 2007, 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 Home Loan Bank Stock, at Cost
Federal Reserve 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
Federal Home Loan Bank Advances and Other Borrowings
Junior Subordinated Debentures
Other Liabilities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 200,000,000 Shares; Issued 50,538,049 Shares
(45,905,549 Shares Outstanding) and 50,493,441 Shares (45,860,941 Shares Outstanding) at
December 31, 2008 and 2007, Respectively
Additional Paid-In Capital
Unearned Compensation
Accumulated Other Comprehensive Income — Unrealized Gain on Securities Available for Sale,
Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes of $473 and $527 at
December 31, 2008 and 2007, Respectively
Retained Earnings (Deficit)
Treasury Stock, at Cost (4,632,500 Shares at December 31, 2008 and 2007)
Total Stockholders’ Equity
December 31,
2008
2007
$
85,188
130,000
215,188
910
196,966
3,253,715
37,410
4,295
20,279
12,347
823
29,456
3,791
—
4,950
30,697
10,228
25,476
29,285
$ 105,898
16,500
122,398
940
349,517
3,234,762
6,335
5,387
20,800
17,411
287
18,470
4,336
107,100
6,908
21,746
11,733
24,525
31,002
$3,875,816
$3,983,657
$ 536,944
$ 680,282
81,869
370,401
849,800
1,231,066
3,070,080
18,539
4,295
422,983
82,406
13,598
3,611,901
51
349,304
(218)
544
(15,754)
(70,012)
263,915
93,099
445,806
1,441,683
340,829
3,001,699
21,828
5,387
487,164
82,406
14,617
3,613,101
50
348,073
(245)
275
92,415
(70,012)
370,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$3,875,816
$3,983,657
See Accompanying Notes to Consolidated Financial Statements.
67
Hanmi Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
2008
2007
2006
Year Ended December 31,
$
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans
Taxable Interest on Investments
Tax-Exempt Interest on Investments
Dividends on Federal Home Loan Bank and Federal Reserve Bank Stock
Interest on Federal Funds Sold
Interest on Term Federal Funds Sold
Total Interest and Dividend Income
INTEREST EXPENSE:
Interest on Deposits
Interest on Federal Home Loan Bank 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
Other Service Charges and Fees
Remittance Fees
Bank-Owned Life Insurance Income
Gain on Sales of Loans
Gain on Sales of Securities Available for Sale
Other-Than-Temporary Impairment Loss on Securities
Other Income
Total Non-Interest Income
NON-INTEREST EXPENSE:
Salaries and Employee Benefits
Occupancy and Equipment
Data Processing
Professional Fees
Advertising and Promotion
Supplies and Communications
Amortization of Other Intangible Assets
Impairment Loss on Goodwill
Other Operating Expenses
Total Non-Interest Expense
223,942
9,397
2,717
1,918
166
43
238,183
84,353
14,373
5,056
103,782
134,401
75,676
58,725
18,463
5,067
3,088
2,365
2,194
952
765
77
(3,115)
2,293
32,149
42,209
11,158
5,799
3,539
3,518
2,518
1,958
107,393
16,230
194,322
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES
Provision (Benefit) for Income Taxes
NET INCOME (LOSS)
EARNINGS (LOSS) PER SHARE:
Basic
Diluted
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic
Diluted
DIVIDENDS DECLARED PER SHARE
(103,448)
(1,355)
$ (102,093)
$
$
(2.23)
(2.23)
45,872,541
45,872,541
0.09
$
See Accompanying Notes to Consolidated Financial Statements.
68
$
$
$
$
261,992
13,399
3,055
1,413
1,032
5
280,896
108,517
13,949
6,644
129,110
151,786
38,323
113,463
18,061
4,954
4,493
2,527
2,049
933
5,452
—
(1,074)
2,611
40,006
47,036
10,494
6,390
2,468
3,630
2,592
2,324
102,891
12,104
189,929
(36,460)
24,302
(60,762)
(1.27)
(1.27)
47,787,213
47,787,213
0.24
$
$
239,075
15,269
3,087
1,354
1,402
2
260,189
93,553
6,977
6,416
106,946
153,243
7,173
146,070
17,134
770
4,567
2,359
2,056
879
6,917
2
—
2,279
36,963
40,512
9,643
5,857
1,910
2,997
2,391
2,379
—
11,624
77,313
105,720
40,370
65,350
1.34
1.32
$
$
$
48,850,221
49,435,128
0.20
$
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S
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,
2008
2007
2006
$(102,093)
$ (60,762)
$ 65,350
Depreciation and Amortization of Premises and Equipment
Amortization of Premiums and Accretion of Discounts on Investments, Net
Amortization of Other Intangible Assets
Amortization of Servicing Assets
Share-Based Compensation Expense
Provision for Credit Losses
Federal Home Loan Bank and Federal Reserve Bank Stock Dividends
Gain on Sales of Securities Available for Sale
Other-Than-Temporary Impairment Loss on Securities
Gain on Sales of Loans
Gain on Sales of Other Real Estate Owned
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) Decrease in Accrued Interest Receivable
Increase in Servicing Assets, Net
Increase in Cash Surrender Value of Bank-Owned Life Insurance
(Increase) Decrease in Other Assets
Increase (Decrease) in Accrued Interest Payable
Increase (Decrease) in Other Liabilities
Net Cash Provided By Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Matured Term Federal Funds Sold
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock
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 Home Loan Bank and Federal Reserve Bank Stock
Purchases of Securities Available for Sale
Purchases of Premises and Equipment
Business Acquisitions, Net of Cash Acquired
Net Cash Provided By (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
Cash Paid to Acquire Treasury Stock
Cash Paid to Repurchase Stock Options and Stock Warrants
Cash Dividends Paid
Proceeds from Long-Term Federal Home Loan Bank Advances and Other Borrowings
Repayment of Long-Term Federal Home Loan Bank Advances and Other Borrowings
Net Change in Short-Term Federal Home Loan Bank 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
2,900
164
1,958
1,295
1,036
75,676
(1,259)
(77)
3,115
(765)
324
107,393
—
(11,254)
(54,347)
24,037
5,064
(750)
(951)
1,151
(3,289)
(5,573)
43,755
—
4,074
147,320
28,501
2,128
(95,286)
—
(10,261)
(25,339)
(2,379)
—
48,758
68,381
—
—
—
(70)
(3,853)
250,000
(468)
(313,713)
277
92,790
122,398
2,953
218
2,324
2,046
1,891
38,323
(708)
—
1,074
(5,452)
(226)
102,891
(193)
(14,618)
(108,639)
131,626
(492)
(1,803)
(933)
2,875
(754)
3,158
94,821
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—
89,958
—
1,306
(461,297)
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(44,980)
(3,682)
(1,727)
(423,271)
56,984
1,164
193
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(2,552)
(11,574)
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(443)
318,546
312,347
(16,103)
138,501
2,924
264
2,379
1,307
1,521
7,173
(641)
(2)
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—
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(598)
(2,942)
(154,608)
138,720
(2,799)
(1,976)
(879)
(9,300)
10,671
(760)
48,909
—
617
56,729
5,005
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(5,000)
(311)
(9,663)
(2,237)
—
(307,538)
118,601
3,553
598
—
—
(11,805)
130,000
(5,420)
(1,874)
233,653
(24,976)
163,477
CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 215,188
$ 122,398
$ 138,501
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid
Income Taxes Paid
Non-Cash Activities:
Stock Issued for Business Acquisition
Transfer of Loans to Other Real Estate Owned
Dividends Declared
$ 107,071
$ 13,873
$
$
$
293
2,988
—
$ 129,864
$ 38,232
$
$
$
2,198
1,367
3,030
$ 117,100
$ 45,869
$
$
$
—
541
2,941
See Accompanying Notes to Consolidated Financial Statements.
70
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
Note 1 — Summary of Significant Accounting Policies
Summary of Operations
Hanmi Financial Corporation (“Hanmi Financial,” “we,” “us” or “our”) was formed as a holding company of Hanmi Bank
(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 financial institution insured by the Federal Deposit Insurance Corporation. As of
December 31, 2008, the Bank maintained a branch network of 26 full-service branch offices in California and 7 loan
production offices in California, Colorado, Georgia, Illinois, Texas, Virginia and Washington.
Our other subsidiaries, Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All
World”), were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance agencies that offer a
complete line of insurance products, including life, commercial, automobile, health, and property and casualty.
Basis of Presentation
The accounting and reporting policies of Hanmi Financial and subsidiaries conform, in all material respects, to U.S. generally
accepted accounting principles (“GAAP”) and general practices within the banking industry. A summary of the significant
accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of Hanmi Financial and our wholly owned subsidiaries, the
Bank, Chun-Ha and All World. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP 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.
Significant areas where estimates are made consist of the allowance for loan losses, other-than-temporary impairment,
investment securities valuations and income taxes. 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.
71
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
Liquidity Risk
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our
business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material
adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired
by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our
access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse
regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific
to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the
financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide
credit markets deteriorates.
For further disclosure on our liquidity position and our available sources of liquidity, see “Note 22 — Liquidity.”
Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks and 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, net of income taxes.
Accreted discounts and amortized premiums on investment securities are included in interest income using the effective
interest method over the remaining period to the call date or contractual maturity and, in the case of mortgage-backed
securities and securities with call features, adjusted for anticipated prepayments. Unrealized and realized gains or losses
related to holding or selling of securities are calculated using the specific-identification method.
