XNAS:HAFC Hanmi Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 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   95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

  90010
(Address of Principal Executive Offices)   (Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨  (Do Not Check if a Smaller Reporting Company)    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  x

As of April 30, 2012, there were 31,489,201 outstanding shares of the Registrant’s Common Stock.

 

 

 


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

          Page  
PART I — FINANCIAL INFORMATION   
ITEM 1.    FINANCIAL STATEMENTS   
  

Consolidated Balance Sheets (Unaudited)

     1   
  

Consolidated Statements of Operations (Unaudited)

     2   
  

Consolidated Statements of Comprehensive Income (Unaudited)

     3   
  

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

     4   
  

Consolidated Statements of Cash Flows (Unaudited)

     5   
  

Notes to Consolidated Financial Statements (Unaudited)

     6   
ITEM 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     35   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     61   
ITEM 4.   

CONTROLS AND PROCEDURES

     61   
PART II — OTHER INFORMATION   
ITEM 1.   

LEGAL PROCEEDINGS

     62   
ITEM 1A.   

RISK FACTORS

     62   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     62   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     62   
ITEM 4.   

MINE SAFETY DISCLOSURES

     62   
ITEM 5.   

OTHER INFORMATION

     62   
ITEM 6.   

EXHIBITS

     63   
SIGNATURES      64   


PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     March 31,
2012
    December 31,
2011
 
    

ASSETS

    

Cash and Due From Banks

   $ 68,093      $ 80,582   

Interest-Bearing Deposits in Other Banks

     92,149        101,101   

Federal Funds Sold

     —          20,000   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     160,242        201,683   

Restricted Cash

     1,818        1,818   

Term Federal Funds Sold

     120,000        115,000   

Securities Available for Sale, at Fair Value (Amortized Cost of $351,048 as of March 31, 2012 and $377,747 as of December 31, 2011, respectively)

  

 

355,837

  

 

 

381,862

  

    

Securities Held to Maturity, at Amortized Cost (Fair Value of $59,977 as of March 31, 2012 and $59,363 as of December 31, 2011, respectively)

  

 

59,472

  

 

 

59,742

  

Loans Held for Sale, at the Lower of Cost or Fair Value

     55,993        22,587   

Loans Receivable, Net of Allowance for Loan Losses of $81,052 as of March 31, 2012 and $89,936 as of December 31, 2011, respectively

  

 

1,896,827

  

 

 

1,849,020

  

Accrued Interest Receivable

     7,969        7,829   

Premises and Equipment, Net

     16,272        16,603   

Other Real Estate Owned, Net

     1,260        180   

Customers’ Liability on Acceptances

     1,539        1,715   

Servicing Assets

     3,515        3,720   

Other Intangible Assets, Net

     1,462        1,533   

Investment in Federal Home Loan Bank Stock, at Cost

     21,761        22,854   

Investment in Federal Reserve Bank Stock, at Cost

     8,558        8,558   

Income Taxes Assets

     11,501        9,073   

Bank-Owned Life Insurance

     28,344        28,289   

Prepaid Expenses

     3,204        1,598   

Other Assets

     15,897        11,160   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,771,471      $ 2,744,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

Deposits:

    

Noninterest-Bearing

   $ 704,061      $ 634,466   

Interest-Bearing

     1,659,665        1,710,444   
  

 

 

   

 

 

 
     2,363,726        2,344,910   

Accrued Interest Payable

     15,602        16,032   

Bank’s Liability on Acceptances

     1,539        1,715   

Federal Home Loan Bank Advances

     3,213        3,303   

Junior Subordinated Debentures

     82,406        82,406   

Accrued Expenses and Other Liabilities

     11,267        10,850   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,477,753        2,459,216   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY:

    

Common Stock, $0.008 Par Value; Authorized 62,500,000 Shares; Issued 32,066,987 Shares (31,489,201 Shares Outstanding) and 32,066,987 Shares (31,489,201 Shares Outstanding) as of March 31, 2012 and December 31, 2011, respectively

  

 

257

  

 

 

257

  

Additional Paid-In Capital

     549,811        549,744   

Unearned Compensation

     (141     (166

Accumulated Other Comprehensive Income - Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $602 as of March 31, 2012, and as of December 31, 2011

     4,201        3,524   

Accumulated Deficit

     (190,552     (197,893

Less Treasury Stock, at Cost; 577,786 Shares as of March 31, 2012 and as of December 31, 2011

     (69,858     (69,858
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     293,718        285,608   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,771,471      $ 2,744,824   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

1


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)

 

     Three Months Ended
March 31,
 
  
     2012     2011  

INTEREST AND DIVIDEND INCOME:

    

Interest and Fees on Loans

   $ 27,542      $ 30,905   

Taxable Interest on Investment Securities

     2,098        2,673   

Tax-Exempt Interest on Investment Securities

     102        40   

Interest on Term Federal Funds Sold

     325        27   

Dividends on Federal Reserve Bank Stock

     128        112   

Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements

     2        8   

Interest on Interest-Bearing Deposits in Other Banks

     68        89   

Dividends on Federal Home Loan Bank Stock

     29        21   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     30,294        33,875   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Interest on Deposits

     4,919        6,735   

Interest on Federal Home Loan Bank Advances

     43        333   

Interest on Junior Subordinated Debentures

     799        698   
  

 

 

   

 

 

 

Total Interest Expense

     5,761        7,766   
  

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

     24,533        26,109   

Provision for Credit Losses

     2,000        —     
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

     22,533        26,109   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Service Charges on Deposit Accounts

     3,168        3,141   

Insurance Commissions

     1,236        1,260   

Remittance Fees

     454        462   

Trade Finance Fees

     292        297   

Other Service Charges and Fees

     364        333   

Bank-Owned Life Insurance Income

     399        230   

Net (Loss) on Sales of Loans

     (2,393     (338

Net Gain on Sales of Investment Securities

     1        —     

Other Operating Income

     112        123   
  

 

 

   

 

