Defining Our Future
Hanmi Financial
2012 ANNUAL REPORT
Defining Our Mission
HANMI BANK and Chun-Ha Insurance Agency are
wholly owned subsidiaries of Hanmi Financial Corporation
(NASDAQ: HAFC).
Hanmi provides a multiethnic customer base in California with
high quality financial services. Hanmi’s mission is to be the quality
market leader in the financial services industry, and the first
choice for employees, customers, and shareholders.
Financial Highlights
(Dollars in Thousands, Except for Per Share Data)
2010
2011
2012
2009
2008
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(1)
Total Deposits
Total Shareholders’ Equity
PER SHARE DATA:
Earnings (Loss) Per Share – Basic
Earnings (Loss) Per Share – Diluted
Cash Dividends Per Share
Book Value Per Share(2)
FINANCIAL RATIOS:
Net Interest Margin(3)
Non-Performing Loans to Total Gross Loans(4)
Allowance for Loan Losses to Total Gross Loans
Efficiency Ratio
Return on Average Assets(5)
Return on Average Shareholders’ Equity(6)
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
$ 101,055
6,000
24,812
76,861
$ 90,374
$ 101,177
12,100
23,851
84,048
$ 28,147
$ 105,874
122,496
25,406
96,805
$ (88,009)
$ 101,229
196,387
32,110
90,354
$ (122,277)
$ 134,401
75,676
32,854
195,027
$ (102,093)
$ 2,882,520
1,986,051
2,395,963
378,364
$ 2,744,824
1,871,607
2,344,910
285,608
$ 2,907,148
2,121,067
2,466,721
173,256
$ 3,162,706
2,674,064
2,749,327
149,744
$ 3,875,816
3,291,125
3,070,080
263,915
$ 2.87
$ 2.87
—
$ 12.01
$ 1.38
$ 1.38
—
$ 9.07
$ (7.46)
$ (7.46)
—
$ 9.20
$ (20.56)
$ (20.56)
—
$ 23.44
$ (17.84)
$ (17.84)
$ 0.72
$ 46.00
3.77%
1.82%
3.09%
61.07%
3.24%
27.55%
20.65%
19.85%
19.37%
18.58%
14.95%
14.33%
3.68%
2.70%
4.64%
67.22%
1.01%
14.04%
18.66%
17.57%
17.36%
16.28%
13.34%
12.50%
3.55%
6.38%
6.55%
73.74%
(2.94%)
(63.79%)
12.32%
12.22%
10.09%
10.91%
7.90%
8.55%
2.84%
7.78%
5.15%
67.76%
(3.29%)
(54.17%)
9.12%
9.07%
6.76%
7.77%
5.82%
6.69%
3.72%
3.67%
2.13%
116.60%
(2.64%)
(31.56%)
10.79%
10.70%
9.52%
9.44%
8.93%
8.85%
(1) Loans receivable, net of allowance for loan losses and
(4) Non-performing loans, excluding loans held for sale,
deferred loan fees.
(2) Total shareholders’ equity divided by common shares
outstanding.
(3) Net interest income before provision for credit losses
divided by average interest-earning assets. Computed
on a tax-equivalent basis using an effective marginal
rate of 35 percent.
consist of non-accrual loan and loans past due 90 days or
more still accruing interest.
(5) Net income (loss) divided by average total assets.
(6) Net income (loss) divided by average shareholders’
equity.
Scan to visit our
Investor Relations
page for
current news
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To Our Shareholders
The transformation we started in our franchise several
38% to $10.1 million, or $0.32 per diluted share,
years ago continues today with excellent results. We
compared to $7.3 million, or $0.23 per diluted share,
are happy to report that Hanmi Financial is profitable
for the first quarter a year ago. Tangible book value
with a strong balance sheet, good asset quality, a grow-
per share has also increased substantially, standing at
ing loan portfolio and expanding margin.
$12.28 at March 31, 2013, which is an increase of $3.26
In 2012, we generated a net profit of $90.4 million, or
from $9.02 at the end of 2011.
$2.87 per diluted share, compared to $28.1 million, or
Our goal is to become a strong institution offering
$1.38 per diluted share, in 2011. The reversal of the
comprehensive financial solutions to our community
valuation allowance for our deferred tax asset contrib-
and beyond. A bank is part of the service industry and
uted a net benefit of $47.4 million and added $1.50
people are its core value. Across our franchise, we are
per share to earnings on a fully taxed basis in 2012.
working to increase marketing and sales competitive-
This tax event is important not just for its addition to
ness by retaining, attracting and rewarding talented
profits and book value, but also as an indicator that
employees, with a strong focus on relationship-based
our turnaround is sustainable.
banking. Exceptional talent and skill in our workers are
Both our return to profitability and the significant
what determine the success or failure of our business.
improvement in asset quality led to regulators lifting
One of our primary goals is to strengthen operating
regulatory enforcement actions in the fourth quarter
efficiency through both strategic cost management and
of 2012. We are no longer constrained by any of our
revenue enhancement from active cross-selling. We
former enforcement agreements, and are now free to
are one of the few local financial institutions offering
focus on pursuing both organic and strategic growth.
a complete line of insurance products, including life,
We have decisively moved from defense to offense, and
health and property coverage. We believe that this
our first quarter results demonstrate our resolve.
aspect of our business can help retain and deepen
In the first quarter of 2013, we reported our tenth
consecutive quarter of profitability. Earnings increased
existing customer relationships, and ultimately
contribute to revenues.
“We are no longer constrained,
and are free to focus on pursuing
strategic and organic growth.”
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In March and April, we deployed some of our excess
Choo and Ryu exemplify our spirit of embracing new
liquidity with the full redemption of $80 million of trust
challenges for growth. We look forward to working
preferred securities. Redeeming these securities will
with them and anticipate that we will have a successful
save more than $2.5 million in annual interest expense
year together, both on and off the field!
and provide support for our net interest margin.
We are patiently exploring various strategic options to
To further deploy surplus liquidity, we are expanding
select the right directions, create the highest sharehold-
our lending capabilities by recruiting experienced SBA
ers’ value, and serve the best interest of all stakeholders.
lenders. Total loan production in 2012 was $694.2
million, including $155.3 million of SBA 504 and 7(a)
loans. To further boost organic growth, we recently
hired an experienced Loan Production Officer to head
our new LPO in Texas. As the second largest SBA mar-
ket and one of the strongest business climates in the
nation, Texas is a logical addition to our footprint.
Recently, we said a fond farewell to Jay S. Yoo, who
served as our President and CEO since 2008. Under
his leadership, Hanmi faced many challenges and
overcame much adversity. We are grateful for his
service and wish him well in retirement. We are also
glad to welcome C. G. Kum as our new President and
CEO. Mr. Kum brings 36 years of banking experience
We are also excited about our alliance with two of
to Hanmi, and has the leadership and management
baseball’s rising stars. We have recently renewed our
abilities to take us to the next level.
marketing agreement with Shin-Soo Choo of the
Cincinnati Reds and signed Hyun-Jin Ryu of the Los
Angeles Dodgers as marketing spokespersons. Both
C. G. Kum, Joseph K. Rho
We ended the year with our 30th Anniversary
celebration, which brought together old friends and
new supporters for a wonderful evening that will be
long remembered. For our employees, customers,
shareholders and supporters, we thank you for the
many years of loyalty and friendship. We started
2013 with a solid performance in the first quarter,
and are confident that we will deliver another year of
improved operating performance in 2013. We look
forward to the coming year with great enthusiasm,
and we thank you for all the dedication and support
you have shown throughout the years.
Sincerely,
C. G. Kum
President and Chief Executive Officer
Joseph K. Rho
Chairman of the Board of Directors
June 12, 2013
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Defining Growth
ACHIEVEMENT: stronger balance sheet
>>> Hanmi celebrated its 30th anniversary last year, ending 2012 on a strong note.
The regulatory action that had hampered our freedom to define our own future was
lifted. Our balance sheet is strong, and overall metrics show a positive trend. We
established a dedicated relationship banking operation in recognition of the fact
that customer loyalty forms a solid foundation for long-term growth.
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SOLID GROWTH
By the end of 2012, with the lifting of the regulatory order, we were able
to shift our focus from defense to offense. We are heading into our next 30 years
with renewed strength and optimism, ready to expand our growth strategies,
with the goal of becoming one of the top financial institutions in every way.
With a strong balance sheet and revitalized loan production, we have begun to
strategically deploy excess liquidity into higher-yielding loans.
Both customers and investors will benefit from our ability to increase lending in
our community, as well as from our upgraded loan process, with centralized
and improved underwriting procedures. At the same time, we are continuing to
enhance operating efficiencies through strategic cost management and
the generation of fee income from cross-selling initiatives.
As another way to enhance the long-term value of our franchise, in 2012
Hanmi established a dedicated relationship banking segment, designating and
training relationship managers for this strategically important unit. As financial
advisers, relationship managers will build closer, more personal relationships with
customers – adding opportunities to provide them with value-added products
and services and ultimately increasing both customer loyalty and revenues.
CHALLENGE:
maintaining efficiency while
growing assets
>>> Going forward with renewed energy and sharp-
ened vision, we recognize that we must maintain and
increase operations efficiency. In addition, we are
expanding loan production and focusing on maximizing
opportunities to create solid growth.
We are heading into our
next 30 years with
strength and optimism.
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THE NEXT 30 YEARS
Since we recognize that competition in our sphere is intense, the ability to identify and
act on promising opportunities forms an essential part of our future success.
With newly streamlined operations, and freedom from regulatory burdens,
Hanmi is ready to move forward strategically with energy and determination.
This year, we have expanded our geographic reach by bringing a highly
experienced loan production officer on board in Texas, where we have opened a new
SBA loan production office. In addition, we are planning to open more
loan production offices in areas with strong niche markets.
We have set a new milestone in the Korean-American banking space with our ability
to provide high-quality insurance products through our wholly-owned subsidiary,
Chun-Ha Insurance Agency. We dedicated significant effort this year to raising
customer awareness of this service, by training and licensing 90 bank employees
(with more to come) who form the basis of this effective new cross-selling initiative.
With improved processes in place, as well as strong asset quality and reserves, we
are well positioned to use our excess capital to the benefit of customers and investors –
whenever and wherever we find solid opportunities to strengthen our franchise.
ACHIEVEMENT: building on a solid foundation
>>> Over the last few years, we have had
a valuable opportunity to deeply examine
the ways we can structure our operations to
be more efficient: to be leaner, more prepared
to take advantage of available opportunities.
Now We stand ready to leverage our strengths
in ways that will best grow our franchise and
bring the greatest benefit to our customers
and our investors.
6 >>> HANMI FINANCIAL
Hanmi is well
positioned to
identify and act
on solid
opportunities.
Defining Opportunity
CHALLENGE: choosing the best opportunities to grow Hanmi’s future
>>> Now that we’re back in the driver’s seat, we can make our own decisions about
opportunities available to us. We’ve started to expand geographically by hiring
a top-notch loan production officer, and have plans to open additional LPOs this year.
Insurance products available through our subsidiary, Chun-Ha Insurance Agency,
as well as directly through our branches, gives us a competitive edge in our market.
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Defining Integrity
ACHIEVEMENT: added checks and balances throughout operations
>>> We have always approached banking as an exercise in trust – every day, with
every customer. We demonstrate our financial integrity by running our operation with
strong checks and balances, while continually enhancing our policies and procedures.
We began to centralize our loan underwriting process this year, implementing
consistent underwriting procedures while achieving loans of the highest quality.
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A FOUNDATION OF TRUST
Integrity is the intangible foundation upon which every successful business
is built, and which enables its healthy growth. Integrity is the
combination of trustworthiness, accountability, and moral responsibility,
maintained consistently over time – something Hanmi demonstrates every day.
While under the regulatory order, we took the opportunity to strengthen and
improve all operations, establishing a robust system of checks and balances.
We also established such strong, sound credit risk management practices that we
have one of the best credit qualities in our banking space. When the order was lifted,
it was in recognition of our demonstrated commitment to transparency
and best practices throughout our operations.
We are proud of to be one of the oldest and strongest banks in our market. We have
not only our own dedication to continual improvement of our practices, but the
loyalty of our community to thank. That community drove a successful capital raise
in 2010, when we were in dire need of funds; that community keeps us strong.
Our goal is clear: to be the quality market leader in the financial services industry.
We will achieve this by demonstrating the integrity that is our core value
to every customer, one interaction at a time.
CHALLENGE:
continuing to demonstrate
best practices with every customer
>>> We will continue to improve the
process of loan generation, as well as
improve operations and products across all
segments. We will continue to demonstrate
best practices with each customer.
We approach banking as an
exercise in trust, every day,
with every customer.
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IDENTIFYING TALENT
Hanmi, like all businesses, rises and falls not only on the strength
of its management, but on the quality of its employees.
Good management identifies and nurtures those employees who give their best
each and every day, while attracting and integrating talented people
with the experience, skills, and qualities to complement existing personnel.
Hanmi improved operations last year by proactively recruiting and hiring
outstanding people at all levels of operations. In addition, we’re growing our internal
talent pool by grooming employees with strong potential, to prepare them for
positions of greater responsibility. And we have implemented a point-based incentive
system to recognize and reward employees for excellent performance.
We believe that it’s important to offer employees the opportunity
to build their careers with us. Starting in 2012, we have begun to more actively
invest in training, including a variety of continuing education programs
for our loan officers. We believe that by retaining and encouraging good employees
while integrating talented newcomers, we will continue to provide
the strong foundation on which our customers rely.
ACHIEVEMENT: cultivating talented employees
>>> In 2012, as a way to demonstrate
that we recognize the value of our
employees, we implemented a point-
based incentive system for those
employees generating more valuable
business for the bank. We’re also
making sure to reward hard-working
employees for their performance
throughout the year.
10 >>> HANMI FINANCIAL
A key to good
management is
identifying
and nurturing
employees who
give their best.
Defining Talent
CHALLENGE: investing in people of the highest quality
>>> We’re investing in training at all levels of responsibility to ensure that
employees are fully engaged. This allows us to identify people with the greatest
potential – for Hanmi as well as for their own careers – and to groom them for
greater responsibilities within the bank. Growing talent from within, while
attracting high-caliber talent from other sources, will ensure our future success.
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Defining Community
ACHIEVEMENT: engaging customers and community via active outreach
>>> Taking a more holistic approach to marketing, we initiated a number of
community-based programs in 2012. By offering seminars, educational workshops
and growing the Hanmi Neighbor Volunteer Service Program, Hanmi is making deeper,
more meaningful connections with our customers and our community.
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OUR COMMUNITY ROOTS
Hanmi is setting new standards for outreach in our community. We are going
beyond advertising to hear, as well as speak to, our community. By continually
looking for new, innovative ways to reach out to our customers and
community members, our relationships become more personal and significant.
We have developed an ongoing series of educational seminars, on topics
including business success, real estate and retirement, all designed to enhance
awareness of Hanmi as a valuable community resource. In addition, these events
allow for friendly, casual interaction between our employees and the public.
Of note is Hanmi Neighbor Volunteer Service Program, the first of its kind in our
market. Launched in 2012, the program was created to maximize employee
involvement in the communities we serve. Already, over 60% of our employees
have donated over 2,600 hours to organizations serving youth, seniors, education,
and health. We look forward to continuing to expand this exciting program.
We strengthened our marketing outreach this year by adding two popular athletes
as spokespersons. Shin-Soo Choo (Cincinnati Reds) and Hyun-Jin Ryu
(Los Angeles Dodgers) will help us better connect with our immediate community,
while reaching out to a larger, more mainstream audience.
CHALLENGE:
maintaining an active dialogue
with customers in our community
and beyond
>>> We will continue to develop ways to reach our
customers and community personally, by engaging
them in an active, participatory dialogue. Hanmi
Neighbor continues to grow, allowing us to make
contact with our community through active service.
We are excited to have two popular
baseball players – Shin-Soo Choo and
Hyun-Jin Ryu – on our team.
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Joseph K. Rho
I Joon Ahn
John (Jack) A. Hall
Paul Seon-Hong Kim
Joon Hyung Lee
William J. Stolte
C. G. Kum
Jay S. Yoo
Former Director and
Chief Executive Officer
Corporate Information
Board of Directors
Joseph K. Rho
Chairman of the Board
Principal, J & S Investment
Officers
C. G. Kum
President and
Chief Executive Officer
Registrar & transfer agent
Computershare
Investor relations
Jenny Park
(213) 427-4255
Website
www.hanmi.com
Stock listing
NASDAQ
Ticker symbol for
common stock “HAFC”
I Joon Ahn
Former Chairman of the Board
John (Jack) A. Hall
Former National Bank Examiner
Paul Seon-Hong Kim
Former Bank President
Joon Hyung Lee
Former Chairman of the Board
Principal, Root-3 Corporation
William J. Stolte
Former Bank Executive
C. G. Kum
President and
Chief Executive Officer
Shick (Mark) Yoon
Senior Vice President and
Chief Financial Officer
J. H. Son
Executive Vice President and
Chief Credit Officer
Independent Public
Accountant
KPMG, LLP
Los Angeles, California
Legal counsel
Greenberg Traurig, LLP
Los Angeles, California
14 >>> HANMI FINANCIAL
C. G. Kum
President and
Chief Executive Officer
Shick (Mark) Yoon
Senior Vice President and
Chief Financial Officer
Jung Hak Son
Executive Vice President and
Chief Credit Officer
Sang Kyu Lee
Executive Vice President and
Chief Marketing Officer
Greg D. Kim
Senior Vice President and
Chief Administrative Officer
Jean Lim
Senior Vice President and
Chief Risk Officer
Lisa L. Kim
Senior Vice President and
General Counsel
Don Bae Lee
Senior Vice President and
North District Leader
Woo Young Choung
Senior Vice President and
South District Leader
Ki Hong Park
President and
Chief Executive Officer
Chun-Ha Insurance Agency
Stephen J. Yun
Executive Vice President and
Chief Financial Officer
Chun-Ha Insurance Agency
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Branch Offices
Corporate headquarters
3660 Wilshire Boulevard
Penthouse Suite A
Los Angeles, California 90010
(213) 382-2200
Koreatown Galleria Branch
3250 West Olympic Boulevard
Suite 200
Los Angeles, California 90006
(323) 730-4830
Beverly Hills Branch
9300 Wilshire Boulevard, Suite 101
Beverly Hills, California 90212
(310) 724-7800
Cerritos-Artesia Branch
11754 East Artesia Boulevard
Artesia, California 90701
(562) 658-0100
Cerritos-South Branch
11900 South Street, Suite 109
Cerritos, California 90703
(562) 467-7400
Diamond Bar Branch
1101 Brea Canyon Road, Suite A-1
Diamond Bar, California 91789
(909) 348-6600
Downtown-Los Angeles 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-Beach Branch
5245 Beach Boulevard
Buena Park, California 90621
(714) 232-7600
Gardena Branch
2001 West Redondo Beach Boulevard
Gardena, California 90247
(310) 965-9400
Garden Grove-Brookhurst Branch
9820 Garden Grove Boulevard
Garden Grove, California 92844
(714) 590-6900
Garden Grove-Magnolia Branch
9122 Garden Grove Boulevard
Garden Grove, California 92844
(714) 741-4420
Irvine Branch
14474 Culver Drive, Suite D
Irvine, California 92604
(949) 262-2500
Koreatown Plaza Branch
928 South Western Avenue
Suite 260
Los Angeles, California 90006
(213) 385-2244
Northridge Branch
10180 Reseda Boulevard
Northridge, California 91324
(818) 709-3300
Olympic Branch
3737 West Olympic Boulevard
Los Angeles, California 90019
(323) 730-2800
Olympic-Kingsley Branch
3099 West Olympic Boulevard
Los Angeles, California 90006
(213) 385-1234
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
Torrance-Crenshaw Branch
2370 Crenshaw Boulevard, Suite H
Torrance, California 90501
(310) 781-1200
Torrance-Del Amo Mall Branch
21838 Hawthorne Boulevard
Torrance, California 90503
(310) 214-4280
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
Western Branch
120 South Western Avenue
Los Angeles, California 90004
(213) 427-5751
Wilshire-Hobart 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 116
Los Angeles, California 90010
(213) 252-6400
International Finance Department
933 S. Vermont Avenue, 2nd Floor
Los Angeles, California 90006
(213) 252-6755
Private Banking Department
3737 W. Olympic Boulevard
Los Angeles, California 90019
(323) 730-2835
SBA Loan Center
928 South Western Avenue, Suite 260
Los Angeles, California 90006
(213) 427-5722
Northwest Region
Loan Production Office
500 108th Avenue N.E., #1760
Bellevue, Washington 98001
(425) 454-0178
Texas Loan Production Office
11461 Harry Hines Boulevard, Suite 103
Dallas, Texas 75229
(469) 387-1383
Subsidiary
Chun-Ha/All World
Insurance Services, Inc.
12912 Brookhurst Street, Suite 480
Garden Grove, California 92840
(800) 943-4555
Design: bloch+ coulter Design Group, www.blochcoulter.com
All paper used in this annual report has been certified by the Forest Stewardship Council (FSC)
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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, 2012
or
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)
95-4788120
(I.R.S. Employer Identification No.)
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
(Address of Principal Executive Offices)
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
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
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Se curities
No
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
No
Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, ever y Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232 405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files)
Yes
No
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b -2 of the Exchange Act
Large Accelerated Filer
Non-Accelerated Filer
(Do Not Check if a Smaller Reporting Company)
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes
No
As of June 30, 2012, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately
$320,085,000 For purposes of the foregoing calculation only, in addition to affiliated companies, all directors and officers of the Regi strant
have been deemed affiliates
Number of shares of common stock of the Registrant outstanding as of March 1, 2013 was 31,584,193shares
Documents Incorporated By Reference Herein: Registrant’s Definitive Proxy Statement for its 2013 Annual Meeting of
Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 2012, is incorporated by reference into Part III of this
report (or information will be provided by amendment to this Form 10-K)
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
HANMI FINANCIAL CORPORATION
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS .................................................................................. 2
PART I
ITEM 1.
BUSINESS ........................................................................................................................................................................... 3
ITEM 1A. RISK FACTORS ................................................................................................................................................................ 20
ITEM 1B. UNRESOLVED STAFF COMMENTS ............................................................................................................................. 26
PROPERTIES .................................................................................................................................................................... 27
ITEM 2.
ITEM 3.
LEGAL PROCEEDINGS .................................................................................................................................................. 27
ITEM 4. MINE SAFETY DISCLOSURES ...................................................................................................................................... 27
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES ............................................................................................... 28
SELECTED FINANCIAL DATA ...................................................................................................................................... 30
ITEM 6.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................................................................................................................................... 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................... 54
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................................................................... 54
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9.
FINANCIAL DISCLOSURE ............................................................................................................................................. 55
ITEM 9A. CONTROLS AND PROCEDURES .................................................................................................................................. 55
ITEM 9B. OTHER INFORMATION .................................................................................................................................................. 58
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ........................................................... 58
ITEM 11. EXECUTIVE COMPENSATION ..................................................................................................................................... 58
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ............................................................................................................... 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ................. 58
PRINCIPAL ACCOUNTING FEES AND SERVICES..................................................................................................... 59
ITEM 14.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .................................................................................................. 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ..................................................................................... 61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................................................ 62
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 .................................................. 63
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2012, 2011 AND 2010 ................................................................................................................ 64
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 .................................................................................... 65
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 .................................................................. 66
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2012, 2011 AND 2010 ................................................................................................. 67
SIGNATURES....................................................................................................................................................................................... 113
EXHIBIT INDEX .................................................................................................................................................................................. 114
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under “Item 1. Business,”“Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this Annual Report on 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”). All statements in this Annual Report on Form 10-K other than statements of historical fact are
“forward –looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about
anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive
outlook, investment and expenditure plans, capital and financing needs, plans and objectives of management for future operations, and
other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases,
you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable
terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those
expressed or implied by the forward-looking statement. These factors include the following
failure to attract new deposits and loans;
failure to maintain adequate levels of capital to support our operations;
a significant number of customers failing to perform under their loans and other extensions of credit;
fluctuations in interest rates and a decline in the level of our interest rate spread;
inability to access sufficient funding sources when needed;
regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our
obligations;
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;
our use of appraisals in deciding whether to make loans secured by real property, which does not ensure that the value of the
real property collateral will be sufficient to pay our loans;
failure to attract or retain our key employees;
credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
volatility and disruption in financial, credit and securities markets, and the price of our common stock;
deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
competition and demographic changes in our primary market areas;
global hostilities, acts of war or terrorism, including but not limited to, conflict between North Korea and South Korea;
the effects of litigation against us;
significant government regulations, legislation and potential changes thereto, including as a result of the Dodd-Frank Act;
and
other risks described herein and in the other reports and statements we file with the U.S. Securities and Exchange
Commission.
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 “– Capital Resources and
Liquidity.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after
the date on which such statements were made, except as required by law.
2
ITEM 1.
BUSINESS
General
PART I
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a Delaware corporation
incorporated on March 14, 2000 to be the holding company for Hanmi Bank (the “Bank”) 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 pursuant to the California Financial Code (“Financial Code”) on December 15, 1982. The Bank’s
deposit accounts are insured under the Federal Deposit Insurance Act (“FDIA”) up to applicable limits thereof, and the Bank is a
member of the Federal Reserve System. The Bank’s headquarters is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los
Angeles, California 90010.
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. T he
Bank’s client base reflects the multi-ethnic composition of these communities. At December 31, 2012, the Bank maintained a branch
network of 27 full-service branch offices in California and one loan production office (“LPO”) in 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 property 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
2012
Year Ended December 31,
2011
(In Thousands)
2010
Interest and Fees on Loans
Interest and Dividends on Investments
Other Interest Income
Service Charges on Deposit Accounts
Other Non-Interest Income
Total Revenues
$
108,982
9,630
1,188
12,146
12,666
75 3%
6 7%
0 8%
8 4%
8 8%
$
117,671
10,518
618
12,826
11,025
77 1%
6 9%
0 4%
8 4%
7 2%
$
137,328
6,631
553
14,049
11,357
80 8%
3 9%
0 3%
8 3%
6 7%
$
144,612
100.0%
$
152,658
100.0%
$
169,918
100.0%
Termination of Regulatory Enforcement Actions
On November 2, 2009, the Board of Directors of the Bank consented to the issuance of the Final Order (the “Order”) with the
California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written
Agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Order and the Written
Agreement contained a list of strict requirements ranging from a capital directive to developing a contingency funding plan.
Following a target joint examination of the Bank by the DFI and the FRB, which commenced in February 2012, and based on
the improved condition of the Bank noted at the examination, the Bank entered into a Memorandum of Understanding (“MOU”) with
the DFI on May 1, 2012. Concurrently with the entry into the MOU, the DFI issued an order terminating the Order.
After our annual joint examination of the Bank by the DFI and the FRB, which commenced in August 2012, the DFI
informed the Bank that the Bank’s overall condition had improved and that the MOU had been terminated effective October 29, 2012.
Furthermore, on December 4, 2012, the FRB informed Hanmi Financial and the Bank that the Written Agreement has been terminated.
Accordingly, Hanmi Financial and the Bank are no longer subject to any of the requirements imposed by the MOU and the Written
Agreement or any other enforcement action.
3
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 wide geographic areas, 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.
Lending Activities
The Bank originates loans for its own portfolio and for sale in the secondary market. Lending activities include real estate
loans (commercial property, construction and residential property), commercial and industrial loans (commercial term loans,
commercial lines of credit, SBA loans and international trade finance), and consumer loans.
Real Estate Loans
Real estate lending involves risks associated with the potential decline in the value of the underlying real estate collateral and
the cash flow from income-producing properties. Declines in real estate values and cash flows can be caused by a number of factors,
including adversity in general economic conditions, rising interest rates, changes in tax and other laws and regulations affecting the
holding of real estate, environmental conditions, governmental and other use restrictions, development of competitive properties and
increasing vacancy rates. When real estate values decline, the Bank’s real estate dependence increases the risk of loss both in the
Bank’s loan portfolio and any holdings of other real estate owned (“OREO”) 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 (“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 at time of origination 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. Representatives of the Bank visit all of the
properties securing the Bank’s real estate loans before the loans are approved.
The Bank requires title insurance insuring the status of its lien on all of the real estate secured loans when a trust deed on the
real estate is taken as collateral. The Bank also requires the borrower to maintain fire insurance, extended coverage casualty insurance
and, if the property is in a flood zone, flood insurance, in an amount equal to the outstanding loan balance, subject to applicable laws
that may limit the amount of hazard insurance a lender can require to replace such improvements. We cannot assure that these
procedures will protect against losses on loans secured by real property.
Construction
The Bank finances the construction of multifamily, low-income housing, commercial and industrial properties within its
market area. The future condition of the local economy could negatively affect the collateral values of such loans. The Bank’s
4
construction loans typically have the following characteristics
a floating rate of interest based on the Bank Prime Rate or the WSJ Prime Rate;
maturities of two years or less;
minimum cash equity of 35 percent of project cost;
reserve of anticipated interest costs during construction or advance of fees;
first lien position on the underlying real estate;
loan-to-value ratios at time of origination generally not exceeding 65 percent; and
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
the uncertain value of the project prior to completion;
the inherent uncertainty in estimating construction costs, which are often beyond the borrower’s control;
construction delays and cost overruns;
possible difficulties encountered in connection with municipal or other governmental regulations during construction;
and
the difficulty in accurately evaluating the market value of the completed project.
Because of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and
interest. If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assuran ce 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 recommendations 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 amortization
schedules of 15 to 30 years and maturities of up to 30 years. The loan fees charged, interest rates and other provisions of the Bank’s
residential loans are determined by an analysis of the Bank’s cost of funds, cost of origination, cost of servicing, risk factors and
portfolio needs. The Bank may sell some of the mortgage loans that it originates to secondary market participants. The typical turn-
around time from origination to sale is between 30 and 90 days. The interest rate and the price of the loan are typically agreed to prior
to the loan origination.
Commercial and Industrial Loans
The Bank offers commercial loans for intermediate and short-term credit. Commercial loans may be unsecured, partially
secured or fully secured. The majority of the origination of commercial loans is in Los Angeles County and Orange County, and loan
maturities are normally 12 to 60 months. The Bank requires a credit underwriting before considering any extension of credit. The
Bank finances primarily small and middle market businesses in a wide spectrum of industries. Commercial and industrial loans consist
of credit lines for operating needs, loans for equipment purchases and working capital, and various other business purposes.
As compared to consumer lending, commercial lending entails 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 payment 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). Collateral may
include liens on inventory, accounts receivable, fixtures and equipment, leasehold improvements and real estate. When real estate is
the primary collateral, the Bank obtains formal appraisals in accordance with applicable regulations to support the value of the real
estate collateral. Typically, the Bank requires all principals of a business to be co-obligors on all loan instruments and all significant
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 liquidating the collateral, based on historical
5
earnings or reliable projections.
Commercial Term Loans
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. Small Business Administration (“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 business assets and by a first or second deed of trust on any
available real property. When the loan is secured by a first deed of trust on real property, the Bank 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 substantial amount of the guaranteed portion of the SBA loans that it
originates. When the Bank sells a SBA loan, it has an obligation to repurchase the loan if the loan defaults. If the Bank repurchases a
loan, the Bank will make a demand for guarantee purchase to the SBA. The Bank retains the right to service the SBA loans, for which
it receives servicing fees. The unsold portions of the SBA loans that remain owned by the Bank are included in loans receivable on the
Consolidated Balance Sheets. As of December 31, 2012, the Bank had $156.6 million of SBA loans in its portfolio, and was servicing
$297.2 million of SBA loans sold to investors.
International Trade Finance
The Bank offers a variety of international finance and trade services and products, including letters of credit, import financing
(trust receipt financing and bankers’ acceptances) and export financing. Although most of our trade finance activities are related to
trade with Asian countries, all of our loans are made to companies domiciled in the United States. A substantial portion of this
business involves California-based customers engaged in import activities.
Consumer Loans
Consumer loans are extended for a variety of purposes, including automobile loans, secured and unsecured personal loans,
home improvement loans, home equity lines of credit, overdraft protection loans, unsecured lines of credit and credit cards.
Management assesses the borrower’s creditworthiness and ability to repay the debt through a review of credit history and ratings,
verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. Although
creditworthiness of the applicant is of primary 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 judgment. In addition, the collection of loans
to individuals is dependent on the borrower’s continuing financial stability, and thus is more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, various federal and state laws, including bankruptcy and insolvency laws,
often limit the amount that the lender can recover on loans to individuals. Loans to individuals may also give rise to claims and
defenses by a consumer borrower against the lender on these loans, and a borrower may be able to assert against any assignee of the
note these claims and defenses that the borrower has against the seller of the underlying collateral.
Off-Balance Sheet Commitments
As part of its service to its small- to medium-sized business customers, the Bank from time to time issues formal
commitments and lines of credit. These commitments can be either secured or unsecured. They may be in the form of revolving lines
6
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 facilitate import trade. Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
Lending Procedures and Loan Limits
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 Committee’s approval limits, to the Board of
Directors’ Loan Committee.
Legal lending limits are calculated in conformance with the California Financial Code, which prohibits a bank from lending
to any one individual or entity or its related interests on an unsecured basis any amount that exceeds 15 percent of the sum of the such
bank’s stockholders’ equity plus the allowance for loan losses, capital notes and any debentures, plus an additional 10 percent on a
secured basis. At December 31, 2012, the Bank’s authorized legal lending limits for loans to one borrower were $75.5 million for
unsecured loans plus an additional $50.3 million for specific secured loans. However, the Bank has established internal loan limits that
are lower than the legal lending limits.
The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to certain underwriting practices. The review of
each loan application includes analysis of the applicant’s experience, prior credit history, income level, cash flow, financial condition,
tax returns, cash flow projections, and the value of any collateral to secure the loan, based upon reports of independent appraisers
and/or audits of accounts receivable or inventory pledged as security. In the case of real estate loans over a specified amount, the
review of collateral value includes an appraisal report prepared by an independent Bank-approved appraiser. All appraisal reports on
commercial real property secured loans are reviewed by an appraisal review officer. The review generally covers an examination of
the appraiser’s assumptions and methods that were used to derive a value for the property, as well as compliance with the USPAP.
