HANMI FINANCIAL CORP - Quarter Report: 2010 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

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)

     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 þ No o

     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 o No o

     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 Filero		Accelerated Filer þ		Non-Accelerated Filero		Smaller Reporting Company o
				(Do Not Check if a Smaller Reporting Company)

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

     As of July 30, 2010, there were 151,198,390 outstanding shares of the Registrant’s Common Stock.

 

 

THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

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 Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited)			3
Consolidated Statements of Cash Flows (Unaudited)			4
Notes to Consolidated Financial Statements (Unaudited)			5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			56
ITEM 4. CONTROLS AND PROCEDURES			56
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			57
ITEM 1A. RISK FACTORS			57
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			68
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			68
ITEM 4. REMOVED AND RESERVED			68
ITEM 5. OTHER INFORMATION			68
ITEM 6. EXHIBITS			69
SIGNATURES			70
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Data)

		June 30,				December 31,
		2010				2009
ASSETS
Cash and Due From Banks		$	60,034			$	55,263
Interest-Bearing Deposits in Other Banks			170,711				98,847
Federal Funds Sold			20,000				—
Cash and Cash Equivalents			250,745				154,110
Securities Held to Maturity, at Amortized Cost (Fair Value of $859 as of June 30, 2010 and $871 as of December 31, 2009)			856				869
Investment Securities Available for Sale, at Fair Value (Amortized Cost of $185,953 as of June 30, 2010 and $130,995 as of December 31, 2009)			190,238				132,420
Loans Receivable, Net of Allowance for Loan Losses of $176,667 as of June 30, 2010 and $144,996 as of December 31, 2009			2,296,215				2,669,054
Loans Held for Sale, at the Lower of Cost or Fair Value			30,544				5,010
Due from Customers on Acceptances			1,072				994
Premises and Equipment, Net			17,917				18,657
Accrued Interest Receivable			7,802				9,492
Other Real Estate Owned, Net			24,064				26,306
Deferred Tax Assets			—				3,608
Servicing Assets			3,356				3,842
Other Intangible Assets, Net			2,754				3,382
Investment in Federal Home Loan Bank Stock, at Cost			29,556				30,697
Investment in Federal Reserve Bank Stock, at Cost			6,783				7,878
Income Taxes Receivable			9,697				56,554
Bank-Owned Life Insurance			26,874				26,408
Other Assets			16,477				13,425
TOTAL ASSETS		$	2,914,950			$	3,162,706
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing		$	574,843			$	556,306
Interest-Bearing			2,000,271				2,193,021
Total Deposits			2,575,114				2,749,327
Accrued Interest Payable			14,024				12,606
Bank Acceptances Outstanding			1,072				994
Deferred Tax Liabilities			1,203				—
Federal Home Loan Bank Advances			153,816				153,978
Other Borrowings			3,062				1,747
Junior Subordinated Debentures			82,406				82,406
Accrued Expenses and Other Liabilities			11,073				11,904
Total Liabilities			2,841,770				3,012,962
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 200,000,000 Shares; Issued 55,830,890 Shares (51,198,390 Shares Outstanding) and 55,814,890 shares (51,182,390 Shares Outstanding) as of June 30, 2010 and December 31, 2009, Respectively			56				56
Additional Paid-In Capital			357,641				357,174
Unearned Compensation			(261	)			(302	)
Accumulated Other Comprehensive Income – Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $1,805 and $602 as of June 30, 2010 and December 31, 2009, Respectively			2,530				859
Accumulated Deficit			(216,774	)			(138,031	)
Less Treasury Stock, at Cost: 4,632,500 Shares as of June 30, 2010 and December 31, 2009			(70,012	)			(70,012	)
Total Stockholders’ Equity			73,180				149,744
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,914,950			$	3,162,706