We assess, at each reporting date, whether there is an “other-than-temporary” impairment to our investment securities. We
examine all individual securities that are in an unrealized loss position at each reporting date for other-than-temporary
impairment (“OTTI”). 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
72
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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 less than five percent in a publicly traded company, Pacific International Bancorp
(“PIB”). As of December 31, 2008, the investment was carried at fair value and included in securities available for sale on the
Consolidated Balance Sheets. At December 31, 2007, due to an inactive market for the common stock of PIB, the
investment was carried at cost and included in other assets on the Consolidated Balance Sheets. As of December 31, 2008
and 2007, its carrying value was $804,000 and $511,000, respectively. We monitor the investment for impairment and make
appropriate reductions in carrying value when necessary.
Loans Receivable
We originate loans for investment, with such designation made at the time of origination. Loans receivable that we have the
intent and ability to hold for the foreseeable future, or until maturity, are stated at their outstanding principal, reduced by an
allowance for loan losses and net deferred loan fees or costs on originated loans and unamortized premiums or discounts on
purchased loans. Non-refundable fees and direct costs associated with the origination or purchase of loans are deferred and
netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income as an
adjustment to yield over the loan term using the effective interest method. Discounts or premiums on purchased loans are
accreted or amortized to interest income using the effective interest method over the remaining period to contractual
maturity adjusted for anticipated prepayments.
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.
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 aggregate cost or market value. Origination fees on loans held for sale, net of certain costs of
processing and closing the loans, are deferred until the time of sale and are included in the computation of the gain or loss
from the sale of the related loans. A valuation allowance is established if the market value of such loans is lower than their
cost and net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
73
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (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 not all amounts, including principal and interest, will 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.
74
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization
are 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
3 to 7 Years
Term of Lease or Useful Life, Whichever is Shorter
3 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.
Other Real Estate Owned
Assets acquired through 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.
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, using a discount
rate and a constant prepayment rate. 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
75
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
strips are accounted for at their estimated fair value, with unrealized gains or losses recorded as adjustments to accumulated
other comprehensive income (loss).
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired. 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. CDI represents the
intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions. 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, 2008. 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 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 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.
76
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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.
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.
77
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
Bank-Owned Life Insurance
We have purchased single premium life insurance policies (“bank-owned life insurance”) on 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. 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.
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.
Financial Accounting Standards Board (“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.
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
78
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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.
In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123R-3, “Transition Election Related to
Accounting for the Tax Effects of the Share-Based Payment Awards.” We have adopted the alternative transition method
prescribed by FSP No. 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 on 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 (Loss) Per Share
Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted earnings (loss) per share 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.
Note 2 — Fair Value Measurements
Fair Value Option and Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value measurements. It also establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction
on the sale or use of an asset. We adopted SFAS No. 157 on January 1, 2008. In February 2008, the FASB issued FSP
No. FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP No. FAS 157-2 delays the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal
79
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 2 — Fair Value Measurements (Continued)
years. The adoption of SFAS No. 157 and FSP No. FAS 157-2 did not have a material impact on our financial condition or
results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities. SFAS No. 159 was effective for us on January 1,
2008. We did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.
In October 2008, the FASB issued FSP No. 157-3, “Determining Fair Value of a Financial Asset in a Market That Is Not
Active.” FSP No. 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value
of a financial asset is determined when the market for that financial asset is inactive. FSP No. 157-3 was effective upon
issuance, including prior periods for which financial statements had not been issued, and did not have a significant impact on
our financial condition or results of operations.
Fair Value Measurement
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. SFAS No. 157 also establishes a three-level fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three
levels of inputs that may be used to measure fair value are defined as follows:
(cid:129) Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
(cid:129) Level 2
(cid:129) Level 3
access as of the measurement date.
Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be
corroborated by observable market data.
Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
We used the following methods and significant assumptions to estimate fair value:
Securities Available for Sale — The fair values of securities available for sale are determined by obtaining quoted prices on
nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the
securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on an active exchange
such as the New York Stock Exchange, as well as other U.S. Government and agency debentures that are traded by dealers or
brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities, collateralized mortgage
obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 are preferred stocks that are not
traded in market.
Loans Held for Sale — Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale was
based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify these
loans as Level 2 and subject to non-recurring fair value adjustments.
80
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 2 — Fair Value Measurements (Continued)
Impaired Loans — SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by
SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” including impaired loans measured at an observable
market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the
loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is
then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 2 and subject to non-
recurring fair value adjustments.
Servicing Assets and Servicing Liabilities — The fair values of servicing assets and servicing liabilities are based on a valuation
model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The
valuation model incorporates assumptions that market participants would use in estimating future cash flows. We are able to
compare the valuation model inputs and results to widely available published industry data for reasonableness. Fair value
measurements of servicing assets and servicing liabilities use significant unobservable inputs. As such, we classify them as
Level 3.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2008, assets and liabilities measured at fair value on a recurring basis are as follows:
(In thousands)
ASSETS:
Securities Available for Sale:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Equity Securities
Corporate Bonds
Total Securities Available for Sale
Servicing Assets
LIABILITIES:
Servicing Liabilities
Level 1
Quoted Prices in
Active Markets
for Identical
Assets
Level 2
Significant
Observable
Inputs With
No Active
Market With
Identical
Characteristics
Level 3
Significant
Unobservable
Inputs
Balance as of
December 31,
2008
$ —
—
—
17,700
759
804
—
$19,263
$ —
$ —
$ 78,860
58,313
36,162
—
2,888
—
169
$176,392
$
$
—
—
$ —
—
—
—
1,311
—
—
$1,311
$3,791
$ 78,860
58,313
36,162
17,700
4,958
804
169
$196,966
$ 3,791
$ 238
$
238
The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities
81
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 2 — Fair Value Measurements (Continued)
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31,
2008:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning
Balance as of
January 1,
2008
Purchases,
Issuances and
Settlements
Realized and
Unrealized
Gains or Losses
in Earnings
Realized and
Unrealized
Gains or Losses
in Other
Comprehensive
Income
Transfers
In and/or Out
of Level 3
Ending
Balance as of
December 31,
2008
$ 925
$4,336
$ —
$405
$ —
$(950)
$386
$ —
$—
$—
$1,311
$3,791
$ 266
$ —
$ (28)
$ —
$—
$ 238
(In thousands)
ASSETS:
Securities
Available for
Sale:
Other Securities
Servicing Assets
LIABILITIES:
Servicing
Liabilities
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of December 31, 2008, assets and liabilities measured at fair value on a non-recurring basis are as follows:
(In thousands)
ASSETS:
Loans Held for Sale
Impaired Loans
Level 1
Quoted Prices in
Active Markets
for Identical
Assets
Level 2
Significant
Observable
Inputs With
No Active
Market With
Identical
Characteristics
Level 3
Significant
Unobservable
Inputs
Balance as of
December 31,
2008
$—
$—
$37,410
$ 2,404
$—
$—
$37,410
$ 2,404
Assets and Liabilities Not Measured at Fair Value on a Recurring or Non-Recurring Basis
SFAS No. 107, “Disclosures About Fair Value of Instruments,” requires disclosure of the fair value of financial assets and
financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on
a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial
liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and
appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to
develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that
82
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 2 — Fair Value Measurements (Continued)
we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
The estimated fair values of financial instruments were as follows:
(In thousands)
FINANCIAL ASSETS:
Cash and Cash Equivalents
Securities Held to Maturity
Securities Available for Sale
Loans Receivable, Net
Accrued Interest Receivable
Federal Home Loan Bank Stock
Federal Reserve Bank Stock
FINANCIAL 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, 2008
December 31, 2007
Carrying
or Contract
Amount
Estimated
Fair
Value
Carrying
or Contract
Amount
Estimated
Fair
Value
$ 215,188
910
196,966
3,251,311
12,347
30,697
10,228
$ 215,188
910
196,966
3,246,955
12,347
30,697
10,228
$ 122,398
940
349,517
3,234,762
17,500
21,746
11,733
$ 122,398
941
349,517
3,232,165
17,500
21,746
11,733
536,944
2,533,136
536,944
2,538,394
680,282
2,321,417
680,282
2,323,199
505,389
18,539
506,429
18,539
569,570
21,828
571,913
21,828
386,785
47,289
384
194
524,349
48,071
535
147
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was
practicable to estimate that value are explained below:
Cash and Cash Equivalents — The carrying amounts approximate fair value due to the short-term nature of these
instruments.
Securities — The fair value of securities was generally obtained from market bids for similar or identical securities or
obtained from independent securities brokers or dealers.
Loans Receivable, Net — Fair values were estimated by loan portfolio and are based on discounted cash flows utilizing
discount rates that approximate the pricing of similar loans and anticipated repayment schedules. The fair value of non-
performing loans at December 31, 2008 and 2007 was not estimated because it was not practicable to reasonably assess the
credit adjustment that would be applied in the marketplace for such loans. The estimated fair value is net of the allowance for
loan losses. Impaired loans and loans held for sale were excluded.
83
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 2 — Fair Value Measurements (Continued)
Accrued Interest Receivable — The carrying amount of accrued interest receivable approximates its fair value.
Federal Home Loan Bank and Federal Reserve Bank Stock — The carrying amounts approximate fair value as the stock may
be resold to the issuer at carrying value.