Allowance for Loan Losses, Allowance for Off-Balance Sheet Items and Provision for Credit Losses
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 associated with unfunded commitments and letters of credit, which is included in other liabilities on the
Consolidated Balance Sheets.
The Bank analyzes its allowance for loan losses on a quarterly basis. 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 the FRB
may require the Bank to recognize additions to the allowance for loan losses through a provision for credit losses based upon their
assessment of the information available to them at the time of their examinations.
Deposits
The Bank offers a traditional array of deposit products, including non-interest bearing checking accounts, interest bearing
checking and savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts and certificates of dep osit.
These accounts, except for non-interest bearing checking accounts, earn interest at rates established by management based on
competitive market factors and management's desire to increase certain types or maturities of deposit liabilities. Our approach is to
tailor fit products and bundle those that meet the customer’s needs. This approach is designed to add value for the customer, increase
products per household and produce higher service fee income.
Website
We maintain an Internet website at www.hanmi.com. We make available 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 U. S. 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. These reports and other information 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 information
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, 2012, the Bank had 415 full-time employees and 17 part-time employees, and Chun-Ha and All World
had 37 full-time employees and 1 part-time employee. Our employees are not represented by a union or covered by a collective
7
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 environment 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 campaigns
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.
Other institutions, including brokerage firms, credit card companies and retail establishments, offer banking services to
consumers in competition with the Bank, 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.
The Bank’s major competitors are relatively smaller community banks that focus their marketing efforts on Korean-American
businesses in the Bank’s service areas. 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 promotional
activity, including advertising in the local media, personal contacts, direct mail and specialized services. The Bank’s promotional
activities emphasize the advantages of dealing with a locally owned and headquartered institution attuned to the particular needs of the
community.
Economic Legislative and Regulatory Developments
Future profitability, like that of most financial institutions, is primarily dependent on interest rate differentials and credit
quality. In general, the difference between the interest rates paid by us on interest-bearing liabilities, such as deposits and other
borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our customers and securities
held in our investment portfolio, will comprise the major portion of our earnings. These rates are highly sensitive to many factors that
are beyond our control, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign
economic conditions might have on us cannot be predicted.
Our business is also influenced by the monetary and fiscal policies of the Board of Governors of the Federal Reserve System
(the “Federal Reserve”) and the Federal Government and the policies of regulatory agencies, particularly the FRB. The Federal
Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-
market operations in U.S. Government securities, by adjusting the required level of reserves for depository institutions subject to its
reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository insti tutions.
The actions of the Federal Reserve 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 predict whether or when any potential legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on our financial condition or results of operations. In addition, the outcome of any
8
investigations initiated by state authorities or litigation raising issues may result in necessary changes in our operations, additional
regulation and increased compliance costs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which became law on July 21, 2010,
significantly revised and expanded the rulemaking, supervisory and enforcement authority of federal bank regulators. Dodd-Frank
followed other legislative and regulatory initiatives in 2008 and 2009 in response to the economic downturn and financial industry
instability. Dodd-Frank impacts many aspects of the financial industry and, in many cases, will impact larger and smaller financial
institutions and community banks differently over time. Dodd-Frank includes, among other things, the following
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency
cooperation;
expanded FDIC resolution authority to conduct the orderly liquidation of certain systemically significant non-bank
financial companies in addition to depository institutions;
the establishment of strengthened capital and liquidity requirements for banks and bank holding companies,
including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for
depository institutions as of the date of enactment;
the requirement by statute that bank holding companies serve as a source of financial strength for their depository
institution subsidiaries;
enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of
certain proprietary trading activities by banks;
the termination of investments by the U.S. Treasury under TARP;
the elimination and phase out of trust preferred securities from Tier 1 capital with certain exceptions;
a permanent increase of FDIC deposit insurance to $250,000;
authorization for financial institutions to pay interest on business checking accounts;
changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be
the institution’s deposit base, but instead, will be its average consolidated total assets less its average tangible equity
and an increase in the minimum insurance ratio for the Deposit Insurance Fund (“DIF”) from 1.15 percent to 1.35
percent;
the elimination of remaining barriers to de novo interstate branching by federal- and state-chartered banks;
expanded restrictions on transactions with affiliates and insiders under Section 23A and 23B of the Federal Reserve
Act and lending limits for derivative transactions, repurchase agreements and securities lending and borrowing
transactions;
the transfer of oversight of federally chartered thrift institutions to the Office of the Comptroller of the Currency and
state chartered savings banks to the FDIC, and the elimination of the Office of Thrift Supervision;
provisions that affect corporate governance and executive compensation at most United States publicly traded
companies, including financial institutions, including (1) stockholder advisory votes on executive compensation, (2)
executive compensation “clawback” requirements for companies listed on national securities exchanges in the event
of materially inaccurate statements of earnings, revenues, gains or other criteria, (3) enhanced independence
requirements for compensation committee members, and (4) authority for the SEC to adopt proxy access rules which
would permit stockholders of publicly traded companies to nominate candidates for election as director and have
those nominees included in a company’s proxy statement; and
the creation of a Consumer Financial Protection Bureau, which is authorized to promulgate consumer protection
regulations relating to bank and non-bank financial products and examine and enforce these regulations on banks
with more than $10 billion in assets.
We cannot predict the extent to which the interpretations and implementation of this wide-ranging federal legislation by
regulations and in supervisory policies and practices may affect us. Many of the requirements of Dodd-Frank will be implemented
over time and most will be subject to regulations to be implemented or which will not become fully effective for several years. There
can be no assurance that these or future reforms (such as possible new standards for commercial real estate (“CRE”) lending or new
stress testing guidance for all banks) arising out of these regulations and studies and reports required by Dodd-Frank will not
significantly increase our compliance or other operating costs and earnings or otherwise have a significant impact on our business,
financial condition and results of operations. Dodd-Frank will likely result in more stringent capital, liquidity and leverage
requirements on us and may otherwise adversely affect our business. For example, the provisions that affect the payment of interest on
demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain
revenues those deposits may generate. Provisions that revoke the Tier 1 capital treatment of trust preferred securities and otherwise
require revisions to the capital requirements of Hanmi Financial and the Bank could require Hanmi Financial and the Bank to seek
other sources of capital in the future.
As a result of the changes required by Dodd-Frank, the profitability of our business activities may be impacted, and we may
9
be required to make changes to certain of our business practices. These changes may also require us to invest significant management
attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.
International Capital and Liquidity Initiatives
The international Basel Committee on Banking Supervision (the “Basel Committee”) is a committee of central banks and
bank supervisors and regulators from the major industrialized countries. The Basel Committee develops broad policy guidelines for
use by each country’s supervisors in determining the supervisory policies they apply. In December 2009, the Basel Committee
released two consultative documents proposing significant changes to bank capital, leverage and liquidity requirements in response to
the economic downturn to enhance the Basel II framework which had not yet been fully implemented internationally and even less so
in the United States. The Group of Twenty Finance Ministers and Central Bank Governors (commonly referred to as the G-20),
including the United States, endorsed the reform package, referred to as Basel III, and proposed phase in timelines in November, 2010.
Basel III provides for increases in the minimum Tier 1 common equity ratio and the minimum requirement for the Tier 1
capital ratio. Basel III additionally includes a “capital conservation buffer” on top of the minimum requirement designed to absorb
losses in periods of financial and economic distress; and an additional required countercyclical buffer percentage to be implemented
according to a particular nation’s circumstances. These capital requirements are further supplemented under Basel III by a non-risk-
based leverage ratio. Basel III also reaffirms the Basel Committee’s intention to introduce higher capital requirements on
securitization and trading activities at the end of 2011.
In June 2012, the Federal Reserve released proposed rules regarding implementation of the Basel III regulatory capital rules
for United States banking regulators. The proposed rules address a significant number of outstanding issues and questions regarding
how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the
total phase-out from tier 1 capital of trust preferred securities for all banks, a capital conservation buffer of 2.50 percent above
minimum capital ratios, inclusion of accumulated other comprehensive income in tier 1 common equity, inclusion in tier 1 capital of
perpetual preferred stock and an effective floor for tier 1 common equity of 7.00 percent. Final rules are expected to be adopted in
2013. We are unable at this time to predict how the final rules will differ from the proposed rules and the effective date of the final
rules. We will continue to monitor Basel III developments and remain committed to managing our capital levels in a prudent manner.
Supervision and Regulation
General
We are extensively regulated under both federal and certain state laws. Regulation and supervision by the federal and state
banking agencies is intended primarily for the protection of depositors and the Deposit Insurance Fund administered by the FDIC, and
not for the benefit of stockholders. Set forth below is a summary description of the principal laws and regulations that relate to our
operations. These descriptions are qualified in their entirety by reference to the applicable laws and regulations.
Hanmi Financial
As a bank and financial holding company, we are subject to supervision and examination by the FRB under the BHCA.
Accordingly, we are subject to the FRB’s authority to:
require periodic reports and such additional information as the FRB may require.
require bank holding companies to maintain certain levels of capital.
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.
restrict the ability of bank holding companies to obtain dividends or other distributions from their subsidiary banks.
terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB
believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any bank subsidiary.
take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for
non-compliance under certain circumstances.
require the prior approval of senior executive officers or director changes and golden parachute payments, including
change in control agreements or new employment agreements with payment terms which are contingent upon
termination.
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.
limit or prohibit and require the FRB’s prior approval of the payment of dividends.
require financial holding companies to divest non-banking activities or subsidiary banks if they fail to meet certain
10
financial holding company standards.
approve acquisitions of more than 5 percent of the voting shares of another bank 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 subsi diaries
and to monitor compliance with the BHCA and other laws affecting the operations 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, 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 writing 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 agreements,
or removal and prohibition orders against officers or directors and other “institution-affiliated” parties.
Regulatory Restrictions on Dividends; Source of Strength
Hanmi Financial is regarded as a legal entity separate and distinct from its other subsidiaries. The principal source of our
revenue is dividends received from the Bank. Various federal and state statutory provisions limit the amount of dividends the Bank
can pay to Hanmi Financial without regulatory approval. It is the policy of the Federal Reserve that bank holding companies should
pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies
should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its
banking subsidiaries.
The Federal Reserve’s view is 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
adversity and should maintain financial flexibility and capital-raising capacity to obtain additional resources for assisting 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 Federal Reserve’s regulations, or both. The source-of-strength doctrine, now codified in the federal banking statues
pursuant to Dodd-Frank, most directly affects bank holding companies where a bank holding company’s subsidiary 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” including obtaining a guarantee by the bank holding company of a capital plan for undercapitalized bank
subsidiaries. See “Prompt Corrective Action Regulations” below. Additionally, if a bank holding company has more than one bank
subsidiary, the FDIA provides that each subsidiary bank may have “cross-guaranty” liability for any loss incurred by the FDIC in
connection with the failure of another commonly-controlled bank.
Because Hanmi Financial is a legal entity separate and distinct from the Bank, its right to participate in the distribution of
assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s
creditors. In the event of a liquidation or other resolution of the Bank, the claims of depositors and other general or subor dinated
creditors of the Bank would be entitled to a priority of payment over the claims of holders of any obligation of the Bank to its
stockholders, including any depository institution holding company (such as Hanmi Financial) or any stockholder or creditor of such
holding company. In the event of a bank holding company’s bankruptcy under Chapter 11 of the United States Bankruptcy Code, the
trustee will be deemed to have assumed, and is required to cure immediately, any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach
of such obligation will generally have priority over most other unsecured claims.
Regulatory Restrictions on Activities
Subject to prior notice or FRB approval, bank holding companies may generally engage in, or acquire shares of companies
engaged in, activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Bank holding companies which elect and retain “financial holding company” status pursuant to the Gramm-Leach-
Bliley Act of 1999 (“GLBA”) may engage in these nonbanking activities and 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 without prior Federal Reserve approval. Pursuant to GLBA and Dodd-Frank, in order to elect and retain financial holding
company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well
11
capitalized, and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with
the Community Reinvestment Act (“CRA”), which requires banks to help meet the credit needs of the communities in which they
operate. 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. Hanmi Financial
elected financial holding company status and Chun-Ha and All World are considered financial subsidiaries of Hanmi Financial.
Hanmi Financial is also a bank holding company within the meaning of Section 3700 of the California Financial Code.
Therefore, Hanmi Financial and any of its subsidiaries are subject to examination by, and may be required to file reports with, the DFI.
Privacy Policies
Under the GLBA, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer
data with nonaffiliated parties and establish procedures and practices to protect customer data from unauthorized access. Hanmi
Financial and its subsidiaries have established policies and procedures to assure our compliance with all privacy provisions of the
GLBA.
Capital Adequacy Requirements
At December 31, 2012, Hanmi Financial and the Bank’s capital ratios exceeded the minimum percentage requirements to be
deemed “well capitalized” for regulatory purposes. See “Notes to Consolidated Financial Statements, Note 1 — Regulatory Matters.”
The regulatory capital guidelines and the actual capital ratios for Hanmi Financial and the Bank as of December 31, 2012, were as
follows
Total Risk-Based Capital Ratio
Tier 1 Risk-Based Capital Ratio
Tier 1 Leverage Rate
Regulatory Capital Guidelines
Adequately
Capitalized
Well
Capitalized
8 00%
4 00%
4 00%
10 00%
6 00%
5 00%
Actual
Hanmi
Financial
20 65%
19 37%
14 95%
Hanmi
Bank
19 85%
18 58%
14 33%
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal
banking agencies. Increased capital requirements are expected as a result of Dodd-Frank and the Basel III international supervisory
developments. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative
measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors.
The current risk-based capital guidelines for bank holding companies and banks adopted by the federal banking agencies are
expected to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both
transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as
commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories
perceived as representing greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items.
Under the risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment percentages, which range from 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.
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 risk-based capital regulations 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 may also be subject to the market risk capital guidelines 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 currently subject to the market risk capital rules.
Qualifying capital is classified depending on the type of capital
“Tier I capital” currently includes common equity and trust preferred securities, subject to certain criteria and
quantitative limits. The capital received from trust preferred offerings also qualifies as Tier I capital, subject to the new
12
provisions of Dodd-Frank. Under Dodd-Frank, depository institution holding companies with more than $15 billion in
total consolidated assets as of December 31, 2009, will no longer be able to include trust preferred securities as Tier 1
regulatory capital after the end of a 3-year phase-out period beginning 2013, and would need to replace any outstanding
trust preferred securities issued prior to May 19, 2010 with qualifying Tier 1 regulatory capital during the phase-out
period. For institutions with less than $15 billion in total consolidated assets, existing trust preferred capital will still
qualify as Tier 1. Since the Company had less than $15 billion in assets at December 31, 2012, under the Dodd-Frank
Act, it will be able to continue to include its existing trust preferred debt in Tier 1 capital.
“Tier II capital” includes hybrid capital instruments, other qualifying debt instruments, a limited amount of the allowance
for loan and lease losses, and a limited amount of unrealized holding gains on equity securities. Following the phase-out
period under Dodd-Frank, trust preferred securities will be treated as Tier II capital. The maximum amount of
supplemental capital elements that qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital.
“Tier III capital” consists of qualifying unsecured debt. The sum of Tier II and Tier III capital may not exceed the
amount of Tier I capital.
Under the current capital guidelines, there are three fundamental capital ratios a total risk-based capital ratio, a Tier 1 risk-
based capital ratio and a Tier 1 leverage ratio. To be deemed “well capitalized,” a bank must have a total risk-based capital ratio, a
Tier 1 risk-based capital ratio and a Tier 1 leverage ratio of at least 10 percent, 6 percent and 5 percent, respectively. At December 31,
2012, the respective capital ratios of Hanmi Financial and the Bank exceeded the minimum percentage requirements to be deemed
“well-capitalized” for regulatory purposes.
In addition to the requirements of Dodd-Frank and Basel III, the federal banking agencies may change existing capital
guidelines or adopt new capital guidelines in the future. Pursuant to federal regulations, banks must maintain capital levels
commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. FRB guidelines
also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong
capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets. Federal
banking regulators may set higher capital requirements when a bank’s particular circumstances warrant and have required many banks
and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise
required to be deemed well capitalized. In such cases, the institutions may no longer be deemed well capitalized and may therefore
additionally be subject to restrictions on taking brokered deposits.
Hanmi Financial and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based
capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories 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 percent. All other institutions are required to maintain a leverage ratio of at least 100 to
200 basis points above the 3 percent minimum, for a minimum of 4 percent to 5 percent. As of December 31, 2012, the Hanmi
Financial’s leverage capital ratio was 14.95 percent, and the Bank’s leverage capital ratio was 14 33 percent, both ratios well
exceeding regulatory minimums.
Imposition of Liability for Undercapitalized Subsidiaries
Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository
institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital
restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount.
Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5 percent of the
institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately
capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically”
undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can
be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to
divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve
before it may acquire all, or substantially all, of the assets of any bank, or ownership or control of any voting shares of any bank, if
after such acquisition it would own or control, directly or indirectly, more than 5 percent of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial
resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities
to be served, and various competitive factors.
13
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company
unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the
Federal Reserve, the acquisition of 10 percent or more of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act would, under the circumstances set forth in the pres umption, constitute acquisition of
control.
In addition, any company is required to obtain the approval of the Federal Reserve under the Bank Holding Company Act
before acquiring 25 percent (5 percent in the case of an acquirer that is a bank holding company) or more of the outstanding common
stock of the company, or otherwise obtaining control or a “controlling influence” over the company.
Sarbanes-Oxley Act
The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of
2002, including, among other things, required executive certification of financial presentations, requirements for board audit
committees and their members, and disclosure to stockholders of internal control reports and assessments by management regarding
financial reporting.
Securities Registration
Hanmi Financial’s common stock is publicly held and listed on the NASDAQ Stock Market (“NASDAQ”). Hanmi Financial
is subject to the periodic reporting, information, proxy solicitation, insider trading, corporate governance and other requirements and
restrictions of the Securities Exchange Act of 1934 and the regulations of the SEC promulgated thereunder as well as listing
requirements of NASDAQ. Dodd-Frank includes the following provisions that affect corporate governance and executive
compensation at most United States publicly traded companies, including Hanmi Financial (1) stockholder advisory votes on
executive compensation, (2) executive compensation “clawback” requirements for companies listed on national securities exchanges
in the event of materially inaccurate statements of earnings, revenues, gains or other criteria similar to the requirements of the
American Recovery and Reinvestment Act of 2009 for TARP CPP recipients, (3) enhanced independence requirements for
compensation committee members, and (4) SEC authority to adopt proxy access rules which would permit stockholders of publicly
traded companies to nominate candidates for election as director and have those nominees included in a company’s proxy statement.
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 the Bank’s primary federal regulator, and must additionally comply with certain
applicable regulations of the Federal Reserve. Specific federal and state laws and regulations which 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 requirements, certain check-clearing activities, branching, and mergers and acquisitions. California banks are also
subject to statutes and federal banking regulations including Regulation O and Federal Reserve Act Sections 23A and 23B and
Regulation W, which restrict or limit loans or extensions of credit to “insiders," including officers directors and principal stockholders,
and loans or extension of credit by banks to affiliates or purchases of assets from affiliates, including parent bank holding companies,
except pursuant to certain exceptions and terms and conditions at least as favorable to those prevailing for comparable transactions
with unaffiliated parties.
Dodd-Frank expanded definitions and restrictions on transactions with affiliates and insiders under Section 23A and 23B and
also lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions.
Pursuant to the FDIA and the Financial Code, California state chartered commercial banks may generally engage in any
activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to
banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries or by non-bank subsidiaries of
bank holding companies. Further, pursuant to GLBA, California banks may conduct certain “financial” activities in a subsidiary to the
same extent as may a national bank, provided the bank is and remains “well-capitalized,” “well-managed” and in satisfactory
compliance with the CRA. The Bank currently has no financial subsidiaries.
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
14
require affirmative action to correct any conditions resulting from any violation or practice;
direct an increase in capital or establish specific minimum capital ratios;
restrict the Bank’s growth geographically, by products and services or by mergers and acquisitions;
enter into informal non-public or formal public memoranda of understanding or written agreements;
enjoin unsafe and unsound practices and issue cease and desist orders to take corrective action;
remove officers and directors and assess civil monetary penalties;
terminate the Bank’s deposit insurance, which would also result in the revocation of the Bank’s license by the DFI; and
take possession and close and liquidate the Bank.
Brokered Deposits
Under the FDIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification.
“Well-capitalized” banks are permitted to accept brokered deposits, but all banks that are not well-capitalized could be restricted to
accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits
if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to
the bank. As of December 31, 2012, the Bank had no brokered deposits.
Community Reinvestment Act
Under the CRA, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop
the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA
requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting
the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The
CRA also requires all institutions to make public disclosure of their CRA ratings. Hanmi Financial has a Compliance Committee,
which oversees the planning of products, and services offered to the community, especially those aimed to serve low and moderate
income communities. The Federal Reserve rated the Bank as “satisfactory” in meeting community credit needs under the CRA at its
most recent examination for CRA performance.
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 percentage of outstanding advances). At December 31,
2012, the Bank was in compliance with the FHLB’s stock ownership requirement, and our investment in FHLB capital stock totaled
$17.8 million. The total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity as of
December 31, 2012 were $275.1 million and $272.1 million, respectively.
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, 2012, the Bank was in compliance with
these requirements.
Prompt Corrective Action Regulations
The FDIA requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository
institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an
acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator under the prompt corrective
action rules generally depend upon an institution’s classification within five capital categories as defined in the regulations. The
relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio. However, the federal banking agencies
have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. These include operational and managerial standards relating to (i) internal
controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset quality and
growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.
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A depository institution’s capital tier under the prompt corrective action regulations will depend upon how its capital levels
compare with various relevant capital measures and the other factors established by the regulations. A bank will be: (i) “well
capitalized” if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6 0
percent or greater, and a leverage ratio of 5.0 percent or greater and is not subject to any order or written directive by any such
regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution
has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage
ratio of 4.0 percent or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio
that is less than 8.0 percent, a Tier 1 risk-based capital ratio of less than 4.0 percent, or a leverage ratio of less than 4.0 percent; (iv)
“significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0 percent, a Tier 1 risk-based capital
ratio of less than 3.0 percent, or a leverage ratio of less than 3.0 percent; and (v) “critically undercapitalized” if the institution’s
tangible equity is equal to or less than 2.0 percent of average quarterly tangible assets. An institution may be downgraded to, or
deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound
condition or if it receives an unsatisfactory examination rating with respect to certain matters.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a
dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration
plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be
acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital
restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the
parent holding company is limited to the lesser of (i) an amount equal to 5.0 percent of the depository institution’s total assets at the
time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a
depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly
undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking
agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower
category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information
other than the capital levels of the institution.
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 Deposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to Dodd-Frank,
the maximum deposit insurance amount has been permanently increased to $250,000. 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.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by
September 30, 2020, as required by Dodd-Frank. At least semi-annually, the FDIC will update its loss and income projections for the
DIF and, if needed, increase or decrease assessment rates.
On February 7, 2011, the FDIC approved a final rule, as mandated by Dodd-Frank, changing the deposit insurance
assessment system from one that is based on total domestic deposits to one that is based on average consolidated total assets minus
average tangible equity. In addition, the final rule creates a scorecard-based assessment system for larger banks (those with more than
$10 billion in assets) and suspends dividend payments if the Deposit Insurance Fund reserve ratio exceeds 1.5 percent, but provides
for decreasing assessment rates when the Deposit Insurance Fund reserve ratio reaches certain thresholds. Larger insured depository
institutions will likely pay higher assessments to the Deposit Insurance Fund than under the old system. Additionally, the final rule
includes a new adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis
points on every dollar of long-term, unsecured debt held as an asset that was issued by another insured depository institution
(excluding debt guaranteed under the FDIC’s Temporary Liquidity Guarantee Program) to the extent that all such debt exceeds 3
percent of the other insured depository institution’s Tier 1 capital. The new rule took effect for the quarter beginning April 1, 2011.
Our FDIC insurance expense totaled $4.2 million for 2012. FDIC insurance expense includes deposit insurance assessments
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and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to fund interest payments on bonds to
recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017. The FICO assessment
rate, which is determined quarterly, was 0.00160% of insured deposits for the year ended December 31, 2012. The total FICO
assessment in 2012 was $157,000.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are
additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC
premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may
have a material effect on our earnings.
In November 2008, the FDIC approved the final ruling establishing the Transaction Account Guarantee Program ( “TAGP”)
as part of the Temporary Liquidity Guarantee Program ( “TLGP”). Under this program, all non-interest bearing transaction accounts
became fully guaranteed by the FDIC for the entire amount in the account. The TAGP expired as of December 31, 2012 and the FDIC
will no longer provide separate, unlimited deposit insurance under that program.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has
engaged in or is engaging in unsafe and unsound banking practices, is in an unsafe or unsound condition or has violated any applicable
law, regulation or order or any condition imposed in writing by, or pursuant to, any written agreement with the FDIC. The termination
of deposit insurance for the Bank could have a material adverse effect on our financial condition and results of operations due to the
fact that the Bank's liquidity position would likely be affected by deposit withdrawal activity.
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.
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
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);
any company controlled by any such executive officer, director or stockholder; or
any political or campaign committee controlled by such executive officer, director or principal stockholder.
Such loans and leases
must comply with loan-to-one-borrower limits;
require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting
procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;
must not involve more than the normal risk of repayment or present other unfavorable features; and
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, as amended by Dodd-
Frank, 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
prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of
designated amounts;
limit such loans and investments to or in any affiliate individually to 10 percent of the Bank’s capital and surplus;
limit such loans and investments to all affiliates in the aggregate to 20 percent of the Bank’s capital and surplus; and
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.
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Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDIA’s prompt corrective action
regulations and the supervisory authority of the federal and state banking agencies discussed above.
Dividends
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 distributions 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, dividends 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 dividends 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 financi al
strength to their subsidiary banks potentially restricts a bank holding company’s ability to pay dividends.
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 regulatory 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 California
law as set forth in the Financial Code, 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 stockholders 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 i ts current fiscal
year. Due to the Bank’s retained deficit of $122.6 million as of December 31, 2012, the Bank is restricted under the Financial Code
from making dividends to Hanmi Financial without the prior approval of the DFI. See “Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — 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 condition 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 transactions and cross-border transportations
of currency. 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 precautions, the Bank keeps currency transaction reports to document cash transactions in excess of
$10,000 or in multiples totaling more than $10,000 during one business day, monitors 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 PATRIOT Act 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 additional comprehensive policies and
procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can
result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory
restrictions on growth and expansion. Such enforcement actions could also have serious reputation consequences for us and the Bank.
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Consumer Laws
The Bank must comply with numerous consumer protection statutes and implementing regulations, including the CRA, the
Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth
in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National
Flood Insurance Act, the Americans with Disabilities Act, statues and regulations regarding unfair, deceptive or abusive acts or
practices, and various federal and state privacy protection laws. 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 criminal penalties, punitive damages to consumers, and the loss of certain
contractual rights.
Dodd-Frank provides for the creation of the Consumer Financial Protection Bureau as an independent entity within the
Federal Reserve. This bureau is a new regulatory agency for United States banks. It will have broad rulemaking, supervisory and
enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity
loans and credit cards, and contains provisions on mortgage-related matters such as steering incentives, determinations as to a
borrower’s ability to repay and prepayment penalties. The bureau’s functions include investigating consumer complaints, conducting
market research, rulemaking, supervising and examining banks consumer transactions, and enforcing rules related to consumer
financial products and services. Banks with less than $10 billion in assets, such as the Bank, will continue to be examined for
consumer financial protection compliance by their primary federal banking agency.
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.
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ITEM 1A.
RISK FACTORS
Together with the other information on the risks we face and our management of risk contained in this Annual Report on
Form 10-K (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 res ults and
prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a
comprehensive list of all risks we face and additional risks that we may currently view as not material may also adversely impact our
financial condition, business operations and results of operations.
Risks Relating to our Business
Unfavorable economic and market conditions could continue to adversely affect our industry. Declines in the housing
market, with decreasing home prices and increasing delinquencies 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. Unfavorable
economic developments beginning in 2008 have negatively impacted the credit performance of commercial and consumer credit,
resulting in additional write-downs. The impact on the Bank’s credit quality has stabilized; however, there is a risk that economic
conditions will deteriorate. Further economic deterioration could exacerbate the adverse effects of the difficult market conditions on us
and others in the financial institutions industry. Particularly, we may face the following risks in connection with these events
We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs and
limit our ability to pursue business opportunities.
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 concerning economic conditions may adversely affect the
accuracy of our estimates, which may, in turn, impact the reliability of the process.
Our liquidity could be negatively impacted by an inability to access the capital markets, unforeseen or extraordinary
demands on cash, or regulatory restrictions.
Our Southern California business focus and economic conditions in Southern California could adversely affect our
operations. The Bank’s operations are located primarily in Los Angeles County and Orange County in Southern California. Because
of this geographic concentration, our results depend largely upon economic conditions in these areas. The continued deterioration in
economic conditions in the Bank’s market areas, continued high unemployment 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 loans collateralized by commercial real estate property located primarily in Southern California
could have adverse effects on credit quality. As of December 31, 2012, the Bank’s loan portfolio included commercial property,
construction, and commercial and industrial loans, which were collateralized by commercial real estate properties located primarily in
Southern California, totaling $1.8 billion, or 87.7 percent of total gross loans. Because of this concentration, a potential deterioration
of the commercial real estate market in Southern California could affect the ability of borrowers, guarantors and related parties to
perform in accordance with the terms of their loans. Among the factors that could contribute to such a potential decline are general
economic conditions in Southern California, interest rates and local market construction and sales activity.
Our concentrations of loans in certain industries could have adverse effects on credit quality. As of December 31, 2012,
the Bank’s loan portfolio included loans to (i) lessors of non-residential buildings totaling $451.5 million, or 22.0 percent of total
gross loans; (ii) borrowers in the accommodation industry totaling $330.7 million, or 16.1 percent of total gross loans; and (iii) gas
stations totaling $276.0 million, or 13.5 percent of total gross loans. Most of these loans are in Southern California. Because of these
concentrations of loans in specific industries, a continued 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 material and adverse consequences for the Bank.
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk. Most of our
commercial business and commercial real estate loans are made to small or middle market businesses. These businesses generally
have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to
economic conditions. If general economic conditions in the markets in which we operate negatively impact this important customer
sector, our results of operations and financial condition and the value of our common stock may be adversely affected. Moreover, a
portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or
economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us,
which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
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Our use of appraisals in deciding whether to make loans secured by real property does not ensure that the value of the
real property collateral will be sufficient to repay our loans. In considering whether to make a loan secured by real property, we
require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is
made and requires the exercise of a considerable degree of judgment and adherence to professional standards. If the appraisa l does not
reflect the amount that may be obtained upon sale or foreclosure of the property, whether due to declines in property values after the
date of the original appraisal or defective preparation, we may not realize an amount equal to the indebtednes s secured by the property
and may suffer losses.
Changes in economic conditions could materially hurt our business. Our business is directly affected by changes in
economic conditions, including finance, legislative and regulatory changes and changes in government monetary and fiscal policies
and inflation, all of which are beyond our control. The economic conditions in the markets in which many of our borrowers operate
have deteriorated and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels.
If economic conditions deteriorate, it may exacerbate the following consequences
problem assets and foreclosures may increase;
demand for our products and services may decline;
low cost or non-interest bearing deposits may decrease; and
collateral for loans made by us, especially real estate, may decline in value.
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
believe are appropriate to limit this risk by assessing the likelihood of non-performance, tracking loan performance and diversifying
our credit portfolio.
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 the 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 interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes,
regulations 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 decline, the value of real estate collateral securing our
loans could be significantly reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral
would then be diminished and we would be more likely to suffer material losses on defaulted loans.
We are exposed to risk of environmental liabilities with respect to properties to which we take title. In the course 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 contamination, or may be required to investigate or clean-up
hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation 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 contamination emanating from the property. If we
become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be
materially and adversely affected.
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 accordance 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 increased for
new loan growth. While we believe that our allowance for loan losses is adequate to cover inherent 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.
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 caused by the response to the financial market crisis and the global
economic recession may affect our operating earnings negatively.
21
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, including brokered 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 a result of the recent turmoil faced by banking organizations in the domestic and worldwide credit markets.
We are subject to government regulations that could limit or restrict our activities, which in turn could adversely affect
our operations. The financial services industry is subject to extensive federal and state supervision and regulation. Significant new
laws, including the enactment of Dodd-Frank Act, changes in existing laws, or repeals of existing laws may cause our results to differ
materially from historical and projected performance. Further, federal monetary policy, particularly as implemented through the
Federal Reserve Board, significantly affects credit conditions and a material change in these conditions could have a material adverse
impact on our financial condition and results of operations.
Additional requirements imposed by the Dodd-Frank Act and other regulations could adversely affect us. The
Dodd-Frank Act and related regulations subject us and other financial institutions to more restrictions, oversight, reporting
obligations and costs. In addition, this increased regulation of the financial services industry restricts the ability of institutions
within the industry to conduct business consistent with historical practices, including aspects such as compensation, interest
rates, new and inconsistent consumer protection regulations and mortgage regulation, among others. Federal and state
regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are
applied.
Current and future legal and regulatory requirements, restrictions and regulations, including those imposed under Dodd-
Frank, may adversely impact our business, financial condition, and results of operations, may require us to invest significant
management attention and resources to evaluate and make any changes required by the legislation and accompanying rules and may
make it more difficult for us to attract and retain qualified executive officers and employees.
Our Tier 1 risk-based capital will be negatively impacted by the Collins Amendment provisions of the Dodd-Frank Act.
