e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
From
To
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Commission File Number:
000-30421
HANMI FINANCIAL
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
(State or Other
Jurisdiction of
Incorporation or Organization)
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95-4788120
(I.R.S. Employer
Identification No.)
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3660 Wilshire Boulevard,
Penthouse Suite A
Los Angeles, California
(Address of Principal
Executive Offices)
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90010
(Zip
Code)
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(213) 382-2200
(Registrants Telephone
Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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None
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None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form
10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in Exchange Act
Rule 12b-2.
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
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 June 30, 2005, the aggregate market value of the
common stock held by non-affiliates of the Registrant was
approximately $670,043,000. For purposes of the foregoing
calculation only, in addition to affiliated companies, all
directors and officers of the Registrant have been deemed
affiliates.
Number of shares of common stock of the Registrant outstanding
as of February 28, 2006 was 48,851,968 shares.
Documents Incorporated By Reference
Herein: Registrants Definitive Proxy
Statement for its Annual Meeting of Stockholders, which will be
filed within 120 days of the fiscal year ended
December 31, 2005, is incorporated by reference into
Part III of this report.
HANMI
FINANCIAL CORPORATION
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
Some of the statements under Item 1. Business,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and
elsewhere in this
Form 10-K
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. In some cases, you can identify forward-looking
statements by terminology such as may,
will, should, could,
expects, plans, intends,
anticipates, believes,
estimates, predicts,
potential, or continue, or the negative
of such terms and other comparable terminology. Although we
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. These
statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance or achievements to differ from those
expressed or implied by the forward-looking statement. For a
discussion of some of the factors that might cause such a
difference, see Item 1A. Risk Factors.
PART I
General
Hanmi Financial Corporation (Hanmi Financial,
we or us) is a Delaware corporation
incorporated on March 14, 2000 pursuant to a Plan of
Reorganization and Agreement of Merger to be the holding company
for Hanmi Bank (the Bank). Hanmi Financial became
the holding company for the Bank in June 2000 and is subject to
the Bank Holding Company Act of 1956, as amended. Our principal
office is located at 3660 Wilshire Boulevard, Penthouse
Suite A, Los Angeles, California 90010, and our telephone
number is
(213) 382-2200.
Hanmi Bank, our primary subsidiary, was incorporated under the
laws of the State of California on August 24, 1981 and was
licensed by the California Department of Financial Institutions
(DFI) on December 15, 1982. The Banks
deposit accounts are insured under the Federal Deposit Insurance
Act up to applicable limits thereof, and the Bank is a member of
the Federal Reserve System. The Banks headquarters is
located at 3660 Wilshire Boulevard, Penthouse Suite A, Los
Angeles, California 90010.
Hanmi Bank is a community bank conducting general business
banking, with its primary market encompassing the multi-ethnic
population of Los Angeles, Orange, San Diego,
San Francisco and Santa Clara counties. The
Banks full-service offices are located in business areas
where many of the businesses are run by immigrants and other
minority groups. The Banks client base reflects the
multi-ethnic composition of these communities. On April 30,
2004, we completed the acquisition of Pacific Union Bank
(PUB), a $1.2 billion (assets) commercial bank
headquartered in Los Angeles that also served primarily the
Korean-American
community. At December 31, 2005, the Bank had 22
full-service branch offices in California and four loan
production offices in California, Illinois, Virginia and
Washington.
Our revenues are derived primarily from interest on our loan and
securities portfolios and service charges on deposit accounts. A
summary of revenues for the periods indicated follows:
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For the Years Ended
December 31,
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2005
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2004
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2003
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(Dollars in thousands)
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Interest and Fees on Loans
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$
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179,011
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77.4
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%
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$
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116,811
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72.2
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%
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$
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64,505
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66.2
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%
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Interest on Investments
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18,507
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8.0
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%
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17,372
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10.7
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%
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12,410
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12.7
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%
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Other Interest Income
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1,589
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0.7
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%
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183
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0.1
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%
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502
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0.5
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%
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Service Charges on Deposit Accounts
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15,782
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6.8
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%
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14,441
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8.9
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%
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10,339
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10.6
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%
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Other Non-Interest Income
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16,434
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7.1
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%
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12,958
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8.1
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%
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9,683
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10.0
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%
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Total Revenues
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$
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231,323
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100.0
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%
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$
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161,765
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100.0
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%
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$
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97,439
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100.0
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%
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1
Business
Combination
On April 30, 2004, we completed the acquisition of PUB and
merged PUB with Hanmi Bank. We paid $164.5 million in cash
to acquire 5,537,431 of the PUB shares owned by Korea Exchange
Bank. All of the remaining PUB shares were converted in the
acquisition into shares of Hanmi Financials common stock
based on an exchange ratio of 2.312 shares for each PUB
share.
Immediately prior to the completion of the acquisition, we
issued a total of 7,894,738 shares of our common stock
pursuant to a private placement for total proceeds of
$75,000,000 before expenses and placement fees. Because of the
issuance of shares in the merger and the private placement, as
well as normal stock option activity, the number of outstanding
shares increased to 49,330,704 as of December 31, 2004.
In addition, all outstanding PUB employee stock options were
converted into 137,414 options to purchase Hanmi Financial stock
valued at $1.1 million in total. Based on Hanmi
Financials average price of $12.53 for the five-day
trading period from April 28, 2004 through May 4,
2004, the total consideration paid for PUB was
$324.7 million and resulted in the recognition of goodwill
aggregating $207.2 million. Net assets acquired totaled
$324.7 million.
The post-merger integration of PUBs operations was
completed substantially as planned. During the third quarter of
2004, we successfully completed the conversion of PUBs
core loan, deposits and general ledger data processing systems
onto Hanmi Banks platform. On October 4, 2004, the
Bank closed four redundant branches, bringing the total number
of branches to 23. On January 22, 2005, the Bank closed an
additional branch, as planned, and completed its post-merger
staff reduction program.
Following the acquisition of PUB, management initiated and
approved plans to restructure the operations of the existing
Bank and PUB branch networks and corporate headquarters to
eliminate duplicative facilities, streamline operations and
reduce costs. Through December 31, 2005, 54 employees had
been terminated.
For further discussion of the financial effects of the merger,
see Notes to Consolidated Financial Statements,
Note 2 Business Combinations.
Market
Area
Hanmi Bank historically has provided its banking services
through its branch network, located primarily in the Koreatown
area of Los Angeles, to a wide variety of small- to medium-sized
businesses. In recent years, it has expanded its service areas
through de novo branching to Orange County, Santa Clara and
San Diego and through acquisition to San Francisco and
Seattle. Throughout the Banks service area, competition is
intense for both loans and deposits. While the market is
dominated by a few nationwide banks with many offices operating
over a wide geographic area, savings banks, thrift and loan
associations, credit unions, mortgage companies, insurance
companies and other lending institutions, the Banks
primary competitors are relatively smaller community banks that
focus their marketing efforts on
Korean-American
businesses in the Banks service areas. Substantially all
of our assets are located in, and substantially all of our
revenues are derived from clients located within, the State of
California.
In September 2005, the Bank opened loan production offices in
Newark, California; Chicago, Illinois and Annandale, Virginia.
These offices will expand our geographic coverage by providing
SBA, real estate and commercial and industrial loans. The Bank
also has a loan production office in Seattle, Washington. We
plan to continue to expand our business services by opening
additional loan production offices throughout the United States.
The Bank is a preferred SBA lender in the following SBA
districts: Los Angeles, Santa Ana, San Diego, Fresno,
San Francisco, Sacramento, Portland, Seattle, Spokane,
Anchorage, Denver, Dallas, Houston, Illinois, Georgia, Florida,
Virginia, Washington, D.C., Maryland, New Jersey and New York.
Lending
Activities
Hanmi Bank originates loans for its own portfolio and for sale
in the secondary market. Lending activities include commercial
loans, Small Business Administration (SBA)
guaranteed loans, loans secured by real estate (commercial
mortgage loans, real estate construction loans and residential
mortgage loans) and consumer loans.
2
Commercial
Loans
Hanmi Bank offers commercial loans for intermediate and
short-term credit. Commercial loans may be unsecured, partially
secured or fully secured. The majority of the origination of
commercial loans is in Los Angeles and Orange Counties, and loan
maturities are normally 12 to 60 months. Hanmi Bank
requires a complete credit underwriting before considering any
extension of credit. The Bank finances primarily small and
middle market businesses in a wide spectrum of industries.
Short-term business loans generally are intended to finance
current operations and typically provide for periodic principal
payments, with interest payable monthly. Term loans normally
provide for floating interest rates, with monthly payments of
both principal and interest.
In general, it is the intent of Hanmi Bank to take collateral
whenever possible, regardless of the loan purpose(s). Collateral
may include liens on inventory, accounts receivable, fixtures
and equipment, leasehold improvements and real estate. When real
estate is the primary collateral, the Bank obtains formal
appraisals in accordance with applicable regulations to support
the value of the real estate collateral. As a matter of policy,
Hanmi Bank requires all principals of a business to be
co-obligors on all loan instruments and all significant
stockholders of corporations to execute a specific debt
guaranty. All borrowers must demonstrate the ability to service
and repay not only Hanmi Bank debt, but also all outstanding
business debt, without liquidating the collateral, based on
historical earnings or reliable projections.
Commercial and industrial loans consist of credit lines for
operating needs, loans for equipment purchases and working
capital, and various other business purposes.
As compared to consumer lending, commercial lending entails
significant additional risks. These loans typically involve
larger loan balances and are generally dependent on the
businesss cash flow and, thus, may be subject to adverse
conditions in the general economy or in a specific industry.
Small
Business Administration Guaranteed Loans
Hanmi Bank originates loans qualifying for guarantees issued by
the United States SBA, an independent agency of the Federal
government. The SBA guarantees on such loans currently range
from 75 percent to 85 percent of the principal and
accrued interest. Under certain circumstances, the guarantee of
principal and interest may be less than 75 percent. In
general, the guaranteed percentage is less than 75 percent
for loans over $1.3 million. Hanmi Bank typically requires
that SBA loans be secured by business assets and by a first or
second deed of trust on any available real property. When the
loan is secured by a first deed of trust on real property, the
Bank obtains appraisals in accordance with applicable
regulations. SBA loans have terms ranging from 7 to
25 years depending on the use of the proceeds. To qualify
for a SBA loan, a borrower must demonstrate the capacity to
service and repay the loan, without liquidating the collateral,
on the basis of historical earnings or reliable projections.
Hanmi Bank generally sells to unrelated third parties a
substantial amount of the guaranteed portion of the SBA
guaranteed loans that it originates. When Hanmi Bank sells a SBA
loan, it may be obligated to repurchase the loan (for a period
of 90 days after the sale) if the loan fails to comply with
certain representations and warranties given by the Bank. The
Bank is also obligated to repurchase the loan (before
120 days past due) if the loan is past due. Hanmi Bank
retains the obligation to service the SBA loans, for which it
receives servicing fees. The unsold portions of the SBA loans
that remain owned by Hanmi Bank are included in Loans
Receivable. As of December 31, 2005, Hanmi Bank had
$155.5 million in SBA loans on its balance sheet, and was
servicing $183.4 million of sold SBA loans.
Loans
Secured by Real Estate
Real estate lending involves risks associated with the potential
decline in the value of the underlying real estate collateral
and the cash flow from income-producing properties. Declines in
real estate values and cash flows can be caused by a number of
factors, including adversity in general economic conditions,
rising interest rates, changes in tax and other laws and
regulations affecting the holding of real estate, environmental
conditions, governmental and other use restrictions, development
of competitive properties and increasing vacancy rates. Hanmi
Banks real estate dependence increases the risk of loss
both in Hanmi Banks loan portfolio and any holdings of
other real estate owned when real estate values decline.
3
Commercial Mortgage Loans Hanmi Bank
offers commercial real estate loans. These loans are generally
collateralized by first deeds of trust. For these commercial
mortgage loans, the Bank obtains formal appraisals in accordance
with applicable regulations to support the value of the real
estate collateral. All appraisal reports on commercial mortgage
loans are reviewed by an appraisal review officer. The review
generally covers an examination of the appraisers
assumptions and methods that were used to derive a value for the
property, as well as compliance with the Uniform Standards of
Professional Appraisal Practice (the USPAP). Hanmi
Bank also considers the cash flow from the business. The
majority of the properties securing these loans are located in
Los Angeles and Orange Counties.
Hanmi Banks commercial real estate loans are principally
secured by investor-owned commercial buildings and
owner-occupied commercial and industrial buildings. Generally,
these types of loans are made for a period of up to seven years,
with monthly payments based upon a portion of the principal plus
interest, and with a
loan-to-value
ratio of 65 percent or less, using an adjustable rate
indexed to the prime rate appearing in the West Coast edition of
The Wall Street Journal (WSJ Prime Rate) or
Hanmi Banks prime rate (Bank Prime Rate), as
adjusted from time to time. Hanmi Bank also offers fixed-rate
loans, including hybrid-fixed rate loans that are fixed for one
to five years and convert to adjustable rate loans for the
remaining term. Amortization schedules for commercial loans
generally do not exceed 25 years.
Payments on loans secured by such properties are often dependent
upon successful operation or management of the properties.
Repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks in a variety of ways,
including limiting the size of such loans and strictly
scrutinizing the property securing the loan. The Bank seeks to
manage these risks in a variety of ways, including vacancy and
interest rate hike sensitivity analysis at the time of loan
origination and quarterly risk assessment of total commercial
real estate secured loan portfolio that includes most recent
industry trends. When possible, the Bank also obtains corporate
or individual guarantees from financially capable parties.
Representatives of the Bank visit all of the properties securing
the Banks real estate loans before the loans are approved.
The Bank requires title insurance insuring the status of its
lien on all of the real estate secured loans when a first or
second trust deed on the real estate is taken as collateral. The
Bank also requires the borrower to maintain fire insurance,
extended coverage casualty insurance and, if the property is in
a flood zone, flood insurance, in an amount equal to the
outstanding loan balance, subject to applicable laws that may
limit the amount of hazard insurance a lender can require to
replace such improvements. Hanmi Financial cannot assure that
these procedures will protect against losses on loans secured by
real property.
Real Estate Construction Loans Hanmi
Bank finances the construction of residential, multifamily,
commercial and industrial properties within its market area. The
future condition of the local economy could negatively affect
the collateral values of such loans. The Banks
construction loans typically have the following characteristics:
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maturities of two years or less;
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a floating rate of interest based on the Bank Prime Rate or a
nationally recognized index such as the WSJ Prime Rate;
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minimum cash equity of 35 percent of project cost;
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reserve of anticipated interest costs during construction or
advance of fees;
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first lien position on the underlying real estate;
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loan-to-value
ratios generally not exceeding 65 percent; and
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recourse against the borrower or a guarantor in the event of
default.
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Hanmi Bank does not typically commit to making permanent loans
on the property unless the permanent loan is a government
guaranteed loan. Construction loans involve additional risks
compared to loans secured by existing improved real property.
These include the following:
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the uncertain value of the project prior to completion;
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the inherent uncertainty in estimating construction costs, which
are often beyond the borrowers control;
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construction delays and cost overruns;
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possible difficulties encountered in connection with municipal
or other governmental regulations during construction; and
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the difficulty in accurately evaluating the market value of the
completed project.
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As a result of these uncertainties, construction lending often
involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project
rather than the ability of the borrower or guarantor to repay
principal and interest. If Hanmi Bank is forced to foreclose on
a project prior to or at completion due to a default, there can
be no assurance that Hanmi Bank will be able to recover all of
the unpaid balance of, or accrued interest on, the loans as well
as the related foreclosure and holding costs. In addition, Hanmi
Bank may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminable
period of time. Hanmi Bank has underwriting procedures designed
to identify what it believes to be acceptable levels of risk in
construction lending. Among other things, qualified and bonded
third parties are engaged to provide progress reports and
recommendations for construction disbursements. No assurance can
be given that these procedures will prevent losses arising from
the risks described above.
Residential Mortgage Loans Hanmi Bank
originates fixed rate and variable rate mortgage loans secured
by one- to four-family properties with amortization schedules of
15 to 30 years and maturities of up to 30 years. The
loan fees charged, interest rates and other provisions of the
Banks residential loans are determined by an analysis of
the Banks cost of funds, cost of origination, cost of
servicing, risk factors and portfolio needs. The Bank sells
fixed rate mortgage loans to secondary market participants. The
typical turn-around time from origination to sale is between 30
and 90 days. The interest rate and the price of the loan
are typically agreed to prior to the loan origination.
Consumer
Loans
Consumer loans are extended for a variety of purposes. Most are
for the purchase of automobiles. Other consumer loans include
secured and unsecured personal loans, home improvement loans,
equity lines, overdraft protection loans, unsecured lines of
credit and credit cards. Management assesses the borrowers
creditworthiness and ability to repay the debt through a review
of credit history and ratings, verification of employment and
other income, review of
debt-to-income
ratios and other measures of repayment ability. Although
creditworthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of
the collateral, if any, to the proposed loan amount. Most of
Hanmi Banks loans to individuals are repayable on an
installment basis.
Any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan
balance, because the collateral is more likely to suffer damage,
loss or depreciation. The remaining deficiency often does not
warrant further collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, the collection of
loans to individuals is dependent on the borrowers
continuing financial stability, and thus is more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, various Federal and state laws,
including bankruptcy and insolvency laws, often limit the amount
that the lender can recover on loans to individuals. Loans to
individuals may also give rise to claims and defenses by a
consumer borrower against the lender on these loans, and a
borrower may be able to assert against any assignee of the note
these claims and defenses that the borrower has against the
seller of the underlying collateral.
Off-Balance
Sheet Commitments
As part of its service to its small to medium-sized business
customers, Hanmi Bank from time to time issues formal
commitments and lines of credit. These commitments can be either
secured or unsecured. They may be in the form of revolving lines
of credit for seasonal working capital needs or may take the
form of commercial letters of credit or standby letters of
credit. Commercial letters of credit facilitate import trade.
Standby letters of credit are conditional commitments issued by
Hanmi Bank to guarantee the performance of a customer to a third
party.
5
Lending
Procedures and Loan Approval Process
Loan applications may be approved by the Board of
Directors Loan Committee, or by Hanmi Banks
management or lending officers to the extent of their lending
authority. Individual lending authority is granted to the Chief
Credit Officer and the Deputy Chief Credit Officer. In early
2006, the Bank granted lending authority to certain additional
officers including Branch Managers and the line managers to whom
they report. Loans for which direct and indirect borrower
liability exceeds an individuals lending authority are
referred to Hanmi Banks Management Credit Committee and,
for those in excess of the Management Credit Committees
approval limits, to the Board of Directors
Loan Committee.
At December 31, 2005, Hanmi Banks authorized legal
lending limits were $47.7 million for unsecured loans plus
an additional $31.8 million for specific secured loans.
Legal lending limits are calculated in conformance with
California law, which prohibits a bank from lending to any one
individual or entity or its related interests an aggregate
amount that exceeds 15 percent of primary capital plus the
allowance for loan losses on an unsecured basis, plus an
additional 10 percent on a secured basis. Hanmi Banks
primary capital plus allowance for loan losses at
December 31, 2005 totaled $318.1 million.
The highest management lending authority at Hanmi Bank is the
combined administrative lending authority for unsecured lending
of $3.0 million and secured lending of $5.0 million,
which requires the approval and signatures of the Management
Credit Committee, composed of the Chief Executive Officer, the
Chief Credit Officer, the Deputy Chief Credit Officer, the
Manager of the Capital Markets Group and the Credit
Administrator. The next highest lending authority is
$1.0 million for the Chief Credit Officer and Deputy Chief
Credit Officer. All other individual lending authority is
substantially less.
Lending limits are authorized for the Management Credit
Committee, the Chief Credit Officer and other officers by the
Banks Board of Directors Loan Committee. The Chief
Credit Officer is responsible for evaluating the authority
limits for individual credit officers and recommending lending
limits for all other officers to the Board of Directors for
approval.
Hanmi Bank seeks to mitigate the risks inherent in its loan
portfolio by adhering to certain underwriting practices. The
review of each loan application includes analysis of the
applicants experience, prior credit history, income level,
cash flow and financial condition, tax returns, cash flow
projections, and the value of any collateral to secure the loan,
based upon reports of independent appraisers and audits of
accounts receivable or inventory pledged as security. In the
case of real estate loans over a specified amount, the review of
collateral value includes an appraisal report prepared by an
independent Bank-approved appraiser. All appraisal reports on
commercial real property secured loans are reviewed by an
Appraisal Review Officer. The review generally covers an
examination of the appraisers assumptions and methods that
were used to derive a value for the property, as well as
compliance with the USPAP.
Asset
Quality
Non-Performing Assets Non-performing
assets include non-performing loans and other real estate owned.
Non-Performing Loans Non-performing
loans are those that are not earning income, and (1) full
payment of principal and interest is no longer anticipated,
(2) principal or interest is 90 days or more
delinquent, or (3) the loan payment or term has been
restructured in accordance with troubled debt restructure
procedures.
Non-Accrual Loans Hanmi Bank generally
places loans on non-accrual status when interest or principal
payments become 90 days or more past due unless the
outstanding principal and interest is adequately secured and, in
the opinion of management, is deemed to be in the process of
collection. When loans are placed on non-accrual status, accrued
but unpaid interest is reversed against the current years
income, and interest income on non-accrual loans is recorded on
a cash basis. The Bank may treat payments as interest income or
return of principal depending upon managements opinion of
the ultimate risk of loss on the individual loan. Cash payments
are treated as interest income where management believes the
remaining principal balance is fully collectible. Additionally,
the Bank may place loans that are not 90 days past due on
non-accrual status, if management reasonably believes the
borrower will not be able to comply with the contractual loan
repayment terms and collection of principal or interest is in
question.
6
Loans 90 Days or More Past Due Hanmi
Bank classifies a loan in this category when the borrower is
more than 90 days late in making a payment of principal or
interest.
Restructured Loans These are loans on
which interest accrues at a below market rate or upon which a
portion of the principal has been forgiven so as to aid the
borrower in the final repayment of the loan, with any interest
previously accrued, but not yet collected, being reversed
against the current years income. Generally, interest is
reported on a cash basis until the borrowers ability to
service the restructured loan in accordance with its terms is
established.
Other Real Estate Owned
(OREO) This category of
non-performing assets consists of real estate to which the Bank
has taken title by foreclosure or by taking a deed in lieu of
foreclosure from the borrower. Before the Bank takes title to
OREO, it generally obtains an environmental review.
Substandard and Doubtful Loans Hanmi
Bank monitors all loans in the loan portfolio to identify
problem credits. Additionally, as an integral part of the credit
review process, credit reviews are performed by inside loan
review officers throughout the year to assure accuracy of
documentation and the identification of problem credits. The DFI
and the Federal Reserve Bank of San Francisco
(FRB) also review Hanmi Bank and its loans during
annual safety and soundness examinations.
Hanmi Bank has three classifications for problem loans:
Substandard An asset is classified as
substandard if it is inadequately protected by the
current net worth and paying capacity of the borrower, or by the
collateral pledged, if any. Credits in this category have a
well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the
possibility that Hanmi Bank will sustain some loss if the
deficiencies are not corrected.
Doubtful An asset is classified as
doubtful if it has all the weaknesses inherent in an
asset classified substandard, and has the added
characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. The
possibility of loss is extremely high, but because of important
and reasonably specific pending factors that may work to the
advantage and strengthening of the asset, its classification as
an estimated loss is deferred until its more exact status may be
determined.
Loss An asset is classified as a
loss if it is considered uncollectible and of such
little value that its continuance as a bankable asset is not
warranted. This classification does not mean that the asset has
absolutely no recovery or salvage value, but rather that it is
not practical or desirable to defer writing off this basically
worthless asset even though partial recovery may be effected in
the future. Any potential recovery is considered too small
and/or the
realization too distant in the future to justify retention as an
asset on the Banks books.
Another category, designated as special mention, is
maintained for loans that do not currently expose Hanmi Bank to
so significant a degree of risk as to warrant classification as
substandard, doubtful or
loss, but do possess credit deficiencies or
potential weaknesses deserving managements close attention.
Impaired Loans Hanmi Bank defines
impaired loans, regardless of past-due status, as those on which
principal and interest are not expected to be collected under
the original contractual repayment terms
and/or loans
that are troubled debt restructurings. Hanmi Bank charges off an
impaired loan at the time management believes that the
collection process has been exhausted. Hanmi Bank measures
impaired loans based on the present value of future cash flows
discounted at the loans effective rate, and the
loans observable market price or the fair value of
collateral if the loan is collateral-dependent. At
December 31, 2005, $10.8 million of loans were
impaired, $10.1 million of which were also on non-accrual
status. The allowance for loan losses related to impaired loans
was $5.0 million at December 31, 2005.
Except as disclosed above, as of December 31, 2005,
management was not aware of any material credit problems of
borrowers that would cause it to have serious doubts about the
ability of a borrower to comply with the present loan repayment
terms. However, no assurance can be given that there are no
current credit problems that have not been brought to the
attention of management. See Allowance for Loan Losses,
Allowance for Off-Balance Sheet Items and Provision for Credit
Losses.
7
Allowance
for Loan Losses, Allowance for Off-Balance Sheet Items and
Provision for Credit Losses
Hanmi Bank maintains an allowance for loan losses at a level
considered by management to be adequate to cover the inherent
risks of loss associated with its loan portfolio under
prevailing and anticipated economic conditions. In addition, the
Bank maintains an allowance for off-balance sheet items
associated with unfunded commitments. It is included within
Other Liabilities on the Consolidated Statements of Financial
Condition.
Hanmi Bank follows the Interagency Policy Statement on
the Allowance for Loan and Lease Losses and analyzes
the allowance for loan losses on a monthly basis. In addition,
as an integral part of the quarterly credit review process of
the Bank, the allowance for loan losses and allowance for
off-balance sheet items are reviewed for adequacy. The DFI
and/or the
FRB require the Bank to recognize additions to the allowance for
loan losses based upon their assessment of the information
available to them at the time of their examinations.
The Banks Chief Credit Officer reports monthly to the
Banks Board of Directors and continuously reviews loan
quality and loan classifications. These reports assist the Board
in reviewing the levels of the allowance for loan losses and
allowance for off-balance sheet items on a quarterly basis.
Deposits
We raise funds primarily through Hanmi Banks network of
branches. The Bank attracts deposits by offering a wide variety
of transaction and term accounts and personalized customer
service. Accounts offered include business and personal checking
accounts, savings accounts, negotiable order of withdrawal
(NOW) accounts, money market accounts and
certificates of deposit.
Website
We maintain an Internet website at www.hanmi.com. We make
available free of charge on the website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and any amendments thereto, as soon as reasonably practicable
after we file such reports with the Securities and Exchange
Commission. None of the information on or hyperlinked from our
website is incorporated into this Annual Report on
Form 10-K.
Employees
As of December 31, 2005, we had 552 full-time
equivalent employees. Our employees are not represented by a
union or covered by a collective bargaining agreement.
Insurance
We maintain financial institution bond and commercial insurance
at levels deemed adequate by management to protect Hanmi
Financial from certain damages.
Competition
The banking and financial services industry in California
generally, and in Hanmi Banks market areas specifically,
are highly competitive. The increasingly competitive environment
is a result primarily of changes in regulation, changes in
technology and product delivery systems, new competitors in the
market, and the pace of consolidation among financial service
providers. Hanmi Bank competes for loans, deposits and customers
with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, real
estate investment trusts, insurance companies, finance
companies, money market funds, credit unions and other non-bank
financial service providers. Some of these competitors are
larger in total assets and capitalization, have greater access
to capital markets and offer a broader range of financial
services than does the Bank. In addition, recent Federal
legislation may have the effect of further increasing the pace
of consolidation within the financial services industry. See
Supervision and Regulation.
Among the advantages that the major banks have over Hanmi Bank
is their ability to finance extensive advertising campaigns and
to allocate their investment assets to regions of highest yield
and demand. Many of the
8
major commercial banks operating in Hanmi Banks service
areas offer specific services (for instance, trust services)
that are not offered directly by Hanmi Bank. By virtue of their
greater total capitalization, these banks also have
substantially higher lending limits than Hanmi Bank does.
Banks generally, and Hanmi Bank in particular, face increasing
competition for loans and deposits from non-bank financial
intermediaries including credit unions, savings and loan
associations, brokerage firms, thrift and loan companies,
mortgage companies, real estate investment trusts, insurance
companies and other financial and non-financial institutions. In
addition, there is increased competition among banks, savings
and loan institutions, and credit unions for the deposit and
loan business of individuals.
The recent trend has been for other institutions, including
brokerage firms, credit card companies and retail
establishments, to offer banking services to consumers,
including money market funds with check access and cash advances
on credit card accounts. In addition, other entities (both
public and private) seeking to raise capital through the
issuance and sale of debt or equity securities compete with
banks in the acquisition of deposits. While the direction of
recent legislation and economic developments seems to favor
increased competition between different types of financial
institutions for both deposits and loans, resulting in increased
cost of funds to banks, it is not possible to predict the full
impact these developments will have on commercial banking or
Hanmi Bank.
Hanmi Banks major competitors are relatively smaller
community banks that focus their marketing efforts on
Korean-American
businesses in Hanmi Banks service areas. Amongst these
banks, Hanmi Bank is the largest, with a loan portfolio that is
71 percent larger than its nearest competitors loan
portfolio, and a deposit portfolio that is 85 percent
larger than its nearest competitors deposit portfolio.
These banks compete for loans primarily through the interest
rates and fees they charge and the convenience and quality of
service they provide to borrowers. The principal bases of
competition for deposits are the interest rate paid, convenience
and service.
In order to compete with other financial institutions in its
service area, Hanmi Bank relies principally upon local
promotional activity, including advertising in the local media,
personal contacts, direct mail and specialized services. The
Banks promotional activities emphasize the advantages of
dealing with a locally owned and headquartered institution
attuned to the particular needs of the community.
Economic
Conditions, Government Policies, Legislation and
Regulation
Our profitability, like that of most financial institutions, is
primarily dependent on interest rate differentials. In general,
the difference between the interest rates paid by us on
interest-bearing liabilities, such as deposits and other
borrowings, and the interest rates received by us on our
interest-earning assets, such as loans extended to our clients
and securities held in our investment portfolio, compose the
major portion of our earnings. These rates are highly sensitive
to many factors that are beyond our control, such as inflation,
recession and unemployment, and the impact that future changes
in domestic and foreign economic conditions might have on us
cannot be predicted.
Our business is also influenced by the monetary and fiscal
policies of the Federal government and the policies of
regulatory agencies, particularly the Board of Governors of the
Federal Reserve System (the FRS). The FRS implements
national monetary policies (with objectives such as curbing
inflation and combating recession) through its open-market
operations in U.S. Government securities by adjusting the
required level of reserves for depository institutions subject
to its reserve requirements, and by varying the target federal
funds and discount rates applicable to borrowings by depository
institutions. The actions of the FRS in these areas influence
the growth of bank loans, investments and deposits and also
affect interest rates earned on interest-earning assets and paid
on interest-bearing liabilities. The nature and impact on us of
any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance
between banks and other financial services providers, such as
recent federal legislation permitting affiliations among
commercial banks, insurance companies and securities firms. We
cannot predict whether any potential legislation will be
enacted, and if enacted, the effect that it, or any implementing
regulations, would have on our financial condition or results of
operations. See Supervision and Regulation.
9
Supervision
and Regulation
General We are extensively regulated
under both Federal and state law. This regulation is intended
primarily for the protection of depositors and the deposit
insurance fund and not for the benefit of stockholders of the
financial institution. Set forth below is a summary description
of the material laws and regulations that relate to our
operations. The description is qualified in its entirety by
reference to the applicable laws and regulations.
Hanmi Financial As a financial holding
company, we are subject to regulation and examination by the FRB
under the Bank Holding Company Act of 1956, as amended (the
BHCA). We are required to file with the FRB periodic
reports and such additional information as the FRB may require.
The FRB bank holding company rating system emphasizes risk
management and evaluation of the potential impact of
non-depository entities on safety and soundness.
The FRB may require us to terminate an activity or terminate
control of or liquidate or divest certain subsidiaries,
affiliates or investments if the FRB believes the activity or
the control of the subsidiary or affiliate constitutes a
significant risk to the financial safety, soundness or stability
of our banking subsidiary. The FRB also has the authority to
regulate provisions of certain bank holding company debt,
including the authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, we must
file written notice and obtain FRB approval prior to purchasing
or redeeming our equity securities. Further, we are required by
the FRB to maintain certain levels of capital. See Capital
Standards.
We are required to obtain prior FRB approval for the acquisition
of more than five percent of the outstanding shares of any class
of voting securities or substantially all of the assets of any
bank or bank holding company. Prior FRB approval is also
required for the merger or consolidation of the company and
another bank holding company.
We are prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect
ownership or control of more than five percent of the
outstanding voting shares of any company that is not a bank or
bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling
banks, or furnishing services to our subsidiaries. However,
subject to the prior FRB approval, we may engage in any, or
acquire shares of companies engaged in, activities that the FRB
deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. We may
also engage in these and certain other activities pursuant to
our election as a financial holding company.
It is the policy of the FRB that each bank holding company serve
as a source of financial and managerial strength to its
subsidiary bank(s) and it may not conduct operations in an
unsafe or unsound manner. A bank holding companys failure
to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the FRB to be
an unsafe and unsound banking practice or a violation of FRB
regulations or both.
We are also a bank holding company within the meaning of the
California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required
to file reports with, the DFI.
Financial Holding Companies As a bank
holding company that has elected to be a financial holding
company, we may affiliate with securities firms and insurance
companies and engage in other activities without prior FRB
notice or approval that are determined to be financial in nature
or are incidental or complementary to activities that are
financial in nature. Financial in nature activities
include:
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lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities;
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providing any device or other instrumentality for transferring
money or other financial assets;
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arranging, effecting or facilitating financial transactions for
the account of third parties;
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securities underwriting;
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dealing and market making;
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sponsoring mutual funds and investment companies;
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insurance underwriting and agency sales;
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merchant banking investments; and
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10
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activities that the FRB, in consultation with the Secretary of
the Treasury, determines from time to time to be so closely
related to banking or managing or controlling banks as to be a
proper incident thereto.
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In order to elect or retain financial holding company status,
all of our depository institution subsidiaries must be well
capitalized, well managed, and, except in limited circumstances,
in satisfactory compliance with the Community Reinvestment Act.
Failure to sustain compliance with these requirements or correct
any non-compliance within a fixed time period could lead to
divestiture of subsidiary banks or require us to conform all of
our activities to those permissible for a bank holding company.