Noninterest-Bearing Deposits — The fair value of non-maturity deposits was the amount payable on demand at the
reporting date. Non-maturity deposits include noninterest-bearing demand deposits, savings accounts and money market
checking.
Interest-Bearing Deposits — The fair value of interest-bearing deposits, such as certificates of deposit, was estimated based
on discounted cash flows. The discount rate used was based on interest rates currently being offered by the Bank on
comparable deposits as to amount and term.
FHLB Advances, Other Borrowings and Junior Subordinated Debentures — Discounted cash flows have been used to value
FHLB advances, other borrowings and junior subordinated debentures.
Accrued Interest Payable — The carrying amount of accrued interest payable approximates its fair value.
Commitments to Extend Credit and Standby Letters of Credit — The fair values of commitments to extend credit and
standby letters of credit are based upon the difference between the current value of similar loans and the price at which the
Bank has committed to make the loans.
Note 3 — Securities
The following is a summary of securities held to maturity:
(In thousands)
December 31, 2008:
Municipal Bonds
Mortgage-Backed Securities
December 31, 2007:
Municipal Bonds
Mortgage-Backed Securities
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
$695
215
$910
$694
246
$940
$—
—
$—
$—
1
$ 1
$—
—
$—
$—
—
$—
$695
215
$910
$694
247
$941
84
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 3 — Securities (Continued)
The following is a summary of securities available for sale:
(In thousands)
December 31, 2008:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Equity Securities
Corporate Bonds
December 31, 2007:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Corporate Bonds
Amortized
Cost
$ 77,515
58,987
36,204
17,580
4,684
511
355
$195,836
$ 99,332
69,907
51,881
104,893
3,925
18,295
$348,233
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
$1,536
413
137
120
386
293
—
$2,885
$ 533
1,867
128
277
—
43
$2,848
$ 191
1,087
179
—
112
—
186
$1,755
$ 667
23
591
81
90
112
$1,564
$ 78,860
58,313
36,162
17,700
4,958
804
169
$196,966
$ 99,198
71,751
51,418
105,089
3,835
18,226
$349,517
The amortized cost and estimated fair value of investment securities at December 31, 2008, 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
Equity Securities
Available for Sale
Held to Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
8,038
17,697
7,083
48,788
77,515
36,204
511
$
8,200
17,812
7,208
47,920
78,860
36,162
804
$195,836
$196,966
$ —
—
695
—
215
—
—
$910
$ —
—
695
—
215
—
—
$910
85
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 3 — Securities (Continued)
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” FSP No. FAS 115-1
and FSP No. FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,”
and Staff Accounting Bulletin No. 59, we periodically evaluate our investments for OTTI. For the years ended December 31,
2008 and 2007, we recorded $3.1 million and $1.1 million, respectively, in other-than-temporary impairment charges on
certain available-for-sale securities and certain unmarketable securities (included in other assets in the accompanying
Consolidated Balance Sheets).
As of December 31, 2008, we had an investment in a Lehman Brothers corporate bond with an aggregate par value of
$2.7 million. During the third quarter of 2008, Lehman Brothers filed for bankruptcy. Based on an evaluation of the
financial condition and near-term prospects of Lehman Brothers, we recorded an OTTI charge of $2.4 million to write
down the value of the corporate bond to its estimated fair value. As of December 31, 2008, we had an investment in a
Community Reinvestment Act (“CRA”) equity fund that was included in other assets. During the third and fourth quarters
of 2008, we recorded OTTI charges of $212,000 and $494,000, respectively, due to the foreclosure of three properties in the
fund and the conversion of three properties from for-sale to rental properties.
As of December 31, 2007, we had investments in CRA preferred securities with an aggregate par value of $2.0 million.
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 near-term prospects
of the issuers, we recorded an OTTI 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, 2008 and 2007:
(In thousands)
Available for Sale — December 31, 2008:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
Other Securities
Corporate Bonds
Available for Sale — December 31, 2007:
Mortgage-Backed Securities
Municipal Bonds
Collateralized Mortgage Obligations
U.S. Government Agency Securities
Other Securities
Corporate Bonds
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
$ 158
968
36
72
186
$1,420
$
$
31
—
—
—
—
—
31
$10,631
35,614
4,569
929
169
$51,912
$ 5,319
—
—
—
—
—
$ 5,319
86
$
33
119
143
40
—
$
5,277
1,749
5,903
1,960
—
$ 335
$ 14,889
$ 636
23
591
81
90
112
$1,533
$ 42,143
2,910
40,167
46,895
2,910
7,834
$142,859
$ 191
1,087
179
112
186
$1,755
$ 667
23
591
81
90
112
$1,564
$ 15,908
37,363
10,472
2,889
169
$ 66,801
$ 47,462
2,910
40,167
46,895
2,910
7,834
$148,178
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 3 — Securities (Continued)
The impairment losses described previously are not included in the table above as the impairment losses were recorded. All
other individual securities that have been in a continuous unrealized loss position for 12 months or longer at December 31,
2008 and 2007 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, 2008 and 2007. 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, 2008 and 2007 are not other-than-temporarily impaired, and therefore, no
additional impairment charges as of December 31, 2008 and 2007 are warranted.
Securities available for sale with carrying values of $123.6 million and $240.4 million as of December 31, 2008 and 2007,
respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
There were $77,000, $0 and $2,000 in net realized gains on sales of securities available for sale during the years ended
December 31, 2008, 2007 and 2006, respectively. In 2008, $281,000 ($163,000, net of income taxes) of net unrealized gains
arose during the year and was included in comprehensive income and $435,000 ($252,000, net of income taxes) of previously
net unrealized gains were realized in earnings. In 2007, $2.7 million ($2.0 million, net of income taxes) of net unrealized
gains arose during the year and was included in comprehensive income. In 2006, $254,000 ($184,000, net of income taxes)
of net unrealized losses arose during the year and was included in comprehensive income and $4,000 ($3,000, net of income
taxes) of previously net unrealized gains were realized in earnings.
87
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 4 — Loans
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
SBA Loans
International Loans
Total Commercial and Industrial Loans
Consumer Loans
Total Gross Loans
Allowance for Loans Losses
Deferred Loan Fees
Loans Receivable, Net
December 31,
2008
2007
$ 908,970
178,783
92,361
1,180,114
1,611,449
214,699
140,989
95,185
2,062,322
83,525
3,325,961
(70,986)
(1,260)
$ 795,675
215,857
90,065
1,101,597
1,599,853
256,978
112,503
119,360
2,088,694
90,449
3,280,740
(43,611)
(2,367)
$3,253,715
$3,234,762
Accrued interest on loans receivable amounted to $11.8 million and $15.6 million at December 31, 2008 and 2007,
respectively. At December 31, 2008 and 2007, loans receivable totaling $2,841.5 million and $1,278.6 million, respectively,
were pledged to secure FHLB advances and the FRB’s federal discount window.
88
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 4 — Loans (Continued)
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Activity in the allowance for loan losses and allowance for off-balance sheet items was as follows:
As of and for the Year Ended December 31,
2008
2007
2006
Allowance
for Loan
Losses
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
Allowance
for Off-
Balance
Sheet
Items
Allowance
for Loan
Losses
Allowance
for Off-
Balance
Sheet
Items
$ 43,611
$1,765
$ 27,557
$2,130
$24,963
$2,130
73,345
(48,152)
2,182
2,331
—
—
38,688
(23,330)
696
(365)
—
—
7,173
(6,129)
1,550
—
—
—
(In thousands)
Balance at Beginning of Year
Provision Charged to Operating
Expense
Loans Charged Off
Recoveries
Balance at End of Year
$ 70,986
$4,096
$ 43,611
$1,765
$27,557
$2,130
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
As of and for the Year Ended December 31,
2008
2007
2006
$ 71,448
49,945
(18,157)
$38,930
15,202
(11,829)
$10,616
3,868
(6,731)
$103,236
$42,303
$ 7,753
$149,680
$61,249
$19,287
The following is a summary of interest foregone on impaired loans for the periods indicated:
(In thousands)
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms
Less: Interest Income Recognized on Impaired Loans on a Cash Basis
Interest Foregone on Impaired Loans
Year Ended December 31,
2008
2007
2006
$ 7,327
(5,422)
$ 4,672
(3,705)
$ 1,726
(1,146)
$ 1,905
$
967
$
580
There were no commitments to lend additional funds to borrowers whose loans are included above.
89
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 4 — Loans (Continued)
Non-Performing Assets
The following table details non-performing assets for the periods indicated:
(In thousands)
Non-Accrual Loans
Loans 90 Days or More Past Due and Still Accruing
Total Non-Performing Loans
Other Real Estate Owned
Total Non-Performing Assets
December 31,
2008
2007
$120,823
1,075
121,898
823
$54,252
227
54,479
287
$122,721
$54,766
Loans on non-accrual status totaled $120.8 million and $54.3 million at December 31, 2008 and 2007, respectively. The
increase in non-accrual loans was primarily due to two large construction loans (a $25.2 million condominium project in
Northern California and an $11.9 million low-income housing construction project in the Los Angeles area) and a
$24.2 million commercial term loan.
Loans past due 90 days or more and still accruing interest totaled $1.1 million and $227,000 at December 31, 2008 and
2007, respectively.