The Collins Amendment provision of the Dodd-Frank Act imposes increased capital requirements in the future. The Collins
Amendment also requires federal banking regulators to establish minimum leverage and risk-based capital requirements to apply to
insured depository institutions, bank and thrift holding companies, and systemically important nonbank financial companies. These
capital requirements must not be less than the Generally Applicable Risk Based Capital Requirements and the Generally Applicable
Leverage Capital Requirements as of July 21, 2010, and must not be quantitatively lower than the requirements that were in effect for
insured depository institution as of July 21, 2010. The Collins Amendment defines Generally Applicable Risk Based Capital
Requirements and Generally Applicable Leverage Capital Requirements to mean the risk-based capital requirements and minimum
ratios of Tier 1 risk-based capital to average total assets, respectively, established by the appropriate federal banking agencies to apply
to insured depository institutions under the Prompt Corrective Action provisions, regardless of total consolidated asset size or foreign
financial exposure. Over a three-year phase-out period effective January 1, 2013, trust preferred securities will no longer qualify as
Tier 1 risk-based capital for certain bank holding companies.
The Consumer Financial Protection Bureau. The Dodd-Frank Act created the Consumer Financial Protection Bureau
(“Bureau”) within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain
federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The
Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition,
the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations
promulgated by the Bureau, and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau
against state-chartered institutions, including the Bank.
The FDIC's restoration plan and the related increased assessment rate could adversely affect our earnings. As required by
the Dodd-Frank Act, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things,
the plan (i) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35 percent (from the former
minimum of 1.15 percent) and removes the upper limit on the designated reserve ratio (which was formerly capped at 1.5 percent) and
consequently on the size of the fund, and (ii) requires that the fund reserve ratio reach 1.35 percent by September 30, 2020 (rather than
1.15 percent by the end of 2016, as formerly required. The Federal Deposit Insurance Act continues to require that the FDIC’s Board
of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio,
engage in notice-and-comment rulemaking before the beginning of the calendar year. The FDIC has set a long-term goal of getting its
reserve ratio up to 2 percent of insured deposits by 2027.
22
The amount of premiums that we are required to pay for FDIC insurance is generally beyond our control. If there are
additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC
premiums than the recently increased levels. These increases and any future increases in FDIC insurance premiums may have a
material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.
The impact of the new Basel III capital standards will likely impose enhanced capital adequacy standards on us. On
September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced
agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III, which were
approved in November 2010 by the G20 leadership. In June 2012, the Federal Reserve released proposed rules regarding
implementation of the Basel III regulatory capital rules for United States banking institutions. The proposed rules address a significant
number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United
States. Key provisions of the proposed rules include the total phase-out from tier 1 capital of trust preferred securities for all banks, a
capital conservation buffer of 2.50 percent above minimum capital ratios, inclusion of accumulated other comprehensive income in
tier 1 common equity, inclusion in tier 1 capital of perpetual preferred stock, and an effective floor for tier 1 common equity of 7.00
percent. Final rules are expected to be adopted in 2013. There is no assurance that the proposed rules will be adopted in their current
form, what changes may be made prior to adoption, or when the final rules will be effective.
We are subject to the risk that the global credit crisis, despite efforts by global governments to halt that crisis, may affect
interest rates and the availability of financing in general, which could adversely affect our financing and our operating results.
Global capital markets and economic conditions are still unstable and the resulting disruption has been particularly acute in the
financial sector. During the past several years, several large European banks experienced financial difficulty and were either rescued
by government assistance or by other large European banks. Several European governments have coordinated plans to attempt to
shore up their financial sectors through loans, credit guarantees, capital infusions, promises of continued liquidity funding and interest
rate cuts. Additionally, other governments of the world’s largest economic countries also implemented interest rate cuts. There is no
assurance that these and other plans and programs will be successful in halting the global credit crisis or in preventing other banks
from failing. The failure of regulatory initiatives to help stabilize the financial markets and a worsening of financial market conditions
could materially and adversely affect our business, financial condition, results of operations, access to capital, liquidity, the financial
condition of our borrowers, and credit or the value of our securities.
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 retaining employees, particularly in
the Korean-American community. 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 be materially and adversely impacted depending upon the nature and level of competition.
We continually encounter technological change, and we may have fewer resources than many of our competitors to
continue to invest in technological improvements. The financial services industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and
enables financial institutions to better serve 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
successful in marketing these products and services to our customers.
We could be liable for breaches of security in our online banking services. Fear of security breaches could limit the
growth of our online services. We offer various Internet-based services to our clients, including online banking services. The secure
transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services.
Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology
we use to protect client transaction data. Although we have developed systems and processes that are designed to prevent security
breaches and periodically test our security, failure to mitigate breaches of security could adversely affect our ability to offer and grow
our online services and could harm our business.
The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a
result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and
we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the
event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be
realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such
losses could have a material adverse effect on our financial condition and results of operations.
23
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. Reputation 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 compli ance,
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.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely
affect our prospects. 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 implement our business objectives.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified
persons with knowledge of, and experience in, our banking space. The process of recruiting personnel with the combination of skills
and attributes required to carry out our strategies is often lengthy. In addition, legislation and regulations which impose restrictions on
executive compensation may make it more difficult for us to retain and recruit key personnel. Our success depends to a significant
degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical
personnel and upon the continued contributions of our management and personnel. The unexpected loss of services of one or more of
our key personnel of failure to attract or retain such employees could have a material adverse effect on our financial condition and
results of operations.
Our controls and procedures could fail or be circumvented. Management regularly reviews and updates our internal
controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the
effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of
our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our
business, results of operations and financial condition.
Changes in accounting standards may affect how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.
From time to time, the Financial Accounting Standards Board and SEC change the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes and their impacts on us can be hard to predict and may result in
unexpected and materially adverse impacts on our reported financial condition and results of operations.
We are required to assess the recoverability of our deferred tax assets on an ongoing basis. Deferred tax assets are
evaluated on a quarterly basis to determine if they are expected to be recoverable in the future. Our evaluation considers positive and
negative evidence to assess whether it is more likely than not that a portion of the asset will not be realized. Future negative operating
performance or other negative evidence may result in a valuation allowance being recorded against some or the entire amount. A
valuation allowance on our deferred tax asset could have a material adverse impact on our capital and results of operations.
We may become subject to regulatory restrictions in the event that our capital levels decline. We cannot provide any
assurance that our total risk-based capital ratio or other capital ratios will not decline in the future such that the Bank may be
considered to be “undercapitalized” for regulatory purposes. If a state member bank, like the Bank, is classified as under capitalized,
the bank is required to submit a capital restoration plan to the Federal Reserve Bank. Pursuant to Federal Deposit Insurance
Corporation Improvement Act, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business,
acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under
certain circumstances, including the acceptance by the Federal Reserve Bank of a capital restoration plan for the bank. Pursuant to
Section 38 of the Federal Deposit Insurance Act and Federal Reserve Board Regulation H, the Federal Reserve Bank also has the
discretion to impose certain other corrective actions.
If a bank is classified as significantly undercapitalized, the Federal Reserve Bank would be required to take one or more
prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital;
improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky
activities and restrictions on compensation paid to executive officers. These actions may also be taken by the Federal Reserve Bank at
24
any time on an undercapitalized bank if it determines those restrictions are necessary. If a bank is classified as critically
undercapitalized, in addition to the foregoing restrictions, the Federal Deposit Insurance Corporation Improvement Act prohibits
payment on any subordinated debt and requires the bank to be placed into conservatorship or receivership within 90 days, unless the
Federal Reserve Bank determines that other action would better achieve the purposes of the Federal Deposit Insurance Corporation
Improvement Act regarding prompt corrective action with respect to undercapitalized banks.
We could be negatively impacted by downturns in the South Korean economy. Many of our customers are locally based
Korean-Americans who also conduct business in South Korea. Although we conduct most of our business with locally-based
customers and rely on domestically located assets to collateralize our loans and credit arrangements, we have historically had some
exposure to the economy of South Korea. Management closely monitors our exposure to the South Korean economy, and to date, we
have not experienced any significant loss attributable to our exposure to South Korea. Nevertheless, our efforts to minimize exposure
to downturns in the South Korean economy may not be successful in the future, and a significant downturn in the South Korean
economy could possibly have a material adverse effect on our financial condition and results of operations.
In addition, due to our customer base being largely made up of Korean-Americans, our deposit base could significantly
decrease as a result of deterioration in the Korean economy. For example, some of our customers' businesses may rely on funds from
South Korea. Further, our customers may temporarily withdraw deposits in order to transfer funds and benefit from gains on foreign
exchange and interest rates, and/or to support their relatives in South Korea during downturns in the Korean economy. A significant
decrease in our deposits could also have a material adverse effect on our financial condition and results of operations.
Our board of directors is exploring and evaluating strategic alternatives. Our board of directors is exploring and evaluating
potential strategic alternatives that may be available to us. We currently have no agreements or commitments to engage in any specific
strategic transactions, and we cannot assure you that our exploration of strategic alternatives will result in any specific action or
transaction. We do not intend to provide updates or make further comments regarding the evaluation of strategic alternatives, unless
otherwise required by law.
Risks Relating to Ownership of Our Common Stock
The Bank is currently restricted from paying dividends to us and we are restricted from paying dividends to stockholders.
The primary source of our income from which we pay our obligations and distribute dividends to our stockholders is from the r eceipt
of dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. The Bank
currently has a retained deficit of $122 6 million as of December 31, 2012 and suffered net losses in 2010, 2009 and 2008, largely
caused by provision for credit losses and goodwill impairments. As a result, the California Financial Code does not provide authority
for the Bank to declare a dividend to us, with or without Commissioner approval.
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 companies. These broad market fluctuations
could adversely affect the market price of our common stock. Among the factors that could affect our stock price are
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by institutional stockholders;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted legislative or regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; or
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. 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 financial
condition, performance, creditworthiness and prospects, future sales of our equity or equity-related securities, and other factors
identified above in “Cautionary Note Regarding Forward-Looking Statements.” A significant decline in our stock price could result in
substantial losses for individual stockholders and could lead to costly and disruptive securities litigation and potential delisting from
the NASDAQ.
25
Your share ownership may be diluted by the issuance of additional shares of our common stock in the future. Your share
ownership may be diluted by the issuance of additional shares of our common stock in the future. We may decide to raise additional
funds through public or private debt or equity financings for a number of reasons, including in response to regulatory or oth er
requirements to meet our liquidity and capital needs, to finance our operations and business strategy or for other reasons. If we raise
funds by issuing equity securities or instruments that are convertible into equity securities, the percentage ownership of our existing
stockholders will further be reduced, the new equity securities may have rights, preferences and privileges superior to those of our
common stock, and the market of our common stock could decline.
In addition, we have adopted a stock option plan that provides for the granting of stock options to our directors, executive
officers and other employees. As of December 31, 2012, 21,550 shares of our common stock were issuable under options granted in
connection with our stock option plans and stock warrants issued in connection with the registered rights and best efforts offerings. It
is probable that the stock options will be exercised during their respective terms if the fair market value of our common stoc k exceeds
the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.
Furthermore, as of December 31, 2011, our Amended and Restated Certificate of Incorporation authorizes the issuance of up
to an additional 32,500,000 shares of common stock. Our Amended and Restated Certificate of Incorporation does not provide for
preemptive rights to the holders of our common stock. Any authorized but unissued shares are available for issuance by our Board of
Directors. As a result, if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you
may be unable to maintain your pro rata ownership in the Company.
Future sales of common stock by existing stockholders may have an adverse impact on the market price of our common
stock. Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could oc cur,
could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity
securities.
Holders of our junior subordinated debentures have rights that are senior to those of our stockholders. As of December
31, 2012, we had outstanding $82.4 million of trust preferred securities issued by our subsidiary trusts. Payments of the principal and
interest on the trust preferred securities are conditionally guaranteed by us. The junior subordinated debentures underlying the trust
preferred securities are senior to our shares of common stock. As a result, we must make payments on the junior subordinated
debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidati on, the
holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have
the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years,
during which time no dividends may be paid on our common stock.
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 Amended and Restated 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, 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 Company 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 circumstances, either Federal Reserve B ank
approval must be obtained or notice must be furnished to the Federal Reserve Bank 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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
26
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, 2012
Office
Address
City/State
Corporate Headquarters (1)
Branches:
Beverly Hills Branch
Cerritos – Artesia Branch
Cerritos – South Branch
Downtown – Los Angeles Branch
Diamond Bar Branch
Fashion District Branch
Fullerton – Beach Branch (3)
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 Lending Center (1)
Private Banking Department (1)
International Finance Department (1)
SBA Loan Center (1)
LPOs and Subsidiaries:
Northwest Region LPO (1)
Chun-Ha/All World (1)
Chun-Ha (1)
_______________
(1) Deposits are not accepted at this facility.
(2)
(3)
Training Facility is also located at this facility.
Administrative offices are also located at this facility.
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
1101 Brea Canyon Road, Suite A-1
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
3660 Wilshire Boulevard, Suite 1050
3660 Wilshire Boulevard, Suite 116
3737 West Olympic Boulevard
933 South Vermont Avenue, 2nd Floor
928 South Western Avenue, Suite 260
500 108th Avenue NE, Suite 1760
12912 Brookhurst Street, Suite 480
3660 Wilshire Boulevard, Suite 528
Beverly Hills, CA
Artesia, CA
Cerritos, CA
Los Angeles, CA
Diamond Bar, 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
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Bellevue, WA
Garden Grove, CA
Los Angeles, CA
Owned/
Leased
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
Leased
Leased
Leased
Leased
Leased
Leased
Leased
As of December 31, 2012, our consolidated investment in premises and equipment, net of accumulated depreciation and
amortization, totaled $15.2 million. Our lease expense was $5.5 million for the year ended December 31, 2012. Hanmi Financial and
its subsidiaries consider their present facilities to be sufficient for their current operations.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business,
such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of
Hanmi Financial and its subsidiaries. In the opinion of management and in consultation with external legal counsel, the resolution of
any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi
Financial or its subsidiaries.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The following table sets forth, for the periods indicated, the high and low trading prices of Hanmi Financial’s common stock
for the last two years as reported on the Nasdaq Global Select Market under the symbol “HAFC”:
High
Low
Cash
Dividend
$
$
$
$
$
$
$
$
13 62
13 33
10 68
10 59
8 56
10 00
11 44
11 44
$
$
$
$
$
$
$
$
11 77
10 38
9 17
7 72
6 48
6 40
6 64
8 80
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
2012:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2011:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
Hanmi Financial had 229 registered stockholders of record as of February 1, 2013.
Dividends
It is the Federal Reserve’s policy that a bank holding company should generally pay dividends on common stock only out of
income available to it over the past year, and only if prospective earnings retention is consistent with the organization’s expected
future needs and financial condition. It is also the Federal Reserve’s policy that a bank holding company should not maintain dividend
levels that undermine its ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current
financial and economic environment, the Federal Reserve has indicated that a bank holding company should carefully review its
dividend policy, and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are
very strong.
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 California state-chartered bank nor a majority-
owned 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. 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.
As a result of the net loss incurred by the Bank in prior years, the Bank is currently not able to pay dividends to Hanmi
Financial under Section 642. Financial Code Section 643 provides, alternatively, that, notwithstanding the foregoing restriction set
forth in Section 642, 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 prio r approval of
the California Commissioner of Financial Institutions. The Bank had an accumulated deficit of $122.6 million as of December 31,
2012 and is not able to pay dividends under Section 643.
The junior subordinated debentures underlying our trust preferred securities are senior to our shares of common stock. As a
result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in
the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any
distributions can be made on our common stock. We deferred distributions on our $82.4 million of outstanding junior subordinated
debentures (and related trust preferred securities) with the interest payment that was due on January 15, 2009. Upon termination of the
regulatory enforcement actions by the FRB on December 4, 2012 and the DFI on October 29, 2012, Hanmi Financial paid accrued
interest of $4 6 million on December 15, 2012 for the Trust II and, subsequent to December 31, 2012, has paid accrued interest of $5.2
million and $3.1 million in January 2013 for the Trust I and III, respectively.
28
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 Poor’s (“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 Annual
Report on Form 10-K into any filing under the Securities Act of 1933, as amended, 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
$120
$100
$80
$60
$40
$20
e
u
l
a
V
x
e
d
n
I
$-
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Hanmi Financial Corporation
S&P 500 Financials
NASDAQ Composite
SNL Bank $1B-$5B Index
2007
2008
As of December 31,
2010
2009
2011
2012
Hanmi Financial Corporation
NASDAQ Composite
S&P 500 Financials
SNL Bank $1B-$5B Index
$
$
$
$
100 00
100 00
100 00
100 00
$
$
$
$
23 90
59 46
61 51
82 94
$
$
$
$
13 92
85 55
75 94
59 45
$
$
$
$
13 34
100 02
85 65
67 39
$
$
$
$
10 73
98 22
85 65
61 46
$
$
$
$
19 71
113 85
97 13
75 78
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of 2012, there were no purchases of Hanmi Financial’s equity securities by Hanmi Financial or its
affiliates. As of December 31, 2012, there was no current plan authorizing purchases of Hanmi Financial’s equity securities by Hanmi
Financial or its affiliates.
29
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-year period ended December 31, 2012 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.
$
$
$
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
NET INCOME (LOSS)
SUMMARY BALANCE SHEETS:
Cash and Cash Equivalents
Total Investment Securities
Net Loans (1)
Total Assets
Total Deposits
Total Liabilities
Total Stockholders’ Equity
Tangible Equity
Average Net Loans (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
2012
119,800
18,745
101,055
6,000
24,812
76,861
43,006
(47,368)
2011
As of and for the Year Ended December 31,
2010
(In Thousands, Except for Per Share Data)
2009
$
$
128,807
27,630
101,177
12,100
23,851
84,048
28,880
733
$
$
144,512
38,638
105,874
122,496
25,406
96,805
(88,021)
(12)
184,147
82,918
101,229
196,387
32,110
90,354
(153,402)
(31,125)
2008
238,183
103,782
134,401
75,676
32,854
195,027
(103,448)
(1,355)
90,374
$
28,147
$
(88,009)
$
(122,277)
$
(102,093)
268,047
451,060
1,986,051
2,882,520
2,395,963
2,504,156
378,364
377,029
1,917,453
412,554
2,686,425
2,792,352
2,349,082
85,760
1,758,135
328,016
326,589
$
201,683
441,604
1,871,607
2,744,824
2,344,910
2,459,216
285,608
284,075
1,995,313
446,198
2,752,696
2,787,707
2,404,655
153,148
1,957,077
200,517
198,626
$
249,720
413,963
2,121,067
2,907,148
2,466,721
2,733,892
173,256
171,023
2,368,369
215,280
2,981,878
2,998,507
2,587,686
243,690
2,268,954
137,968
135,171
$
154,110
133,289
2,674,064
3,162,706
2,749,327
3,012,962
149,744
146,362
3,044,395
188,325
3,611,009
3,717,179
3,109,322
341,514
2,909,014
225,708
221,537
$
215,947
197,117
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
PER SHARE DATA:
Earnings (Loss) Per Share – Basic (2)
Earnings (Loss) Per Share – Diluted (2)
Book Value Per Share (3)
Tangible Book Value Per Share (4)
Cash Dividends Per Share
Common Shares Outstanding
_______________
(1)
(2)
$
$
$
$
$
2 87
2 87
12 01
11 97
-
31,496,540
$
$
$
$
$
1 38
1 38
9 07
9 02
-
31,489,201
$
$
$
$
$
(7 46)
(7 46)
9 20
9 04
-
18,899,799
$
$
$
$
$
(20 56)
(20 56)
23 44
22 88
-
6,397,799
$
$
$
$
$
(17 84)
(17 84)
46 00
45 12
0 72
5,738,194
Loans receivable, net of allowance for loan losses and deferred loan fees.
The computation of basic and diluted earnings (loss) per share was adjusted retroactively for all periods presented to reflect the 1-for-8 reverse stock split, which
became effective on December 19, 2011.
Total stockholders’ equity divided by common shares outstanding.
Tangible equity divided by common shares outstanding.
(3)
(4)
30
2012
3 24%
27 55%
27 67%
3 40%
3 77%
61 07%
As of and for the Year Ended December 31,
2010
2011
2009
1 01%
14 04%
14 17%
3 27%
3 68%
67 22%
-2 94%
-63 79%
-65 11%
3 15%
3 55%
73 74%
-3 29%
-54 17%
-55 19%
2 28%
2 84%
67 76%
-
-
-
-
11 75%
7 19%
4 60%
6 07%
20 65%
19 85%
19 37%
18 58%
14 95%
14 33%
1 82%
1 32%
1 70%
3 09%
169 81%
18 66%
17 57%
17 36%
16 28%
13 34%
12 50%
2 70%
1 91%
3 25%
4 64%
171 71%
12 32%
12 22%
10 09%
10 91%
7 90%
8 55%
6 38%
5 04%
4 79%
6 55%
102 54%
9 12%
9 07%
6 76%
7 77%
5 82%
6 69%
7 78%
7 76%
3 88%
5 15%
66 19%
2008
-2 64%
-31 56%
-38 60%
2 95%
3 72%
116 60%
-4 05%
8 36%
10 79%
10 70%
9 52%
9 44%
8 93%
8 85%
3 67%
3 17%
1 38%
2 13%
58 23%
SELECTED PERFORMANCE RATIOS:
Return on Average Assets (5)
Return on Average Stockholders’ Equity (6)
Return on Average Tangible Equity (7)
Net Interest Spread (8)
Net Interest Margin (9)
Efficiency Ratio (10)
Dividend Payout Ratio (11)
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 (12)
Non-Performing Assets to Total Assets (13)
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
_______________
(5) Net income (loss) divided by average total assets.
(6) Net income (loss) divided by average stockholders’ equity.
(7) Net income (loss) divided by average tangible equity.
(8)
Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities. Computed on a tax-equivalent basis using an effective
marginal rate of 35 percent.
(9) Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using an effective marginal
rate of 35 percent.
(10) Total non-interest expense divided by the sum of net interest income before provision for credit losses and total non-interest income.
(11) Dividends declared per share divided by basic earnings (loss) per share.
(12) Non-performing loans, excluding loans held for sale, consist of non-accrual loan and loans past due 90 days or more still accruing interest.
(13) Non-performing assets consist of non-performing loans and other real estate owned.
31
Non-GAAP Financial Measures
Return on Average Tangible Equity
Return on average tangible equity is supplemental financial information determined by a method other than in accordance
with U.S. generally accepted accounting principles (“GAAP”). This non-GAAP measure is used by management in the analysis of
Hanmi Financial’s performance. Average tangible equity is calculated by subtracting average goodwill and average other intangible
assets from average stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible
assets from stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation
of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper
understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible
capital. This disclosure should not be viewed as a 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
Average Stockholders' Equity
Less Average Goodwill and Average Other
Intangible Assets
2012
2011
As of December 31,
2010
(In Thousands)
2009
2008
$
328,016
$
200,517
$
137,968
$
225,708
$
323,462
(1,427)
(1,891)
(2,797)
(4,171)
(58,972)
Average Tangible Equity
$
326,589
$
198,626
$
135,171
$
221,537
$
264,490
Return on Average Stockholders' Equity
Effect of Average Goodwill and Average Other
Intangible Assets
Return on Average Tangible Equity
Tangible Book Value Per Share
27 55%
14 04%
-63 79%
-54 17%
-31 56%
0 12%
27.67%
0 13%
14.17%
-1 32%
-65.11%
-1 02%
-55.19%
-7 04%
-38.60%
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
As of December 31,
2012
2011
2010
(In Thousands, Except Per Share Data)
2009
2008
Total Stockholders' Equity
Less Goodwill and Other Intangible Assets
Tangible Equity
Book Value Per Share
Effect of Goodwill and Other Intangible Assets
Tangible Book Value Per Share
$
$
$
$
378,364
(1,335)
$
285,608
(1,533)
$
173,256
(2,233)
$
149,744
(3,382)
$
263,915
(4,950)
377,029
$
284,075
$
171,023
$
146,362
$
258,965
12 01
(0 04)
$
9 07
(0 05)
$
9 20
(0 16)
$
23 44
(0 56)
$
11.97
$
9.02
$
9.04
$
22.88
$
46 00
(0 88)
45.12
32
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion presents management’s analysis of the financial condition and results of operations as of and for the years
ended December 31, 2012, 2011, and 2010. This discussion should be read in conjunction with our Consolidated Financial Statements
and the Notes related thereto presented elsewhere in this Report. See also “Cautionary Note Regarding Forward-Looking Statements.”
CRITICAL ACCOUNTING POLICIES
We have established various accounting policies that govern the application of U.S. generally accepted accounting principles
(“GAAP”) in the preparation of our Consolidated Financial Statements. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts
reported for revenues and expenses. Our financial position and results of operations can be materially affected by these estimates and
assumptions. Critical accounting policies are those policies that are most important to the determination of our financial condition and
results of operations or that require management to make assumptions and estimates that are subjective or complex. Our significant
accounting policies are discussed in the “Notes to Consolidated Financial Statements, Note 2 — Summary of Significant Accounting
Policies.” Management believes that the following policies are critical.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Our allowance for loan losses methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in
establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include
our historical loss experiences on 14 segmented loan pools by type and risk rating, delinquency and charge-off trends, collateral
values, changes in non-performing loans, and other factors. Qualitative factors include the general economic environment in our
markets, delinquency and charge-off trends, and the change in non-performing loans. Concentration of credit, change of lending
management and staff, quality of loan review system, and change in interest rates are other qualitative factors that are considered in
our methodologies. See “Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items,” “Results of
Operations — Provision for Credit Losses” and “Notes to Consolidated Financial Statements, Note 2 — Summary of Significant
Accounting Policies” for additional information on methodologies used to determine the allowance for loan losses and allowance for
off-balance sheet items.
Loan Sales
We normally sell guaranteed portion of certain SBA 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 compensation to a servicer, which is determined by discounting all of the future net cash flows associated
with the contractual rights and obligations of the servicing agreement. The expected future net cash flows are discounted at a rate
equal to the return that would adequately compensate a substitute servicer for performing the servicing. In addition to the anticipated
rate of loan prepayments and discount rates, other assumptions (such as the cost to service the underlying loans, foreclosure costs,
ancillary income and float rates) are also used in determining the value of the loan servicing assets. Loan servicing assets are discussed
in more detail in “Notes to Consolidated Financial Statements, Note 2 — Summary of Significant Accounting Policies” and “Note 5
— Loans” presented elsewhere herein.
We reclassify certain loans to loans held for sale. In such reclassification, we take into consideration a number of factors,
including, but not limited to, the following
possibility of rehabilitation or workout for the near future and long term earning capability as an asset;
number of times the loan was modified;
overall debt coverage ratio;
NPL and/or classified status, non-accrual status, and days delinquent;
whether the debt is on troubled debt restructure status;
the location of the collateral; and
the borrower’s overall financial condition.
The fair value of nonperforming loans held for sale is generally based upon the recent appraisals, quotes, bids or sales
contract prices which approximate the fair value. All loans held for sale are recorded at the lower of cost or fair value.
Investment Securities
The classification and accounting for investment securities are discussed in more detail in “Notes to Consolidated Financial
Statements, Note 2 — Summary of Significant Accounting Policies” and “Note 5 – Investment Securities” presented elsewhere herein.
33
Under FASB ASC 320, “Investment,” investment securities generally must be classified as held-to-maturity, available-for-sale or
trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s
intentions 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 determined by 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 represent 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 review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or
permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the
change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we wi ll be required to
sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.
For debt securities, the classification of OTTI depends on whether we intend to sell the security or if it is more likely than not
that we will be required to sell the security before recovery of its costs basis, and on the nature of the impairment. If we intend to sell a
security or if it is more likely than not that we will be required to sell the security before recovery, an OTTI write-down is recognized
in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell the
security or it is not more likely than not that we will be required to sell the security before recovery, the OTTI write-down is separated
into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is
recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the
present value of cash flows expected to be collected, discounted at the security’s effective interest rate at the date of acquisition. The
cost basis of an other than temporarily impaired security is written down by the amount of impairment recognized in earnings. The
new cost basis is not adjusted for subsequent recoveries in fair value.
The Company had an equity investment of less than five percent in a publicly traded company, Pacific International Bancorp
(“PIB”), and recognized an OTTI of $176,000 and $116,000 in the second and third quarter, respectively, of 2012. We will continue to
monitor the investment for impairment and make appropriate reductions in carrying value when necessary. Other than this OTTI,
management does not believe that there is any investment securities that are deemed other-than-temporarily impaired as of December
31, 2012.
Income Taxes
In accordance with the provisions of FASB ASC 740, the Company periodically reviews its income tax positions based on
tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into
consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing
authorities on similar transactions, if any, and the overall tax environment.
As of December 31, 2012, the Company’s deferred tax assets of $51.0 million were primarily the result of net operating loss
carryforwards, allowance for loan losses, and tax credit carryforwards. For the year ended December 31, 2012, the Company recorded
a net valuation allowance release of $62.6 million based on management’s reassessment of the amount of its deferred tax assets that
are more likely than not to be realized.
The Company’s management considers new evidence, both positive and negative, that could impact management’s view with
regards to future realization of deferred tax assets. As of December 31, 2012, in part because possible sources of taxable income were
available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards, management deter mined
that sufficient positive evidence existed as of December 31, 2012, to conclude that it is more likely than not that deferred taxes were
fully realizable, and therefore, reduced the valuation allowance accordingly.
Income taxes are discussed in more detail in “Notes to Consolidated Financial Statements, Note 2 — Summary of Significant
Accounting Policies” and “Note 11 — Income Taxes” presented elsewhere herein.
34
EXECUTIVE OVERVIEW
For the years ended December 31, 2012, 2011 and 2010, we recognized net income of $90.4 million and $28.1 million and
net loss of $88.0 million, respectively. The increase in net income for the year ended December 31, 2012 as compared to the year
ended December 31, 2011 was primarily attributable to the reversal of the deferred tax asset (“DTA”) valuation allowance, which
contributed an income tax benefit of $47.4 million. The increase in net income for the year ended December 31, 2011 as compared to
the year ended December 31, 2010 was primarily the result of lower levels of provision for credit losses of $12.1 million compared to
$122.5 million in 2010. For the years ended December 31, 2012, 2011 and 2010, our earnings per diluted share was $2.87, $1.38 and a
loss per diluted share of $7.46, respectively.
Subsequent to our annual full-scope examination by the California Department of Financial Institutions (the “DFI”) and the
Federal Reserve Bank (the “FRB”), which commenced in August 2012, the DFI terminated the Memorandum of Understanding on
October 29, 2012 and the FRB terminated the Written Agreement on December 4, 2012. As a result, Hanmi Financial and the Bank
are no longer subject to any regulatory enforcement actions, allowing us to focus on growth and profitability.
Significant financial highlights include
With improvement in new loan production, gross loans increased by $109.8 million, or 5.7 percent, to $2.05 billion as of
December 31, 2012, compared to $1.94 billion as of December 31, 2011. During 2011, gross loans decreased by $292.3
million, or 13.1 percent, compared to $2.23 billion as of December 31, 2010, owing mainly to higher levels of problem
loan sales and charge offs.
Asset quality improved in 2012 as indicated by lower levels of non-performing assets declining to1.32 percent of total
assets as of December 31, 2012, compared to 1.91 percent of total assets as of December 31, 2011. Similarly, delinquent
loans, 30 to 89 days past due and still accruing, declined to $2.4 million, or 0.12 percent of gross loans, at December 31,
2012 from $13.9 million, or 0.72 percent of gross loans, at December 31, 2011. The Bank’s strategy of selling notes
before non-performing assets were moved into foreclosure has allowed us to efficiently reduce them.
Reversal of a $62.6 million DTA valuation allowance contributed an income tax benefit of $47.4 million to net income
of $90.4 million for the year ended December 31, 2012. Our effective tax rate is estimated to be approximately 39% for
2013.
Net interest margin continued to increase year over year. For the year ended December 31, 2012, net interest margin was
3.77 percent, increases of 9 and 22 basis points compared to 3.68 percent and 3.55 percent for the years ended December
31, 2011 and 2010, respectively.
Operating efficiency improved to 61 07 percent for the year ended December 31, 2012, from 67.22 percent for the year
ended the December 31, 2011 and 73.74 percent for the year ended December 31, 2010, reflecting higher revenues and
lower operating costs.
Outlook for fiscal 2013
With strong asset quality and the lifting of the regulatory enforcement requirements, we believe that we are well positioned to
take on the following strategic goals in 2013.
First, we would like to optimize our operating efficiency through strategic cost management and active cross-selling, while
deploying our excess liquidity to quality loan production. This is the basis for our organic growth and profitability in this new normal
environment.
In addition, we would like to increase our marketing and sales competitiveness by continuously emphasizing and rewarding
personalized, relationship-based banking, and recruiting, retaining, and rewarding talented employees. This should enable us to offer
value-added services and products to our customers.
Furthermore, given that our market will continue to evolve and be highly competitive, we will be proactive in exploring all
strategic options available to us.
35
RESULTS OF OPERATIONS
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning
assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix
of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes
in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are affected
principally by changes to interest rates, the demand for such loans, the supply of money available for lending purposes, and other
competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as
federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and
the actions of the Federal Reserve Board.
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. All average balances are daily average balances.