A bank holding company that is not also a financial holding
company can only engage in banking and such other activities
determined by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The Bank As a California chartered bank
which is a member of the Federal Reserve, we are subject to
primary supervision, periodic examination, and regulation by the
DFI and the Federal Reserve Board (the FRB), as well
as certain regulations promulgated by the Federal Deposit
Insurance Corporation (the FDIC). If, as a result of
an examination of the Bank, the FRB or DFI determines that the
financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of our
operations are unsatisfactory or that we are violating or have
violated any law or regulation, various remedies are available
to the FRB, including the power to enjoin unsafe or
unsound practices, to require affirmative action to
correct any conditions resulting from any violation or practice,
to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict our
growth, to assess civil monetary penalties, to remove officers
and directors, and ultimately to terminate our deposit
insurance, which would result in a revocation of the Banks
charter. See Safety and Soundness Standards.
The DFI also possesses broad powers to take corrective and other
supervisory actions to resolve the problems of California
state-chartered banks. These enforcement powers include cease
and desist orders, the imposition of fines, the ability to take
possession of a bank and the ability to close and liquidate a
bank.
Any changes in Federal or state banking laws or the regulations
of the banking agencies could have a material adverse impact on
us, the Bank and our operations. For example, in January, 2006,
the Federal banking agencies jointly issued proposed guidance
for banks and thrifts with high and increasing concentrations of
commercial real estate (CRE) construction and
development loans. The implementation of these guidelines in
final form could result in increased reserves and capital costs
for banks and thrifts with CRE concentration. The
Banks CRE portfolio as of December 31, 2005 would not
meet the definition of CRE concentration as set forth in the
proposed guidelines.
Because California permits commercial banks chartered by the
state to engage in any activity permissible for national banks,
the Bank can form subsidiaries to engage in the many so-called
closely related to banking or
non-banking activities commonly conducted by
national banks in operating subsidiaries, but also expanded
financial activities to the same extent as a national bank.
However, in order to form a financial subsidiary, the Bank must
be well-capitalized and would be subject to the same capital
deduction, risk management and affiliate transaction rules as
applicable to national banks. Generally, a financial subsidiary
is permitted to engage in activities that are financial in
nature or incidental thereto, even though they are not
permissible for the national bank to conduct directly within the
bank. The definition of financial in nature
includes, among other items, underwriting, dealing in or making
a market in securities, including, for example, distributing
shares of mutual funds. The subsidiary may not, however, engage
as principal in underwriting insurance (other than credit life
insurance), issue annuities or engage in real estate development
or investment or merchant banking.
Federal Home Loan Bank System The
Bank is a member of the Federal Home Loan Bank of
San Francisco (FHLB). Among other benefits,
each FHLB serves as a reserve or central bank for its members
within its assigned region. Each FHLB is financed primarily from
the sale of consolidated obligations of the FHLB system. Each
FHLB makes available loans or advances to its members in
compliance with the policies and procedures established by the
Board of Directors of the individual FHLB. As a FHLB member, we
are required to own a certain amount of capital stock in the
FHLB. At December 31, 2005, we were in compliance with the
stock requirements.
Interstate Banking and Branching Banks
have the ability, subject to certain state restrictions, to
acquire by acquisition or merger branches outside their home
states. The establishment of new interstate branches is also
11
possible in those states with laws that expressly permit it.
Interstate branches are subject to certain laws of the states in
which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
The Sarbanes-Oxley Act of 2002 The
Sarbanes-Oxley Act of 2002 addresses accounting oversight and
corporate governance matters, including:
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required executive certification of financial presentations;
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increased requirements for board audit committees and their
members;
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enhanced disclosure of controls and procedures and internal
control over financial reporting;
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enhanced controls on, and reporting of, insider trading;
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increased penalties for financial crimes and forfeiture of
executive bonuses in certain circumstances; and
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the prohibition of accounting firms from providing various types
of consulting services to public clients and requiring
accounting firms to rotate partners among public client
assignments every five years.
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The legislation and its implementing regulations have resulted
in increased costs of compliance, including certain outside
professional costs. To date these costs have not had a material
impact on our operations.
Dividends and Other Transfers of
Funds Dividends from the Bank constitute
the principal source of income to Hanmi Financial, which is a
legal entity separate and distinct from the Bank. A FRB policy
statement on the payment of cash dividends states that a bank
holding company should pay cash dividends only to the extent
that the holding companys net income for the past year is
sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the holding
companys capital needs, asset quality and overall
financial condition. The FRB also indicated that it would be
inappropriate for a company experiencing serious financial
problems to borrow funds to pay dividends. Furthermore, under
the Federal prompt corrective action regulations, the FRB may
prohibit a bank holding company from paying any dividends if the
holding companys bank subsidiary is classified as
undercapitalized. See Prompt Corrective Action
and Other Enforcement Mechanisms below.
The Bank is subject to various statutory and regulatory
restrictions on its ability to pay dividends. Under such
restrictions, the amount available for payment of dividends to
Hanmi Financial by the Bank totaled $95.4 million at
December 31, 2005. In addition, the Banks regulators
have the authority to prohibit the Bank from paying dividends,
depending upon the Banks financial condition, if such
payment is deemed to constitute an unsafe or unsound practice.
Capital Standards The Federal banking
agencies have adopted risk-based minimum capital guidelines
intended to provide a measure of capital that reflects the
degree of risk associated with a banking organizations
operations for both transactions reported on the balance sheet
as assets and transactions which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items
are multiplied by one of several risk adjustment percentages,
which range from zero percent for assets with low credit risk,
such as certain U.S. Treasury securities, to
100 percent for assets with relatively high credit risk,
such as business loans.
The risk-based capital ratio is determined by classifying assets
and certain off-balance sheet financial instruments into
weighted categories, with higher levels of capital being
required for those categories perceived as representing greater
risk. Under the capital guidelines, a banking
organizations total capital is divided into tiers.
Tier I capital consists of (1) common
equity, (2) qualifying non-cumulative perpetual preferred
stock, (3) a limited amount of qualifying cumulative
perpetual preferred stock and (4) minority interests in the
equity accounts of consolidated subsidiaries (including
trust-preferred securities), less goodwill and certain other
intangible assets. Qualifying Tier I capital may consist of
trust-preferred securities, subject to the FRBs final rule
adopted March 4, 2005, which changed the criteria and
quantitative limits for inclusion of restricted core capital
elements in Tier I capital. Tier II
capital consists of hybrid capital instruments, perpetual
debt, mandatory convertible debt securities, a limited amount of
subordinated debt, preferred stock that does not qualify as
Tier I capital, a limited amount of the allowance for loan
and lease losses and a limited amount of unrealized holding
gains on equity
12
securities. Tier III capital consists of
qualifying unsecured subordinated debt. The sum of Tier II
and Tier III capital may not exceed the amount of
Tier I capital.
The risk-based capital guidelines require a minimum ratio of
qualifying total capital to risk-adjusted assets of
8 percent and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4 percent. In addition to the
risk-based guidelines, Federal banking regulators require
banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage
ratio. For a banking organization rated in the highest of the
five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital
to total assets must be 3 percent.
A bank that does not achieve and maintain the required capital
levels may be issued a capital directive by the FDIC to ensure
the maintenance of required capital levels. As discussed above,
we are required to maintain certain levels of capital, as is the
bank. The regulatory capital guidelines as well as our actual
capitalization on a consolidated basis and for the Bank as of
December 31, 2005 follow:
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Requirement
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Adequately
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Well
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Holding
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Capitalized
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Capitalized
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Bank
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Company
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Total Risk-Based Capital Ratio
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8.0
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%
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10.0
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%
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11.98
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%
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12.04
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%
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Tier 1 Risk-Based Capital
Ratio
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4.0
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%
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6.0
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%
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10.96
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%
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11.03
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%
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Tier 1 Leverage Capital Ratio
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4.0
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%
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5.0
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%
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9.06
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%
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9.11
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%
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The risk-based capital guidelines are based upon the 1988
capital accord of the international Basel Committee on Banking
Supervision. A new international accord, referred to as
Basel II, which emphasizes internal assessment of credit,
market and operational risk; supervisory assessment and market
discipline in determining minimum capital requirements,
currently becomes mandatory in 2008 only for banks with over
$250 billion in assets or total on-balance-sheet foreign
exposure of $10 billion or more. Alternative capital
requirements are under consideration by the U.S. Federal
banking agencies for smaller U.S. banks which may be
negatively impacted competitively by certain provisions of
Basel II.
Prompt Corrective Action Federal banking
agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions
that fall within any undercapitalized category. Each Federal
banking agency has promulgated regulations defining the
following five categories in which an insured depository
institution will be placed, based on its capital ratios:
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well capitalized;
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adequately capitalized;
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undercapitalized;
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significantly undercapitalized; and
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critically undercapitalized.
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The regulations use an institutions risk-based capital,
leverage capital and tangible capital ratios to determine the
institutions capital classification. An institution is
treated as well capitalized if its total capital to
risk-weighted assets ratio is 10.00 percent or more; its
core capital to risk-weighted assets ratio is 6.00 percent
or more; and its core capital to adjusted total assets ratio is
5.00 percent or more. At December 31, 2005, the Bank
and Hanmi Financial had capital ratios that exceeded the
required ratios for classification as
well-capitalized.
An institution that, based upon its capital levels, is
classified as well capitalized, adequately capitalized, or
undercapitalized may be treated as though it were in the next
lower capital category if the appropriate Federal banking
agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject
to more restrictions. The Federal banking agencies, however, may
not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually
warrants such treatment.
13
Safety and Soundness Standards In
addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to
potential enforcement actions by the Federal regulators and/or
state regulations for state banks, for unsafe or unsound
practices in conducting their businesses or for violations of
any law, rule, regulation, or any condition imposed in writing
by the agency or any written agreement with the agency. Further,
pursuant to an interagency agreement, the FDIC can examine any
institution that has a substandard regulatory examination score
or is considered undercapitalized without the
express permission of the institutions primary regulator.
The Federal banking agencies have adopted guidelines designed to
assist the Federal banking agencies in identifying and
addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth operational
and managerial standards relating to: (i) internal
controls, information systems and internal audit systems,
(ii) loan documentation, (iii) credit underwriting,
(iv) asset growth, (v) earnings, and
(vi) compensation, fees and benefits. In addition, the
Federal banking agencies have also adopted safety and soundness
guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent
those assets from deteriorating. Under these standards, an
insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and
establish reserves that are sufficient to absorb estimated
losses, (iii) compare problem asset totals to capital,
(iv) take appropriate corrective action to resolve problem
assets, (v) consider the size and potential risks of
material asset concentrations, and (vi) provide periodic
asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk.
These guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves.
Premiums for Deposit Insurance Through
the BIF, the FDIC insures our customer deposits up to prescribed
limits for each depositor. The amount of FDIC assessments paid
by each BIF member institution is based on its relative risk of
default as measured by regulatory capital ratios and other
factors. Specifically, the assessment rate is based on the
institutions capitalization risk category and supervisory
subgroup category. An institutions capitalization risk
category is based on the FDICs determination of whether
the institution is well capitalized, adequately capitalized or
less than adequately capitalized. An institutions
supervisory subgroup category is based on the FDICs
assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action
will be required.
The assessment rate currently ranges from zero to 27 cents per
$100 of domestic deposits. The FDIC may increase or decrease the
assessment rate schedule on a semi-annual basis. Due principally
to continued growth in deposits, the BIF is nearing its minimum
ratio of 1.25 percent of insured deposits as mandated by
law. If the ratio drops below 1.25 percent, it is likely
the FDIC will be required to assess premiums on all banks. Any
increase in assessments or the assessment rate could have a
material adverse effect on earnings, depending on the amount of
the increase. Furthermore, the FDIC is authorized to raise
insurance premiums under certain circumstances.
The FDIC is authorized to terminate a depository
institutions deposit insurance upon a finding by the FDIC
that the institutions financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound
practices or has violated any applicable rule, regulation, order
or condition enacted or imposed by the institutions
regulatory agency. The termination of deposit insurance for one
or more of the companys subsidiary depository institutions
could have a material adverse effect on the companys
earnings, depending on the collective size of the particular
institutions involved.
All FDIC-insured depository institutions must pay an annual
assessment to provide funds for the payment of interest on bonds
issued by the Financing Corporation, a Federal corporation
chartered under the authority of the Federal Housing Finance
Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance
Corporation. The FICO assessment rate for the fourth quarter of
fiscal 2005 was 1.34 basis points for each $100 of assessable
deposits. The FICO assessments are adjusted quarterly to reflect
changes in the assessment bases of the FDICs insurance
funds and do not vary depending on a depository
institutions capitalization or supervisory evaluations.
The enactment in February 2006, of the Federal Deposit Insurance
Reform Act of 2006, or FDIRA, provides, among other things, for
the merger of the BIF and the SAIF into the Deposit Insurance
Fund; future inflation
14
adjustment increases in the standard maximum deposit insurance
amount of $100,000; the increase of retirement account coverage
to $250,000; changes in the formula and factors to be considered
by the FDIC in calculating the FDIC reserve ratio, assessments
and dividends, and a one-time aggregate assessment credit for
depository institutions in existence on December 31, 1996
(or their successors) which paid assessments to recapitalize the
insurance funds after the banking crises of the late 1980s and
early 1990s. The FDIC is to issue regulations implementing the
provisions of FDIRA. At this time it is uncertain what effect
FDIRA and the forthcoming regulations will have on the Bank.
Loans-to-One
Borrower Limitations With certain limited
exceptions, the maximum amount of obligations, secured and
unsecured, that any borrower (including certain related
entities) may owe to a California state bank at any one time may
not exceed 25 percent of the sum of the shareholders
equity, allowance for loan losses, capital notes and debentures
of the bank. Unsecured obligations may not exceed
15 percent of the sum of the shareholders equity, allowance
for loan losses, capital notes and debentures of the bank.
Extensions of Credit to Insiders and Transactions with
Affiliates The Federal Reserve Act and FRB
Regulation O place limitations and conditions on loans or
extensions of credit to:
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a banks or bank holding companys executive officers,
directors and principal shareholders (i.e., in most cases, those
persons who own, control or have power to vote more than
10 percent of any class of voting securities);
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any company controlled by any such executive officer, director
or shareholder; or
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any political or campaign committee controlled by such executive
officer, director or principal shareholder.
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Loans and leases extended to any of the above persons must
comply with the
loan-to-one-borrower
limits, require prior full board approval when aggregate
extensions of credit to the person exceed specified amounts,
must be made on substantially the same terms (including interest
rates and collateral) as, and follow credit-underwriting
procedures that are not less stringent than, those prevailing at
the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present
other unfavorable features. In addition, Regulation O
provides that the aggregate limit on extensions of credit to all
insiders of a bank as a group cannot exceed the banks
unimpaired capital and unimpaired surplus. Regulation O
also prohibits a bank from paying an overdraft on an account of
an executive officer or director, except pursuant to a written
pre-authorized interest-bearing extension of credit plan that
specifies a method of repayment or a written pre-authorized
transfer of funds from another account of the officer or
director at the bank.
The Bank also is subject to certain restrictions imposed by
Federal Reserve Act Sections 23A and 23B and FRB
Regulation W on any extensions of credit to, or the
issuance of a guarantee or letter of credit on behalf of, any
affiliates, the purchase of, or investments in, stock or other
securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of any affiliates. Such
restrictions prevent any affiliates from borrowing from the Bank
unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments
to or in any affiliate are limited, individually, to
10.0 percent of our capital and surplus (as defined by
Federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20.0 percent of our capital
and surplus. Some of the entities included in the definition of
an affiliate are parent companies, sister banks, sponsored and
advised companies, investment companies whereby the Banks
affiliate serves as investment advisor, and financial
subsidiaries of the Bank. Additional restrictions on
transactions with affiliates may be imposed on us under the
prompt corrective action provisions of Federal law and the
supervisory authority of the Federal and state banking agencies.
See Prompt Corrective Action and Safety and
Soundness Standards.
USA PATRIOT Act The USA PATRIOT Act of
2001 and its implementing regulations significantly expanded the
anti-money laundering and financial transparency laws. Under the
USA PATRIOT Act, financial institutions are subject to
prohibitions regarding specified financial transactions and
account relationships, as well as additional enhanced due
diligence and know your customer standards in their
dealings with foreign financial
15
institutions, foreign customers and private banking customers.
For example, the enhanced due diligence policies, procedures,
and controls generally require financial institutions to take
reasonable steps:
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to conduct enhanced scrutiny of account relationships to guard
against money laundering and report any suspicious transaction;
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to ascertain the identity of the nominal and beneficial owners
of, and the source of funds deposited into, each account as
needed to guard against money laundering and report any
suspicious transactions;
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to ascertain for any foreign bank, the shares of which are not
publicly traded, the identity of the owners of the foreign bank,
and the nature and extent of the ownership interest of each such
owner; and
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to ascertain whether any foreign bank provides correspondent
accounts to other foreign banks and, if so, the identity of
those foreign banks and related due diligence information.
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Under the USA PATRIOT Act, financial institutions are required
to establish and maintain anti-money laundering programs which
include:
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the establishment of a customer identification program;
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the development of internal policies, procedures, and controls;
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the designation of a compliance officer;
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an ongoing employee training program; and
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an independent audit function to test the programs.
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The Bank has adopted comprehensive policies and procedures to
address the requirements of the USA PATRIOT Act. Material
deficiencies in anti-money laundering compliance can result in
public enforcement actions by the banking agencies, including
the imposition of civil money penalties and supervisory
restrictions on growth and expansion. Such actions could have
serious reputation consequences for the Company and the Bank.
Consumer Protection Laws and
Regulations Examination and enforcement by
the bank regulatory agencies for non-compliance with consumer
protection laws and their implementing regulations have become
more intense in nature. The Bank is subject to many Federal
consumer protection statutes and regulations, some of which are
discussed below.
The Home Ownership and Equal Protection Act of 1994, or HOEPA,
requires extra disclosures and consumer protections to borrowers
for certain lending practices. The term predatory
lending, much like the terms safety and
soundness and unfair and deceptive practices,
is far-reaching and covers a potentially broad range of
behavior. As such, it does not lend itself to a concise or a
comprehensive definition. Typically predatory lending involves
at least one, and perhaps all three, of the following elements:
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making unaffordable loans based on the assets of the borrower
rather than on the borrowers ability to repay an
obligation (asset-based lending);
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inducing a borrower to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced
(loan flipping); and/or
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engaging in fraud or deception to conceal the true nature of the
loan obligation from an unsuspecting or unsophisticated borrower.
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Federal Reserve regulations and Office of the Comptroller of the
Currency guidelines aimed at curbing predatory lending
significantly widen the pool of high cost home secured loans
covered by HOEPA. In addition, the regulations bar certain
refinances within a year with another loan subject to HOEPA by
the same lender or loan servicer. Lenders also will be presumed
to have violated the law which says loans
should not be made to people unable to repay
them unless they document that the borrower has
the ability to repay. Lenders that violate the rules face
cancellation of loans and penalties equal to the finance charges
paid. We do not expect these rules and potential state action in
this area to have a material impact on our financial condition
or results of operation.
16
Privacy policies are required by Federal banking regulations
which limit the ability of banks and other financial
institutions to disclose non-public information about consumers
to non-affiliated third parties. Pursuant to those rules,
financial institutions must provide:
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initial notices to customers about their privacy policies,
describing the conditions under which they may disclose
non-public personal information to non-affiliated third parties
and affiliates;
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annual notices of their privacy policies to current
customers; and
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a reasonable method for customers to opt out of
disclosures to non-affiliated third parties.
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These privacy protections affect how consumer information is
transmitted through diversified financial companies and conveyed
to outside vendors.
In addition, state laws may impose more restrictive limitations
on the ability of financial institution to disclose such
information. California has adopted such a privacy law that
among other things generally provides that customers must
opt in before information may be disclosed to
certain non-affiliated third parties.
The Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act, or FACT Act, requires
financial firms to help deter identity theft, including
developing appropriate fraud response programs, and gives
consumers more control of their credit data. It also
reauthorizes a Federal ban on state laws that interfere with
corporate credit granting and marketing practices. In connection
with FACT Act, financial institution regulatory agencies
proposed rules that would prohibit an institution from using
certain information about a consumer it received from an
affiliate to make a solicitation to the consumer, unless the
consumer has been notified and given a chance to opt out of such
solicitations. A consumers election to opt out would be
applicable for at least five years.
The Check Clearing for the 21st Century Act, or
Check 21, facilitates check truncation and electronic check
exchange by authorizing a new negotiable instrument called a
substitute check, which is the legal equivalent of
an original check. Check 21 does not require banks to create
substitute checks or accept checks electronically; however, it
does require banks to accept a legally equivalent substitute
check in place of an original. In addition to its issuance of
regulations governing substitute checks, the Federal Reserve has
issued final rules governing the treatment of remotely created
checks (sometimes referred to as demand drafts) and
electronic check conversion transactions (involving checks that
are converted to electronic transactions by merchants and other
payees).
The Equal Credit Opportunity Act, or ECOA, generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
The Truth in Lending Act, or TILA, is designed to ensure that
credit terms are disclosed in a meaningful way so that consumers
may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit
terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the
total of payments and the payment schedule, among other things.
The Fair Housing Act, or FH Act, regulates many practices,
including making it unlawful for any lender to discriminate in
its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap
or familial status. A number of lending practices have been
found by the courts to be, or may be considered, illegal under
the FH Act, including some that are not specifically mentioned
in the FH Act itself.
The Community Reinvestment Act, or CRA, is intended to encourage
insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. The
CRA specifically directs the Federal regulatory agencies, in
examining insured depository institutions, to assess a
banks record of helping meet the credit needs of its
entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices.
The CRA further requires the agencies to take a financial
institutions record of meeting its community credit needs
into account when evaluating applications for, among other
things, domestic branches, mergers or acquisitions, or holding
company formations. The agencies use the CRA assessment factors
in order to provide a rating to the financial institution. The
ratings range from a high of outstanding to a low of
17
substantial non-compliance. In its last examination
for CRA compliance, as of August 30, 2004, the Bank was
rated Satisfactory.
The Home Mortgage Disclosure Act, or HMDA, grew out of public
concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether
financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located. The
HMDA also includes a fair lending aspect that
requires the collection and disclosure of data about applicant
and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing
anti-discrimination statutes. The Federal Reserve Board amended
regulations issued under HMDA to require the reporting for 2004
of certain pricing data with respect to higher priced mortgage
loans. The expanded 2004 HMDA data is being reviewed by Federal
banking agencies and others from a fair lending perspective. We
do not expect that the HMDA data reported by the Bank for 2005
will raise material issues regarding the Banks compliance
with the fair lending laws.
The Real Estate Settlement Procedures Act, or RESPA, requires
lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements. Also, RESPA
prohibits certain abusive practices, such as kickbacks, and
places limitations on the amount of escrow accounts. Penalties
under the above laws may include fines, reimbursements and other
penalties.
Due to heightened regulatory concern related to compliance with
HOEPA, FACT, ECOA, TILA, FH Act, CRA, HMDA and RESPA generally,
the Bank may incur additional compliance costs or be required to
expend additional funds for investments in its local community.
In addition to other factors set forth herein, below is a
discussion of certain factors that may affect our financial
operations and should be considered in evaluating us:
Our Southern California business focus and economic
conditions in Southern California could adversely affect our
operations. Hanmi Banks operations are
located primarily in Los Angeles and Orange counties. Because of
this geographic concentration, our results depend largely upon
economic conditions in these areas. Deterioration in economic
conditions in Hanmi Banks market area, or a significant
natural or man-made disaster in these market areas, could have a
material adverse effect on the quality of Hanmi Banks loan
portfolio, the demand for its products and services and on its
overall financial condition and results of operations.
Our concentrations in commercial real estate loans located
primarily in Southern California could have adverse effects on
credit quality. Approximately
35.5 percent of the Banks loan portfolio consists of
commercial real estate and construction loans, primarily in
Southern California. As a result of this concentration, a
deterioration of the Southern California commercial real estate
market could have adverse consequences for the Bank. Among the
factors that could contribute to such a decline are general
economic conditions in Southern California, interest rates and
local market construction and sales activity.
Our earnings are affected by changing interest
rates. Changes in interest rates affect the
level of loans, deposits and investments, the credit profile of
existing loans, the rates received on loans and securities and
the rates paid on deposits and borrowings. Significant
fluctuations in interest rates may have a material adverse
effect on our financial condition and results of operations.
We are subject to government regulations that could limit
or restrict our activities, which in turn could adversely affect
our operations. The financial services
industry is subject to extensive Federal and state supervision
and regulation. Significant new laws, changes in existing laws,
or repeals of existing laws may cause our results to differ
materially. Further, Federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly
affects credit conditions and a material change in these
conditions could have a material adverse affect on our financial
condition and results of operations.
Competition may adversely affect our
performance. The banking and financial
services businesses in our market areas are highly competitive.
We face competition in attracting deposits, in making loans and
attracting and retaining employees. The increasingly competitive
environment is a result of changes in
18
regulation, changes in technology and product delivery systems,
new competitors in the market, and the pace of consolidation
among financial services providers. Our results in the future
may differ depending upon the nature and level of competition.
If a significant number of borrowers, guarantors or
related parties fail to perform as required by the terms of
their loans, we could sustain losses. A
significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors or
related parties may fail to perform in accordance with the terms
of their loans. We have adopted underwriting and credit
monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that
management believes are appropriate to limit this risk by
assessing the likelihood of non-performance, tracking loan
performance and diversifying our credit portfolio. These
policies and procedures, however, may not prevent unexpected
losses that could have a material adverse effect on our
financial condition and results of operations.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Hanmi Financials principal office is located at 3660
Wilshire Boulevard, Penthouse Suite A, Los Angeles,
California. The office is leased pursuant to a five-year term
lease, which expires on November 30, 2008.
The following table sets forth information about our offices:
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Type of
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Owned/
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Office
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Office
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Address
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Leased
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Corporate Headquarters
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Headquarters(1)(2)
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3660 Wilshire Boulevard, Penthouse
Suite A
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Los Angeles, CA
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Leased
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Cerritos Branch
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Branch
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11754 East Artesia Boulevard
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Artesia, CA
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Leased
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Downtown Branch
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Branch
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950 South Los Angeles Street
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Los Angeles, CA
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Leased
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Fashion District Branch
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Branch
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726 East 12th Street,
Suite 211
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Los Angeles, CA
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Leased
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Garden Grove Branch
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Branch
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9820 Garden Grove Boulevard
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Garden Grove, CA
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Owned
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Gardena Branch
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Branch
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2001 West Redondo Beach
Boulevard
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Gardena, CA
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Leased
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Irvine Branch
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Branch
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14474 Culver Drive, Suite D
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Irvine, CA
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Leased
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Koreatown Galleria Branch
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Branch
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3250 West Olympic Boulevard,
Suite 200
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Los Angeles, CA
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Leased
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Koreatown Plaza Branch
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Branch(3)
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928 South Western Avenue,
Suite 260
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Los Angeles, CA
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Leased
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Mid-Olympic Branch
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Branch(4)
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3099 West Olympic Boulevard
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Los Angeles, CA
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Owned
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Olympic Branch
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Branch(5)
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3737 West Olympic Boulevard
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Los Angeles, CA
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Owned
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Rowland Heights Branch
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Branch
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18720 East Colima Road
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Rowland Heights, CA
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Leased
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San Diego Branch
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Branch
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4637 Convoy Street, Suite 101
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San Diego, CA
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Leased
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San Francisco Branch
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Branch
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1491 Webster Street
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San Francisco, CA
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Leased
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Silicon Valley Branch
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Branch
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2765 El Camino Real
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Santa Clara, CA
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Leased
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South Cerritos Branch
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Branch
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11900 South Street, Suite 109
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Cerritos, CA
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Leased
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Torrance Branch
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Branch
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2370 Crenshaw Boulevard, Suite H
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Torrance, CA
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Leased
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Van Nuys Branch
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Branch
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14427 Sherman Way
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Van Nuys, CA
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Leased
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Vermont Branch
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Branch(6)
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933 South Vermont Avenue
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Los Angeles, CA
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Owned
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West Garden Grove Branch
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Branch
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9122 Garden Grove Boulevard
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Garden Grove, CA
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Owned
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West Torrance Branch
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Branch
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21838 Hawthorne Boulevard
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Torrance, CA
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Leased
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Western Branch
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Branch
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120 South Western Avenue
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Los Angeles, CA
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Leased
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Wilshire Branch
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Main
Branch(7)
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3660 Wilshire Boulevard,
Suite 103
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Los Angeles, CA
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Leased
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Commercial Loan Department
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Loan
Office(1)
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3660 Wilshire Boulevard,
Suite 1050
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Los Angeles, CA
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Leased
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SBA Loan Department
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Loan
Office(1)
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3327 Wilshire Boulevard
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Los Angeles, CA
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Leased
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Northern California LPO
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Loan
Office(1)
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39899 Balentine Drive,
Suite 200
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Newark, CA
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Leased
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Seattle LPO
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Loan
Office(1)
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33110 Pacific Highway South,
Suite 4
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Federal Way, WA
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Leased
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Chicago LPO
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Loan
Office(1)
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6200 North Hiawatha, Suite 235
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Chicago, IL
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Leased
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Virginia LPO
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Loan
Office(1)
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7535 Little River Turnpike,
Suite 200B
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Annandale, VA
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Leased
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(1) |
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Deposits are not accepted at
this facility. |
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(2) |
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Capital Markets Group is also
located at this facility. |
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(3) |
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Residential Mortgage Center is
also located at this facility. |
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(4) |
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Auto Loan Center and
Consumer Loan Center are also located at this
facility. |
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(5) |
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Training Facility is also
located at this facility. |
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(6) |
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Administrative offices are also
located at this facility. |
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(7) |
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International Finance Department
is also located at this facility. |
Hanmi Financial and Hanmi Bank consider their present facilities
to be sufficient for their current operations.
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ITEM 3.
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LEGAL
PROCEEDINGS
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From time to time, Hanmi Financial and Hanmi Bank are parties to
litigation that arises in the ordinary course of business, such
as claims to enforce liens, claims involving the origination and
servicing of loans, and other issues related to the business of
Hanmi Financial and Hanmi Bank. In the opinion of management,
the resolution of any such issues would not have a material
adverse impact on the financial condition, results of
operations, or liquidity of Hanmi Financial or Hanmi Bank.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the fourth quarter of 2005, no matters were submitted to
stockholders for a vote.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Price for Common Stock
The following table sets forth, for the periods indicated, the
high and low trading prices of Hanmi Financials common
stock for the last two years as reported by NASDAQ under the
symbol HAFC.
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|
|
|
High
|
|
|
Low
|
|
|
Cash Dividend
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
20.42
|
|
|
$
|
16.51
|
|
|
$
|
0.05 per share
|
|
Third Quarter
|
|
$
|
19.72
|
|
|
$
|
16.27
|
|
|
$
|
0.05 per share
|
|
Second Quarter
|
|
$
|
17.90
|
|
|
$
|
14.05
|
|
|
$
|
0.05 per share
|
|
First Quarter
|
|
$
|
19.19
|
|
|
$
|
15.62
|
|
|
$
|
0.05 per share
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
19.16
|
|
|
$
|
14.70
|
|
|
$
|
0.05 per share
|
|
Third Quarter
|
|
$
|
16.70
|
|
|
$
|
13.47
|
|
|
$
|
0.05 per share
|
|
Second Quarter
|
|
$
|
14.77
|
|
|
$
|
11.64
|
|
|
$
|
0.05 per share
|
|
First Quarter
|
|
$
|
14.99
|
|
|
$
|
9.75
|
|
|
$
|
0.05 per share
|
|
Hanmi Financial had 367 registered stockholders of record as of
February 28, 2006.
Dividends
The amount and timing of dividends will be determined by Hanmi
Financials Board of Directors and substantially depend
upon the earnings and financial condition of Hanmi Financial.
The ability of Hanmi Financial to obtain funds for the payment
of dividends and for other cash requirements is largely
dependent on the amount of dividends that may be declared by
Hanmi Bank.
The power of the board of directors of a state chartered bank,
such as Hanmi Bank, to declare a cash dividend is limited by
statutory and regulatory restrictions that restrict the amount
available for cash dividends depending upon
20
the earnings, financial condition and cash needs of the bank, as
well as general business conditions. See Item 1.
Business Dividends and Other Transfers of
Funds.
On January 20, 2005, our Board of Directors declared a
two-for-one
stock split, to be effected in the form of a 100 percent
common stock dividend. The new shares were distributed on
February 15, 2005 to shareholders of record on the close of
business on January 31, 2005.