 

 

Total Non-Interest Income

     3,633        5,508   
  

 

 

   

 

 

 

NON-INTEREST EXPENSE:

    

Salaries and Employee Benefits

     9,110        9,124   

Occupancy and Equipment

     2,595        2,565   

Deposit Insurance Premiums and Regulatory Assessments

     1,401        2,070   

Data Processing

     1,253        1,399   

Other Real Estate Owned Expense

     (44     829   

Professional Fees

     749        789   

Directors and Officers Liability Insurance

     297        734   

Supplies and Communications

     558        578   

Advertising and Promotion

     601        566   

Loan-Related Expense

     200        225   

Amortization of Other Intangible Assets

     71        218   

Other Operating Expenses

     1,955        1,964   
  

 

 

   

 

 

 

Total Non-Interest Expense

     18,746        21,061   
  

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     7,420        10,556   

Provision for Income Taxes

     79        119   
  

 

 

   

 

 

 

NET INCOME

   $ 7,341      $ 10,437   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.23      $ 0.55   

Diluted

   $ 0.23      $ 0.55   

WEIGHTED-AVERAGE SHARES OUTSTANDING:

    

Basic

     31,470,520        18,882,627   

Diluted

     31,489,569        18,910,947   

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

2


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     Three Months  Ended
March 31,
 
  
     2012        2011  

NET INCOME

   $ 7,341         $ 10,437   

OTHER COMPREHENSIVE INCOME, NET OF TAX

       

Unrealized gains on securities

       

Unrealized holding gains arising during period

     674           43   

Less: Reclassification adjustment for gains included in net income

     —             —     

Unrealized gains on interest rate swap

     1           1   

Unrealized gains on interest-only strip of servicing assets

     2           —     
  

 

 

      

 

 

 

Other Comprehensive Income

     677           44   
  

 

 

      

 

 

 

COMPREHENSIVE INCOME

   $          8,018         $        10,481   
  

 

 

      

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

3


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands)

 

    Common Stock – Number of
Shares
    Stockholders’ Equity  
  Gross
Shares
Issued and
Outstanding
    Treasury
Shares
    Net
Shares
Issued and
Outstanding
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Treasury
Stock,
at Cost
    Total
Stockholders’
Equity
 
                   
                   
                   

BALANCE AT JANUARY 1, 2011

    19,478,862        (579,063     18,899,799      $ 156      $ 472,335      $ (219   $ (2,964   $ (226,040   $ (70,012   $ 173,256   

Share-Based Compensation Expense

    —          —          —          —          263        51        —          —          —          314   

Restricted Stock Awards

    7,500        —          7,500        —          78        (78     —          —          —          —     

Comprehensive Income:

                  —         

Net Income

    —          —          —          —          —          —          —          10,437        —          10,437   

Change in Unrealized Gain on Securities

                   

Available for Sale and Interest-Only Strips,

                   

Net of Income Taxes

    —          —          —          —          —          —          44        —          —          44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      10,481   
                   

 

 

 

BALANCE AT MARCH 31, 2011

    19,486,362        (579,063     18,907,299      $ 156      $ 472,676      $ (246   $ (2,920   $ (215,603   $ (70,012   $ 184,051   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,744      $ (166   $ 3,524      $ (197,893   $ (69,858   $ 285,608   

Share-Based Compensation Expense

    —          —          —          —          67        25        —          —          —          92   

Comprehensive Income:

                   

Net Income

    —          —          —          —          —          —          —          7,341        —          7,341   

Change in Unrealized Gain on Securities

                   

Available for Sale and Interest-Only Strips,

                   

Net of Income Taxes

    —          —          —          —          —          —          677        —          —          677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      8,018   
                   

 

 

 

BALANCE AT MARCH 31, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,811      $ (141   $ 4,201      $ (190,552   $ (69,858   $ 293,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

 

4


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Three Months Ended
March 31,
 
  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

     7,341        10,437   

Adjustments to Reconcile Net Income to Net Cash (Used In) Provided By Operating Activities:

    

Depreciation and Amortization of Premises and Equipment

     554        547   

Amortization of Premiums and Accretion of Discounts on Investment Securities, Net

     1,078        717   

Amortization of Other Intangible Assets

     71        218   

Amortization of Servicing Assets

     205        192   

Share-Based Compensation Expense

     92        314   

Provision for Credit Losses

     2,000        —     

Net Gain on Sales of Investment Securities

     (1     —     

Net Loss (Gain) on Sales of Loans

     1,736        (1,883

Loss on Sales of Other Real Estate Owned

     —          219   

Valuation Impairment on Other Real Estate Owned

     —          441   

Lower of Cost or Fair Value Adjustment for Loans Held for Sale

     657        2,221   

Gain on Bank-Owned Life Insurance Settlement

     (163     —     

Proceeds from Insurance Settlement on Bank-Owned Life Insurance

     344        —     

Increase in Cash Surrender Value of Bank-Owned Life Insurance

     (236     (231

Origination of Loans Held for Sale

     (25,866     (1,771

Changes in Fair Value of Stock Warrants

     170        14   

Loss on Investment in Affordable Housing Partnership

     220        220   

Increase in Accrued Interest Receivable

     (140     (748

Increase in Prepaid Expenses

     (1,606     (2,520

Increase in Other Assets

     (4,957     (78

Increase in Income Taxes Assets

     (2,428     —     

Decrease in Accrued Interest Payable

     (430     (1,782

Increase in Other Liabilities

     247        722   
  

 

 

   

 

 

 

Net Cash (Used In) Provided By Operating Activities

     (21,112     7,249   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock

     1,093        1,082   

Proceeds from Matured or Called Securities Available for Sale

     40,873        19,173   

Proceeds from Sale of Securities Available for Sale

     3,000        —     

Proceeds from Matured or Called Securities Held to Maturity

     135        7   

Proceeds from Sales of Other Real Estate Owned

     —          1,752   

Proceeds from Sales of Loans Held for Sale

     26,961        27,944   

Net (Increase) Decrease in Loans Receivable

     (20,353     44,680   

Purchase of Residential Mortgage Loans

     (67,428     —     

Purchases of Term Federal Fund

     (5,000     —     

Purchases of Securities Available for Sale

     (18,113     (145,083

Purchases of Premises and Equipment

     (223     (113
  

 