As of December 31, 2008, there were three OREO properties with a combined net carrying value of $823,000. As of
December 31, 2007, there was one OREO property with a net carrying value of $287,000. During the year ended
December 31, 2008, an OREO property, with a carrying value of $2.3 million, was sold and a net loss of $324,000 was
realized. During the year ended December 31, 2007, an OREO property, with a carrying value of $1.1 million, was sold and
a net gain of $226,000 was realized.
Restructured Loans
As of December 31, 2008, restructured loans totaled $24.2 million and the related allowance was $714,000. There were no
restructured loans at December 31, 2007.
Servicing Assets
The changes in servicing assets were as follows for the periods indicated:
(In thousands)
Balance at Beginning of Year
Additions
Changes in Valuation Allowance
Amortization
Balance at End of Year
90
December 31,
2008
2007
$ 4,336
405
345
(1,295)
$ 4,579
1,821
(18)
(2,046)
$ 3,791
$ 4,336
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 4 — Loans (Continued)
At December 31, 2008 and 2007, we serviced loans sold to unaffiliated parties in the amounts of $228.6 million and
$258.5 million, respectively. These represent loans that have either been sold or securitized for which the Bank continues to
provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. 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,
2008
2007
$ 6,120
8,790
14,528
10,956
862
$ 6,120
8,433
13,783
10,141
862
41,256
(20,977)
39,339
(18,539)
$ 20,279
$ 20,800
Depreciation and amortization expense totaled $2.9 million, $3.0 million and $2.9 million for the years ended December 31,
2008, 2007 and 2006, respectively.
Note 6 — Goodwill
As of December 31, 2008 and 2007, goodwill totaled $0 and $107.1 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 Year Ended
December 31,
2008
2007
$ 107,100
293
(107,393)
$ 207,646
2,345
(102,891)
$
— $ 107,100
The acquisitions of Chun-Ha and All World resulted in the recognition of goodwill aggregating $293,000 and $2.3 million
for the years ended December 31, 2008 and 2007, respectively.
91
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 6 — Goodwill (Continued)
Impairment Loss on Goodwill
During our assessments of goodwill during the second quarter of 2008 and 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. Based on these assessments, we concluded that the related
goodwill was impaired and $107.4 million and $102.9 million was required to be expensed as a non-cash charge to
continuing operations during the second quarter of 2008 and the fourth quarter of 2007, respectively.
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
December 31, 2008
December 31, 2007
Amortization
Period
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
8 years
20 years
10 years
5 years
15 years
$13,137
970
770
600
580
$(10,538) $2,599
873
616
360
502
(97)
(154)
(240)
(78)
$13,137
970
770
600
580
$(8,865)
(48)
(77)
(120)
(39)
$4,272
922
693
480
541
Total Other Intangible Assets
$16,057
$(11,107) $4,950
$16,057
$(9,149)
$6,908
The weighted-average amortization period for other intangible assets is 9.1 years. The total amortization expense for other
intangible assets was $2.0 million, $2.3 million and $2.4 million during the years ended December 31, 2008, 2007 and 2006,
respectively.
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)
2009
2010
2011
2012
2013
Amount
$1,568
$1,149
$ 700
$ 198
$ 165
As of December 31, 2008 and 2007, management is not aware of any circumstances that would indicate impairment of other
intangible assets. There were no impairment charges recorded through earnings in 2008 or 2007.
92
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 8 — Deposits
At December 31, 2008, the scheduled maturities of time deposits are as follows:
Year Ending
December 31,
(In thousands)
2009
2010
2011
2012
2013
Thereafter
Total
Time
Deposits
of $100,000
or More
$823,015
26,499
182
—
—
104
Other
Time
Deposits
Total
$1,106,010
124,934
84
4
—
34
$1,929,025
151,433
266
4
—
138
$849,800
$1,231,066
$2,080,866
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,
2008
2007
2006
$ 2,093
19,909
43,598
18,753
$
2,004
15,446
75,516
15,551
$84,353
$108,517
$ 1,853
14,539
64,184
12,977
$93,553
Accrued interest payable on deposits totaled $16.7 million and $20.7 million at December 31, 2008 and 2007, respectively.
Total deposits reclassified to loans due to overdrafts at December 31, 2008 and 2007 were $3.1 million and $6.3 million,
respectively.
On October 3, 2008, FDIC deposit insurance on most accounts was increased from $100,000 to $250,000. This increase is
in place until the end of 2009. As of December 31, 2009, time deposits of $250,000 or more were $149.5 million.
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
93
December 31,
2008
2007
$422,196
—
787
$432,664
50,000
4,500
$422,983
$487,164
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 9 — FHLB Advances and Other Borrowings (Continued)
FHLB advances represent collateralized obligations with the FHLB. The following is a summary of contractual maturities
pertaining to FHLB advances:
Year of Maturity
December 31, 2008
December 31, 2007
(Dollars in thousands)
2008
2009
2010
2011
2012
2013
Thereafter
$
Amount
—
161,000
6,908
150,000
—
100,000
4,288
$422,196
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
Weighted-
Average
Interest
Rate
—
1.71%
4.44%
0.76%
—
0.67%
5.27%
1.21%
2008
1.21%
2.81%
Weighted-
Average
Interest
Rate
4.72%
5.63%
4.44%
—
—
—
5.27%
4.73%
Amount
$415,000
6,000
7,084
—
—
—
4,580
$432,664
Year Ended December 31,
2007
4.73%
5.11%
2006
5.20%
5.02%
$498,875
$597,472
$237,733
$432,664
$123,295
$168,250
We have pledged investment securities available for sale and loans receivable with carrying values of $110.1 million and
$1,441.5 million, respectively, as collateral with the FHLB for this borrowing facility. The total borrowing capacity available
from the collateral that has been pledged is $682.7 million, of which $260.5 million remained available as of December 31,
2008.
For the years ended December 31, 2008, 2007 and 2006, interest expense on FHLB advances and other borrowings totaled
$14.4 million, $13.9 million and $7.0 million, respectively, and the weighted-average interest rates were 2.82 percent,
5.10 percent and 5.02 percent, respectively.
Total credit lines for borrowing amounted to $5.0 million and $186.0 million at December 31, 2008 and 2007, respectively.
As of December 31, 2008 and 2007, $0 and $50.0 million, respectively, was borrowed under these credit lines. On
December 31, 2008, the Bank was approved for a credit line of $1.07 billion through the FRB discount window.
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
94
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 10 — Junior Subordinated Debentures (Continued)
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, 2008 and 2007.
In October 2008, Hanmi Financial committed to the FRB that no interest payments on the trust preferred securities would
be made without the prior written consent of the FRB. In addition, limitations imposed by our regulators prohibited the
Bank from providing a dividend to Hanmi Financial. Therefore, in order to preserve its capital position, Hanmi Financial’s
Board of Directors has elected to defer quarterly interest payments on its outstanding trust preferred securities until further
notice, beginning with the interest payment that was due on January 15, 2009. See “Note 14 — Regulatory Matters” for
further discussion.
For the years ended December 31, 2008, 2007 and 2006, interest expense on the junior subordinated debentures totaled
$5.1 million, $6.6 million and $6.4 million, respectively, and the weighted-average interest rates were 6.14 percent,
8.06 percent and 7.79 percent, respectively.
Note 11 — Income Taxes
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109.” 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.
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 the adoption. Because of the implementation, there was no cumulative effect related to adopting
FIN No. 48. However, certain amounts have been reclassified on 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 Beginning of Year
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 End of Year
95
December 31,
2008
2007
$1,032
960
—
131
—
(686)
$1,437
$ 794
40
—
198
—
—
$1,032
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 11 — Income Taxes (Continued)
The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $976,000, $141,000
and $115,000 as of December 31, 2008, December 31, 2007 and January 1, 2007, respectively.
During 2008 and 2007, we accrued interest of $58,000 and $52,000, respectively, for uncertain tax benefits. As of
December 31, 2008 and 2007, the total amount of accrued interest related to uncertain tax positions, net of federal tax
benefit, was $117,000 and $96,000, respectively. 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 on 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 2009 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 2009. We do not anticipate any material change in the total amount of unrecognized tax
benefits to occur within the next 12 months.
We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended
December 31, 2005 through 2007. 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, 2004 through 2007.
We are currently not under any audit by the Internal Revenue Service or state tax authorities.
A summary of the provision (benefit) for income taxes was as follows:
(In thousands)
Current Expense:
Federal
State
Deferred Expense:
Federal
State
Provision (Benefit) for Income Taxes
Year Ended December 31,
2008
2007
2006
$ 7,020
2,879
$ 30,074
8,846
$34,298
9,014
9,899
38,920
43,312
(7,590)
(3,664)
(10,791)
(3,827)
(2,222)
(720)
(11,254)
(14,618)
(2,942)
$ (1,355)
$ 24,302
$40,370
96
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 11 — Income Taxes (Continued)
Deferred tax assets and liabilities were as follows:
(In thousands)
Deferred Tax Assets:
Credit Loss Provision
Depreciation
State Taxes
Other
Total Deferred Tax Assets
Deferred Tax Liabilities:
Purchase Accounting
State Taxes
Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest
Rate Swaps
Other
Total Deferred Tax Liabilities
Net Deferred Tax Assets
December 31,
2008
2007
$35,792
2,170
—
962
38,924
(4,559)
(2,337)
(471)
(2,101)
(9,468)
$20,800
1,729
1,594
2,133
26,256
(5,464)
—
(527)
(1,795)
(7,786)
$29,456
$18,470
The realization of deferred tax assets will depend on the existence of future taxable income. The losses in 2006 and 2007 were
caused by goodwill impairment charges that were not (and will never be) deductible for tax return purposes. Given our
current financial position, the results of operations for the preceding years and the lack of any negative evidence suggesting
otherwise, 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. Therefore, as of December 31, 2008 and 2007, management has determined
that no valuation allowance was required.