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table presents selected historical financial
information, including per share information as adjusted for the
stock dividends and stock splits declared by us. This selected
historical financial data should be read in conjunction with our
consolidated financial statements and the notes thereto
appearing elsewhere in this Report and the information contained
in Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Item 1. Business Business
Combination. The selected historical financial data as of
and for each of the years in the five years ended
December 31, 2005 is derived from our audited financial
statements. In the opinion of management, the information
presented reflects all adjustments, including normal and
recurring accruals, considered necessary for a fair presentation
of the results of such periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
for per share data)
|
|
|
SUMMARY STATEMENT OF INCOME
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
199,107
|
|
|
$
|
134,366
|
|
|
$
|
77,417
|
|
|
$
|
69,316
|
|
|
$
|
76,678
|
|
Interest Expense
|
|
|
62,111
|
|
|
|
32,617
|
|
|
|
20,796
|
|
|
|
21,345
|
|
|
|
32,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Before
Provision for Credit Losses
|
|
|
136,966
|
|
|
|
101,749
|
|
|
|
56,621
|
|
|
|
47,971
|
|
|
|
43,688
|
|
Provision for Credit Losses
|
|
|
5,395
|
|
|
|
2,907
|
|
|
|
5,680
|
|
|
|
4,800
|
|
|
|
1,400
|
|
Non-Interest Income
|
|
|
32,216
|
|
|
|
27,399
|
|
|
|
20,022
|
|
|
|
21,204
|
|
|
|
17,253
|
|
Non-Interest Expenses
|
|
|
69,133
|
|
|
|
66,566
|
|
|
|
39,325
|
|
|
|
38,333
|
|
|
|
32,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
94,684
|
|
|
|
59,675
|
|
|
|
31,638
|
|
|
|
26,042
|
|
|
|
27,513
|
|
Income Taxes
|
|
|
36,455
|
|
|
|
22,975
|
|
|
|
12,425
|
|
|
|
9,012
|
|
|
|
10,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
|
$
|
17,030
|
|
|
$
|
16,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY STATEMENT OF FINANCIAL
CONDITION DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
163,477
|
|
|
$
|
127,164
|
|
|
$
|
62,595
|
|
|
$
|
122,772
|
|
|
$
|
81,205
|
|
Total Securities
|
|
|
443,912
|
|
|
|
418,973
|
|
|
|
414,616
|
|
|
|
279,548
|
|
|
|
213,179
|
|
Loans Receivable,
Net(1)
|
|
|
2,469,080
|
|
|
|
2,234,842
|
|
|
|
1,248,399
|
|
|
|
975,154
|
|
|
|
781,718
|
|
Total Assets
|
|
|
3,414,252
|
|
|
|
3,104,188
|
|
|
|
1,787,139
|
|
|
|
1,457,313
|
|
|
|
1,159,416
|
|
Total Deposits
|
|
|
2,826,114
|
|
|
|
2,528,807
|
|
|
|
1,445,835
|
|
|
|
1,283,979
|
|
|
|
1,042,353
|
|
Total Liabilities
|
|
|
2,987,475
|
|
|
|
2,704,278
|
|
|
|
1,647,672
|
|
|
|
1,332,845
|
|
|
|
1,054,543
|
|
Total Shareholders Equity
|
|
|
426,777
|
|
|
|
399,910
|
|
|
|
139,467
|
|
|
|
124,468
|
|
|
|
104,873
|
|
Tangible Equity
|
|
|
209,028
|
|
|
|
178,791
|
|
|
|
137,424
|
|
|
|
122,304
|
|
|
|
102,689
|
|
Average Net Loans
|
|
|
2,359,439
|
|
|
|
1,912,534
|
|
|
|
1,103,765
|
|
|
|
882,625
|
|
|
|
701,714
|
|
Average Securities
|
|
|
418,964
|
|
|
|
425,537
|
|
|
|
379,635
|
|
|
|
244,675
|
|
|
|
235,034
|
|
Average Interest-Earning Assets
|
|
|
2,871,564
|
|
|
|
2,387,412
|
|
|
|
1,538,820
|
|
|
|
1,222,050
|
|
|
|
1,029,046
|
|
Average Total Assets
|
|
|
3,249,190
|
|
|
|
2,670,701
|
|
|
|
1,623,214
|
|
|
|
1,308,885
|
|
|
|
1,100,182
|
|
Average Deposits
|
|
|
2,632,254
|
|
|
|
2,129,724
|
|
|
|
1,416,564
|
|
|
|
1,164,562
|
|
|
|
988,392
|
|
Average Interest-Bearing Liabilities
|
|
|
2,046,227
|
|
|
|
1,687,688
|
|
|
|
1,057,249
|
|
|
|
854,858
|
|
|
|
736,947
|
|
Average Shareholders Equity
|
|
|
417,813
|
|
|
|
293,313
|
|
|
|
132,369
|
|
|
|
112,927
|
|
|
|
95,740
|
|
Average Tangible Equity
|
|
|
198,527
|
|
|
|
143,262
|
|
|
|
130,252
|
|
|
|
110,762
|
|
|
|
93,427
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
for per share data)
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share Basic
|
|
$
|
1.18
|
|
|
$
|
0.87
|
|
|
$
|
0.68
|
|
|
$
|
0.62
|
|
|
$
|
0.61
|
|
Earnings Per
Share Diluted
|
|
$
|
1.17
|
|
|
$
|
0.84
|
|
|
$
|
0.67
|
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
Book Value Per
Share(2)
|
|
$
|
8.77
|
|
|
$
|
8.11
|
|
|
$
|
4.92
|
|
|
$
|
4.47
|
|
|
$
|
3.83
|
|
Tangible Book Value Per
Share(3)
|
|
$
|
4.30
|
|
|
$
|
3.62
|
|
|
$
|
4.85
|
|
|
$
|
4.39
|
|
|
$
|
3.75
|
|
Cash Dividends Per Share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
|
|
|
$
|
|
|
Common Shares Outstanding
|
|
|
48,658,798
|
|
|
|
49,330,704
|
|
|
|
28,326,820
|
|
|
|
27,830,866
|
|
|
|
27,385,660
|
|
SELECTED PERFORMANCE
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average
Assets(4)
|
|
|
1.79
|
%
|
|
|
1.37
|
%
|
|
|
1.18
|
%
|
|
|
1.30
|
%
|
|
|
1.53
|
%
|
Return on Average
Shareholders
Equity(5)
|
|
|
13.94
|
%
|
|
|
12.51
|
%
|
|
|
14.51
|
%
|
|
|
15.08
|
%
|
|
|
17.56
|
%
|
Return on Average Tangible
Equity(6)
|
|
|
29.33
|
%
|
|
|
25.62
|
%
|
|
|
14.75
|
%
|
|
|
15.38
|
%
|
|
|
17.99
|
%
|
Net Interest
Spread(7)
|
|
|
3.89
|
%
|
|
|
3.70
|
%
|
|
|
3.06
|
%
|
|
|
3.17
|
%
|
|
|
2.97
|
%
|
Net Interest
Margin(8)
|
|
|
4.77
|
%
|
|
|
4.26
|
%
|
|
|
3.68
|
%
|
|
|
3.93
|
%
|
|
|
4.25
|
%
|
Average Shareholders Equity
to Average Total Assets
|
|
|
12.86
|
%
|
|
|
10.98
|
%
|
|
|
8.15
|
%
|
|
|
8.63
|
%
|
|
|
8.70
|
%
|
Efficiency
Ratio(9)
|
|
|
40.86
|
%
|
|
|
51.54
|
%
|
|
|
51.31
|
%
|
|
|
55.41
|
%
|
|
|
52.40
|
%
|
Dividend Payout
Ratio(10)
|
|
|
16.95
|
%
|
|
|
22.99
|
%
|
|
|
29.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans are net of deferred fees and related direct costs. |
|
(2) |
|
Total shareholders equity divided by common shares
outstanding. |
|
(3) |
|
Tangible equity divided by common shares outstanding. |
|
(4) |
|
Net income divided by average total assets. |
|
(5) |
|
Net income divided by average shareholders equity. |
|
(6) |
|
Net income divided by average tangible equity. |
|
(7) |
|
Average yield earned on interest-earning assets less average
rate paid on interest-bearing liabilities. |
|
(8) |
|
Net interest income before provision for credit losses
divided by average interest-earning assets. |
|
(9) |
|
Total non-interest expenses divided by the sum of net
interest income before provision for credit losses and total
non-interest income. |
|
(10) |
|
Dividends declared per share divided by basic earnings per
share. |
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
for per share data)
|
|
|
SELECTED CAPITAL
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to Average
Total Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
9.11
|
%
|
|
|
8.93
|
%
|
|
|
7.80
|
%
|
|
|
8.50
|
%
|
|
|
8.86
|
%
|
Hanmi Bank
|
|
|
9.06
|
%
|
|
|
8.78
|
%
|
|
|
7.75
|
%
|
|
|
8.34
|
%
|
|
|
8.76
|
%
|
Tier 1 Capital to Total
Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
11.03
|
%
|
|
|
10.93
|
%
|
|
|
10.05
|
%
|
|
|
11.01
|
%
|
|
|
11.71
|
%
|
Hanmi Bank
|
|
|
10.96
|
%
|
|
|
10.75
|
%
|
|
|
10.00
|
%
|
|
|
10.81
|
%
|
|
|
11.59
|
%
|
Total Capital to Total
Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
12.04
|
%
|
|
|
11.98
|
%
|
|
|
11.13
|
%
|
|
|
12.14
|
%
|
|
|
12.87
|
%
|
Hanmi Bank
|
|
|
11.98
|
%
|
|
|
11.80
|
%
|
|
|
11.09
|
%
|
|
|
11.94
|
%
|
|
|
12.75
|
%
|
SELECTED ASSET QUALITY
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans to Total
Gross
Loans(11)
|
|
|
0.41
|
%
|
|
|
0.27
|
%
|
|
|
0.68
|
%
|
|
|
0.65
|
%
|
|
|
0.63
|
%
|
Non-Performing Assets to Total
Assets(12)
|
|
|
0.30
|
%
|
|
|
0.19
|
%
|
|
|
0.48
|
%
|
|
|
0.44
|
%
|
|
|
0.43
|
%
|
Net Loan Charge-Offs to
Average Total Gross Loans
|
|
|
0.12
|
%
|
|
|
0.19
|
%
|
|
|
0.29
|
%
|
|
|
0.28
|
%
|
|
|
0.45
|
%
|
Allowance for Loan Losses to Total
Gross Loans
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
|
1.06
|
%
|
|
|
1.14
|
%
|
|
|
1.19
|
%
|
Allowance for Loan Losses to
Non-Performing Loans
|
|
|
246.40
|
%
|
|
|
377.49
|
%
|
|
|
154.13
|
%
|
|
|
173.81
|
%
|
|
|
188.12
|
%
|
|
|
|
(11) |
|
Non-performing loans consist of non-accrual loans, loans past
due 90 days or more and restructured loans. |
|
(12) |
|
Non-performing assets consist of non-performing loans (see
footnote (11) above) and other real estate owned. |
Non-GAAP Financial
Measures
Return
on Average Tangible Equity
Return on average tangible equity is supplemental financial
information determined by a method other than in accordance with
accounting principles generally accepted in the United States of
America (GAAP). This non-GAAP measure is used by
management in the analysis of Hanmi Financials
performance. Average tangible equity is calculated by
subtracting average goodwill and average core deposit intangible
assets from average shareholders equity. Banking and
financial institution regulators also exclude goodwill and
intangibles from shareholders equity when assessing the
capital adequacy of a financial institution. Management believes
the presentation of this financial measure excluding the impact
of these items provides useful supplemental information that is
essential to a proper understanding of the financial results of
Hanmi Financial, as it provides a method to assess
managements success in utilizing tangible capital. This
disclosure should not be viewed as a substitution for results
determined in accordance with GAAP, nor is it necessarily
comparable to non-GAAP performance measures that may be
presented by other companies.
23
The following table reconciles this non-GAAP performance measure
to the GAAP performance measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Average Shareholders Equity
|
|
$
|
417,813
|
|
|
$
|
293,313
|
|
|
$
|
132,369
|
|
|
$
|
112,927
|
|
|
$
|
95,740
|
|
Less Average Goodwill and Core
Deposit Intangible Assets
|
|
|
(219,286
|
)
|
|
|
(150,051
|
)
|
|
|
(2,117
|
)
|
|
|
(2,165
|
)
|
|
|
(2,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Tangible
Equity
|
|
$
|
198,527
|
|
|
$
|
143,262
|
|
|
$
|
130,252
|
|
|
$
|
110,762
|
|
|
$
|
93,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average
Shareholders Equity
|
|
|
13.94
|
%
|
|
|
12.51
|
%
|
|
|
14.51
|
%
|
|
|
15.08
|
%
|
|
|
17.56
|
%
|
Effect of Average Goodwill and
Core Deposit Intangible Assets
|
|
|
15.39
|
%
|
|
|
13.11
|
%
|
|
|
0.24
|
%
|
|
|
0.30
|
%
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Tangible
Equity
|
|
|
29.33
|
%
|
|
|
25.62
|
%
|
|
|
14.75
|
%
|
|
|
15.38
|
%
|
|
|
17.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
Book Value Per Share
Tangible book value per share is supplemental financial
information determined by a method other than in accordance with
GAAP. This non-GAAP measure is used by management in the
analysis of Hanmi Financials performance. Tangible book
value per share is calculated by subtracting goodwill and core
deposit intangible assets from total shareholders equity
and dividing the difference by the number of shares of common
stock outstanding. Management believes the presentation of this
financial measure excluding the impact of these items provides
useful supplemental information that is essential to a proper
understanding of the financial results of Hanmi Financial, as it
provides a method to assess managements success in
utilizing tangible capital. This disclosure should not be viewed
as a substitution for results determined in accordance with
GAAP, nor is it necessarily comparable to non-GAAP performance
measures that may be presented by other companies.
The following table reconciles this non-GAAP performance measure
to the GAAP performance measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Total Shareholders Equity
|
|
$
|
426,777
|
|
|
$
|
399,910
|
|
|
$
|
139,467
|
|
|
$
|
124,468
|
|
|
$
|
104,873
|
|
Less Goodwill and Core Deposit
Intangible Assets
|
|
|
(217,749
|
)
|
|
|
(221,119
|
)
|
|
|
(2,043
|
)
|
|
|
(2,164
|
)
|
|
|
(2,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Equity
|
|
$
|
209,028
|
|
|
$
|
178,791
|
|
|
$
|
137,424
|
|
|
$
|
122,304
|
|
|
$
|
102,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share
|
|
$
|
8.77
|
|
|
$
|
8.11
|
|
|
$
|
4.92
|
|
|
$
|
4.47
|
|
|
$
|
3.83
|
|
Effect of Goodwill and Core
Deposit Intangible Assets
|
|
|
(4.47
|
)
|
|
|
(4.49
|
)
|
|
|
(0.07
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per
Share
|
|
$
|
4.30
|
|
|
$
|
3.62
|
|
|
$
|
4.85
|
|
|
$
|
4.39
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This discussion presents managements analysis of the
financial condition and results of operations as of and for the
years ended December 31, 2005, 2004 and 2003. This
discussion should be read in conjunction with our consolidated
financial statements and the notes related thereto presented
elsewhere in this Report.
This discussion and analysis contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in such forward-looking
statements because of certain factors discussed elsewhere in
this report. See Item 1A. Risk Factors.
24
CRITICAL
ACCOUNTING POLICIES
We have established various accounting policies that govern the
application of accounting principles generally accepted in the
United States of America in the preparation of our financial
statements. Our significant accounting policies are described in
the Notes to Consolidated Financial Statements.
Certain accounting policies require us to make significant
estimates and assumptions that have a material impact on the
carrying value of certain assets and liabilities, and we
consider these critical accounting policies. We use estimates
and assumptions based on historical experience and other factors
that we believe to be reasonable under the circumstances. Actual
results could differ significantly from these estimates and
assumptions, which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and
our results of operations for the reporting periods. Management
has discussed the development and selection of these critical
accounting policies with the Audit Committee of Hanmi
Financials Board of Directors.
During the year ended December 31, 2004, in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations
(SFAS No. 141), the purchase of
Pacific Union Bank (PUB) required significant
estimates and assumptions. We engaged outside experts, including
appraisers, to assist in estimating the fair values of certain
assets acquired, particularly the loan portfolio, core deposit
intangible asset and fixed assets. The Bank used market data
regarding securities market prices and interest rates to
estimate the fair values of financial assets, including the
securities portfolio, deposits and borrowings. We also evaluated
long-lived assets for impairment and recorded any necessary
adjustments. In accordance with Emerging Issues Task Force Issue
No. 95-3,
Recognition of Liabilities in Connection With a
Purchase Business Combination, we recognized
liabilities assumed for costs to involuntarily terminate
employees of PUB and costs to exit activities of PUB under an
exit plan approved by Hanmi Banks Board of Directors.
We believe the allowance for loan losses and allowance for
off-balance sheet items are critical accounting policies that
require significant estimates and assumptions that are
particularly susceptible to significant change in the
preparation of our financial statements. See Financial
Condition Allowance for Loan Losses and
Allowance for Off-Balance Sheet Items, Results of
Operations Provision for Credit Losses
and Notes to Consolidated Financial Statements,
Note 1 Summary of Significant Accounting
Policies for a description of the methodology used to
determine the allowance for loan losses and allowance for
off-balance sheet items.
OVERVIEW
On April 30, 2004, we completed the merger with PUB.
Therefore, operating results for the year ended
December 31, 2004 include eight months of operations of the
combined entity and reflect an increase in average total assets
from $2.67 billion for the year ended December 31,
2004 to $3.25 billion for the year ended December 31,
2005.
Over the last two years, we have experienced significant growth
in assets and deposits. Total assets increased to
$3,414.3 million at December 31, 2005 from
$3,104.2 million and $1,787.1 million at
December 31, 2004 and 2003, respectively. Net loans
increased to $2,469.1 million at December 31, 2005
from $2,234.8 million and $1,248.4 million at
December 31, 2004 and 2003, respectively. Total deposits
increased to $2,826.1 million at December 31, 2005
from $2,528.8 million and $1,445.8 million at
December 31, 2004 and 2003, respectively. Our asset growth
was mainly due to the acquisition of PUB, which had assets of
$1.2 billion, and also was attributable to loan production
during the period.
For the year ended December 31, 2005, net income was
$58.2 million, representing an increase of
$21.5 million, or 58.7 percent, from
$36.7 million for the year ended December 31, 2004.
This resulted in basic earnings per share of $1.18 and $0.87 for
the years ended December 31, 2005 and 2004, respectively,
and diluted earnings per share of $1.17 and $0.84 for the same
years. Our primary source of revenue is net interest income,
which is the difference between interest and fees derived from
earning assets and interest paid on liabilities incurred to fund
those assets. Net interest income is affected by changes in the
volume of interest-earning assets and interest-bearing
liabilities. It also is affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing
liabilities. The increase in net income for 2005 was
attributable to increases in net interest margin and average
interest-earning assets. Net interest income increased due to a
23.2 percent increase in volume of gross loans. The average
interest rate paid on interest-bearing liabilities increased by
111 basis points while the average interest rate
25
earned on interest-earning assets increased by 130 basis points.
As a result, net interest spread increased by 19 basis
points from 3.70 percent in 2004 to 3.89 percent in
2005.
For the year ended December 31, 2004, net income was
$36.7 million, representing an increase of
$17.5 million, or 91.0 percent, from
$19.2 million for the year ended December 31, 2003.
This resulted in basic earnings per share of $0.87 and $0.68 for
the years ended December 31, 2004 and 2003, respectively,
and diluted earnings per share of $0.84 and $0.67 for the same
years. The increase in net income for 2004 was attributable to
increases in net interest margin and average interest-earning
assets. Net interest income increased due to a 73.1 percent
increase in volume of gross loans. The average interest rate
paid on interest-bearing liabilities decreased by four basis
points while the average interest rate earned increased by
60 basis points. As a result, net interest spread increased
by 64 basis points from 3.06 percent in 2003 to
3.70 percent in 2004.
Our results of operations are significantly affected by the
provision for credit losses. The provision for credit losses was
$5.4 million, $2.9 million and $5.7 million in
2005, 2004 and 2003, respectively, reflecting changes in the
balance and credit quality of the loan portfolio.
We also generated substantial non-interest income from service
charges on deposit accounts, charges and fees from international
trade finance, and gains on sales of loans. For the year ended
December 31, 2005, non-interest income was
$32.2 million, an increase of $4.8 million, or
17.6 percent, over 2004 non-interest income of
$27.4 million. For the year ended December 31, 2004,
non-interest income was $27.4 million, an increase of
$7.4 million, or 36.8 percent, over 2003 non-interest
income of $20.0 million. The increases in both years
resulted primarily from the merger with PUB and expansion in the
Banks loan and deposit portfolios.
Non-interest expenses consist primarily of employee compensation
and benefits, occupancy and equipment expenses and data
processing expenses. For the year ended December 31, 2005,
non-interest expenses were $69.1 million, an increase of
$2.6 million, or 3.9 percent, over 2004 non-interest
expenses of $66.6 million. For the year ended
December 31, 2004, non-interest expenses were
$66.6 million, an increase of $27.3 million, or
69.3 percent, over 2003 non-interest expenses of
$39.3 million. In both years, the increases were primarily
the result of the merger with PUB. The efficiency ratio improved
to 40.86 percent in 2005 compared to 51.54 percent in
2004 as the Bank achieved greater operating efficiencies after
completing the integration of PUBs operations into the
Banks, whereas 2004 non-interest expenses included the
cost of parallel operations and non-recurring expenses
associated with the merger. In 2004, the efficiency ratio
increased slightly to 51.54 percent compared to
51.31 percent in 2003 because of non-recurring expenses
associated with the merger.
RESULTS
OF OPERATIONS
Net
Interest Income and Net Interest Margin
Our earnings depend largely upon the difference between the
interest income received from our loan portfolio and other
interest-earning assets and the interest paid on deposits and
borrowings. The difference is net interest income.
The difference between the yield earned on interest-earning
assets and the cost of interest-bearing liabilities is net
interest spread. Net interest income, when expressed as a
percentage of average total interest-earning assets, is referred
to as the net interest margin. Net interest income is affected
by the change in the level and mix of interest-earning assets
and interest-bearing liabilities, referred to as volume changes.
Our net interest income also is affected by changes in the
yields earned on assets and rates paid on liabilities, referred
to as rate changes. Interest rates charged on loans are affected
principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. Those
factors are, in turn, affected by general economic conditions
and other factors beyond our control, such as Federal economic
policies, the general supply of money in the economy, income tax
policies, governmental budgetary matters and the actions of the
Fed.
For the years ended December 31, 2005 and 2004, net
interest income was $137.0 million and $101.7 million,
respectively. The net interest spread and net interest margin
for the year ended December 31, 2005 were 3.89 percent
and 4.77 percent, respectively, compared to
3.70 percent and 4.26 percent, respectively, for the
year ended December 31, 2004.
For the years ended December 31, 2004 and 2003, net
interest income was $101.7 million and $56.6 million,
respectively. The net interest spread and net interest margin
for the year ended December 31, 2004 were 3.70 percent
26
and 4.26 percent, respectively, compared to
3.06 percent and 3.68 percent, respectively, for the
year ended December 31, 2003.
Average interest-earning assets increased 20.3 percent to
$2,871.6 million in 2005 from $2,387.4 million in
2004. Average gross loans increased 23.2 percent to
$2,382.2 million in 2005 from $1,933.8 million in
2004, and average investment securities decreased
1.5 percent to $419.0 million in 2005 from
$425.5 million in 2004. Total loan interest income
increased by 53.2 percent in 2005 on an annual basis due to
the increase in average gross loans outstanding and the increase
in the average yield on loans from 6.04 percent in 2004 to
7.51 percent in 2005. The average interest rate charged on
loans increased 147 basis points, reflecting the increase in the
WSJ Prime Rate of 185 basis points from 4.34 percent
in 2004 to 6.19 percent in 2005. The yield on average
interest-earning assets increased from 5.63 percent in 2004
to 6.93 percent in 2005, an increase of 130 basis
points, reflecting a shift in the mix of interest-earning assets
from 81.0 percent loans, 17.8 percent securities and
1.2 percent other interest-earning assets in 2004 to
83.0 percent loans, 14.6 percent securities and
2.4 percent other interest-earning assets in 2005.
The majority of interest-earning assets growth was funded by a
$502.5 million, or 23.6 percent, increase in average
total deposits. Total average interest-bearing liabilities grew
by 21.2 percent to $2,046.2 million in 2005 compared
to $1,687.7 million in 2004. The average interest rate paid
for interest-bearing liabilities increased by 111 basis
points from 1.93 percent in 2004 to 3.04 percent in
2005 due to competitive pricing. As a result of the increases in
the yield on interest-earning assets and cost of
interest-bearing liabilities, the net interest spread increased
to 3.89 percent in 2005 compared to 3.70 percent in
2004.
The 2005 net interest spread reflects the increase in the
average balance of Federal funds sold, which are highly liquid
but have a relatively low yield, from $12.8 million in 2004
to $46.8 million in 2005. The average yield on Federal
funds sold was 3.40 percent and 1.43 percent in 2005
and 2004, respectively. In the second half of 2005, the Bank
increased its rates on certificates of deposit to maintain
relationships with valued customers and fund loan growth. In
2005, loan production increased 32.2 percent over 2004
levels. This trend was particularly evident in the second
quarter of 2005 and continued throughout the second half of the
year, during which production was 37.4 percent higher than
2004 levels. However, because of the flat yield curve (long-term
interest rates were unusually low relative to short-term rates,
approaching and briefly falling below short-term rates) and
strong competition, the Bank experienced a high level of loan
payoffs because management elected not to match the aggressive
pricing on five- to seven-year fixed-rate loans offered to our
customers by certain competitors.
Average interest-earning assets increased 55.1 percent to
$2,387.4 million in 2004 from $1,538.8 million in
2003. Average gross loans increased 73.1 percent to
$1,933.8 million in 2004 from $1,117.0 million in 2003
and average investment securities increased 12.1 percent to
$425.5 million in 2004 from $379.6 million in 2003.
Total loan interest income increased by 81.1 percent in
2004 on an annual basis due to the increase in average gross
loans outstanding and the increase in average yield on loans
from 5.78 percent in 2003 to 6.04 percent in 2004. The
average interest rate charged on loans increased 26 basis
points, reflecting the average WSJ Prime Rate increase of
22 basis points from 4.12 percent in 2003 to
4.34 percent in 2004. The yield on average interest-earning
assets increased from 5.03 percent in 2003 to
5.63 percent in 2004, an increase of 60 basis points,
reflecting a shift in the mix of interest-earning assets from
72.3 percent loans, 24.9 percent securities and
2.8 percent other interest-earning assets in 2003 to
81.0 percent loans, 17.8 percent securities and
1.2 percent other interest-earning assets in 2004.
The majority of interest-earning assets growth was funded by a
$713.2 million, or 50.3 percent, increase in average
total deposits. Total average interest-bearing liabilities grew
by 59.6 percent to $1,687.7 million in 2004 compared
to $1,057.2 million in 2003. The average interest rate paid
for interest-bearing liabilities decreased by four basis points
from 1.97 percent in 2003 to 1.93 percent in 2004. As
a result of the increases in the yield on interest-earning
assets and cost of interest-bearing liabilities, the net
interest spread increased to 3.74 percent in 2004 compared
to 3.09 percent in 2003.
27
The following tables show the average balances of assets,
liabilities and shareholders equity; the amount of
interest income or interest expense; the average yield or rate
for each category of interest-earning assets and
interest-bearing liabilities; and the net interest spread and
the net interest margin for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans,
Net(1)
|
|
$
|
2,382,230
|
|
|
$
|
179,011
|
|
|
|
7.51
|
%
|
|
$
|
1,933,761
|
|
|
$
|
116,811
|
|
|
|
6.04
|
%
|
|
$
|
1,116,952
|
|
|
$
|
64,505
|
|
|
|
5.78
|
%
|
Municipal
Securities(2)
|
|
|
74,166
|
|
|
|
3,122
|
|
|
|
6.48
|
%
|
|
|
70,372
|
|
|
|
3,015
|
|
|
|
6.59
|
%
|
|
|
33,596
|
|
|
|
1,421
|
|
|
|
6.97
|
%
|
Obligations of Other U.S.
Government Agencies
|
|
|
102,703
|
|
|
|
4,002
|
|
|
|
3.90
|
%
|
|
|
90,336
|
|
|
|
3,374
|
|
|
|
3.73
|
%
|
|
|
70,465
|
|
|
|
2,395
|
|
|
|
3.40
|
%
|
Other Debt Securities
|
|
|
241,881
|
|
|
|
10,271
|
|
|
|
4.25
|
%
|
|
|
264,829
|
|
|
|
10,261
|
|
|
|
3.87
|
%
|
|
|
275,574
|
|
|
|
8,321
|
|
|
|
3.02
|
%
|
Equity Securities
|
|
|
23,571
|
|
|
|
1,107
|
|
|
|
4.70
|
%
|
|
|
15,041
|
|
|
|
716
|
|
|
|
4.76
|
%
|
|
|
6,003
|
|
|
|
273
|
|
|
|
4.55
|
%
|
Federal Funds Sold
|
|
|
46,799
|
|
|
|
1,589
|
|
|
|
3.40
|
%
|
|
|
12,772
|
|
|
|
183
|
|
|
|
1.43
|
%
|
|
|
21,844
|
|
|
|
277
|
|
|
|
1.27
|
%
|
Term Federal Funds Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,370
|
|
|
|
225
|
|
|
|
1.57
|
%
|
Interest-Earning Deposits
|
|
|
214
|
|
|
|
5
|
|
|
|
2.34
|
%
|
|
|
301
|
|
|
|
6
|
|
|
|
1.99
|
%
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets
|
|
|
2,871,564
|
|
|
|
199,107
|
|
|
|
6.93
|
%
|
|
|
2,387,412
|
|
|
|
134,366
|
|
|
|
5.63
|
%
|
|
|
1,538,820
|
|
|
|
77,417
|
|
|
|
5.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
92,245
|
|
|
|
|
|
|
|
|
|
|
|
76,064
|
|
|
|
|
|
|
|
|
|
|
|
52,067
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
(22,791
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,227
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,187
|
)
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
308,172
|
|
|
|
|
|
|
|
|
|
|
|
228,452
|
|
|
|
|
|
|
|
|
|
|
|
45,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Earning Assets
|
|
|
377,626
|
|
|
|
|
|
|
|
|
|
|
|
283,289
|
|
|
|
|
|
|
|
|
|
|
|
84,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,249,190
|
|
|
|
|
|
|
|
|
|
|
$
|
2,670,701
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Checking
|
|
$
|
539,678
|
|
|
|
12,964
|
|
|
|
2.40
|
%
|
|
$
|
466,880
|
|
|
|
8,098
|
|
|
|
1.73
|
%
|
|
$
|
207,689
|
|
|
|
2,584
|
|
|
|
1.24
|
%
|
Savings
|
|
|
138,167
|
|
|
|
2,130
|
|
|
|
1.54
|
%
|
|
|
131,589
|
|
|
|
1,790
|
|
|
|
1.36
|
%
|
|
|
97,070
|
|
|
|
1,894
|
|
|
|
1.95
|
%
|
Time Deposits of $100,000 or More
|
|
|
959,904
|
|
|
|
31,984
|
|
|
|
3.33
|
%
|
|
|
611,555
|
|
|
|
10,966
|
|
|
|
1.79
|
%
|
|
|
386,701
|
|
|
|
7,415
|
|
|
|
1.92
|
%
|
Other Time Deposits
|
|
|
242,996
|
|
|
|
7,114
|
|
|
|
2.93
|
%
|
|
|
253,884
|
|
|
|
5,414
|
|
|
|
2.13
|
%
|
|
|
302,651
|
|
|
|
7,354
|
|
|
|
2.43
|
%
|
Other Borrowed Funds
|
|
|
165,482
|
|
|
|
7,919
|
|
|
|
4.79
|
%
|
|
|
223,780
|
|
|
|
6,349
|
|
|
|
2.84
|
%
|
|
|
63,138
|
|
|
|
1,549
|
|
|
|
2.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities
|
|
|
2,046,227
|
|
|
|
62,111
|
|
|
|
3.04
|
%
|
|
|
1,687,688
|
|
|
|
32,617
|
|
|
|
1.93
|
%
|
|
|
1,057,249
|
|
|
|
20,796
|
|
|
|
1.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
|
751,509
|
|
|
|
|
|
|
|
|
|
|
|
665,816
|
|
|
|
|
|
|
|
|
|
|
|
422,453
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
33,641
|
|
|
|
|
|
|
|
|
|
|
|
23,884
|
|
|
|
|
|
|
|
|
|
|
|
11,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Bearing
Liabilities
|
|
|
785,150
|
|
|
|
|
|
|
|
|
|
|
|
689,700
|
|
|
|
|
|
|
|
|
|
|
|
433,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,831,377
|
|
|
|
|
|
|
|
|
|
|
|
2,377,388
|
|
|
|
|
|
|
|
|
|
|
|
1,490,845
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
417,813
|
|
|
|
|
|
|
|
|
|
|
|
293,313
|
|
|
|
|
|
|
|
|
|
|
|
132,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
3,249,190
|
|
|
|
|
|
|
|
|
|
|
$
|
2,670,701
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
$
|
136,996
|
|
|
|
|
|
|
|
|
|
|
$
|
101,749
|
|
|
|
|
|
|
|
|
|
|
$
|
56,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Spread(3)
|
|
|
|
|
|
|
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin(4)
|
|
|
|
|
|
|
|
|
|
|
4.77
|
%
|
|
|
|
|
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans are net of deferred fees
and related direct costs. Loan fees have been included in the
calculation of interest income. Loan fees were
$5.6 million, $6.0 million and $3.2 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. |
|
(2) |
|
Yields on tax-exempt income have
been computed on a tax-equivalent basis, using a tax rate of
35 percent. |
|
(3) |
|
Represents the average yield
earned on interest-earning assets less the average rate paid on
interest-bearing liabilities. |
|
(4) |
|
Represents net interest income
as a percentage of average interest-earning assets. |
28
The following table sets forth, for the periods indicated, the
dollar amount of changes in interest earned and paid for
interest-earning assets and interest-bearing liabilities and the
amount of change attributable to changes in average daily
balances (volume) or changes in average daily interest rates
(rate). The variances attributable to both the volume and rate
changes have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amount of
the changes in each:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
Increases (Decreases)
|
|
|
Increases (Decreases)
|
|
|
|
Due to Change in
|
|
|
Due to Change in
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans, Net
|
|
$
|
30,311
|
|
|
$
|
31,889
|
|
|
$
|
62,200
|
|
|
$
|
49,212
|
|
|
$
|
3,094
|
|
|
$
|
52,306
|
|
Municipal Securities
|
|
|
161
|
|
|
|
(54
|
)
|
|
|
107
|
|
|
|
1,576
|
|
|
|
18
|
|
|
|
1,594
|
|
Obligations of Other U.S.
Government Agencies
|
|
|
477
|
|
|
|
151
|
|
|
|
628
|
|
|
|
725
|
|
|
|
254
|
|
|
|
979
|
|
Other Debt Securities
|
|
|
(929
|
)
|
|
|
939
|
|
|
|
10
|
|
|
|
(335
|
)
|
|
|
2,275
|
|
|
|
1,940
|
|
Equity Securities
|
|
|
401
|
|
|
|
(10
|
)
|
|
|
391
|
|
|
|
429
|
|
|
|
14
|
|
|
|
443
|
|
Federal Funds Sold
|
|
|
930
|
|
|
|
476
|
|
|
|
1,406
|
|
|
|
(126
|
)
|
|
|
32
|
|
|
|
(94
|
)
|
Term Federal Funds Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
(113
|
)
|
|
|
(225
|
)
|
Interest-Earning Deposits
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
31,349
|
|
|
|
33,392
|
|
|
|
64,741
|
|
|
|
51,375
|
|
|
|
5,574
|
|
|
|
56,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Checking
|
|
|
1,403
|
|
|
|
3,463
|
|
|
|
4,866
|
|
|
|
4,191
|
|
|
|
1,323
|
|
|
|
5,514
|
|
Savings
|
|
|
92
|
|
|
|
248
|
|
|
|
340
|
|
|
|
564
|
|
|
|
(668
|
)
|
|
|
(104
|
)
|
Time Deposits of $100,000 or More
|
|
|
8,385
|
|
|
|
12,633
|
|
|
|
21,018
|
|
|
|
4,060
|
|
|
|
(509
|
)
|
|
|
3,551
|
|
Other Time Deposits
|
|
|
(241
|
)
|
|
|
1,941
|
|
|
|
1,700
|
|
|
|
(1,103
|
)
|
|
|
(837
|
)
|
|
|
(1,940
|
)
|
Other Borrowed Funds
|
|
|
(1,966
|
)
|
|
|
3,536
|
|
|
|
1,570
|
|
|
|
4,522
|
|
|
|
278
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
7,673
|
|
|
|
21,821
|
|
|
|
29,494
|
|
|
|
12,234
|
|
|
|
(413
|
)
|
|
|
11,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest
Income
|
|
$
|
23,676
|
|
|
$
|
11,571
|
|
|
$
|
35,247
|
|
|
$
|
39,141
|
|
|
$
|
5,987
|
|
|
$
|
45,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Credit Losses
For the year ended December 31, 2005, the provision for
credit losses was $5.4 million, compared to
$2.9 million for the year ended December 31, 2004, an
increase of 85.6 percent. The allowance for loan losses
remained at 1.00 percent of total gross loans at
December 31, 2005 and 2004, with the increase in the dollar
amount allowed for credit losses due to an increase in loan
volume. This was primarily due to the overall decrease in
historical loss factors on pass grade loans, while
non-performing assets increased from $6.1 million, or
0.27 percent of gross loans, to $10.1 million, or
0.41% of gross loans, as of December 31, 2004. The
$235.2 million, or 10.4 percent, increase in the loan
portfolio and the $4.1 million, or 68.5 percent,
increase in non-performing assets required the provision to
increase to $5.4 million in 2005 from $2.9 million in
2004 to maintain the necessary allowance level. Since 2001, we
have refined our credit management process and instituted a more
comprehensive risk rating system. For the year ended
December 31, 2004, the provision for credit losses was
$2.9 million, compared to $5.7 million for the year
ended December 31, 2003, a decrease of 48.8 percent.