 

   

 

 

 

Net Cash Used In Investing Activities

     (39,055     (50,558
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (Decrease) in Deposits

     18,816        (35,781

Repayment of Long-Term Federal Home Loan Bank Advances

     (90     (413

Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings

     —          144   
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     18,726        (36,050
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (41,441     (79,359

Cash and Cash Equivalents at Beginning of Year

     201,683        249,720   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

     160,242        170,361   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash Paid During the Period for:

    

Interest Paid

     5,331        9,548   

Income Taxes Paid

     2,507        —     

Non-Cash Activities:

    

Transfer of Loans and Loans Held for Sale to Other Real Estate Owned

     1,080        1,476   

Transfer of Loans to Loans Held for Sale

     37,481        37,540   

Loans Provided in the Sale of Loans Held for Sale

     —          1,850   

Loans Provided in the Sale of Other Real Estate Owned

     —          511   

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

 

5


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

NOTE 1 — BASIS OF PRESENTATION

Hanmi Financial Corporation (“Hanmi Financial,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Our primary subsidiary is Hanmi Bank (the “Bank”), a California state chartered bank. Our other subsidiaries are Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”), and All World Insurance Services, Inc., a California corporation (“All World”).

In the opinion of management, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2012, but are not necessarily indicative of the results that will be reported for the entire year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Annual Report on Form 10-K”).

The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Descriptions of our significant accounting policies are included in “Note 2 Summary of Significant Accounting Policies” in our 2011 Annual Report on Form 10-K.

Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.

The number of shares of Hanmi Financial’s common stock and the computation of basic and diluted earnings per share were adjusted retroactively for all periods presented to reflect the 1-for-8 reverse stock split of Hanmi Financial’s common stock, which became effective on December 19, 2011.

NOTE 2 — REGULATORY MATTERS

On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order (“Final Order”) with the California Department of Financial Institutions (the “DFI”). The Final Order contained a list of requirements ranging from a capital directive to developing a contingency funding plan. Following a full scope target examination of the Bank by the DFI which commenced in February 2012, and based on the improved condition of the Bank noted at the examination, on May 1, 2012, the Bank entered into a Memorandum of Understanding (“MOU”) with the DFI. Concurrently with the entry into the MOU, the DFI issued an order terminating the Final Order. The MOU imposes substantially less requirements on the Bank, however, under the provisions of the MOU, the Bank is required to continue to maintain a ratio of tangible stockholders’ equity to total tangible assets of not less than 9.5 percent.

On November 2, 2009, Hanmi Financial and the Bank entered into a Written Agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Written Agreement contains a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

While Hanmi Financial has taken such actions as necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Written Agreement and the MOU, there can be no assurance that compliance with the Written Agreement and the MOU will not have material and adverse effects on the operations and financial condition of Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Written Agreement and the MOU could result in further enforcement actions by both the DFI and the FRB, or the placing of the Bank into conservatorship or receivership.

 

6


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

Written Agreement and MOU

Pursuant to the Written Agreement, the Board of Directors of the Bank prepared and submitted written plans to the FRB that addressed the following items: (i) strengthening board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, of Hanmi Financial; and (vii) improving the Bank’s earnings through a strategic plan and a budget; (viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Written Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank. The Written Agreement also requires the Bank to charge off or collect certain problem loans and review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. Hanmi Financial and the Bank are also prohibited from paying dividends, without prior approval from the FRB.

Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan approved by the FRB.

The MOU imposes substantially less requirements on the Bank than the Final Order. Pursuant to the MOU, the Bank is required to continue to (i) maintain strong board oversight, management and operation of the Bank, (ii) review and implement policies and procedures to address credit administration and credit risk management, (iii) maintain an acceptable methodology for calculating loan and lease losses, (iv) obtain the prior approval from the DFI prior to declaring and paying dividends, and (v) maintain a ratio of tangible stockholders’ equity to total tangible assets of not less than 9.5 percent.

On November 18, 2011, we completed an underwritten public offering of our common stock by which we raised $77.1 million in net proceeds. As a result, we satisfied the requirement that the ratio of tangible stockholders’ equity to total tangible assets be not less than 9.5 percent, as of December 31, 2011. As of Mach 31, 2012, Hanmi Financial and the Bank had a ratio of tangible stockholders’ equity to total tangible assets ratio of 10.55 percent and 12.71 percent, respectively.

Based on submissions to and consultations with the DFI and the FRB, we believe that the Bank has taken the required corrective action and has complied with substantially all of the requirements of the Written Agreement and the MOU.

Risk-Based Capital

Federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require banking organizations to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. For a bank rated in the highest of the five categories used by federal bank regulatory agencies to rate banks, the minimum leverage ratio is 3.0 percent. In addition to these uniform risk-based capital guidelines that apply across the industry, federal bank regulatory agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

 

7


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

Risk-Based Capital (Continued)

 

The capital ratios of Hanmi Financial and the Bank were as follows as of March 31, 2012 and 2011, respectively:

 

     Actual     Minimum
Regulatory
Requirement
    Minimum to Be
Categorized as
“Well Capitalized”
 
      
      
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In Thousands)  

March 31, 2012

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 394,973         18.74   $ 168,569         8.00     N/A         N/A   

Hanmi Bank

   $ 373,171         17.74   $ 168,325         8.00   $ 210,406         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 367,927         17.46   $ 84,284         4.00     N/A         N/A   

Hanmi Bank

   $ 346,154         16.45   $ 84,162         4.00   $ 126,243         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 367,927         13.44   $ 109,456         4.00     N/A         N/A   

Hanmi Bank

   $ 346,154         12.67   $ 109,247         4.00   $ 136,559         5.00

March 31, 2011

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 294,446         13.05   $ 180,446         8.00     N/A         N/A   

Hanmi Bank

   $ 292,650         13.00   $ 180,055         8.00   $ 225,069         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 247,235         10.96   $ 90,223         4.00     N/A         N/A   

Hanmi Bank

   $ 263,285         11.70   $ 90,027         4.00   $ 135,041         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 247,235         8.51   $ 116,272         4.00     N/A         N/A   

Hanmi Bank

   $ 263,285         9.08   $ 115,980         4.00   $ 144,976         5.00

Reserve Requirement

The Bank is required to maintain a percentage of its deposits as reserves at the FRB. The daily average reserve balance required to be maintained with the FRB was $1.5 million, and the Bank was in compliance with the such requirement as of March 31, 2012 and December 31, 2011, respectively.

