XNAS:HAFC Hanmi Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

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

 

 

 


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE AND SIX MONTHS ENDED JUNE 30, 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

     40   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     70   
ITEM 4.   

CONTROLS AND PROCEDURES

     70   
PART II — OTHER INFORMATION   
ITEM 1.   

LEGAL PROCEEDINGS

     71   
ITEM 1A.   

RISK FACTORS

     71   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     71   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     71   
ITEM 4.   

MINE SAFETY DISCLOSURES

     71   
ITEM 5.   

OTHER INFORMATION

     71   
ITEM 6.   

EXHIBITS

     72   
SIGNATURES      73   


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and Due From Banks

   $ 73,645      $ 80,582   

Interest-Bearing Deposits in Other Banks

     197,760        101,101   

Federal Funds Sold

     33,000        20,000   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     304,405        201,683   

Restricted Cash

     3,819        1,818   

Term Federal Funds Sold

     110,000        115,000   

Securities Available for Sale, at Fair Value (Amortized Cost of $315,712 as of June 30, 2012 and $377,747 as of December 31, 2011)

     319,154        381,862   

Securities Held to Maturity, at Amortized Cost (Fair Value of $54,573 as of June 30, 2012 and $59,363 as of December 31, 2011)

     53,130        59,742   

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

     5,138        22,587   

Loans Receivable, Net of Allowance for Loan Losses of $71,893 as of June 30, 2012 and $89,936 as of December 31, 2011

     1,878,367        1,849,020   

Accrued Interest Receivable

     7,168        7,829   

Premises and Equipment, Net

     15,912        16,603   

Other Real Estate Owned, Net

     1,071        180   

Customers’ Liability on Acceptances

     1,443        1,715   

Servicing Assets

     5,003        3,720   

Other Intangible Assets, Net

     1,417        1,533   

Investment in Federal Home Loan Bank Stock, at Cost

     20,687        22,854   

Investment in Federal Reserve Bank Stock, at Cost

     10,261        8,558   

Deferred Taxes Assets

     47,483        —     

Current Tax Assets

     13,952        9,073   

Bank-Owned Life Insurance

     28,581        28,289   

Prepaid Expenses

     2,726        1,598   

Other Assets

     16,935        11,160   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,846,652      $ 2,744,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

Deposits:

    

Non-interest-Bearing

   $ 679,085      $ 634,466   

Interest-Bearing

     1,706,022        1,710,444   
  

 

 

   

 

 

 
     2,385,107        2,344,910   

Accrued Interest Payable

     14,882        16,032   

Bank’s Liability on Acceptances

     1,443        1,715   

Federal Home Loan Bank Advances

     3,122        3,303   

Junior Subordinated Debentures

     82,406        82,406   

Accrued Expenses and Other Liabilities

     11,236        10,850   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,498,196        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) as of June 30, 2012 and December 31, 2011

     257        257   

Additional Paid-In Capital

     549,796        549,744   

Unearned Compensation

     (116     (166

Accumulated Other Comprehensive Income—Unrealized Gain on Securities

    

Available for Sale and Loss on Interest-Only Strips, Net of Income Taxes of $302 as of June 30, 2012 and $602 as of December 31, 2011

     3,154        3,524   

Accumulated Deficit

     (134,777     (197,893

Less Treasury Stock, at Cost; 577,786 Shares as of June 30, 2012 and as of December 31, 2011

     (69,858     (69,858
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     348,456        285,608   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,846,652      $ 2,744,824   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

1


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

INTEREST AND DIVIDEND INCOME:

        

Interest and Fees on Loans

   $ 27,241      $ 29,249      $ 54,783      $ 60,154   

Taxable Interest on Investment Securities

     2,190        3,094        4,288        5,767   

Tax-Exempt Interest on Investment Securities

     99        37        201        77   

Interest on Term Federal Funds Sold

     168        18        493        45   

Dividends on Federal Reserve Bank Stock

     148        112        276        224   

Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements

     31        9        33        17   

Interest on Interest-Bearing Deposits in Other Banks

     59        79        127        168   

Dividends on Federal Home Loan Bank Stock

     29        20        58        41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest and Dividend Income

     29,965        32,618        60,259        66,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE:

        

Interest on Deposits

     3,953        6,192        8,872        12,927   

Interest on Federal Home Loan Bank Advances

     43        239        86        572   

Interest on Junior Subordinated Debentures

     797        711        1,596        1,409   

Interest on Other Borrowing

     —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

     4,793        7,143        10,554        14,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

     25,172        25,475        49,705        51,584   

Provision for Credit Losses

     4,000        —          6,000        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

     21,172        25,475        43,705        51,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME:

        

Service Charges on Deposit Accounts

     2,936        3,278        6,104        6,419   

Insurance Commissions

     1,294        1,203        2,530        2,463   

Remittance Fees

     487        499        941        961   

Trade Finance Fees

     292        328        584        625   

Other Service Charges and Fees

     380        368        744        701   

Bank-Owned Life Insurance Income

     238        233        637        463   

Net Gain on Sales of SBA Loans

     5,473        —          5,473        —     

Net (Loss) on Sales of Other Loans

     (5,326     (77     (7,719     (415

Net Gain (Loss) on Sales of Investment Securities

     1,381        (70     1,382        (70

Impairment Loss on Investment Securities:

        

Total Other-than-temporary Impairment Loss on Investment Securities

     (116     —          (116     —     

Less: Portion of Loss Recognized in Other Comprehensive Income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Impairment Loss Recognized in Earnings

     (116     —          (116     —     

Other Operating Income

     150        255        262        378   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

     7,189        6,017        10,822        11,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSE:

        

Salaries and Employee Benefits

     9,449        8,762        18,559        17,886   

Occupancy and Equipment

     2,621        2,650        5,216        5,215   

Deposit Insurance Premiums and Regulatory Assessments

     1,498        1,377        2,899        3,447   

Data Processing

     1,298        1,487        2,551        2,886   

Other Real Estate Owned Expense

     69        806        25        1,635   

Professional Fees

     1,089        1,138        1,838        1,927   

Directors and Officers Liability Insurance

     295        733        592        1,467   

Supplies and Communications

     576        496        1,134        1,074   

Advertising and Promotion

     1,009        908        1,610        1,474   

Loan-Related Expense

     88        184        288        409   

Amortization of Other Intangible Assets

     45        190        116        408   

Expense related to Unconsumated Capital Offerings

     —          2,220        —          2,220   

Other Operating Expenses

     1,726        1,935        3,681        3,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

     19,763        22,886        38,509        43,947   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES

     8,598        8,606        16,018        19,162   

(Benefit) Provision for Income Taxes

     (47,177     605        (47,098     724   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 55,775      $ 8,001      $ 63,116      $ 18,438   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE:

        

Basic

   $ 1.77      $ 0.42      $ 2.01      $ 0.98   

Diluted

   $ 1.77      $ 0.42      $ 2.00      $ 0.98   

WEIGHTED-AVERAGE SHARES OUTSTANDING:

        

Basic

     31,475,610        18,888,080        31,473,065        18,885,368   

Diluted

     31,499,803        18,907,299        31,489,943        18,907,169   

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

2


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  

NET INCOME

   $ 55,775      $ 8,001       $ 63,116      $ 18,438   

OTHER COMPREHENSIVE INCOME, NET OF TAX

         

Unrealized gains on securities

         

Unrealized holding gains arising during period

     214        6,172         888        6,216   

Less: Reclassification adjustment for (gains) losses included in net income

     (1,266     70         (1,266     70   

Unrealized gains on interest rate swap

     8        1         9        2   

Unrealized (losses) gains on interest-only strip of servicing assets

     (3     1         (1     1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other Comprehensive (Loss) Income

     (1,047     6,244         (370     6,289   
  

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $        54,728      $        14,245       $        62,746      $        24,727   
  

 

 

   

 

 

    

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

3


Table of Contents

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

    —          —          —          —          304        78        —          —          —          382   

Restricted Stock Awards

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

Comprehensive Loss:

                  —         

Net Income

    —          —          —          —          —          —          —          18,438        —          18,438   

Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          6,289        —          —          6,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      24,727   
                   

 

 

 

BALANCE AT JUNE 30, 2011

    19,486,362        (579,063     18,907,299      $ 156      $ 472,717      $ (219   $ 3,325      $ (207,602   $ (70,012   $ 198,365   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          77        25        —          —          —          102   

Restricted Stock Awards

    —          —          —          —          (25     25        —          —          —          —     

Comprehensive Income:

                   

Net Income

    —          —          —          —          —          —          —          63,116        —          63,116   

Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          (370     —          —          (370
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      62,746   
                   

 

 

 

BALANCE AT JUNE 30, 2012

    32,066,987        (577,786     31,489,201      $ 257      $ 549,796      $ (116   $ 3,154      $ (134,777   $ (69,858   $ 348,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

4


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 63,116      $ 18,438   

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

    

Depreciation and Amortization of Premises and Equipment

     1,087        1,083   

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

     2,005        1,227   

Amortization of Other Intangible Assets

     116        408   

Amortization of Servicing Assets

     419        345   

Share-Based Compensation Expense

     102        382   

Provision for Credit Losses

     6,000        —     

Net Gain on Sales of Investment Securities

     (1,382     70   

Other-Than-Temporary Loss on Investment Securities

     116        —     

FRB and FHLB Stock Dividends

     334        265   

Deferred Tax Benefit

     (47,184     —     

Net Loss (Gain) on Sales of Loans

     465        (2,489

Loss on Sales of Other Real Estate Owned

     —          681   

Valuation Impairment on Other Real Estate Owned

     57        470   

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

     1,781        2,903   

Gain on Bank-Owned Life Insurance

     (163     —     

Increase in Cash Surrender Value of Bank-Owned Life Insurance

     (473     (463

Origination of Loans Held for Sale

     (60,589     (16,056

Net Proceeds from Sales of Loans Held for Sale

     72,223        —     

Changes in Fair Value of Stock Warrants

     137        —     

Loss on Investment in Affordable Housing Partnership

     440        440   

Decrease in Accrued Interest Receivable

     661        536   

Increase in Restricted Cash

     (2,001     —     

Increase in Prepaid Expenses

     (1,128     —     

Increase in Other Assets

     (7,909     (1,054

Increase in Current Tax Assets

     (4,879     —     

Decrease in Accrued Interest Payable

     (1,150     (1,636

Increase in Other Liabilities

     882        (521
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     23,083        5,029   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

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

     2,109        2,206   

Proceeds from Matured or Called Securities Available for Sale

     71,339        70,841   

Proceeds from Sales of Securities Available for sale

     88,538        157,777   

Proceeds from Matured or Called Securities Held to Maturity

     6,338        12   

Proceeds from Sales of Other Real Estate Owned

     —          3,736   

Proceeds from Sales of Loans Held for Sale

     65,470        45,963   

Proceeds from Matured Term Federal Funds

     160,000        —     

Proceeds from Insurance Settlement on Bank-Owned Life Insurance

     344        —     

Net (Increase) Decrease in Loans Receivable

     (16,160     83,809   

Purchase of Federal Reserve Bank Stock

     (1,979     (40

Purchase of Loans Receivable

     (82,669     —     

Purchases of Term Federal Fund

     (155,000     —     

Purchases of Securities Available for Sale

     (98,311     (200,724

Purchases of Premises and Equipment

     (396     (353
  

 

 

   

 

 

 

Net Cash Provided By Investing Activities

     39,623        163,227   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (Decrease) in Deposits

     40,197        (68,346

Repayment of Long-Term Federal Home Loan Bank Advances

     (181     (171

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

     —          (150,536
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     40,016        (219,053
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     102,722        (50,797

Cash and Cash Equivalents at Beginning of Year

     201,683        249,720   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 304,405      $ 198,923   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash Paid During the Period for:

    

Interest Paid

     11,704        16,649   

Income Taxes Paid

     4,912        3   

Non-Cash Activities:

    

Transfer of Loans to Other Real Estate Owned

     948        2,752   

Transfer of Loans to Loans Held for Sale

     64,471        37,806   

Transfer of Loans Held for Sale to Loans

     1,779        —     

Loans Provided in the Sale of Loans Held for Sale

     —          5,750   

Loans Provided in the Sale of Other Real Estate Owned

     —          510   

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

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 June 30, 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 target joint examination of the Bank by the DFI and Federal Reserve Bank of San Francisco (the “FRB”) 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.

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

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

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.

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; (vii) improving the Bank’s earnings through a strategic plan and a budget; and (viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Written Agreement places 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 operations 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 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 June 30, 2012, Hanmi Financial and the Bank had a ratio of tangible stockholders’ equity to total tangible assets of 12.20 percent and 14.34 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.

 

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

Risk-Based Capital

Federal bank regulatory agencies require bank holding companies such as Hanmi Financial to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. In order to be considered “well capitalized,” federal bank regulatory agencies require depository institutions such as the Bank to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, the federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent. 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.

The capital ratios of Hanmi Financial and the Bank were as follows as of June 30, 2012 and 2011:

 

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

June 30, 2012

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 422,301         20.02   $ 168,754         8.00     N/A         N/A   

Hanmi Bank

   $ 401,456         19.06   $ 168,467         8.00   $ 210,584         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 395,342         18.74   $ 84,377         4.00     N/A         N/A   

Hanmi Bank

   $ 374,540         17.79   $ 84,234         4.00   $ 126,351         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 395,342         14.70   $ 107,587         4.00     N/A         N/A   

Hanmi Bank

   $ 374,540         13.95   $ 107,361         4.00   $ 134,201         5.00

June 30, 2011

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 301,045         13.92   $ 173,032         8.00     N/A         N/A   

Hanmi Bank

   $ 302,827         14.02   $ 172,802         8.00   $ 216,003         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 257,911         11.92   $ 86,516         4.00     N/A         N/A   

Hanmi Bank

   $ 274,785         12.72   $ 86,401         4.00   $ 129,602         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 257,911         9.09   $ 113,504         4.00     N/A         N/A   

Hanmi Bank

   $ 274,785         9.70   $ 113,260         4.00   $ 141,576         5.00

Reserve Requirement

The Bank is required to maintain a certain 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 June 30, 2012 and December 31, 2011, respectively.

Federal Reserve Notices of Proposed Rulemaking.

On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital effective January 1, 2013. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or nonaccrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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.

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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-dealers. We review the market prices provided by the broker-dealers 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 June 30, 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 June 30, 2012 and December 31, 2011, we had $360,000 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 June 30, 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 prices which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of June 30, 2012 and December 31, 2011, we had $3.5 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. These loans are classified as Level 2. Level 3 values additionally include adjustments by the Company for historical knowledge and for changes in market conditions.

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.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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.”

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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, 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 six months ended June 30, 2012. We recognize transfers of assets between levels at the end of each respective quarterly reporting period.

As of June 30, 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 June 30, 2012

           

ASSETS:

           

Debt Securities Available for Sale:

           

Residential Mortgage-Backed Securities

   $ —         $ 115,136       $ —         $ 115,136   

U.S. Government Agency Securities

     74,226         —           —           74,226   

Collateralized Mortgage Obligations

     —           96,582         —           96,582   

Municipal Bonds-Tax Exempt

     —           3,137         —           3,137   

Municipal Bonds-Taxable

     —           6,330         —           6,330   

Corporate Bonds

     —           19,901         —           19,901   

Other Securities

     —           3,357         —           3,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

   $ 74,226       $ 244,443       $ —         $ 318,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

   $ 485       $ —         $ —         $ 485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

   $ 485       $ —         $ —         $ 485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 74,711       $ 244,443       $ —         $ 319,154   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 1,020       $ 1,020   

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   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 883       $ 883   

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 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
June 30,
2012
 
     (In Thousands)  

LIABILITIES:

                 

Stock Warrants (1)

   $ 883       $ —         $ 137       $ —         $ —         $ 1,020   

  

 

(1) 

Reflects warrants for our common stock issued in connection with services it provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise price of $9.60 per share of our common stock and expire on October 14, 2015. See “Note 8 – Stockholders’ Equity” for more details.

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

As of June 30, 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 June 30,
2012 and 2011
     Loss During The
Six Months
Ended June 30,
2012 and 2011
 
            (In Thousands)                      

June 30, 2012

             

ASSETS:

             

Non-performing Loans Held for Sale (1)

   $ —         $ —         $ 3,489      $ —         $ 657   

Impaired Loans (2)

   $ —         $ 22,694       $ 10,911      $ 2,285       $ 4,690   

Other Real Estate Owned (3)

   $ —         $ —         $ 1,071      $ 57       $ 57   

June 30, 2011

             

ASSETS:

             

Non-performing Loans Held for Sale (4)

   $ —         $ —         $ 18,683      $ 682       $ 9,462   

Impaired Loans (5)

   $ —         $ 33,071       $ 145,019      $ 14,314       $ 23,940   

Other Real Estate Owned (6)

   $ —         $ —         $ 1,298      $ 203       $ 770   

 

(1) Includes commercial term loans of $3.0 million, and SBA loans of $484,000.
(2) Includes real estate loans of $5.2 million, commercial and industrial loans of $27.4 million, and consumer loans of $1.0 million.
(3) Includes properties from the foreclosure of a commercial property loan of $346,000 and a SBA loan of $725,000.
(4) Includes commercial property loans of $418,000, commercial term loans of $12.0 million, SBA loans of $6.0 million and residential property loans of $266,000.
(5) Includes real estate loans of $73.7 million, commercial and industrial loans of $103.7 million, and consumer loans of $732,000.
(6) Includes properties from the foreclosure of commercial property loans of $308,000 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.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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:

 

     June 30, 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

   $ 304,405       $ 304,405       $ 201,683       $ 201,683   

Restricted Cash

     3,819         3,819         1,818         1,818   

Term Federal Funds

     110,000         110,153         115,000         115,173   

Investment Securities Available for Sale

     319,154         319,154         381,862         381,862   

Investment Securities Held to Maturity

     53,130         54,573         59,742         59,363   

Loans Receivable, Net of Allowance for Loan Losses

     1,878,367         1,830,880         1,849,020         1,802,511   

Loans Held for Sale

     5,138         5,138         22,587         22,587   

Accrued Interest Receivable

     7,168         7,168         7,829         7,829   

Investment in Federal Home Loan Bank Stock

     20,687         20,687         22,854         22,854   

Investment in Federal Reserve Bank Stock

     10,261         10,261         8,558         8,558   

Financial Liabilities:

           

Noninterest-Bearing Deposits

     679,085         679,085         634,466         634,466   

Interest-Bearing Deposits

     1,706,022         1,712,021         1,710,444         1,710,878   

Borrowings

     85,528         85,616         85,709         83,853   

Accrued Interest Payable

     14,882         14,882         16,032         16,032   

Off-Balance Sheet Items:

           

Commitments to Extend Credit

     196,079         220         158,748         194   

Standby Letters of Credit

     10,949         37         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 2).

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

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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 non-interest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows 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).

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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)  

June 30, 2012:

           

Municipal Bonds-Tax Exempt

   $ 9,762       $ 254       $ —         $ 10,016   

Municipal Bonds-Taxable

     38,588         1,155         31         39,712   

Mortgage-Backed Securities (1)

     2,785         55         —           2,840   

U.S. government Agency Securities

     1,995         10         —           2,005   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 53,130       $ 1,474       $ 31       $ 54,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Municipal Bonds-Tax Exempt

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

Municipal Bonds-Taxable

     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)  

June 30, 2012

           

Mortgage-Backed Securities (1)

   $ 112,672       $ 2,574       $ 110       $ 115,136   

Collateralized Mortgage Obligations (1)

     95,663         1,068         149         96,582   

U.S. Government Agency Securities

     74,094         208         76         74,226   

Municipal Bonds-Tax Exempt

     3,074         63         —           3,137   

Municipal Bonds-Taxable

     5,895         435         —           6,330   

Corporate Bonds

     20,465         3         567         19,901   

Other Securities

     3,318         81         42         3,357   

Equity Securities

     531         —           46         485   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 315,712       $ 4,432       $ 990       $ 319,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

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-Taxable

     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 June 30, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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

     36,579         36,017         1,756         1,808   

Over Five Years Through Ten Years

     58,110         58,592         21,778         22,382   

Over Ten Years

     12,157         12,342         26,811         27,543   

Mortgage-Backed Securities

     112,672         115,136         2,785         2,840   

Collateralized Mortgage Obligations

     95,663         96,582         —           —     

Equity Securities

     531         485         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 315,712       $ 319,154       $ 53,130       $ 54,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three months ended June 30, 2012, we recorded $116,000 in OTTI charges in earnings on available-for-sale security.

The Company had an equity security with a carrying value of $395,000 at June 30, 2012. During 2012, the issuer’s financial condition had deteriorated and it was determined that the value on the investment is other-than-temporarily-impaired. Based on the closing price of the shares at June 30, 2012, we recorded an OTTI charge of $116,000 to write down the value of the investment security to its fair value.

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 June 30, 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)  

June 30, 2012:

                          

Mortgage-Backed Securities

   $ 110       $ 20,100         4       $ —         $ —           —         $ 110       $ 20,100         4   

Collateralized Mortgage Obligation

     22         9,470         4         127         2,643         3         149         12,113         7   

U.S. Government Agency Securities

     76         15,481         5         —           —           —           76         15,481         5   

Other Securities

     —           —           —           42         958         1         42         958         1   

Corporate Bonds

     —           —           —           567         18,398         5         567         18,398         5   

Equity Securities

     46         90         1         —           —           —           46         90         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 254       $ 45,141         14       $ 736       $ 21,999         9       $ 990       $ 67,140         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impairment losses described previously are not included in the table above. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of June 30, 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 June 30, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

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.

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 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 scheduled, and management believes this will continue in the future and that the bonds 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, other than the OTTI write-down related to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of June 30, 2012 and December 31, 2011 are not other-than-temporarily-impaired, and therefore, no other impairment charges as of June 30, 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:

 

     Three Months Ended June 31,     Six Months Ended June 31,  
     2012     2011     2012     2011  
     (In Thousands)     (In Thousands)  

Gross Realized Gains on Sales of Investment Securities

   $ 1,431      $ 969      $ 1,432      $ 969   

Gross Realized Losses on Sales of Investment Securities

   $ (50   $ (1,039   $ (50   $ (1,039
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized Gains on Sales of Investment Securities

   $ 1,381      $ (70   $ 1,382      $ (70
  

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from Sales of Investment Securities

   $ 85,538      $ 157,777      $ 88,538      $ 157,777   

Tax Expense on Sales of Investment Securities

   $ 581      $ —        $ 581      $ —     

For the three months ended June 30, 2012, $1.0 million of net unrealized losses arose during the period and was included in comprehensive income and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had previously recorded net realized gains of $1.9 million in comprehensive income. For the three months ended June 30, 2011, $6.2 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $70,000 loss in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $1.3 million in comprehensive income.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

For the six months ended June 31, 2012, $370,000 of net unrealized losses arose during the period and was included in comprehensive income and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.7 million in comprehensive income. For the six months ended June 30, 2011, $6.3 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $70,000 loss in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $1.5 million in comprehensive income.

Investment securities available for sale with carrying values of $25.6 million and $45.8 million as of June 30, 2012 and December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

NOTE 5 — LOANS

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.

Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy. Most of the Bank’s lending activity occurs within Southern California.

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Loans Receivable

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

 

     June 30,
2012
    December 31,
2011
 
     (In Thousands)  

Real Estate Loans:

    

Commercial Property

   $ 724,129      $ 663,023   

Construction

     7,930        33,976   

Residential Property

     107,757        52,921   
  

 

 

   

 

 

 

Total Real Estate Loans

     839,816        749,920   
  

 

 

   

 

 

 

Commercial and Industrial Loans

    

Commercial Term Loans (1)

     854,499        944,836   

Commercial Lines of Credit (2)

     53,916        55,770   

SBA Loans (3)

     129,415        116,192   

International Loans

     32,639        28,676   
  

 

 

   

 

 

 

Total Commercial and Industrial Loans

     1,070,469        1,145,474   
  

 

 

   

 

 

 

Consumer Loans

     39,339        43,346   
  

 

 

   

 

 

 

Total Gross Loans

     1,949,624        1,938,740   

Allowance for Loan Losses

     (71,893     (89,936

Deferred Loan Costs

     636        216   
  

 

 

   

 

 

 

Loans Receivable, Net

   $ 1,878,367      $ 1,849,020   
  

 

 

   

 

 

 

 

(1) 

Includes owner-occupied property loans of $722.5 million and $786.3 million as of June 30, 2012 and December 31, 2011, respectively.

(2) 

Includes owner-occupied property loans of $919,000 and $936,000 as of June 30, 2012 and December 31, 2011, respectively.

(3) 

Includes owner-occupied property loans of $114.5 million and $93.6 million as of June 30, 2012 and December 31, 2011, respectively.

Accrued interest on loans receivable amounted to $5.2 million and $5.7 million at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, loans receivable totaling $682.3 million and $797.1 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Discount Window.

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended June 30, 2012 and 2011.

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

June 30, 2012:

         

Loans Held for Sale:

         

Beginning Balance

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

Origination of Loans Held for Sale

     —          34,723        —           34,723   

Reclassification from Loans Receivable to Loans Held for Sale

     15,148        11,842        —           26,990   

Reclassification from Loans Held for Sale to Loan Receivables

     (1,647     (132     —           (1,779

Sales of Loans Held for Sale

     (21,909     (87,552     —           (109,461

Principal Payoffs and Amortization

     (58     (146     —           (204

Valuation Adjustments

     (1,124     —          —           (1,124
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,289      $ 3,849      $ —         $ 5,138   
  

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2011:

         

Loans Held for Sale:

         

Beginning Balance

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

Origination of Loans Held for Sale

     —          1,771        —           1,771   

Reclassification from Loans Receivable to Loans Held for Sale

     266        9,567        —           9,833   

Sales of Loans Held for Sale

     (2,664     (11,557     —           (14,221

Principal Payoffs and Amortization

     (8     (237     —           (245

Valuation Adjustments

     (133     (549     —           (682
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 974      $ 43,131      $ —         $ 44,105   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended June 30, 2012, loans receivable of $27.0 million were reclassified as loans held for sale, and loans held for sale of $109.5 million were sold. For the three months ended June 30, 2011, loans receivable of $9.8 million were reclassified as loans held for sale and loans held for sale of $14.2 million were sold. For the three months ended June 30, 2012, $15.2 million of commercial real estate loans were purchased. There were no purchases of loans receivable for the three months ended June 30, 2011.

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2012 and 2011.

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

June 30, 2012:

         

Loans Held for Sale:

         

Beginning Balance

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

Origination of Loans Held for Sale

     —          60,589        —           60,589   

Reclassification from Loans Receivable to Loans Held for Sale

     32,224        32,247        —           64,471   

Reclassification from Loans Held for Sale to OREO

     (360     —          —           (360

Reclassification from Loans Held for Sale to Loan Receivables

     (1,647     (132     —           (1,779

Sales of Loans Held for Sale

     (38,703     (99,455     —           (138,158

Principal Payoffs and Amortization

     (169     (262     —           (431

Valuation Adjustments

     (1,124     (657     —           (1,781
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,289      $ 3,849      $ —         $ 5,138   
  

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2011:

         

Loans Held for Sale:

         

Beginning Balance

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

Origination of Loans Held for Sale

     —          16,056        —           16,056   

Reclassification from Loans Receivable to Loans Held for Sale

     18,175        19,631        —           37,806   

Sales of Loans Held for Sale

     (20,653     (22,140     —           (42,793

Principal Payoffs and Amortization

     (14     (667     —           (681

Valuation Adjustments

     (200     (2,703     —           (2,903
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 974      $ 43,131      $ —         $ 44,105   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

For the six months ended June 30, 2012, loans receivable of $64.5 million were reclassified as loans held for sale, and loans held for sale of $138.2 million were sold. For the six months ended June 30, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential mortgage loans were purchased. For the six months ended June 30, 2011, loans receivable of $37.8 million were reclassified as loans held for sale, and loans held for sale of $42.8 million were sold. There were no purchases of loans receivable for the six months ended June 30, 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     As of and for the Six Months Ended  
     June 30,
2012
    March 31,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 
     (In Thousands)  

Allowance for Loan Losses:

          

Balance at Beginning of Period

   $ 81,052      $ 89,936      $ 125,780      $ 89,936      $ 146,059   

Actual Charge-Offs

     (14,716     (12,321     (20,652     (27,037     (45,833

Recoveries on Loans Previously Charged Off

     1,324        1,037        4,151        2,361        7,777   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (13,392     (11,284     (16,501     (24,676     (38,056

Provision Charged to Operating Expense

     4,233        2,400        (250     6,633        1,026   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 71,893      $ 81,052      $ 109,029      $ 71,893      $ 109,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

          

Balance at Beginning of Period

   $ 2,581      $ 2,981      $ 2,141      $ 2,981      $ 3,417   

Provision Charged to (Reversal of Charged to) Operating Expense

     (233     (400     250        (633     (1,026
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 2,348      $ 2,581      $ 2,391      $ 2,348      $ 2,391   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table details the information on the allowance for credit losses by portfolio segment for the three months ended June 30, 2012 and 2011.

 

     Real Estate      Commercial
andIndustrial
     Consumer     Unallocated     Total  
     (In Thousands)  

June 30, 2012:

            

Allowance for Loan Losses:

            

Beginning Balance

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

Charge-Offs

     5,243         9,393         80        —          14,716   

Recoveries on Loans Previously Charged Off

     517         789         18        —          1,324   

Provision

     3,902         776         (425     (20     4,233   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,406       $ 46,810       $ 1,757      $ 1,920      $ 71,893   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 437       $ 7,224       $ —        $ —        $ 7,661   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,969       $ 39,586       $ 1,757      $ 1,920      $ 64,232   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans Receivable:

            

Ending Balance

   $ 839,816       $ 1,070,469       $ 39,339      $ —        $ 1,949,624   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,619       $ 42,087       $ 1,401      $ —        $ 60,107   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,197       $ 1,028,382       $ 37,938      $ —        $ 1,889,517   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

June 30, 2011:

            

Allowance for Loan Losses:

            

Beginning Balance

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

Charge-Offs

     5,591         14,741         320        —          20,652   

Recoveries on Loans Previously Charged Off

     2,223         1,915         13        —          4,151   

Provision

     1,599         1,793         162        (3,804     (250
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 24,115       $ 82,845       $ 1,587      $ 482      $ 109,029   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 3,324       $ 26,149       $ 223      $ —        $ 29,696   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,791       $ 56,696       $ 1,364      $ 482      $ 79,333   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans Receivable:

            

Ending Balance

   $ 787,585       $ 1,234,519       $ 46,500      $ —        $ 2,068,604   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 78,065       $ 114,560       $ 870      $ —        $ 193,495   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 709,520       $ 1,119,959       $ 45,630      $ —        $ 1,875,109   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 2012 and 2011.

 

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

June 30, 2012:

           

Allowance for Loan Losses:

           

Beginning Balance

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

Charge-Offs

     8,085         18,508        444        —          27,037   

Recoveries on Loans Previously Charged Off

     517         1,802        42        —          2,361   

Provision

     9,337         (2,489     (84     (131     6,633   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,406       $ 46,810      $ 1,757      $ 1,920      $ 71,893   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 437       $ 7,224      $ —        $ —        $ 7,661   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,969       $ 39,586      $ 1,757      $ 1,920      $ 64,232   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

           

Ending Balance

   $ 839,816       $ 1,070,469      $ 39,339      $ —        $ 1,949,624   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,619       $ 42,087      $ 1,401      $ —        $ 60,107   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,197       $ 1,028,382      $ 37,938      $ —        $ 1,889,517   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2011:

           

Allowance for Loan Losses:

           

Beginning Balance

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

Charge-Offs

     12,644         32,693        496        —          45,833   

Recoveries on Loans Previously Charged Off

     2,744         5,011        22        —          7,777   

Provision

     1,249         1,541        (18     (1,746     1,026   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 24,115       $ 82,845      $ 1,587      $ 482      $ 109,029   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 3,324       $ 26,149      $ 223      $ —        $ 29,696   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,791       $ 56,696      $ 1,364      $ 482      $ 79,333   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

           

Ending Balance

   $ 787,585       $ 1,234,519      $ 46,500      $ —        $ 2,068,604   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 78,065       $ 114,560      $ 870      $ —        $ 193,495   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 709,520       $ 1,119,959      $ 45,630      $ —        $ 1,875,109   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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. Following 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.

 

23


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 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 as 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.

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

 

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

June 30, 2012:

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 332,656       $ 3,095       $ 9,975       $ 345,726   

Land

     6,163         —           12,340         18,503   

Other

     330,499         25,141         4,260         359,900   

Construction

     —           —           7,930         7,930   

Residential Property

     103,901         —           3,856         107,757   

Commercial and Industrial Loans:

           

Commercial Term Loans

           

Unsecured

     102,701         1,356         27,923         131,980   

Secured by Real Estate

     651,727         16,145         54,647         722,519   

Commercial Lines of Credit

     50,808         885         2,223         53,916   

SBA Loans

     113,925         1,382         14,108         129,415   

International Loans

     31,589         —           1,050         32,639   

Consumer Loans

     35,821         218         3,300         39,339