29
Non-Interest
Income
The following table sets forth the various components of
non-interest income for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Service Charges on Deposit Accounts
|
|
$
|
15,782
|
|
|
$
|
14,441
|
|
|
$
|
10,339
|
|
Trade Finance Fees
|
|
|
4,269
|
|
|
|
4,044
|
|
|
|
2,887
|
|
Remittance Fees
|
|
|
2,122
|
|
|
|
1,653
|
|
|
|
952
|
|
Other Service Charges and Fees
|
|
|
2,496
|
|
|
|
1,486
|
|
|
|
1,219
|
|
Bank-Owned Life Insurance Income
|
|
|
845
|
|
|
|
731
|
|
|
|
499
|
|
Increase in Fair Value of
Derivatives
|
|
|
1,105
|
|
|
|
232
|
|
|
|
35
|
|
Other Income
|
|
|
2,459
|
|
|
|
1,681
|
|
|
|
840
|
|
Gain on Sales of Loans
|
|
|
3,021
|
|
|
|
2,997
|
|
|
|
2,157
|
|
Gain on Sales of Securities
Available for Sale
|
|
|
117
|
|
|
|
134
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest
Income
|
|
$
|
32,216
|
|
|
$
|
27,399
|
|
|
$
|
20,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We earn non-interest income from three major sources: service
charges on deposit accounts, fees generated from international
trade finance and gain on sales of loans. Non-interest income
has become a significant part of revenue in the past several
years. For the year ended December 31, 2005, non-interest
income was $32.2 million, an increase of 17.6 percent
from $27.4 million for the year ended December 31,
2004. The increase was primarily a result of the merger with PUB
and expansion in the Banks loan and deposit portfolios.
Service charges on deposit accounts increased $1.3 million,
or 9.3 percent, in 2005 compared to 2004 and increased
$4.1 million, or 39.7 percent, in 2004 compared to
2003. Service charge income on deposit accounts increased with
the higher deposit volume and number of accounts as a result of
the PUB merger and expansion in the Banks deposit
portfolio. Average demand deposits increased by
12.9 percent to $751.5 million in 2005 from
$665.8 million in 2004 and increased by 57.6 percent
to $665.8 million in 2004 from $422.5 million in 2003.
Service charges are constantly reviewed to maximize service
charge income while still maintaining a competitive position.
Fees generated from international trade finance increased by
5.6 percent from $4.0 million in 2004 to
$4.3 million in 2005 and increased 40.1 percent from
$2.9 million in 2003 to $4.0 million in 2004. The
increase was primarily due to the PUB merger. Trade finance fees
relate primarily to import and export letters of credit.
Remittance fees increased 28.4 percent and
73.6 percent in 2005 and 2004, respectively, to
$2.1 million in 2005 from $1.7 million in 2004 and
$952,000 in 2003. The 2005 increase reflects increased volume
derived from Hanmi Banks close relationship with Korea
Exchange Bank, a stockholder of Hanmi Financial, and the 2004
increase reflects increased volume resulting from the merger
with PUB.
Other charges and fees increased $1.0 million, or
68.0 percent, in 2005, from $1.5 million in the prior
year to $2.5 million, and increased $270,000, or
22.2 percent, in 2004, from $1.2 million in the prior
year to $1.5 million. The increase in 2005 was caused by
higher loan prepayment fees as prepayment activity increased in
response to increasing interest rates and the flat yield curve
environment. The increase in 2004 was caused primarily by
increased activity associated with the merger with PUB.
The changes in the fair value of derivatives are caused
primarily by movements in the indexes to which interest rates on
certain certificates of deposit are tied. In 2005 and 2004, the
Bank offered certificates of deposit tied to either of the
Standard & Poors 500 Index and a basket of Asian
currencies. As explained in Notes to Consolidated
Financial Statements,
Note 15 Derivatives, the Bank
entered into swap transactions to hedge the market risk
associated with such certificates of deposit. The swaps and the
related derivatives embedded in the certificates of deposit are
accounted for at fair value. The increase in the fair value of
the swaps of $1.1 million and $232,000 recorded in
non-interest income in 2005 and 2004, respectively, are
partially offset by changes in the fair value of the embedded
derivatives recorded in non-interest expenses.
30
Other income increased $778,000, or 46.3 percent, to
$2.5 million in 2005 from $1.7 million in 2004,
compared to an increase of $841,000, or 100.1 percent, to
$1.7 million in 2004 from $840,000 in 2003. The increase in
other income over these years is mainly due to an increase in
sales commissions from mutual funds and insurance products and,
in 2004, an increase in credit card fee income. As a part of our
continuing effort to expand non-interest income, we offer
non-depository products, such as life insurance, mutual funds
and annuities, to customers. During 2005, we generated income of
$749,000 from this activity, which represented a
61.4 percent increase from $464,000 earned in 2004.
Gain on sales of loans was $3.0 million in 2005, compared
to $3.0 million and $2.2 million in 2004 and 2003,
respectively, representing increases of 0.8 percent and
38.9 percent for the years ended December 31, 2005 and
2004, respectively. The increase in gain on sales of loans
resulted from increased sales activity in SBA loans, which was
primarily due to the acquisition of PUB. The guaranteed portion
of a substantial percentage of SBA loans is sold in the
secondary markets, and servicing rights are retained. During
2005, there were $50.6 million of SBA loans sold, compared
to $51.3 million in 2004 and $32.9 in 2003. The lower
premiums earned in 2005 reflect a greater use of brokers to
refer loan applications, which causes a higher cost to originate
loans, compared to retail originations through the branch
network.
Gain on sales of securities available for sale decreased by
87.8 percent from $1.1 million in 2003 to $134,000 in
2004. Gain on sales of securities was $117,000 in 2005. In 2003,
we sold $45.1 million of securities, recognizing premiums
of 2.43 percent over their carrying value. In 2004, we sold
$53.1 million of securities, primarily securities from
PUBs portfolio, in order to reposition the balance sheet.
Securities sales activity was limited to $11.4 million in
2005, and gains on sales of securities were nominal in amount in
2004 and 2005.
Non-Interest
Expenses
The following table sets forth the breakdown of non-interest
expenses for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Salaries and Employee Benefits
|
|
$
|
36,839
|
|
|
$
|
33,540
|
|
|
$
|
21,214
|
|
Occupancy and Equipment
|
|
|
8,978
|
|
|
|
8,098
|
|
|
|
5,198
|
|
Data Processing
|
|
|
4,844
|
|
|
|
4,540
|
|
|
|
3,080
|
|
Advertising and Promotion
|
|
|
2,913
|
|
|
|
3,001
|
|
|
|
1,635
|
|
Supplies and Communications
|
|
|
2,556
|
|
|
|
2,433
|
|
|
|
1,496
|
|
Professional Fees
|
|
|
2,201
|
|
|
|
2,068
|
|
|
|
1,167
|
|
Amortization of Core Deposit
Intangible
|
|
|
2,785
|
|
|
|
1,872
|
|
|
|
121
|
|
Decrease in Fair Value of Embedded
Option
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Other Operating Expense
|
|
|
7,778
|
|
|
|
8,961
|
|
|
|
5,414
|
|
Merger-Related Expenses
|
|
|
(509
|
)
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest
Expenses
|
|
$
|
69,133
|
|
|
$
|
66,566
|
|
|
$
|
39,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, non-interest expenses
were $69.1 million, an increase of $2.6 million, or
3.9 percent, from $66.6 million for the year ended
December 31, 2004. For the year ended December 31,
2004, non-interest expenses were $66.6 million, an increase
of $27.2 million, or 69.3 percent, from
$39.3 million for the year ended December 31, 2003.
The increases in both years were primarily due to the PUB
merger, which closed on April 30, 2004.
Salaries and employee benefits expenses for 2005 increased
$3.3 million, or 9.8 percent, to $36.8 million
from $33.5 million for 2004 and, for 2004, increased
$12.3 million, or 58.1 percent, to $33.5 million
from $21.2 million for 2003. These increases were due
primarily to increases in the average number of employees
following the acquisition of PUB. Average headcount was 535 and
503 in 2005 and 2004, respectively, representing increases of
6.4 percent and 36.5 percent, respectively, over the
prior years. Assets per employee were $6.2 million at
31
December 31, 2005, compared to $5.8 million at
December 31, 2004, an increase of 6.2 percent, which
reflects the greater operating efficiencies achieved following
the merger with PUB.
Occupancy and equipment expenses for 2005 increased $880,000, or
10.9 percent, to $9.0 million compared to
$8.1 million for 2004 and, for 2004, increased
$2.9 million, or 55.8 percent, to $8.1 million
compared to $5.2 million for 2003. These increases were
mainly due to the acquisition of twelve former PUB branches in
April 2004, which increased the branch network to 27 facilities.
Following the closure of four branches in October 2004 and an
additional branch closure in January 2005, the Bank now operates
22 branches, the same as the average number of branches for the
year ended December 31, 2004.
Data processing expense for 2005 increased $304,000, or
6.7 percent, to $4.8 million from $4.5 million
for 2004 as a result of a 12.9 percent increase in average
demand deposits, a 28.5 percent increase in average
deposits, and a 23.2 percent increase in average loans
outstanding. Data processing expense for 2004 increased
$1.5 million, or 47.4 percent, to $4.5 million
from $3.1 million for 2003. In 2004, average demand
deposits increased 57.6 percent, average deposits increased
47.3 percent, and average loans outstanding increased
73.1 percent compared to 2003. In 2004, additional expense
was incurred because of the need to operate parallel systems
until the conversion of the Banks core data processing
systems.
Advertising and promotion expense decreased from
$3.0 million for 2004 to $2.9 million for 2005, a
decrease of $88,000, or 2.9 percent. In 2004, Hanmi Bank
conducted print, radio and television campaigns and distributed
various promotional items to publicize its merger with PUB and
attract and retain customers, and advertising and promotion
expense increased $1.4 million, or 83.5 percent, to
$3.0 million from $1.6 million in 2003.
Supplies and communication expenses increased $123,000, or
5.1 percent, to $2.6 million in 2005 from
$2.4 million in 2004. Supplies and communication expenses
increased $937,000, or 62.6 percent, to $2.4 million
in 2004 from $1.5 million in 2003 because of the merger
with PUB.
Professional fees were $2.2 million in 2005, representing
an increase of $133,000, or 6.4 percent, compared to
$2.1 million in 2004. The increase was caused primarily by
increased regulatory compliance consulting fees. Professional
fees were $2.1 million in 2004, representing an increase of
$901,000, or 62.6 percent, compared to $1.2 million
for 2003. The increase was caused primarily by consulting fees
related to the integration with PUB and data processing system
conversions.
Core deposit premium amortization increased to $2.8 million
in 2005 compared to $1.9 million in 2004 and $121,000 in
2003. The increases are attributable to the acquisition of PUB.
Other operating expenses were $7.8 million for 2005,
compared to $9.0 million for 2004, representing a decrease
of $1.2 million, or 13.2 percent. The decreases are
primarily attributable to a $1.2 million decrease in loan
referral fees from 2004 to 2005. Other operating expenses were
$9.0 million for 2004, compared to $5.4 million for
2003, representing an increase of $3.5 million, or
65.5 percent. The increases are primarily attributable to
additional operating expenses associated with the acquisition of
PUB.
During the year ended December 31, 2004, restructuring
charges totaling $2.1 million were recorded in connection
with the acquisition of PUB, consisting of employee severance
and retention bonuses, leasehold termination costs, and fixed
asset impairment charges associated with planned branch
closures. In 2004, $975,000 of restructuring costs was
recognized related to retention bonuses paid to former PUB
employees. Such costs are treated as period costs and are
recognized in the period services are rendered. In 2005,
$509,000 of restructuring charges was reversed, as severance
payments were lower than anticipated.
Income
Taxes
For the year ended December 31, 2005, income taxes of
$36.5 million were recognized on pre-tax income of
$94.7 million, representing an effective tax rate of
38.5 percent, compared to income taxes of
$23.0 million recognized on pre-tax income of
$59.7 million, representing an effective tax rate of
38.5 percent, for 2004, and income taxes of
$12.4 million recognized on pre-tax income of
$31.6 million, representing an effective tax rate of
39.3 percent, for 2003.
32
We have made investments in various tax credit funds totaling
$6.9 million as of December 31, 2005 and recognized
$673,000 of income tax credits earned from qualified low-income
housing investments in 2005. We recognized an income tax credit
of $723,000 for the tax year 2004 from $5.3 million in such
investments. We intend to continue to make such investments as
part of an effort to lower the effective tax rate and to meet
our community reinvestment obligations under the CRA.
As indicated in Notes to Consolidated Financial
Statements, Note 10 Income Taxes,
income taxes are the sum of two components: current tax expense
and deferred tax expense (benefit). Current tax expense is the
result of applying the current tax rate to taxable income. The
deferred portion is intended to account for the fact that income
on which taxes are paid differs from financial statement pretax
income because certain items of income and expense are
recognized in different years for income tax purposes than in
the financial statements. These differences in the years that
income and expenses are recognized cause temporary
differences.
Most of our temporary differences involve recognizing more
expenses in our financial statements than we have been allowed
to deduct for taxes, and therefore we normally have a net
deferred tax asset. At December 31, 2005, we had net
deferred tax assets of $9.7 million.
FINANCIAL
CONDITION
Loan
Portfolio
Total gross loans increased by $235.2 million, or
10.4 percent, in 2005. Total gross loans represented
73.2 percent of total assets at December 31, 2005
compared with 72.9 percent and 70.8 percent at
December 31, 2004 and 2003, respectively.
Commercial and industrial loans were $1,431.5 million and
$1,218.3 million at December 31, 2005 and 2004,
respectively, representing 57.3 percent and
53.8 percent, respectively, of the total loan portfolio.
Commercial loans include term loans and revolving lines of
credit. Term loans typically have a maturity of three to five
years and are extended to finance the purchase of business
entities, owner-occupied commercial property, business
equipment, leasehold improvements or for permanent working
capital. SBA guaranteed loans usually have a longer maturity (5
to 20 years). Lines of credit, in general, are extended on
an annual basis to businesses that need temporary working
capital
and/or
import/export financing. These borrowers are well diversified as
to industry, location and their current and target markets. We
manage the portfolio to avoid concentration in any of the areas
mentioned.
Real estate loans were $974.2 million and
$956.8 million at December 31, 2005 and 2004,
respectively, representing 39.0 percent and
42.3 percent, respectively, of the total loan portfolio.
Real estate loans are extended to finance the purchase
and/or
improvement of commercial real estate and residential property.
The properties generally are investor-owned, but may be for
user-owned purposes. Underwriting guidelines include, among
other things, review of appraised value, limitations on
loan-to-value
ratios, and minimum cash flow requirements to service debt. The
majority of the properties taken as collateral are located in
Southern California.
Overall, loan production increased 32.2 percent in 2005
compared to 2004, as the Banks customer base continued to
expand and collateral values continued to increase, although at
a slower pace than in past years. However, loan portfolio growth
was restricted by a high level of loan payoffs caused by the
flat yield curve that obtained throughout much of 2005 and
aggressive pricing of five-to seven-year fixed-rate commercial
real estate loans by certain competitors, which eroded the
Banks portfolio of commercial real estate loans tied to
the prime rate.
The shift in the mix of the loan portfolio in 2005 reflects
managements intent to emphasize commercial and industrial
lending, while continuing to grow the commercial real estate
portfolio at a prudent pace commensurate with the Banks
rigorous underwriting standards and asset/liability management
and profitability objectives.
33
The following table sets forth the amount of total loans
outstanding in each category as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Outstanding as of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
733,650
|
|
|
$
|
783,539
|
|
|
$
|
397,853
|
|
|
$
|
284,465
|
|
|
$
|
198,529
|
|
Construction
|
|
|
152,080
|
|
|
|
92,521
|
|
|
|
43,047
|
|
|
|
39,237
|
|
|
|
33,618
|
|
Residential
Property(1)
|
|
|
88,442
|
|
|
|
80,786
|
|
|
|
58,477
|
|
|
|
47,891
|
|
|
|
49,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
974,172
|
|
|
|
956,846
|
|
|
|
499,377
|
|
|
|
371,593
|
|
|
|
281,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
945,210
|
|
|
|
754,108
|
|
|
|
433,398
|
|
|
|
346,522
|
|
|
|
280,057
|
|
Commercial Lines of Credit
|
|
|
224,271
|
|
|
|
201,940
|
|
|
|
120,856
|
|
|
|
117,304
|
|
|
|
98,304
|
|
SBA
Loans(2)
|
|
|
155,491
|
|
|
|
166,285
|
|
|
|
91,717
|
|
|
|
66,443
|
|
|
|
60,053
|
|
International Loans
|
|
|
106,520
|
|
|
|
95,936
|
|
|
|
65,040
|
|
|
|
42,641
|
|
|
|
34,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial
Loans
|
|
|
1,431,492
|
|
|
|
1,218,269
|
|
|
|
711,011
|
|
|
|
572,910
|
|
|
|
472,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
92,154
|
|
|
|
87,526
|
|
|
|
54,878
|
|
|
|
44,416
|
|
|
|
38,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
$
|
2,497,818
|
|
|
$
|
2,262,641
|
|
|
$
|
1,265,266
|
|
|
$
|
988,919
|
|
|
$
|
793,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2005, loans held for sale totaling
$1.1 million were included at the lower of cost or
market. |
|
(2) |
|
As of December 31, 2004, loans held for sale totaling
$3.9 million were included at the lower of cost or
market. |
The following table sets forth the percentage distribution of
loans in each category as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Distribution of Loans
as of December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
29.37
|
%
|
|
|
34.63
|
%
|
|
|
31.44
|
%
|
|
|
28.77
|
%
|
|
|
25.03
|
%
|
Construction
|
|
|
6.09
|
%
|
|
|
4.09
|
%
|
|
|
3.40
|
%
|
|
|
3.97
|
%
|
|
|
4.24
|
%
|
Residential Property
|
|
|
3.54
|
%
|
|
|
3.57
|
%
|
|
|
4.63
|
%
|
|
|
4.84
|
%
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
39.00
|
%
|
|
|
42.29
|
%
|
|
|
39.47
|
%
|
|
|
37.58
|
%
|
|
|
35.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
37.84
|
%
|
|
|
33.33
|
%
|
|
|
34.25
|
%
|
|
|
35.04
|
%
|
|
|
35.31
|
%
|
Commercial Lines of Credit
|
|
|
8.98
|
%
|
|
|
8.92
|
%
|
|
|
9.55
|
%
|
|
|
11.86
|
%
|
|
|
12.40
|
%
|
SBA Loans
|
|
|
6.23
|
%
|
|
|
7.35
|
%
|
|
|
7.25
|
%
|
|
|
6.72
|
%
|
|
|
7.57
|
%
|
International Loans
|
|
|
4.26
|
%
|
|
|
4.24
|
%
|
|
|
5.14
|
%
|
|
|
4.31
|
%
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial
Loans
|
|
|
57.31
|
%
|
|
|
53.84
|
%
|
|
|
56.19
|
%
|
|
|
57.93
|
%
|
|
|
59.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
3.69
|
%
|
|
|
3.87
|
%
|
|
|
4.34
|
%
|
|
|
4.49
|
%
|
|
|
4.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The following table shows the distribution of undisbursed loan
commitments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Commitments to Extend Credit
|
|
$
|
555,736
|
|
|
$
|
367,708
|
|
Commercial Letters of Credit
|
|
|
58,036
|
|
|
|
49,699
|
|
Standby Letters of Credit
|
|
|
42,768
|
|
|
|
47,901
|
|
Unused Credit Card Lines
|
|
|
14,892
|
|
|
|
14,324
|
|
|
|
|
|
|
|
|
|
|
Total Undisbursed
Loan Commitments
|
|
$
|
671,432
|
|
|
$
|
479,632
|
|
|
|
|
|
|
|
|
|
|
The table below shows the maturity distribution and repricing
intervals of outstanding loans as of December 31, 2005. In
addition, the table shows the distribution of such loans between
those with variable or floating interest rates and those with
fixed or predetermined interest rates. The table includes
non-accrual loans of $10.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
But Within
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
589,647
|
|
|
$
|
67,705
|
|
|
$
|
76,298
|
|
|
$
|
733,650
|
|
Construction
|
|
|
152,080
|
|
|
|
|
|
|
|
|
|
|
|
152,080
|
|
Residential Property
|
|
|
36,785
|
|
|
|
2,195
|
|
|
|
49,462
|
|
|
|
88,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
778,512
|
|
|
|
69,900
|
|
|
|
125,760
|
|
|
|
974,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
825,209
|
|
|
|
34,764
|
|
|
|
85,237
|
|
|
|
945,210
|
|
Commercial Lines of Credit
|
|
|
224,271
|
|
|
|
|
|
|
|
|
|
|
|
224,271
|
|
SBA Loans
|
|
|
155,491
|
|
|
|
|
|
|
|
|
|
|
|
155,491
|
|
International Loans
|
|
|
106,520
|
|
|
|
|
|
|
|
|
|
|
|
106,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial
Loans
|
|
|
1,311,491
|
|
|
|
34,764
|
|
|
|
85,237
|
|
|
|
1,431,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
37,291
|
|
|
|
53,941
|
|
|
|
922
|
|
|
|
92,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
$
|
2,127,294
|
|
|
$
|
158,605
|
|
|
$
|
211,919
|
|
|
$
|
2,497,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans With Predetermined Interest
Rates
|
|
$
|
115,215
|
|
|
$
|
158,605
|
|
|
$
|
200,849
|
|
|
$
|
474,669
|
|
Loans With Variable Interest Rates
|
|
$
|
2,012,079
|
|
|
$
|
|
|
|
$
|
11,070
|
|
|
$
|
2,023,149
|
|
As of December 31, 2005, there were $258.3 million of
loans outstanding, or 10.34 percent of total gross loans
outstanding, to borrowers who were involved in the
accommodation/hospitality industry. There was no other
concentration of loans to any one type of industry exceeding
10 percent of total gross loans.
Non-Performing
Assets
Non-performing assets consist of loans on non-accrual status,
loans 90 days or more past due and still accruing interest,
loans restructured where the terms of repayment have been
renegotiated resulting in a reduction or deferral of interest or
principal, and other real estate owned (OREO). Loans
are generally placed on non-accrual status when they become
90 days past due unless management believes the loan is
adequately collateralized and in the process of collection.
Loans may be restructured by management when a borrower has
experienced some change in financial status, causing an
inability to meet the original repayment terms, and where we
believe the borrower eventually will overcome those
circumstances and repay the loan in full. OREO consists of
properties acquired by foreclosure or similar means that
management intends to offer for sale.
Managements classification of a loan as non-accrual is an
indication that there is reasonable doubt as to the full
collectibility of principal or interest on the loan; at this
point, we stop recognizing income from the interest on
35
the loan and reverse any uncollected interest that had been
accrued but unpaid. These loans may or may not be
collateralized, but collection efforts are continuously pursued.
Non-performing loans, which made up all non-performing assets,
were $10.1 million at December 31, 2005, compared to
$6.0 million and $8.7 million at December 31,
2004 and 2003, respectively, representing a 68.5 percent
increase in 2005 and a 30.6 percent decrease in 2004. Total
gross loans increased by 10.5 percent in 2005 over 2004 and
78.8 percent in 2004 over 2003. As a result, the ratio of
non-performing assets to total gross loans increased to
0.41 percent at December 31, 2005 from
0.27 percent at December 31, 2004, and decreased to
0.27 percent at December 31, 2004 from
0.68 percent at December 31, 2003. As of
December 31, 2005 and 2004, we had no OREO.
Except for non-performing loans set forth below and loans
disclosed as impaired, our management is not aware of any loans
as of December 31, 2005 for which known credit problems of
the borrower would cause serious doubts as to the ability of
such borrowers to comply with their present loan repayment
terms, or any known events that would result in the loan being
designated as non-performing at some future date. Our management
cannot, however, predict the extent to which a deterioration in
general economic conditions, real estate values, increases in
general rates of interest, or changes in the financial condition
or business of borrower may adversely affect a borrowers
ability to pay.
The following table provides information with respect to the
components of non-performing assets as of December 31 for
the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Non-Accrual Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
|
|
|
$
|
|
|
|
$
|
527
|
|
|
$
|
|
|
|
$
|
1,183
|
|
Residential Property
|
|
|
474
|
|
|
|
112
|
|
|
|
1,126
|
|
|
|
287
|
|
|
|
730
|
|
Commercial and Industrial Loans
|
|
|
9,574
|
|
|
|
5,510
|
|
|
|
6,398
|
|
|
|
5,522
|
|
|
|
2,275
|
|
Consumer Loans
|
|
|
74
|
|
|
|
184
|
|
|
|
53
|
|
|
|
49
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Accrual Loans
|
|
|
10,122
|
|
|
|
5,806
|
|
|
|
8,104
|
|
|
|
5,858
|
|
|
|
4,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 Days or More Past Due and
Still Accruing (as to Principal or Interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
557
|
|
|
|
356
|
|
|
|
602
|
|
Residential Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
117
|
|
Commercial and Industrial Loans
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
9
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans 90 Days or More Past
Due and Still Accruing (as to Principal or Interest)
|
|
|
9
|
|
|
|
208
|
|
|
|
557
|
|
|
|
617
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Loans
|
|
|
10,131
|
|
|
|
6,014
|
|
|
|
8,661
|
|
|
|
6,475
|
|
|
|
5,001
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing
Assets
|
|
$
|
10,131
|
|
|
$
|
6,014
|
|
|
$
|
8,661
|
|
|
$
|
6,475
|
|
|
$
|
5,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt
Restructurings
|
|
$
|
642
|
|
|
$
|
1,227
|
|
|
$
|
491
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a
Percentage of Total Gross Loans
|
|
|
0.41
|
%
|
|
|
0.27
|
%
|
|
|
0.68
|
%
|
|
|
0.65
|
%
|
|
|
0.63
|
%
|
Non-Performing Assets as a
Percentage of Total Assets
|
|
|
0.30
|
%
|
|
|
0.19
|
%
|
|
|
0.48
|
%
|
|
|
0.44
|
%
|
|
|
0.43
|
%
|
Allowance
for Loan Losses and Allowance for Off-Balance Sheet
Items
Provisions to the allowance for loan losses are made quarterly
to recognize probable loan losses. The quarterly provision is
based on the allowance need, which is calculated using a formula
designed to provide adequate
36
allowances for anticipated losses. The formula is composed of
various components. The allowance is determined by assigning
specific allowances for all classified loans. All loans that are
not classified are then given certain allocations according to
type with larger percentages applied to loans deemed to be of a
higher risk. These percentages are determined based on the prior
loss history by type of loan, adjusted for current economic
factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Allowance for Loan
|
|
Allowance
|
|
|
Total
|
|
|
Allowance
|
|
|
Total
|
|
|
Allowance
|
|
|
Total
|
|
|
Allowance
|
|
|
Total
|
|
|
Allowance
|
|
|
Total
|
|
Losses Applicable to
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
2,043
|
|
|
$
|
733,650
|
|
|
$
|
1,854
|
|
|
$
|
783,539
|
|
|
$
|
374
|
|
|
$
|
397,853
|
|
|
$
|
337
|
|
|
$
|
284,465
|
|
|
$
|
1,108
|
|
|
$
|
198,336
|
|
Construction
|
|
|
475
|
|
|
|
152,080
|
|
|
|
349
|
|
|
|
92,521
|
|
|
|
427
|
|
|
|
43,047
|
|
|
|
267
|
|
|
|
39,237
|
|
|
|
163
|
|
|
|
33,618
|
|
Residential
Property(1)
|
|
|
19
|
|
|
|
87,377
|
|
|
|
155
|
|
|
|
80,786
|
|
|
|
191
|
|
|
|
58,477
|
|
|
|
149
|
|
|
|
47,891
|
|
|
|
258
|
|
|
|
49,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
2,537
|
|
|
|
973,107
|
|
|
|
2,358
|
|
|
|
956,846
|
|
|
|
992
|
|
|
|
499,377
|
|
|
|
753
|
|
|
|
371,593
|
|
|
|
1,529
|
|
|
|
281,480
|
|
Commercial and Industrial Loans
|
|
|
21,035
|
|
|
|
1,431,492
|
|
|
|
19,051
|
|
|
|
1,214,419
|
|
|
|
11,376
|
|
|
|
685,557
|
|
|
|
9,773
|
|
|
|
560,370
|
|
|
|
7,072
|
|
|
|
457,973
|
|
Consumer Loans
|
|
|
1,391
|
|
|
|
92,154
|
|
|
|
1,293
|
|
|
|
87,526
|
|
|
|
846
|
|
|
|
54,878
|
|
|
|
652
|
|
|
|
44,416
|
|
|
|
738
|
|
|
|
38,645
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,963
|
|
|
$
|
2,496,753
|
|
|
$
|
22,702
|
|
|
$
|
2,258,791
|
|
|
$
|
13,349
|
|
|
$
|
1,239,812
|
|
|
$
|
11,254
|
|
|
$
|
976,379
|
|
|
$
|
9,408
|
|
|
$
|
778,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans held for sale excluded. |
The allowance is based on estimates, and ultimate future losses
may vary from current estimates. Underlying trends in the
economic cycle, particularly in Southern California, which
management cannot completely predict, will influence credit
quality. It is always possible that future economic or other
factors may adversely affect Hanmi Banks borrowers. As a
result, we may sustain loan losses in any particular period that
are sizable in relation to the allowance, or exceed the
allowance. In addition, our asset quality may deteriorate
through a number of possible factors, including:
|
|
|
|
|
rapid growth;
|
|
|
|
failure to maintain or enforce appropriate underwriting
standards;
|
|
|
|
failure to maintain an adequate number of qualified loan
personnel; and
|
|
|
|
failure to identify and monitor potential problem loans.
|
The allowance for loan losses and allowance for off-balance
sheet items are maintained at levels that are believed to be
adequate by management to absorb estimated probable loan losses
inherent in the loan portfolio. The adequacy of the allowance
and the reserve is determined through periodic evaluations of
the loan portfolio and other pertinent factors, which are
inherently subjective as the process calls for various
significant estimates and assumptions. Among others, the
estimates involve the amounts and timing of expected future cash
flows and fair value of collateral on impaired loans, estimated
losses on loans based on historical loss experience, various
qualitative factors, and uncertainties in estimating losses and
inherent risks in the various credit portfolios, which may be
subject to substantial change.
On a quarterly basis, we utilize a classification migration
model and individual loan review analysis tools as starting
points for determining the allowance for loan loss and reserve
for credit loss adequacy. Our loss migration analysis tracks
twelve quarters of loan losses to determine historical loss
experience in every classification category (i.e., pass, special
mention, substandard and doubtful) for each loan type, except
consumer loans (auto, mortgage and credit cards), which are
analyzed as homogeneous loan pools. These calculated loss
factors are then applied to outstanding loan balances, unused
commitments and off-balance sheet exposures, such as letters of
credit. The individual loan review analysis is the other part of
the allowance allocation process, applying specific monitoring
policies and procedures in analyzing the existing loan
portfolios. Further allowance assignments are made based on
37
general and specific economic conditions, as well as performance
trends within specific portfolio segments and individual
concentrations of credit.
The allowance for loan losses was $25.0 million at
December 31, 2005, compared to $22.7 million at
December 31, 2004. The increase in the allowance for loan
losses in 2005 was due primarily to increased specific reserves
for impaired loans and an increase in the qualitative
adjustments due to changes in the qualitative factors. The ratio
of the allowance for loan losses to total gross loans was
1.00 percent at December 31, 2005 and 2004, primarily
due to the overall decrease of historical loss factors on pass
grade loans. The loan loss estimation, based on historical
losses, and specific allocations of the allowance are performed
on a quarterly basis. The allowance for off-balance sheet items
was $2.1 million at December 31, 2005, compared to
$1.8 million at December 31, 2004.
The loan loss estimation, based on historical losses, and
specific allocations of the allowance are performed on a
quarterly basis. Adjustments to allowance allocations for
specific segments of the loan portfolio may be made as a result
thereof, based on the accuracy of forecasted loss amounts and
other loan- or policy-related issues.
We determine the appropriate overall allowance for loan losses
and allowance for off-balance sheet items based on the analysis
described above, taking into account managements judgment.