 

8


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS

 

Fair Value Option and Fair Value Measurements

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 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. The adoption of FASB ASC 825 resulted in additional disclosures that are presented in “Note 4 – Investment Securities.”

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820),” provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS. The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or allowed. ASU 2011-04 supersedes most of the guidance in ASC topic 820, but many of the changes are clarifications of existing guidance or wording changes to reflect IFRS 13. Amendments in FASB ASU 2011-04 change the wording used to describe U.S. GAAP requirements for fair value and disclosing information about fair value measurements. FASB ASU 2011-04 became effective for interim and annual reporting periods beginning after December 15, 2011, and early application was not permitted. Our adoption of FASB ASU 2011-04 did not have a significant impact on our financial condition or result of operations.

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 or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices 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.

 

9


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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 we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and we also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Securities classified as Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into our proprietary valuation model. As of March 31, 2012 and December 31, 2011, we had no level 3 investment securities.

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 March 31, 2012 and December 31, 2011, we had $30.9 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 financial 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 March 31, 2012 and December 31, 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 when we make the decision to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract price which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of March 31, 2012 and December 31, 2011, we had $15.5 million and $15.0 million of non-performing loans held for sale, respectively. We measure non-performing loans held for sale at fair value on a nonrecurring basis with Level 3 inputs.

Impaired Loans – FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 3 and subject to non-recurring fair value adjustments.

Other Real Estate Owned – Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned, which is subject to non-recurring fair value adjustments, as Level 3.

Servicing Assets and Servicing Liabilities – The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. We compare the valuation model inputs and results to widely available published industry data for reasonableness. Since fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs, we classify them as Level 3.

 

10


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

Other Intangible Assets – Other intangible assets consist of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Fair value measurements of other intangible assets use significant unobservable inputs. As such, we classify other intangible assets, which are subject to non-recurring fair value adjustments, as Level 3.

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 the 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. As such, we classify stock warrants, which are subject to recurring fair value adjustments, as Level 3.

FASB ASC 320, “Investments – Debt and Equity Securities,” amended current other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-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. FASB ASC 320 did not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. FASB ASC 320 also extended disclosure requirements about debt and equity securities to interim reporting periods. FASB ASC 320 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB ASC 320 requires comparative disclosures only for periods ending after initial adoption.

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 fair 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.

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.

 

11


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, mortgage servicing assets, 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.

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 three months ended March 31, 2012. We recognize transfers of assets between levels at the end of each respective quarterly reporting period.

As of March 31, 2012 and December 31, 2011, assets and liabilities measured at fair value on a recurring basis are as follows:

 

     Level 1      Level 2      Level 3         
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
     Significant
Unobservable
Inputs
     Balance  
     (In Thousands)  

As of March 31, 2012

           

ASSETS:

           

Debt Securities Available for Sale:

           

Residential Mortgage-Backed Securities

   $ —         $ 107,288       $ —         $ 107,288   

U.S. Government Agency Securities

     61,421         —           —           61,421   

Collateralized Mortgage Obligations

     —           153,467         —           153,467   

Municipal Bonds-Tax Exempt

     —           3,471         —           3,471   

Municipal Bonds-Taxable

     —           6,231         —           6,231   

Corporate Bonds

     —           20,088         —           20,088   

Other Securities

     —           3,331         —           3,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

   $ 61,421       $ 293,876       $ —         $ 355,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

   $ 540       $ —         $ —         $ 540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

   $ 540       $ —         $ —         $ 540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 61,961       $ 293,876       $ —         $ 355,837   

Servicing Assets

   $ —         $ —         $ 3,515       $ 3,515   

LIABILITIES:

           

Servicing Liabilities

   $ —         $ —         $ 143       $ 143   

Stock Warrants

   $ —         $ —         $ 1,053       $ 1,053   

As of December 31, 2011

  

ASSETS:

           

Debt Securities Available for Sale:

           

Residential Mortgage-Backed Securities

   $ —         $ 113,005       $ —         $ 113,005   

U.S. Government Agency Securities

     72,548         —           —           72,548   

Collateralized Mortgage Obligations

     —           162,837         —           162,837   

Municipal Bonds-Tax Exempt

     —           3,482         —           3,482   

Municipal Bonds-Taxable

     —           6,138         —           6,138   

Corporate Bonds

     —           19,836         —           19,836   

Other Securities

     —           3,335         —           3,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

   $ 72,548       $ 308,633       $ —         $ 381,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

   $ 681       $ —         $ —         $ 681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

   $ 681       $ —         $ —         $ 681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 73,229       $ 308,633       $ —         $ 381,862   

Servicing Assets

   $ —         $ —         $ 3,720       $ 3,720   

LIABILITIES:

           

Servicing Liabilities

   $ —         $ —         $ 142       $ 142   

Stock Warrants

   $ —         $ —         $ 883       $ 883   

 

12


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (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 three months ended March 31, 2012:

 

     Beginning
Balance as of
January 1,
2012
     Purchases,
Issuances and
Settlements
     Realized
Gains or Losses
in Earnings
    Unrealized
Gains  or Losses
in Other
Comprehensive
Income
     Transfers
In  and/or Out
of Level 3
     Ending
Balance  as of
March 31,
2012
 