A reconciliation between the federal statutory income tax rate and the effective tax rate was 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,
2008
2007
2006
35.0% (35.0)% 35.0%
0.5%
9.1% 5.8%
0.9% (3.0)% (1.0)%
1.2% (4.3)% (1.6)%
(36.3)% 99.9% —
1.3% 66.7% 38.2%
At December 31, 2008 and 2007, net current taxes receivable of $11.7 million and $5.6 million, respectively, were included
in other assets on the Consolidated Balance Sheets.
97
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 12 — Share-Based Compensation
At December 31, 2008, 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.
Under the Plan, we may grant equity incentive awards for up to 3,000,000 shares of common stock. As of December 31,
2008, 3,000,000 shares were still available for issuance. The CEO Plan was terminated as of December 31, 2007 and there
were no additional shares available for issuance.
The table below shows the share-based compensation expense and related tax benefits for the periods indicated:
Share-Based Compensation Expense
Related Tax Benefits
As of December 31, 2008, unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
Stock Option Awards
Restricted Stock Awards
Total Unrecognized Share-Based Compensation Expense
2007 Equity Compensation Plan
Stock Options
Year Ended December 31,
2008
2007
2006
$1,036
$ 436
$1,891
$ 795
$1,521
$ 640
Unrecognized
Expense
Average Expected
Recognition Period
$1,976
218
$2,194
2.2 years
3.9 years
2.4 years
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 5 years of continuous service and
expire 10 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 are issued or treasury shares are utilized upon the exercise of
stock options.
The weighted-average estimated fair value per share of options granted under the Plan was as follows:
Year Ended December 31,
2008
2007
2006
Weighted-Average Estimated Fair Value Per Share of Options Granted
$1.54
$4.49
$6.23
98
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 12 — 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,
2008
2007
2006
1.78%
35.89%
1.68%
29.98%
1.26%
34.79%
3.1 years
4.9 years
4.6 years
3.04%
4.29%
4.85%
Expected volatility was 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 was 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,
2008
2007
2006
$ 596
$ 216
$1,249
$1,590
$ — $1,197
$ — $1,145
$ — $ 317
$5,940
$ 695
$2,874
$2,032
$ 661
(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 stock option transactions under the Plan for the periods indicated:
Year Ended December 31,
2008
2007
2006
Weighted-
Average
Exercise
Price Per
Share
Number
of
Shares
Options Outstanding at Beginning of Year
Options Granted
Options Exercised
Options Forfeited
Options Expired
1,472,766
140,000
$15.33
$ 6.28
— $ —
$17.36
$15.33
(208,467)
(80,832)
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
Options Outstanding at End of Year
1,323,467
$14.05
1,472,766
$15.33
1,755,813
$15.31
Options Exercisable at End of Year
778,245
$13.51
617,634
$12.48
471,903
$ 8.55
99
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 12 — 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,
2008
2007
2006
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of
Shares
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of
Shares
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of
Shares
Non-Vested Options Outstanding at
Beginning of Year
Options Granted
Options Vested
Options Forfeited
Non-Vested Options Outstanding at
End of Year
855,132
140,000
(241,443)
(208,467)
$5.47
$1.54
$5.17
$4.92
1,283,910
132,667
(305,178)
(256,267)
$5.53
$4.49
$5.21
$5.57
653,110
953,000
(210,660)
(111,540)
$3.68
$6.23
$3.30
$4.90
545,222
$4.79
855,132
$5.47
1,283,910
$5.53
As of December 31, 2008, 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
Weighted-
Average
Remaining
Contractual
Life
Number
of Shares
Intrinsic
Value(1)
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life
(Dollars in thousands, except per share data)
$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
203,096
319,700
534,487
138,000
1,323,467
$—
—
—
—
—
$—
$ 3.89
$ 6.65
$13.51
$17.68
$21.58
1.7 years
7.0 years
5.2 years
7.3 years
7.9 years
128,184
79,096
249,700
223,265
98,000
$14.05
6.3 years
778,245
$—
—
—
—
—
$—
$ 3.89
$ 7.22
$13.51
$17.71
$21.62
1.7 years
3.1 years
5.2 years
7.2 years
7.9 years
$13.51
5.3 years
(1) Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $2.06 as of December 31, 2008, and the exercise
price, multiplied by the number of options.
Restricted Stock Awards
Restricted stock awards under the Plan become fully vested after three to five years of continued employment from the date
of grant. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported
by the holders of the restricted shares when the restrictions are released and the shares are issued. Restricted shares are
forfeited if officers and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock are treated as
cancelled shares.
100
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 12 — Share-Based Compensation (Continued)
The table below provides information for restricted stock awards under the Plan for the periods indicated:
Year Ended December 31,
2008
2007
2006
Weighted-
Average
Grant Date
Fair Value
Per Share
$13.48
$ 6.68
$ 8.21
$11.74
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of
Shares
19,000
— $ —
$13.48
— $ —
19,000
$13.48
Number
of
Shares
19,000
10,000
(5,000)
24,000
Weighted-
Average
Grant Date
Fair Value
Per Share
$—
$—
$—
$—
Number
of
Shares
—
—
—
—
Restricted Stock at Beginning of Year
Restricted Stock Granted
Restricted Stock Forfeited
Restricted Stock at End of Year
2004 CEO Stock Option Plan
Stock Options
There were no stock options granted under the CEO Plan during the years ended December 31, 2008, 2007 and 2006.
Upon the former Chief Executive Officer’s retirement on December 31, 2007, 116,666 vested stock options were
repurchased for $70,000.
The following is a summary of stock option transactions under the CEO Plan for the periods indicated:
Year Ended December 31,
2008
2007
2006
Number
of
Shares
Exercise
Price Per
Share
Number
of
Shares
Exercise
Price Per
Share
$17.17
$17.17
$17.17
Number
of
Shares
Exercise
Price Per
Share
350,000
$17.17
— $ —
— $ —
350,000
(233,334)
(116,666)
— $ — 350,000
$17.17
— $ —
58,333
$17.17
Options Outstanding at Beginning of Year
Options Forfeited
Options Repurchased
Options Outstanding at End of Year
Options Exercisable at End of Year
—
—
—
—
—
$—
$—
$—
$—
$—
101
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 12 — Share-Based Compensation (Continued)
The following is a summary of transactions for non-vested stock options under the CEO Plan for the periods indicated:
Year Ended December 31,
2008
2007
2006
Number
of
Shares
Grant Date
Fair Value
Per Share
Number
of
Shares
Grant Date
Fair Value
Per Share
Number
of
Shares
Grant Date
Fair Value
Per Share
Non-Vested Options Outstanding at Beginning
of Year
Options Forfeited
Options Vested
Non-Vested Options Outstanding at End of
Year
—
—
—
—
$—
$—
$—
$—
291,667
(233,334)
(58,333)
$4.82
$4.82
$4.82
350,000
—
(58,333)
$4.82
$ —
$4.82
—
$ —
291,667
$4.82
Restricted Stock Awards
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 table below provides information for restricted stock awards under the CEO Plan for the periods indicated:
Year Ended December 31,
2008
2007
2006
Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of
Shares
Number
of
Shares
$—
$—
$—
60,000
(60,000)
$18.15
$18.15
80,000
(20,000)
— $ —
60,000
Weighted-
Average
Grant Date
Fair Value
Per Share
$18.15
$18.15
$18.15
Number
of
Shares
—
—
—
Restricted Stock at Beginning of Year
Restricted Stock Vested
Restricted Stock at End of Year
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, 2008, 2007 and 2006, 0, 2,000 and 160,056 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, 2008, there
were outstanding stock warrants to purchase 2,000 shares of our common stock.
102
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 13 — Stockholders’ Equity (Continued)
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 2008 or 2006. Repurchased shares are held in treasury pending use for general corporate purposes, including
issuance under our stock option plans.
Note 14 — Regulatory Matters
Risk-Based Capital
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, 2008 and 2007, Hanmi Financial and the Bank met all capital adequacy requirements to which they were
subject.
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.
103
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 14 — Regulatory Matters (Continued)
The capital ratios of Hanmi Financial and Hanmi Bank at December 31, 2008 and 2007 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, 2008
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, 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
Reserve Requirement
$383,043
$379,438
10.79% $283,943
10.70% $283,561
8.00%
N/A
8.00% $354,451
N/A
10.00%
$338,042
$334,628
9.52% $141,972
9.44% $141,781
4.00%
N/A
4.00% $212,671
$338,042
$334,628
8.93% $151,371
8.85% $151,168
4.00%
N/A
4.00% $188,959
N/A
6.00%
N/A
5.00%
$380,057
$377,613
10.65% $285,417
10.59% $285,137
8.00%
N/A
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%
The Bank is required to maintain a percentage of its deposits as reserves at the FRB. The daily average reserve balance
required to be maintained with the FRB was $1.5 million as of December 31, 2008 and 2007, respectively.