The allowance methodology is reviewed on a periodic basis and
modified as appropriate. Based on this analysis, including the
aforementioned factors, we believe that the allowance for loan
losses and allowance for off-balance sheet items are adequate as
of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for Loan
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
$
|
22,702
|
|
|
$
|
13,349
|
|
|
$
|
11,254
|
|
|
$
|
9,408
|
|
|
$
|
11,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan
Losses PUB Acquisition
|
|
|
|
|
|
|
10,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Charge-Offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
4,371
|
|
|
|
5,004
|
|
|
|
3,687
|
|
|
|
3,213
|
|
|
|
3,782
|
|
Consumer Loans
|
|
|
827
|
|
|
|
481
|
|
|
|
538
|
|
|
|
358
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-Offs
|
|
|
5,198
|
|
|
|
5,485
|
|
|
|
4,423
|
|
|
|
3,571
|
|
|
|
4,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries on Loans Previously
Charged Off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
273
|
|
Residential Property
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
2,193
|
|
|
|
1,702
|
|
|
|
859
|
|
|
|
871
|
|
|
|
307
|
|
Consumer Loans
|
|
|
201
|
|
|
|
78
|
|
|
|
322
|
|
|
|
105
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries
|
|
|
2,394
|
|
|
|
1,780
|
|
|
|
1,208
|
|
|
|
976
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Charge-Offs
|
|
|
2,804
|
|
|
|
3,705
|
|
|
|
3,215
|
|
|
|
2,595
|
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision Charged to Operating
Expenses
|
|
|
5,065
|
|
|
|
2,492
|
|
|
|
5,310
|
|
|
|
4,441
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of
Year
|
|
$
|
24,963
|
|
|
$
|
22,702
|
|
|
$
|
13,349
|
|
|
$
|
11,254
|
|
|
$
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Off-Balance Sheet
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
$
|
1,800
|
|
|
$
|
1,385
|
|
|
$
|
1,015
|
|
|
$
|
656
|
|
|
$
|
700
|
|
Provision Charged to Operating
Expenses
|
|
|
330
|
|
|
|
415
|
|
|
|
370
|
|
|
|
359
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of
Year
|
|
$
|
2,130
|
|
|
$
|
1,800
|
|
|
$
|
1,385
|
|
|
$
|
1,015
|
|
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Charge-Offs to
Average Total Gross Loans
|
|
|
0.12
|
%
|
|
|
0.19
|
%
|
|
|
0.29
|
%
|
|
|
0.29
|
%
|
|
|
0.46
|
%
|
Net Loan Charge-Offs to Total
Gross Loans at End of Period
|
|
|
0.11
|
%
|
|
|
0.16
|
%
|
|
|
0.25
|
%
|
|
|
0.26
|
%
|
|
|
0.42
|
%
|
Allowance for Loan Losses to
Average Total Gross Loans
|
|
|
1.05
|
%
|
|
|
1.17
|
%
|
|
|
1.19
|
%
|
|
|
1.26
|
%
|
|
|
1.32
|
%
|
Allowance for Loan Losses to Total
Gross Loans at End of Period
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
|
1.06
|
%
|
|
|
1.14
|
%
|
|
|
1.19
|
%
|
Net Loan Charge-Offs to
Allowance for Loan Losses
|
|
|
11.23
|
%
|
|
|
16.32
|
%
|
|
|
24.08
|
%
|
|
|
23.06
|
%
|
|
|
35.20
|
%
|
Net Loan Charge-Offs to
Provision Charged to Operating Expenses
|
|
|
55.36
|
%
|
|
|
148.68
|
%
|
|
|
60.55
|
%
|
|
|
58.43
|
%
|
|
|
229.36
|
%
|
Allowance for Loan Losses to
Non-Performing Loans
|
|
|
246.40
|
%
|
|
|
377.55
|
%
|
|
|
154.13
|
%
|
|
|
173.81
|
%
|
|
|
188.12
|
%
|
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Gross Loans
Outstanding During Period
|
|
$
|
2,382,230
|
|
|
$
|
1,933,761
|
|
|
$
|
1,116,952
|
|
|
$
|
893,122
|
|
|
$
|
713,338
|
|
Total Gross Loans Outstanding at
End of Period
|
|
$
|
2,497,818
|
|
|
$
|
2,262,641
|
|
|
$
|
1,265,266
|
|
|
$
|
988,919
|
|
|
$
|
793,045
|
|
Non-Performing Loans at End of
Period
|
|
$
|
10,131
|
|
|
$
|
6,014
|
|
|
$
|
8,661
|
|
|
$
|
6,475
|
|
|
$
|
5,001
|
|
We concentrate the majority of our earning assets in loans. In
all forms of lending, there are inherent risks. We concentrate
the preponderance of our loan portfolio in either commercial
loans or real estate loans. A small part of the portfolio is
represented by installment loans primarily for the purchase of
automobiles.
While we believe that our underwriting criteria are prudent,
outside factors can adversely impact credit quality.
A portion of the portfolio is represented by loans guaranteed by
the SBA, which further reduces the potential for loss. We also
utilize credit review in an effort to maintain loan quality.
Loans are reviewed throughout the year with special attention
given to new loans and those that are classified special mention
and worse. In addition to our internal grading system, loans
criticized by this credit review are downgraded with appropriate
allowance added if required.
As indicated above, we formally assess the adequacy of the
allowance on a quarterly basis by:
|
|
|
|
|
reviewing the adversely graded, delinquent or otherwise
questionable loans;
|
|
|
|
generating an estimate of the loss potential in each such loan;
|
|
|
|
adding a risk factor for industry, economic or other external
factors; and
|
|
|
|
evaluating the present status of each loan.
|
Although management believes the allowance is adequate to absorb
probable losses, no assurance can be given that we will not
sustain losses in any given period, which could be substantial
in relation to the size of the allowance.
Investment
Portfolio
As of December 31, 2005, the investment portfolio was
composed primarily of mortgage-backed securities,
U.S. Government agency securities (Agencies),
collateralized mortgage obligations, municipal bonds and
corporate bonds.
39
Investment securities available for sale were 99.8 percent
and 99.7 percent of the total investment portfolio as of
December 31, 2005 and 2004, respectively. Most of the
securities held by us carried fixed interest rates. Other than
holdings of Agencies, there were no investments in securities of
any one issuer exceeding 10 percent of shareholders
equity as of December 31, 2005, 2004 or 2003.
We maintain an investment portfolio primarily for liquidity
purposes. As of December 31, 2005, the investment portfolio
balance was $446.7 million, or 13.1 percent of total
assets, compared to $415.8 million, or 13.4 percent of
total assets as of December 31, 2004. During 2005, we
purchased $132.7 million of securities, primarily
mortgage-backed and Agencies, to replenish the portfolio for
principal repayments in the form of calls, prepayments and
scheduled amortization and to maintain an asset mix consistent
with our strategic direction.
The following table summarizes the amortized cost, fair value
and distribution of investment securities as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio as of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
692
|
|
|
$
|
692
|
|
|
$
|
691
|
|
|
$
|
691
|
|
|
$
|
690
|
|
|
$
|
689
|
|
Mortgage-Backed Securities
|
|
|
357
|
|
|
|
359
|
|
|
|
399
|
|
|
|
402
|
|
|
|
638
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Held to
Maturity
|
|
$
|
1,049
|
|
|
$
|
1,051
|
|
|
$
|
1,090
|
|
|
$
|
1,093
|
|
|
$
|
1,328
|
|
|
$
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
149,311
|
|
|
$
|
147,268
|
|
|
$
|
148,706
|
|
|
$
|
149,174
|
|
|
$
|
117,139
|
|
|
$
|
117,484
|
|
U.S. Government Agency
Securities
|
|
|
129,589
|
|
|
|
127,813
|
|
|
|
89,345
|
|
|
|
89,677
|
|
|
|
80,845
|
|
|
|
81,426
|
|
Collateralized Mortgage Obligations
|
|
|
83,068
|
|
|
|
81,456
|
|
|
|
93,172
|
|
|
|
92,539
|
|
|
|
125,491
|
|
|
|
124,096
|
|
Municipal Bonds
|
|
|
71,536
|
|
|
|
73,220
|
|
|
|
71,771
|
|
|
|
73,616
|
|
|
|
60,741
|
|
|
|
61,403
|
|
Corporate Bonds
|
|
|
8,235
|
|
|
|
8,053
|
|
|
|
8,380
|
|
|
|
8,444
|
|
|
|
13,641
|
|
|
|
13,903
|
|
Other Securities
|
|
|
4,999
|
|
|
|
5,053
|
|
|
|
4,437
|
|
|
|
4,433
|
|
|
|
15,055
|
|
|
|
14,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available for
Sale
|
|
$
|
446,738
|
|
|
$
|
442,863
|
|
|
$
|
415,811
|
|
|
$
|
417,883
|
|
|
$
|
412,912
|
|
|
$
|
413,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the maturity
and/or
repricing schedule for investment securities and their
weighted-average yield as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five
|
|
|
|
|
|
|
Within
|
|
|
but Within
|
|
|
but Within
|
|
|
After
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Mortgage-Backed
Securities(1)
|
|
$
|
55,507
|
|
|
|
3.94
|
%
|
|
$
|
45,238
|
|
|
|
4.56
|
%
|
|
$
|
41,224
|
|
|
|
4.73
|
%
|
|
$
|
5,656
|
|
|
|
5.15
|
%
|
U.S. Government Agency
Securities
|
|
|
14,882
|
|
|
|
3.20
|
%
|
|
|
112,931
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage
Obligations(1)
|
|
|
15,915
|
|
|
|
3.70
|
%
|
|
|
57,895
|
|
|
|
4.25
|
%
|
|
|
7,646
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
Municipal
Bonds(2)
|
|
|
270
|
|
|
|
7.82
|
%
|
|
|
1,408
|
|
|
|
4.94
|
%
|
|
|
8,089
|
|
|
|
6.19
|
%
|
|
|
64,145
|
|
|
|
6.30
|
%
|
Corporate Bonds
|
|
|
|
|
|
|
|
|
|
|
8,053
|
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Securities
|
|
|
5,053
|
|
|
|
6.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,627
|
|
|
|
3.93
|
%
|
|
$
|
225,525
|
|
|
|
4.36
|
%
|
|
$
|
56,959
|
|
|
|
4.93
|
%
|
|
$
|
69,801
|
|
|
|
6.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
(1) |
|
Mortgage-backed securities and collateralized mortgage
obligations have contractual maturities through 2035. The above
table is based on the expected prepayment schedule. |
|
(2) |
|
The yield on municipal bonds has been computed on a
tax-equivalent basis, using an effective marginal rate of
35 percent. |
Deposits
Total deposits at December 31, 2005, 2004 and 2003 were
$2,826.1 million, $2,528.8 million and
$1,445.8 million, respectively, representing an increase of
$297.3 million, or 11.8 percent, in 2005 and
$1,083.0 million, or 74.9 percent, in 2004. At
December 31, 2005, 2004 and 2003, total time deposits
outstanding were $1,439.8 million, $1,031.7 million
and $667.8 million, respectively, representing
50.9 percent, 40.8 percent and 46.2 percent,
respectively, of total deposits. This growth reflects the shift
away from low-yielding accounts that normally occurs as interest
rates rise and depositors take advantage of the greater interest
rate differentials available in the market.
Demand deposits and money market accounts decreased by
$78.5 million, or 5.8 percent, in 2005 and increased
by $662.1 million, or 97.2 percent, in 2004. Core
deposits (defined as demand, money market and savings deposits)
decreased $110.7 million, or 7.4 percent, to
$1,386.4 million as of December 31, 2005 from
$1,497.1 million as of December 31, 2004, as
depositors shifted funds into higher yielding certificates of
deposit. At December 31, 2005, noninterest-bearing demand
deposits represented 26.1 percent of total deposits
compared to 28.9 percent at December 31, 2004.
Average deposits for the years ended December 31, 2005,
2004 and 2003 were $2,632.3 million, $2,129.7 million
and $1,416.6 million, respectively. Average deposits grew
by 23.6 percent in 2005 and 50.3 percent in 2004.
We accept brokered deposits on a selective basis at prudent
interest rates to augment deposit growth. There were
$7.4 million and $40.0 million of brokered deposits as
of December 31, 2005 and 2004, respectively. We also had
$200.0 million of state time deposits over $100,000 with a
weighted-average interest rate of 3.87 percent and
2.08 percent as of December 31, 2005 and 2004,
respectively.
The table below summarizes the distribution of average deposits
and the average rates paid for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Demand, Noninterest-Bearing
|
|
$
|
751,509
|
|
|
|
|
|
|
$
|
665,816
|
|
|
|
|
|
|
$
|
422,453
|
|
|
|
|
|
Money Market Checking
|
|
|
539,678
|
|
|
|
2.40
|
%
|
|
|
466,880
|
|
|
|
1.73
|
%
|
|
|
207,689
|
|
|
|
1.24
|
%
|
Savings
|
|
|
138,167
|
|
|
|
1.54
|
%
|
|
|
131,589
|
|
|
|
1.36
|
%
|
|
|
97,070
|
|
|
|
1.95
|
%
|
Time Deposits of $100,000 or More
|
|
|
959,904
|
|
|
|
3.33
|
%
|
|
|
611,555
|
|
|
|
1.79
|
%
|
|
|
386,701
|
|
|
|
1.92
|
%
|
Other Time Deposits
|
|
|
242,996
|
|
|
|
2.93
|
%
|
|
|
253,884
|
|
|
|
2.13
|
%
|
|
|
302,651
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
2,632,254
|
|
|
|
|
|
|
$
|
2,129,724
|
|
|
|
|
|
|
$
|
1,416,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
The table below summarizes the maturity of time deposits in
denominations of $100,000 or greater at December 31 of the
years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Three Months or Less
|
|
$
|
587,251
|
|
|
$
|
378,205
|
|
|
$
|
261,274
|
|
Over Three Months Through Six
Months
|
|
|
248,338
|
|
|
|
232,231
|
|
|
|
57,034
|
|
Over Six Months Through Twelve
Months
|
|
|
321,714
|
|
|
|
131,775
|
|
|
|
52,815
|
|
Over Twelve Months
|
|
|
4,647
|
|
|
|
14,369
|
|
|
|
17,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,161,950
|
|
|
$
|
756,580
|
|
|
$
|
388,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Our borrowings mostly take the form of advances from the Federal
Home Loan Bank of San Francisco (FHLB),
overnight Federal funds, and junior subordinated debt associated
with trust preferred securities.
At December 31, 2005, advances from the FHLB were
$43.5 million, a decrease of $22.8 million, or
34.4 percent, from the December 31, 2004 balance of
$66.4 million. In 2005, we used liquidity available from
the growth of the portfolio of certificates of deposit to pay
down borrowings to the extent it was cost-effective to do so.
During the first half of 2004, we issued two junior subordinated
notes bearing interest at three-month London InterBank Offered
Rate (LIBOR) plus 2.90 percent totaling
$61.8 million and one junior subordinated note bearing
interest at three-month LIBOR plus 2.63 percent totaling
$20.6 million. Our outstanding subordinated debentures
related to these offerings, the proceeds of which were used to
finance the purchase of PUB, totaled $82.4 million at
December 31, 2005.
INTEREST
RATE RISK MANAGEMENT
Interest rate risk indicates our exposure to market interest
rate fluctuations. The movement of interest rates directly and
inversely affects the economic value of fixed-income assets,
which is the present value of future cash flow discounted by the
current interest rate; under the same conditions, the higher the
current interest rate, the higher the denominator of
discounting. Interest rate risk management is intended to
decrease or increase the level of our exposure to market
interest rates. The level of interest rate risk can be managed
through such means as the changing of gap positions and the
volume of fixed-income assets. For successful management of
interest rate risk, we use various methods to measure existing
and future interest rate risk exposures. In addition to regular
reports used in business operations, repricing gap analysis,
stress testing and simulation modeling are the main measurement
techniques used to quantify interest rate risk exposure.
42
The following table shows the most recent status of our gap
position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
Three
|
|
|
Year But
|
|
|
|
|
|
|
|
|
|
|
|
|
Than
|
|
|
Months
|
|
|
Within
|
|
|
After
|
|
|
Non-
|
|
|
|
|
|
|
Three
|
|
|
But Within
|
|
|
Five
|
|
|
Five
|
|
|
Interest-
|
|
|
|
|
|
|
Months
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Sensitive
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Cash
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
103,477
|
|
|
$
|
103,477
|
|
Federal Funds Sold
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Securities Purchased Under
Agreements to Resell
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
FRB and FHLB Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,587
|
|
|
|
|
|
|
|
24,587
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
11,238
|
|
|
|
29,339
|
|
|
|
225,521
|
|
|
|
126,762
|
|
|
|
|
|
|
|
392,860
|
|
Floating Rate
|
|
|
6,718
|
|
|
|
|
|
|
|
36,261
|
|
|
|
8,073
|
|
|
|
|
|
|
|
51,052
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
35,775
|
|
|
|
41,169
|
|
|
|
175,691
|
|
|
|
163,986
|
|
|
|
|
|
|
|
416,621
|
|
Floating Rate
|
|
|
1,952,655
|
|
|
|
13,028
|
|
|
|
104,878
|
|
|
|
|
|
|
|
|
|
|
|
2,070,561
|
|
Non-Accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,122
|
|
|
|
10,122
|
|
Deferred Loan Fees and
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,224
|
)
|
|
|
(28,224
|
)
|
Other Assets
|
|
|
|
|
|
|
22,713
|
|
|
|
|
|
|
|
6,944
|
|
|
|
283,539
|
|
|
|
313,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,066,386
|
|
|
$
|
106,249
|
|
|
$
|
542,351
|
|
|
$
|
330,352
|
|
|
$
|
368,914
|
|
|
$
|
3,414,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
$
|
72,459
|
|
|
$
|
192,446
|
|
|
$
|
407,097
|
|
|
$
|
66,616
|
|
|
$
|
|
|
|
$
|
738,618
|
|
Savings
|
|
|
16,483
|
|
|
|
39,913
|
|
|
|
57,453
|
|
|
|
7,725
|
|
|
|
|
|
|
|
121,574
|
|
Money Market Checking
|
|
|
70,270
|
|
|
|
174,274
|
|
|
|
223,155
|
|
|
|
58,472
|
|
|
|
|
|
|
|
526,171
|
|
Time Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
700,402
|
|
|
|
572,925
|
|
|
|
17,332
|
|
|
|
137
|
|
|
|
|
|
|
|
1,290,796
|
|
Floating Rate
|
|
|
148,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,955
|
|
Other Borrowed Funds
|
|
|
2,803
|
|
|
|
5,000
|
|
|
|
33,411
|
|
|
|
5,117
|
|
|
|
|
|
|
|
46,331
|
|
Junior Subordinated Debentures
|
|
|
82,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,406
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,624
|
|
|
|
32,624
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426,777
|
|
|
|
426,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
1,093,778
|
|
|
$
|
984,558
|
|
|
$
|
738,448
|
|
|
$
|
138,067
|
|
|
$
|
459,401
|
|
|
$
|
3,414,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing Gap
|
|
$
|
972,608
|
|
|
$
|
(878,309
|
)
|
|
$
|
(196,097
|
)
|
|
$
|
192,285
|
|
|
$
|
(90,487
|
)
|
|
|
|
|
Cumulative Repricing Gap
|
|
$
|
972,608
|
|
|
$
|
94,299
|
|
|
$
|
(101,798
|
)
|
|
$
|
90,487
|
|
|
$
|
|
|
|
|
|
|
Cumulative Repricing Gap as a
Percentage of Total Assets
|
|
|
28.49
|
%
|
|
|
2.76
|
%
|
|
|
(2.98
|
%)
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
Cumulative Repricing Gap as a
Percentage of Interest-Earning Assets
|
|
|
32.25
|
%
|
|
|
3.13
|
%
|
|
|
(3.38
|
%)
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
43
The repricing gap analysis measures the static timing of
repricing risk of assets and liabilities, i.e., a
point-in-time
analysis measuring the difference between assets maturing or
repricing in a period and liabilities maturing or repricing
within the same time period. Assets are assigned to maturity and
repricing categories based on their expected repayment or
repricing dates, and liabilities are assigned based on their
repricing or maturity dates. Core deposits that have no maturity
dates (demand deposits, savings and money market checking) are
assigned to categories based on expected decay rates.
On December 31, 2005, the cumulative repricing gap as a
percentage of interest-earning assets in the
less-than-three
month period was 32.25 percent. This was a large decrease
from the previous years figure of 46.00 percent. The
decrease was primarily caused by a shift in the mix of the loan
portfolio into fixed-rate loans, funded primarily by
certificates of deposit, as the mix of the deposits portfolio
shifted away from core deposits and the balance of loans linked
to the prime rate decreased $48.6 million. The cumulative
repricing percentage in the
three-to-twelve
month period also moved significantly lower, reaching
3.13 percent. In terms of fixed and floating gap positions,
which are used internally to control repricing risk, the
accumulated fixed gap position between assets and liabilities as
a percentage of interest-earning assets was (10.30) percent. The
floating gap position in the
less-than-one
year period was 7.00 percent.
The following table summarizes the status of the gap position as
of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Three Months
|
|
|
Less Than Twelve Months
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Cumulative Repricing Gap
|
|
$
|
972,608
|
|
|
$
|
1,274,507
|
|
|
$
|
94,299
|
|
|
$
|
451,176
|
|
Percentage of Total Assets
|
|
|
28.49
|
%
|
|
|
41.06
|
%
|
|
|
2.76
|
%
|
|
|
14.53
|
%
|
Percentage of Interest-Earning
Assets
|
|
|
32.25
|
%
|
|
|
46.00
|
%
|
|
|
3.13
|
%
|
|
|
16.29
|
%
|
The spread between interest income on interest-earning assets
and interest expense on interest-bearing liabilities is the
principal component of net interest income, and interest rate
changes substantially affect our financial performance. We
emphasize capital protection through stable earnings rather than
maximizing yield. In order to achieve stable earnings, we
prudently manage our assets and liabilities and closely monitor
the percentage changes in net interest income and equity value
in relation to limits established within our guidelines.
To supplement traditional gap analysis, we perform simulation
modeling to estimate the potential effects of interest rate
changes. The following table summarizes one of the stress
simulations performed to forecast the impact of changing
interest rates on net interest income and the market value of
interest-earning assets and interest-bearing liabilities
reflected on our balance sheet. This sensitivity analysis is
compared to policy limits, which specify the maximum tolerance
level for net interest income exposure over a one-year horizon,
given the basis point adjustment in interest rates reflected
below.
Rate
Shock Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Changes
|
|
|
Change in Amount
|
|
|
|
Net
|
|
|
Economic
|
|
|
Net
|
|
|
Economic
|
|
|
|
Interest
|
|
|
Value of
|
|
|
Interest
|
|
|
Value of
|
|
Change in Interest
Rate
|
|
Income
|
|
|
Equity
|
|
|
Income
|
|
|
Equity
|
|
(Dollars in thousands)
|
|
|
200%
|
|
|
14.78
|
%
|
|
|
(8.78
|
)%
|
|
$
|
22,688
|
|
|
$
|
(38,522
|
)
|
100%
|
|
|
7.37
|
%
|
|
|
(4.66
|
)%
|
|
$
|
11,311
|
|
|
$
|
(20,438
|
)
|
(100)%
|
|
|
(7.42
|
)%
|
|
|
5.14
|
%
|
|
$
|
(11,394
|
)
|
|
$
|
22,565
|
|
(200)%
|
|
|
(14.91
|
)%
|
|
|
10.54
|
%
|
|
$
|
(22,896
|
)
|
|
$
|
46,234
|
|
In the above stress simulation, for a 100 basis point
decline in interest rates, we may be exposed to a
7.42 percent decline in net interest income and a
5.14 percent increase in the economic value of equity. For
a 100 basis point increase in interest rates, net interest
income may increase by 7.37 percent, but the economic value
of equity may decrease by 4.66 percent. For a 200 basis
point increase in interest rates, net interest income may
increase by 14.78 percent, but the economic value of equity
may decrease by 8.78 percent. For a 200 basis point
decrease in
44
interest rates, net interest income may decrease by
14.91 percent, but the economic value of equity may
increase by 10.54 percent. All projected changes remained
well within internal policy guidelines at December 31, 2005.
The estimated sensitivity does not necessarily represent our
forecast and the results may not be indicative of actual change
to our net interest income. These estimates are based upon a
number of assumptions including: the nature and timing of
interest rate levels including yield curve shape, prepayments on
loans and securities, pricing strategies on loans and deposits,
and replacement of asset and liability cash flows. While the
assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of
these conditions, including how customer preferences or
competitor influences might change.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity of the Bank is defined as the ability to supply cash
as quickly as needed without causing a severe deterioration in
profitability. The Banks major liquidity on the asset side
stems from available cash positions, Federal funds sold and
short-term investments categorized as available for sale
securities, which can be disposed of without significant capital
losses in the ordinary business cycle. Liquidity sources on the
liability side come from borrowing capacities, which include
Federal funds lines, repurchase agreements, and Federal Home
Loan Bank advances. Thus, maintenance of high quality loans
and securities that can be used for collateral in repurchase
agreements or other secured borrowings is another important
feature of liquidity management. Liquidity risk may occur when
the Bank has few short-duration securities available for sale
and/or is
not capable of raising funds as quickly as necessary at
acceptable rates in the capital or money markets. In addition, a
heavy and sudden increase in cash demands for loans
and/or
deposits can tighten the liquidity position. Several ratios are
reviewed on a daily, monthly and quarterly basis to manage the
liquidity position and to preempt any liquidity crisis. Six
specific statistics, which include the
loans-to-assets
ratio, off-balance sheet items and dependence on non-core
deposits, foreign deposits, lines of credit and liquid assets,
are reviewed regularly for liquidity management purposes. In
2005, the mix of the deposits portfolio shifted towards time
deposits, and strong growth in certificates of deposit offset a
decline in core deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Liquidity Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments/Total Assets
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Core Deposits/Total Assets
|
|
|
35
|
%
|
|
|
41
|
%
|
|
|
40
|
%
|
Short-Term Non-Core Funding/Total
Assets
|
|
|
42
|
%
|
|
|
33
|
%
|
|
|
45
|
%
|
Short-Term Investments/Short-Term
Non-Core Funding Dependence
|
|
|
18
|
%
|
|
|
23
|
%
|
|
|
20
|
%
|
Net Loans/Total Assets
|
|
|
72
|
%
|
|
|
72
|
%
|
|
|
70
|
%
|
Investments/Deposits
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
30
|
%
|
Loans and Investments/Deposits
|
|
|
106
|
%
|
|
|
109
|
%
|
|
|
116
|
%
|
Off-Balance Sheet Items/Total
Assets
|
|
|
18
|
%
|
|
|
15
|
%
|
|
|
18
|
%
|
The net loans to total assets ratio remained at 72 percent
as of December 31, 2005. Despite fluctuations during the
year, net loans grew at approximately the same rate as assets.
During the year, the ratio of net loans to total assets
generally was in the range of 71 percent to
74 percent. The investments to deposits ratio decreased to
19 percent as of December 31, 2005, while the ratio of
loans and investments to deposits decreased to 106 percent.
Off-balance sheet items as a percentage of total assets
increased at December 31, 2005 to 18 percent from
15 percent at December 31, 2004, and the total amount
increased to $671.4 million at December 31, 2005 from
$479.6 million at December 31, 2004. The increase was
primarily due to a $188.0 million increase in unused loan
commitments. During the year, the percentage of off-balance
sheet items to total assets generally ranged from
15 percent to 18 percent. The ratios of short-term
non-core funding to total assets and short-term investments to
short-term non-core funding dependence were 42 percent and
18 percent, respectively, at December 31, 2005,
compared to 33 percent and 23 percent, respectively,
at December 31, 2004.
Foreign deposit risk deals with dependency on foreign deposits
that could adversely affect the Banks liquidity. These
liabilities are assumed to be volatile in accordance with the
variability of social, political and environmental
45
conditions in foreign countries. On a quarterly basis, the Bank
monitors foreign deposits and Brazilian deposits separately, and
exposures to both categories remained well within the
Banks internal guidelines.
There were increases to the lines of credit secured by us to
meet our liquidity needs. As of December 31, 2005, we
maintained a total of $154.0 million in credit lines. In
addition, we maintained eight master repurchase agreements, all
of which can furnish liquidity to us in consideration of bond
collateral. We also can meet our liquidity needs through
borrowings from the FHLB. We are eligible to borrow up of
25 percent of our total assets from the FHLB.
As of December 31, 2005, there were no material commitments
for capital expenditures. We raise capital in the form of
deposits, borrowings (primarily FHLB advances and junior
subordinated debentures) and equity, and expect to continue to
rely upon deposits as the primary source of capital.
OFF-BALANCE
SHEET ARRANGEMENTS
For a discussion of off-balance sheet arrangements, see
Item 1. Business Small
Business Administration Guaranteed Loans and
Item 1. Business Off-Balance Sheet
Commitments.
CONTRACTUAL
OBLIGATIONS
Our contractual obligations as of December 31, 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
More Than
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
|
|
|
|
|
|
|
|
|
|
and Less
|
|
|
and Less
|
|
|
More
|
|
|
|
|
|
|
Less Than
|
|
|
Than Three
|
|
|
Than Five
|
|
|
Than Five
|
|
|
|
|
Contractual
Obligations
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Time Deposits
|
|
$
|
1,422,981
|
|
|
$
|
8,067
|
|
|
$
|
9,405
|
|
|
$
|
237
|
|
|
$
|
1,440,690
|
|
Long-Term Debt Obligations
|
|
|
5,000
|
|
|
|
20,000
|
|
|
|
13,411
|
|
|
|
87,522
|
|
|
|
125,933
|
|
Operating Lease Obligations
|
|
|
2,570
|
|
|
|
4,376
|
|
|
|
2,415
|
|
|
|
5,484
|
|
|
|
14,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual
Obligations
|
|
$
|
1,430,551
|
|
|
$
|
32,443
|
|
|
$
|
25,231
|
|
|
$
|
93,243
|
|
|
$
|
1,581,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board
(FASB) issued a revision to SFAS No. 123R
(Revised), Share-Based Payment
(SFAS No. 123R). This Statement
addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are
based on the fair value of the companys equity instruments
or that may be settled by the issuance of such equity
instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the
intrinsic method that is currently used and requires that such
transactions be accounted for using a fair value-based method
and recognized as expense in the Consolidated Statement of
Income. This Statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees. In addition, this Statement amends
SFAS No. 95, Statement of Cash Flows,
to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid.
This Statement is effective for Hanmi Financial as of
January 1, 2006.
As a result of the adoption of SFAS No. 123R, we
estimate that we will recognize additional compensation expense
of approximately $894,000, net of taxes, or $.02 per
diluted share, for the full year 2006. Estimated future levels
of compensation expense recognized related to stock based awards
would be impacted by new awards, modifications to awards, or
cancellation of awards after the adoption of
SFAS No. 123R. We have elected to use the modified
prospective method to adopt SFAS No. 123R.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, an
amendment of FASB Statements No. 133 and
SFAS No. 140
(SFAS No. 155). This Statement:
|
|
|
|
|
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation;
|
46
|
|
|
|
|
clarifies which interest-only strips and principal-only strips
are not subject to SFAS No. 133;
|
|
|
|
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or hybrid financial instruments that contain an
embedded derivative requiring bifurcation;
|
|
|
|
clarifies that concentrations of credit risks in the form of
subordinations are not embedded derivatives; and
|
|
|
|
amends SFAS No. 140 to eliminate the prohibition on a
QSPE from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative
financial instrument.
|
SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. Early adoption of this statement is
allowed. We have not determined the financial impact of the
adoption of SFAS No. 155 or whether we will adopt
SFAS No. 155 in 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces Accounting Principles Board
(APB) Opinion No. 20, Accounting
Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial
Statements (an Amendment of APB Opinion
No. 28). SFAS No. 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a
change in accounting principle. SFAS No. 154 provides
guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for
reporting a change when retrospective application is
impracticable. The reporting of a correction of an error by
restating previously issued financial statements is also
addressed by SFAS No. 154. SFAS No. 154 is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 31, 2005. We will
adopt this pronouncement beginning in fiscal year 2006.
SFAS No. 154 is not expected to have a material impact
on our financial position or results of operations.
In March 2004, the FASB issued Emerging Issues Task Force
(EITF) Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF
No. 03-1).
This EITF describes a model involving three steps:
(1) determine whether an investment is impaired;
(2) determine whether the impairment is
other-than-temporary;
and (3) recognize any impairment loss in earnings. The EITF
also requires several additional disclosures for cost-method
investments. In September 2004, the FASB approved the deferral
of the effective date for EITF
No. 03-1
pending reconsideration of implementation guidance relating to
debt securities that are impaired solely due to market interest
rate fluctuation.
On November 3, 2005, FASB Staff Position (FSP)
FAS Nos. 115-1 and
124-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
was issued. This FSP nullifies certain requirements of EITF
No. 03-1
and supersedes EITF Topic
No. D-44,
Recognition of
Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. This FSP nullified the
requirements of paragraphs 10 to 18 of EITF
No. 03-1,
carried forward the requirements of paragraph 8 and 9 of
EITF
No. 03-1
with respect to cost-method investments, and carried forward the
disclosure requirements included in paragraphs 21 and 22 of
EITF
No. 03-1
and related examples. The guidance in this FSP is applicable to
reporting periods beginning after December 15, 2005.
Adoption is not expected to have a material impact on our
financial position, results of operations or related disclosures.
In December 2003, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position
03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer
(SOP 03-3).
SOP 03-3
addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to
credit quality.
SOP 03-3
is effective for loans acquired in fiscal years beginning after
December 15, 2004. Adoption in 2005 did not have a material
impact on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153,
Exchange of Non-Monetary Assets, an Amendment of APB
Opinion No. 29, Accounting for Non-Monetary
Transactions
(SFAS No. 153). SFAS No. 153
is based on the principle that exchange of non-monetary assets
should be measured based on the fair market value of the assets
exchanged. SFAS No. 153 eliminates the exception for
non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance.
47
SFAS No. 153 is effective for non-monetary asset
exchanges in fiscal periods beginning after June 15, 2005.
We are currently assessing the provisions of
SFAS No. 153 and its impact on our financial position
and results of operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
For quantitative and qualitative disclosures regarding market
risks in Hanmi Banks portfolio, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Interest Rate Risk
Management and Liquidity and Capital
Resources.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements required to be filed as a part of this
Report are set forth on pages 50 through 81.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
As of December 31, 2005, Hanmi Financial carried out an
evaluation, under the supervision and with the participation of
Hanmi Financials management, including Hanmi
Financials Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
Hanmi Financials disclosure controls and procedures and
internal controls over financial reporting pursuant to
Securities and Exchange Commission (SEC) rules.
Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that:
|
|
|
|
|
Hanmi Financials disclosure controls and procedures were
effective as of the end of the period covered by this report in
timely alerting them to material information relating to Hanmi
Financial that is required to be included in Hanmi
Financials periodic SEC filings; and
|
|
|
|
Hanmi Financials internal controls over financial
reporting provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles.
|
During the quarter ended December 31, 2005, there have been
no significant changes in Hanmi Financials internal
controls over financial reporting or in other factors that could
significantly affect these controls subsequent to the evaluation
date.
Disclosure controls and procedures are defined in SEC rules as
controls and other procedures designed to ensure that
information required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Hanmi
Financials disclosure controls and procedures were
designed to ensure that material information related to Hanmi
Financial, including subsidiaries, is made known to management,
including the Chief Executive Officer and Chief Financial
Officer, in a timely manner.
Managements
Report on Internal Control Over Financial Reporting
Management of Hanmi Financial Corporation (Hanmi
Financial) is responsible for establishing and maintaining
adequate internal control over financial reporting pursuant to
the rules and regulations of the Securities and Exchange
Commission. Hanmi Financials internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial
reporting includes those written policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company;
|
48
|
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles;
|
|
|
|
provide reasonable assurance that receipts and expenditures of
the company are being made only in accordance with
authorizations of management and directors of the
company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
consolidated financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Hanmi Financials
internal control over financial reporting as of
December 31, 2005. Management based this assessment on
criteria for effective internal control over financial reporting
described in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included an evaluation
of the design of Hanmi Financials internal control over
financial reporting and testing of the operational effectiveness
of its internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee
of our Board of Directors.
Based on this assessment, management determined that, as of
December 31, 2005, Hanmi Financial maintained effective
internal control over financial reporting.
KPMG LLP, the independent registered public accounting firm that
audited and reported on the consolidated financial statements of
Hanmi Financial, has issued a report on managements
assessment of Hanmi Financials internal control over
financial reporting as of December 31, 2005. The report
expresses unqualified opinions on managements assessment
and on the effectiveness of Hanmi Financials internal
control over financial reporting as of December 31, 2005.