                
                
                
                
                
     (In Thousands)  

ASSETS:

                

Servicing Assets

   $ 3,720       $ —         $ (205   $ —         $ —         $ 3,515   

LIABILITIES:

                

Servicing Liabilities

   $ 142       $ —         $ (5   $ 6       $ —         $ 143   

Stock Warrants (1)

   $ 883       $ —         $ 170      $ —         $ —         $ 1,053   

 

(1) 

Reflects warrants for our common stock 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 an exercise price of $9.60 per share of our common stock and expire on October 14, 2015. See “Note 8 – Stockholders’ Equity” for more details.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of March 31, 2012 and 2011, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

    Level 1     Level 2     Level 3        
    Quoted Prices in
Active Markets
for Identical
Assets
    Significant
Observable
Inputs With
No Active
Market With
Identical
Characteristics
    Significant
Unobservable
Inputs
    Loss During The
Three Months
Ended March 31,
2012 and 2011
 
          (In Thousands)              

March 31, 2012

 

ASSETS:

       

Non-performing Loans Held for Sale

  $      $      $ 6,569  (1)    $ 657   

Impaired Loans

  $      $      $ 35,514  (2)    $ 8,331   

Other Real Estate Owned

  $      $      $ 1,080  (3)    $   

December 31, 2011

       

ASSETS:

       

Non-performing Loans Held for Sale

  $      $      $ 30,713  (4)    $ 12,965   

Impaired Loans

  $      $      $ 155,352  (5)    $ 3,883   

Other Real Estate Owned

  $      $      $ 1,350  (6)    $ 882   

 

(1)

Includes residential property loan of $969,000, and commercial term loans of $5.6 million.

(2)

Includes real estate loans of $13.2 million, commercial and industrial loans of $22.2 million, and consumer loans of $128,000.

(3)

Includes properties from the foreclosure of a commercial property loan of $360,000 and a SBA loan of $720,000.

(4) 

Includes commercial property loans of $3.2 million, commercial term loans of $21.3 million, and SBA loans of $6.2 million.

(5) 

Includes real estate loans of $70.5 million, commercial and industrial loans of $84.4 million, and consumer loans of $517,000.

(6) 

Includes properties from the foreclosure of a commercial property loan of $360,000 and SBA loans of $990,000.

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.

 

13


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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:

 

     March 31, 2012      December 31, 2011  
     Carrying or
Contract
Amount
     Estimated
Fair

Value
     Carrying or
Contract
Amount
     Estimated
Fair

Value
 
     (In Thousands)  

Financial Assets:

           

Cash and Cash Equivalents

   $ 160,242       $ 160,242       $ 201,683       $ 201,683   

Restricted Cash

     1,818         1,818         1,818         1,818   

Term Federal Funds

     120,000         120,053         115,000         115,173   

Investment Securities Held to Maturity

     59,472         59,977         59,742         59,363   

Investment Securities Available for Sale

     355,837         355,837         381,862         381,862   

Loans Receivable, Net of Allowance for Loan Losses

     1,896,827         1,889,502         1,849,020         1,802,511   

Loans Held for Sale

     55,993         55,993         22,587         22,587   

Accrued Interest Receivable

     7,969         7,969         7,829         7,829   

Investment in Federal Home Loan Bank Stock

     21,761         21,761         22,854         22,854   

Investment in Federal Reserve Bank Stock

     8,558         8,558         8,558         8,558   

Financial Liabilities:

           

Noninterest-Bearing Deposits

     704,061         704,061         634,466         634,466   

Interest-Bearing Deposits

     1,659,665         1,666,516         1,710,444         1,710,878   

Borrowings

     85,619         85,938         85,709         83,853   

Accrued Interest Payable

     15,602         15,602         16,032         16,032   

Off-Balance Sheet Items:

           

Commitments to Extend Credit

     167,374         228         158,748         194   

Standby Letters of Credit

     12,661         41         12,742         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 3).

Investment Securities – The fair value of investment securities is generally obtained from market bids for similar or identical securities or obtained from independent securities brokers or dealers (Level 1 and 2).

 

14


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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 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 which approximates its fair value (Level 2 and 3).

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 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 noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 1).

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 are used to value 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).

 

15


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES

The following is a summary of investment securities held to maturity:

 

          Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair
Value
 
          (In Thousands)  

March 31, 2012:

              

Municipal Bonds-Tax Exempt

      $ 9,788       $ 174       $ 4       $ 9,958   

Municipal Bonds

        38,703         454         122         39,035   

Mortgage-Backed Securities(1)

        2,987         13         —           3,000   

U.S. government Agency Securities

        7,994         —           10         7,984   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 59,472       $ 641       $ 136       $ 59,977   
     

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

              

Municipal Bonds-Tax Exempt

      $ 9,815       $ 98       $ 46       $ 9,867   

Municipal Bonds

        38,797         117         522         38,392   

Mortgage-Backed Securities(1)

        3,137         2         11         3,128   

U.S. government Agency Securities

        7,993         2         19         7,976   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 59,742       $ 219       $ 598       $ 59,363   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

The following is a summary of investment securities available for sale:

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair Value
 
     (In Thousands)  

March 31, 2012

           

Mortgage-Backed Securities (1)

   $ 104,296       $ 2,992       $ —         $ 107,288   

Collateralized Mortgage Obligations (1)

     151,688         2,006         227         153,467   

U.S. Government Agency Securities

     61,350         133         62         61,421   

Municipal Bonds-Tax Exempt

     3,389         82         —           3,471   

Municipal Bonds

     5,898         333         —           6,231   

Corporate Bonds

     20,462         18         392         20,088   

Other Securities

     3,318         55         42         3,331   

Equity Securities

     647         7         114         540   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 351,048       $ 5,626       $ 837       $ 355,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Mortgage-Backed Securities (1)

   $ 110,433       $ 2,573       $ 1       $ 113,005   

Collateralized Mortgage Obligations (1)

     161,214         1,883         260         162,837   

U.S. Government Agency Securities

     72,385         168         5         72,548   

Municipal Bonds-Tax Exempt

     3,389         93         —           3,482   

Municipal Bonds

     5,901         237         —           6,138   

Corporate Bonds

     20,460         —           624         19,836   

Other Securities

     3,318         58         41         3,335   

Equity Securities

     647         85         51         681   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 377,747       $ 5,097       $ 982       $ 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 March 31, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2041, 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.