Memorandum of Understanding
On October 8, 2008, the members of the Board of the Bank entered into an informal supervisory agreement (a
memorandum of understanding) with the FRB and the DFI (the “Regulators”) to address certain issues raised in the
Bank’s most recent regulatory examination by the DFI on March 10, 2008. Certain of the issues to be addressed by
management under the terms of the memorandum of understanding relate to the following, among others: (i) Board and
senior management maintenance and succession planning; (ii) Board oversight and education; (iii) Board assessment and
enhancement; (iv) loan policies and procedures; (v) allowance for loan losses policies and procedures; (vi) liquidity and funds
management policies; (vii) strategic planning; (viii) capital maintenance, including a requirement that the Bank maintain a
minimum Tier 1 leverage ratio and tangible stockholder’s equity to total tangible assets ratio of not less than 8.0 percent; and
(ix) restrictions on the payment of dividends without the Regulators’ prior approval. At December 31, 2008, the Bank had a
Tier 1 leverage ratio of 8.85 percent and a tangible stockholder’s equity to total tangible assets ratio of 8.68 percent, both
above the required 8.0 percent level.
104
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 14 — Regulatory Matters (Continued)
The Bank is required to regularly keep the Regulators informed of its progress in complying with the provisions of the
memorandum of understanding. If we fail to comply with the terms of the memorandum of understanding or any other
regulatory orders or agreements we have entered into, or the Regulators believe that further enforcement action against us is
necessary, we may be subject to further requirements to take corrective action, face further regulation and intervention and
additional constraints on our business operations, any of which could have a material adverse effect on our results of
operations and business.
The Board and management are committed to addressing and resolving the issues raised in the memorandum of
understanding on a timely basis. Since completion of the March 10, 2008 regulatory examination, actions have already
been undertaken to resolve or make progress on many of the issues raised by the memorandum of understanding.
Troubled Asset Relief Program
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted to restore confidence
and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to
customers and to each other. Initially introduced as the Troubled Asset Relief Program (“TARP”), the EESA authorized the
U.S. Department of the Treasury (the “Treasury”) to purchase from financial institutions and their holding companies up to
$700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and
equity securities issued by financial institutions and their holding companies in a troubled asset relief program. Initially,
$350 billion, or half of the $700 billion, was made immediately available to the Treasury. On January 15, 2009, the
remaining $350 billion was released to the Treasury.
On October 14, 2008, the Treasury announced its intention to inject capital into nine large U.S. financial institutions under
the TARP Capital Purchase Program (the “TARP CPP”), and since has injected capital into many other financial
institutions. The Treasury initially allocated $250 billion towards the TARP CPP. We have filed an application for TARP
CPP funds, which remains pending with the Treasury. Under the terms of the TARP CPP, if Hanmi Financial enters into a
Securities Purchase Agreement with the Treasury to sell to the Treasury preferred stock and warrants, we would be
prohibited from increasing dividends on our common stock, and from making certain repurchases of equity securities,
including our common stock, without the Treasury’s consent. Furthermore, as long as the preferred stock issued to the
Treasury under the TARP CPP is outstanding, dividend payments and repurchases or redemptions relating to certain equity
securities, including common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
In order to participate in the TARP CPP, financial institutions were also required to adopt certain standards for executive
compensation and corporate governance. These standards generally applied to the Chief Executive Officer, Chief Financial
Officer and the three next most highly compensated senior executive officers. The standards include: 1) ensuring that
incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of
the financial institution; 2) required clawback of any bonus or incentive compensation paid to a senior executive based on
statements of earnings, gains or other criteria that are later proven to be materially inaccurate; 3) prohibition on making
golden parachute payments to senior executives; and 4) agreement not to deduct for tax purposes executive compensation in
excess of $500,000 for each senior executive. If Hanmi Financial were to receive TARP CPP funds, we would be required to
comply with these requirements and additionally other requirements adopted in the new legislation as discussed below.
We have applied to participate in the TARP CPP for an investment of up to $105 million from the Federal Government, but
we are still waiting a final decision from the Treasury as to whether we will be able to participate in this program.
105
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 14 — Regulatory Matters (Continued)
Capital Plan
Separately, Hanmi Financial has committed to the FRB that it will adopt a consolidated capital plan to augment and
maintain a sufficient consolidated capital position. In addition, Hanmi Financial has agreed that it will not (i) declare or pay
any dividends or make any payments on its trust preferred securities or any other capital distributions without the prior
written consent of the FRB, and (ii) incur, increase or renew any existing debt or purchase, redeem or otherwise acquire any
of its capital stock without the prior written consent of the FRB. In order to preserve its capital position, the Board of Hanmi
Financial has elected to defer quarterly interest payments on its outstanding trust preferred securities until further notice,
beginning with the interest payment that was due on January 15, 2009. Finally, Hanmi Financial has agreed to provide prior
written notice and obtain the consent of the FRB prior to appointing any new directors or senior executive officers.
Note 15 — Earnings (Loss) Per Share
Earnings (loss) per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from the issuance of common stock that then
shared in earnings, excluding common shares in treasury. Unvested restricted stock was excluded from the calculation of
weighted-average common shares for basic EPS. For diluted EPS, weighted-average common shares include the impact of
restricted stock under the treasury method.
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
(Dollars in thousands, except per share amounts)
Year Ended December 31, 2008:
Basic EPS — Income Available to Common Stockholders
Effect of Dilutive Securities — Options and Warrants
Diluted EPS — Income Available to Common Stockholders
Year Ended December 31, 2007:
Basic EPS — Income Available to Common Stockholders
Effect of Dilutive Securities — Options and Warrants
Diluted EPS — Income Available to Common Stockholders
Year Ended December 31, 2006:
Basic EPS — Income Available to Common Stockholders
Effect of Dilutive Securities — Options and Warrants
Income
(Loss)
(Numerator)
Weighted-
Average
Shares
(Denominator)
Per
Share
Amount
$(102,093)
—
45,872,541
—
$(2.23)
—
$(102,093)
45,872,541
$(2.23)
$ (60,762)
—
47,787,213
—
$(1.27)
—
$ (60,762)
47,787,213
$(1.27)
$ 65,350
—
48,850,221
584,907
$ 1.34
(0.02)
Diluted EPS — Income Available to Common Stockholders
$ 65,350
49,435,128
$ 1.32
For the years ended December 31, 2008, 2007 and 2006, there were 1,197,283, 1,493,766 and 1,373,554 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.
106
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
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. For the years ended
December 31, 2008, 2007 and 2006, contributions to the 401(k) plan were $1.3 million, $1.2 million and $1.0 million,
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, 2008 and 2007, the liability for the deferred compensation
plan and interest thereon was $151,000 and $188,000, respectively.
Note 17 — Commitments and Contingencies
Lease Commitments
We lease our premises under non-cancelable operating leases. At December 31, 2008, future minimum annual rental
commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, was as
follows:
Year Ending
December 31,
2009
2010
2011
2012
2013
Thereafter
Total
Amount
(In thousands)
$ 5,382
5,048
4,138
3,295
2,742
6,479
$27,084
For the years ended December 31, 2008, 2007 and 2006, rental expenses recorded under such leases amounted to
$5.2 million, $4.8 million and $4.1 million, respectively.
Litigation
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
107
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 17 — Commitments and Contingencies (Continued)
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 on
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, was 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
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
Note 19 — Segment Reporting
December 31,
2008
2007
$386,785
47,289
29,177
16,912
$524,349
48,071
52,544
18,622
$480,163
$643,586
Through our branch network and lending units, we provide a broad range of financial services to individuals and companies
located primarily in Southern California. These services include demand, time and savings deposits; and commercial and
industrial, real estate and consumer lending. While our chief decision makers monitor the revenue streams of our various
products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accord-
ingly, we consider all of our operations to be aggregated in one reportable operating segment.
Note 20 — Correction of Immaterial Errors in Prior Periods
Our historical financial statements have been revised from that issued in prior years to correct immaterial errors related to the
recording of interest expense. We recognized an adjustment of $989,000, net of income taxes, to retained earnings and
related accrued interest payable on the Consolidated Balance Sheet as of December 31, 2007 and pre-tax adjustments of
$417,000 and $517,000 to interest expense on deposits on the Consolidated Statement of Operations for the years ended
December 31, 2007 and 2006, respectively.