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting included in Item 9A, that Hanmi
Financial Corporation and subsidiary (the Company) maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of The Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of Hanmi
Financial Corporation and subsidiary as of December 31,
2005 and 2004, and the related consolidated statements of
income, changes in shareholders equity and comprehensive
income, and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated
March 15, 2006 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
March 15, 2006
50
ITEM 9B.
OTHER INFORMATION
None.
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Except as hereinafter noted, the information concerning
directors and officers of Hanmi Financial is incorporated by
reference from the sections entitled The Board of
Directors and Executive Officers and
Section 16(a) Beneficial Ownership Reporting
Compliance of Hanmi Financials Definitive Proxy
Statement for the Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the close
of Hanmi Financials fiscal year.
Audit
Committee Financial Expert
M. Christian Mitchell was appointed to the Audit Committee
of the Board of Directors as of April 11, 2004. The Board
has determined that Mr. Mitchell meets the independence
standards required by NASDAQ and is a financial
expert within the meaning of the current rules of the
Securities and Exchange Commission.
Code of
Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to our principal executive officer, principal financial
and accounting officer, controller and other persons performing
similar functions. It will be provided to any stockholder
without charge, upon the written request of that stockholder.
Such requests should be addressed to Justine Roe, General
Counsel, Hanmi Financial Corporation, 3660 Wilshire Boulevard,
Penthouse Suite A, Los Angeles, CA 90010. It is also
available on our website at www.hanmi.com.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information concerning executive compensation is incorporated by
reference from the section entitled Executive
Compensation of Hanmi Financials Definitive Proxy
Statement for the Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the close
of Hanmi Financials fiscal year.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The following table summarizes information as of
December 31, 2005 relating to equity compensation plans of
Hanmi Financial pursuant to which grants of options, restricted
stock awards or other rights to acquire shares may be granted
from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
|
|
|
Equity Compensation Plans Approved
By Security Holders
|
|
|
1,173,712
|
|
|
$
|
10.55
|
|
|
|
3,047,557
|
|
Equity Compensation Plans Not
Approved By Security Holders
|
|
|
838,558
|
(1)
|
|
$
|
12.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Compensation
Plans
|
|
|
2,012,270
|
|
|
$
|
11.45
|
|
|
|
3,047,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Composed of (a) stock options granted to Chief Executive
Officer to purchase 350,000 shares of common stock at an
exercise price of $17.17 per share with vesting in equal
annual installments of 16.66 percent; and (b) stock
warrants issued to affiliates of Castle Creek Financial LLC (for
services rendered in connection with the placement of Hanmi
Financials equity securities) to purchase a total of
488,558 shares of common stock at an exercise price of
$9.50 per share. |
51
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters will
appear under the caption Beneficial Ownership of Principal
Stockholders and Management in Hanmi Financials
Definitive Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Information concerning certain relationships and related
transactions is incorporated by reference from the section
entitled Certain Relationships and Related
Transactions of Hanmi Financials Definitive Proxy
Statement for the Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the close
of Hanmi Financials fiscal year.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information concerning Hanmi Financials principal
accountants fees and services is incorporated by reference
from the section entitled Independent Accountants of
Hanmi Financials Definitive Proxy Statement for the Annual
Meeting of Stockholders, which will be filed with the Commission
within 120 days after the close of Hanmi Financials
fiscal year.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) Financial Statements and Schedules
(1) The Financial Statements required to be filed hereunder
are listed in the Index to Consolidated Financial Statements on
page 53 of this Report.
(2) All Financial Statement Schedules have been omitted as
the required information is inapplicable or has been included in
the Notes to Consolidated Financial Statements.
(3) The Exhibits required to be filed with this Report are
listed in the Exhibit Index included herein at page 89.
52
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
53
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited the accompanying consolidated statements of
financial condition of Hanmi Financial Corporation and
subsidiary as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in
shareholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements
are the responsibility of the Hanmi Financial Corporations
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hanmi Financial Corporation and subsidiary as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Hanmi Financial Corporations internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 15, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 15, 2006
54
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Cash and Due From Banks
|
|
$
|
103,477
|
|
|
$
|
55,164
|
|
Federal Funds Sold and Securities
Purchased Under Agreements to Resell
|
|
|
60,000
|
|
|
|
72,000
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
163,477
|
|
|
|
127,164
|
|
Federal Reserve Bank Stock
|
|
|
12,350
|
|
|
|
12,099
|
|
Federal Home Loan Bank Stock
|
|
|
12,237
|
|
|
|
9,862
|
|
Securities Held to Maturity, at
Amortized Cost (Fair Value: 2005 $1,051;
2004 $1,093)
|
|
|
1,049
|
|
|
|
1,090
|
|
Securities Available for Sale, at
Fair Value
|
|
|
442,863
|
|
|
|
417,883
|
|
Loans Receivable, Net of Allowance
for Loan Losses of $24,963 and $22,702 at December 31, 2005
and 2004, Respectively
|
|
|
2,468,015
|
|
|
|
2,230,992
|
|
Loans Held for Sale, at the Lower
of Cost or Fair Value
|
|
|
1,065
|
|
|
|
3,850
|
|
Customers Liability on
Acceptances
|
|
|
8,432
|
|
|
|
4,579
|
|
Premises and Equipment, Net
|
|
|
20,784
|
|
|
|
19,691
|
|
Accrued Interest Receivable
|
|
|
14,120
|
|
|
|
10,029
|
|
Deferred Income Taxes
|
|
|
9,651
|
|
|
|
5,009
|
|
Servicing Asset
|
|
|
3,910
|
|
|
|
3,846
|
|
Goodwill
|
|
|
209,058
|
|
|
|
209,643
|
|
Core Deposit Intangible
|
|
|
8,691
|
|
|
|
11,476
|
|
Bank-Owned Life Insurance
|
|
|
22,713
|
|
|
|
21,868
|
|
Other Assets
|
|
|
15,837
|
|
|
|
15,107
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,414,252
|
|
|
$
|
3,104,188
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
$
|
738,618
|
|
|
$
|
729,583
|
|
Interest-Bearing:
|
|
|
|
|
|
|
|
|
Savings
|
|
|
121,574
|
|
|
|
153,862
|
|
Money Market Checking
|
|
|
526,171
|
|
|
|
613,662
|
|
Time Deposits of $100,000 or More
|
|
|
1,161,950
|
|
|
|
756,580
|
|
Other Time Deposits
|
|
|
277,801
|
|
|
|
275,120
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
2,826,114
|
|
|
|
2,528,807
|
|
Accrued Interest Payable
|
|
|
11,911
|
|
|
|
7,100
|
|
Acceptances Outstanding
|
|
|
8,432
|
|
|
|
4,579
|
|
Other Borrowed Funds
|
|
|
46,331
|
|
|
|
69,293
|
|
Junior Subordinated Debentures
|
|
|
82,406
|
|
|
|
82,406
|
|
Other Liabilities
|
|
|
12,281
|
|
|
|
12,093
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,987,475
|
|
|
|
2,704,278
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Notes 16 and 17)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common Stock, $.001 Par Value;
Authorized 200,000,000 Shares; 49,821,798 Shares and
49,330,704 Shares Issued at December 31, 2005 and
2004, Respectively
|
|
|
50
|
|
|
|
49
|
|
Additional Paid-In Capital
|
|
|
339,991
|
|
|
|
334,932
|
|
Unearned Compensation
|
|
|
(1,150
|
)
|
|
|
|
|
Accumulated Other Comprehensive
Income (Loss) Unrealized Gain (Loss) on
Securities Available for Sale, Interest-Only Strips and Interest
Rate Swaps, Net of Income Taxes of ($1,671) and $744 at
December 31, 2005 and 2004, Respectively
|
|
|
(4,383
|
)
|
|
|
1,035
|
|
Retained Earnings
|
|
|
112,310
|
|
|
|
63,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446,818
|
|
|
|
399,910
|
|
Less Treasury Stock, at Cost;
1,163,000 Shares and 0 Shares at December 31,
2005 and 2004, Respectively
|
|
|
(20,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders
Equity
|
|
|
426,777
|
|
|
|
399,910
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
3,414,252
|
|
|
$
|
3,104,188
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
55
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fees on Loans
|
|
$
|
179,011
|
|
|
$
|
116,811
|
|
|
$
|
64,505
|
|
Interest on Investments
|
|
|
18,507
|
|
|
|
17,372
|
|
|
|
12,410
|
|
Interest on Term Federal Funds Sold
|
|
|
|
|
|
|
|
|
|
|
225
|
|
Interest on Federal Funds Sold
|
|
|
1,589
|
|
|
|
183
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
199,107
|
|
|
|
134,366
|
|
|
|
77,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Deposits
|
|
|
54,192
|
|
|
|
26,268
|
|
|
|
19,247
|
|
Interest on Borrowings
|
|
|
7,919
|
|
|
|
6,349
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
62,111
|
|
|
|
32,617
|
|
|
|
20,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME BEFORE
PROVISION FOR CREDIT LOSSES
|
|
|
136,996
|
|
|
|
101,749
|
|
|
|
56,621
|
|
Provision for Credit Losses
|
|
|
5,395
|
|
|
|
2,907
|
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES
|
|
|
131,601
|
|
|
|
98,842
|
|
|
|
50,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Charges on Deposit Accounts
|
|
|
15,782
|
|
|
|
14,441
|
|
|
|
10,339
|
|
Trade Finance Fees
|
|
|
4,269
|
|
|
|
4,044
|
|
|
|
2,887
|
|
Remittance Fees
|
|
|
2,122
|
|
|
|
1,653
|
|
|
|
952
|
|
Other Service Charges and Fees
|
|
|
2,496
|
|
|
|
1,486
|
|
|
|
1,219
|
|
Bank-Owned Life Insurance Income
|
|
|
845
|
|
|
|
731
|
|
|
|
499
|
|
Increase in Fair Value of
Derivatives
|
|
|
1,105
|
|
|
|
232
|
|
|
|
35
|
|
Other Income
|
|
|
2,459
|
|
|
|
1,681
|
|
|
|
840
|
|
Gain on Sales of Loans
|
|
|
3,021
|
|
|
|
2,997
|
|
|
|
2,157
|
|
Gain on Sales of Securities
Available for Sale
|
|
|
117
|
|
|
|
134
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income
|
|
|
32,216
|
|
|
|
27,399
|
|
|
|
20,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
|
36,839
|
|
|
|
33,540
|
|
|
|
21,214
|
|
Occupancy and Equipment
|
|
|
8,978
|
|
|
|
8,098
|
|
|
|
5,198
|
|
Data Processing
|
|
|
4,844
|
|
|
|
4,540
|
|
|
|
3,080
|
|
Advertising and Promotion
|
|
|
2,913
|
|
|
|
3,001
|
|
|
|
1,635
|
|
Supplies and Communication
|
|
|
2,556
|
|
|
|
2,433
|
|
|
|
1,496
|
|
Professional Fees
|
|
|
2,201
|
|
|
|
2,068
|
|
|
|
1,167
|
|
Amortization of Core Deposit
Intangible
|
|
|
2,785
|
|
|
|
1,872
|
|
|
|
121
|
|
Decrease in Fair Value of Embedded
Options
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Other Operating Expense
|
|
|
7,778
|
|
|
|
8,961
|
|
|
|
5,414
|
|
Merger-Related Expenses
|
|
|
(509
|
)
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expenses
|
|
|
69,133
|
|
|
|
66,566
|
|
|
|
39,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
94,684
|
|
|
|
59,675
|
|
|
|
31,638
|
|
Income Taxes
|
|
|
36,455
|
|
|
|
22,975
|
|
|
|
12,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
0.87
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
0.84
|
|
|
$
|
0.67
|
|
WEIGHTED-AVERAGE
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,174,885
|
|
|
|
42,268,964
|
|
|
|
28,092,708
|
|
Diluted
|
|
|
49,942,356
|
|
|
|
43,517,257
|
|
|
|
28,662,026
|
|
DIVIDENDS DECLARED PER SHARE
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
See Accompanying Notes to Consolidated Financial Statements.
56
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Number of Shares
|
|
|
Shareholders
Equity
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Issued and
|
|
|
Treasury
|
|
|
Issued and
|
|
|
Common
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stock,
|
|
|
Shareholders
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Earnings
|
|
|
at Cost
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
BALANCE DECEMBER 31,
2002
|
|
|
27,830,866
|
|
|
|
|
|
|
|
27,830,866
|
|
|
$
|
28
|
|
|
$
|
99,927
|
|
|
$
|
|
|
|
$
|
2,105
|
|
|
$
|
22,408
|
|
|
$
|
|
|
|
$
|
124,468
|
|
Stock Options Exercised
|
|
|
495,954
|
|
|
|
|
|
|
|
495,954
|
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,141
|
|
Cash Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,636
|
)
|
|
|
|
|
|
|
(5,636
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,213
|
|
|
|
|
|
|
|
19,213
|
|
Change in Unrealized Gain on
Securities Available for Sale, Interest-Only Strips and Interest
Rate Swaps, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,719
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31,
2003
|
|
|
28,326,820
|
|
|
|
|
|
|
|
28,326,820
|
|
|
|
28
|
|
|
|
103,068
|
|
|
|
|
|
|
|
386
|
|
|
|
35,985
|
|
|
|
|
|
|
|
139,467
|
|
Stock Options Exercised
|
|
|
670,576
|
|
|
|
|
|
|
|
670,576
|
|
|
|
1
|
|
|
|
3,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,235
|
|
Warrants Exercised
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Stock Issued Through Private
Placement
|
|
|
7,894,654
|
|
|
|
|
|
|
|
7,894,654
|
|
|
|
8
|
|
|
|
71,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,710
|
|
Stock Issued in PUB Acquisition
|
|
|
12,418,654
|
|
|
|
|
|
|
|
12,418,654
|
|
|
|
12
|
|
|
|
156,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,750
|
|
Cash Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,791
|
)
|
|
|
|
|
|
|
(8,791
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,700
|
|
|
|
|
|
|
|
36,700
|
|
Change in Unrealized Gain on
Securities Available for Sale, Interest-Only Strips and Interest
Rate Swaps, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31,
2004
|
|
|
49,330,704
|
|
|
|
|
|
|
|
49,330,704
|
|
|
|
49
|
|
|
|
334,932
|
|
|
|
|
|
|
|
1,035
|
|
|
|
63,894
|
|
|
|
|
|
|
|
399,910
|
|
Stock Options Exercised
|
|
|
391,094
|
|
|
|
|
|
|
|
391,094
|
|
|
|
1
|
|
|
|
2,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,516
|
|
Restricted Stock Award
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
1,815
|
|
|
|
(1,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Unearned
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
Tax Benefit from Exercise of Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
Stock Repurchase
|
|
|
|
|
|
|
(1,163,000
|
)
|
|
|
(1,163,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,041
|
)
|
|
|
(20,041
|
)
|
Cash Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,813
|
)
|
|
|
|
|
|
|
(9,813
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,229
|
|
|
|
|
|
|
|
58,229
|
|
Change in Unrealized Gain on
Securities Available for Sale, Interest-Only Strips and Interest
Rate Swaps, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,418
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31,
2005
|
|
|
49,821,798
|
|
|
|
(1,163,000
|
)
|
|
|
48,658,798
|
|
|
$
|
50
|
|
|
$
|
339,991
|
|
|
$
|
(1,150
|
)
|
|
$
|
(4,383
|
)
|
|
$
|
112,310
|
|
|
$
|
(20,041
|
)
|
|
$
|
426,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
57
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
Years Ended December 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
Adjustments to Reconcile Net Income
to Net Cash and Cash Equivalents Provided By Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization of
Premises and Equipment
|
|
|
2,704
|
|
|
|
2,447
|
|
|
|
1,558
|
|
Amortization of Premiums and
Discounts on Investments
|
|
|
565
|
|
|
|
3,246
|
|
|
|
121
|
|
Amortization of Core Deposit
Intangible
|
|
|
2,785
|
|
|
|
1,872
|
|
|
|
212
|
|
Amortization of Unearned
Compensation
|
|
|
665
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
5,395
|
|
|
|
2,907
|
|
|
|
5,680
|
|
Federal Reserve Bank and Federal
Home Loan Bank Stock Dividends
|
|
|
(362
|
)
|
|
|
(497
|
)
|
|
|
(107
|
)
|
Gain on Sales of Securities
Available for Sale
|
|
|
(117
|
)
|
|
|
(134
|
)
|
|
|
(1,094
|
)
|
Increase in Fair Value of
Derivatives
|
|
|
(1,105
|
)
|
|
|
(232
|
)
|
|
|
(35
|
)
|
Decrease in Fair Value of Embedded
Options
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Gain on Sales of Loans
|
|
|
(3,021
|
)
|
|
|
(2,997
|
)
|
|
|
(2,157
|
)
|
Gain on Sales of Other Real Estate
Owned
|
|
|
|
|
|
|
|
|
|
|
(82
|
)
|
Loss on Sales of Premises and
Equipment
|
|
|
34
|
|
|
|
15
|
|
|
|
67
|
|
Tax Benefit from Exercise of Stock
Options
|
|
|
729
|
|
|
|
|
|
|
|
|
|
Deferred Tax (Benefit) Expense
|
|
|
(2,707
|
)
|
|
|
694
|
|
|
|
(2,069
|
)
|
Origination of Loans Held for Sale
|
|
|
(61,709
|
)
|
|
|
(53,855
|
)
|
|
|
(45,858
|
)
|
Proceeds from Sales of Loans Held
for Sale
|
|
|
67,515
|
|
|
|
54,311
|
|
|
|
35,100
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) Decrease in Accrued
Interest Receivable
|
|
|
(4,091
|
)
|
|
|
155
|
|
|
|
(1,153
|
)
|
Increase in Cash Surrender Value of
Bank-Owned Life Insurance
|
|
|
(845
|
)
|
|
|
(731
|
)
|
|
|
(500
|
)
|
(Increase) Decrease in Other Assets
|
|
|
(5,347
|
)
|
|
|
7,028
|
|
|
|
(1,832
|
)
|
Increase (Decrease) in Accrued
Interest Payable
|
|
|
4,811
|
|
|
|
(444
|
)
|
|
|
1,018
|
|
Increase (Decrease) in Other
Liabilities
|
|
|
4,068
|
|
|
|
(12,751
|
)
|
|
|
5,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents
Provided By Operating Activities
|
|
|
68,944
|
|
|
|
37,734
|
|
|
|
13,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Matured Term Federal
Funds Sold
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Proceeds from Sales of Federal Home
Loan Bank Stock
|
|
|
|
|
|
|
5,031
|
|
|
|
|
|
Proceeds from Matured or Called
Securities Available for Sale
|
|
|
89,885
|
|
|
|
120,389
|
|
|
|
170,346
|
|
Proceeds from Matured or Called
Securities Held to Maturity
|
|
|
|
|
|
|
239
|
|
|
|
6,214
|
|
Proceeds from Sales of Securities
Available for Sale
|
|
|
11,360
|
|
|
|
53,063
|
|
|
|
45,051
|
|
Proceeds from Sales of Other Real
Estate Owned
|
|
|
|
|
|
|
|
|
|
|
204
|
|
Net Increase in Loans Receivable
|
|
|
(242,088
|
)
|
|
|
(120,651
|
)
|
|
|
(265,641
|
)
|
Purchases of Federal Reserve Bank
and Federal Home Loan Bank Stock
|
|
|
(2,264
|
)
|
|
|
(9,884
|
)
|
|
|
(5,669
|
)
|
Purchases of Securities Available
for Sale
|
|
|
(132,700
|
)
|
|
|
(22,384
|
)
|
|
|
(358,218
|
)
|
Purchases of Bank-Owned Life
Insurance
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
Purchases of Premises and Equipment
|
|
|
(3,831
|
)
|
|
|
(2,049
|
)
|
|
|
(2,031
|
)
|
Acquisition of Pacific Union Bank,
Net of Cash Acquired
|
|
|
|
|
|
|
(63,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents
Used In Investing Activities
|
|
|
(279,638
|
)
|
|
|
(49,744
|
)
|
|
|
(379,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Deposits
|
|
|
297,307
|
|
|
|
146,273
|
|
|
|
161,856
|
|
Issuance of Junior Subordinated
Debentures
|
|
|
|
|
|
|
82,406
|
|
|
|
|
|
Proceeds from Exercises of Stock
Options
|
|
|
2,516
|
|
|
|
3,235
|
|
|
|
3,141
|
|
Proceeds from Exercises of Stock
Warrants
|
|
|
|
|
|
|
190
|
|
|
|
|
|
Stock Issued Through Private
Placement
|
|
|
|
|
|
|
71,710
|
|
|
|
|
|
Cash Paid to Acquire Treasury Stock
|
|
|
(20,041
|
)
|
|
|
|
|
|
|
|
|
Cash Dividends Paid
|
|
|
(9,813
|
)
|
|
|
(7,740
|
)
|
|
|
(4,220
|
)
|
(Decrease) Increase in Other
Borrowed Funds
|
|
|
(22,962
|
)
|
|
|
(219,495
|
)
|
|
|
145,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash and Cash Equivalents
Provided By Financing Activities
|
|
|
247,007
|
|
|
|
76,579
|
|
|
|
305,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
|
|
36,313
|
|
|
|
64,569
|
|
|
|
(60,177
|
)
|
Cash and Cash
Equivalents Beginning of Year
|
|
|
127,164
|
|
|
|
62,595
|
|
|
|
122,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS END
OF YEAR
|
|
$
|
163,477
|
|
|
$
|
127,164
|
|
|
$
|
62,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash
Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
41,266
|
|
|
$
|
29,920
|
|
|
$
|
19,778
|
|
Income Taxes Paid
|
|
$
|
37,650
|
|
|
$
|
25,400
|
|
|
$
|
9,469
|
|
Supplemental Schedule of
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of Loans to Other Real
Estate Owned
|
|
$
|
|
|
|
$
|
|
|
|
$
|
122
|
|
Accrued Dividend
|
|
$
|
2,433
|
|
|
$
|
2,467
|
|
|
$
|
1,416
|
|
Reconciliation of Acquisition of
Pacific Union Bank, Net of Cash Acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Assets Acquired
|
|
|
|
|
|
$
|
1,383,782
|
|
|
|
|
|
Cash and Cash Equivalents Acquired
|
|
|
|
|
|
|
(104,383
|
)
|
|
|
|
|
Non-Cash Financing of Purchase
Price and Liabilities Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
(156,750
|
)
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
|
|
(1,059,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Pacific Union
Bank, Net of Cash Acquired
|
|
|
|
|
|
$
|
63,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
58
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Hanmi Financial
Corporation and subsidiary conform to accounting principles
generally accepted in the United States of America and to
prevailing practices within the banking industry. A summary of
the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial
statements follows.
Principles of Consolidation The
consolidated financial statements include the accounts of Hanmi
Financial Corporation (Hanmi Financial,
we or us) and our wholly owned
subsidiary, Hanmi Bank (the Bank), after elimination
of all material intercompany transactions and balances.
Hanmi Financial was formed as a holding company of the Bank and
registered with the Securities and Exchange Commission under the
Securities Act of 1933 on March 17, 2001. Subsequent to our
formation, each of the Banks shares was exchanged for one
share of Hanmi Financial with an equal value.
Our primary operations are related to traditional banking
activities, including the acceptance of deposits and the lending
and investing of money through operation of the Bank. The Bank
is a community bank conducting general business banking with its
primary market encompassing the multi-ethnic population of Los
Angeles, Orange, San Diego, San Francisco and
Santa Clara counties. The Banks full-service offices
are located in business areas where many of the businesses are
run by immigrants and other minority groups. The Banks
client base reflects the multi-ethnic composition of these
communities. The Bank is a California state-chartered,
FDIC-insured financial institution.
On April 30, 2004, we completed our acquisition of Pacific
Union Bank (PUB), a $1.2 billion (assets)
commercial bank headquartered in Los Angeles that also served
primarily the
Korean-American
community. As of December 31, 2005, the Bank maintained a
branch network of 22 locations, serving individuals and small-
to medium-sized businesses in Los Angeles and surrounding areas.
Cash and Cash Equivalents Cash
and cash equivalents include cash and due from banks, Federal
funds sold and securities purchased under resale agreements, all
of which have maturities of less than 90 days.
Federal Reserve Bank Stock As a
member of the Federal Reserve Bank of San Francisco
(FRB), the Bank is required to maintain stock in the
FRB based on a specified ratio relative to our capital. FRB
stock is carried at cost and may be sold back to the FRB at its
carrying value. Both cash and stock dividends received are
reported as dividend income.
Federal Home Loan Bank
Stock As a member of the Federal Home
Loan Bank of San Francisco (FHLB), the
Bank is required to own common stock in the FHLB based upon our
balance of residential mortgage loans and outstanding FHLB
advances. FHLB stock is carried at cost and may be sold back to
the FHLB at its carrying value. Both cash and stock dividends
received are reported as dividend income.
Securities Securities are
classified into three categories and accounted for as follows:
1. Securities that we have the positive intent and ability
to hold to maturity are classified as
held-to-maturity
and reported at amortized cost;
2. Securities that are bought and held principally for the
purpose of selling them in the near future are classified as
trading securities and reported at fair value.
Unrealized gains and losses are recognized in earnings; and
3. Securities not classified as
held-to-maturity
or trading securities are classified as available for
sale and reported at fair value. Unrealized gains and
losses are reported as a separate component of
shareholders equity as Accumulated Other Comprehensive
Income, Net of Income Taxes.
59
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accreted discounts and amortized premiums on investment
securities are included in interest income using the effective
interest method over the remaining period to the call date or
contractual maturity and, in the case of mortgage-backed
securities and securities with call features, adjusted for
anticipated prepayments. Unrealized and realized gains or losses
related to holding or selling of securities are calculated using
the specific-identification method. To the extent there is an
impairment of value deemed other than temporary for a security
held to maturity or available for sale, a loss is recognized in
earnings and a new cost basis established for the security.
We also have a minority investment of 4.99 percent in a
non-publicly traded company, Pacific International Bank. The
investment is included in Other Assets on the Consolidated
Statements of Financial Condition and is carried at cost. As of
December 31, 2005 and 2004, the carrying value was
$511,000. We monitor the investment for impairment and makes
appropriate reductions in carrying value when necessary.
Derivative Instruments We account
for derivatives in accordance with the provisions of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133). Under
SFAS No. 133, all derivatives are recognized on the
balance sheet at their fair value. On the date the derivative
contract is entered into, we designate the derivative as a fair
value hedge, a cash flow hedge, a hedge of a net investment in a
foreign operation, or a non-hedging derivative. Fair value
hedges include hedges of the fair value of a recognized asset or
liability and certain foreign currency hedges. Cash flow hedges
include hedges of the variability of cash flows to be received
or paid related to a recognized asset or liability and certain
foreign currency hedges. Changes in the fair value of
derivatives designated as fair value hedges, along with the
change in fair value on the hedged asset or liability that is
attributable to the hedged risk, are recorded in current period
earnings. Changes in the fair value of derivatives designated as
cash flow hedges, to the extent effective as a hedge, are
recorded in accumulated other comprehensive income and
reclassified into earnings in the period during which the hedged
item affects earnings. Changes in the fair value of derivatives
used to hedge our net investment in foreign subsidiaries, to the
extent effective as a hedge, are recorded in common
shareholders equity as a component of the cumulative
translation adjustment account within accumulated other
comprehensive income. Changes in the fair value of derivative
instruments not designated as hedging instruments and
ineffective portions of changes in the fair value of hedging
instruments are recognized in other income in the current period.
We formally document all relationships between hedging
instruments and hedged items. This documentation includes our
risk management objective and strategy for undertaking various
hedge transactions, as well as how hedge effectiveness and
ineffectiveness will be measured. This process includes linking
derivatives to specific assets and liabilities on the balance
sheet. We also formally assess, both at the hedges
inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge,
we discontinue hedge accounting prospectively.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective hedge,
the derivative will continue to be carried on the balance sheet
at its fair value, with changes in its fair value recognized in
current period earnings. For fair value hedges, the formerly
hedged asset or liability will no longer be adjusted for changes
in fair value and any previously recorded adjustments to the
carrying value of the hedged asset or liability will be
amortized in the same manner that the hedged item affects
income. For cash flow hedges, amounts previously recorded in
Accumulated Other Comprehensive Income will be reclassified into
income as earnings are impacted by the variability in the cash
flows of the hedged item.
If the hedging instrument is terminated early, the derivative is
removed from the balance sheet. Accounting for the adjustments
to the hedged asset or liability or adjustments to Accumulated
Other Comprehensive Income are the same as described above when
a derivative no longer qualifies as an effective hedge.
If the hedged asset or liability is sold or extinguished, the
derivative will continue to be carried on the balance sheet at
its fair value, with changes in its fair value recognized in
current period earnings. The hedged item,
60
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including previously recorded
mark-to-market
adjustments, is derecognized immediately as a component of the
gain or loss upon disposition.
Loans We originate loans for
investment, with such designation made at the time of
origination. Loans are recorded at the contractual amounts due
from borrowers, adjusted for unamortized discounts and premiums,
undisbursed funds, net deferred loan fees and origination costs,
and the allowance for loan losses.
Certain Small Business Administration (SBA) loans
that may be sold prior to maturity have been designated as held
for sale at origination and are recorded at the lower of cost or
fair value, determined on an aggregate basis. A valuation
allowance is established if the market value of such loans is
lower than their cost, and operations are charged or credited
for valuation adjustments. Upon sales of such loans, we receive
a fee for servicing the loans. The servicing asset is recorded
based on the present value of the contractually specified
servicing fee, net of adequate compensation, for the estimated
life of the loan, discounted by a rate in the range of
11 percent to 12 percent and a constant prepayment
rate ranging from 6 percent to 16 percent. The
servicing asset is amortized in proportion to and over the
period of estimated servicing income. Management periodically
evaluates the servicing asset for impairment. Impairment, if it
occurs, is recognized in a valuation allowance in the period of
impairment.
Interest-only strips are recorded based on the present value of
the excess of total servicing fee over the contractually
specified servicing fee for the estimated life of the loan,
calculated using the same assumptions as noted above. Such
interest-only strips are accounted for at their estimated fair
value, with unrealized gains or losses recorded as adjustments
to Other Comprehensive Income.
Loans Held for Sale Loans
originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through
a valuation allowance by charges to income.
Loan Interest Income and
Fees Interest on loans is credited to
income as earned and is accrued only if deemed collectible.
Direct loan origination costs are offset by loan origination
fees with the net amount deferred and recognized over the
contractual lives of the loans in interest income as a yield
adjustment using the effective interest method. Discounts or
premiums associated with purchased loans are accreted or
amortized to interest income using the interest method over the
contractual lives of the loans, adjusted for prepayments.
Accretion of discounts and deferred loan fees is discontinued
when loans are placed on non-accrual status.
Loans are placed on non-accrual status when, in the opinion of
management, the full timely collection of principal or interest
is in doubt. Generally, the accrual of interest is discontinued
when principal or interest payments become more than
90 days past due. However, in certain instances, we may
place a particular loan on non-accrual status earlier, depending
upon the individual circumstances surrounding the loans
delinquency. When an asset is placed on non-accrual status,
previously accrued but unpaid interest is reversed against
current income. Subsequent collections of cash are applied as
principal reductions when received, except when the ultimate
collectibility of principal is probable, in which case interest
payments are credited to income. Non-accrual assets may be
restored to accrual status when principal and interest become
current and full repayment is expected. Interest income is
recognized on the accrual basis for impaired loans not meeting
the criteria for non-accrual.
Allowance for Loan
Losses Management believes the
allowance for loan losses is adequate to provide for probable
losses inherent in the loan portfolio. However, the allowance is
an estimate that is inherently uncertain and depends on the
outcome of future events. Managements estimates are based
on previous loan loss experience; volume, growth and composition
of the loan portfolio; the value of collateral; and current
economic conditions. Our lending is concentrated in consumer,
commercial, construction and real estate loans in the greater
Los Angeles/Orange County area. Although management believes the
level of the allowance is adequate to absorb probable losses
inherent in the loan portfolio, a decline in the local economy
may result in increasing losses that cannot reasonably be
predicted at this date.
61
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-performing loans are those that are not earning income, and
(1) full payment of principal and interest is no longer
anticipated, (2) principal or interest is 90 days or
more delinquent, or (3) the loan payment or term has been
restructured in accordance with troubled debt restructure
procedures. The Bank generally places loans on non-accrual
status when interest or principal payments become 90 days
or more past due unless the outstanding principal and interest
is adequately secured and, in the opinion of management, is
deemed to be in the process of collection. When loans are placed
on non-accrual status, accrued but unpaid interest is reversed
against the current years income, and interest income on
non-accrual loans is recorded on a cash basis. The Bank may
treat payments as interest income or return of principal
depending upon managements opinion of the ultimate risk of
loss on the individual loan. Cash payments are treated as
interest income where management believes the remaining
principal balance is fully collectible. Additionally, the Bank
may place loans that are not 90 days past due on
non-accrual status, if management reasonably believes the
borrower will not be able to comply with the contractual loan
repayment terms and collection of principal or interest is in
question.
Loan losses are charged, and recoveries are credited, to the
allowance account. Additions to the allowance account are
charged to the provision for credit losses. The allowance for
loan losses is maintained at a level considered adequate by
management to absorb probable losses in the loan portfolio. The
adequacy of the allowance is determined by management based upon
an evaluation and review of the loan portfolio, consideration of
historical loan loss experience, current economic conditions,
changes in the composition of the loan portfolio, analysis of
collateral values and other pertinent factors.
Loans are measured for impairment when it is probable that all
amounts, including principal and interest, will not be collected
in accordance with the contractual terms of the loan agreement.
The amount of impairment and any subsequent changes are recorded
through the provision for credit losses as an adjustment to the
allowance for loan losses. Accounting standards require that an
impaired loan be measured based on:
1. the present value of the expected future cash flows,
discounted at the loans effective interest rate; or
2. the loans observable fair value; or
3. the fair value of the collateral, if the loan is
collateral-dependent.
We evaluate installment loans for impairment on a pooled basis.
These loans are considered to be smaller balance, homogeneous
loans and are evaluated on a portfolio basis considering the
projected net realizable value of the portfolio compared to the
net carrying value of the portfolio.
Hanmi Bank follows the Interagency Policy Statement on
the Allowance for Loan and Lease Losses and analyzes
the allowance for loan losses on a monthly basis. In addition,
as an integral part of the quarterly credit review process of
the Bank, the allowance for loan losses and allowance for
off-balance sheet items are reviewed for adequacy. The
California Department of Financial Institutions
(DFI) and/or the FRB require the Bank to recognize
additions to the allowance for loan losses based upon their
assessment of the information available to them at the time of
their examinations.
Premises and Equipment Premises
and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation on furniture, fixtures and
equipment is computed on the straight-line method over the
estimated useful lives of the related assets, which range from
three to 30 years. Leasehold improvements are capitalized
and amortized using the straight-line method over the term of
the lease or the estimated useful lives of the improvements,
whichever is shorter.
Goodwill Goodwill, which
represents the excess of purchase price over fair value of net
assets acquired, amounted to $209.1 million and
$209.6 million as of December 31, 2005 and 2004,
respectively. We adopted SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), effective
January 1, 2002. SFAS No. 142 required that
goodwill be recorded at the reporting unit level. Reporting
units are defined as an operating segment. We have identified
one reporting unit our banking operations.
SFAS No. 142 prohibits the amortization of goodwill,
but requires that it be tested for impairment at least annually,
or earlier if events have
62
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occurred that might indicate impairment. We ceased amortization
of goodwill as of January 1, 2002. Our impairment test is
performed in two phases. The first step involves comparing the
fair value of the reporting unit with its carrying amount,
including goodwill. Fair value of the reporting unit is
estimated using two different valuation techniques:
(a) discounted earnings cash flow and (b) average
market price to earnings multiple using a management selected
peer group. If the fair value of the reporting unit exceeds its
fair value, an additional procedure must be performed. This
additional procedure involves comparing the implied fair value
of the reporting unit goodwill with the carrying amount of that
goodwill. An impairment loss is recorded through earnings to the
extent the carrying amount of goodwill exceeds its implied fair
value. As of December 31, 2005 and 2004, management is
unaware of any circumstances that would indicate a potential
impairment of goodwill.
Core Deposit Intangible We
amortize the core deposit intangible (CDI) balance
using an accelerated method over eight years. As required upon
adoption of SFAS No. 142, we evaluated the useful
lives assigned to the CDI assets and determined that no change
was necessary and amortization expense was not adjusted for the
year ended December 31, 2005. As required by
SFAS No. 142, the CDI balance is assessed for
impairment or recoverability whenever events or changes in
circumstances indicate the carrying amount may not be
recoverable. The CDI recoverability analysis is consistent with
our policy for assessing impairment of long-lived assets. As of
and for the year ended December 31, 2005 and 2004,
management is not aware of any circumstances that would indicate
impairment of the CDI asset, and no impairment charges were
recorded through earnings in 2005.
As of December 31, 2005 and 2004, the gross carrying amount
of the CDI balance totaled $13.8 million and
$13.8 million, respectively, and the related accumulated
amortization totaled $5.1 million and $2.3 million,
respectively. The total amortization expense on the CDI balance
was $2,785,000, $1,872,000 and $121,000 during the years ended
December 31, 2005, 2004 and 2003, respectively.
Estimated future amortization expense of the CDI balance is as
follows: $2,379,000 in 2006; $2,039,000 in 2007; $1,675,000 in
2008; $1,284,000 in 2009; $865,000 in 2010; and $450,000
thereafter.
Junior Subordinated Debentures We
have established three statutory business trusts that are wholly
owned subsidiaries of Hanmi Financial. In three separate private
placement transactions, the Trusts issued variable rate capital
securities representing undivided preferred beneficial interests
in the assets of the Trusts. Hanmi Financial is the owner of all
the beneficial interests represented by the common securities of
the Trusts.
FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities (Revised December
2003) an Interpretation of ARB
No. 51, requires that variable interest entities
be consolidated by a company if that company is subject to a
majority of expected loss from the variable interest
entitys activities or is entitled to receive a majority of
the entitys expected residual returns or both. Junior
subordinated debt represents liabilities of the Hanmi Financial
to the Trusts.
Income Taxes We provide for
income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred
tax assets will not be realized.
Stock-Based Compensation Our
employee stock-based compensation arrangements are measured
under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation cost for stock
options and restricted stock awards is measured as the excess,
if any, of the quoted market price of our stock at the date of
grant over the exercise price an employee must pay to acquire
the stock. No compensation expense has been recognized for the
stock option plan, as stock options were granted at fair value
at the date of grant. Had compensation expense for the stock
option plan been determined based on the fair
63
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
values estimated using the Black-Scholes model at the grant
dates for previous awards, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Net Income As
Reported
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
Add Stock-Based
Employee Compensation Expense Included
|
|
|
|
|
|
|
|
|
|
|
|
|
in Reported Net Income, Net of
Related Tax Effects (Restricted Stock Award)
|
|
|
409
|
|
|
|
|
|
|
|
|
|
Deduct Total
Stock-Based Employee Compensation Expense Determined Under Fair
Value-Based Method for All Awards Subject to
SFAS No. 123, Net of Related Tax Effects
|
|
|
(1,214
|
)
|
|
|
(408
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Pro
Forma
|
|
$
|
57,424
|
|
|
$
|
36,292
|
|
|
$
|
18,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share As Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
0.87
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
0.84
|
|
|
$
|
0.67
|
|
Earnings Per
Share Pro Forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.17
|
|
|
$
|
0.86
|
|
|
$
|
0.67
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.83
|
|
|
$
|
0.65
|
|
The estimated weighted-average fair value of options granted was
$4.96 per share in 2005, $3.94 per share in 2004 and
$3.30 per share in 2003. The weighted-average fair value of
options granted under our fixed stock option plan was estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend
yield of 1.18 percent, 1.40 percent and
0.00 percent in 2005, 2004 and 2003, respectively; expected
volatility of 32.6 percent, 32.4 percent and
31.0 percent in 2005, 2004 and 2003; respectively; expected
lives of 4.1 years, 4.2 years and 4.5 years in
2005, 2004 and 2003, respectively; and risk-free interest rates
of 4.13 percent, 2.90 percent and 1.87 percent in
2005, 2004 and 2003, respectively.
In February 2005, 100,000 shares of restricted stock were
awarded to Dr. Sung Won Sohn, our Chief Executive Officer.
20,000 of these shares vested immediately, and an additional
20,000 shares will vest each year over the next four years
on each anniversary date of the grant. The market value of the
shares awarded totaled $1,815,000. The 20,000 shares that
vested immediately were recorded as compensation expense and the
remaining 80,000 shares were recorded as unearned
compensation, a separate component of shareholders equity.
Unearned compensation is being amortized against income over the
four-year vesting period. For the year ended December 31,
2005, compensation expense of $665,000 was recognized in the
Consolidated Statements of Income.
Earnings Per Share Basic earnings
per share (EPS) is computed by dividing earnings
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share
in the earnings.
Treasury Stock We use the cost
method of accounting for treasury stock. The cost method
requires us to record the reacquisition cost of treasury stock
as a deduction from shareholders equity on the
Consolidated Statements of Financial Condition.
Impairment of Long-Lived
Assets We account for long-lived assets
in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by
64
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
Use of Estimates in the Preparation of Financial
Statements The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recently Issued Accounting
Standards In December 2004, the
Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 123R (Revised),
Share-Based Payment
(SFAS No. 123R). This Statement
addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are
based on the fair value of the companys equity instruments
or that may be settled by the issuance of such equity
instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the
intrinsic method that is currently used and requires that such
transactions be accounted for using a fair value-based method
and recognized as expense in the Consolidated Statement of
Income. This Statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees. In addition, this Statement amends
SFAS No. 95, Statement of Cash Flows,
to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid.
This Statement is effective for Hanmi Financial as of
January 1, 2006. We have elected to use the modified
prospective method to adopt SFAS No. 123R.
As a result of the adoption of SFAS No. 123R, we
estimate that we will recognize additional compensation expense
of approximately $894,000, net of taxes, or $.02 per
diluted share, for the full year 2006. Estimated future levels
of compensation expense recognized related to stock based awards
would be impacted by new awards, modifications to awards, or
cancellation of awards after the adoption of
SFAS No. 123R.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, an
amendment of FASB Statements No. 133 and
SFAS No. 140
(SFAS No. 155). This Statement:
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|
|
|
|
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation;
|
|
|
|
clarifies which interest-only strips and principal-only strips
are not subject to SFAS No. 133;
|
|
|
|
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or hybrid financial instruments that contain an
embedded derivative requiring bifurcation;
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|
|
clarifies that concentrations of credit risks in the form of
subordinations are not embedded derivatives; and
|
|
|
|
amends SFAS No. 140 to eliminate the prohibition on a
QSPE from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative
financial instrument.
|
SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. Early adoption of this statement is
allowed. We have not determined the financial impact of the
adoption of SFAS No. 155 or whether we will adopt
SFAS No. 155 in 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces Accounting Principles Board
(APB) Opinion No. 20, Accounting
Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial
Statements (an Amendment of APB Opinion
No. 28). SFAS No. 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a
change in accounting principle. SFAS No. 154 provides
guidance for determining whether retrospective application of a
change in accounting
65
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
principle is impracticable and for reporting a change when
retrospective application is impracticable. The reporting of a
correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 31, 2005. We will adopt this pronouncement
beginning in fiscal year 2006. SFAS No. 154 is not
expected to have a material impact on our financial position or
results of operations.
In March 2004, the FASB issued Emerging Issues Task Force
(EITF) Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF
No. 03-1).
This EITF describes a model involving three steps:
(1) determine whether an investment is impaired;
(2) determine whether the impairment is
other-than-temporary;
and (3) recognize any impairment loss in earnings. The EITF
also requires several additional disclosures for cost-method
investments. In September 2004, the FASB approved the deferral
of the effective date for EITF
No. 03-1
pending reconsideration of implementation guidance relating to
debt securities that are impaired solely due to market interest
rate fluctuation.
On November 3, 2005, FASB Staff Position (FSP)
FAS Nos. 115-1 and
124-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
was issued. This FSP nullifies certain requirements of EITF
No. 03-1
and supersedes EITF Topic
No. D-44,
Recognition of
Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. This FSP nullified the
requirements of paragraphs 10 to 18 of EITF
No. 03-1,
carried forward the requirements of paragraph 8 and 9 of
EITF
No. 03-1
with respect to cost-method investments, and carried forward the
disclosure requirements included in paragraphs 21 and 22 of
EITF
No. 03-1
and related examples. The guidance in this FSP is applicable to
reporting periods beginning after December 15, 2005.
Adoption is not expected to have a material impact on our
financial position, results of operations or related disclosures.
In December 2003, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position
03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer
(SOP 03-3).
SOP 03-3
addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to
credit quality.
SOP 03-3
is effective for loans acquired in fiscal years beginning after
December 15, 2004. Adoption in 2005 did not have a material
impact on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153,
Exchange of Non-Monetary Assets, an Amendment of APB
Opinion No. 29, Accounting for Non-Monetary
Transactions
(SFAS No. 153). SFAS No. 153
is based on the principle that exchange of non-monetary assets
should be measured based on the fair market value of the assets
exchanged. SFAS No. 153 eliminates the exception for
non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. SFAS No. 153 is
effective for non-monetary asset exchanges in fiscal periods
beginning after June 15, 2005. Adoption is not expected to
have a material impact on our financial position or results of
operations.
Reclassifications Certain
reclassifications were made to the prior years
presentation to conform to the current years presentation.
NOTE 2 BUSINESS
COMBINATION
On April 30, 2004, we completed our acquisition of PUB and
merged PUB with Hanmi Bank. We paid $164.6 million in cash
to acquire 5,537,431 of the PUB shares owned by Korea Exchange
Bank. All of the remaining PUB shares were converted in the
acquisition into shares of Hanmi Financials common stock
based on an exchange ratio of 2.312 Hanmi Financial shares for
each PUB share.
In addition, all outstanding PUB employee stock options were
converted into 137,414 options to purchase Hanmi Financial stock
valued at $1.1 million in total. Based on Hanmi
Financials average price of $12.53 for the five-day
trading period from April 28 through May 4, 2004, the total
consideration paid for PUB was $324.6 million and resulted
in the recognition of goodwill aggregating $207.2 million.
66
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchase Price and Acquisition
Costs The purchase price was as follows:
|
|
|
|
|
|
|
(Dollars in thousands;
|
|
|
|
except share prices)
|
|
|
Common Stock:
|
|
|
|
|
Number of Shares of PUB Stock
Outstanding as of April 30, 2004
|
|
|
10,908,821
|
|
Less Shares Acquired for Cash
|
|
|
(5,537,431
|
)
|
|
|
|
|
|
Number of Shares of PUB Stock to
be Exchange for Hanmi Stock
|
|
|
5,371,390
|
|
Exchange Ratio
|
|
|
2.312
|
|
|
|
|
|
|
Stock Issued in PUB Acquisition
|
|
|
12,418,654
|
|
Multiplied by Hanmi
Financials Average Stock Price for the Period Two Days
Before Through Two Days After the April 29, 2004 Pricing of
the Merger Agreement
|
|
$
|
12.53
|
|
|
|
|
|
|
|
|
$
|
155,606
|
|
Stock Options:
|
|
|
|
|
Estimated Fair Value of 137,414
Hanmi Financial Stock Options to be Issued in Exchange for
59,443 PUB Outstanding Stock Options, Calculated Using the
Black-Scholes Option Pricing Model, Modified for Dividends, With
Model Assumptions Estimated as of April 30, 2004 and a
Hanmi Financial Stock Price of $12.53, the Average Stock Price
for the Period Two Days Before Through Two Days After the
April 29, 2004 Pricing of the Merger Agreement
|
|
|
1,063
|
|
Cash
|
|
|
164,562
|
|
Transaction Costs:
|
|
|
|
|
Cash
|
|
|
3,320
|
|
Stock Warrants
|
|
|
145
|
|
|
|
|
|
|
Total Purchase Price
|
|
$
|
324,696
|
|
|
|
|
|
|
The purchase price was allocated based on the fair values of the
assets acquired and liabilities assumed:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Book Value of Net Assets Acquired
|
|
$
|
110,683
|
|
Adjustments:
|
|
|
|
|
Adjustment to Record Acquired
Securities at Estimated Fair Value
|
|
|
(1,489
|
)
|
Adjustment to Record Acquired
Loans at Estimated Fair Value
|
|
|
376
|
|
Adjustment to Record Acquired
Fixed Assets at Estimated Fair Value
|
|
|
5,459
|
|
Adjustment to Record Core Deposit
Intangible Asset
|
|
|
13,137
|
|
Adjustment to Record Various Other
Assets at Estimated Fair Value
|
|
|
15
|
|
Adjustment to Record
Interest-Bearing Deposits at Fair Value
|
|
|
(264
|
)
|
Adjustment to Record Other
Borrowings at Fair Value
|
|
|
(789
|
)
|
Adjustment to Record Severance
Benefits Associated with the Elimination of Positions,
Termination of Certain Contractual Obligations of PUB and Other
Miscellaneous Adjustments
|
|
|
(1,711
|
)
|
Adjustment to Record Deferred Tax
Liability
|
|
|
(7,948
|
)
|
Adjustment to Record Goodwill
Associated with the Acquisition of PUB
|
|
|
207,227
|
|
|
|
|
|
|
Total Purchase Price
|
|
$
|
324,696
|
|
|
|
|
|
|
67
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, the carrying amount of goodwill
from the PUB acquisition was $207.2 million compared to
$207.8 million at December 31, 2004, a decrease of
$585,000. The decrease was due to adjustments based on the final
valuation of net assets acquired.
The fair value of PUB net assets acquired was as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
Cash and Due From Banks
|
|
$
|
27,483
|
|
Federal Fund Sold
|
|
|
76,900
|
|
Federal Home Loan Bank Stock
|
|
|
6,256
|
|
Securities Available for Sale
|
|
|
157,905
|
|
Loans Receivable, Net of Allowance
for Loan Losses
|
|
|
865,743
|
|
Premises and Equipment
|
|
|
11,668
|
|
Accrued Interest Receivable
|
|
|
3,498
|
|
Goodwill
|
|
|
207,227
|
|
Core Deposit Intangible
|
|
|
13,137
|
|
Other Assets
|
|
|
12,888
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,382,705
|
|
|
|
|
|
|
|
Liabilities:
|
Deposits
|
|
$
|
936,699
|
|
Borrowings
|
|
|
105,789
|
|
Other Liabilities
|
|
|
15,521
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
1,058,009
|
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
324,696
|
|
|
|
|
|
|
The core deposit intangible is being amortized using an
accelerated method over eight years. None of the goodwill
balance is expected to be deductible for income tax purposes.
Merger-related costs recognized as expenses during 2004
consisted of employee retention bonuses, the costs of vacating
duplicative branches within the existing network and the
impairment of fixed assets (primarily leasehold improvements)
associated with such branches. Of the $2,053,000 provided in
2004, $767,000 and $777,000 was utilized and charged against the
related liability in 2005 and 2004, respectively. The remaining
balance of $509,000 was reversed in 2005.
Certain costs (primarily PUB employee severance, data processing
contract termination costs, and the costs of vacating
duplicative branches within PUBs network) were recognized
as liabilities assumed in the business combination or
impairments of fixed assets associated with such branches.
Accordingly, they have been considered part of the purchase
price of PUB and recorded as an increase in the balance of
goodwill. Of the $4,515,000 provided, $834,000 and $2,444,000
was utilized and charged against the related liability in 2005
and 2004, respectively, and $1,142,000 was reversed in 2005. The
remaining balance of $95,000 is related to certain lease
commitments that may continue into 2009.
68
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We incurred the following merger-related costs for the years
ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
|
Expensed
|
|
|
Cost of
|
|
|
|
(Credited)
|
|
|
Acquisition
|
|
|
|
(In thousands)
|
|
|
Merger-Related
Costs 2005:
|
|
|
|
|
|
|
|
|
Reversal of Merger-Related Costs
|
|
$
|
(509
|
)
|
|
$
|
(1,142
|
)
|
|
|
|
|
|
|
|
|
|
Total Merger-Related
Costs 2005
|
|
$
|
(509
|
)
|
|
$
|
(1,142
|
)
|
|
|
|
|
|
|
|
|
|
Merger-Related
Costs 2004:
|
|
|
|
|
|
|
|
|
Employee Termination Costs
|
|
$
|
1,364
|
|
|
$
|
1,425
|
|
Contract Termination Costs
|
|
|
|
|
|
|
1,828
|
|
Leasehold Termination Costs
|
|
|
348
|
|
|
|
1,262
|
|
Asset Impairments
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merger-Related
Costs 2004
|
|
$
|
2,053
|
|
|
$
|
4,515
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL
We purchase government agency securities
and/or whole
loans under agreements to resell the same securities (reverse
repurchase agreements) with primary dealers. Amounts advanced
under these agreements represent cash and cash equivalents.
Securities subject to the reverse repurchase agreements are held
in the name of Hanmi Financial by dealers who arrange the
transactions. In the event that the fair value of the securities
decreases below the carrying amount of the related reverse
repurchase agreement, the counterparties are required to
designate an equivalent value of additional securities in the
name of Hanmi Financial.
The following is a summary of the securities purchased under
agreements to resell at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at Year-End
|
|
$
|
20,000
|
|
|
$
|
10,000
|
|
Average Balance Outstanding During
the Year
|
|
$
|
13,137
|
|
|
$
|
55
|
|
Maximum Amount Outstanding at Any
Month-End During the Year
|
|
$
|
25,000
|
|
|
$
|
10,000
|
|
Weighted-Average Interest Rate
During the Year
|
|
|
3.38
|
%
|
|
|
2.33
|
%
|
69
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 4 SECURITIES
The following is a summary of the securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
692
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
692
|
|
Mortgage-Backed Securities
|
|
|
357
|
|
|
|
2
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,049
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
691
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
691
|
|
Mortgage-Backed Securities
|
|
|
399
|
|
|
|
3
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,090
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
149,311
|
|
|
$
|
144
|
|
|
$
|
2,187
|
|
|
$
|
147,268
|
|
U.S. Government Agencies
|
|
|
129,589
|
|
|
|
|
|
|
|
1,776
|
|
|
|
127,813
|
|
Collateralized Mortgage Obligations
|
|
|
83,068
|
|
|
|
3
|
|
|
|
1,615
|
|
|
|
81,456
|
|
Municipal Bonds
|
|
|
71,536
|
|
|
|
1,758
|
|
|
|
74
|
|
|
|
73,220
|
|
Corporate Bonds
|
|
|
8,235
|
|
|
|
|
|
|
|
182
|
|
|
|
8,053
|
|
Other
|
|
|
4,999
|
|
|
|
156
|
|
|
|
102
|
|
|
|
5,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
446,738
|
|
|
$
|
2,061
|
|
|
$
|
5,936
|
|
|
$
|
442,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
148,706
|
|
|
$
|
1,014
|
|
|
$
|
546
|
|
|
$
|
149,174
|
|
U.S. Government Agencies
|
|
|
89,345
|
|
|
|
381
|
|
|
|
49
|
|
|
|
89,677
|
|
Collateralized Mortgage Obligations
|
|
|
93,172
|
|
|
|
236
|
|
|
|
869
|
|
|
|
92,539
|
|
Municipal Bonds
|
|
|
71,771
|
|
|
|
1,938
|
|
|
|
93
|
|
|
|
73,616
|
|
Corporate Bonds
|
|
|
8,380
|
|
|
|
76
|
|
|
|
12
|
|
|
|
8,444
|
|
Other
|
|
|
4,437
|
|
|
|
34
|
|
|
|
38
|
|
|
|
4,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
415,811
|
|
|
$
|
3,679
|
|
|
$
|
1,607
|
|
|
$
|
417,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of investment
securities at December 31, 2005, by contractual maturity,
are shown below. Although mortgage-backed securities and
collateralized mortgage obligations have
70
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contractual maturities through 2035, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Within One Year
|
|
$
|
15,245
|
|
|
$
|
15,205
|
|
|
$
|
|
|
|
$
|
|
|
Over One Year Through Five Years
|
|
|
129,260
|
|
|
|
127,392
|
|
|
|
|
|
|
|
|
|
Over Five Years Through Ten Years
|
|
|
7,279
|
|
|
|
7,397
|
|
|
|
692
|
|
|
|
692
|
|
Over Ten Years
|
|
|
62,575
|
|
|
|
64,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,359
|
|
|
|
214,139
|
|
|
|
692
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
|
149,311
|
|
|
|
147,268
|
|
|
|
357
|
|
|
|
359
|
|
Collateralized Mortgage Obligations
|
|
|
83,068
|
|
|
|
81,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,379
|
|
|
|
228,724
|
|
|
|
357
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
446,738
|
|
|
$
|
442,863
|
|
|
$
|
1,049
|
|
|
$
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses on investment securities and the fair
value of the related securities, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position, were as follows as of
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding Period
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Available for
Sale December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
922
|
|
|
$
|
78,891
|
|
|
$
|
1,265
|
|
|
$
|
40,364
|
|
|
$
|
2,187
|
|
|
$
|
119,255
|
|
U.S. Government Agency
Securities
|
|
|
1,682
|
|
|
|
112,931
|
|
|
|
94
|
|
|
|
9,882
|
|
|
|
1,776
|
|
|
|
122,813
|
|
Collateralized Mortgage Obligations
|
|
|
383
|
|
|
|
29,281
|
|
|
|
1,232
|
|
|
|
42,988
|
|
|
|
1,615
|
|
|
|
72,269
|
|
Municipal Bonds
|
|
|
31
|
|
|
|
4,126
|
|
|
|
43
|
|
|
|
2,353
|
|
|
|
74
|
|
|
|
6,479
|
|
Corporate Bonds
|
|
|
106
|
|
|
|
5,102
|
|
|
|
76
|
|
|
|
2,951
|
|
|
|
182
|
|
|
|
8,053
|
|
Other
|
|
|
21
|
|
|
|
979
|
|
|
|
81
|
|
|
|
1,919
|
|
|
|
102
|
|
|
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,145
|
|
|
$
|
231,310
|
|
|
$
|
2,791
|
|
|
$
|
100,457
|
|
|
$
|
5,936
|
|
|
$
|
331,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for
Sale December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
135
|
|
|
$
|
22,747
|
|
|
$
|
411
|
|
|
$
|
37,428
|
|
|
$
|
546
|
|
|
$
|
60,175
|
|
U.S. Government Agency
Securities
|
|
|
264
|
|
|
|
13,780
|
|
|
|
605
|
|
|
|
39,824
|
|
|
|
869
|
|
|
|
53,604
|
|
Collateralized Mortgage Obligations
|
|
|
49
|
|
|
|
14,883
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
14,883
|
|
Municipal Bonds
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
3,775
|
|
|
|
93
|
|
|
|
3,775
|
|
Corporate Bonds
|
|
|
12
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
3,103
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
1,962
|
|
|
|
38
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
460
|
|
|
$
|
54,513
|
|
|
$
|
1,147
|
|
|
$
|
82,989
|
|
|
$
|
1,607
|
|
|
$
|
137,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All individual securities that have been in a continuous
unrealized loss position for 12 months or longer at
December 31, 2005 and 2004 had investment grade ratings
upon purchase. The issuers of these securities have not, to our
knowledge, established any cause for default on these securities
and the various rating agencies have reaffirmed these
securities long-term investment grade status at
December 31, 2005 and 2004. These securities have
fluctuated in value since their purchase dates as market
interest rates have fluctuated. However, we have the ability,
and management intends to hold these securities until their fair
values recover to cost. Therefore, in managements opinion,
all securities that have been in a continuous unrealized loss
position for the past 12 months or longer as of
December 31, 2005 and 2004 are not
other-than-temporarily
impaired, and therefore, no impairment charges as of
December 31, 2005 and 2004 are warranted.
Securities with carrying values of $279.7 million and
$307.5 million as of December 31, 2005 and 2004,
respectively, were pledged to secure public deposits and for
other purposes as required or permitted by law.
There were $117,000, $134,000 and $1,094,000 in net realized
gains on sales of securities available for sale during the years
ended December 31, 2005, 2004 and 2003, respectively. In
2005, $3.6 million ($2.6 million, net of tax) of
unrealized losses arose during the year and were included in
comprehensive income and $114,000 ($83,000, net of tax) of
previously unrealized gains were realized in earnings. In 2004,
$983,000 ($713,000, net of tax) of unrealized losses arose
during the year and were included in comprehensive income and
$167,000 ($122,000, net of tax) of previously unrealized losses
were realized in earnings. In 2003, $1.8 million
($1.3 million, net of tax) of unrealized losses arose
during the year and were included in comprehensive income and
$1.1 million ($692,000, net of tax) of previously
unrealized gains were realized in earnings.
NOTE 5 LOANS
RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
733,650
|
|
|
$
|
783,539
|
|
Construction
|
|
|
152,080
|
|
|
|
92,521
|
|
Residential Property
|
|
|
87,377
|
|
|
|
80,786
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
973,107
|
|
|
|
956,846
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
945,210
|
|
|
|
754,108
|
|
Commercial Lines of Credit
|
|
|
224,271
|
|
|
|
201,940
|
|
SBA Loans
|
|
|
155,491
|
|
|
|
162,435
|
|
International Loans
|
|
|
106,520
|
|
|
|
95,936
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans
|
|
|
1,431,492
|
|
|
|
1,214,419
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
92,154
|
|
|
|
87,526
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
|
2,496,753
|
|
|
|
2,258,791
|
|
Allowance for Loans Losses
|
|
|
(24,963
|
)
|
|
|
(22,702
|
)
|
Deferred Loan Fees
|
|
|
(3,775
|
)
|
|
|
(5,097
|
)
|
|
|
|
|
|
|
|
|
|
Loans Receivable, Net
|
|
$
|
2,468,015
|
|
|
$
|
2,230,992
|
|
|
|
|
|
|
|
|
|
|
72
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity in the allowance for loan losses and allowance for
off-balance sheet items was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
for Off-
|
|
|
|
|
|
|
|
|
for Off-
|
|
|
|
|
|
|
|
|
for Off-
|
|
|
|
|
|
|
Allowance
|
|
|
Balance
|
|
|
|
|
|
Allowance
|
|
|
Balance
|
|
|
|
|
|
Allowance
|
|
|
Balance
|
|
|
|
|
|
|
for Loan
|
|
|
Sheet
|
|
|
|
|
|
for Loan
|
|
|
Sheet
|
|
|
|
|
|
for Loan
|
|
|
Sheet
|
|
|
|
|
|
|
Losses
|
|
|
Items
|
|
|
Total
|
|
|
Losses
|
|
|
Items
|
|
|
Total
|
|
|
Losses
|
|
|
Items
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance Beginning
of Year
|
|
$
|
22,702
|
|
|
$
|
1,800
|
|
|
$
|
24,502
|
|
|
$
|
13,349
|
|
|
$
|
1,385
|
|
|
$
|
14,734
|
|
|
$
|
11,254
|
|
|
$
|
1,015
|
|
|
$
|
12,269
|
|
Allowance for Loan Losses Acquired
in PUB Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,566
|
|
|
|
|
|
|
|
10,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision Charged to Operating
Expense
|
|
|
5,065
|
|
|
|
330
|
|
|
|
5,395
|
|
|
|
2,492
|
|
|
|
415
|
|
|
|
2,907
|
|
|
|
5,310
|
|
|
|
370
|
|
|
|
5,680
|
|
Loans Charged Off
|
|
|
(5,198
|
)
|
|
|
|
|
|
|
(5,198
|
)
|
|
|
(5,485
|
)
|
|
|
|
|
|
|
(5,485
|
)
|
|
|
(4,423
|
)
|
|
|
|
|
|
|
(4,423
|
)
|
Recoveries, Net of Charge-Offs
|
|
|
2,394
|
|
|
|
|
|
|
|
2,394
|
|
|
|
1,780
|
|
|
|
|
|
|
|
1,780
|
|
|
|
1,208
|
|
|
|
|
|
|
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance End
of Year
|
|
$
|
24,963
|
|
|
$
|
2,130
|
|
|
$
|
27,093
|
|
|
$
|
22,702
|
|
|
$
|
1,800
|
|
|
$
|
24,502
|
|
|
$
|
13,349
|
|
|
$
|
1,385
|
|
|
$
|
14,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of interest foregone on impaired
loans for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Interest Income That Would Have
Been Recognized Had Impaired Loans Performed in Accordance With
Their Original Terms
|
|
$
|
957
|
|
|
$
|
678
|
|
|
$
|
362
|
|
Less: Interest Income Recognized
on Impaired Loans
|
|
|
(603
|
)
|
|
|
(350
|
)
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Foregone on Impaired
Loans
|
|
$
|
354
|
|
|
$
|
328
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information on impaired loans for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Recorded Investment With Related
Allowance
|
|
$
|
7,548
|
|
|
$
|
4,391
|
|
|
$
|
5,893
|
|
Recorded Investment With No
Related Allowance
|
|
|
3,235
|
|
|
|
3,262
|
|
|
|
392
|
|
Allowance on Impaired Loans
|
|
|
(4,991
|
)
|
|
|
(3,039
|
)
|
|
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recorded Investment in
Impaired Loans
|
|
$
|
5,792
|
|
|
$
|
4,614
|
|
|
$
|
3,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Recorded Investment
in Impaired Loans
|
|
$
|
14,340
|
|
|
$
|
9,850
|
|
|
$
|
6,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no commitments to lend additional funds to borrowers
whose loans are included above.
Loans on non-accrual status totaled $10.1 million and
$5.8 million at December 31, 2005 and 2004,
respectively. Loans past due 90 days or more and still
accruing interest totaled $9,000 and $208,000 at
December 31, 2005 and 2004, respectively. Restructured
loans totaled $4.0 million and $2.6 million at
December 31, 2005 and 2004, respectively.
73
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is an analysis of all loans to officers and
directors of Hanmi Financial and their affiliates. In the
opinion of management, all such loans were made under terms that
are consistent with our normal lending policies.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Outstanding Balance, Beginning of
Year
|
|
$
|
1,552
|
|
|
$
|
885
|
|
Credit Granted, Including Renewals
|
|
|
|
|
|
|
951
|
|
Repayments
|
|
|
(702
|
)
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, End of
Year
|
|
$
|
850
|
|
|
$
|
1,552
|
|
|
|
|
|
|
|
|
|
|
Income from these loans totaled $81,000, $70,000 and $153,000
for the years ended December 31, 2005, 2004 and 2003,
respectively, and is reflected in the accompanying Consolidated
Statements of Income.
Servicing Assets Changes in loan
servicing rights, net of amortization, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance Beginning
of Year
|
|
$
|
3,846
|
|
|
$
|
2,364
|
|
Additions
|
|
|
1,150
|
|
|
|
2,172
|
|
Amortization
|
|
|
(1,086
|
)
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
Balance End of
Year
|
|
$
|
3,910
|
|
|
$
|
3,846
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 and 2004, we serviced loans sold to
unaffiliated parties in the amounts of $183.4 million and
$173.7 million, respectively. All of the loans being
serviced were SBA loans.
NOTE 6 PREMISES
AND EQUIPMENT
The following is a summary of the major components of premises
and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
6,120
|
|
|
$
|
6,120
|
|
Buildings and Improvements
|
|
|
7,804
|
|
|
|
7,354
|
|
Furniture and Equipment
|
|
|
12,095
|
|
|
|
11,116
|
|
Leasehold Improvements
|
|
|
7,924
|
|
|
|
7,845
|
|
Software
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,330
|
|
|
|
32,435
|
|
Accumulated Depreciation and
Amortization
|
|
|
(13,546
|
)
|
|
|
(12,744
|
)
|
|
|
|
|
|
|
|
|
|
Total Premises and Equipment,
Net
|
|
$
|
20,784
|
|
|
$
|
19,691
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $2,704,000,
$2,447,000 and $1,558,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
74
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 7 DEPOSITS
Time deposits by maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Less Than Three Months
|
|
$
|
701,140
|
|
|
$
|
534,394
|
|
After Three Months to Six Months
|
|
|
314,151
|
|
|
|
289,134
|
|
After Six Months to Twelve Months
|
|
|
407,689
|
|
|
|
174,548
|
|
After Twelve Months
|
|
|
16,771
|
|
|
|
33,624
|
|
|
|
|
|
|
|
|
|
|
Total Time Deposits
|
|
$
|
1,439,751
|
|
|
$
|
1,031,700
|
|
|
|
|
|
|
|
|
|
|
For time deposits having a remaining term of more than one year,
the aggregate amount of maturities for each of the five years
following the balance sheet date are as follows: none in 2006;
$7,027,000 in 2007; $1,040,000 in 2008; $9,350,000 in 2009; and
$55,000 in 2010.
A summary of interest expense on deposits was as follows for the
years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Money Market Checking
|
|
$
|
12,964
|
|
|
$
|
8,098
|
|
|
$
|
2,584
|
|
Savings
|
|
|
2,130
|
|
|
|
1,790
|
|
|
|
1,894
|
|
Time Deposits of $100,000 or More
|
|
|
31,984
|
|
|
|
10,966
|
|
|
|
7,415
|
|
Other Time Deposits
|
|
|
7,114
|
|
|
|
5,414
|
|
|
|
7,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense on
Deposits
|
|
$
|
54,192
|
|
|
$
|
26,268
|
|
|
$
|
19,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits reclassified to loans due to overdraft at
December 31, 2005 and 2004 were $3.7 million and
$3.0 million, respectively.
NOTE 8 OTHER
BORROWED FUNDS
Other borrowed funds consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
FHLB Advances
|
|
$
|
43,527
|
|
|
$
|
66,363
|
|
Note Issued to
U.S. Treasury
|
|
|
2,804
|
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
Total Other Borrowed
Funds
|
|
$
|
46,331
|
|
|
$
|
69,293
|
|
|
|
|
|
|
|
|
|
|
75
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FHLB advances represent collateralized obligations with the FHLB
of San Francisco. A summary of contractual maturities
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Year
|
|
Amount
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
5,000
|
|
|
|
3.56
|
%
|
2007
|
|
|
20,000
|
|
|
|
3.85
|
%
|
2008
|
|
|
|
|
|
|
|
|
2009
|
|
|
6,000
|
|
|
|
5.63
|
%
|
2010
|
|
|
7,411
|
|
|
|
4.44
|
%
|
Thereafter
|
|
|
5,116
|
|
|
|
5.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial data pertaining to FHLB advances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Weighted-Average Interest Rate at
End of Year
|
|
|
4.33
|
%
|
|
|
4.12
|
%
|
|
|
1.65
|
%
|
Weighted-Average Interest Rate
During the Year
|
|
|
3.70
|
%
|
|
|
2.23
|
%
|
|
|
2.74
|
%
|
Average Balance of FHLB Advances
|
|
$
|
74,437
|
|
|
$
|
137,827
|
|
|
$
|
52,577
|
|
Maximum Amount Outstanding at Any
Month-End
|
|
$
|
100,700
|
|
|
$
|
261,000
|
|
|
$
|
148,400
|
|
All of the FHLB advances had fixed interest rates.
We have pledged investment securities available for sale with a
carrying value of $279.7 million as collateral with the
FHLB for this borrowing facility. The total borrowing capacity
available from the collateral that has been pledged is
$1,062.3 million, of which $782.6 million remained
available as of December 31, 2005.
For the years ended December 31, 2005, 2004 and 2003,
interest expense on other borrowed funds totaled
$3.0 million, $3.3 million and $1.5 million,
respectively, and the weighted-average interest rates were
3.36 percent, 2.14 percent and 2.45 percent,
respectively.
In 2005, we obtained additional lines of credit totaling
$69.0 million. Total credit lines for borrowing amounted to
$154.0 million at December 31, 2005. As of
December 31, 2005 and 2004, there were no borrowings under
these credit lines.
NOTE 9 JUNIOR
SUBORDINATED DEBENTURES
During the first half of 2004, we issued two junior subordinated
notes bearing interest at the three-month London InterBank
Offered Rate (LIBOR) plus 2.90 percent totaling
$61.8 million and one junior subordinated note bearing
interest at the three-month LIBOR plus 2.63 percent
totaling $20.6 million. The outstanding subordinated
debentures related to these offerings, the proceeds of which
were used to finance the purchase of PUB, totaled
$82.4 million at December 31, 2005.
For the years ended December 31, 2005 and 2004, interest
expense on the junior subordinated debentures totaled
$4.9 million and $3.0 million, respectively, and the
weighted-average interest rates were 5.94 percent and
4.41 percent, respectively.
76
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 10 INCOME
TAXES
A summary of income taxes for the years ended December 31,
2005, 2004 and 2003 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
29,779
|
|
|
$
|
16,010
|
|
|
$
|
10,852
|
|
State
|
|
|
9,383
|
|
|
|
6,271
|
|
|
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,162
|
|
|
|
22,281
|
|
|
|
14,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,350
|
)
|
|
|
1,032
|
|
|
|
(1,732
|
)
|
State
|
|
|
(357
|
)
|
|
|
(338
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,707
|
)
|
|
|
694
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$
|
36,455
|
|
|
$
|
22,975
|
|
|
$
|
12,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2004, the Federal and state
deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Credit Loss Provision
|
|
$
|
12,419
|
|
|
$
|
11,232
|
|
Depreciation
|
|
|
591
|
|
|
|
816
|
|
State Taxes
|
|
|
2,928
|
|
|
|
1,475
|
|
Unrealized Loss on Securities
Available for Sale, Interest-Only Strips and Interest Rate Swaps
|
|
|
1,671
|
|
|
|
|
|
Other
|
|
|
59
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
17,668
|
|
|
|
13,565
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Purchase Accounting
|
|
|
(6,497
|
)
|
|
|
(7,022
|
)
|
Unrealized Gain on Securities
Available for Sale, Interest-Only Strips and Interest Rate Swaps
|
|
|
|
|
|
|
(744
|
)
|
Other
|
|
|
(1,520
|
)
|
|
|
(790
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
|
(8,017
|
)
|
|
|
(8,556
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax
Assets
|
|
$
|
9,651
|
|
|
$
|
5,009
|
|
|
|
|
|
|
|
|
|
|
Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable
income to realize the deferred tax assets, net of the valuation
allowance.
77
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the difference between the Federal statutory
income tax rate and the effective tax rate as of
December 31 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory Tax Rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State Taxes, Net of Federal Tax
Benefits
|
|
|
6.2
|
%
|
|
|
6.5
|
%
|
|
|
6.6
|
%
|
Tax-Exempt Municipal Securities
|
|
|
(1.2
|
)%
|
|
|
(1.8
|
)%
|
|
|
(1.5
|
)%
|
Reversal of Valuation Allowance
|
|
|
|
|
|
|
(0.7
|
)%
|
|
|
|
|
Other
|
|
|
(1.5
|
)%
|
|
|
(0.5
|
)%
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
38.5
|
%
|
|
|
38.5
|
%
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, net current taxes payable of
$2.3 million were included in Other Liabilities in the
Consolidated Statements of Financial Condition. At
December 31, 2004, net current taxes receivable of
$2.4 million were included in Other Assets in the
Consolidated Statements of Financial Condition.
NOTE 11 SHAREHOLDERS
EQUITY
Year 2000 Stock Option Plan The
Bank adopted a Stock Option Plan in 1992, which was replaced by
the Hanmi Financial Corporation Year 2000 Stock Option Plan (the
Plan), under which options to purchase shares of
Hanmi Financial common stock may be granted to key employees and
directors. The Plan provides that the option price shall not be
less than the fair value of the stock on the effective date of
the grant. Generally, options will vest over five years. No
option may be granted with a term of more than ten years.
The following is a summary of the transactions under the Plan
described above for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Number
|
|
|
Price Per
|
|
|
Number
|
|
|
Price Per
|
|
|
Number
|
|
|
Price Per
|
|
|
|
of Shares
|
|
|
Share
|
|
|
of Shares
|
|
|
Share
|
|
|
of Shares
|
|
|
Share
|
|
|
Options Outstanding, Beginning of
Year
|
|
|
1,618,836
|
|
|
$
|
9.33
|
|
|
|
1,500,064
|
|
|
$
|
5.52
|
|
|
|
2,137,012
|
|
|
$
|
5.32
|
|
Options Granted
|
|
|
135,554
|
|
|
$
|
17.10
|
|
|
|
791,000
|
|
|
$
|
13.51
|
|
|
|
80,000
|
|
|
$
|
8.75
|
|
Options Assumed in PUB Acquisition
|
|
|
|
|
|
$
|
|
|
|
|
137,414
|
|
|
$
|
5.11
|
|
|
|
|
|
|
$
|
|
|
Options Exercised
|
|
|
(391,094
|
)
|
|
$
|
6.44
|
|
|
|
(670,576
|
)
|
|
$
|
4.82
|
|
|
|
(495,954
|
)
|
|
$
|
4.53
|
|
Options Cancelled/Expired
|
|
|
(189,584
|
)
|
|
$
|
13.26
|
|
|
|
(139,066
|
)
|
|
$
|
9.61
|
|
|
|
(220,994
|
)
|
|
$
|
6.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding End of Year
|
|
|
1,173,712
|
|
|
$
|
10.55
|
|
|
|
1,618,836
|
|
|
$
|
9.33
|
|
|
|
1,500,064
|
|
|
$
|
5.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable End of Year
|
|
|
520,602
|
|
|
$
|
7.00
|
|
|
|
487,242
|
|
|
$
|
6.10
|
|
|
|
655,154
|
|
|
$
|
5.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, stock options outstanding under
the Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
|
|
Number
|
|
|
Price per
|
|
|
Contractual
|
|
|
Number
|
|
|
Price per
|
|
Exercise Price Range
|
|
Outstanding
|
|
|
Share
|
|
|
Life
|
|
|
Outstanding
|
|
|
Share
|
|
|
$ 3.27 to $ 3.99
|
|
|
211,602
|
|
|
$
|
3.81
|
|
|
|
4.7 years
|
|
|
|
211,602
|
|
|
$
|
3.81
|
|
$ 4.00 to $ 7.99
|
|
|
287,332
|
|
|
$
|
7.06
|
|
|
|
5.3 years
|
|
|
|
205,909
|
|
|
$
|
7.07
|
|
$ 8.00 to $11.99
|
|
|
3,624
|
|
|
$
|
10.44
|
|
|
|
0.4 years
|
|
|
|
3,624
|
|
|
$
|
10.44
|
|
$12.00 to $15.99
|
|
|
585,600
|
|
|
$
|
13.67
|
|
|
|
8.3 years
|
|
|
|
99,467
|
|
|
$
|
13.51
|
|
$16.00 to $19.10
|
|
|
85,554
|
|
|
$
|
17.64
|
|
|
|
9.2 years
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,173,712
|
|
|
$
|
10.55
|
|
|
|
|
|
|
|
520,602
|
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 CEO Stock Option Plan The
Bank adopted the 2004 CEO Stock Option Plan (CEO
Plan) under which 350,000 options to purchase shares of
Hanmi Financial common stock were granted to the Chief Executive
Officer. The CEO Plan provided that the option price on the
effective date of the grant was equal to the fair value of the
stock, which was $17.17. The options will vest over six years
and expire after ten years.
Stock Warrants In 2004, we issued
stock warrants to affiliates of Castle Creek Financial LLC for
services rendered in connection with the placement of our equity
securities. Under the terms of the warrants, the warrant holders
can purchase a total of 508,558 shares of common stock at
an exercise price of $9.50 per share. The warrants were
immediately exercisable and expire after five years. During 2005
and 2004, 0 and 20,000 shares of common stock,
respectively, were issued for the exercise of stock warrants.
Repurchase of Common Stock On
August 25, 2005, we repurchased 1,163,000 shares of
our common stock from Korea Exchange Bank for an aggregate
purchase price of $20.0 million as part of our ongoing
capital management program. Repurchased shares are held in
treasury pending use for general corporate purposes, including
issuances under our employee stock option plan.
NOTE 12 REGULATORY
MATTERS
Hanmi Financial and the Bank are subject to various regulatory
capital requirements administered by the Federal banking
regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and
possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material
effect on our consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, Hanmi Financial and the Bank must meet
specific capital guidelines that involve quantitative measures
of the assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require Hanmi Financial and the Bank to
maintain minimum ratios (set forth in the table below) of Total
and Tier 1 Capital (as defined in the regulations) to
Risk-Weighted Assets (as defined), and of Tier 1 Capital
(as defined) to Average Assets (as defined). Management believes
that, as of December 31, 2005 and 2004, Hanmi Financial and
the Bank met all capital adequacy requirements to which they
were subject.
As of December 31, 2005, the most recent notification from
the Federal Reserve Board categorized the Bank as well
capitalized under the regulatory framework for prompt
corrective action. To be categorized as well
capitalized, the Bank must maintain minimum Total
Risk-Based, Tier 1 Risk-Based, and Tier 1 Leverage
Ratios as set forth in the table below. There are no conditions
or events since that notification which management believes have
changed the institutions category.
79
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The capital ratios of Hanmi Financial and Hanmi Bank at
December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Minimum to be
|
|
|
|
|
|
|
Regulatory
|
|
|
Categorized as
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Well
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
319,866
|
|
|
|
12.04
|
%
|
|
$
|
212,617
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
318,099
|
|
|
|
11.98
|
%
|
|
$
|
212,383
|
|
|
|
8.00
|
%
|
|
$
|
265,478
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to
Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
292,750
|
|
|
|
11.03
|
%
|
|
$
|
106,191
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
290,983
|
|
|
|
10.96
|
%
|
|
$
|
106,191
|
|
|
|
4.00
|
%
|
|
$
|
159,287
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
295,750
|
|
|
|
9.11
|
%
|
|
$
|
128,566
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
290,983
|
|
|
|
9.06
|
%
|
|
$
|
128,447
|
|
|
|
4.00
|
%
|
|
$
|
160,558
|
|
|
|
5.00
|
%
|
December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
281,684
|
|
|
|
11.98
|
%
|
|
$
|
188,173
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
277,075
|
|
|
|
11.80
|
%
|
|
$
|
187,921
|
|
|
|
8.00
|
%
|
|
$
|
234,901
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to
Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
257,182
|
|
|
|
10.93
|
%
|
|
$
|
94,087
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
252,573
|
|
|
|
10.75
|
%
|
|
$
|
93,960
|
|
|
|
4.00
|
%
|
|
$
|
140,940
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
$
|
257,182
|
|
|
|
8.93
|
%
|
|
$
|
115,235
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Hanmi Bank
|
|
$
|
252,573
|
|
|
|
8.78
|
%
|
|
$
|
115,055
|
|
|
|
4.00
|
%
|
|
$
|
143,818
|
|
|
|
5.00
|
%
|
The average reserve balance required to be maintained with the
FRB was $1.5 million as of December 31, 2005 and 2004.
Memorandum of Understanding On
July 20, 2005, following a joint regular examination by the
FRB and the DFI, the Banks Board of Directors approved and
signed an informal memorandum of understanding
(Memorandum) in connection with certain deficiencies
identified by the regulators relating to the Banks
compliance with certain provisions of the Bank Secrecy Act (the
BSA) and anti-money laundering regulations. Under
the terms of the Memorandum, the Bank must comply in all
material respects with the BSA and take certain actions within
various timeframes. The Memorandum requires in part that the
Bank enhance its written programs designed to ensure and
maintain compliance with the BSA and anti-money laundering
regulations, improve documentation of its compliance with
suspicious activity reporting provisions of applicable
regulations and provide regular compliance reports to the
regulators. The implementation of these programs will include
revisions of the Banks policies, processes and procedures,
enhancements of the Banks system of internal controls for
BSA compliance, retention of and support from an increased
compliance staff and improved ongoing employee training.
Management expects additional BSA compliance expenses for the
Bank resulting from the Memorandum, although these expenses are
not anticipated to have a material financial impact on our
financial position or results of
80
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations. The Memorandum may also affect the timing or ability
of the Bank or Hanmi Financial to engage in or obtain regulatory
approval for certain expansionary activities.
NOTE 13 EARNINGS
PER SHARE
The following is a reconciliation of the numerators and
denominators of the basic and diluted per share computations for
the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Income
Available to Common Shareholders
|
|
$
|
58,229
|
|
|
|
49,174,885
|
|
|
$
|
1.18
|
|
Effect of Dilutive
Securities Options and Warrants
|
|
|
|
|
|
|
767,471
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Income Available to Common Shareholders
|
|
$
|
58,229
|
|
|
|
49,942,356
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Income
Available to Common Shareholders
|
|
$
|
36,700
|
|
|
|
42,268,964
|
|
|
$
|
0.87
|
|
Effect of Dilutive
Securities Options and Warrants
|
|
|
|
|
|
|
1,248,293
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Income Available to Common Shareholders
|
|
$
|
36,700
|
|
|
|
43,517,257
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Income
Available to Common Shareholders
|
|
$
|
19,213
|
|
|
|
28,092,708
|
|
|
$
|
0.68
|
|
Effect of Dilutive
Securities Options
|
|
|
|
|
|
|
569,318
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Income Available to Common Shareholders
|
|
$
|
19,213
|
|
|
|
28,662,026
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003, there
were 50,554, 354,000 and 0 options outstanding, respectively,
that were not included in the computation of diluted EPS because
their exercise price was greater than the average market price
of the common shares and, therefore, the effect would be
anti-dilutive.
NOTE 14 EMPLOYEE
BENEFITS
We have a Section 401(k) plan for the benefit of
substantially all of our employees. We match 75 percent of
participant contributions to the 401(k) plan up to
8 percent of each 401(k) plan participants annual
compensation. We made contributions to the 401(k) plan for the
years ended December 31, 2005, 2004 and 2003 of $918,000,
$858,000 and $553,000, respectively.
In 2001 and 2004, we purchased single premium life insurance
policies called bank-owned life insurance covering certain
officers. Hanmi Bank is the beneficiary under the policy. In the
event of the death of a covered officer, we will receive the
specified insurance benefit from the insurance carrier.
81
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 15 DERIVATIVE
FINANCIAL INSTRUMENTS
During 2004, to hedge interest rate risk, the Bank entered into
an interest rate swap agreement maturing in 2009, wherein the
Bank received a fixed rate of 7.29 percent at quarterly
intervals, and paid Prime-based floating rates at quarterly
intervals on a total notional amount of $10.0 million.
During 2003, to hedge interest rate risk, the Bank entered into
four interest rate swap agreements maturing in 2008, wherein the
Bank received fixed rates of 5.77 percent,
6.37 percent, 6.51 percent and 6.76 percent, at
quarterly intervals, and paid Prime-based floating rates, at
quarterly intervals, on a total notional amount of
$60.0 million. These swaps were designated as cash flow
hedges for accounting purposes.
In 2005, the Bank terminated these swaps. At such time, the
swaps were in an unfavorable position of $2,139,000. Such amount
is being amortized in amounts proportional to the interest
income associated with the hedged loan pools over the remaining
terms of the swaps or the lives of the hedged loans, whichever
is shorter. Prior to the termination of the swaps, income of $0,
$19,000 and $35,000 related to hedge ineffectiveness was
recognized for the years ended December 31, 2005, 2004 and
2003, respectively.
In 2004, the Bank offered a certificate of deposit
(CD) product that paid interest tied to the movement
in the Standard & Poors 500 Index plus
1.00 percent annual interest. The economic characteristics
and risks of the embedded option were not clearly and closely
related to the CD. Therefore, the embedded option was separated
from the CD and accounted for separately in liabilities. As of
December 31, 2005 and 2004, the fair value of the embedded
option was $1,280,000 and $1,396,000, respectively, and the
change in the liability during 2005 and 2004 was ($4,000) and
$242,000, respectively. The change was recognized in earnings.
To economically hedge the interest risk described above, the
Bank entered into an agreement to purchase an equity swap with a
notional amount of $9,340,000. As of December 31, 2005 and
2004, the fair value of the equity swap was $4,000 and $212,000,
respectively, which was also equal to the change during those
years. The change was recognized in earnings.
In 2005, the Bank offered a CD product that pays interest based
on the increase in the weighted-average value of five Asian
currencies (Korean Won, Singapore Dollar, Taiwan Dollar, Thai
Baht and Chinese Yuan) against the U.S. Dollar plus
0.25 percent annual interest. The economic characteristics
and risks of the embedded option were not clearly and closely
related to the CD. Therefore, the embedded option was separated
from the CD and accounted for separately in liabilities. As of
December 31, 2005, the fair value of the embedded option
was $5,000, and the change in the liability during 2005 was
($19,000). The change was recognized in earnings.
To economically hedge the interest risk described above, the
Bank entered into an agreement to purchase a currency swap with
a notional amount of $14,274,000. As of December 31, 2005,
the fair value of the currency swap was ($105,000), and the
change recognized in earnings for 2005 was $119,000.
82
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 16 COMMITMENTS
AND CONTINGENCIES
We lease our premises under non-cancelable operating leases. At
December 31, 2005, future minimum annual rental commitments
under these non-cancelable operating leases, with initial or
remaining terms of one year or more, is as follows:
|
|
|
|
|
Year Ending
December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
2,570
|
|
2007
|
|
|
2,457
|
|
2008
|
|
|
1,919
|
|
2009
|
|
|
1,284
|
|
2010
|
|
|
1,131
|
|
Thereafter
|
|
|
5,484
|
|
|
|
|
|
|
|
|
$
|
14,845
|
|
|
|
|
|
|
Rental expenses recorded under such leases in 2005, 2004 and
2003 amounted to $3,389,000, $3,226,000 and $2,008,000,
respectively.
In the normal course of business, we are involved in various
legal claims. Management has reviewed all legal claims against
us with in-house or outside legal counsel and has taken into
consideration the views of such counsel as to the outcome of the
claims. In managements opinion, the final disposition of
all such claims will not have a material adverse effect on our
financial position or results of operations.
NOTE 17 OFF-BALANCE
SHEET COMMITMENTS
We are a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized
in the Consolidated Statements of Financial Condition. The
Banks exposure to credit losses in the event of
non-performance by the other party to commitments to extend
credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to
customers. The Bank evaluates each customers
creditworthiness on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on managements
credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable;
inventory; property, plant and equipment; and income-producing
or borrower-occupied properties. The following table shows the
distribution of undisbursed loan commitments as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Commitments to Extend Credit
|
|
$
|
555,736
|
|
|
$
|
367,708
|
|
Commercial Letters of Credit
|
|
|
58,036
|
|
|
|
49,699
|
|
Standby Letters of Credit
|
|
|
42,768
|
|
|
|
47,901
|
|
Unused Credit Card Lines
|
|
|
14,892
|
|
|
|
14,324
|
|
|
|
|
|
|
|
|
|
|
Total Undisbursed
Loan Commitments
|
|
$
|
671,432
|
|
|
$
|
479,632
|
|
|
|
|
|
|
|
|
|
|
83
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 18 FAIR
VALUE OF FINANCIAL INSTRUMENTS
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
163,477
|
|
|
$
|
163,477
|
|
|
$
|
127,164
|
|
|
$
|
127,164
|
|
Federal Reserve Bank Stock
|
|
|
12,350
|
|
|
|
12,350
|
|
|
|
12,099
|
|
|
|
12,099
|
|
Federal Home Loan Bank Stock
|
|
|
12,237
|
|
|
|
12,237
|
|
|
|
9,862
|
|
|
|
9,862
|
|
Securities Held to Maturity
|
|
|
1,049
|
|
|
|
1,051
|
|
|
|
1,090
|
|
|
|
1,093
|
|
Securities Available for Sale
|
|
|
442,863
|
|
|
|
442,863
|
|
|
|
417,883
|
|
|
|
417,883
|
|
Loans Receivable, Net
|
|
|
2,468,015
|
|
|
|
2,460,092
|
|
|
|
2,230,992
|
|
|
|
2,229,096
|
|
Loans Held for Sale
|
|
|
1,065
|
|
|
|
1,074
|
|
|
|
3,850
|
|
|
|
4,026
|
|
Accrued Interest Receivable
|
|
|
14,120
|
|
|
|
14,120
|
|
|
|
10,029
|
|
|
|
10,029
|
|
Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
(293
|
)
|
Equity Swap
|
|
|
4
|
|
|
|
4
|
|
|
|
212
|
|
|
|
212
|
|
|
Liabilities:
|
Noninterest-Bearing Deposits
|
|
|
738,618
|
|
|
|
738,618
|
|
|
|
729,853
|
|
|
|
729,853
|
|
Interest-Bearing Deposits
|
|
|
2,087,496
|
|
|
|
2,087,496
|
|
|
|
1,799,224
|
|
|
|
1,799,224
|
|
Other Borrowed Funds and Junior
Subordinated Debentures
|
|
|
128,737
|
|
|
|
129,441
|
|
|
|
151,699
|
|
|
|
153,541
|
|
Accrued Interest Payable
|
|
|
11,911
|
|
|
|
11,911
|
|
|
|
7,100
|
|
|
|
7,100
|
|
Currency Swap
|
|
|
(105
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
Embedded Derivative
|
|
|
1,280
|
|
|
|
1,280
|
|
|
|
1,396
|
|
|
|
1,396
|
|
The methods and assumptions used to estimate the fair value of
each class of financial instruments for which it is practicable
to estimate that value are explained below:
(a) Cash and Cash
Equivalents The carrying amounts
approximate fair value due to the short-term nature of these
instruments.
(b) Federal Reserve Bank Stock and Federal Home
Loan Bank Stock The carrying
amounts approximate fair value as the stock may be resold to the
issuer at carrying value.
(c) Securities The fair
value of securities is generally obtained from market bids for
similar or identical securities or obtained from independent
securities brokers or dealers.
(d) Loans Fair values are
estimated for portfolios of loans with similar financial
characteristics, primarily fixed and adjustable rate interest
terms. The fair values of fixed rate mortgage loans are based on
discounted cash flows utilizing applicable risk-adjusted spreads
relative to the current pricing of similar fixed rate loans, as
well as anticipated repayment schedules. The fair value of
adjustable rate commercial loans is based on the estimated
discounted cash flows utilizing the discount rates that
approximate the pricing of loans collateralized by similar
commercial properties. The fair value of non-performing loans at
December 31, 2005
84
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2004 was not estimated because it is not practicable to
reasonably assess the credit adjustment that would be applied in
the marketplace for such loans. The estimated fair value is net
of allowance for loan losses.
(e) Accrued Interest
Receivable The carrying amount of
accrued interest receivable approximates its fair value.
(f) Deposits The fair value
of non-maturity deposits is the amount payable on demand at the
reporting date. Non-maturity deposits include
noninterest-bearing demand deposits, savings accounts and money
market checking. Discounted cash flows have been used to value
term deposits such as certificates of deposit. The discount rate
used is based on interest rates currently being offered by the
Bank on comparable deposits as to amount and term.
(g) Accrued Interest
Payable The carrying amount of accrued
interest payable approximates its fair value.
(h) Other Borrowed Funds and Junior Subordinated
Debentures Discounted cash flows have
been used to value other borrowed funds and junior subordinated
debentures.
(i) Loan Commitments and Standby Letters of
Credit The fair value of loan
commitments and standby letters of credit is based upon the
difference between the current value of similar loans and the
price at which the Bank has committed to make the loans. The
fair value of loan commitments and standby letters of credit is
immaterial at December 31, 2005 and 2004.
(j) Interest Rate Swaps, Equity Swap, Embedded
Derivative and Currency Swap The
carrying amounts of the interest rate swaps, equity swap,
embedded derivative and currency swap approximate their fair
value.
NOTE 19 CONDENSED
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS
OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,470
|
|
|
$
|
5,376
|
|
Receivable from Hanmi Bank
|
|
|
|
|
|
|
455
|
|
Investment in Hanmi Bank
|
|
|
505,009
|
|
|
|
475,302
|
|
Investment in Unconsolidated
Subsidiaries
|
|
|
2,986
|
|
|
|
2,986
|
|
Other Assets
|
|
|
3,091
|
|
|
|
1,799
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
512,556
|
|
|
$
|
485,918
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity:
|
Liabilities:
|
|
|
|
|
|
|
|
|
Junior Subordinated Debentures
|
|
$
|
82,406
|
|
|
$
|
82,406
|
|
Other Liabilities
|
|
|
3,373
|
|
|
|
3,602
|
|
Shareholders Equity
|
|
|
426,777
|
|
|
|
399,910
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
512,556
|
|
|
$
|
485,918
|
|
|
|
|
|
|
|
|
|
|
85
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
STATEMENTS
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Equity in Earnings of Hanmi Bank
|
|
$
|
62,001
|
|
|
$
|
39,574
|
|
|
$
|
19,578
|
|
Other Expenses, Net
|
|
|
(6,133
|
)
|
|
|
(4,673
|
)
|
|
|
(602
|
)
|
Income Tax Benefit
|
|
|
2,361
|
|
|
|
1,799
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
58,229
|
|
|
$
|
36,700
|
|
|
$
|
19,213
|
|
Adjustments to Reconcile Net
Income to Net Cash Used In Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of Hanmi Bank
|
|
|
(62,001
|
)
|
|
|
(39,574
|
)
|
|
|
(19,578
|
)
|
Decrease (Increase) in Receivable
from Hanmi Bank
|
|
|
455
|
|
|
|
(224
|
)
|
|
|
(231
|
)
|
Increase in Other Assets
|
|
|
(1,292
|
)
|
|
|
(718
|
)
|
|
|
(1,968
|
)
|
(Decrease) Increase in Other
Liabilities
|
|
|
(229
|
)
|
|
|
132
|
|
|
|
1,065
|
|
Tax Benefit from Exercise of
Non-Qualified Stock Options
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Operating
Activities
|
|
|
(4,109
|
)
|
|
|
(3,684
|
)
|
|
|
(1,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Received from Hanmi Bank
|
|
|
27,541
|
|
|
|
11,990
|
|
|
|
2,300
|
|
Capital Contribution to Hanmi Bank
|
|
|
|
|
|
|
(80,000
|
)
|
|
|
|
|
Acquisition of Pacific Union Bank
|
|
|
|
|
|
|
(71,710
|
)
|
|
|
|
|
Purchase of Investment in
Unconsolidated Subsidiaries
|
|
|
|
|
|
|
(2,475
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In)
Investing Activities
|
|
|
27,541
|
|
|
|
(142,195
|
)
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Junior Subordinated
Debentures
|
|
|
|
|
|
|
82,406
|
|
|
|
|
|
Proceeds from Exercise of Stock
Options
|
|
|
2,528
|
|
|
|
3,425
|
|
|
|
3,141
|
|
Stock Issued Through Private
Placement
|
|
|
|
|
|
|
71,710
|
|
|
|
|
|
Repurchase of Common Stock
|
|
|
(20,041
|
)
|
|
|
|
|
|
|
|
|
Cash Dividends Paid
|
|
|
(9,825
|
)
|
|
|
(7,740
|
)
|
|
|
(4,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided By
Financing Activities
|
|
|
(27,338
|
)
|
|
|
149,801
|
|
|
|
(1,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash
|
|
|
(3,906
|
)
|
|
|
3,922
|
|
|
|
(439
|
)
|
Cash Beginning of
Year
|
|
|
5,376
|
|
|
|
1,454
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH END OF
YEAR
|
|
$
|
1,470
|
|
|
$
|
5,376
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 20 QUARTERLY
FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in thousands; except
per share amounts)
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
43,209
|
|
|
$
|
47,607
|
|
|
$
|
51,952
|
|
|
$
|
56,339
|
|
Interest Expense
|
|
|
11,347
|
|
|
|
13,462
|
|
|
|
16,831
|
|
|
|
20,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Before
Provision for Credit Losses
|
|
|
31,862
|
|
|
|
34,145
|
|
|
|
35,121
|
|
|
|
35,868
|
|
Provision for Credit Losses
|
|
|
136
|
|
|
|
450
|
|
|
|
3,157
|
|
|
|
1,652
|
|
Non-Interest Income
|
|
|
7,357
|
|
|
|
7,347
|
|
|
|
9,200
|
|
|
|
8,312
|
|
Non-Interest Expenses
|
|
|
17,405
|
|
|
|
16,212
|
|
|
|
16,991
|
|
|
|
18,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
21,678
|
|
|
|
24,830
|
|
|
|
24,173
|
|
|
|
24,003
|
|
Income Taxes
|
|
|
8,346
|
|
|
|
9,792
|
|
|
|
9,204
|
|
|
|
9,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
13,332
|
|
|
$
|
15,038
|
|
|
$
|
14,969
|
|
|
$
|
14,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
21,998
|
|
|
$
|
31,514
|
|
|
$
|
39,144
|
|
|
$
|
41,710
|
|
Interest Expense
|
|
|
5,170
|
|
|
|
7,484
|
|
|
|
9,276
|
|
|
|
10,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Before
Provision for Credit Losses
|
|
|
16,828
|
|
|
|
24,030
|
|
|
|
29,868
|
|
|
|
31,023
|
|
Provision for Credit Losses
|
|
|
900
|
|
|
|
850
|
|
|
|
|
|
|
|
1,157
|
|
Non-Interest Income
|
|
|
4,905
|
|
|
|
6,951
|
|
|
|
7,279
|
|
|
|
8,264
|
|
Non-Interest Expenses
|
|
|
10,364
|
|
|
|
17,762
|
|
|
|
18,989
|
|
|
|
19,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
10,469
|
|
|
|
12,369
|
|
|
|
18,158
|
|
|
|
18,679
|
|
Income Taxes
|
|
|
4,083
|
|
|
|
4,824
|
|
|
|
7,089
|
|
|
|
6,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
6,386
|
|
|
$
|
7,545
|
|
|
$
|
11,069
|
|
|
$
|
11,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.23
|
|
Reclassifications have been made to the 2005 and 2004 quarterly
financial statements to conform to the current presentation.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HANMI FINANCIAL CORPORATION
|
|
|
|
By:
|
/s/ Sung Won Sohn, Ph.D.
|
Sung Won Sohn, Ph.D.
President and Chief Executive Officer
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated as
of March 15, 2006.
|
|
|
|
|
|
/s/ Sung Won
Sohn, Ph.D.
Sung
Won Sohn, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
|
|
/s/ Michael J.
Winiarski
Michael
J. Winiarski
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
|
|
/s/ Joon Hyung Lee
Joon
Hyung Lee
Chairman of the Board
|
|
/s/ Richard B. C.
Lee
Richard
B. C. Lee
Vice Chairman of the Board
|
|
|
|
/s/ I Joon Ahn
I
Joon Ahn
Director
|
|
/s/ Stuart S. Ahn
Stuart
S. Ahn
Director
|
|
|
|
/s/ Kraig A. Kupiec
Kraig
A. Kupiec
Director
|
|
/s/ M. Christian
Mitchell
M.
Christian Mitchell
Director
|
|
|
|
/s/ Chang Kyu Park
Chang
Kyu Park
Director
|
|
/s/ Joseph K. Rho
Joseph
K. Rho
Director
|
|
|
|
/s/ William J. Ruh
William
J. Ruh
Director
|
|
/s/ Won R. Yoon
Won
R. Yoon
Director
|
88
HANMI
FINANCIAL CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
3
|
.1
|
|
Certificate of Incorporation, As
Amended*
|
|
3
|
.2
|
|
Bylaws, As Amended*
|
|
4
|
.1
|
|
Specimen Certificate of Registrant*
|
|
10
|
.1
|
|
Employment Agreement with Sung Won
Sohn**
|
|
10
|
.2
|
|
Hanmi Financial Corporation Year
2000 Stock Option Plan***
|
|
10
|
.3
|
|
Hanmi Financial Corporation 2004
CEO Stock Option Plan****
|
|
14
|
|
|
Code of Ethics**
|
|
21
|
|
|
Subsidiaries of the Registrant****
|
|
23
|
|
|
Consent of KPMG LLP
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer Under Section 906 of the Sarbanes-Oxley Act
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer Under Section 906 of the Sarbanes-Oxley Act
|
|
|
|
* |
|
Previously filed and incorporated by reference herein from
Hanmi Financials Registration Statement on
Form S-4
(No. 333-32770)
filed with the SEC on March 20, 2000. |
|
** |
|
Previously filed and incorporated by reference herein from
Hanmi Financials Annual Report on
Form 10-K
for the year ended December 31, 2004 filed with the SEC on
March 16, 2005. |
|
*** |
|
Previously filed and incorporated by reference herein from
Hanmi Financials Registration Statement on
Form S-8
(No. 333-44320
and 44090) filed with the SEC on August 18, 2000. |
|
**** |
|
Previously filed and incorporated by reference herein from
Hanmi Financials Joint Proxy Statement/Prospectus on
Form S-4
filed with the SEC on February 9, 2004. |
89