December 31, 2012
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
For the Year Ended
December 31, 2011
Average
Balance
Interest
Income /
Expense
(In Thousands)
Average
Yield /
Rate
December 31, 2010
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
ASSETS
Interest-Earning Assets
Gross Loans, Net of Deferred Loan Fees (1)
Municipal Securities - Taxable
Municipal Securities - Tax Exempt (2)
Obligations of Other U S Government
Agencies
Other Debt Securities
Equity Securities
Federal Funds Sold
Term Federal Funds Sold
Interest-Bearing Deposits in Other Banks
$ 1,993,367
45,213
12,902
$ 108,982
1,796
606
77,053
277,386
31,356
14,178
70,478
164,492
1,372
5,250
818
60
706
422
Total Interest-Earning Assets
2,686,425
120,012
Noninterest-Earning Assets
Cash and Cash Equivalents
Allowance for Loan Losses
Other Assets
Total Noninterest-Earning Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Deposits
Savings
Money Market Checking and NOW
Accounts
Time Deposits of $100,000 or More
Other Time Deposits
FHLB Advances
Other Borrowings
Junior Subordinated Debentures
71,123
(75,914)
110,718
105,927
$ 2,792,352
$ 110,349
529,976
681,173
350,877
3,354
-
82,406
2,152
3,085
7,290
3,350
165
-
2,703
Total Interest-Bearing Liabilities
1,758,135
18,745
Noninterest-Bearing Liabilities
Demand Deposits
Other Liabilities
Total Noninterest-Bearing Liabilities
Total Liabilities
Stockholders' Equity
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
676,707
29,494
706,201
2,464,336
328,016
5 47%
3 97%
4 70%
1 78%
1 89%
2 61%
0 42%
1 00%
0 26%
4 47%
$ 2,114,546
21,740
6,544
$ 117,671
884
332
121,961
295,953
33,573
5,857
38,693
113,829
1,963
6,921
534
27
276
315
2,752,696
128,923
5 56%
4 07%
5 07%
1 61%
2 34%
1 59%
0 46%
0 71%
0 28%
4 68%
$ 2,544,472
3,746
6,909
$ 137,328
189
346
69,112
135,513
37,437
10,346
8,342
166,001
1,952
3,733
532
52
33
468
2,981,878
144,633
68,255
(119,233)
85,989
35,011
67,492
(176,103)
125,240
16,629
$ 2,787,707
$ 2,998,507
1 95%
$ 109,272
2,757
2 52%
$ 119,754
3,439
3,461
13,855
3,885
662
95
2,915
27,630
0 74%
1 52%
1 23%
1 00%
2 09%
3 54%
1 41%
0 58%
1 07%
0 95%
4 92%
-
3 28%
1 07%
465,840
913,643
315,174
66,191
4,551
82,406
1,957,077
600,726
29,387
630,113
2,587,190
200,517
4,936
19,529
6,504
1,366
53
2,811
38,638
464,864
1,069,600
371,046
158,531
2,753
82,406
2,268,954
562,422
29,163
591,585
2,860,539
137,968
$ 2,792,352
$ 2,787,707
$ 2,998,507
NET INTEREST INCOME
$ 101,267
$ 101,293
$ 105,995
COST OF DEPOSITS
NET INTEREST SPREAD (3)
NET INTEREST MARGIN (4)
0.68%
3.40%
3.77%
36
1.00%
3.27%
3.68%
5 40%
5 05%
5 01%
2 82%
2 75%
1 42%
0 50%
0 40%
0 28%
4 85%
2 87%
1 06%
1 83%
1 75%
0 86%
1 93%
3 41%
1 70%
1.33%
3.15%
3.55%
______________
(1)
Loans are net of deferred fees and related direct costs, but exclude the allowance for loan losses. Non-accrual loans are included in the average loan balance.
Loan fees have been included in the calculation of interest income. Loan fees were $1.5 million, $2.0 million and $1.8 million for the years ended December 31,
2012, 2011 and 2010, respectively.
(2) Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.
(3)
(4)
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
Represents net interest income as a percentage of average interest-earning assets.
The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest
rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to
the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount
attributable solely to the change in volume and to the change in rate.
Interest and Dividend Income:
Gross Loans, Net of Deferred Loan Fees
Municipal Securities - Taxable
Municipal Securities - Tax Exempt
Obligations of Other U S Government Agencies
Other Debt Securities
Equity Securities
Federal Funds Sold
Term Federal Funds Sold
Interest-Bearing Deposits in Other Banks
Total Interest and Dividend Income
Interest Expense:
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
FHLB Advances
Other Borrowings
Junior Subordinated Debentures
Total Interest Expense
Change in Net Interest Income
$
$
$
$
$
2012 vs. 2011
Increase (Decrease)
Due to Change In
Rate
Volume
Year Ended December 31,
Total
Volume
(In Thousands)
2011 vs. 2010
Increase (Decrease)
Due to Change In
Rate
Total
$
$
(6,649)
903
266
(540)
(412)
11
32
288
102
(2,040)
9
8
(51)
(1,259)
273
1
142
5
(8,689)
912
274
(591)
(1,671)
284
33
430
107
$
$
(21,995)
739
(19)
1,082
3,828
(58)
(21)
198
(144)
$
2,338
(44)
5
(1,071)
(640)
60
(4)
45
(9)
(19,657)
695
(14)
11
3,188
2
(25)
243
(153)
(5,999)
$
(2,912)
$
(8,911)
$
(16,390)
$
680
$
(15,710)
(12)
1
(3,040)
(31)
(351)
(48)
-
(3,481)
(2,518)
$
$
$
(593)
(377)
(3,525)
(504)
(146)
(47)
(212)
(5,404)
2,492
$
$
$
(605)
(376)
(6,565)
(535)
(497)
(95)
(212)
(8,885)
(26)
$
$
$
(286)
5
(2,626)
(882)
(809)
38
-
(4,560)
(11,830)
$
$
$
(396)
(1,480)
(3,048)
(1,737)
105
4
104
(6,448)
7,128
$
$
$
(682)
(1,475)
(5,674)
(2,619)
(704)
42
104
(11,008)
(4,702)
For the years ended December 31, 2012, 2011 and 2010, net interest income before provision for credit losses on a tax-
equivalent basis was $101.3 million, $101.3 million and $106.0 million, respectively. The net interest spread and net interest margin
for the year ended December 31, 2012 were 3.40 percent and 3.77 percent, respectively, compared to 3.27 percent and 3.68 percent,
respectively, for the year ended December 31, 2011, and 3.15 percent and 3.55 percent, respectively, for the year ended December 31,
2010. Net interest income remained stable for the years ended December 31, 2012 and 2011 due to the decrease in interest income,
which was primarily offset by the decrease in interest expense. The decrease in interest income was due primarily to declines in
average loans outstanding and loan yields, and a decrease in other debt securities yield. This decrease was primarily offset in the
interest expense by lower deposit costs resulting from the replacement of high-cost promotional time deposits with low-cost deposits.
The decrease in net interest income in 2011 as compared to 2010 was primarily due to decreases in average loan outstanding and
investment yields, which was partially offset by higher loan yields and lower deposit costs resulting from the replacement of higher-
cost promotional time deposits with low-cost deposit products.
Average gross loans were $1.99 billion in 2012, as compared with $2.11 billion in 2011 and $2.54 billion in 2010,
representing decreases of 5.7 percent and 16.9 percent in 2012 and 2011, respectively. Average investment securities were $412.6
million in 2012, as compared with $446.2 million in 2011 and $215.3 million in 2010, representing a decrease of 7.5 percent in 2012
and an increase of 107.3 percent in 2011. Average interest-earning assets were $2.69 billion in 2012, as compared with $2.75 billion in
2011 and $2.98 billion in 2010, representing decreases of 2.2 percent and 7.7 percent in 2012 and 2011, respectively. The decrease in
average interest earning assets was a direct result of the proactive disposition of problem loans under the credit quality improvement
strategy and the balance sheet deleveraging strategy during 2012 and 2011. Average interest-bearing liabilities were $1.76 billion in
2012, as compared to $1.96 billion in 2011 and $2.27 billion in 2010, representing decreases of 10.2 percent and 13.7 percent in 2012
and 2011, respectively. Average Federal Home Loan Bank advances were $3.4 million in 2012, as compared with $66.2 million in
2011 and $158.5 million in 2010, representing decreases of 94.9 percent and 58.2 percent in 2012 and 2011, respectively.
The average yield on interest-earning assets decreased by 21 basis points to 4.47 percent in 2012, after a 17 basis point
37
decrease to 4.68 percent in 2011 from 4.85 percent in 2010, due primarily to lower yields on investment securities and loans. The
average yield on gross loans decreased by 9 basis points to 5.47 percent in 2012, after a 16 basis point increase to 5.56 percent in 2011
from 5.40 percent in 2010. The decrease in 2012 was attributable to lower interest rates on new loans resulting from rising competition
in the market, and the increase in 2011 was attributable to a decrease in our overall level of nonaccrual loans. Total loan interest and
fee income decreased by $8.7 million, or 7.4 percent, to $109.0 million in 2012, after a $19.7 million, or 14.3 percent, decrease to
$117.7 million in 2011 from $137.3 million in 2010. The average cost on interest-bearing liabilities decreased by 34 basis points to
1.07 percent in 2012, after a decrease of 29 basis points to 1.41 percent in 2011 from 1.70 percent in 2010. These decreases were
primarily due to a continued shift in funding sources toward lower-cost funds through disciplined deposit pricing while reducing
wholesale funds and rate sensitive deposits.
Provision for Credit Losses
In anticipation of credit risks inherent in our lending business, we set aside allowance for loan losses through charges to
earnings. These charges are made not only for our outstanding loan portfolio, but also for off-balance sheet items, such as
commitments to extend credit, or letters of credit. The charges made for our outstanding loan portfolio are recorded to the allowance
for loan losses, whereas charges for off-balance sheet items are recorded to the reserve for off-balance sheet items, and are presented
as a component of other liabilities.
Due to the continued improvement of our overall credit quality during 2012, net charge-offs decreased by $34.9 million, or
50.8 percent, to $33.8 million for the year ended December 31, 2012 from $68.7 million for the year ended December 31, 2011. Non-
accrual loans decreased by $15.1 million, or 28.8 percent, to $37.3 million for the year ended December 31, 2012 from $52.4 million
for the year ended December 31, 2011. Delinquent loans, 30 to 89 days past due and still accruing, decreased by $11.5 million, or 82.7
percent, to $2.4 million for the year ended December 31, 2012 from $13.9 million for the year ended December 31, 2011. All other
credit metrics also experienced improvements as the quality of the loan portfolio improved. Therefore, provision for credit losses was
$6.0 million for the year ended December 31, 2012, compared to $12.1 million for the year ended December 31, 2011. See “Non-
Performing Assets” and “Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” for further details.
For the year ended December 31, 2011, the provision for credit losses was $12.1 million, compared to $122.5 million for the
year ended December 31, 2010. The decrease in the provision for credit losses was attributable to a decrease in problem loans and an
improvement in asset quality through aggressive management of our problem assets. Net charge-offs decreased by $53.2 million, or
43.7 percent, from $121.9 million for the year ended December 31, 2010 to $68.7 million for the year ended December 31, 2011. Non-
performing loans decreased from $142.4 million, or 6.38 percent of total gross loans, as of December 31, 2010 to $52.4 million, or 2.7
percent of total gross loans, as of December 31, 2011.
Non-Interest Income
The following table sets forth the various components of non-interest income for the years indicated
Service Charges on Deposit Accounts
Insurance Commissions
Remittance Fees
Trade Finance Fees
Other Service Charges and Fees
Bank-Owned Life Insurance Income
Gain on Sales of SBA Loans Guaranteed Portion
Net Loss on Sales of Other Loans
Net Gain on Sales of Investment Securities
Net Impairment Loss Recognized in Earnings
Other Operating Income
Total Non-Interest Income
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
12,146
4,857
1,976
1,140
1,499
1,110
9,923
(9,481)
1,396
(292)
538
$
12,826
4,500
1,925
1,305
1,447
939
4,543
(6,020)
1,635
-
751
$
14,049
4,695
1,968
1,523
1,516
942
514
-
122
(790)
867
$
24,812
$
23,851
$
25,406
For the year ended December 31, 2012, non-interest income was $24.8 million, an increase of $961,000, or 4.0 percent, from
$23.9 million for the year ended December 31, 2011. The increase in non-interest income for 2012 was primarily attributable to a gain
from selling the guaranteed portions of SBA loans, partially offset by a net loss recognized from selling other loans. Gain from selling
the guaranteed portions of SBA loans for the year ended December 31, 2012 totaled $9.9 million, or 40.0 percent of total non-interest
income, a $5.4 million increase from $4.5 million for the year ended December 31, 2011. However, the net loss on sales of other loans
increased to $9.5 million for the year ended December 31, 2012 from $6.0 million for the year ended December 31, 2011. This
increase was a result of management’s effort to reduce problem and non-performing assets. The other large source of non-interest
38
income for the year ended December 31, 2012 was service charges on deposit accounts, which represented 49.0 percent of total non-
interest income for the year ended December 31, 2012. Service charge income decreased to $12.1 million for the year ended
December 31, 2012, compared with $12.8 million for the year ended December 31, 2011, due mainly to a decrease in number of non-
interest bearing demand deposit accounts.
For the year ended December 31, 2011, non-interest income was $23.9 million, a decrease of $1.6 million, or 6.1 percent,
from $25.4 million for the year ended December 31, 2010. This decrease was primarily attributable to a decrease in service charges on
deposit accounts, and an increase in net loss on sales of other loans, partially offset by an increase in gain on sales of guaranteed
portions of SBA loans and an increase in net gain recognized from the sale of investment securities. The service charges on deposit
accounts decreased by $1.2 million, or 8.7 percent, to $12.8 million for the year ended December 31, 2011 compared to $14.0 million
for the year ended December 31, 2010, due primarily to the decreased deposit portfolio driven by our balance-sheet deleveraging
strategy. The net loss on sale of loans was $1.5 million compared to the net gain of $514,000 for the year ended December 31, 2010,
as a result of our effort to enhance our credit quality through note sales. Impaired loans of $135.0 million and $119.2 million were sold
during 2011 and 2010, respectively. The net gain from the sales of investment securities increased by $1.5 million for the year ended
December 31, 2011 to $1.6 million compared to $122,000 for the year ended December 31, 2010. The aforementioned higher level of
sales transactions of loans and investment securities in 2011 was a direct result of our balance-sheet deleveraging strategy. The
additional liquidity from such sales of assets allowed us to reduce wholesale funds.
Non-Interest Expense
The following table sets forth the breakdown of non-interest expense for the years indicated
Salaries and Employee Benefits
Occupancy and Equipment
Deposit Insurance Premiums and Regulatory Assessments
Data Processing
Other Real Estate Owned Expense
Professional Fees
Directors and Officers Liability Insurance
Supplies and Communications
Advertising and Promotion
Loan-Related Expense
Amortization of Other Intangible Assets
Expense related to Unconsummated Capital Offerings
Other Operating Expenses
Total Non-Interest Expense
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
$
36,931
10,424
4,431
4,941
344
4,694
1,186
2,370
3,876
527
198
-
6,939
76,861
$
$
35,465
10,353
6,630
5,601
1,620
4,187
2,940
2,323
2,993
827
700
2,220
8,189
84,048
$
$
36,730
10,773
10,756
5,931
10,679
3,521
2,865
2,302
2,394
1,147
1,149
-
8,558
96,805
For the year ended December 31, 2012, non-interest expense was $76.9 million, a decrease of $7.1 million, or 8.5 percent,
from $84.0 million for the year ended December 31, 2011. This decrease was due primarily to a non-recurring expense of $2.2 million
related to an unconsummated capital raise in 2011, and reductions in deposit insurance premiums, directors and officers liability
insurance and other real estate owned expense. Reflecting improved overall financial conditions, premiums for deposit insurance
premium and regulatory assessments decreased by $2.2 million, or 33.2 percent, to $4.4 million, for the year ended December 31,
2012, compared to $6.6 million for the year ended December 31, 2011. For the same reason, along with a change in new insurance
carriers, directors and officers liability insurance also decreased by $1.7 million, or 58.6 percent, to $1.2 million for the year ended
December 31, 2012, compared to $2.9 million for the year ended December 31, 2011. Salaries and employee benefits, however,
increased by $1.4 million, or 4.0 percent, to $36.9 million for the year ended December 31, 2012, compared to $35.5 million for the
year ended December 31, 2011, due mainly to increased bonus provisions and incentive awards during 2012. Other real estate owned
expenses decreased by $1.3 million, or 78.8 percent, to $344,000 for the year ended December 31, 2012, compared to $1.6 million for
the year ended December 31, 2011, due mainly to our reduction of OREO properties.
For the year ended December 31, 2011, non-interest expense was $84.0 million, a decrease of $12.8 million, or 13.2 percent,
from $96.8 million for the year ended December 31, 2010. The decrease was primarily due to the decreases in OREO expense and
deposit insurance premiums and regulatory assessments, partially offset by the expense incurred in relation to an unconsummated
capital raise in 2011. OREO expense decreased by $9.1 million to $1.6 million for the year ended December 31, 2011 compared to
$10.7 million for the year ended December 31, 2010, due mainly to the absence of $8.7 million valuation allowance charged during
the prior year and a decrease in maintenance costs related to foreclosed assets. The deposit insurance premiums and regulatory
assessments decreased by $4.1 million, or 38.4 percent, to $6.6 million compared to $10.8 million for the year ended December 31,
2010, due primarily to the lower assessment rates for the FDIC insurance on deposits. The average assessment rates decreased by 16
basis points to 26 basis points for the year ended December 31, 2011 from 41 basis points for the year ended December 31, 2010,
39
resulting from the improvement in risk categories of the Bank and the Dodd-Frank Act’s changes to FDIC assessment systems in early
2011.
Income Taxes
As of December 31, 2012, the Company’s net deferred tax assets of $51.0 million were primarily the result of net operating
loss carryforwards, allowance for loan losses, and tax credit carryforwards. For the year ended December 31, 2012, the Company
recorded a net valuation allowance release of $62.6 million based on management’s reassessment of the amount of its deferred tax
assets that are more likely than not to be realized. For the year ended December 31, 2012, total income tax benefit was $47.4 million,
resulting in an effective rate of (110.14)%.
The Company’s management considers new evidence, both positive and negative, that could impact management’s view with
regards to future realization of deferred tax assets. As of December 31, 2012, in part because possible sources of taxable income were
available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards, management deter mined
that sufficient positive evidence existed as of December 31, 2012, to conclude that it is more likely than not that deferred taxes were
fully realizable, and therefore, reduced the valuation allowance accordingly.
FINANCIAL CONDITION
Investment Portfolio
Investment securities are classified as held to maturity or available for sale in accordance with GAAP. Those securities that
we have the ability and the intent to hold to maturity are classified as “held to maturity.” All other securities are classified as
“available for sale.” There were no trading securities as of December 31, 2012, 2011 and 2010. Securities classified as held to
maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available for sale securities are stated
at fair value. The composition of our investment portfolio reflects our investment strategy of providing a relatively stable source of
interest income while maintaining an appropriate level of liquidity. Our investment portfolio also provides a source of liquidity by
pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.
As of December 31, 2012, our investment portfolio was composed primarily of mortgage-backed securities, U.S. government
agency securities, and collateralized mortgage obligations. Investment securities available for sale were 100.00 percent, 86.5 percent
and 99.8 percent of the total investment portfolio as of December 31, 2012, 2011 and 2010, respectively. Most of the investment
securities 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 December 31, 2012, 2011 and 2010.
During 2012, all held-to-maturity securities were reclassified to available-for-sale securities. As more than 95 percent of the
reclassified securities were municipal bonds, the Company decided to reclassify all held-to-maturity securities to available-for-sale
securities to be more proactive under the current municipal market with a rising default risk. These securities carried a fair value of
$52.3 million and an amortized cost of $50.3 million at December 31, 2012.
As of December 31, 2012, securities available for sale were $451.1 million, or 15.6 percent of total assets, compared to
$381.9 million, or 13.9 percent of total assets, as of December 31, 2011. For the year ended December 31, 2012, our total investment
portfolio increased by $9.5 million, or 2.2 percent, to $451.1 million from $441.6 million as of December 31, 2011, due to purchases
of $267.9 million of investment securities available for sale, offset mainly by paydowns, sales and scheduled amortization.
40
The following table summarizes the amortized cost, fair value and distribution of investment securities as of the dates
indicated
2012
Amortized
Cost
Fair
Value
As of December 31,
2011
Amortized
Cost
Fair
Value
(In Thousands)
2010
Amortized
Cost
Fair
Value
$
$
$
Securities Held to Maturity:
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Mortgage-Backed Securities (1)
U S Government Agency Securities
Total Securities Held to Maturity
Securities Available for Sale:
Mortgage-Backed Securities (1)
Collateralized Mortgage Obligations (1)
U S Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
SBA Loan Pools Securities
Asset-Backed Securities
Other Securities
Equity Securities
Total Securities Available for Sale
$
-
-
-
-
-
$
$
-
-
-
-
-
$
$
9,815
38,797
3,137
7,993
59,742
$
$
9,867
38,392
3,128
7,976
59,363
$
$
696
-
-
149
845
$
$
157,185
98,821
92,990
12,209
44,248
20,470
14,104
-
3,331
354
443,712
$
160,326
100,487
93,118
12,812
46,142
20,400
14,026
-
3,357
392
451,060
110,433
161,214
72,385
5,901
3,389
20,460
-
-
3,318
647
377,747
$
113,005
162,837
72,548
6,138
3,482
19,836
-
-
3,335
681
381,862
$
108,436
139,053
114,066
18,032
4,388
20,449
-
7,115
3,305
647
415,491
$
$
696
-
-
151
847
109,842
137,193
113,334
16,603
4,425
20,205
-
7,384
3,259
873
413,118
_______________
(1) Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
The following table summarizes the contractual maturity schedule for investment securities, at amortized cost, and their
weighted-average yield as of December 31, 2012
Within One Year
Yield
Amount
After One Year But
Within Five Years
Yield
Amount
After Five Years But
Within Ten Years
Yield
Amount
After Ten Years
Yield
Amount
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Municipal Bonds-Tax Exempt (1)
Municipal Bonds-Taxable
Corporate Bonds
SBA Loan Pools Securities
Other Securities
Equity Securities
Total
$ 239
8,530
-
-
-
-
-
3,331
-
$ 12,100
3 60%
0 85%
-
-
-
-
-
1 28%
-
1.02%
$ 93,536
64,464
6,039
698
1,050
20,470
4,940
-
-
$ 191,197
(In Thousands)
1 93%
1 73%
1 45%
7 06%
3 47%
1 81%
1 38%
-
-
1.85%
$ 49,550
22,944
69,976
5,186
26,893
-
-
-
-
$ 174,549
2 06%
1 79%
1 97%
2 86%
4 00%
-
-
-
-
2.31%
$ 13,860
2,883
16,975
6,325
16,305
-
9,164
-
354
$ 65,866
2 86%
2 47%
1 89%
3 63%
4 32%
-
1 85%
-
-
2.87%
_______________
(1)
The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35%.
41
The amortized cost and estimated fair value of investment securities as of December 31, 2012, by contractual maturity, are
shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042,
expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Within One Year
Over One Year Through Five Years
Over Five Years Through Ten Years
Over Ten Years
Mortgage-Backed Securities
Collateralized Mortgage Obligations
SBA Loans Pool Securities
Equity Securities
Total
Available for Sale
Amortized
Cost
Estimated
Fair Value
(In Thousands)
$
$
-
28,257
105,386
39,605
157,185
98,821
14,104
354
443,712
$
$
-
28,342
106,787
40,700
160,326
100,487
14,026
392
451,060
We periodically evaluate our investments for other-than-temporary impairment (“OTTI”). The Company had an equity
security with a carrying value of $296,000 at December 31, 2012. During 2012, the issuer’s financial condition had deteriorated, and it
was determined that the investment value is other-than-temporarily impaired. Based on the closing prices of the shares at
September 30, 2012 and June 30, 2012, we recorded OTTI charges of $176,000 and $116,000, respectively, to write down the
investment value to its fair value. As such, for the year ended December 31, 2012, the total OTTI charge on this equity security was
$292,000. During the fourth quarter of 2012, there was no OTTI on this equity security due to the improved closing price of the shares
being higher than the book value.
Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the
number of 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, 2012 and December 31, 2011
Investment Securities Available for Sale
December 31, 2012:
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Municipal Bonds-Taxable
Corporate Bonds
SBA Loans Pool Securities
Other Securities
Equity Securities
Total
December 31, 2011:
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Corporate Bonds
Other Securities
Equity Securities
Total
Less Than 12 Months
Gross
Unrealized
Loss
Estimated
Fair
Value
Number
of
Securities
Holding Period
12 Months or More
Gross
Unrealized
Loss
Estimated
Fair
Value
(In Thousands Except Number of Securities)
Number
of
Securities
Total
Gross
Unrealized
Loss
Estimated
Fair
Value
Number
of
Securities
$ 186
109
94
126
-
82
1
40
$ 638
$ 1
260
5
41
1
51
$ 359
$ 28,354
14,344
26,894
4,587
-
11,004
12
96
$ 85,291
$ 3,076
36,751
6,061
4,445
12
85
$ 50,430
10
5
9
4
-
3
1
1
33
1
16
2
2
1
1
23
$ -
-
-
9
246
-
46
-
$ 301
$ -
-
-
582
41
-
$ 623
$ -
-
-
1,964
10,738
-
953
-
$ 13,655
$ -
-
-
15,391
959
-
$ 16,350
-
-
-
3
3
-
1
-
7
-
-
-
4
1
-
5
$ 186
109
94
135
246
82
47
40
$ 939
$ 1
260
5
623
42
51
$ 982
$ 28,354
14,344
26,894
6,551
10,738
11,004
965
96
$ 98,946
$ 3,076
36,751
6,061
19,836
971
85
$ 66,780
10
5
9
7
3
3
2
1
40
1
16
2
6
2
1
28
The impairment losses described previously are not included in the above table. All individual securities that have been in a
continuous unrealized loss position for 12 months or longer as of December 31, 2012 and 2011 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 as of December 31, 2012. These securities have fluctuated in value
since their purchase dates as market interest rates have fluctuated.
The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the
investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are
not considered other-than-temporarily impaired, as the bonds are rated investment grade and there are no credit quality concerns with
the issuers. Interest payments have been made as scheduled, and management believes that this will continue in the future and that the
42
bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related
to an equity security, that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2012 and
December 31, 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of December 31, 2012 and
December 31, 2011 are warranted.
Investment securities available for sale with carrying values of $18.2 million and $45.8 million as of December 31, 2012 and
December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or
permitted by law.
Loan Portfolio
Real estate loans are extended to finance the purchase and/or improvement of commercial real estate and residential property.
The properties generally are investor-owned, but may be for user-owned purposes. Underwriting guidelines include, among other
things, an appraisal in conformity with the USPAP, limitations on loan-to-value ratios, and minimum cash flow requirements to
service debt. The majority of the properties taken as collateral are located in Southern California. Commercial loans include term
loans and revolving lines of credit. Term loans typically have a maturity of three to seven years and are extended to finance the
purchase of business entities, owner-occupied commercial property, business equipment, leasehold improvements or for permanent
working capital. SBA guaranteed loans usually have a longer maturity (5 to 20 years). Lines of credit, in general, are extended on an
annual basis to businesses that need temporary working capital and/or import/export financing. These borrowers are well diversified as
to industry, location and their current and target markets.
The following table sets forth the amount of total loans outstanding in each category as of the dates indicated, excluding
loans held for sale
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term
Commercial Lines of Credit
SBA Loans
International Loans
Total Commercial and Industrial Loans
Consumer Loans (1)
Total Gross Loans
_______________
(1)
Consumer loans include home equity lines of credit.
2012
2011
As of December 31,
2010
(In Thousands)
2009
2008
$
$
787,094
-
101,778
888,872
884,364
56,121
148,306
34,221
1,123,012
36,676
2,048,560
$
$
663,023
33,976
52,921
749,920
944,836
55,770
116,192
28,676
1,145,474
43,346
1,938,740
$
$
729,222
60,995
62,645
852,862
1,118,999
59,056
105,688
44,167
1,327,910
50,300
2,231,072
$
$
839,598
126,350
77,149
1,043,097
1,420,034
101,159
134,521
53,488
1,709,202
63,303
2,815,602
$
$
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
As of December 31, 2012 and 2011, loans receivable (excluding loans held for sale), net of deferred loan costs and allowance
for loan losses, totaled $1.99 billion and $1.85 billion, respectively, representing an increase of $137.0 million, or 7.4 percent. Total
gross loans increased by $109.8 million, or 5.7 percent, to $2.05 billion as of December 31, 2012, from $1.94 billion as of
December 31, 2011.
The increase was due mainly to a $124.1 million increase in commercial property, a $48.9 million increase in residential
property, and a $32.1 million increase in SBA loans, partially offset by a $60.5 million decrease in commercial term loans and a $34.0
million decrease in construction loans for the year ended December 31, 2012. The increase in commercial property loans was due to
$222.5 million new loans and $15.2 million purchases, partially offset by $35.5 million loans transferred to loans held for sale, $8.5
million charge-offs, and $69.7 million net amortization and payoffs. The increase in residential property was mainly due to $67.6
million purchases, partially offset by $2.2 million loans transferred to loans held for sale and $16.1 million net amortization and
payoffs. The increase in SBA loans was due to $38.5 million new loans, partially offset by $1.2 million loans transferred to loans held
for sale, $1.8 million charge-offs, and $3.4 million net amortization and payoffs. The decrease in commercial term loans was due to
$202.5 million net amortization and payoffs, $46.4 million loans transferred to loans held for sale, and $23.9 million charge-offs,
partially offset by $211.5 million new loans. The decrease in constructions was due to $22.8 million net amortization and payoffs,
$9.3 million loans transferred to loans held for sale, and $2.0 million charge-offs. As of December 31, 2012, we did not have any
construction loan.
43
The following table sets forth the percentage distribution of loans in each category as of the dates indicated
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term
Commercial Lines of Credit
SBA Loans
International Loans
Total Commercial and Industrial Loans
Consumer Loans
Total Gross Loans
2012
2011
As of December 31,
2010
2009
2008
38 4%
0 0%
5 0%
43 4%
43 2%
2 7%
7 2%
1 7%
54 8%
1 8%
100.0%
34 2%
1 8%
2 7%
38 7%
48 7%
2 9%
6 0%
1 5%
59 1%
2 2%
100.0%
32 7%
2 7%
2 8%
38 2%
50 2%
2 6%
4 7%
2 0%
59 5%
2 3%
100.0%
29 9%
4 5%
2 7%
37 1%
50 4%
3 6%
4 8%
1 9%
60 7%
2 2%
100.0%
27 2%
5 4%
2 8%
35 4%
48 5%
6 5%
4 2%
2 9%
62 1%
2 5%
100.0%
The following table shows the distribution of undisbursed loan commitments as of the dates indicated
2012
2011
As of December 31,
2010
(In Thousands)
2009
2008
Commitments to Extend Credit
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
$
$
182,746
10,588
6,092
13,459
212,885
$
$
158,748
12,742
9,298
15,937
196,725
$
$
178,424
15,226
11,899
24,649
230,198
$
$
262,821
17,225
13,544
23,408
316,998
$
$
386,785
47,289
29,177
16,912
480,163
The table below shows the maturity distribution and repricing intervals of outstanding loans as of December 31, 2012. 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 $38.1 million.
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term
Commercial Lines of Credit
SBA Loans
International Loans
Total Commercial and Industrial Loans
Consumer Loans
Total Gross Loans
Loans With Predetermined Interest Rates
Loans With Variable Interest Rates
Within
One Year
$
$
$
$
415,398
-
80,439
495,837
605,277
55,910
139,195
34,221
834,603
36,388
1,366,828
232,356
1,134,472
After One
Year But
Within
Five Years
After
Five Years
Total
(In Thousands)
$
$
$
$
360,935
-
19,856
380,791
270,213
191
8,698
-
279,102
288
660,181
351,342
308,839
$
$
$
$
10,761
-
1,483
12,244
8,874
20
413
-
9,307
-
21,551
20,497
1,054
$
$
$
$
787,094
-
101,778
888,872
884,364
56,121
148,306
34,221
1,123,012
36,676
2,048,560
604,195
1,444,365
As of December 31, 2012, 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
Balance as of
Percentage of Total
December 31, 2012
Gross Loans Outstanding
Lessors of Non-Residential Buildings
Accommodation/Hospitality
Gasoline Stations
(In Thousands)
$
451,452
330,720
276,042
22 0%
16 1%
13 5%
There was no other concentration of loans to any one type of industry exceeding 10 percent of total gross loans outstanding.
44
Non-Performing Assets
Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due and still accruing interest.
Non-performing assets consist of non-performing loans and OREO. Loans are placed on non-accrual status when, in the opinion of
management, the full timely collection of principal or interest is in doubt. These loans may or may not be collateralized, but collection
efforts are continuously pursued. Generally, the accrual of interest is discontinued when principal or interest payments become more
than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. 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
collectability 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. OREO consists of properties acquired by foreclosure or similar
means that management intends to offer for sale.
Except for non-performing loans set forth below, management is not aware of any loans as of December 31, 2012 and 2011
for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their
present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future
date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values,
increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s
ability to pay.
The following table provides information with respect to the components of non-performing assets as of December 31 for the
years indicated
Non-Performing Loans:
Commercial Property
Construction
Residential Property
Commercial and Industrial Loans
Consumer Loans
Total Non-Accrual Loans
Loans 90 Days or More Past Due and Still Accruing (as to
Principal or Interest):
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 (1) (2)
Other Real Estate Owned
Total Non-Performing Assets
Performing Troubled Debt Restructured Loans
Non-Performing Loans as a Percentage of Total Gross
Loans
$
$
$
Non-Performing Assets as a Percentage of Total Assets
_______________
(1)
(2) Exclude loans held for sale.
2012
2011
As of December 31,
2010
(In Thousands)
2009
2008
$
$
$
3,176
-
1,270
31,074
1,759
37,279
-
-
-
37,279
774
38,053
16,980
1 82%
1 32%
4,820
8,310
2,745
36,342
161
52,378
-
-
-
52,378
180
52,558
28,375
2 70%
1 91%
$
$
$
45,677
17,691
1,925
76,097
1,047
142,437
-
-
-
142,437
4,089
146,526
47,395
6 38%
5 04%
$
$
$
58,927
15,185
3,335
140,931
622
219,000
-
67
67
219,067
26,306
245,373
-
7 78%
7 76%
$
$
$
8,160
38,163
1,350
73,007
143
120,823
989
86
1,075
121,898
823
122,721
-
3 67%
3 17%
Include troubled debt restructured non-performing loans of $18.8 million, $23.2 million and $27.0 million as of December 31, 2012, 2011 and 2010, respectively.