108
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 20 — Correction of Immaterial Errors in Prior Periods (Continued)
The following is a summary of the effects of the immaterial error correction on the consolidated financial statements for the
periods indicated:
CONSOLIDATED BALANCE SHEET
(In thousands)
Accrued Interest Receivable
Total Assets
Other Liabilities
Total Liabilities
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
December 31, 2007
As
Previously
Reported
$
17,500
$3,983,746
$
13,717
$3,612,201
$
93,404
$ 371,545
$3,983,746
Adjustments
$ (89)
$ (89)
$ 900
$ 900
$(989)
$(989)
$ (89)
As
Restated
$
17,411
$3,983,657
$
14,617
$3,613,101
$
92,415
$ 370,556
$3,983,657
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Interest on Deposits
Total Interest Expense
Net Interest Income Before Provision for
Year Ended December 31, 2007
Year Ended December 31, 2006
As
Previously
Reported
Adjustments
As
Restated
As
Previously
Reported
Adjustments
As
Restated
$108,100
$128,693
$ 417
$ 417
$108,517
$129,110
$ 93,036
$106,429
$ 517
$ 517
$ 93,553
$106,946
Credit Losses
$152,203
$(417)
$151,786
$153,760
$ (517)
$153,243
Net Interest Income After Provision for
Credit Losses
Income (Loss) Before Provision for
Income Taxes
Provision for Income Taxes
Net Income (Loss)
Earnings (Loss) Per Share:
Basic
Diluted
$113,880
$(417)
$113,463
$146,587
$ (517)
$146,070
$ (36,043)
$ 24,477
$ (60,520)
$(417)
$(175)
$(242)
$ (36,460)
$ 24,302
$ (60,762)
$106,237
$ 40,588
$ 65,649
$ (517)
$ (218)
$ (299)
$105,720
$ 40,370
$ 65,350
$
$
(1.27)
(1.27)
$ —
$ —
$
$
(1.27)
(1.27)
$
$
1.34
1.33
$ —
$(0.01)
$
$
1.34
1.32
109
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 21 — Cumulative-Effect Adjustment From the Adoption of EITF Issue No. 06-4
In September 2006, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements,” which requires the
recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance
arrangement. The consensus highlights that 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, if 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 could 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. We adopted the provisions of EITF Issue No. 06-4 on January 1, 2008 and recorded a $2.2 million
cumulative-effect adjustment to the beginning balance in retained earnings.
Note 22 — Liquidity
Currently, management believes that Hanmi Bank, on a stand-alone basis, has adequate liquid assets to meet its current
obligations through December 31, 2009, which include deposits and FHLB borrowings. In addition to its deposits, the
Bank’s principal source of liquidity is its ability to utilize borrowings, as needed. The Bank’s primary source of borrowings is
the FHLB. The Bank is eligible to borrow up to 20 percent of its total assets from the FHLB. The Bank has pledged
investment securities available for sale and loans receivable as collateral with the FHLB for this borrowing facility. As of
December 31, 2008, the total borrowing capacity available from the collateral that has been pledged and the remaining
available borrowing capacity were $682.7 million and $260.5 million, respectively.
At December 31, 2008, the Bank’s FHLB borrowings totaled $422.2 million, representing 10.9 percent of total assets. As of
March 3, 2009, the Bank’s FHLB borrowings totaled $311.1 million and the remaining amount available based on pledged
collateral was $443.3 million. The amount that the FHLB is willing to advance differs based on the quality and character of
qualifying collateral offered by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or
downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund
maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities
and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity
from its FHLB borrowing arrangement. During the second quarter of 2008, the FHLB cancelled the Bank’s $62.0 million
unsecured line of credit with them. This cancellation was the result of the Bank’s net loss for the fourth quarter of 2007.
In an effort to ease the credit crisis, the FRB lowered its discount rate from 4.75 percent to 0.50 percent through eight
separate actions since December 2007, and made modifications to previous practices to facilitate financing for longer
periods. This makes the FRB’s federal discount window a viable source of funding given current market conditions. We have
pledged securities available for sale and loans receivable on this short-term borrowing facility. On December 31, 2008, we
received approval for participation in the Borrower-in-Custody Program, where a broad range of loans may be pledged and
borrowed against it through the FRB’s federal discount window. As an additional source of funding, we significantly
increased our borrowing capacity with the FRB.
At December 31, 2008, the carrying values of investment securities available for sale and loans pledged as collateral with the
FRB amounted to $54.0 million and $1.4 billion, respectively. As of December 31, 2008, we had $1.07 billion available for
110
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 22 — Liquidity (Continued)
use through this short-term (generally not to exceed three months) borrowing facility and there were no borrowings. When
combined with the borrowing capacity available from the FHLB, the total contingent available line was $1.33 billion at
December 31, 2008.
As a means of augmenting our current liquidity sources, we will consider selling some of our loans held for sale, beginning
with SBA loans, in an ordinary fashion, as soon as the secondary market is normalized. We are also participating in the
FDIC’s Debt Guarantee Program, which will enable us to issue up to two percent of our liabilities (approximately
$70.0 million) in senior unsecured debt. Given that there is no cost involved in our participation if we do not issue debt
under the program, we believe continuing to participate in the Debt Guarantee Program helps us to maintain a cushion of
extra liquidity.
During the second half of 2008, we experienced a deposit run-off caused by the U.S. financial crisis. This deposit run-off was
further amplified by an outflow of funds triggered by some depositors’ currency speculation over potential appreciation of
the South Korean currency. Our deposit campaign launched in December 2008, together with some stabilization of the
South Korean currency, slowed the rate at which retail deposits decreased during the fourth quarter of 2008.
We addressed liquidity concerns mainly through utilization of brokered deposits during 2008. As a result, we issued new
brokered time deposits of $824.2 million during the second half of 2008.
Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its current
obligations through December 31, 2009, which are primarily interest payments on junior subordinated debentures, subject
to prior approval of such payments by the FRB. As of December 31, 2008, limitations imposed by our regulators prohibited
the Bank from providing a dividend to Hanmi Financial. On August 29, 2008, we elected to suspend payment of quarterly
dividends on our common stock. At December 31, 2008, Hanmi Financial’s liquid assets, including amounts deposited with
the Bank, totaled $2.2 million, down from $5.3 million at December 31, 2007. In order to preserve its capital position, the
Board of Directors (the “Board”) of Hanmi Financial has elected to defer quarterly interest payments on its outstanding
junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009.
Current market conditions have also limited the Bank’s liquidity sources principally to secured funding outlets, such as the
FHLB and FRB, in addition to deposits originated through the Bank’s branch network and from brokered deposits. There
can be no assurance that actions by the FHLB or FRB would not reduce the Bank’s borrowing capacity or that we would be
able to continue to replace deposits at competitive rates. If the Bank’s capital ratio falls below well capitalized, the Bank
would need regulatory consent before accepting brokered deposits. Over the next 12 months, approximately $1.9 billion of
time deposits will mature. There can be no assurances that we will be able to replace these time deposits with deposits at
competitive rates. Such events could have a material adverse impact on our results of operations and financial condition.
However, if we are unable to replace these maturing deposits with new deposits, we believe that we have adequate liquidity
resources to fund this need with our secured funding outlets with the FHLB and FRB.
Note 23 — Retirement and Resignation of Directors
Retirement of Directors
On October 29, 2008, the Board of Hanmi Financial received notices that the following directors were retiring from service
as a director as of November 5, 2008: Dr. Won R. Yoon, Ki Tae Hong and Chang Kyu Park. None of the directors retired
because of a disagreement with our operations, policies or practices. In connection with their retirements, each of the retiring
directors and Hanmi Bank entered into a Severance and Release Agreement (the “Severance Agreement”). Pursuant to the
111
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 23 — Retirement and Resignation of Directors (Continued)
Severance Agreements, among other things, each of the retiring directors will receive $3,000 per month for the next five
years. Each of the retiring directors will also receive current health insurance coverage for the next five years in which the
Bank will continue to pay for medical, dental and/or vision premiums. In accordance with GAAP, $1.0 million was expensed
during the fourth quarter of 2008 for the amounts to be paid per the Severance Agreements.
Resignation of Directors
On January 31, 2009, the Board of Hanmi Financial received notice from Robert Abeles that he was resigning from service
as a director of Hanmi Financial and the Bank effective as of that date. On December 3, 2008, the Board of Hanmi Financial
received notice from Mark K. Mason that he was resigning from service as a director of Hanmi Financial and the Bank
effective as of that date. Both directors cited fundamental differences of opinion on appropriate corporate governance.
Note 24 — Condensed Financial Information of Parent Company
BALANCE SHEETS
(In thousands)
ASSETS
Cash
Securities Available for Sale
Investment in Consolidated Subsidiaries
Investment in Trust Preferred Securities
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Junior Subordinated Debentures
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
STATEMENTS OF OPERATIONS
(In thousands)
Equity in Earnings (Losses) of Subsidiaries
Other Expenses, Net
Income Tax Benefit
Net Income (Loss)
112
December 31,
2008
2007
$
2,167
804
340,297
2,475
1,738
$
5,296
—
447,668
2,475
1,543
$347,481
$456,982
$ 82,406
1,160
263,915
$ 82,406
4,020
370,556
$347,481
$456,982
Year Ended December 31,
2008
2007
2006
$ (97,040)
(8,610)
3,557
$(54,500)
(10,155)
3,893
$70,858
(9,266)
3,758
$(102,093)
$(60,762)
$65,350
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 24 — Condensed Financial Information of Parent Company (Continued)
STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Year Ended December 31,
2008
2007
2006
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used In Operating
$(102,093)
$(60,762)
$ 65,350
Activities:
Losses (Earnings) of Subsidiaries
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
Cash Paid to Acquire Treasury Stock
Cash Paid to Repurchase Stock Options and 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
97,040
1,036
(706)
(2,983)
—
54,500
1,891
3,139
(208)
317
(70,858)
1,521
(1,473)
659
661
(7,706)
(1,123)
(4,140)
8,500
—
8,500
—
—
(70)
(3,853)
63,501
(1,727)
61,774
18,500
—
18,500
1,164
(49,971)
(2,552)
(11,574)
3,553
—
—
(11,805)
(3,923)
(62,933)
(8,252)
(3,129)
5,296
(2,282)
7,578
6,108
1,470
$
2,167
$ 5,296
$ 7,578
113
Hanmi Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006 (Continued)
Note 25 — 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
2008:
Interest and Dividend Income
Interest Expense
Net Interest Income Before Provision for Credit Losses
Provision for Credit Losses
Non-Interest Income
Non-Interest Expense
Income (Loss) Before Provision (Benefit) for Income Taxes
Provision (Benefit) for Income Taxes
$64,970
30,773
$ 59,663
25,595
$59,441
23,844
$ 54,109
23,570
34,197
17,821
9,765
21,588
4,553
1,632
34,068
19,229
9,652
129,443
(104,952)
595
35,597
13,176
5,328
22,235
5,514
1,166
30,539
25,450
7,404
21,056
(8,563)
(4,748)
NET INCOME (LOSS)
$ 2,921
$(105,547)
$ 4,348
$ (3,815)
EARNINGS (LOSS) PER SHARE:
Basic
Diluted
2007:
Interest and Dividend Income
Interest Expense
Net Interest Income Before Provision for Credit Losses
Provision for Credit Losses
Non-Interest Income
Non-Interest Expense
Income (Loss) Before Provision for Income Taxes
Provision for Income Taxes
$
$
0.06
0.06
$
$
(2.30)
(2.30)
$
$
0.09
0.09
$
$
(0.08)
(0.08)
$67,956
29,999
$ 69,860
31,376
$71,197
33,447
$ 71,883
34,288
37,957
6,132
9,987
20,969
20,843
7,851
38,484
3,023
10,692
21,490
24,663
9,401
37,750
8,464
9,526
21,249
17,563
6,536
37,595
20,704
9,801
126,221
(99,529)
514
NET INCOME (LOSS)
$12,992
$ 15,262
$11,027
$(100,043)
EARNINGS (LOSS) PER SHARE:
Basic
Diluted
$
$
0.27
0.26
$
$
0.32
0.31
$
$
0.23
0.23
$
$
(2.15)
(2.15)
The 2007 quarterly financial statements have been revised from that previously issued to correct immaterial errors related to
the recording of interest expense. See “Note 20 — Correction of Immaterial Errors in Prior Periods” for further details.
114
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/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
Date: March 13, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated as of March 13, 2009.
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Brian E. Cho
Brian E. Cho
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Joseph K. Rho
Joseph K. Rho
Chairman of the Board
/s/ John A. Hall
John A. Hall
Director
/s/ Joon Hyung Lee
Joon Hyung Lee
Director
/s/ I Joon Ahn
I Joon Ahn
Director
/s/ Richard B. C. Lee
Richard B. C. Lee
Director
/s/ Paul (Seon-Hong) Kim
Paul (Seon-Hong) Kim
Director
115
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Document
Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation
Certificate of Second Amendment of Certificate of Incorporation of Hanmi Financial Corporation
Amended and Restated Bylaws of Hanmi Financial Corporation
Certificate of Amendment to Bylaws of Hanmi Financial Corporation
Amended and Restated Trust Agreement of Hanmi Capital Trust I dated as of January 8, 2004 among Hanmi
Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust
Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
Exhibit
Number
3.1
3.2
3.3
3.4
10.1
10.2 Hanmi Capital Trust I Junior Subordinated Indenture dated as of January 8, 2004 entered into between Hanmi
Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to
Exhibit 10.1) (5)
10.3 Hanmi Capital Trust I Guarantee Agreement dated as of January 8, 2004 entered into between Hanmi
Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
10.4 Hanmi Capital Trust I Form of Common Securities Certificate (included as exhibit B to Exhibit 10.1) (5)
10.5 Hanmi Capital Trust I Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.1) (5)
Amended and Restated Trust Agreement of Hanmi Capital Trust II dated as of March 15, 2004 among Hanmi
10.6
Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust
Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
10.7 Hanmi Capital Trust II Junior Subordinated Indenture dated as of March 15, 2004 entered into between
Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D
to Exhibit 10.6) (5)
10.8 Hanmi Capital Trust II Guarantee Agreement dated as of March 15, 2004 entered into between Hanmi
Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
10.9 Hanmi Capital Trust II Form of Common Securities Certificate (included as exhibit B to Exhibit 10.6) (5)
10.10 Hanmi Capital Trust II Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.6) (5)
10.11 Amended and Restated Trust Agreement of Hanmi Capital Trust III dated as of April 28, 2004 among Hanmi
Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust
Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (5)
10.12 Hanmi Capital Trust III Junior Subordinated Indenture dated as of April 28, 2004 entered into between
Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D
to Exhibit 10.11) (5)
10.13 Hanmi Capital Trust III Guarantee Agreement dated as of April 28, 2004 entered into between Hanmi
Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (5)
10.14 Hanmi Capital Trust III Form of Common Securities Certificate (included as exhibit B to Exhibit 10.11) (5)
10.15 Hanmi Capital Trust III Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.11) (5)
10.16 Employment Agreement Between Hanmi Financial Corporation and Hanmi Bank, on the One Hand, and Jay
S. Yoo, on the Other Hand, dated as of June 19, 2008 (6)
10.17 Hanmi Financial Corporation 2007 Equity Compensation Plan (3)
10.18
Separation Agreement between Hanmi Financial Corporation and Dr. Sung Won Sohn, dated December 27,
2007 (4)
10.19 Employment Offer Letter to John Park from Hanmi Bank dated August 13, 2008 (7)
14
21
23
Code of Ethics (8)
Subsidiaries of the Registrant (9)
Consent of KPMG LLP
116
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (Continued)
Document
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit
Number
31.1
31.2
32.1
32.2
(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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 filed with the SEC on
August 9, 2004.
(6) Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed with the SEC on
August 11, 2008.
(7) Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 filed with the
SEC on November 7 2008.
(8) 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.
(9) Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on
February 29, 2008.
117
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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 and
corporate financial services.
Corporate Headquarters
3660 Wilshire Boulevard
Penthouse Suite a
Los Angeles, California 90010
213.382.2200
Beverly Hills Branch
9300 Wilshire Boulevard, Suite 101
Beverly Hills, California 90212
310.724.7800
Cerritos Branch
11754 East Artesia Boulevard
Artesia, California 90701
562.658.0100
Diamond Bar Branch
1101 Brea Canyon Road, Suite a-1
Diamond Bar, California 91789
909.348.6600
Downtown Branch
950 South Los Angeles Street
Los Angeles, California 90015
213.347.6051
Fashion District Branch
726 East 12th Street, Suite 211
Los Angeles, California 90021
213.743.5850
Fullerton Branch
5245 Beach Boulevard
Buena Park, California 90621
714.232.7600
Garden Grove Branch
9820 Garden Grove Boulevard
Garden Grove, California 92844
714.590.6900
Gardena Branch
2001 West Redondo Beach Boulevard
Gardena, California 90247
310.965.9400
Irvine Branch
14474 Culver Drive, Suite d
Irvine, California 92604
949.262.2500
branch offices
Koreatown Galleria Branch
3250 West Olympic Boulevard
Suite 200
Los Angeles, California 90006
323.730.4830
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, California 90006
213.385.2244
Mid-Olympic Branch
3099 West Olympic Boulevard
Los Angeles, California 90006
213.385.1234
Northridge Branch
10180 Reseda Boulevard
Northridge, California 91324
818.709.3300
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, California 90019
323.370.2800
Rancho Cucamonga Branch
9759 Baseline Road
Rancho Cucamonga, California 91730
909.919.7599
Rowland Heights Branch
18720 East Colima Road
Rowland Heights, California 91748
626.435.1400
San Diego Branch
4637 Convoy Street, Suite 101
San Diego, California 92111
858.467.4800
San Francisco Branch
1469 Webster Street
San Francisco, California 94115
415.749.7600
Silicon Valley Branch
2765 El Camino Real
Santa Clara, California 95051
408.260.3400
South Cerritos Branch
11900 South Street, Suite 109
Cerritos, California 90703
562.467.7400
Torrance Branch
2370 Crenshaw Boulevard, Suite h
Torrance, California 90501
310.781.1200
Van Nuys Branch
14427 Sherman Way
Van Nuys, California 91405
818.779.3120
Vermont Branch
933 South Vermont Avenue
Los Angeles, California 90006
213.252.6380
West Garden Grove Branch
9122 Garden Grove Boulevard
Garden Grove, California 92844
714.741.4420
West Torrance Branch
21838 Hawthorne Boulevard
Torrance, California 90503
310.214.4280
Western Branch
120 South Western Avenue
Los Angeles, California 90004
213.427.5751
Wilshire Branch
3660 Wilshire Boulevard, Suite 103
Los Angeles, California 90010
213.427.5757
Commercial Loan Department
3660 Wilshire Boulevard, Suite 1050
Los Angeles, California 90010
213.637.4792
Consumer Loan Center
3660 Wilshire Boulevard, Suite 424
Los Angeles, California 90010
213.252.6400
International Finance
933 S. Vermont Avenue, 2nd Floor
Los Angeles, California 90006
213-427-5680
SBA Loan Department
3660 Wilshire Boulevard, Suite 116
Los Angeles, California 90010
213.427.5722
1
Design: bloch+coulter Design Group, www.blochcoulter.com
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a
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o n f u n d a m e n t a l s
hanmi financial
corporate headquarters
3660 Wilshire Boulevard
Penthouse Suite a
Los Angeles, California 90010
(213) 382-2200
www.hanmifinancial.com
www.hanmibank.com
Annual Report 2008