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans		$	34,486			$	44,718			$	71,181			$	89,803
Taxable Interest on Investment Securities			1,359				1,370				2,443				2,720
Tax-Exempt Interest on Investment Securities			77				621				154				1,264
Dividends on Federal Reserve Bank Stock			103				153				207				306
Dividends on Federal Home Loan Bank Stock			20				—				41				—
Interest on Interest-Bearing Deposits in Other Banks			99				11				154				13
Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements			16				112				33				194
Interest on Term Federal Funds Sold			11				695				11				1,395
Total Interest and Dividend Income			36,171				47,680				74,224				95,695
INTEREST EXPENSE:
Interest on Deposits			8,813				22,686				18,517				45,471
Interest on Federal Home Loan Bank Advances			339				1,010				685				2,122
Interest on Other Borrowings			31				2				31				2
Interest on Junior Subordinated Debentures			692				846				1,361				1,834
Total Interest Expense			9,875				24,544				20,594				49,429
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES			26,296				23,136				53,630				46,266
Provision for Credit Losses			37,500				23,934				95,496				69,887
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES			(11,204	)			(798	)			(41,866	)			(23,621	)
NON-INTEREST INCOME:
Service Charges on Deposit Accounts			3,602				4,442				7,328				8,757
Insurance Commissions			1,206				1,185				2,484				2,367
Remittance Fees			523				545				985				1,068
Trade Finance Fees			412				499				763				1,005
Other Service Charges and Fees			372				467				784				950
Bank-Owned Life Insurance Income			235				227				466				461
Net Gain on Sales of Investment Securities			—				1				105				1,168
Net Gain on Sales of Loans			220				—				214				2
Other Operating Income			106				214				552				280
Total Non-Interest Income			6,676				7,580				13,681				16,058
NON-INTEREST EXPENSE:
Salaries and Employee Benefits			9,011				8,508				17,797				16,011
Deposit Insurance Premiums and Regulatory Assessments			4,075				3,929				6,299				5,419
Occupancy and Equipment			2,674				2,788				5,399				5,672
Other Real Estate Owned Expense			1,718				1,502				7,418				1,645
Data Processing			1,487				1,547				2,986				3,083
Professional Fees			1,022				890				2,088				1,506
Supplies and Communication			574				599				1,091				1,169
Advertising and Promotion			503				624				1,038				1,193
Loan-Related Expense			310				1,217				617				1,398
Amortization of Other Intangible Assets			301				406				629				835
Other Operating Expenses			3,090				3,595				5,627				6,024
Total Non-Interest Expense			24,765				25,605				50,989				43,955
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES			(29,293	)			(18,823	)			(79,174	)			(51,518	)
Benefit for Income Taxes			(36	)			(9,288	)			(431	)			(24,787	)
NET LOSS		$	(29,257	)		$	(9,535	)		$	(78,743	)		$	(26,731	)
LOSS PER SHARE:
Basic		$	(0.57	)		$	(0.21	)		$	(1.54	)		$	(0.58	)
Diluted		$	(0.57	)		$	(0.21	)		$	(1.54	)		$	(0.58	)
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic			51,036,573				45,924,767				51,017,885				45,907,998
Diluted			51,036,573				45,924,767				51,017,885				45,907,998
DIVIDENDS DECLARED PER SHARE		$	—			$	—			$	—			$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)(UNAUDITED)

(In Thousands; Except Share Data)

		Common Stock – Number of Shares												Stockholders’ Equity
																										Accumulated
																		Additional								Other				Retained				Treasury				Total
						Treasury								Common				Paid-In				Unearned				Comprehensive				Earnings				Stock,				Stockholders’
		Issued				Stock				Outstanding				Stock				Capital				Compensation				Income (Loss)				(Deficit)				at Cost				Equity
BALANCE AS OF JANUARY 1, 2009			50,538,049				(4,632,500	)			45,905,549			$	51			$	349,304			$	(218	)		$	544			$	(15,754	)		$	(70,012	)		$	263,915
Shares Issued for Business Acquisitions			39,418				—				39,418				—				46				—				—				—				—				46
Share-Based Compensation Expense			—				—				—				—				460				29				—				—				—				489
Restricted Stock Awards			190,000				—				190,000				—				259				(259	)			—				—				—				—
Forfeiture of Restricted Stock Award			(4,000	)			—				(4,000	)			—				(64	)			64				—				—				—				—
Comprehensive Loss:
Net Loss			—				—				—				—				—				—				—				(26,731	)			—				(26,731	)
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes			—				—				—				—				—				—				1,407				—				—				1,407
Total Comprehensive Loss																																							(25,324	)
BALANCE AS OF JUNE 30, 2009			50,763,467				(4,632,500	)			46,130,967			$	51			$	350,005			$	(384	)		$	1,951			$	(42,485	)		$	(70,012	)		$	239,126
BALANCE AS OF JANUARY 1, 2010			55,814,890				(4,632,500	)			51,182,390			$	56			$	357,174			$	(302	)		$	859			$	(138,031	)		$	(70,012	)		$	149,744
Exercises of Stock Options and Stock Warrants			16,000				—				16,000				—				22				—				—				—				—				22
Share-Based Compensation Expense			—				—				—				—				445				41				—				—				—				486
Comprehensive Loss:
Net Loss			—				—				—				—				—				—				—				(78,743	)			—				(78,743	)
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes			—				—				—				—				—				—				1,671				—				—				1,671
Total Comprehensive Loss																																							(77,072	)
BALANCE AS OF JUNE 30, 2010			55,830,890				(4,632,500	)			51,198,390			$	56			$	357,641			$	(261	)		$	2,530			$	(216,774	)		$	(70,012	)		$	73,180

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Six Months Ended
		June 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss		$	(78,743	)		$	(26,731	)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment			1,204				1,329
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net			288				(957	)
Amortization of Other Intangible Assets			629				835
Amortization of Servicing Assets			496				421
Share-Based Compensation Expense			486				489
Provision for Credit Losses			95,496				69,887
Net Gain on Sales of Investment Securities			(105	)			(1,168	)
Net Gain on Sales of Loans			(214	)			(2	)
(Gain) Loss on Sales of Other Real Estate Owned			(154	)			324
Provision for Valuation Allowance on Other Real Estate Owned			6,503				1,001
Deferred Tax Benefit			3,608				—
Origination of Loans Held for Sale			(1,782	)			(199	)
Net Proceeds from Sales of Loans Held for Sale			79,254				3,354
Decrease in Accrued Interest Receivable			1,690				229
Increase in Servicing Asset			(10	)			(74	)
Increase in Cash Surrender Value of Bank-Owned Life Insurance			(466	)			(461	)
Increase in Other Assets			(3,039	)			(16,497	)
Decrease in Income Tax Receivable			46,857				—
Increase in Accrued Interest Payable			1,418				13,320
Increase in Other Liabilities			682				390
Net Cash Provided By Operating Activities			154,098				45,490
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock			2,236				175
Proceeds from Matured or Called Investment Securities Available for Sale			37,023				38,494
Proceeds from Matured or Called Investment Securities Held to Maturity			13				—
Proceeds from Sales of Investment Securities Available for Sale			3,252				38,448
Proceeds from Sales of Other Real Estate Owned			5,042				215
Net Decrease in Loans Receivable			163,888				130,866
Purchases of Investment Securities Available for Sale			(95,415	)			(93,511	)
Purchases of Premises and Equipment			(464	)			(883	)
Net Cash Provided By Investing Activities			115,575				113,804
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Deposits			(174,213	)			217,843
Proceeds from Exercise of Stock Options			22				—
Repayment of Long-Term Federal Home Loan Bank Advances			(162	)			(107,061	)
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings			1,315				(102,438	)
Net Cash Provided By (Used In) Financing Activities			(173,038	)			8,344
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			96,635				167,638
Cash and Cash Equivalents at Beginning of Period			154,110				215,188
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	250,745			$	382,826
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid		$	8,457			$	36,109
Income Taxes Paid, Net of Refunds		$	(49,971	)		$	—
Non-Cash Activities:
Stock Issued for Business Acquisition		$	—			$	46
Transfer of Loans to Other Real Estate Owned		$	10,366			$	34,735
Transfer of Loans to Loan Held for Sale		$	101,620			$	—
Loans Provided in the Sale of Other Real Estate Owned		$	1,217			$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

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. (“Chun-Ha”) and All World Insurance Services, Inc. (“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, 2010, 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 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 “SEC”). The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 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 2009 Annual Report on Form 10-K.

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

NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION

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

     While Hanmi Financial intends to take such actions as may be necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Final Order and Agreement, there can be no assurance that Hanmi Financial or the Bank will be able to comply fully with the provisions of the Final Order and the Agreement, or that compliance with the Final Order and the Agreement 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 Final Order and the Agreement could result in further enforcement actions by both DFI and FRB, or the placing of the Bank into conservatorship or receivership.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)

Final Order and Written Agreement

     The Final Order and the Agreement contain substantially similar provisions. The Final Order and the Agreement require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address 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, with respect to the Agreement, of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Final Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Final Order and the Agreement also require the Bank to review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and Hanmi Financial and the Bank must obtain prior approval from the FRB prior to declaring and paying dividends.

     Under the Final Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million. The Bank will be required to maintain a ratio of tangible stockholders’ equity to total tangible assets as follows:

		Ratio of Tangible Stockholders’
Date		Equity to Total Tangible Assets
By July 31, 2010		Not Less Than 9.0 Percent
From December 31, 2010 and Until the Final Order is Terminated		Not Less Than 9.5 Percent

     If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and 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 to be approved by the FRB. As of June 30, 2010, the Bank had tangible stockholders’ equity to total tangible assets ratio of 5.20 percent.

     To comply with the provisions of the Order and the Agreement, we entered into a definitive securities purchase agreement with Woori Finance Holdings Co. Ltd. (“Woori”) on May 25, 2010 which provides that upon satisfactions of all conditions to closing , we will issue 175 million shares of common stock to Woori at a purchase price per share of $1.20, for aggregate gross consideration of $210 million. In addition, pursuant to the terms of the securities purchase agreement, Woori has the option to purchase an additional 25 million shares of common stock at a purchase price of $1.20 for additional aggregate gross consideration of $30 million. See “Note 12-Subsequent Events.”

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)

     Furthermore, on June 27, 2010, we completed a $120 million registered rights and best efforts offering and satisfied the capital contribution requirement set forth in the Final Order. See “Note 12-Subsequent Events.” The following additional actions which have been taken to comply with the provisions of the Final Order and the Agreement include the following:

	•		The Board Committees have been reorganized after a Board assessment was conducted to leverage the experience and skill base of our directors and to improve Board oversight of the Bank’s operations.
	•		Tools such as a master calendar of scheduled events and policy exception trigger tables have been created to assist the Board in its ability to monitor the Bank’s operations more effectively.
	•		Jung Hak Son, a 24 year employee of the Bank, was appointed to the Chief Credit Officer position on December 23, 2009 and the Bank received notice that the regulatory agency interposed no objection to his appointment on March 18, 2010.
	•		Loan policies and procedures continue to be adjusted and enhanced to keep current with the rapidly changing credit and economic environment.
	•		Quantitative and qualitative factors in our allowance for loan losses have been updated to reflect the higher risk in the loan portfolio due to the recessionary economy.
	•		Allowance methodology has been enhanced to better allocate reserves according to more specified loss and concentration risks.
	•		The credit department has also been reorganized and reinforced with additional personnel to increase the level of management loan review and loan monitoring.
	•		Third party loan reviews have been conducted quarterly to validate the loan grading.
	•		Written plans have been developed for each problem loan greater than $3 million and the plans have been implemented and are being monitored to improve loan work out and loan collection.
	•		The Bank’s strategic plan has been reviewed and revised, and the revised plan has been approved by the Board of Directors.
	•		The Bank’s liquidity management plan and contingency funding plan have been significantly revised to reflect the additional restrictions and challenges of the market.
	•		The capital plan has been revised and we believe significant progress has been made as set forth above.
	•		A Board Compliance Committee has been organized to monitor the progress toward full compliance with all the provisions of the Agreement and the Final Order and approves the related progress reports at least on a monthly basis prior to submission to the DFI and FRB according to the schedule established.

     Policies and procedures have been developed, plans have been formulated, documented, approved and submitted and administrative requirements such as submission of quarterly progress reports are also being met. The results of these actions, however, are still subject to review by our regulators.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)

Risk-Based Capital

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

     As of June 30, 2010, Hanmi Financial’s Tier 1 capital (stockholders’ equity plus qualified junior subordinated debentures less intangible assets) was $91.1 million. This represented a decrease of $103.6 million, or 53.2 percent, over Tier 1 capital of $194.7 million as of December 31, 2009. The capital ratios of Hanmi Financial and the Bank were as follows as of June 30, 2010:

																		To be Categorized as
										Minimum								“Well Capitalized”
										Regulatory								under Prompt Corrective
		Actual								Requirement								Action Provision
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
June 30, 2010
Total Capital (to Risk-Weighted Assets):
Hanmi Financial		$	180,545				7.31	%		$	197,634				8.00	%			N/A				N/A
Hanmi Bank		$	181,093				7.35	%		$	197,189				8.00	%		$	246,486				10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial		$	91,111				3.69	%		$	98,817				4.00	%			N/A				N/A
Hanmi Bank		$	148,300				6.02	%		$	98,594				4.00	%		$	147,891				6.00	%
Tier 1 Capital (to Average Assets):
Hanmi Financial		$	91,111				3.06	%		$	118,922				4.00	%			N/A				N/A
Hanmi Bank		$	148,300				4.99	%		$	118,763				4.00	%		$	148,454				5.00	%

Going Concern

     As previously mentioned, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. As part of the DFI Final Order issued on November 2, 2009, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent. As a result of the successful completion of the registered rights and best efforts offering in July 2010, the capital contribution requirement set forth in the Final Order has been satisfied. See “Note 12 — Subsequent Event.”

     We have also committed to the FRB to adopt a consolidated capital plan to augment and maintain a sufficient capital position. Our capital resources at June 30, 2010 do not currently satisfy our capital requirements for the foreseeable future and are not sufficient to offset additional problem assets. Further, should our asset quality continue to erode and require significant additional provision for credit losses, resulting in added future net operating losses at the Bank, our capital levels will additionally decline requiring the raising of more capital than the amount currently required to satisfy our agreements with our regulators. An inability to raise additional Capital when needed or comply with the terms of the Final Order or Agreement, raises substantial doubt about our ability to continue as a going concern.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 2 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION (Continued)

     The accompanying interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.

     As set forth above, on May 25, 2010, we entered into a definitive securities purchase agreement with Woori and are currently awaiting for approval from the regulatory agencies on the application filed on June 22, 2010. On July 27, 2010, we completed the registered rights and best efforts offering. We intend to contribute a substantial portion of the net proceeds from the Woori transaction as new capital into Hanmi Bank. However, we cannot provide assurance that we will be successful in consummating the transaction with Woori.

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 providing disclosures for 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 security during both interim and annual periods. FASB ASC 825 is effective for interim and annual reporting periods ending after June 15, 2009 and does 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 3 — Fair Value Measurements.”

     FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)” — ASU 2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU 2010-06 resulted in additional disclosures that are presented in “Note 3 — Fair Value Measurements.”

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

          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.

     Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities’ categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and we 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 preferred stocks 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 the Company’s proprietary valuation model. The fair value of the securities is determined by discounting contractual cash flows at a discount rate derived from a synthetic bond-rating method. This method relies on significant unobservable assumptions such as default spread and expected cash flows, and therefore, the Company has determined that classification of the instrument as Level 3 is appropriate.

     Loans Held for Sale — Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify these loans as Level 2 and subject to non-recurring fair value adjustments.

     Impaired Loans — FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 2 and subject to non-recurring fair value adjustments.

     Other Real Estate Owned — Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned as Level 2 and subject to non-recurring fair value adjustments.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

     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 using discount rates and a constant prepayment rate. The discount rate is based on the interest rate charged to a borrower plus a risk adjustment factor of one percent. We utilize the industrial constant prepayment rate provided by Bloomberg. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. Fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs. As such, we classify them as Level 3.

     Other Intangible Assets — Other intangible assets consists 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 them as Level 3 and subject to non-recurring fair value adjustments.

     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. We adopted FASB ASC 320 in the second quarter of 2009 and it had no impact on our financial condition or results of operations.

     Fair Value Measurement

     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.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three and six months periods ended June 30, 2010.

     As of June 30, 2010, assets and liabilities measured at fair value on a recurring basis are as follows:

		Level 1				Level 2				Level 3
						Significant
						Observable
						Inputs With
		Quoted Prices in				No Active
		Active Markets				Market With				Significant				Balance as of
		for Identical				Identical				Unobservable				June 30,
		Assets				Characteristics				Inputs				2010
		(In Thousands)
ASSETS:
Debt Securities Available for Sale:
Residential Mortgage-Backed Securities		$	—			$	57,195			$	—			$	57,195
U.S. Government Agency Securities			95,172				—				—				95,172
Collateralized Mortgage Obligations			—				19,291				—				19,291
Asset-Backed Securities			—				7,911				—				7,911
Municipal Bonds			—				5,318				—				5,318
Other Securities			—				3,309				1,258				4,567
Total Debt Securities Available for Sale		$	95,172			$	93,024			$	1,258			$	189,454
Equity Securities Available for Sale:
Financial Service Industry		$	784				—				—			$	784
Total Equity Securities Available for Sale		$	784			$	—			$	—			$	784
Total Securities Available for Sale		$	95,956			$	93,024			$	1,258			$	190,238
Servicing Assets		$	—			$	—			$	3,356			$	3,356
LIABILITIES:
Servicing Liabilities		$	—			$	—			$	193			$	193

     The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2010:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
														Realized and
														Unrealized
		Beginning								Realized and				Gains or Losses								Ending
		Balance as of				Purchases,				Unrealized				in Other				Transfers				Balance as of
		April 1,				Issuances and				Gains or Losses				Comprehensive				In and/or Out				June 30,
		2010				Settlements				in Earnings				Income				of Level 3				2010
		(In Thousands)
ASSETS:
Securities Available for Sale:
Other Securities		$	1,258			$	—			$	—			$	—			$	—			$	1,258
Servicing Assets		$	3,590			$	—			$	(234	)		$	—			$	—			$	3,356
LIABILITIES:
Servicing Liabilities		$	(200	)		$	—			$	7			$	—			$	—			$	(193	)

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (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, 2010:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
														Realized and
														Unrealized
		Beginning								Realized and				Gains or Losses								Ending
		Balance as of				Purchases,				Unrealized				in Other				Transfers				Balance as of
		January 1,				Issuances and				Gains or Losses				Comprehensive				In and/or Out				June 30,
		2010				Settlements				in Earnings				Income				of Level 3				2010
		(In Thousands)
ASSETS:
Securities Available for Sale:
Other Securities		$	1,258			$	—			$	—			$	—			$	—			$	1,258
Servicing Assets		$	3,842			$	—			$	(486	)		$	—			$	—			$	3,356
LIABILITIES:
Servicing Liabilities		$	(216	)		$	—			$	23			$	—			$	—			$	(193	)

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

     As of June 30, 2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:

		Level 1				Level 2				Level 3
						Significant
						Observable
						Inputs With
		Quoted Prices in				No Active
		Active Markets				Market With				Significant				Balance as of
		for Identical				Identical				Unobservable				June 30,
		Assets				Characteristics				Inputs				2010
		(In Thousands)
ASSETS:
Loans Held for Sale		$	—			$	30,544	(1)		$	—			$	30,544
Impaired Loans		$	—			$	235,899	(2)		$	—			$	235,899
Other Real Estate Owned		$	—			$	24,064	(3)		$	—			$	24,064
Other Intangible Assets		$	—			$	—			$	2,754			$	2,754

Assets and Liabilities Not Measured at Fair Value on a Recurring or Non-Recurring Basis

     FASB ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.

     The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

     The estimated fair values of financial instruments were as follows:

		June 30, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		or Contract				Fair				or Contract				Fair
		Amount				Value				Amount				Value
		(In Thousands)
Financial Assets:
Cash and Cash Equivalents		$	250,745			$	250,745			$	154,110			$	154,110
Investment Securities Held to Maturity			856				859				869				871
Investment Securities Available for Sale			190,238				190,238				132,420				132,420
Loans Receivable, Net of Allowance for Loan Losses			2,326,759				2,297,093				2,674,064				2,573,080
Accrued Interest Receivable			7,802				7,802				9,492				9,492
Investment in Federal Home Loan Bank Stock			29,556				29,556				30,697				30,697
Investment in Federal Reserve Bank Stock			6,783				6,783				7,878				7,878
Financial Liabilities:
Noninterest-Bearing Deposits			574,843				574,843				556,306				556,306
Interest-Bearing Deposits			2,000,271				2,003,379				2,193,021				2,197,866
Borrowings			239,284				239,947				236,453				237,354
Accrued Interest Payable			14,024				14,024				12,606				12,606
Off-Balance Sheet Items:
Commitments to Extend Credit			150,661				182				262,821				177
Standby Letters of Credit			17,665				56				17,225				37