Loans on non-accrual status, excluding loans held for sale, totaled $37.3 million as of December 31, 2012, compared to $52.4
million as of December 31, 2011, representing a 28.8 percent decrease. Delinquent loans (defined as 30 days or more past due),
excluding loans held for sale, were $16.5 million as of December 31, 2012, compared to $35.2 million as of December 31, 2011,
representing a 53.1 percent decrease. Of the $16.5 million delinquent loans as of December 31, 2012, $14.1 million was included in
non-performing loans. The $21.2 million of the $35.2 million delinquent loans as of December 31, 2011 was included in non-
performing loans. During the year ended December 31, 2012, loans totaling $69.4 million were placed on non-accrual status. The
additions to nonaccrual loans were offset by $38.2 million in charge-offs, $23.5 million transferred to loans held for sale, $16.0
million in principal paydowns and payoffs, $6.0 million that were transferred back to accrual status, and $0.7 million that were
transferred to OREO.
The ratio of non-performing loans to total gross loans also decreased to 1.82 percent at December 31, 2012 from 2.70 percent
at December 31, 2011 due primarily to the decrease in non-accrual loans. During the same period, our allowance for loan losses
45
decreased $26.6 million, or 29.6 percent, to $63.3 million from $89.9 million. Of the $37.3 million non-performing loans,
approximately $29.2 million were impaired based on the definition contained in FASB ASC 310, “Receivables,” which resulted in
aggregate impairment reserve of $4.4 million as of December 31, 2012. We calculate our allowance for the collateral-dependent loans
as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals les s estimated
costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the
time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a
quarterly basis and adjust the allowance accordingly.
As of December 31, 2012, other real estate owned consisted of two properties located in Illinois and Virginia with a
combined carrying value of $774,000 with no valuation adjustment. For the year ended December 31, 2012, six properties were
transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $3.1 million, and a valuation
adjustment of $433,000 was recorded. As of December 31, 2011, there was one real estate owned property, located in Colorado, with
a net carrying value of $180,000.
We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value
of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price
or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than
the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific
allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly migration analysis when
determining the amount of the allowance for loan losses required for the period.
The following table provides information on impaired loans, disaggregated by loan class as of the dates indicated
December 31, 2012:
Real Estate Loans
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total Gross Loans
December 31, 2011:
Real Estate Loans
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total Gross Loans
Recorded
Investment
Unpaid
Principal
Balance
With No
Related
Allowance
Recorded
With an
Allowance
Recorded
(In Thousands)
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
$
2,930
2,097
527
-
3,265
14,532
22,050
1,521
6,170
-
1,652
$
3,024
2,307
527
-
3,308
15,515
23,221
1,704
10,244
-
1,711
$
2,930
2,097
-
-
1,866
6,826
9,520
848
4,294
-
449
$
-
-
527
-
1,399
7,706
12,530
673
1,876
-
1,203
$
-
-
67
-
94
2,144
2,319
230
762
-
615
$
2,357
2,140
835
6,012
3,268
14,160
21,894
1,688
7,173
-
1,205
$
54,744
$
61,561
$
28,830
$
25,914
$
6,231
$
60,732
$
$
$
1,260
3,178
14,773
14,120
5,368
16,035
53,159
1,431
11,619
-
746
$
1,260
3,210
14,823
14,120
5,408
16,559
54,156
1,554
12,971
-
788
$
1,100
-
1,131
14,120
3,208
244
14,990
715
9,445
-
511
$
160
3,178
13,642
-
2,160
15,791
38,169
716
2,174
-
235
$
126
360
3,004
-
128
10,793
7,062
716
1,167
-
26
$
105
16,910
14,850
14,353
5,399
15,685
51,977
1,590
12,658
-
832
$
121,689
$
124,849
$
45,464
$
76,225
$
23,382
$
134,359
$
136
179
43
207
164
821
1,723
64
1,131
-
73
4,541
-
78
907
1,077
279
1,043
3,652
82
1,186
-
44
8,348
The following is a summary of interest foregone on impaired loans for the periods indicated
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms
Less: Interest Income Recognized on Impaired Loans
Interest Foregone on Impaired Loans
46
2012
Year Ended December 31,
2011
(In Thousands)
2010
$
$
5,887
(4,541)
1,346
$
$
9,192
(8,348)
844
$
$
20,848
(11,473)
9,375
For the year ended December 31, 2012, we restructured monthly payments for 59 loans, with a net carrying value of $15.0
million at the time of modification, which we subsequently classified as troubled debt restructured loans. Temporary payment
structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest
due monthly, and/or allowing for interest only monthly payments for six months or less. As of December 31, 2012, troubled debt
restructurings on accrual status totaled $17.0 million, all of which were temporary interest rate and payment reductions and extensions
of maturity, and a $1.5 million reserve relating to these loans is included in the allowance for loan losses. For the restructured loans on
accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the
borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the
revised terms is probable. As of December 31, 2012, restructured loans on non-accrual status totaled $18.8 million, and a $2.1 million
reserve relating to these loans is included in the allowance for loan losses.
For the year ended December 31, 2011, we restructured monthly payments on 98 loans, with a net carrying value of
$42.1million at the time of modification. As of December 31, 2011, restructured loans on accrual status totaled $28.4 million, all of
which were temporary interest rate and payment reductions, and an $8.0 million reserve relating to these loans is included in the
allowance for loan losses. As of December 31, 2011, restructured loans on non-accrual status totaled $23.2 million, and a $6.3 million
reserve relating to these loans is included in the allowance for loan losses.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is
based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for
general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.
Risk factor calculations are based on eight-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent four
quarters. As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis.
To determine general reserve requirements, existing loans are divided into 11 general loan pools of risk-rated loans as well as
3 homogenous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade to determine
risk factors for potential loss inherent in the current outstanding loan portfolio.
Specific reserves are allocated for loans deemed “impaired.” A loan is “impaired” when it is probable that a creditor will be
unable to collect all amounts due, including principal and interest, according to the contractual terms and schedules of the loan
agreement. The loans identified as impaired are measured using one of the three methods of valuations (1) the present value of
expected future cash flows discounted at the loan’s effective interest rate, (2) the fair market value of the collateral if the loan is
collateral dependent, or (3) the loan’s observable market price.
When determining the appropriate level for allowance for loan losses, management considers qualitative adjustments for any
factors that are likely to cause estimated credit losses associated with the Bank’s current portfolio to differ from historical loss
experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations,
and problem loan trends.
To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is
utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss
migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with
corresponding basis points for qualitative adjustments.
The following table reflects our allocation of allowance for loan and lease losses by loan category as well as the loans
receivable for each loan type
As of December 31,
2012
2011
2010
2009
2008
Allowance
Amount
Loan
Receivable
Allowance
Amount
Loan
Receivable
Allowance
Amount
Loan
Receivable
Allowance
Amount
Loan
Receivable
Allowance
Amount
Loan
Receivable
(In Thousands)
$ 17,109
-
1,071
18,180
41,928
2,280
917
$ 787,094
-
101,778
888,872
1,123,012
36,676
-
$ 17,129
1,403
1,105
19,637
66,005
2,243
2,051
$ 663,023
33,976
52,921
749,920
1,145,474
43,346
-
$ 26,248
5,606
911
32,765
108,986
2,077
2,231
$ 729,222
60,995
62,645
852,862
1,327,910
50,300
-
$ 19,149
9,043
997
29,189
110,678
2,690
2,439
$ 839,598
126,350
77,149
1,043,097
1,709,202
63,303
-
$ 5,587
4,102
449
10,138
58,866
1,586
396
$ 908,970
178,783
92,361
1,180,114
2,062,322
83,525
-
Real Estate Loans
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans
Consumer Loans
Unallocated
Total
$ 63,305
$ 2,048,560
$ 89,936
$ 1,938,740
$ 146,059
$ 2,231,072
$ 144,996
$ 2,815,602
$ 70,986
$ 3,325,961
47
The following table sets forth certain information regarding our allowance for loan losses and allowance for off-balance sheet
items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to loan
pool and grade as well as actual current commitment usage figures by loan type to existing contingent liabilities.
Allowance for Loan Losses:
Balance at Beginning of Year
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
2012
As of and for the Year Ended December 31,
2010
2011
(In Thousands)
2009
2008
$
89,936
$
146,059
$
144,996
$
70,986
$
43,61
11,382
25,897
948
38,227
583
3,758
98
4,439
33,788
7,157
63,305
2,981
(1,157)
1,824
1 70%
1 65%
3 18%
3 09%
53 37%
472 10%
169 81%
$
$
$
18,539
58,721
1,392
78,652
2,794
7,101
98
9,993
68,659
12,536
89,936
3,417
436
2,981
3 25%
3 54%
4 25%
4 64%
76 34%
547 69%
171 71%
$
$
$
33,216
97,340
1,267
131,823
3,131
6,623
177
9,931
121,892
122,955
146,059
3,876
459
3,417
4 79%
5 46%
5 74%
6 55%
83 45%
99 14%
102 54%
$
$
$
27,262
95,768
2,350
125,380
5
2,650
128
2,783
122,597
196,607
144,996
4,096
220
3,876
3 88%
4 35%
4 59%
5 14%
84 55%
62 36%
66 19%
$
$
$
15,00
31,91
1,23
48,15
1,97
20
2,18
45,97
73,34
70,98
1,76
(2,33
4,09
1 38
1 37
2 13
2 11
64 76
62 68
58 23
$
$
$
$
$
$
1,993,367
2,048,560
37,279
$
$
$
2,114,546
1,938,740
52,378
$
$
$
2,545,408
2,231,072
142,437
$
$
$
3,158,624
2,820,612
219,067
$
$
$
3,334,00
3,363,37
121,89
The allowance for loan losses decreased by $26.6 million, or 29.6 percent, to $63.3 million at December 31, 2012 as
compared to $89.9 million at December 31, 2011, which decreased by $56.1 million, or 38.4 percent, as compared to $146.1 million at
December 31, 2010. The allowance for loan losses as a percentage of total gross loans decreased to 3.09 percent as of December 31,
2012 compared to 4.64 percent as of December 31, 2011 and 6.55 percent as of December 31, 2010. The provision for credit losses
decreased by $5.4 million, or 42.9 percent, to $7.2 million for the year ended December 31, 2012, and decreased by $110.4 million, or
89.8 percent, to $12.5 million for the year ended December 31, 2011, as compared to $123.0 million at December 31, 2010.
The decrease in the allowance for loan losses as of December 31, 2012 was due primarily to decreases in historical loss rates
and classified assets. Due to these factors, general reserves decreased by $12.7 million, or 30.4 percent, to $29.1 million as of
December 31, 2012 as compared to $41.8 million at December 31, 2011. However, total qualitative reserves increased by $4.4 million,
or 19.3 percent, to $27.0 million as of December 31, 2012 as compared to $22.6 million as of December 31, 2011, due mainly to the
continuous uncertainty in the economic condition and high levels of competition, legal and regulations factors.
Total impaired loans, excluding loans held for sale, decreased by $66.9 million, or 50.0 percent, to $54.7 million as of
December 31, 2012 as compared to $121.7 million at December 31, 2011. Accordingly, specific reserve allocations associated with
impaired loans decreased by $17.1 million, or 73.4 percent, to $6.2 million as of December 31, 2012 as compared to $23.4 million as
of December 31, 2011.
48
Deposits
The table below summarizes the deposit balances by major category for the periods indicated
2012
As of December 31,
2011
2010
Balance
Percent
Balance
Percent
Balance
Percent
Demand, Noninterest-Bearing
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
Total Deposits
$
$
720,931
114,302
575,744
616,187
368,799
2,395,963
30 1%
4 8%
24 0%
25 7%
15 4%
100.0%
(In Thousands)
634,466
104,664
449,854
822,165
333,761
2,344,910
27 1%
4 4%
19 2%
35 1%
14 2%
100.0%
546,815
113,968
402,481
1,118,621
284,836
2,466,721
22 2%
4 6%
16 3%
45 3%
11 6%
100.0%
Total deposits increased by $51.1 million, or 2.18 percent, to $2.4 billion as of December 31, 2012 from $2.34 billion as of
December 31, 2011. This increase is the direct result of asset/liability management plans aimed to increase core deposits while
reducing the reliance on rate-sensitive time deposits.
While time deposits of $100,000 or more decreased by $206.0 million, or 25.1 percent, to $616.2 million at December 31,
2012 from $822.2 million at December 31, 2011, core deposits (defined as demand, savings, money market, NOW accounts and other
time deposits) increased by $257.0 million, or 16.9 percent, to $1.78 billion at December 31, 2012 from $1.52 billion at December 31,
2011. Time deposits of $250,000 or more also decreased by $126.7 million, or 34.7 percent, to $238.2 million at December 31, 2012
from $364.9 million at December 31, 2011. Noninterest-bearing demand deposits represented 30.1 percent of total deposits at
December 31, 2012 compared to 27.1 percent and 22.2 percent of total deposits at December 31, 2011 and 2010, respectively. We had
no brokered deposits as of December 31, 2012, 2011 and 2010.
The table below summarizes the distribution of average deposits and the average rates paid for the periods indicated
2012
Average
Balance
Average
Rate
As of December 31,
2011
Average
Balance
Average
Rate
(In Thousands)
2010
Average
Balance
Average
Rate
Demand, Noninterest-Bearing
Savings
Money Market Checking and NOW Accounts
Time Deposits of $100,000 or More
Other Time Deposits
Total Deposits
$
$
676,707
110,349
529,976
681,173
350,877
2,349,082
-
1 95%
0 58%
1 07%
0 95%
0.68%
$
$
600,726
109,272
465,840
913,643
315,174
2,404,655
-
2 52%
0 74%
1 52%
1 23%
1.00%
$
$
562,422
119,754
464,864
1,069,600
371,046
2,587,686
-
2 87%
1 06%
1 83%
1 75%
1.33%
Average deposits for the years ended December 31, 2012, 2011 and 2010 were $2.35 billion, $2.40 billion and $2.59 billion,
respectively. Average deposits for 2012 and 2011 decreased by 2.3 percent and 7.1 percent, respectively.
The table below summarizes the maturity of time deposits of $100,000 or more at December 31 for the years indicated
Three Months or Less
Over Three Months Through Six Months
Over Six Months Through Twelve Months
Over Twelve Months
Federal Home Loan Bank Advances
2012
As of December 31,
2011
(In Thousands)
2010
$
$
173,179
134,213
136,855
171,940
616,187
$
$
357,527
186,230
202,780
75,628
822,165
$
$
343,946
135,620
118,428
520,627
1,118,621
FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight
federal funds. At December 31, 2012, advances from the FHLB were $2.9 million, a decrease of $368,000, or 11.1 percent, from the
December 31, 2011 balance of $3.3 million. At December 31, 2012, there was no FHLB advance with a remaining maturity of less
than one year, and the weighted-average interest rate was 5.27 percent. See “Note 9 – FHLB Advances and Other Borrowings” for
more details.
49
Junior Subordinated Debentures
During the second half of 2004, we issued two junior subordinated notes bearing interest at the three-month London
Interbank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the
three-month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the
proceeds of which were used to finance the purchase of Pacific Union Bank, totaled $82.4 million at December 31, 2012 and 2011,
respectively.
In October 2008, we committed to the FRB that no interest payments on the junior subordinated debentures would be made
without the prior written consent of the FRB. Therefore, to preserve its capital position, Hanmi Financial’s Board of Directors 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. In addition, we were prohibited from making interest payments on our outstanding junior
subordinated debentures under the terms of the regulatory enforcement actions without the prior written consent of the FRB and DFI.
Upon termination of the regulatory enforcement actions by the FRB on December 4, 2012 and the DFI on October 29, 2012,
Hanmi Financial paid accrued interest of $4.6 million on December 15, 2012 for the Trust II and, subsequent to December 31, 2012,
has paid accrued interest of $5.2 million and $3.1 million in January 2013 for the Trust I and III, respectively. Accrued interest
payable on the junior subordinated debentures were $8.2 million and $9.8 million at December 31, 2012 and 2011, respectively. See
“Note 10 — Junior Subordinated Debentures” for further details.
50
INTEREST RATE RISK MANAGEMENT
Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and
inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current
interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate
risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk
can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful
management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures, giving effect to
historical attrition rates of core deposits. In addition to regular reports used in business operations, repricing gap analysis, stress testing
and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.
The following table shows the status of our gap position as of December 31, 2012
ASSETS
Cash and Due from Bank
Interest-Bearing Deposits in Other Banks
Fed Funds Sold
Restricted Cash
Term Fed Funds Sold
Investment Securities
Fixed Rate
Floating Rate
Loans
Fixed Rate
Floating Rate
Non-Accrual (1)
Deferred Loan Fees, Discount, and Allowance for Loan Losses
Federal Home Loan Bank and Federal Reserve Bank Stock
Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand – Noninterest-Bearing
Savings
Money Market Checking and NOW Accounts
Time Deposits
Fixed Rate
Floating Rate
Federal Home Loan Bank Advances
Junior Subordinated Debentures
Other Liabilities
Stockholders Equity
More Than
More Than
Less
Than
Three
Months
Three
Months But
Less Than
One Year
One
Year But
Less Than
Five Years
More Than
Five Years
Non-
Interest-
Sensitive
Total
(In Thousands)
$ -
175,697
-
-
-
$ -
-
-
-
-
$ -
-
-
-
-
$ -
-
-
-
-
$ 92,350
-
-
5,350
-
$ 92,350
175,697
-
5,350
-
24,308
41,138
63,841
1,051,928
-
-
-
-
74,656
9,585
131,236
98,756
-
-
-
29,054
175,251
7,953
351,342
308,838
-
-
-
-
98,303
1,717
20,497
1,054
-
-
30,022
5,147
18,029
120
-
-
36,919
(70,054)
-
99,483
390,547
60,513
566,916
1,460,576
36,919
(70,054)
30,022
133,684
$ 1,356,912
$ 343,287
$ 843,384
$ 156,740
$ 182,197
$ 2,882,520
$ -
7,688
70,598
-
269,141
59
97
82,406
-
-
$ -
21,457
180,715
-
475,992
-
298
-
-
-
$ -
59,092
214,051
-
239,792
-
2,540
-
-
-
$ -
26,065
110,380
-
2
-
-
-
-
-
$ 720,931
-
-
-
-
-
-
-
22,852
378,364
$ 720,931
114,302
575,744
-
984,927
59
2,935
82,406
22,852
378,364
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 429,989
$ 678,462
$ 515,475
$ 136,447
$ 1,122,147
$ 2,882,520
Repricing Gap
Cumulative Repricing Gap
$ 926,923
$ 926,923
$ (335,175)
$ 591,748
$ 327,909
$ 919,657
$ 20,293
$ 939,950
$ (939,950)
$ -
-
-
Cumulative Repricing Gap as a Percentage of Total Assets
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets
32 16%
34 96%
20 53%
22 32%
31 90%
34 69%
32 61%
35 45%
0 00%
0 00%
_______________
(1)
Includes non-accrual loans held for sale.
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 and other time deposits) are assigned to categories based on expected decay rates.
As of December 31, 2012, the cumulative repricing gap for the three-month period was at an asset-sensitive position of 34.96
percent of interest-earning assets, which decreased from 36.85 percent as of December 31, 2011. This decrease was due mainly to
$184.8 million and $115.0 million decreases in floating-rate loans and fed funds sold, respectively, primarily offset by a $76.6 million
increase in interest-bearing deposits in other banks and a $187.8 million decrease in fixed-rate deposit.
As of December 31, 2012, the cumulative repricing gap for the twelve-month period was at an asset-sensitive position of
22.32 percent of interest-earning assets, which increased from 22.26 percent as of December 31, 2011. The increase was due mainly to
a $69.4 million increase in floating-rate loans and a $116.9 million decrease in fixed-rate time deposits, primarily offset by a $45.6
51
million decrease in fixed-rate loans, a $39.2 million increase in Money Market Checking and Now Accounts, a $21.7 million decrease
in fixed-rate investment securities, a $20.0 million decrease in fed funds sold, and a $14.8 million decrease in floating-rate investment
securities.
The following table summarizes the status of the cumulative gap position as of the dates indicated.
Less Than Three Months
December 31,
2012
2011
Less Than Twelve Months
December 31,
2012
2011
(In Thousands)
Cumulative Repricing Gap
Percentage of Total Assets
Percentage of Interest-Earning Assets
$ 926,923
32 16%
34 96%
$ 960,898
35 01%
36 85%
$ 591,748
20 53%
22 32%
$ 580,284
21 14%
22 26%
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 emph asize
capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our
assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits
established within our guidelines.
To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate
changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on
net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e ,
an instantaneous parallel shift in the yield curve of the magnitude indicated). This sensitivity analysis is compared to policy limits,
which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjustment
in interest rates reflected below.
Change in
Interest
Rate
200%
100%
-100%
-200%
Rate Shock Table
Percentage Changes
Net
Interest
Income
2 43%
0 66%
(1)
(1)
Economic
Value of
Equity
-1 82%
-0 17%
(1)
(1)
Change in Amount
Net
Interest
Income
Economic
Value of
Equity
(In Thousands)
2,541
686
(1)
(1)
(6,064)
(579)
(1)
(1)
_______________
(1)
The table above only reflects the impact of upward shocks due to the fact that a downward parallel shock of 100 basis points or more is not possible given that
some short-term rates are currently less than one percent.
The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to
our net interest income. These estimates are based upon a number of assumptions including the nature and timing of interest rate
levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of
asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no
assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. 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 securities, including common stock or notes, to meet our capital needs.
On July 27, 2010, the Bank completed a registered rights and best efforts public offering of our common stock by which we
raised $116.8 million in net proceeds. On November 18, 2011, we also completed an underwritten public offering of our common
stock by which we raised $77.1 million in net proceeds. As a result, we satisfied our tangible stockholders’ equity to total tangible
assets ratio requirement set forth in the Order as of December 31, 2011. Our tangible stockholders’ equity to total tangible assets ratio
improved to 15.29 percent as of December 31, 2012 from 12.48 percent as of December 31, 2011.
52
The primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. At December 31,
2012, the Bank’s Tier 1 risk-based capital ratio of 18.58 percent, total risk-based capital ratio of 19.85 percent, and Tier 1 leverage
capital ratio of 14.33 percent, placed the Bank in the “well capitalized” category, which is defined as institutions with Tier 1 risk-
based capital ratio equal to or greater than 6.00%, total risk-based capital ratio equal to or greater than 10.00%, and Tier 1 leverage
capital ratio equal to or greater than 5.00%.
Liquidity – Hanmi Financial
Management currently believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating
cash needs through December 31, 2013. Upon termination of the regulatory enforcement actions by the FRB on December 4, 2012
and the DFI on October 29, 2012, Hanmi Financial paid deferred interest of $4.6 million on December 15, 2012 for the Trust II and,
subsequent to December 31, 2012, $5.2 million and $3.1 million in January 2013 for the Trust I and III, respectively. Accrued interest
payable on junior subordinated debentures amounted to $8.2 million and $9.8 million at December 31, 2012 and 2011, respectively.
Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $24.7 and $31.7 million as of December 31, 2012
and 2011, respectively.
Liquidity – Hanmi Bank
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash
flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s
primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically
consisted of FHLB advances and brokered deposits. As of December 31, 2012, the Bank had no brokered deposits, and had FHLB
advances of $2.9 million compared to $3.3 million as of December 31, 2011.
We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary
source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of December 31,
2012, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $275.1
million and $272.2 million, respectively. The Bank’s FHLB borrowings as of December 31, 2012 totaled $2.9 million, representing
0.10 percent of total assets.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged 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.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $111.4 million from the Federal
Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $160.2 million,
and had no borrowings as of December 31, 2012. In December 31, 2012, the Bank had a line of credit with Raymond James &
Associates, Inc. for reverse repurchase agreements up to a maximum of $100.0 million.
The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its
ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and
quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical
personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation
and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is 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 similar to the risk involved in on-balance sheet items
recognized in the Consolidated Balance Sheets.
The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, was based on management’s credit evaluation of the counterparty.
53
Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or
borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated
Commitments to Extend Credit
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
December 31,
2012
December 31,
2011
(In Thousands)
$
182,746
10,588
6,092
13,459
$
158,748
12,742
9,298
15,937
Total Undisbursed Loan Commitments
$
212,885
$
196,725
CONTRACTUAL OBLIGATIONS
Our contractual obligations, excluding accrued interest payments, as of December 31, 2012 are as follows
Less Than
One Year
$
745,134
395
182,746
-
10,588
3,784
More Than
One Year
and Less
Than Three
Years
More Than
Three Years
and Less
Than Five
Years
(In Thousands)
More Than
Five Years
Total
$
237,127
2,540
$
-
-
7,134
2,723
-
-
-
4,922
7,645
$
$
2
-
82,406
-
3,400
984,986
2,935
182,746
82,406
10,588
19,240
$
85,808
$ 1,282,901
$
942,647
$
246,801
$
Time Deposits
Federal Home Loan Bank Advances
Commitments to Extend Credit
Junior Subordinated Debentures
Standby Letter of Credit
Operating Lease Obligations
Total Contractual Obligations
Operating lease obligations represent the total minimum lease payments under non-cancelable operating leases with
remaining terms of up to 10 years.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB ASU No. 2012-02, “Testing Indefinite-Lived Assets for Impairment (Topic 350)” - ASU 2012-02 is intended to
reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity
tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The
amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance
with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The amendments are effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of ASU 2012-02 is not
expected to have a significant impact on our financial condition or result of operations.
FASB ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU
2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by
component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount
reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for
annual and interim reporting periods beginning on or after December 15, 2012. The Company is currently in the process of evaluating
ASU 2013-02 but does not expect it will have a material impact on the Company’s Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in the Bank’s portfolio, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “—Capital
Resources and Liquidity.”
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 61 through 111.
54
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2012, 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 Interim 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 Securities and Exchange Commission (“SEC”) rules. Based upon that evaluation, the Chief Executive Officer
and Interim Chief Financial Officer concluded that Hanmi Financial’s disclosure controls and procedures were effective as of the end
of the period covered by this report.
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. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act is
accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2012, there have been no changes in Hanmi Financial’s internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect, Hanmi Financial’s internal control over
financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Hanmi Financial Corporation (“Hanmi Financial”) is responsible for establishing and maintaining adequate
internal control over financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission. Hanmi
Financial’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabili ty of
financial reporting and the preparation of Consolidated Financial Statements for external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting includes those written policies and procedures that
•
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles;
provide reasonable assurance that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the company’s assets that could have a material effect on the Consolidated Financial Statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
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 procedures may deteriorate.
Management assessed the effectiveness of Hanmi Financial’s internal control over financial reporting as of December 31,
2012. Management based this assessment on criteria for effective internal control over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s
assessment included an evaluation of the design of Hanmi Financial’s internal control over financial reporting and testing of the
operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the
Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2012, Hanmi Financial maintained effective
internal control over financial reporting.
55
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, 2012. The report expresses an unqualified opinion on the effectiveness of Hanmi Financial’s internal control over
financial reporting as of December 31, 2012.
56
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,
2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness 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 accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
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 procedures may deteriorate.
In our opinion, Hanmi Financial Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by COSO.
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, 2012 and 2011, and the related
consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2012, and our report dated March 15, 2013 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
March 15, 2013
57
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as hereinafter noted, the information concerning directors and officers of Hanmi Financial is incorporated by
reference from the sections entitled “The Board of Directors and Executive Officers” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in Hanmi Financial’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which will be
filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year ended December 31, 2012 (or information will be
provided in an amendment to this Form 10-K).
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial
and accounting officer, controller and other persons performing similar functions. It will be provided to any stockholder without
charge, upon the written request of that stockholder. Such requests should be addressed to Lisa Kim, General Counsel, Hanmi
Financial Corporation, 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010. It is also available on our
website at www.hanmi.com.
ITEM 11.
EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the section entitled “Executive
Compensation” in Hanmi Financial’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which will be filed
with the SEC within 120 days after the close of Hanmi Financial’s fiscal year ended December 31, 2012 (or information will be
provided in an amendment to this Form 10-K).
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management and related stockholder matters is
incorporated herein by reference from the section entitled “Beneficial Ownership of Principal Stockholders and Management” in
Hanmi Financial’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which will be filed with the SEC within
120 days after the close of Hanmi Financial’s fiscal year ended December 31, 2012 (or information will be provided by amendment to
this Form 10-K).
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information as of December 31, 2012 relating to equity compensation plans of Hanmi
Financial pursuant to which grants of options, restricted stock awards or other rights to acquire shares may be granted from time to
time.
Equity Compensation Plans Approved By Security Holders
Equity Compensation Plans Not Approved By Security
Holders
Total Equity Compensation Plans
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
342,950
216,250
559,200
(1)
$
$
37 44
9 60
26.67
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
364,500
216,250
580,750
____________
(1) Reflects warrants issued to Cappello Capital Corp. in connection with services it provided to us as a placement agent in connection with our best efforts public
offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at a purchase
price of $9.60 per share of our common stock and expire on October 14, 2015. The warrants may be exercised for cash or by “cashless exercise.” The exercise
price and number of shares subject to the warrants are subject to adjustment for, among other events, stock splits and stock dividends.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence is incorporated by reference
58
from the sections entitled “Certain Relationships and Related Transactions” and “Director Independence” in Hanmi Financial’s
Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the
close of Hanmi Financial’s fiscal year ended December 31, 2012 (or information will be provided by amendment to this Form 10-K).
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” in Hanmi Financial’s Definitive Proxy Statement for the 2013 Annual Meeting of
Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year ended December 31,
2012 (or information will be provided by amendment to this Form 10-K).
59
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1) The Financial Statements are listed in the Index to Consolidated Financial Statements on page 61 of this Report.
(2) All Financial Statement Schedules have been omitted as the required information is not applicable, not material 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 pages 114 - 115.
60
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .. .. .. ... . ... . .... ... ..... ... ... ... ... ..... ... ......... …… ….
Consolidated Balance Sheets as of December 31, 2012 and 2011 .. .. ... . .... ... ..... ... ..... ... . ..... ... ..... ... …… ….
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 ... ..... ... . …… ….
Page
6 2
6 3
6 4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 2012, 2011 and 2010 ………………………………………………………………………………....
65
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2012, 2011 and 2010 .. .. ... . ... . ... . ... . ... . ... . ... . . ... . ... . .... ... ................ ............... …… ….
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 ... ..... ... …… ….
Notes to Consolidated Financial Statements .. .. ... . ... . ... . ... . ... . ... . ... . ..... ........ ................... ....... …… ….
6 6
6 7
6 9
61
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 (the
Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes
in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Hanmi Financial Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations, and
their cash flows for each of the years in the three-year period ended December 31, 2012, 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, 2012, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission , and our
report dated March 15, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG LLP
Los Angeles, California
March 15, 2013
62
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
ASSETS
Cash and Due From Banks
Interest-Bearing Deposits in Other Banks
Federal Funds Sold
Cash and Cash Equivalents
Restricted Cash
Term Federal Funds Sold
Securities Available for Sale, at Fair Value (Amortized Cost of $443,712 as of December 31, 2012 and $377,747 as of
December 31, 2011)
Securities Held to Maturity, at Amortized Cost (Fair Value of $59,363 as of December 31, 2011)
Loans Held for Sale, at the Lower of Cost or Fair Value
Loans Receivable, Net of Allowance for Loan Losses of $63,305 as of December 31, 2012 and $89,936 as of December
31, 2011
Accrued Interest Receivable
Premises and Equipment, Net
Other Real Estate Owned, Net
Customers' Liability on Acceptances
Servicing Assets
Other Intangible Assets, Net
Investment in Federal Home Loan Bank Stock, at Cost
Investment in Federal Reserve Bank Stock, at Cost
Deferred Tax Assets
Current Tax Assets
Bank-Owned Life Insurance
Prepaid Expenses
Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing
Interest-Bearing
Total Deposits
Accrued Interest Payable
Bank's Liability on Acceptances
Federal Home Loan Bank Advances
Junior Subordinated Debentures
Accrued Expenses and Other Liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY:
Common Stock, $0 001 Par Value; Authorized 62,500,000 Shares; Issued 32,074,434 Shares (31,496,540 Shares
Outstanding) and 32,066,987 Shares (31,489,201 Shares Outstanding) as of December 31, 2012 and 2011, respectively
Additional Paid-In Capital
Unearned Compensation
Accumulated Other Comprehensive Income - Unrealized Gain on Securities Available for Sale and Loss on Interest-Only
Strip, Net of Income Taxes of $1,946 as of December 31, 2012 and $602 as of December 31, 2011
Accumulated Deficit
Less Treasury Stock, at Cost; 577,894 Shares as of December 31, 2012 and 2011
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See Accompanying Notes to Consolidated Financial Statements
63
December 31,
2012
December 31,
2011
$
92,350
175,697
-
268,047
5,350
-
451,060
-
8,306
1,986,051
7,581
15,150
774
1,336
5,542
1,335
17,800
12,222
50,998
9,030
29,054
2,084
10,800
$
80,582
101,101
20,000
201,683
1,818
115,000
381,862
59,742
22,587
1,849,020
7,829
16,603
180
1,715
3,720
1,533
22,854
8,558
-
9,073
28,289
1,598
11,160
$
2,882,520
$
2,744,824
$
720,931
1,675,032
2,395,963
11,775
1,336
2,935
82,406
9,741
2,504,156
257
550,123
(57)
5,418
(107,519)
(69,858)
378,364
$
634,466
1,710,444
2,344,910
16,032
1,715
3,303
82,406
10,850
2,459,216
257
549,744
(166)
3,524
(197,893)
(69,858)
285,608
$
2,882,520
$
2,744,824
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans
Taxable Interest on Investment Securities
Tax-Exempt Interest on Investment Securities
Interest on Term Federal Funds Sold
Interest on Federal Funds Sold
Interest on Interest-Bearing Deposits in Other Banks
Dividends on Federal Reserve Bank Stock
Dividends on Federal Home Loan Bank Stock
Total Interest and Dividend Income
INTEREST EXPENSE:
Interest on Deposits
Interest on Federal Home Loan Bank Advances
Interest on Junior Subordinated Debentures
Interest on Other Borrowings
Total Interest Expense
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Provision for Credit Losses
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Service Charges on Deposit Accounts
Insurance Commissions
Remittance Fees
Trade Finance Fees
Other Service Charges and Fees
Bank-Owned Life Insurance Income
Gain on Sales of SBA Loans Guaranteed Portion
Net Loss on Sales of Other Loans
Net Gain on Sales of Investment Securities
Impairment Loss on Investment Securities:
Total Other-Than-Temporary Impairment Loss on Investment Securities
Less: Portion of Loss Recognized in Other Comprehensive Income
Net Impairment Loss Recognized in Earnings
Other Operating Income
Total Non-Interest Income
NON-INTEREST EXPENSE:
Salaries and Employee Benefits
Occupancy and Equipment
Deposit Insurance Premiums and Regulatory Assessments
Data Processing
Other Real Estate Owned Expense
Professional Fees
Directors and Officers Liability Insurance
Supplies and Communications
Advertising and Promotion
Loan-Related Expense
Amortization of Other Intangible Assets
Expense related to Unconsummated Capital Offerings
Other Operating Expenses
Total Non-Interest Expense
INCOME (LOSS) BEFORE (BENEFIT) PROVISION FOR INCOME
TAXES
(Benefit) Provision for Income Taxes
NET INCOME (LOSS)
EARNINGS (LOSS) PER SHARE:
Basic
Diluted
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic
Diluted
2012
Year Ended December 31,
2011
2010
$
$
$
$
108,982
8,418
394
706
60
422
609
209
119,800
15,877
165
2,703
-
18,745
101,055
6,000
95,055
12,146
4,857
1,976
1,140
1,499
1,110
9,923
(9,481)
1,396
(292)
-
(292)
538
24,812
36,931
10,424
4,431
4,941
344
4,694
1,186
2,370
3,876
527
198
-
6,939
76,861
43,006
(47,368)
90,374
2 87
2 87
$
$
$
$
117,671
9,768
216
276
27
315
458
76
128,807
23,958
662
2,915
95
27,630
101,177
12,100
89,077
12,826
4,500
1,925
1,305
1,447
939
4,543
(6,020)
1,635
-
-
-
751
23,851
35,465
10,353
6,630
5,601
1,620
4,187
2,940
2,323
2,993
827
700
2,220
8,189
84,048
28,880
733
28,147
1 38
1 38
$
$
$
$
137,328
5,874
225
33
52
468
430
102
144,512
34,408
1,366
2,811
53
38,638
105,874
122,496
(16,622)
14,049
4,695
1,968
1,523
1,516
942
514
-
122
(790)
-
(790)
867
25,406
36,730
10,773
10,756
5,931
10,679
3,521
2,865
2,302
2,394
1,147
1,149
-
8,558
96,805
(88,021)
(12)
(88,009)
(7 46)
(7 46)
31,475,510
31,515,582
20,403,549
20,422,984
11,790,278
11,790,278
See Accompanying Notes to Consolidated Financial Statements
64
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
NET INCOME (LOSS)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized Gain (Loss) on Securities
Unrealized Holding Gain (Loss) Arising During Period
Unrealized Holding Gain Arising from the reclassification of held-to-maturity
securities to available-for-sale securities
Less: Reclassification Adjustment for Loss (Gain) Included in Net Income (Loss)
Unrealized Gain on Interest Rate Swap
Unrealized Loss on Interest-Only Strip of Servicing Assets
Income Tax Related to Items of Other Comprehensive Income
Other Comprehensive Income (Loss)
2012
Year Ended December 31,
2011
2010
$
90,374
$
28,147
$
(88,009)
2,369
1,968
(1,104)
9
(4)
(1,344)
1,894
8,123
-
(1,635)
2
(2)
-
6,488
(4,471)
-
668
21
(41)
-
(3,823)
COMPREHENSIVE INCOME (LOSS)
$
92,268
$
34,635
$
(91,832)
See Accompanying Notes to Consolidated Financial Statements
65
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Number of Shares)
Common Stock - Number of Shares
Stockholders' Equity
BALANCE AT JANUARY 1, 2010
Shares Issued, Net of Offering and Underwriting Costs
Exercises of Stock Options
Share-Based Compensation Expense
Comprehensive Loss
Net Loss
Change in Unrealized Gain on Securities
Available for Sale and Interest-Only Strips,
Net of Income Taxes
Total Comprehensive Loss
Gross
Shares
Issued and
Outstanding
6,976,862
12,500,000
2,000
Treasury
Shares
(579,063)
Net
Shares
Issued and
Outstanding
6,397,799
12,500,000
2,000
Common
Stock
$ 56
100
Additional
Paid-in
Capital
$ 357,174
114,209
22
930
Unearned
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Deficit)
Treasury
Stock,
at Cost
Total
Stockholders'
Equity
$ (302)
$ 859
$ (138,031)
$ (70,012)
83
(88,009)
-
-
-
-
-
-
(3,823)
-
-
$ 149,744
114,309
22
1,013
(88,009)
(3,823)
(91,832)
BALANCE AT DECEMBER 31, 2010
19,478,862
(579,063)
18,899,799
$ 156
$ 472,335
$ (219)
$ (2,964)
$ (226,040)
$ (70,012)
$ 173,256
Shares Issued, Net of Offering and Underwriting Costs
Treasury Shares Issued Related to Reverse Stock Split
Share-Based Compensation Expense
Restricted Stock Awards
Comprehensive Income
Net Income
Change in Unrealized Gain on Securities
Available for Sale and Interest-Only Strips,
Net of Income Taxes
Total Comprehensive Income
12,578,233
-
10,000
-
-
1,169
-
-
-
-
12,578,233
1,169
-
10,000
-
-
101
-
-
-
-
77,008
(154)
456
99
-
-
152
(99)
-
-
-
-
-
-
-
28,147
6,488
-
154
-
-
-
-
77,109
-
608
-
28,147
6,488
34,635
BALANCE AT DECEMBER 31, 2011
32,067,095
(577,894)
31,489,201
$ 257
$ 549,744
$ (166)
$ 3,524
$ (197,893)
$ (69,858)
$ 285,608
Share-Based Compensation Expense
Exercises of Stock Options
Exercises of Stock Warrants
Restricted Stock Cancellation
Comprehensive Income
Net Income
Change in Unrealized Gain on Securities
Available for Sale and Interest-Only Strips,
Net of Income Taxes
Total Comprehensive Income
-
1,250
8,089
(2,000)
-
-
-
-
-
-
-
1,250
8,089
(2,000)
-
-
-
-
-
-
-
-
385
10
-
(16)
-
-
93
-
-
16
-
-
-
-
-
-
-
-
-
-
-
90,374
1,894
-
-
-
-
-
-
-
478
10
-
-
90,374
1,894
92,268
BALANCE AT DECEMBER 31, 2012
32,074,434
(577,894)
31,496,540
$ 257
$ 550,123
$ (57)
$ 5,418
$ (107,519)
$ (69,858)
$ 378,364
See Accompanying Notes to Consolidated Financial Statements
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
2012
Year Ended December 31,
2011
2010
$
90,374
$
28,147
$
(88,009)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net
Amortization of Other Intangible Assets
Amortization of Servicing Assets
Share-Based Compensation Expense
Provision for Credit Losses
Net Gain on Sales of Investment Securities
Other-Than-Temporary Loss on Investment Securities
Deferred Tax (Benefit) Expense
Net Gain on Sales of Loans
(Gain) Loss on Sales of Other Real Estate Owned
Valuation Impairment on Other Real Estate Owned
Lower of Cost or Fair Value Adjustment for Loans Held for Sale
Gain on Bank-Owned Life Insurance Settlement
Increase in Cash Surrender Value of Bank-Owned Life Insurance
Origination of Loans Held for Sale
Proceeds from Sales of SBA Loans Guaranteed Portion
Changes in Fair Value of Stock Warrants
Loss on Sale of Premises and Equipment
Loss on Investment in Affordable Housing Partnership
Decrease in Accrued Interest Receivable
Increase in Servicing Assets
Increase in Restricted Cash
(Increase) Decrease in Prepaid Expenses
Decrease (Increase) in Other Assets
Decrease in Current Tax Assets
(Decrease) Increase in Accrued Interest Payable
(Increase) Decrease in Other Liabilities
Net Cash Provided By Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
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 Matured or Called Securities Held to Maturity
Proceeds from Sales of Other Real Estate Owned
Proceeds from Sales of Loans Held for Sale
Proceeds from Matured Term Federal Funds
Proceeds from Insurance Settlement on Bank-Owned Life Insurance
Net (Increase) Decrease in Loans Receivable
Purchase of Federal Reserve Bank Stock
Purchase of Loans Receivable
Purchases of Term Federal Fund
Purchases of Securities Available for Sale
Purchases of Securities Held to Maturity
Purchases of Premises and Equipment
Net Cash (Used In) Provided By Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Deposits
Net Proceeds from Issuance of Common Stock in Offering
Proceeds from Exercises of Stock Options
Repayment of Long-Term Federal Home Loan Bank Advances
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings
Net Cash Provided By (Used In) Financing Activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Year
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid
Income Taxes Paid
67
2,123
3,470
198
1,067
478
6,000
(1,396)
292
(52,342)
(4,188)
(10)
301
3,746
(163)
(947)
(116,829)
126,777
23
5
620
248
(2,889)
(3,532)
(486)
183
43
(4,257)
1,029
49,938
5,054
150,113
102,538
6,704
749
97,915
270,000
345
(157,514)
(3,664)
(82,885)
(155,000)
(267,949)
-
(675)
(34,269)
51,053
-
10
(368)
-
50,695
2,163
3,222
700
730
608
12,100
(1,635)
-
-
(1,426)
671
488
2,903
-
(939)
(60,238)
63,950
(717)
-
846
219
(1,560)
(1,818)
(167)
2,118
115
66
(1,301)
49,245
4,428
249,282
155,468
135
6,453
107,782
-
-
120,686
(1,109)
(115,000)
(368,442)
(59,179)
(1,167)
99,337
(121,811)
77,109
-
(347)
(151,570)
(196,619)
(48,037)
249,720
201,683
2,286
1,329
1,149
1,033
1,013
122,496
(122)
790
3,561
(514)
196
8,683
-
-
(942)
(20,228)
144,308
(362)
-
880
1,444
(81)
-
347
(3,361)
47,366
3,360
(177)
226,445
4,510
130,125
31,832
24
25,113
-
-
-
294,701
(666)
-
(448,428)
-
(1,228)
35,983
(282,606)
116,271
22
(328)
(177)
(166,818)
95,610
154,110
249,720
$
66,364
201,683
268,047
$
$
$
$
23,002
4,912
$
$
27,696
3
$
$
35,278
(49,971)
Non-Cash Activities:
Transfer of Loans Receivable to Other Real Estate Owned
Transfer of Loans Receivable to Loans Held for Sale
Transfer of Loans Held for Sale to Loans Receivable
Loans Provided in the Sale of Loans Held for Sale
Loans Provided in the Sale of Other Real Estate Owned
Reclassification of held-to-maturity securities to available-for-sale securities
Issuance of Stock Warrants in Connection with Common Stock Offering
Issuance of Treasury Stocks in Connection with Reverse Stock Split
$
$
$
$
$
$
$
$
3,071
95,611
1,779
-
-
52,674
-
-
$
$
$
$
$
$
$
$
4,213
110,290
-
5,750
510
-
-
154
$
$
$
$
$
$
$
$
12,992
155,176
-
1,217
-
1,962
-
See Accompanying Notes to Consolidated Financial Statements
68
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 1 — REGULATORY MATTERS
On November 2, 2009, the Board of Directors of the Bank consented to the issuance of the Final Order (the “Order”) with the
California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written
Agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Order and the Written
Agreement contain a list of strict requirements ranging from a capital directive to developing a contingency funding plan.
Following a target joint examination of the Bank by the DFI and the FRB, which commenced in February 2012, and based on
the improved condition of the Bank noted at the examination, the Bank entered into a Memorandum of Understanding (the “MOU”)
with the DFI on May 1, 2012. Concurrently with the entry into the MOU, the DFI issued an order terminating the Order.
After our annual joint examination of the Bank by the DFI and the FRB, which commenced in August 2012, the DFI
informed the Bank that the Bank’s overall condition had improved and that the MOU had been terminated effective October 29, 2012.
Furthermore, on December 4, 2012, the FRB informed Hanmi Financial and the Bank that the Written Agreement has been terminated.
Accordingly, Hanmi Financial and the Bank are no longer subject to any of the requirements imposed by the MOU and the Written
Agreement or any other enforcement action.
Risk-Based Capital
The federal banking agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total
capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition
to the risk-based guidelines, the agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to
average total assets, referred to as the leverage ratio, of 4.0 percent.
In order for banks to be considered “well capitalized,” the federal banking agencies require them to maintain a minimum ratio
of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0
percent. In addition to the risk-based guidelines, the agencies require depository institutions to maintain a minimum ratio of Tier 1
capital to average total assets, referred to as the leverage ratio, of 5.0 percent.
The capital ratios of Hanmi Financial and the Bank were as follows as of December 31, 2012 and 2011
Actual
Minimum
Regulatory
Requirement
Minimum to Be
Categorized as
“Well Capitalized”
Amount
Ratio
Amount
Ratio
Amount
Ratio
(In Thousands)
December 31, 2012
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, 2011
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
$
$
$
$
$
$
$
$
$
$
$
$
451,784
433,570
423,937
405,801
423,937
405,801
387,328
364,041
360,500
337,309
360,500
337,309
$
$
$
$
$
$
$
$
$
$
$
$
175,050
174,734
87,525
87,367
113,464
113,278
166,082
165,795
83,041
82,897
108,106
107,924
8 00%
8 00%
4 00%
4 00%
4 00%
4 00%
8 00%
8 00%
4 00%
4 00%
4 00%
4 00%
$
$
$
$
$
$
N/A
218,418
N/A
131,051
N/A
141,597
N/A
207,243
N/A
124,346
N/A
134,905
N/A
10 00%
N/A
6 00%
N/A
5 00%
N/A
10 00%
N/A
6 00%
N/A
5 00%
20 65%
19 85%
19 37%
18 58%
14 95%
14 33%
18 66%
17 57%
17 36%
16 28%
13 34%
12 50%
69
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Reserve Requirement
The Bank was required to maintain a certain percentage of its deposits as reserves at the FRB. Average daily reserve balances
required to be maintained with the FRB were $0 and $1.5 million, and the Bank was in compliance with such requirements, as of
December 31, 2012 and 2011, respectively.
Federal Reserve Notices of Proposed Rulemaking
On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register
three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to
reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III
international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard
consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a
requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well
as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust
preferred securities as a component of Tier 1 capital effective January 1, 2013. In addition, the Notices contemplate the deduction of
certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a
more risk-sensitive treatment to residential mortgage exposures and to past due or nonaccrual loans. The Notices provide for various
phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until
final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Operations
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “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 ethnic communities in 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
FDIC. As of December 31, 2012, the Bank maintained a branch network of 27 full-service branch offices in California and one loan
production office in 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.
The number of shares of our common stock and the computation of basic and diluted earnings (loss) per share were adjusted
retroactively for all periods presented to reflect the 1-for-8 reverse stock split, which became effective on December 19, 2011.
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.
70
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
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.
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.
Restricted Cash
Effective June 30, 2011, the Bank was required to enter into a Reserve Account Agreement (the “Agreement”) with the SBA
to sell loans into the secondary market. Under the Agreement, the Bank is required to maintain a reserve account at a well-capitalized
FDIC insured depository financial institution for the amount equal to the percentage (currently at 3.61 percent) of the guaranteed
portion sold into the secondary market. As of December 31, 2012 and 2011, $5.4 million and $1.8 million, respectively, were
deposited in compliance with the Agreement at such financial institution.
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 review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or
permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the
change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to
sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.
For debt securities, the classification of OTTI depends on whether we intend to sell the security or if it is more likely than not
that we will be required to sell the security before recovery of its costs basis, and on the nature of the impairment. If we intend to sell a
security or if it is more likely than not that we will be required to sell the security before recovery, an OTTI write-down is recognized
in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell the
security or it is not more likely than not that we will be required to sell the security before recovery, the OTTI write-down is separated
into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is
recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the
present value of cash flows expected to be collected, discounted at the security’s effective interest rate at the date of acquisition. The
71
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
cost basis of an other than temporarily impaired security is written down by the amount of impairment recognized in earnings. The
new cost basis is not adjusted for subsequent recoveries in fair value.
The Company had equity investment of less than five percent in a publicly traded company, Pacific International Bancorp
(“PIB”), and recognized an OTTI of $176,000 and $116,000 in the second and third quarter, respectively, of 2012. See “Note 4 —
Investment Securities” for more detail. We will continue to monitor the investment for impairment and make appropriate reductions in
carrying value when necessary. Other than this OTTI, management does not believe that there is any investment securities that are
deemed other-than-temporarily impaired as of December 31, 2012.
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 of 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 outstan ding
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. 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 collectability 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, or transferred from loans receivable, and intended for sale in the secondary market are carried at the lower
of aggregate cost or fair market value. Fair market value, if lower than cost, is determined based on valuations obtained from market
participants or the value of underlying collateral, calculated individually. 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. 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.
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.
Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is
based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for
general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.
Risk factor calculations are based on 8-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent four
quarters. As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis
To determine general reserve requirements, existing loans are divided into 11 general loan pools of risk-rated loans
(Commercial Real Estate, Construction, Commercial Term-Unsecured, Commercial Term-T/D Secured, Commercial Line of Credit,
72
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
SBA-Unsecured, SBA-T/D Secured, International, Consumer Installment, Consumer Line of Credit, and Miscellaneous loans) as well
as 3 homogenous loan pools (Residential Mortgage, Auto, and Credit Card). For risk-rated loans, migration analysis allocates
historical losses by loan pool and risk grade (pass, special mention, substandard, and doubtful) to determine risk factors for potential
loss inherent in the current outstanding loan portfolio.
To enhance reserve calculations to better reflect the Bank’s current loss profile, the two loan pools of commercial real estate
and commercial term – T/D secured were subdivided according to the 21 collateral codes used by the Bank to identify commercial
property types (Apartment, Auto, Car Wash, Casino, Church, Condominium, Gas Station, Golf Course, Industrial, Land,
Manufacturing, Medical, Mixed Used, Motel, Office, Retail, School, Supermarket, Warehouse, Wholesale, and Others). This further
segregation allows the Bank to more specifically allocate reserves within the commercial real estate portfolio according to risks
defined by historic loss as well as current loan concentrations of the different collateral types.
For purposes of determining the allowance for loan losses, the loan portfolio is subdivided into three portfolio segments Real
Estate, Commercial and Industrial, and Consumer. The portfolio segment of Real Estate contains the allowance loan pools of
Commercial Real Estate, Construction, and Residential Mortgage. The portfolio segment of Commercial and Industrial contains the
loan pools of Commercial Term – Unsecured, Commercial Term – T/D Secured, Commercial Line of Credit, SBA, International, and
Miscellaneous. Lastly, the portfolio segment of Consumer contains the loan pools of Consumer Installment, Consumer Line of Credit,
Auto, and Credit Card.
Non-performing assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans
restructured with troubled borrowers 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 off, 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 original 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 st andards
require that an impaired loan be measured based on
•
•
•
the present value of the expected future cash flows, discounted at the loan’s effective interest rate; or
the loan’s observable fair value; or
the fair value of the collateral, if the loan is collateral-dependent.
The Bank follows the “Interagency Policy Statement on the Allowance for Loan and Lease Losses” and, as an integral part of
the quarterly credit review process, 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 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.
In general, the Bank will charge off a loan and declare a loss when its collectability is questionable and when the Bank can no
longer justify presenting the loan as an asset on its balance sheet. To determine if a loan should be charged off, all possible sources of
repayment are analyzed, including the potential for future cash flow from income or liquidation of other assets, the value of any
collateral, and the strength of co makers or guarantors. When these sources do not provide a reasonable probability that principal can
be collected in full, the Bank will fully or partially charge off the loan.
73
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
For a real estate loan, including commercial term loans secured by collateral, any impaired portion is considered as loss if the
loan is more than 90 days past due. In a case where the fair value of collateral is less than the loan balance and the borrower has no
other assets or income to support repayment, the amount of the deficiency is considered as loss and charged off.
For a commercial and industrial loan other than those secured by real estate, if the borrower is in the process of a bankruptcy
filing in which the Bank is an unsecured creditor or deemed virtually unsecured by lack of collateral equity or lien position and the
borrower has no realizable equity in assets and prospects for recovery are negligible, the loan is considered as loss and charged off.
Additionally, a commercial and industrial unsecured loan that is more than 120 days past due is considered as loss and charged off.
An unsecured consumer loan where a borrower files for bankruptcy, the loan is considered as loss within 60 days of receipt
of notification of filing from the bankruptcy court. Other consumer loans are considered as loss if they are more than 90 days past due.
Other events such as bankruptcy, fraud, or death, resulting charge offs being recorded in an earlier period.
Impaired Loans
Loans are identified and classified as impaired 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 Bank will consider the following loans as impaired
non-accrual loans or loans where principal or interest payments have been contractually past due for 90 days or more, unless the loan
is both well-collateralized and in the process of collection; loans classified as Troubled Debt Restructuring (“TDR”) loans; or any loan
classified as Substandard that the amount is over 5 percent of the Bank’s Tier 1 Capital.
The Bank considers whether the borrower is experiencing problems such as operating losses, marginal working capital,
inadequate cash flow or business deterioration in realizable value. The Bank also considers the financial condition of a borrower who
is in industries or countries experiencing economic or political instability.
When a loan is considered impaired, any future cash receipts on such loans will be treated as either 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.
We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value
of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable
market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan
is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or,
alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly
migration analysis when determining the amount of the allowance for loan losses required for the period.
For impaired loans where the impairment amount is measured based on the present value of expected future cash flows
discounted at the loan’s original effective interest rate, any impairment that represents the change in present value attributable to the
passage of time is recognized as provision for credit losses.
The amount of interest income recognized on impaired loans using a cash basis method is disclosed in Note 5 – Loans.
Troubled Debt Restructuring
A loan is identified as a troubled debt restructuring (“TDR”) loan when a borrower is experiencing financial difficulties and,
for economic or legal reasons related to these difficulties, the Bank grants a concession to the borrower in the restructuring that it
would not otherwise consider. The Bank has granted a concession when, as a result of the restructuring, it does not expect to collect all
amounts due, including principal and/or interest accrued at the original terms of the loan. The concessions may be granted in various
forms, including a below-market change in the stated interest rate, a reduction in the loan balance or accrued interest, an extension of
the maturity date, or a note split with principal forgiveness. All troubled debt restructurings are reviewed for potential impairment.
Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of six months to demonstrate that the
borrower can perform under the restructured terms. If the borrower's performance under the new terms is not reasonably assure d, the
loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.
74
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (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
10 to 30 Years
3 to 7 Years
Term of Lease or Useful Life, Whichever is Shorter
3 Years
Impairment of Long-Lived Assets
We account for long-lived assets in accordance with the provisions of FASB ASC 360, “Property, Plant and Equipment.”
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, valuation impairment 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 FASB ASC
860, “Transfers and Servicing.” 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.
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. Management periodically
evaluates the servicing asset for impairment. Impairment, if it occurs, is recognized in a valuation allowance in the period of
impairment.
Interest-only strips are recorded based on the present value of the excess of total servicing fee over the contractually specified
servicing fee for the estimated life of the loan, calculated using the same assumptions as noted above. Such interest-only strips are
accounted for at their estimated fair value, with unrealized gains or losses recorded as adjustments to accumulated other
comprehensive income (loss).
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 FASB ASC 350, other intangible assets are assessed for impairment or recoverability whenever events or
changes in circumstances indicate the carrying amount may not be recoverable.
75
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
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.
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.
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.
FASB ASC 810, “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
Company has not consolidated the Trusts in its Consolidated Financial Statements, and as a result, the junior subordinated debentures
issued by the Company to the Trusts are reflected on the Company’s Consolidated Balance Sheet as junior subordinated debentures.
Income Tax
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 FASB ASC 718, “Compensation-Stock Compensation,” on January 1, 2006 using the “modified prospective”
76
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
method. Under this method, awards that are granted, modified or settled after December 31, 2005 are measured and accounted for in
accordance with FASB ASC 718. 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.”
FASB ASC 718 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 FASB ASC 718 be classified as a financing cash inflow and an operating cash outflow on the
Consolidated Statements of Cash Flows. Before the adoption of FASB ASC 718, we presented all tax benefits realized from the
exercise of stock options as an operating cash inflow.
In addition, FASB ASC 718 requires that any unearned compensation related to awards granted prior to the adoption of
FASB ASC 718 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. The computation of basic and diluted earnings (loss) per share was adjusted retroactively
for all periods presented to reflect the 1-for-8 reverse stock split, which became effective on December 19, 2011.
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.
Recently Issued Accounting Standards
FASB ASU No. 2012-02, “Testing Indefinite-Lived Assets for Impairment (Topic 350)” - ASU 2012-02 is intended to
reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity
tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The
amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance
with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The amendments are effective
for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of ASU 2012-02 is
not expected to have a significant impact on our financial condition or result of operations.
FASB ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU
2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by
component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount
reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for
annual and interim reporting periods beginning on or after December 15, 2012. The Company is currently in the process of evaluating
ASU 2013-02 but does not expect it will have a material impact on the Company’s Consolidated Financial Statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
Fair Value Measurements
FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRSs (Topic 820),” amends existing guidance regarding the highest and best use and valuation premise by clarifying these
concepts are only applicable to measuring the fair value of nonfinancial assets. FASB ASU 2011-4 also clarifies that the fair value
measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are
managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about
Level 3 fair value measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in
the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in
77
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
unobservable inputs and interrelationships about those inputs as well as disclosure of the level of the fair value of items that are not
measured at fair value in the financial statements but disclosure of fair value is required. The provisions of FASB ASU 2011-04 are
effective for the Company’s reporting period beginning after December 15, 2011 and should be applied prospectively. Our adoption of
FASB ASU 2011-04 did not have a significant impact on our financial condition or result of operations.
FASB ASC 820, “Fair Value Measurements and Disclosures,” 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. FASB ASC 820
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.
FASB ASC 820 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 fai r value
are defined as follows
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
Level 2 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.
Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
FASB ASC 825, “Financial Instruments,” provides additional guidance for estimating fair value in accordance with FASB
ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FASB ASC 825 emphasizes that even if there has been a
significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. FASB ASC 825 also requires additional disclosures relating to fair value
measurement inputs and valuation techniques, as well as disclosures of all debt and equity investment securities by major security
types rather than by major security categories that should be based on the nature and risks of the securities during both interim and
annual periods. FASB ASC 825 became effective for interim and annual reporting periods ending after June 15, 2009 and did not
require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB
ASC 825 requires comparative disclosures only for periods ending after initial adoption. We adopted FASB ASC 825 in the second
quarter of 2009. Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of
accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure
purposes in accordance with FASB ASC 825 “Financial Instruments.” The adoption of FASB ASC 825 resulted in additional
disclosures that are presented in “Note 4 – Investment Securities.”
We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held
for sale, impaired loans, other real estate owned, and other intangible assets, are recorded at fair value on a non-recurring basis. Non-
recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any
impairment is recorded in the period in which the re-measurement is performed.
We used the following methods and significant assumptions to estimate fair value
Investment Securities Available for Sale – The fair values of investment securities available for sale are determined by
obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured
using 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, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve,
prepayment speeds, and default rates. Level 1 investment securities include U.S. government and agency debentures and equity
securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these
securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily
include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining
the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair
value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized
pricing services to value our fixed income securities. The fair value of the municipal bonds is determined based on a proprietary model
maintained by the broker-dealers. We review the prices obtained for reasonableness based on our understanding of the marketplace,
78
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and
as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 investment
securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which
necessitates the use of significant unobservable inputs. As of December 31, 2012, we had a zero coupon tax credit municipal bond of
$779,000. This bond was recorded at estimated fair value using a discounted cash flow method, and was measured on a recurring basis
with Level 3 inputs. Key assumptions used in measuring the fair value of the tax credit bond as of December 31 were discount rate
and cash flows. The discount rate was derived from the term structure of Bank Qualified (“BQ”) “A-” rated municipal bonds, as the
tax credit bond’s guarantee had the similar credit strength. The contractual future cash flows were the tax credits to be received for a
remaining life of 2.23 years. Even if the discount rate is adjusted down to the term structure of BQ “BBB-” rating municipal bonds,
the tax credit bond’s value would decline by 2%. We do not anticipate a significant deterioration of the tax credit bond’s credit quality.
Management reviews the discount rate on an ongoing basis based on current market rates.
SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair
value. As of December 31, 2012 and 2011, we had $7.8 million and $5.1 million of SBA loans held for sale, respectively.
Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing finan cial
institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is
lower than fair value. At December 31, 2012 and 2011, the entire balance of SBA loans held for sale was recorded at its cost. We
record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.
Non-Performing Loans Held for Sale – We reclassify certain non-performing loans as held-for-sale when we decide to sell
those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices
which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation
cost. As of December 31, 2012 and 2011, we had $484,000 and $15.0 million of non-performing loans held for sale, respectively,
which are measured on a nonrecurring basis with Level 3 inputs.
Stock Warrants - The Company followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts
in Entity’s Own Stock” (“ASC 815- 40”), which establishes a framework for determining whether certain freestanding and embedded
instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing
accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of
earlier of i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or ii) the
date at which the counterparty’s performance is complete. The fair value of the warrants was recorded as a liability and a cost of
equity, which was determined by the Black-Scholes option pricing modeling and was measured on a recurring basis with Level 3
inputs.
79
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the year ended December 31,
2012. As of December 31, 2012 and 2011, assets and liabilities measured at fair value on a recurring basis are as follows
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
(In Thousands)
December 31, 2012:
ASSETS:
Debt Securities Available for Sale:
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
SBA Loan Pools Securities
Other Securities
Total Debt Securities Available for Sale
Equity Securities Available for Sale:
Financial Services Industry
Total Equity Securities Available for Sale
Total Securities Available for Sale
LIABILITIES:
Stock Warrants
December 31, 2011:
ASSETS:
Debt Securities Available for Sale:
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
Other Securities
Total Debt Securities Available for Sale
Equity Securities Available for Sale:
Financial Services Industry
Total Equity Securities Available for Sale
Total Securities Available for Sale
LIABILITIES:
Stock Warrants
-
-
93,118
-
-
-
-
-
93,118
392
392
93,510
$
$
160,326
100,487
-
12,033
46,142
20,400
14,026
3,357
356,771
-
-
356,771
$
$
-
-
-
779
-
-
-
-
779
-
-
779
$
$
160,326
100,487
93,118
12,812
46,142
20,400
14,026
3,357
450,668
392
392
451,060
-
$
-
$
906
$
906
-
-
72,548
-
-
-
-
72,548
681
681
73,229
-
$
$
$
113,005
162,837
-
3,482
6,138
19,836
3,335
308,633
-
-
308,633
-
$
$
$
-
-
-
-
-
-
-
-
-
-
-
883
$
$
$
113,005
162,837
72,548
3,482
6,138
19,836
3,335
381,181
681
681
381,862
883
$
$
$
$
$
$
80
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2012
Beginning
Balance as of
January 1,
2012
Purchase,
Issuances,
Sales and
Settlement
Realized
Gains or
Losses
In Earnings
(In Thousands)
Unrealized
Gains or
Losses
In Other
Comprehensive
Income
Ending
Balance as of
December 31,
2012
ASSETS:
Municipal Bonds-Tax Exempt (1)
LIABILITIES:
Stock Warrants (2)
$
$
-
$
698
$
-
$
81
$
779
883
$
-
$
23
$
-
$
906
Beginning
Balance as of
January 1,
2011
Purchase,
Issuances,
Sales and
Settlement
Realized
Gains or
Losses
In Earnings
Unrealized
Gains or
Losses
In Other
Comprehensive
Income
Ending
Balance as of
December 31,
2011
LIABILITIES:
Stock Warrants (2)
$
1,600
$
-
$
(717)
$
-
$
883
________________
(1)
Reflects a zero coupon tax credit municipal bond that was previously classified as a held-to-maturity security, which was reclassified as an available-for-sale
security during the year ended December 31, 2012. As the Company was not able to obtain a price from independent external pricing service providers, the
discounted cash flow method was used to determine its fair value. The bond carried a par value of $700,000 and an amortized value of $698,000 with a remaining
life of 2.2 years at December 31, 2012.
(2) Reflects warrants for our common stock issued in connection with services it provided to us as a placement agent in connection with our best efforts public
offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise
price of $9.60 per share of our common stock and expire on October 14, 2015. See “Note 13 – Stockholders’ Equity” for more details.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of December 31, 2012, assets and liabilities measured at fair value on a non-recurring basis are as follows
December 31, 2012:
ASSETS:
Non-Performing Loans Held for Sale (1)
Impaired Loans (2)
Other Real Estate Owned (3)
December 31, 2011:
ASSETS:
Non-Performing Loans Held for Sale (4)
Impaired Loans (5)
Other Real Estate Owned (6)
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
(In Thousands)
$
$
$
$
$
$
-
-
-
-
-
-
$
$
$
$
$
$
484
27,844
774
$
$
$
-
8,888
-
17,525
54,784
180
$
$
$
-
35,835
-
Loss During
The Year
Ended
December 31,
2012 and 2011
$
$
$
$
$
$
3,747
580
301
2,903
7,364
488
_______________
(1)
(2)
(3)
(4)
(5)
(6)
Includes a SBA loan of $484,000
Includes real estate loans of $8.7 million, commercial and industrial loans of $27.0 million, and consumer loans of $1.0 million
Includes properties from the foreclosure of real estate loans of $774,000
Includes commercial property loans of $11.1 million, commercial term loan of $5.6 million, and SBA loans of $870,500
Includes real estate loans of $35.1 million, commercial and industrial loans of $54.8 million, and consumer loans of $721,000
Includes properties from the foreclosure of real estate loans of $180,000
81
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
FASB ASC 825 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 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
Financial Assets:
Cash and Cash Equivalents
Restricted Cash
Term Federal Funds
Investment Securities Available for Sale
Investment Securities Held to Maturity
Loans Receivable, Net of Allowance for Loan Losses
Loans Held for Sale
Accrued Interest Receivable
Investment in Federal Home Loan Bank Stock
Investment in Federal Reserve Bank
Financial Liabilities:
Noninterest-Bearing Deposits
Interest-Bearing Deposits
Borrowings
Accrued Interest Payable
Off-Balance Sheet Items:
Commitments to Extend Credit
Standby Letters of Credit
December 31, 2012
December 31, 2011
Carrying or
Contract
Amount
Estimated
Fair Value
Carrying or
Contract
Amount
(In Thousands)
Estimated
Fair Value
$
268,047
5,350
-
451,060
-
1,986,051
8,306
7,581
17,800
12,222
720,931
1,675,032
85,341
11,775
182,746
10,588
$
268,047
5,350
-
451,060
-
1,981,669
8,306
7,581
17,800
12,222
720,931
1,680,211
85,414
11,775
146
24
$
201,683
1,818
115,000
381,862
59,742
1,849,020
22,587
7,829
22,854
8,558
634,466
1,710,444
85,709
16,032
158,748
12,742
$
201,683
1,818
115,173
381,862
59,363
1,802,511
22,587
7,829
22,854
8,558
634,466
1,710,878
83,853
16,032
194
26
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 of cash and cash equivalents approximate fair value due to the short-
term nature of these instruments (Level 1).
Restricted Cash – The carrying amount of restricted cash approximates its fair value (Level 1).
Term Federal Funds – The fair value of term federal funds with original maturities of more than 90 days is estimated by
discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates (Level 2).
Investment Securities – The fair value of investment securities, consisting of investment securities available for sale, is
generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other
model-based valuation techniques described above (Level 1, 2 and 3).
Loans Receivable, Net of Allowance for Loan Losses – The fair value for loans receivable is estimated based on the
discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering
rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the
Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would
offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for
these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for
loan losses relating to performing and nonperforming loans results in a fair valuation of such loans. Additionally, the fair value of our
82
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ
materially from the values that we may ultimately realize (Level 3).
Loans Held for Sale – Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based
upon quotes, bids or sales contract prices or may be assessed based upon the fair value of the collateral which is obtained from recent
real estate appraisals (Level 2). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences
between the comparable sales and income data available. Such adjustment is typically significant and result in Level 3 classification of
the inputs for determining fair value.
Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts of investment in Federal
Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock approximate fair value as such stock may be resold to the
issuer at carrying value (Level 1).
Non-Interest-Bearing Deposits – The fair value of non-interest-bearing deposits is the amount payable on demand at the
reporting date (Level 2).
Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking,
and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings
accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair
valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash
flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings
(Level 3).
Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).
Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected
stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption
is based on the contract term. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends.
The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant (Level 3).
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 (Level 3).
NOTE 4 — INVESTMENT SECURITIES
During the year ended December 31, 2012, all held-to-maturity securities were reclassified to available-for-sale securities. As
more than 95 percent of the securities were municipal bonds, the Company decided to reclassify them to available-for-sale securities
to be more proactive under the current municipal market with a rising risk of default.
The following is a summary of investment securities held to maturity
December 31, 2011
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Mortgage-Backed Securities (1)
U S Government Agency Securities
Total Securities Held to Maturity
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Estimated
Fair
Value
$
$
9,815
38,797
3,137
7,993
59,742
$
$
98
117
2
2
219
$
$
46
522
11
19
598
$
$
9,867
38,392
3,128
7,976
59,363
_______________
(1) Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
83
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following is a summary of investment securities available for sale
December 31, 2012:
Mortgage-Backed Securities (1)
Collateralized Mortgage Obligations (1)
U S Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
SBA Loans Pool Securities
Other Securities
Equity Securities
Total Securities Available for Sale
December 31, 2011:
Mortgage-Backed Securities (1)
Collateralized Mortgage Obligations (1)
U S Government Agency Securities
Municipal Bonds-Tax Exempt
Municipal Bonds-Taxable
Corporate Bonds
Other Securities
Equity Securities
Total Securities Available for Sale
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(In Thousands)
Estimated
Fair
Value
$
$
$
$
157,185
98,821
92,990
12,209
44,248
20,470
14,104
3,331
354
443,712
110,433
161,214
72,385
3,389
5,901
20,460
3,318
647
377,747
$
$
$
$
3,327
1,775
222
603
2,029
176
4
73
78
8,287
2,573
1,883
168
93
237
-
58
85
5,097
$
$
$
$
186
109
94
-
135
246
82
47
40
939
1
260
5
-
-
624
41
51
982
$
$
$
$
160,326
100,487
93,118
12,812
46,142
20,400
14,026
3,357
392
451,060
113,005
162,837
72,548
3,482
6,138
19,836
3,335
681
381,862
_______________
(1) Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
The amortized cost and estimated fair value of investment securities at December 31, 2012, by contractual maturity, are
shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042,
expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Within One Year
Over One Year Through Five Years
Over Five Years Through Ten Years
Over Ten Years
Mortgage-Backed Securities
Collateralized Mortgage Obligations
SBA Loans Pool Securities
Equity Securities
Total
Available for Sale
Amortized
Cost
Estimated
Fair Value
(In Thousands)
$
$
-
28,257
105,386
39,605
157,185
98,821
14,104
354
443,712
$
$
-
28,342
106,787
40,700
160,326
100,487
14,026
392
451,060
In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-
temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI.
The Company had an equity security with a carrying value of $296,000 at December 31, 2012. During 2012, the issuer’s
financial condition had deteriorated, and it was determined that the investment value is other-than-temporarily impaired. Based on the
closing prices of the shares at September 30, 2012 and June 30, 2012, we recorded OTTI charges of $176,000 and $116,000,
respectively, to write down the investment value to its fair value. As such, for the year ended December 31, 2012, the total OTTI
charge on this equity security was $292,000. During the fourth quarter of 2012, there was no OTTI charged on this equity security due
to the improved closing price of the shares being higher than the book value.
84
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the
number of 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, 2012 and 2011
Investment Securities Available for Sale
December 31, 2012
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Municipal Bonds-Taxable
Corporate Bonds
SBA Loans Pool Securities
Other Securities
Equity Securities
Total
December 31, 2011
Mortgage-Backed Securities
Collateralized Mortgage Obligations
U S Government Agency Securities
Corporate Bonds
Other Securities
Equity Securities
Total
Less Than 12 Months
Gross
Unrealized
Loss
Estimated
Fair
Value
Number
of
Securities
Holding Period
12 Months or More
Gross
Unrealized
Loss
Estimated
Fair
Value
(In Thousands, Except Number of Securities)
Number
of
Securities
Total
Gross
Unrealized
Loss
Estimated
Fair
Value
Number
of
Securities
$ 186
109
94
126
-
82
1
40
$ 638
$ 1
260
5
41
1
51
$ 359
$ 28,354
14,344
26,894
4,587
-
11,004
12
96
$ 85,291
$ 3,076
36,751
6,061
4,445
12
85
$ 50,430
10
5
9
4
-
3
1
1
33
1
16
2
2
1
1
23
$ -
-
-
9
246
-
46
-
$ 301
$ -
-
-
582
41
-
$ 623
$ -
-
-
1,964
10,738
-
953
-
$ 13,655
$ -
-
-
15,391
959
-
$ 16,350
-
-
-
3
3
-
1
-
7
-
-
-
4
1
-
5
$ 186
109
94
135
246
82
47
40
$ 939
$ 1
260
5
623
42
51
$ 982
$ 28,354
14,344
26,894
6,551
10,738
11,004
965
96
$ 98,946
$ 3,076
36,751
6,061
19,836
971
85
$ 66,780
10
5
9
7
3
3
2
1
40
1
16
2
6
2
1
28
The impairment losses described previously are not included in the table above. All individual securities that have been in a
continuous unrealized loss position for 12 months or longer as of December 31, 2012 and 2011 had investment grade ratings upon
purchase. The issuers of these securities have not established any cause for default on these securities and the various rati ng agencies
have reaffirmed these securities’ long-term investment grade status as of December 31, 2012. These securities have fluctuated in value
since their purchase dates as market interest rates have fluctuated.
FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below
amortized cost in circumstances where (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be
required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized
cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the
security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized
cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to
sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in
earnings, and the amount related to all other factors, which is recognized in other comprehensive income.
The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the
investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are
not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with
the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the
bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related
to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of December 31, 2012
and 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of December 31, 2012 and 2011 are
warranted.
85
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense
on sales of investment securities were as follows for the periods indicated
Gross Realized Gains on Sales of Investment Securities
Gross Realized Losses on Sales of Investment Securities
Net Realized Gains on Sales of Investment Securities
Proceeds from Sales of Investment Securities
Tax Expense on Sales of Investment Securities
2012
Year Ended December 31,
2011
(In Thousands)
2010
$
$
$
$
1,447
(50)
1,396
102,538
587
$
$
$
$
2,674
(1,039)
1,635
155,468
687
$
$
$
$
228
(106)
122
31,832
52
For the year ended December 31, 2012, $3.2 million of net unrealized gains arose during the period and was included in
comprehensive income, and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had
previously recorded net unrealized gains of $1.7 million in comprehensive income. Of the $3.2 million increase in net unrealized gains,
$2.0 million resulted from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities.
For the year ended December 31, 2011, $6.5 million of net unrealized gains arose during the period and was included in
comprehensive income, and there was a $1.6 million gain in earnings resulting from the sale of investment securities that had
previously recorded net unrealized losses of $249,000 million in comprehensive income. For the year ended December 31, 2010, $3.6
million of net unrealized losses arose during the period and was included in comprehensive income, and there was a $122,000 g ain in
earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $205,000 in
comprehensive income.
Investment securities available for sale with carrying values of $18.2 million and $45.8 million as of December 31, 2012 and
2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
NOTE 5 — LOANS
The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to
reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan
delinquencies and non-performing loans, problem loans, and policy adjustments.
Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and
refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and
SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain
management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent
further deterioration.
Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial
and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening
underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s
loan policy. Most of the Bank’s lending activity occurs within Southern California.
86
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Loans Receivable
Loans receivable consisted of the following as of the dates indicated
Real Estate Loans:
Commercial Property
Construction
Residential Property
Total Real Estate Loans
Commercial and Industrial Loans:
Commercial Term (1)
Commercial Lines of Credit (2)
SBA Loans (3)
International Loans
Total Commercial and Industrial Loans
Consumer Loans
Total Gross Loans
Allowance for Loans Losses
Deferred Loan Fees
Loan Receivables, Net
As of December 31,
2012
2011
(In Thousands)
$
787,094
-
101,778
888,872
$
663,023
33,976
52,921
749,920
884,364
56,121
148,306
34,221
1,123,012
36,676
2,048,560
(63,305)
796
944,836
55,770
116,192
28,676
1,145,474
43,346
1,938,740
(89,936)
216
$ 1,986,051
$ 1,849,020
_______________
(1)
(2)
(3)
Includes owner-occupied property loans of $774.2 million and $776.3 million as of December 31, 2012 and 2011, respectively.
Includes owner-occupied property loans of $1.4 million and $936,000 as of December 31, 2012 and 2011, respectively.
Includes owner-occupied property loans of $128.4 million and $93.6 million as of December 31, 2012 and 2011, respectively.
Accrued interest on loans receivable was $5.4 million and $5.7 million at December 31, 2012 and 2011, respectively. At
December 31, 2012 and 2011, loans receivable totaling $524.0 million and $797.1 million, respectively, were pledged to secure FHLB
advances and the FRB’s federal discount window.
The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for
sale by portfolio segment for the years ended December 31, 2012 and 2011
Real Estate
Commercial
and
Industrial
Consumer
Total
December 31, 2012:
Balance at Beginning of Period
Origination of Loans Held for Sale
Reclassification from Loans Receivable to Loans Held for Sale
Reclassification from Loans Held for Sale to Other Real Estate Owned
Reclassification from Loans Held for Sale to Loans Receivable
Sales of Loans Held for Sale
Principal Payoffs and Amortization
Valuation Adjustments
Balance at End of Period
December 31, 2011:
Balance at Beginning of Period
Origination of Loans Held for Sale
Reclassification from Loans Receivable to Loans Held for Sale
Sales of Loans Held for Sale
Principal Payoffs and Amortization
Valuation Adjustments
Balance at End of Period
$
$
$
$
11,068
-
46,960
(360)
(1,647)
(54,669)
(228)
(1,124)
-
3,666
-
56,428
(48,841)
(52)
(133)
11,068
$
$
$
$
(In Thousands)
11,519
116,829
48,651
-
(132)
(165,563)
(376)
(2,622)
8,306
32,954
60,238
53,862
(131,653)
(1,112)
(2,770)
11,519
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
22,587
116,829
95,611
(360)
(1,779)
(220,232)
(604)
(3,746)
8,306
36,620
60,238
110,290
(180,494)
(1,164)
(2,903)
22,587
For the year ended December 31, 2012, loans receivable of $95.6 million were reclassified as loans held for sale, and loans
held for sale of $220.0 million were sold. For the year ended December 31, 2011, loans receivable of $110.3 million were reclassified
as loans held for sale, and loans held for sale of $180.5 million were sold.
87
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
For the year ended December 31, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential
mortgage loans were purchased. There was no purchase of loans receivable for the year ended December 31, 2011.
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 for the periods indicated
2012
As of and for the Year Ended December 31,
2011
2010
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
(In Thousands)
Balance at Beginning of Period
Provision Charged to Operating Expense
Actual Charge-Offs
Recoveries on Loans Previously Charged Off
Balance at End of Period
$
$
89,936
7,157
(38,227)
4,439
63,305
$
$
2,981
(1,157)
-
-
1,824
$
$
146,059
12,536
(78,652)
9,993
89,936
$
$
3,417
(436)
-
-
2,981
$
$
144,996
122,955
(131,823)
9,931
146,059
$
$
3,876
(459)
-
-
3,417
The allowance for off-balance sheet items and provisions is maintained at a level believed to be sufficient to absorb estimated
probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic
evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for
loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of December 31,
2012 and 2011, the allowance for off-balance sheet items amounted to $1.8 million and $3.0 million, respectively. Net adjustments to
the allowance for off-balance sheet items are included in the provision for credit losses.
88
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table details the information on the allowance for loan losses by portfolio segment for the years ended
December 31, 2012 and 2011
Real Estate
Commercial
and
Industrial
Consumer
(In Thousands)
Unallocated
Total
December 31, 2012:
Allowance for Loan Losses:
Beginning Balance
Charge-Offs
Recoveries on Loans Previously Charged Off
Provision
Ending Balance
Ending Balance: Individually Evaluated for Impairment
Ending Balance: Collectively Evaluated for Impairment
Loans Receivable:
Ending Balance
Ending Balance: Individually Evaluated for Impairment
Ending Balance: Collectively Evaluated for Impairment
December 31, 2011:
Allowance for Loan Losses:
Beginning Balance
Charge-Offs
Recoveries on Loans Previously Charged Off
Provision
Ending Balance
Ending Balance: Individually Evaluated for Impairment
Ending Balance: Collectively Evaluated for Impairment
Loans Receivable:
Ending Balance
Ending Balance: Individually Evaluated for Impairment
Ending Balance: Collectively Evaluated for Impairment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Credit Quality Indicators
19,637
11,382
583
9,342
18,180
161
18,019
888,872
8,819
880,053
32,766
18,539
2,794
2,616
19,637
3,618
16,019
749,920
38,699
711,221
$
$
$
$
$
$
$
$
$
$
$
$
$
$
66,005
25,897
3,758
(1,938)
41,928
5,456
36,472
1,123,012
44,273
1,078,739
108,986
59,498
7,093
9,424
66,005
19,738
46,267
1,145,474
82,244
1,063,230
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,243
948
98
887
2,280
615
1,665
36,676
1,652
35,024
2,079
615
106
673
2,243
26
2,217
43,346
746
42,600
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,051
-
-
(1,134)
917
-
917
-
-
-
2,228
-
-
(177)
2,051
-
2,051
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
89,936
38,227
4,439
7,157
63,305
6,232
57,073
2,048,560
54,744
1,993,816
146,059
78,652
9,993
12,536
89,936
23,382
66,554
1,938,740
121,689
1,817,051
As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to
identify credit risk and assign an appropriate grade (from (0) to (8)) for each and every loan in our loan portfolio. All loans are
reviewed by a third-party loan reviewer on a semi-annual basis. Additional adjustments are made when determined to be necessary.
The loan grade definitions are as follows
Pass: Pass loans, grade (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements,
and do not exhibit any potential or defined weaknesses as defined under “Special Mention (5)”, “Substandard (6)” or “Doubtful (7)”.
This grade is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It
includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass grade, or
(0) to (4)
Pass (0) Loans secured in full by cash or cash equivalents.
Pass (1)
Pass (2)
Loans or commitments requiring a very strong, well-structured credit relationship with an established borrower.
The relationship should be supported by audited financial statements indicating cash flow, well in excess of
debt service requirement, excellent liquidity, and very strong capital.
Loans or commitments requiring a well-structured credit that may not be as seasoned or as high quality as grade
(1). Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This
category includes individuals with substantial net worth supported by liquid assets and strong income.
89
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Pass (3)
Pass (4)
Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have
sound balance sheets and significant cash flow coverage, although they may be somewhat more leveraged and
exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the
Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real
estate and asset-based loans with this grade must have characteristics that place them well above the minimum
underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable
leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity.
Loans or commitments to borrowers exhibiting either somewhat weaker balance sheets or positive, but
inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result, the
Bank may have secured its exposure to mitigate the risk. If so, the collateral taken should provide an
unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be
adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s
ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based
borrowers who fully comply with all underwriting standards and are performing according to projections would
be assigned this grade.
Special Mention: A Special Mention credit, grade (5), has potential weaknesses that deserve management’s close attention.
If left uncollected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard
classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A Substandard credit, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A
credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type o f
collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or
deficiencies are not corrected.
Doubtful: A Doubtful credit, grade (7), is one that has critical weaknesses that would make the collection or liquidation of
the full amount due improbable. However, there may be pending events which may work to strengthen the credit, and therefore the
amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active
bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it
is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified
Loss will be charged off in a timely manner.
90
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total
December 31, 2011:
Real Estate Loans:
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total
Pass
(Grade 0-4)
Criticized
(Grade 5)
Classified
(Grade 6-7)
Total Loans
(In Thousands)
$
$
$
$
386,650
5,491
366,518
-
99,250
87,370
710,723
53,391
136,058
34,221
33,707
1,913,379
292,914
4,351
297,734
-
48,592
100,804
634,822
44,985
96,983
26,566
40,454
1,588,205
$
$
$
$
3,971
-
12,132
-
-
663
13,038
863
1,119
-
201
31,987
8,858
-
8,428
14,080
-
8,680
36,290
7,676
1,496
-
676
86,184
$
$
$
$
2,324
8,516
1,492
-
2,528
22,139
50,431
1,867
11,129
-
2,768
103,194
10,685
3,418
36,635
19,896
4,329
41,796
122,444
3,109
17,713
2,110
2,216
264,351
$
$
$
$
392,945
14,007
380,142
-
101,778
110,172
774,192
56,121
148,306
34,221
36,676
2,048,560
312,457
7,769
342,797
33,976
52,921
151,280
793,556
55,770
116,192
28,676
43,346
1,938,740
91
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following is an aging analysis of past due loans, disaggregated by loan class, as of December 31, 2012 and 2011
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
or More
Past Due
Total
Past Due
(In Thousands)
Current
Total Loans
Accruing
90 Days
or More
Past Due
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total
December 31, 2011:
Real Estate Loans:
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
International Loans
Consumer Loans
Total
Impaired Loans
$
$
$
$
$
-
-
-
-
-
$
111
-
-
-
588
$
-
335
-
-
311
$
111
335
-
-
899
392,834
13,672
380,142
-
100,879
$
392,945 $
14,007
380,142
-
101,778
918
1,949
-
3,759
-
61
6,687
485
-
-
-
277
438
3,162
-
260
-
126
4,748
$
$
$
1,103
-
188
1,039
-
146
3,175
-
-
-
-
1,613
611
6,496
-
472
-
7
9,199
$
$
$
1,279
926
416
2,800
-
538
6,605
-
-
-
8,310
2,221
1,833
1,202
416
7,108
-
154
21,244
$
$
$
3,300
2,875
604
7,598
-
745
16,467
485
-
-
8,310
4,111
2,882
10,860
416
7,840
-
287
35,191
$
$
$
106,872
771,317
55,517
140,708
34,221
35,931
2,032,093
311,972
7,769
342,797
25,666
48,810
148,398
782,696
55,354
108,352
28,676
43,059
1,903,549
$
$
$
110,172
774,192
56,121
148,306
34,221
36,676
2,048,560 $
$
312,457
7,769
342,797
33,976
52,921
151,280
793,556
55,770
116,192
28,676
43,346
1,938,740
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Loans are considered impaired when non-accrual and principal or interest payments have been contractually past due for 90
days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt
Restructuring (“TDR”) loans to offer terms not typically granted by the Bank; or when current information or events make it unlikely
to collect in full according to the contractual terms of the loan agreements; or there is a deterioration in the borrower’s financial
condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is
in doubt according to the original contractual terms.
We evaluate loan impairment in accordance with applicable GAAP. Impaired loans are measured based on the present value
of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable
market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan
is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or,
alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from
the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.
The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan
balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from
loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the
collateral coverage, using recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
92
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated
December 31, 2012:
Real Estate Loans
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Consumer Loans
Total Gross Loans
December 31, 2011:
Real Estate Loans
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Consumer Loans
Total Gross Loans
Recorded
Investment
Unpaid
Principal
Balance
With No
Related
Allowance
Recorded
With an
Allowance
Recorded
(In Thousands)
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
2,930
2,097
527
-
3,265
14,532
22,050
1,521
6,170
1,652
54,744
1,260
3,178
14,773
14,120
5,368
16,035
53,159
1,431
11,619
746
121,689
$
$
$
$
3,024
2,307
527
-
3,308
15,515
23,221
1,704
10,244
1,711
61,561
1,260
3,210
14,823
14,120
5,408
16,559
54,156
1,554
12,971
788
124,849
$
$
$
$
2,930
2,097
-
-
1,866
6,826
9,520
848
4,294
449
28,830
1,100
-
1,131
14,120
3,208
244
14,990
715
9,445
511
45,464
$
$
$
$
-
-
527
-
1,399
7,706
12,530
673
1,876
1,203
25,914
160
3,178
13,642
-
2,160
15,791
38,169
716
2,174
235
76,225
$
$
$
$
-
-
67
-
94
2,144
2,319
230
762
615
6,231
126
360
3,004
-
128
10,793
7,062
716
1,167
26
23,382
$
$
$
$
2,357
2,140
835
6,012
3,268
14,160
21,894
1,688
7,173
1,205
60,732
105
16,910
14,850
14,353
5,399
15,685
51,977
1,590
12,658
832
134,359
$
$
$
$
136
179
43
207
164
821
1,723
64
1,131
73
4,541
-
78
907
1,077
279
1,043
3,652
82
1,186
44
8,348
The following is a summary of interest foregone on impaired loans for the periods indicated
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms
Less: Interest Income Recognized on Impaired Loans
Interest Foregone on Impaired Loans
_______________
(1)
Includes interest income recognized on an accrual basis prior to classification as impaired.
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
$
5,887
(4,541)
$
9,192
(8,348)
$
20,848
(11,473)
1,346
$
844
$
9,375
There were no commitments to lend additional funds to borrowers whose loans are included above.
Non-Accrual loans
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,
unless management believes the loan is adequately collateralized and in the process of collection. 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 a loan 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 collectability of principal
is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when
principal and interest payments become current and full repayment is expected.
93
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table details non-accrual loans, disaggregated by loan class for the periods indicated
Real Estate Loans:
Commercial Property
Retail
Land
Other
Construction
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Consumer Loans
Total Non-Accrual Loans
The following table details non-performing assets for the periods indicated
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
As of December 31,
2012
2011
(In Thousands)
$
$
1,079
2,097
-
-
1,270
8,311
8,679
1,521
12,563
1,759
$
37,279
$
1,260
2,362
1,199
8,310
2,097
7,706
11,725
1,431
15,479
809
52,378
As of December 31,
2012
2011
(In Thousands)
$
$
37,279
-
37,279
774
$
38,053
$
52,378
-
52,378
180
52,558
Loans on non-accrual status, excluding loans held for sale, totaled $37.3 million as of December 31, 2012, compared to $52.4
million as of December 31, 2011, representing a 28.8 percent decrease. Delinquent loans (defined as 30 days or more past due),
excluding loans held for sale, were $16.5 million as of December 31, 2012, compared to $35.2 million as of December 31, 2011,
representing a 53.1 percent decrease.
As of December 31, 2012, other real estate owned consisted of two properties located in Illinois and Virginia with a
combined carrying value of $774,000 with no valuation adjustment. For the year ended December 31, 2012, six properties were
transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $3.1 million, and a valuation
adjustment of $433,000 was recorded. As of December 31, 2011, there was one real estate owned property, located in Colorado, with
a net carrying value of $180,000.
Troubled Debt Restructuring
In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled
Debt Restructuring, which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective
for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the
annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance
should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.
As a result of the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the
annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired
and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.
94
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
During the year ended December 31, 2012, we restructured monthly payments on 59 loans, with a net carrying value of $15.0
million as of December 31, 2012, through temporary payment structure modifications or re-amortization. For the restructured loans on
accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructu ring and the
borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the
revised terms are probable.
The following table details troubled debt restructurings, disaggregated by type of concession and by loan type as of
December 31, 2012 and 2011
Non-Accrual TDRs
Reduction
of
Principal
or
Interest
Deferral
of
Principal
and
Interest
Extension
of
Maturity
Deferral
of
Principal
Accrual TDRs
Reduction
of
Principal
or
Interest
Extension
of
Maturity
Deferral
of
Principal
and
Interest
Total
Deferral
of
Principal
Total
(In Thousands)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail
Other
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Total
December 31, 2011:
Real Estate Loans:
Commercial Property
Retail
Other
Residential Property
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Total
$ -
-
827
$ -
-
-
$ -
-
-
$ 1,080
-
-
$ 1,080
-
827
$ 357
527
-
$ -
-
572
$ -
-
-
$ 175
-
-
$ 532
527
572
-
2,317
673
2,831
$ 6,648
658
1,343
-
1,287
$ 3,288
4,558
318
188
1,032
$ 6,096
1,413
-
244
-
$ 2,737
6,629
3,978
1,105
5,150
$ 18,769
976
4,444
-
484
$ 6,788
-
-
-
-
$ 572
1,090
448
-
100
$ 1,638
3,260
4,547
-
-
$ 7,982
5,326
9,439
-
584
$ 16,980
$ -
900
-
$ -
-
-
$ -
-
138
$ 1,260
-
-
$ 1,260
900
138
$ -
1,480
2,167
$ -
-
572
$ -
-
-
$ -
-
-
$ -
1,480
2,739
765
1,202
715
2,758
$ 6,340
669
1,523
-
1,524
$ 3,716
4,650
2,403
-
794
$ 7,985
484
3,243
198
-
$ 5,185
6,568
8,371
913
5,076
$ 23,226
185
2,005
-
1,354
$ 7,191
-
-
468
$ 1,040
7,069
8,628
-
-
$ 15,697
1,584
2,699
-
-
$ 4,283
8,838
13,332
-
1,986
$ 28,375
95
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table details troubled debt restructuring, disaggregated by loan class, for the years ended December 31, 2012
and 2011
December 31, 2012
December 31, 2011
For the Year Ended
Number
of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
(In Thousands, Except Number of Loans)
2
1
-
37
7
1
11
59
$
$
562
547
-
6,024
7,963
202
1,022
16,320
$
$
533
527
-
5,277
7,570
188
951
15,046
2
2
3
50
12
-
29
98
$
$
1,260
2,387
2,740
15,410
15,363
-
7,954
45,114
$
$
1,260
2,381
2,739
14,797
14,268
-
6,670
42,115
Real Estate Loans:
Commercial Property
Retail (1)
Other (2)
Residential Property (3)
Commercial and Industrial Loans:
Commercial Term
Unsecured (4)
Secured By Real Estate (5)
Commercial Lines of Credit (6)
SBA Loans (7)
Total
_______________
(1)
Includes modifications of $357,000 through payment deferrals and $175,000 through extensions of maturity for the year ended December 31, 2012, and $1.3
million through extensions of maturity for the year ended December 31, 2011.
Includes modifications of $527,000 through payment deferrals for the year ended December 31, 2012 and $2.4 million through payment deferrals for the year
ended December 31, 2011.
Includes modifications of $2.7 million through payment deferrals for the year ended December 31, 2011.
Includes modifications of $909,000 through payment deferrals, $723,000 through reductions of principal or accrued interest, and $3.6 million through extensions
of maturity for the year ended December 31, 2012, and $1.6 million through payment deferrals, $11.5 million through reductions of principal or accrued interest,
and $1.5 million through extensions of maturity for the year ended December 31, 2011.
Includes modifications of $5.4 million through payment deferrals, $318,000 through reductions of principal or accrued interest, and $1.9 million through
extensions of maturity for the year ended December 31, 2012, and $2.4 million through payment deferrals, $9.1 million through reduction of principal or accrued
interest and $2.7 million through extensions of maturity for the year ended December 31, 2011.
Includes a modification of $188,000 through reductions of principal or accrued interest for the year ended December 31, 2012.
Includes modifications of $504,000 through payment deferrals and $447,000 through reductions of principal or accrued interest for the year ended December 31,
2012, and $5.7 million through payment deferrals and $957,000 through reductions of principal or accrued interest for the year ended December 31, 2011.
(2)
(3)
(4)
(5)
(6)
(7)
As of December 31, 2012 and 2011, total TDRs, excluding loans held for sale, was $35.7 million and $51 6 million,
respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the
borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were
restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or
allowing for interest only monthly payments for six months or less. All TDRs are impaired and are individually evaluated for specific
impairment using one of these three criteria (1) the present value of expected future cash flows discounted at the loan’s effective
interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.
At December 31, 2012 and 2011, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and
$3.6 million and $14.2 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.
96
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the
previous twelve months, disaggregated by loan class, during the years ended December 31, 2012 and 2011
For the Year Ended
December 31, 2012
December 31, 2011
Number
of
Loans
Recorded
Investment
Number
of
Loans
Recorded
Investment
(In Thousands)
8
-
1
3
12
$
$
554
-
188
165
907
6
-
-
8
14
$
$
2,368
-
-
1,450
3,818
Commercial and Industrial Loans:
Commercial Term
Unsecured
Secured By Real Estate
Commercial Lines of Credit
SBA Loans
Totals
Servicing Assets
The changes in servicing assets were as follows for the years ended December 31, 2012 and 2011
Balance at Beginning of Year
Addition
Amortization
Balance at End of Year
As of December 31,
2012
2011
(In Thousands)
$
$
$
3,720
2,889
(1,067)
5,542
$
2,890
1,560
(730)
3,720
At December 31, 2012 and 2011, we serviced loans sold to unaffiliated parties in the amounts of $297.2 million and $218.5
million, respectively. These represented loans that have been sold 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 6 — PREMISES AND EQUIPMENT
The following is a summary of the major components of premises and equipment
Land
Building and Improvements
Furniture and Equipment
Leasehold Improvements
Software
Accumulated Depreciation and Amortization
Total Premises and Equipment, Net
As of December 31,
2012
2011
(In Thousands)
$
$
6,120
9,197
15,039
10,320
862
41,538
(26,388)
6,120
9,198
15,229
11,298
862
42,707
(26,104)
$
15,150
$
16,603
Depreciation and amortization expense totaled $2.1 million, $2.2 million, and $2.3 million for the years ended December 31,
2012, 2011 and 2010, respectively.
97
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 7 — OTHER INTANGIBLE ASSETS
Other intangible assets were as follows for the periods indicated
December 31, 2012
December 31, 2011
Recorded
Investment
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
(In Thousands)
Accumulated
Amortization
Net
Carrying
Amount
8 years
20 years
10 years
15 years
$
$
13,137
970
770
580
15,457
$
$
(13,137) $
(290)
(462)
(233)
(14,122) $
-
680
308
347
1,335
$
$
13,137
970
770
580
15,457
$
$
(13,103) $
(242)
(385)
(194)
(13,924) $
34
728
385
386
1,533
Other Intangible Assets:
Core Deposit Intangible
Trade Names
Client/Insured Relationships
Carrier Relationships
Total Other Intangible Assets
The weighted-average amortization period for other intangible assets is 9.0 years. The total amortization expense for other
intangible assets was $198,000, $700,000 and $1.1 million during the years ended December 31, 2012, 2011 and 2010, respectively.
Estimated future amortization expense related to other intangible assets for each of the next five years is as follows
Year Ending
December 31,
2013
2014
2015
2016
2017
Total
Amount
(In Thousands)
$
$
164
164
164
164
87
743
As of December 31, 2012 and 2011, management is not aware of any circumstances that would indicate impairment of other
intangible assets. There was no impairment charges related to other intangible asset recorded through earnings in 2012 or 2011.
NOTE 8 — DEPOSITS
At December 31, 2012, the scheduled maturities of time deposits are as follows
Year Ending December 31,
2013
2014
2015
2016
2017 and Thereafter
Total
Time
Deposits
of $100,000
or More
444,247
159,123
12,817
-
-
Other
Time
Deposits
(In Thousands)
$
300,887
60,529
4,658
1,782
943
Total
$
745,134
219,652
17,475
1,782
943
616,187
$
368,799
$
984,986
$
$
98
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
A summary of interest expense on deposits was as follows for the periods indicated
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,
2012
2011
(In Thousands)
2010
$
$
2,152
3,085
7,290
3,350
2,757
3,461
13,855
3,885
$
$
15,877
$
23,958
$
3,439
4,936
19,529
6,504
34,408
Accrued interest payable on deposits totaled $3.5 million and $6.2 million at December 31, 2012 and 2011, respectively.
Total deposits reclassified to loans due to overdrafts at December 31, 2012 and 2011 were $1.8 million and $2.4 million, respectively.
Pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000. As of
December 31, 2012, time deposits of more than $250,000 were $238.2 million.
NOTE 9 — FHLB ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings consisted of the following
FHLB Advances
Total FHLB Advances
As of December 31,
2012
2011
(In Thousands)
$
$
2,935
2,935
$
$
3,303
3,303
FHLB advances represent collateralized obligations with the FHLB. The following is a summary of contractual maturities
pertaining to FHLB advances
Year of Maturity: 2013
2014
2015
Total
The following is financial data pertaining to FHLB advances
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
As of December 31, 2012
Weighted-
Average
Interest
Rate
Amount
(In Thousands)
$
$
395
2,540
-
2,935
5 27%
5 27%
-
5.27%
Year Ended December 31,
2012
2011
(In Thousands)
2010
5 27%
5 27%
3,354
3,273
5 27%
1 00%
66,191
153,622
$
$
0 87%
0 88%
158,531
153,951
$
$
$
$
We have pledged investment securities available for sale and loans receivable with carrying values of $17.1 million and
$363.8 million, respectively, as collateral with the FHLB for this borrowing facility. The total borrowing capacity available from the
collateral that has been pledged is $275.1 million, of which $272.1 million remained available as of December 31, 2012. At December
99
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
31, 2012, we had $111.4 million available for use through the Fed Discount Window, as we pledged loans with a carrying value of
$160.2 million, and there were no borrowings.
At December 31, 2012, advances from the FHLB were $2.9 million, a decrease of $368,000, or 11.1 percent, from the
December 31, 2011 balance of $3.3 million. At December 31, 2012, there was no FHLB advance with a remaining maturity of less
than one year.
For the years ended December 31, 2012, 2011 and 2010, interest expense on FHLB advances were $165,000, $662,000 and
$1.4 million, respectively, and the weighted-average interest rates were 5.27 percent, 1.00 percent and 0.88 percent, respectively.
NOTE 10 — JUNIOR SUBORDINATED DEBENTURES
During the first half of 2004, we issued three junior subordinated notes to finance the purchase of Pacific Union Bank. The
outstanding subordinated debentures related to these offerings totaled $82.4 million at December 31, 2012 and 2011 as follows
Trust
Preferred
Securities
Issuance (1) Outstanding
Interest
Rate as of
December 31,
2012
Description
Adjustable
Hanmi Capital Trust I
1/8/2004
$ 30,000
3 24%
Adjustable Quarterly
Hanmi Capital Trust II
3/15/2004
$ 30,000
3 21%
Adjustable Quarterly
Hanmi Capital Trust III
4/28/2004
$ 20,000
2 94%
Adjustable Quarterly
Junior
Subordinated
Debt Owed
to Trusts (2)
Final
Maturity
Date
$ 30,928
1/15/2034
$ 30,928
3/15/2034
$ 20,619
4/30/2034
Interest Rate
Basis
3 Month LIBOR
+ 2 90%
3 Month LIBOR
+ 2 90%
3 Month LIBOR
+ 2 63%
_______________
(1)
(2)
Each issue of junior subordinated debentures may be redeemed in whole or in part by us after five years from the first interest payment date
Junior subordinated debt includes the funding cost of $69,000
Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing
the proceeds in our junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests
in the assets of the respective trusts and are subject to mandatory redemption upon payments of the junior subordinated debentures
held by the trust. The common securities of each trust are wholly-owned by us. Each trust’s ability to pay amounts due on the trust
preferred securities is solely dependent upon our making payment on the related junior subordinated debentures. The debentures,
which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior
indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to
the extent not paid or made by each trust, provided that such trust has funds available for such obligations.
Under the provisions of each issue of the junior subordinated debentures, we have the right to defer payment of interest on
the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the junior
subordinated debentures are deferred, the distributions on the applicable trust preferred securities will also be deferred. However, the
interest due would continue to accrue during any such interest payment deferral period.
In October 2008, we committed to the FRB that no interest payments on the junior subordinated debentures would be made
without the prior written consent of the FRB. Therefore, to preserve its capital position, Hanmi Financial’s Board of Directors 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. In addition, we were prohibited from making interest payments on our outstanding junior
subordinated debentures under the terms of the regulatory enforcement actions without the prior written consent of the FRB and the
DFI. Upon termination of the regulatory enforcement actions by the FRB on December 4, 2012 and the DFI on October 29, 2012,
Hanmi Financial paid accrued interest of $4.6 million on December 15, 2012 for the Trust II and, subsequent to December 31, 2012,
has paid accrued interest of $5.2 million and $3.1 million in January 2013 for the Trust I and III, respectively. Accrued interest
payable on the junior subordinated debentures were $8.2 million and $9.8 million at December 31, 2012 and 2011, respectively.
For the years ended December 31, 2012, 2011, and 2010, interest expense on the junior subordinated debentures totaled $2.7
million, $2.9 million and $2.8 million, respectively, and the average interest rates were 3.28 percent, 3.54 percent and 3.41 percent,
respectively.
The trust preferred securities issued by the trusts are included in our Tier 1 capital for regulatory purposes, subject to
100
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
quantitative and qualitative limits. Under the rules issued by FRB, restricted core capital elements (including trust preferred securities
and qualifying perpetual preferred stock) can be no more than 25 percent of core capital, net of goodwill and associated deferred tax
liability. The amount of such excess trust preferred securities are includable in Tier 2 capital.
NOTE 11 — INCOME TAXES
In accordance with the provisions of FASB ASC 740, the Company periodically reviews its income tax positions based on
tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into
consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing
authorities on similar transactions, if any, and the overall tax environment.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
Unrecognized Tax Benefits at Beginning of Year
Gross Increases for Tax Positions of Prior Years
Gross Decreases for Tax Positions of Prior Years
Increase in Tax Positions for Current Year
Decrease Due to FTB Audit Result
Transfer to Current State Tax Reserve
Lapse in Statute of Limitations
Unrecognized Tax Benefits at End of Year
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
$
1,281
14
-
-
-
-
(41)
$
940
515
-
-
-
-
(174)
$
1,254
$
1,281
$
1,988
157
-
-
(673)
(358)
(174)
940
The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $1.0 million, $1.0
million and $0.7 million as of December 31, 2012, 2011 and 2010, respectively.
For the year ended December 31, 2012, unrecognized tax benefits decreased by $27,000 in connection with the tax position
taken on expense related to prior business acquisition cost. For the year ended December 31, 2011, unrecognized tax benefits
increased by $341,000 in connection with the tax position taken on expense related to non-qualified stock option and prior business
acquisition costs. For the year ended December 31, 2010, unrecognized tax benefit decreased by $1.0 million mainly due to the audit
result from the Franchise Tax Board (“FTB”) and the recognition of state tax benefits for the year.
In 2012 and 2011, the company accrued interest of $41,000 and $181,000 for uncertain tax benefits, respectively. In 2010,
accrued interest of $136,000 was reversed due to the audit result from the FTB for the tax year 2005 to 2007. As of December 31,
2012, 2011 and 2010, the total amount of accrued interest related to uncertain tax positions, net of federal tax benefit, was $360,000,
$319,000 and $138,000, 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, dividend income from Federal Reserve Bank stock and expense related to non-
qualified stock options. 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 2014 because of a lapse of the statute of limitations. We do not anticipate
any material change in the total amount of unrecognized tax benefits to occur within the next 12 months.
As of December 31, 2012, the Company was subject to examination by various federal and state tax authorities for the years
ended December 31, 2004 through 2011. As of December 31, 2012, the Company was subjected to audit or examination by Internal
Revenue Service for the 2009 tax year, California FTB for the 2008 and 2009 tax years, and Texas Comptroller of Public Accounts for
the 2008 tax year. Management does not anticipate any material changes in our financial statements due to the result of the audits.
101
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
A summary of the provision (benefit) for income taxes was as follows
Current Expense:
Federal
State
Total Current Expense (Benefit)
Deferred Expense:
Federal
State
Total Deferred (Benefit) Expense
Provision (Benefit) for Income Taxes
Deferred tax assets and liabilities were as follows
Deferred Tax Assets:
Credit Loss Provision
Depreciation
Net Operating Loss Carryforward
Unrealized Loss on Securities Available for Sale, Interest-Only Strips
Tax Credit
State Taxes
Other
Total Deferred Tax Assets
Deferred Tax Liabilities:
Mark to Market
Purchase Accounting
Unrealized Gain on Securities Available for Sale, Interest-Only Strips
State Taxes
Other
Total Deferred Tax Liabilities
Valuation Allowance
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
$
4,993
(19)
4,974
(25,836)
(26,506)
(52,342)
$
704
29
733
-
-
-
(3,224)
(349)
(3,573)
3,561
-
3,561
$
(47,368)
$
733
$
(12)
2012
As of December 31,
2011
(In Thousands)
2010
$
29,995
1,253
33,875
-
5,426
-
3,766
74,315
(5,562)
(3,217)
(3,096)
(9,429)
(2,013)
(23,317)
-
$
42,712
1,240
50,255
-
5,803
91
3,517
103,618
(14,820)
(3,119)
(1,752)
-
(1,658)
(21,349)
(82,269)
$
69,532
1,203
39,994
988
4,059
90
4,259
120,125
(21,696)
(3,747)
-
-
(2,003)
(27,446)
(92,679)
Net Deferred Tax Assets
$
50,998
$
-
$
-
As of December 31, 2012, the Company’s net deferred tax assets were primarily the result of net operating loss carryforwards,
allowance for loan losses, and tax credit carryforwards. A valuation allowance of $82.3 million was recorded against its gross deferred
tax asset balance as of December 31, 2011. For the year ended December 31, 2012, the Company recorded a net valuation allowan ce
release of $62.6 million based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to
be realized.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact
management’s view with regards to future realization of deferred tax assets. As of December 31, 2012, in part because possible
sources of taxable income were available under the tax law to realize a tax benefit for deductible temporary differences and
carryforwards, management determined that sufficient positive evidence existed as of December 31, 2012, to conclude that it was
more likely than not that deferred taxes were fully realizable, and therefore, reduced the valuation allowance accordingly.
As of December 31, 2012, the Company had net operating loss carryforwards of $39.9 million and $183.8 million for federal
and state income tax purposes, respectively, which are available to offset future taxable income, if any, through 2031.
102
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Reconciliation between the federal statutory income tax rate and the effective tax rate is shown in the following table
Federal Statutory Income Tax Rate
State Taxes, Net of Federal Tax Benefits
Tax-Exempt Municipal Securities
Tax Credit - Federal
Other
Valuation Allowance
Effective Tax Rate
NOTE 12 — SHARE-BASED COMPENSATION
Year Ended December 31,
2012
2011
2010
35 00%
0 03%
-0 32%
-2 10%
-2 16%
-140 59%
-110.14%
35 00%
0 00%
-0 26%
-2 97%
-0 80%
-28 50%
2.47%
35 00%
-0 10%
0 10%
1 50%
1 60%
-38 00%
-0.10%
At December 31, 2012, we had two incentive plans, the Year 2000 Stock Option Plan (the “2000 Plan”) and, the 2007 Equity
Compensation Plan (the “2007 Plan” and with the 2000 Plan, the “Plans”), which replaced the 2000 Plan. The 2007 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 2000 Plan provided for the grant of non-
qualified and incentive stock options. Although no future stock options may be granted under the 2000 Plan, certain employees,
directors and officers of Hanmi Financial and its subsidiaries still hold options to purchase Hanmi Financial common stock under the
2000 Plan.
Under the 2007 Plan, we may grant equity incentive awards for up to 375,000 shares of common stock. As of December 31,
2012, 21,550 shares were still available for issuance under the 2007 Plan.
The table below shows the share-based compensation expense and related tax benefits for the periods indicated
Share-Based Compensation Expense
Related Tax Benefits
Year Ended December 31,
2012
2011
(In Thousands)
2010
$
$
478
201
$
$
608
256
$
$
1,012
426
As of December 31, 2012, unrecognized share-based compensation expense was as follows
Stock Option Awards
Restricted Stock Awards
Total Unrecognized Share-Based Compensation Expense
2007 Equity Compensation Plan and 2000 Stock Option Plan
Stock Options
Unrecognized
Expense
(In Thousands)
$
$
932
57
989
Average
Expected
Recognition
Period
2 9 years
1 2 years
2.8 years
All stock options granted under the 2007 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 2007 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.
103
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The weighted-average estimated fair value per share of options granted under the Plans was as follows
Weighted-Average Estimated Fair Value Per Share of Options Granted
$
5 40
$
6 23
$
-
Scholes option-pricing model with the following weighted-average assumptions
The weighted-average fair value per share of options granted was estimated on the date of grant using the Black-
Year Ended December 31,
2012
2011
2010
Weighted-Average Assumptions
Dividend Yield
Expected Volatility
Expected Term
Risk-Free Interest Rate
Year Ended December 31,
2012
2011
2010
-
65 23%
3 0 years
0 32%
-
103 76%
3 2 years
1 04%
-
-
-
-
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 Plans is presented for the periods indicated
Grant Date Fair Value of Options Granted
Fair Value of Options Vested
Total Intrinsic Value of Options Exercised (1)
Cash Received from Options Exercised
Weighted-Average Estimated
Fair Value Per Share of Options Granted
Year Ended December 31,
2012
2011
(In Thousands, Except Per Share Data)
2010
$
$
$
$
$
1,197
911
6
10
$
$
$
$
156
1,272
-
-
$
$
$
$
5 40
$
6 23
$
-
538
14
22
-
_______________
(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.
104
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following is a summary of stock option transactions under the Plans for the periods indicated
2012
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
Year Ended December 31,
2011
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
2010
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
Options Outstanding at Beginning of Year
Options Granted
Options Exercised
Options Forfeited
Options Expired
Options Outstanding at End of Year
Options Exercisable at End of Year
143,325
221,750
(1,250)
(5,375)
(15,500)
342,950
159,762
$
$
$
$
$
$
$
81 27
12 54
8 32
8 61
98 76
37.44
66 19
$
133,361
$
25,000
$
-
(425) $
(14,611) $
$
143,325
95 45
9 88
-
64 89
39 09
81.27
107,475
$
104 25
$
147,544
$
-
(2,000) $
(1,025) $
(11,158) $
$
133,361
99,586
$
94 26
-
10 80
136 96
91 04
95.45
111 52
The following is a summary of transactions for non-vested stock options under the Plans for the periods indicated
2012
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
Year Ended December 31,
2011
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
2010
Weighted-
Average
Exercise
Price 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
35,850
$
$
221,750
(69,037) $
(5,375) $
$
183,188
25 20
12 54
13 20
8 61
12.37
33,775
$
$
25,000
(22,500) $
(425) $
$
35,850
17 68
9 88
56 54
64 89
25.20
54,550
$
$
-
(19,750) $
(1,025) $
$
33,775
21 65
-
27 28
44 00
17.68
As of December 31, 2012, stock options outstanding under the Plans were as follows
Options Outstanding
Options Exercisable
Number
of Shares
Intrinsic
Value (1)
Weighted- Weighted-
Average
Average
Remaining
Exercise
Contractual
Price Per
Life
Share
Number
of Shares
Intrinsic
Value (1)
Weighted- Weighted-
Average
Average
Remaining
Exercise
Contractual
Price Per
Life
Share
$8 00 to $49 99
$50 00 to $99 99
$100 00 to $149 99
$150 00 to $173 04
Total
274,375
-
56,075
12,500
$ 359
-
-
-
$ 13 29
-
$ 126 63
$ 167 52
9 3 years
-
2 4 years
3 8 years
91,187
-
56,075
12,500
$ 136
-
-
-
$ 15 14
-
$ 71 14
$ 167 52
8 7 years
2 4 years
3 8 years
342,950
$ 359
$ 37.44
8.0 years
159,762
$ 136
$ 27.68
6.1 years
_______________
(1)
Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $13.59 as of December 31, 2012, and the
exercise price, multiplied by the number of options.
Restricted Stock Awards
Restricted stock awards under the 2007 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 forfeite d if officers
and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock are treated as cancelled shares.
105
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The table below provides information for restricted stock awards under the 2007 Plan for the periods indicated
2012
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
Year Ended December 31,
2011
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
2010
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
Restricted Stock at Beginning of Year
Restricted Stock Granted
Restricted Stock Forfeited
Restricted Stock Vested
Restricted Stock at End of Year
$
19,725
$
-
(2,000) $
(7,225) $
10,500
$
11 66
-
8 32
13 78
10.83
18,200 $
10,000 $
- $
(8,475) $
19,725 $
14 38
9 88
-
15 41
11.66
22,925 $
- $
- $
(4,725) $
18,200 $
15 04
-
-
17 52
14.38
NOTE 13 — STOCKHOLDERS’ EQUITY
Stock Warrants
As part of the agreement dated as of July 27, 2010 with Cappello Capital Corp., the placement agent in connection with our
best efforts offering and the financial advisor in connection with our completed rights offering, we issued warrants to purch ase
250,000 shares of our common stock for services performed. The warrants have an exercise price of $9 60 per share. According to the
agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company
followed the guidance of FASB ASC Topic 815- 40, “Derivatives and Hedging—Contracts in Entity’s Own Stock” (“ASC 815- 40”),
which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s
own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the
issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of i) the date at which a
commitment for performance by the counterparty to earn the equity instruments is reached or ii) the date at which the counterparty’s
performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liabi lity and a
cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility was based on historical
volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of
111.46 percent. The expected life assumption was based on the contract term of five years. The dividend yield of zero was based on
the fact that we had no intention to pay cash dividends for the term at the grant date. The risk free rate of 2.07 percent used for the
warrant was equal to the zero coupon rate in effect at the time of the grant.
Upon re-measuring the fair value of the stock warrants at December 31, 2012, compared to $883,000 at December 31, 2011,
the fair value increased by $23,000, which we have included in other operating expenses for the year ended December 31, 2012. We
used a weighted average expected stock volatility of 46.82 percent and a remaining contractual life of 2.8 years based on the contract
terms. We also used a dividend yield of zero as we have no present intention to pay cash dividends. The risk free rate of 0.45 percent
used for the warrant is equal to the zero coupon rate in effect at the end of the measurement period.
NOTE 14 — EARNINGS (LOSS) PER SHARE
Earnings 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 is 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.
106
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated
Income
(Loss)
(Numerator)
Weighted-
Average
Shares
(Denominator)
(In Thousands, Except Per Share Data)
Per
Share
Amount
Year Ended December 31, 2012:
Basic EPS
Effect of Dilutive Securities - Options, Warrants and Unvested Restricted Stock
Diluted EPS
Year Ended December 31, 2011:
Basic EPS
Effect of Dilutive Securities - Options, Warrants and Unvested Restricted Stock
Diluted EPS
Year Ended December 31, 2010:
Basic EPS
Effect of Dilutive Securities - Options, Warrants and Unvested Restricted Stock
Diluted EPS
$
$
$
$
$
$
90,374
-
90,374
28,147
-
28,147
(88,009)
-
(88,009)
31,475,510
40,072
$
31,515,582
$
20,403,549
19,435
$
20,422,984
$
11,790,278
$
-
11,790,278
$
2
2
1
1
(7
(7
For the year ended December 31, 2012, 2011 and 2010, there were 301,200, 409,875, and 401,561 options, warrants and
unvested restricted stock outstanding, respectively, that were not included in the computation of diluted EPS because their effect
would be anti-dilutive.
NOTE 15 — 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, 2012, 2011 and 2010, contributions to the 401(k) plan were $1.0 million, $1.0 million, and $992,000, respectively.
Bank-Owned Life Insurance
In 2001 and 2004, we purchased single premium life insurance policies called bank-owned life insurance covering certain
officers. The Bank is the beneficiary under the policy. In the event of the death of a covered officer, we will receive the s pecified
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 unfunded, and 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. As of December 31, 2012 and 2011, the liabilities for the deferred compensation plan and interest thereon were $0 and $6,000,
respectively.
107
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease our premises under non-cancelable operating leases. At December 31, 2012, future minimum annual rental
commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows
Year Ending
December 31,
2013
2014
2015
2016
2017
Thereafter
Total
Amount
(In Thousands)
$
$
3,784
3,771
3,363
2,844
2,078
3,400
19,240
For the years ended December 31, 2012, 2011 and 2010, rental expenses recorded under such leases amounted to $5.5
million, $5.4 million, and $5.7 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 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 17 — OFF-BALANCE SHEET COMMITMENTS
The Bank is 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 similar to the risk involved in on-balance sheet items
recognized in the Consolidated Balance Sheets.
The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, was based on management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or
borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated
Commitments to Extend Credit
Standby Letters of Credit
Commercial Letters of Credit
Unused Credit Card Lines
Total Undisbursed Loan Commitments
108
December 31,
2012
December 31,
2011
(In Thousands)
$
182,746
10,588
6,092
13,459
$
158,748
12,742
9,298
15,937
$
212,885
$
196,725
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 18 — SEGMENT REPORTING
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. Accordingly, we consider all of our
operations to be aggregated in one reportable operating segment.
NOTE 19 — LIQUIDITY
Hanmi Financial
Management currently believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating
cash needs through December 31, 2013. Upon termination of the regulatory enforcement actions by the FRB on December 4, 2012
and the DFI on October 29, 2012, Hanmi Financial paid deferred interest of $4.6 million on December 15, 2012 for the Trust II and,
subsequent to December 31, 2012, $5.2 million and $3.1 million in January 2013 for the Trust I and III, respectively. Accrued interest
payable on junior subordinated debentures amounted to $8.2 million and $9.8 million at December 31, 2012 and 2011, respectively.
Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $24.7 million and $31.7 million as of
December 31, 2012 and 2011, respectively.
Hanmi Bank
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash
flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s
primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically
consisted of FHLB advances and brokered deposits. As of December 31, 2012, the Bank had no brokered deposits, and had FHLB
advances of $2.9 million compared to $3.3 million as of December 31, 2011.
We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary
source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 15 percent of its total assets. As of December 31,
2012, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $275.1
million and $272.2 million, respectively. The Bank’s FHLB borrowings as of December 31, 2012 totaled $2.9 million, representing
0.10 percent of total assets.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged 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.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $111.4 million from the Federal
Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $160.2 million,
and had no borrowings as of December 31, 2012. In December 31, 2012, the Bank established a line of credit with Raymond James &
Associates, Inc. for reverse repurchase agreements up to a maximum of $100.0 million.
The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its
ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and
quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical
personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation
and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.
109
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 20 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Balance Sheets
ASSETS
Cash
Securities Available for Sale
Investment in Consolidated Subsidiaries
Investment in Trust Preferred Securities
Other Assets
TOTAL ASSET
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Junior Subordinated Debentures
Other Liabilities
Stockholders' Equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Statement of Operations
Equity in Earnings (Losses) of Subsidiaries
Other Expenses, Net
Income Tax Benefit
NET INCOME (LOSS)
As of December 31,
2012
2011
(In Thousands)
$
$
$
$
24,722
296
442,380
2,475
330
470,203
82,406
9,433
378,364
470,203
$
$
$
$
31,706
595
344,129
2,475
-
378,905
82,406
10,891
285,608
378,905
2012
Year Ended December 31,
2011
(In Thousands)
2010
$
$
96,350
(5,976)
-
90,374
$
$
35,654
(7,507)
-
28,147
$
$
(82,705)
(5,339)
35
(88,009)
110
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
Statement of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
By Operating Activities:
(Income) Losses from Subsidiaries
Share-Based Compensation Expense
Changes in Fair Value of Stock Warrants
Other-Than-Temporary Loss on Investment Securities
(Increase) Decrease in Other Assets
(Decrease) Increase in Other Liabilities
Net Cash Used In Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to Hanmi Bank
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options and Stock Warrants
Net Proceeds from Issuance of Common Stock in Offering
Net Cash Provided By Financing Activities
NET (DECREASE) INCREASE IN CASH
Cash at Beginning of Year
CASH AT END OF YEAR
2012
Year Ended December 31,
2011
(In Thousands)
2010
$
90,374
$
28,147
$
(88,009)
(96,350)
478
23
292
(330)
(1,481)
(6,994)
-
-
10
-
10
(6,984)
31,706
$
24,722
$
(35,654)
608
(717)
-
1,833
2,664
(3,119)
(50,000)
(50,000)
-
77,109
77,109
23,990
7,716
31,706
82,705
1,013
(362)
-
(116)
2,706
(2,063)
(110,000)
(110,000)
22
116,271
116,293
4,230
3,486
$
7,716
111
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010 (Continued)
NOTE 21 — QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is shown in the following tables
2012:
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 Before Provision (Benefit) for Income Taxes
Provision (Benefit) for Income Taxes
NET INCOME
EARNINGS PER SHARE:
Basic
Diluted
2011:
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 Before Provision (Benefit) for Income Taxes
Provision (Benefit) for Income Taxes
NET INCOME
EARNINGS PER SHARE:
Basic
Diluted
NOTE 22 — SUBSEQUENT EVENTS
Quarter Ended
March 31
June 30
September 30
(In Thousands, Except Per Share Data)
December 31
$
$
$
$
$
$
$
$
30,294
5,761
24,533
2,000
3,633
18,746
7,420
79
7,341
0 23
0 23
33,875
7,766
26,109
-
5,508
21,061
10,556
119
10,437
$
$
$
$
$
$
29,965
4,793
25,172
4,000
7,189
19,763
8,598
(47,177)
55,775
$
$
29,402
4,483
24,919
-
6,520
18,804
12,635
(644)
13,279
1 77
1 77
$
$
0 42
0 42
32,618
7,143
25,475
-
6,017
22,886
8,606
605
8,001
$
$
31,674
6,515
25,159
8,100
5,978
18,852
4,185
(18)
4,203
$
$
$
$
$
$
30,139
3,708
26,431
-
7,470
19,548
14,353
374
13,979
0 44
0 44
30,640
6,206
24,434
4,000
6,348
21,249
5,533
27
5,506
0 55
0 55
$
$
0 42
0 42
$
$
0 22
0 22
$
$
0 22
0 22
Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have
been no subsequent events that occurred during such period that would require disclosure in this Annual Report on Form 10-K or
would be required to be recognized in the Consolidated Financial Statements as of December 31, 2012.
112
SIGNATURES
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.
HANMI FINANCIAL CORPORATION
By
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
Date
March 15, 2013
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 15, 2013.
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Shick (Mark) Yoon
Shick (Mark) Yoon
Senior Vice President and Interim Chief Financial
Officer
(Principal Financial and Accounting Officer)
/s/ Joseph K. Rho
Joseph K. Rho
Chairman of the Board
/s/ I Joon Ahn
I Joon Ahn
Director
/s/ John A. Hall
John A. Hall
Director
/s/ Joon Hyung Lee
Joon Hyung Lee
Director
/s/ William J. Stolte
William J. Stolte
Director
/s/ Paul (Seon-Hong) Kim
Paul (Seon-Hong) Kim
Director
113
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
Exhibit
Number
EXHIBIT INDEX
Document
3 1
Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated April 19, 2000 (Previously filed and incorporated by reference
herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the SEC on November 9, 2010)
3 2
3 3
3 4
3 5
Certificate of Second Amendment of Certificate of Incorporation of Hanmi Financial Corporation, dated June, 23, 2004 (Previously filed and incorporated
by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the SEC on November 9,
2010)
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated May 28, 2009 (Previously filed
and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the
SEC on November 9, 2010)
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated July 28, 2010 (Previously filed
and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the
SEC on November 9, 2010)
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated December 16, 2011 (Previously
filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on December 19, 2011)
3 6
Amended and Restated Bylaws of Hanmi Financial Corporation, dated April 19, 2000 (Previously filed and incorporated by refere nce herein from Hanmi
Financial’s Registration Statement on Form S-3 filed with the SEC on February 4, 2010)
3 7
Certificate of Amendment to Bylaws of Hanmi Financial Corporation, dated November 21, 2007 (Previously filed and incorporated by reference herein
4
4 1
10 1
10 2
10 3
10 4
10 5
10 6
10 7
10 8
10 9
10 10
from Hanmi Financial’s Registration Statement on Form S-3 filed with the SEC on February 4, 2010)
Specimen stock certificate representing Hanmi Financial Corporation Common Stock
Hanmi Financial Corporation Warrant for the Purchase of Shares of Common Stock, issued to Cappello Capital Corp , dated October 14, 2010 (Previously
filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on October 14, 2010)
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
(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)
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) (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)
Hanmi Capital Trust I Guarantee Agreement dated as of January 8, 2004 entered into between Hanmi Financial Corporation, as Gu arantor, and Deutsche
Bank Trust Company Americas, as Guarantee Trustee (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)
Hanmi Capital Trust I Form of Common Securities Certificate (included as Exhibit B to Exhibit 10 1) (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)
Hanmi Capital Trust I Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10 1) (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)
Amended and Restated Trust Agreement of Hanmi Capital Trust II dated as of March 15, 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
(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)
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) (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)
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 (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)
Hanmi Capital Trust II Form of Common Securities Certificate (included as Exhibit B to Exhibit 10 6) (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)
Hanmi Capital Trust II Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10 6) (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)
114
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (Continued)
Document
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,
(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)
Hanmi Capital Trust III Junior Subordinated Indenture dated as of April 28, 2004 entered into between Hanmi Financial Corpora tion and Deutsche Bank
Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10 11) (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)
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 (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)
Hanmi Capital Trust III Form of Common Securities Certificate (included as Exhibit B to Exhibit 10 11) (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)
Hanmi Capital Trust III Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10 11) (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)
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 (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) †
Exhibit
Number
10 11
10 12
10 13
10 14
10 15
10 16
10 17
Hanmi Financial Corporation 2007 Equity Compensation Plan (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) †
10 18
Hanmi Financial Corporation Year 2000 Stock Option Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Registration
Statement on Form S-8 filed with the SEC on August 18, 2000) †
10 19
Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan (Previously filed and incorporated by reference herein
from Hanmi Financial’s Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on April 9, 2009) †
10 20
Hanmi Financial Corporation Amended and Restated 2007 Employee Stock Incentive Plan – Restricted Stock Agreement (Previously filed and
incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on
April 9, 2009) †
10 21
Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan (Previously filed and incorporated by reference
herein from Hanmi Financial’s Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on April 9, 2009) †
10 22
Summary of 2010 Executive Retention Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-
Q for the quarter ended June 30, 2010, filed with the SEC on August 9, 2010) †
10 23
Form of Indemnification Agreement (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the
year ended December 31, 2010, filed with the SEC on March 16, 2011)
23
Consent of KPMG LLP
31 1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31 2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32 1
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
32 2
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
101 INS XBRL Instance Document *
101 SCH XBRL Taxonomy Extension Schema Document *
101 CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101 LAB XBRL Taxonomy Extension Label Linkbase Document *
101 PRE XBRL Taxonomy Extension Presentation Linkbase Document *
101 DEF XBRL Taxonomy Extension Definition Linkbase Document *
_________________
†
*
Constitutes a management contract or compensatory plan or arrangement.
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language).
115
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
The Board of Directors
Hanmi Financial Corporation
We consent to the incorporation by reference in the registration statements (Nos. 333-177996, 333-164690 and 333-163206)
on Form S-3 and the registration statements (Nos. 333-44090, 333-149858 and 333-115753) on Form S-8 of Hanmi Financial
Corporation (the Company) of our reports dated March 15, 2013, with respect to the consolidated balance sheets of Hanmi Financial
Corporation and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive
income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and
the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012
annual report on Form 10-K of the Company.
/s/ KPMG LLP
Los Angeles, California
March 15, 2013
116
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jay S Yoo, President and Chief Executive Officer, certify that:
1
I have reviewed this Annual Report on Form 10-K of Hanmi Financial Corporation;
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period cove red by
this report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4 The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a -15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be desig ned under our
supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such eva luation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registra nt’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affect ed, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5 The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control ov er financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equiva lent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal contro l over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information ; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting
Date: March 15, 2013
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
117
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Shick (Mark) Yoon, Senior Vice President and Interim Chief Financial Officer, certify that:
1
I have reviewed this Annual Report on Form 10-K of Hanmi Financial Corporation;
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in a ll material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4 The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and p rocedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financia l statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusio ns about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the re gistrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5 The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial r eporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the eq uivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant ’s internal
control over financial reporting
Date: March 15, 2013
/s/ Shick (Mark) Yoon
Shick (Mark) Yoon
Senior Vice President and Interim Chief Financial Officer
118
EXHIBIT 32.1
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report (the “Report”) of Hanmi Financial Corporation (the “Company”) on Form 10 -K for the
fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof, I, Jay S. Yoo,
President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date March 15, 2013
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
119
EXHIBIT 32.2
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report (the “Report”) of Hanmi Financial Corporation (the “Company”) on Form 10 -K for the
fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof, I, Shick (Mark)
Yoon, Senior Vice President and Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date March 15, 2013
/s/ Shick (Mark) Yoon
Shick (Mark) Yoon
Senior Vice President and Interim Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
120
CORPORATE HEADQUARTERS
3660 Wilshire Boulevard
Penthouse Suite A
Los Angeles, California 90010
www.hanmi.com