 

16


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
     (In Thousands)  

Within One Year

   $ —         $ —         $ —         $ —     

Over One Year Through Five Years

     38,583         38,254         1,760         1,802   

Over Five Years Through Ten Years

     46,673         47,021         24,830         24,989   

Over Ten Years

     9,161         9,267         29,895         30,186   

Mortgage-Backed Securities

     104,296         107,288         2,987         3,000   

Collateralized Mortgage Obligations

     151,688         153,467         —           —     

Equity Securities

     647         540         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 351,048       $ 355,837       $ 59,472       $ 59,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

FASB ASC 320, “Investments – Debt and Equity Securities,” amended current other-than-temporary impairment (“OTTI”) guidance, and in accordance therewith, we periodically evaluate our investments for OTTI. For the three months ended March 31, 2012 and 2011, there were no OTTI charges recorded in earnings.

We perform periodic reviews for impairment in accordance with FASB ASC 320. 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 March 31, 2012 and December 31, 2011:

 

     Holding Period  
     Less than 12 Months      12 Months or More      Total  

Investment Securities

Available for Sale

   Gross
Unrealized
Losses
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Number
of
Securities
 
     (In Thousands, Except Number of Securities)  

March 31, 2012:

                          

Mortgage-Backed Securities

   $ —         $ —           —         $ —         $ —           —         $ —         $ —           —     

Collateralized Mortgage Obligation

     227         16,035         8         —           —           —           227         16,035         8   

U.S. Government Agency Securities

     62         28,982         9         —           —           —           62         28,982         9   

Other Securities

     1         13         1         41         958         1         42         971         2   

Corporate Bonds

     19         2,969         1         373         15,601         4         392         18,570         5   

Equity Securities

     114         397         1         —           —           —           114         397         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 423       $ 48,396         20       $ 414       $ 16,559         5       $ 837       $ 64,955         25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                          

Mortgage-Backed Securities

   $ 1       $ 3,076         1       $ —         $ —           —         $ 1       $ 3,076         1   

Collateralized Mortgage Obligation

     260         36,751         16         —           —           —           260         36,751         16   

U.S. Government Agency Securities

     5         6,061         2         —           —           —           5         6,061         2   

Other Securities

     1         12         1         40         959         1         41         971         2   

Corporate Bonds

     41         4,445         2         583         15,391         4         624         19,836         6   

Equity Securities

     51         85         1         —           —           —           51         85         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 359       $ 50,430         23       $ 623       $ 16,350         5       $ 982       $ 66,780         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of March 31, 2012 and December 31, 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 March 31, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The unrealized losses on investments in U.S. agency securities were caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

 

17


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at March 31, 2012, all of them are issued and guaranteed by U.S. government sponsored entities. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and were not caused by concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The unrealized losses on 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 agreed and management believe this will continue in the future and the bond will be repaid in full as scheduled.

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. We do 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. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of March 31, 2012 and December 31, 2011 are not other-than-temporarily impaired, and therefore, no impairment charges as of March 31, 2012 and December 31, 2011 are warranted.

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:

 

XXXX XXXX
     Three Months Ended March 31,  
     2012      2011  
     (In Thousands)  

Gross Realized Gains on Sales of Investment Securities

   $ 1       $ —     

Gross Realized Losses on Sales of Investment Securities

   $ —         $ —     
  

 

 

    

 

 

 

Net Realized Gains on Sales of Investment Securities

   $ 1       $ —     
  

 

 

    

 

 

 

Proceeds from Sales of Investment Securities

   $ 3,000       $ —     

Tax Expense on Sales of Investment Securities

   $ —         $ —     

There was $1,000 in net realized gains on sales of securities available for sale during the three months ended March 31, 2012. For the three months ended March 31, 2012, $674,000 of net unrealized gain arose during the period and was included in comprehensive income. For the three months ended March 31, 2011, no investment securities were sold. For the three months ended March 31, 2011, $43,000 of net unrealized gains arose during the period and was included in comprehensive income.

Investment securities available for sale with carrying values of $39.7 million and $45.8 million as of March 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.

 

18


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

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.

Loans Receivable

Loans receivable consisted of the following as of the dates indicated:

 

     March 31,
2012
    December 31,
2011
 
     (In Thousands)  

Real Estate Loans:

    

Commercial Property

   $ 692,013      $ 663,023   

Construction

     25,477        33,976   

Residential Property

     116,566        52,921   
  

 

 

   

 

 

 

Total Real Estate Loans

     834,056        749,920   
  

 

 

   

 

 

 

Commercial and Industrial Loans

    

Commercial Term Loans (1)

     891,001        944,836   

Commercial Lines of Credit (2)

     55,698        55,770   

SBA Loans (3)

     123,021        116,192   

International Loans

     32,420        28,676   
  

 

 

   

 

 

 

Total Commercial and Industrial Loans

     1,102,140        1,145,474   
  

 

 

   

 

 

 

Consumer Loans

     40,782        43,346   
  

 

 

   

 

 

 

Total Gross Loans

     1,976,978        1,938,740   

Allowance for Loan Losses

     (81,052     (89,936

Deferred Loan Costs

     901        216   
  

 

 

   

 

 

 

Loans Receivable, Net

   $ 1,896,827      $ 1,849,020   
  

 

 

   

 

 

 

 

(1) 

Include owner-occupied property loans of $751.8 million and $786.3 million as of March 31, 2012 and December 31, 2011, respectively.

(2) 

Include owner-occupied property loans of $1.5 million and $936,000, as of March 31, 2012 and December 31, 2011, respectively.

(3) 

Include owner-occupied property loans of $96.1 million and $93.6 million, as of March 31, 2012 and December 31, 2011, respectively.

 

19


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Accrued interest on loans receivable amounted to $5.8 million and $5.7 million at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 and December 31, 2011, loans receivable totaling $760.3 million and $797.1 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Discount Window.

The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the three months ended March 31, 2012 and 2011.

 

     Real
Estate
    Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

March 31, 2012:

         

Loans Held for Sale:

         

Beginning Balance

   $ 11,068      $ 11,519      $ —         $ 22,587   

Origination of Loans Held for Sale

     —          25,866        —           25,866   

Reclassification from Loans Receivable to Loans Held for Sale

     17,076        20,405        —           37,481   

Reclassification from Loans Held for Sale to OREO

     (360     —          —           (360

Sales of Loans Held for Sale

     (16,794     (11,903     —           (28,697

Principal Payoffs and Amortization

     (111     (116     —           (227

Valuation Adjustments

     —          (657     —           (657
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 10,879      $ 45,114      $ —         $ 55,993   
  

 

 

   

 

 

   

 

 

    

 

 

 

March 31, 2011:

         

Loans Held for Sale:

         

Beginning Balance

   $ 3,666      $ 32,954      $ —         $ 36,620   

Origination of Loans Held for Sale

     —          —          —           —     

Reclassification from Loans Receivable to Loans Held for Sale

     17,909        23,081        —           40,990   

Sales of Loans Held for Sale

     (17,989     (9,316     —           (27,305

Principal Payoffs and Amortization

     (7     (407     —           (414

Valuation Adjustments

     (66     (2,176     —           (2,242
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 3,513      $ 44,136      $ —         $ 47,649   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended March 31, 2012, loans receivable of $37.5 million were reclassified as loans held for sale, and loans held for sale of $28.7 million were sold. For the three months ended March 31, 2011, loans receivable of $41.0 million were reclassified as loans held for sale, and loans held for sale of $27.3 million were sold. For the three months ended March 31, 2012, $67.4 million of residential mortgage loans were purchased. There were no purchases of loans receivable for the three months ended March 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:

 

     As of and for the Three Months Ended  
     March 31,
2012
    December 31,
2011
    March 31,
2011
 
     (In Thousands)  

Allowance for Loan Losses:

      

Balance at Beginning of Period

   $ 89,936      $ 100,792      $ 146,059   

Actual Charge-Offs

     (12,321     (16,267     (25,181

Recoveries on Loans Previously Charged Off

     1,037        1,170        3,626   
  

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (11,284     (15,097     (21,555

Provision Charged to Operating Expense

     2,400        4,241        1,276   
  

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 81,052      $ 89,936      $ 125,780   
  

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

      

Balance at Beginning of Period

   $ 2,981      $ 3,222      $ 3,417   

Reversal of Charged to Operating Expense

     (400     (241     (1,276
  

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 2,581      $ 2,981      $ 2,141   
  

 

 

   

 

 

   

 

 

 

 

20


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the allowance for credit losses by portfolio segment for the three months ended March 31, 2012 and 2011.

 

     Real
Estate
    Commercial
and
Industrial
    Consumer     Unallocated     Total  
     (In Thousands)  

March 31, 2012:

          

Allowance for Loan Losses:

          

Beginning Balance

   $ 19,637      $ 66,005      $ 2,243      $  2,051      $ 89,936   

Charge-Offs

     2,842        9,115        364        —          12,321   

Recoveries on Loans Previously Charged Off

     —          1,013        24        —          1,037   

Provision

     5,435        (3,265     341        (111     2,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 22,230      $ 54,638      $ 2,244      $ 1,940      $ 81,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 536      $ 16,686      $ —        $ —        $ 17,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 21,694      $ 37,952      $ 2,244      $ 1,940      $ 63,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

          

Ending Balance

   $ 834,056      $ 1,102,140      $ 40,782      $ —        $ 1,976,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,395      $ 50,960      $ 402      $ —        $ 67,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 817,661      $ 1,051,180      $ 40,380      $ —        $ 1,909,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2011:

          

Allowance for Loan Losses:

          

Beginning Balance

   $ 32,766      $ 108,986      $ 2,079      $ 2,228      $ 146,059   

Charge-Offs

     7,053        17,955        173        —          25,181   

Recoveries on Loans Previously Charged Off

     521        3,096        9        —          3,626   

Provision

     (350     (249     (183     2,058        1,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 25,884      $ 93,878      $ 1,732      $ 4,286      $ 125,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 3,855      $ 27,599      $ 81      $ —        $ 31,535   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 22,029      $ 66,279      $ 1,651      $ 4,286      $ 94,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

          

Ending Balance

   $ 812,416      $ 1,265,507      $ 48,120      $ —        $ 2,126,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 75,154      $ 107,585      $ 903      $ —        $ 183,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 737,262      $ 1,157,922      $ 47,217      $ —        $ 1,942,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality Indicators

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 semi-annually. 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 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. Followings are sub categories within the Pass grade, or (0) to (4):

 

Pass or (0):   loans secured in full by cash or cash equivalents.
Pass or (1):   requires 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.

 

21


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

  Pass or (2):   requires 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 centered in liquid assets and strong income.

 

  Pass or (3):   loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheet proportions 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 which are designated 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

 

  Pass or (4):   loans or commitments to borrowers exhibiting either somewhat weaker balance sheet proportions or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result of this the Bank may have secured its exposure in an effort 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 or (5): Special Mention credits are potentially weak, as the borrower is exhibiting deteriorating trends which, if not corrected, could jeopardize repayment of the debt and result in a substandard classification. Credits which have significant actual, not potential, weaknesses are considered more severely classified.

Substandard or (6): A Substandard credit 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 of 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 or (7): A Doubtful credit 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 or (8): Loans classified Loss are 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.

 

22


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

     Pass
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade  6-7)
     Total Loans  
     (In Thousands)  

March 31, 2012:

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 307,429       $ 3,114       $ 19,520       $ 330,063   

Land

     3,526         —           17,303         20,829   

Other

     308,345         10,359         22,417         341,121   

Construction

     —           11,544         13,933         25,477   

Residential Property

     112,093         —           4,473         116,566   

Commercial and Industrial Loans:

           

Commercial Term Loans

           

Unsecured

     99,252         3,612         33,253         136,117   

Secured by Real Estate

     660,982         20,559         73,343         754,884   

Commercial Lines of Credit

     52,273         1,173         2,252         55,698   

SBA Loans

     104,305         1,460         17,256         123,021   

International Loans

     30,186         —           2,234         32,420   

Consumer Loans

     38,442         226         2,114         40,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,716,833       $ 52,047       $ 208,098       $ 1,976,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 292,914       $ 8,858       $ 10,685       $ 312,457   

Land

     4,351         —           3,418         7,769   

Other

     297,734         8,428         36,635         342,797   

Construction

     —           14,080         19,896         33,976   

Residential Property

     48,592         —           4,329         52,921   

Commercial and Industrial Loans:

           

Commercial Term Loans

           

Unsecured

     100,804         8,680         41,796         151,280   

Secured by Real Estate

     634,822         36,290         122,444         793,556   

Commercial Lines of Credit

     44,985         7,676         3,109         55,770   

SBA Loans

     96,983         1,496         17,713         116,192   

International Loans

     26,566         —           2,110         28,676   

Consumer Loans

     40,454         676         2,216         43,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,588,205       $ 86,184       $ 264,351       $ 1,938,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following is an aging analysis of past due loans, disaggregated by class of loans, as of March 31, 2012 and December 31, 2011:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past
Due
     Total
Past Due
     Current      Total
Loans
     Accruing
90 Days
or More
Past Due
 
     (In Thousands)  

March 31, 2012:

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 761       $ —         $ —         $ 761       $ 329,302       $ 330,063       $ —     

Land

     —           —           —           —           20,829         20,829         —     

Other

     279         65         —           344         340,777         341,121         —     

Construction

     —           —           8,157         8,157         17,320         25,477         —     

Residential Property

     372         2,656         284         3,312         113,254         116,566         —     

Commercial and Industrial Loans:

                    

Commercial Term Loans

                    

Unsecured

     1,126         263         816         2,205         133,912         136,117         —     

Secured by Real Estate

     927         3,503         4,882         9,312         745,572         754,884         —     

Commercial Lines of Credit

     —           —           616         616         55,082         55,698         —     

SBA Loans

     2,278         648         7,036         9,962         113,059         123,021         —     

International Loans

     —           —           —           —           32,420         32,420         —     

Consumer Loans

     248         1,063         238         1,549         39,233         40,782         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,991       $ 8,198       $ 22,029       $ 36,218       $ 1,940,760       $ 1,976,978       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ 485       $ —         $ —         $ 485       $ 311,972       $ 312,457       $ —     

Land

     —           —           —           —           7,769         7,769         —     

Other

     —           —           —           —           342,797         342,797         —     

Construction

     —           —           8,310         8,310         25,666         33,976         —     

Residential Property

     277         1,613         2,221         4,111         48,810         52,921         —     

Commercial and Industrial Loans:

                    

Commercial Term Loans

                    

Unsecured

     438         611         1,833         2,882         148,398         151,280         —     

Secured by Real Estate

     3,162         6,496         1,202         10,860         782,696         793,556         —     

Commercial Lines of Credit

     —           —           416         416         55,354         55,770         —     

SBA Loans

     260         472         7,108         7,840         108,352         116,192         —     

International Loans

     —           —           —           —           28,676         28,676         —     

Consumer Loans

     126         7         154         287         43,059         43,346         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,748       $ 9,199       $ 21,244       $ 35,191       $ 1,903,549       $ 1,938,740       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Impaired Loans

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 they are classified as substandard loans in an amount over 5 percent of the Bank’s Tier 1 Capital; 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. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. 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, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

 

25


HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table provides information on impaired loans, disaggregated by class of loans, as of the dates indicated:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     With No
Related
Allowance
Recorded
     With an
Allowance
Recorded
     Related
Allowance
     Average
Recorded
Investment
 
     (In Thousands)  

March 31, 2012:

                 

Real Estate Loans:

                 

Commercial Property

                 

Retail

   $ 1,327       $ 1,355       $ 102       $ 1,225       $ 145       $ 1,344   

Land

     2,187         2,265         2,187         —           —           2,212   

Other

     1,389         1,459         1,389         —           —           1,398   

Construction

     8,157         8,246         —           8,157         44         8,196   

Residential Property

     3,335         3,385         1,137         2,198         347         3,340   

Commercial and Industrial Loans:

                 

Commercial Term Loans

                 

Unsecured

     14,966         15,761         1,167         13,799         12,858         15,039   

Secured by Real Estate

     26,475         27,322         11,237         15,238         1,679         26,491   

Commercial Lines of Credit

     1,610         1,746         705         905         888         1,882   

SBA Loans

     7,909         11,697         4,526         3,383         1,261         7,964   

Consumer Loans

     402         433         402         —           —           404   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67,757       $ 73,669       $ 22,852       $ 44,905       $ 17,222       $ 68,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

Real Estate Loans:

                 

Commercial Property

                 

Retail

   $ 1,260       $ 1,260       $ 1,100       $ 160       $ 126       $ 105   

Land

     3,178         3,210         —           3,178         360         16,910   

Other

     14,773         14,823         1,131         13,642         3,004         14,850   

Construction

     14,120         14,120         14,120         —           —           14,353   

Residential Property

     5,368         5,408         3,208         2,160         128         5,399   

Commercial and Industrial Loans: