HANMI BANK
3660 WILSHIRE BOULEVARD, SUITE PH-A
LOS ANGELES, CALIFORNIA 90010
------------------------
Dear Shareholder:
You are cordially invited to attend the 2000 annual meeting of shareholders
of Hanmi Bank, which will be held Wednesday, May 31, 2000, 10:30 a.m. at the
Sheraton Universal Hotel, 333 Universal Terrace Parkway, Universal City,
California 91608.
The board of directors of Hanmi Bank has voted in favor of a plan of
reorganization creating a bank holding company to be called Hanmi Financial
Corporation. IF SHAREHOLDERS APPROVE THE REORGANIZATION, THEN WE WILL EXCHANGE
FOR EACH SHARE OF HANMI BANK COMMON STOCK ONE SHARE OF HANMI FINANCIAL COMMON
STOCK. Thus, instead of owning Hanmi Bank directly, you will own shares in Hanmi
Financial Corporation which will own Hanmi Bank. After the reorganization you
will have the same number of shares in Hanmi Financial as you currently have in
Hanmi Bank.
YOUR STOCK IN HANMI FINANCIAL WILL HAVE A VALUE EQUAL TO THE VALUE OF YOUR
STOCK IN HANMI BANK AND THEREFORE THE EXCHANGE WILL TAKE PLACE WITHOUT ANY
RECOGNITION OF GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES. No changes in the
Hanmi Bank's directors, officers, or other personnel are contemplated as a
result of the reorganization. Hanmi Bank will continue its present business and
operations.
The enclosed proxy statement/prospectus is also provided by the board of
directors in connection with the annual election of the board of directors of
Hanmi Bank (all of whom are also directors of Hanmi Financial) and approval of
our shareholders, as prospective shareholders of Hanmi Financial, of the Hanmi
Financial Year 2000 Stock Option Plan. The Hanmi Financial Year 2000 Stock
Option Plan is intended to replace the Hanmi Bank 1992 Stock Plan. The terms and
conditions of the Year 2000 Stock Option Plan are described in the proxy
statement/prospectus.
We are pleased to enclose for your review this proxy statement/prospectus
that provides you with the information you need to evaluate the reorganization.
We encourage you to review it carefully.
Your board of directors recommends a vote "For" the reorganization, "For"
the election of the proposed nominees to the board and "For" the Hanmi Financial
Year 2000 Stock Option Plan.
I strongly support the organization of Hanmi Financial Corporation and
enthusiastically recommend that you vote in favor of it.
Very truly yours,
[/S/ CHUNG HOON YOUK]
Chung Hoon Youk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
------------------------
YOU SHOULD REVIEW "RISK FACTORS" BEGINNING ON PAGE 7.
These securities are not deposits or accounts, and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the California Department of Financial Institutions nor
any state securities commission has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this proxy statement/ prospectus. Any
representation to the contrary is a criminal offense.
The date of this proxy statement/prospectus is May 10, 2000, and is being
mailed to Hanmi Bank shareholders on or about May 10, 2000.
HANMI BANK
3660 WILSHIRE BOULEVARD, SUITE PH-A
LOS ANGELES, CALIFORNIA 90010
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 31, 2000
------------------------
To the Shareholders of
HANMI BANK:
The Annual Meeting of Shareholders of Hanmi Bank will be held at the
Sheraton Universal Hotel, 333 Universal Terrace Parkway, Universal City,
California 91608 on Wednesday, May 31, 2000, at 10:30 a.m., local time, for the
following purposes:
1. REORGANIZATION OF HANMI BANK INTO A BANK HOLDING COMPANY. To consider
and act upon a proposal to approve the plan of reorganization and
agreement of merger dated as of April 15, 2000, pursuant to which:
- Hanmi Bank will continue as a wholly owned subsidiary of Hanmi
Financial.
- Hanmi Financial will become the sole shareholder and holding company of
Hanmi Bank.
- You will become shareholders of Hanmi Financial. You will receive one
share of Hanmi Financial for each share of Hanmi Bank that you own
prior to the reorganization.
A copy of the plan of reorganization and agreement of merger is attached
as Appendix A to the proxy statement/prospectus.
2. ELECTION OF DIRECTORS. The election of eleven persons to the board of
directors to serve until the next annual meeting and until their
successors are elected and qualified. The following persons have been
nominated:
Eung Kyun Ahn Richard B. C. Lee
I Joon Ahn Chang Kyu Park
Stuart S. Ahn Joseph K. Rho
George S. Chey Won R. Yoon
Ki Tae Hong Chung Hoon Youk
Joon H. Lee
Each of the foregoing persons are currently members of the Hanmi Bank
Board of Directors and each person is also a director of Hanmi
Financial.
3. EMPLOYER STOCK OPTION PLAN. As prospective shareholders of Hanmi
Financial Corporation to adopt the Hanmi Financial Corporation Year 2000
Stock Option Plan.
4. OTHER BUSINESS. To consider and transact other business that may
properly come before the Annual Meeting and at any adjournments or
postponements.
The Bylaws of Hanmi Bank provide for the nomination of directors in the
following manner.
"Nominations for election of members of the board of directors may be made
by the board of directors or by any shareholder of any outstanding class of
voting stock of the corporation entitled to vote for the election of
directors. Notice of intention to make any nominations, other than by the
board of directors, shall be received by the president of the corporation no
more than 60 days prior to any meeting of shareholders called for the
election of directors, and no more than 10 days
after the date the notice of such meeting is sent to shareholders pursuant
to Section 2.2 of the bylaws, provided, however, that if 10 days' notice of
the meeting is given to shareholders, such notice of intention to nominate
shall be received by the president of the corporation not later than the
time fixed in the notice of the meeting for the opening of the meeting. Such
notification shall contain the following information to the extent known to
the notifying shareholder:
- The name and address of each proposed nominee;
- The principal occupation of each proposed nominee;
- The number of shares of voting stock of the corporation owned by each
proposed nominee;
- The name and residence address of the notifying shareholder;
- The number of the shares of voting stock of the corporation owned by the
notifying shareholder.
Nominations not made in accordance herewith shall be disregarded by the then
chairman of the meeting and the inspectors of election shall then disregard
all votes cast for each such nominee."
Only shareholders of record on the books of Hanmi Bank as of the close of
business on May 1, 2000 will be entitled to notice of and to vote at the Annual
Meeting.
YOUR VOTE IS VERY IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. YOUR PROXY WILL
BE REVOCABLE, EITHER IN WRITING OR BY VOTING IN PERSON AT THE ANNUAL MEETING, AT
ANY TIME PRIOR TO ITS EXERCISE, BY FOLLOWING THE PROCEDURE DESCRIBED IN THE
PROXY STATEMENT/PROSPECTUS.
If you would like to attend the Annual Meeting and your shares are held by a
broker, bank or other nominee, you must bring to the meeting a recent brokerage
statement or a letter from the nominee confirming your beneficial ownership of
the shares. You must also bring a form of personal identification. In order to
vote your shares at the Annual Meeting, you must obtain from the nominee a proxy
issued in your name.
By Order of the Board of Directors
[/S/ CHUNG HOON YOUK]
Chung Hoon Youk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
May 10, 2000
Los Angeles, California
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS, PLEASE
INDICATE ON THE PROXY WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
SHAREHOLDERS MAY OBTAIN, WITHOUT CHARGE, A COPY OF THE HANMI BANK ANNUAL
DISCLOSURE STATEMENT PREPARED PURSUANT TO PART 350 OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION'S RULES AND REGULATIONS BY WRITING HANMI BANK AT 3660
WILSHIRE BOULEVARD, PENTHOUSE "A", LOS ANGELES, CALIFORNIA 90010 OR BY CALLING
HANMI BANK AT (213) 382-2200.
HANMI BANK
AND
HANMI FINANCIAL CORPORATION
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
PAGE
--------
SUMMARY..................................................... 2
SUMMARY FINANCIAL INFORMATION............................... 5
RISK FACTORS................................................ 7
FORWARD-LOOKING STATEMENTS.................................. 10
THE ANNUAL MEETING OF HANMI BANK............................ 12
General................................................... 12
Record Date; Solicitation of Proxies...................... 12
Revocability of Proxies................................... 12
Matters to be Considered at the Meeting................... 12
Proposal No. 1--Approval of the Reorganization.......... 12
Proposal No. 2--Election of Directors................... 13
Proposal No. 3--Approval of the Hanmi Financial Year
2000 Stock Option Plan................................. 13
PROPOSAL 1
BANK HOLDING COMPANY REORGANIZATION......................... 13
Reasons for the Reorganization............................ 13
Organizational Transactions............................... 14
Terms of the Plan of Reorganization....................... 14
Exchange of Share Certificates............................ 16
Costs of Reorganization................................... 16
Regulatory Approvals...................................... 16
Dissenting Shareholders' Rights........................... 17
Accounting Treatment...................................... 17
Material Federal Income Tax Consequences.................. 17
Restrictions on Affiliates................................ 18
Recommendations........................................... 18
HANMI FINANCIAL STOCK....................................... 19
COMPARISON OF HANMI FINANCIAL COMMON STOCK AND HANMI BANK
COMMON STOCK.............................................. 19
Classification of Board of Directors, Filling Vacancies;
Removal of Directors.................................... 19
Amendments to the Certificate of Incorporation............ 20
Voting Rights............................................. 20
Dividend Restrictions..................................... 20
Removal of Directors...................................... 21
Indemnification and Limitation of Liability............... 22
Inspection of Shareholder List............................ 23
California and Delaware Law Shareholder Voting in Mergers
and Other Acquisitions.................................. 23
Shareholder Derivative Suits.............................. 24
Appraisal Rights.......................................... 24
Dissolution............................................... 25
Other Attributes of the Stock of Hanmi Financial.......... 25
RESTRICTIONS ON ACQUISITION OF HANMI FINANCIAL.............. 27
California and Federal Banking Law........................ 27
Delaware Law.............................................. 27
i
PAGE
--------
Consideration of Factors Other Than Price in
Acquisitions............................................ 29
Voting on Interested Party Business Combinations.......... 29
Takeover Provisions in Hanmi Financial's Certificate of
Incorporation and Bylaws................................ 30
MARKET PRICE OF HANMI BANK COMMON STOCK..................... 33
DIVIDENDS................................................... 33
Hanmi Financial........................................... 33
Hanmi Bank................................................ 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION........................ 34
Overview.................................................. 34
Results of Operations Net Interest Income and Net Interest
Margin.................................................. 35
Provision for Loan Losses................................. 37
Non-interest Income....................................... 38
Non-interest Expense...................................... 39
Provision for Income Taxes................................ 40
Financial Condition....................................... 40
Loan Portfolio............................................ 40
Non-performing Assets..................................... 42
Allowance for Loan Losses................................. 44
Investment Portfolio...................................... 47
Deposits.................................................. 48
Interest Rate Risk Management............................. 49
Liquidity and Capital Resources........................... 53
Accounting Matters........................................ 55
Impact of Inflation; Seasonality.......................... 55
BUSINESS OF HANMI BANK...................................... 55
General................................................... 55
Competition and Service Area.............................. 55
Lending Activities........................................ 56
Commercial Loans.......................................... 56
Small Business Administration ("SBA") Guaranteed Loans.... 57
Loans Secured by Real Estate.............................. 57
Loans to individuals...................................... 59
Off-Balance Sheet Commitments............................. 59
Lending Procedures and Loan Approval Process.............. 60
Asset Quality............................................. 61
Allowance and Provisions for Loan Losses.................. 62
Premises.................................................. 63
Employees................................................. 63
Litigation................................................ 63
Insurance................................................. 63
Competition............................................... 63
SUPERVISION AND REGULATION.................................. 64
General................................................... 64
Hanmi Financial........................................... 65
Hamni Bank................................................ 66
Dividends and Other Transfers of Funds.................... 66
Capital Standards......................................... 67
Prompt Corrective Action and Other Enforcement
Mechanisms.............................................. 68
Safety and Soundness Standards............................ 68
ii
PAGE
--------
Premiums for Deposit Insurance............................ 69
Interstate Banking and Branching.......................... 69
Community Reinvestment Act and Fair Lending
Developments............................................ 69
Financial Modernization Act............................... 70
MANAGEMENT OF HANMI FINANCIAL............................... 71
Directors................................................. 71
Director Compensation..................................... 71
Executive Officer Compensation............................ 71
PROPOSAL 2
ELECTION OF HANMI BANK DIRECTORS............................ 71
The Board of Directors and Committees..................... 72
Compensation of Non-Executive Directors................... 73
Executive Officers........................................ 74
Security Ownership of Certain Beneficial Owners and
Management.............................................. 74
BENEFICIAL OWNERSHIP........................................ 75
Executive Compensation.................................... 76
Employment Agreements..................................... 77
Hanmi Bank 1992 Stock Option Plan......................... 77
Stock Option Grants....................................... 78
Options Exercised......................................... 78
Options Outstanding as of the End of the Year............. 79
Certain Relationships and Related Transactions............ 79
PROPOSAL 3
APPROVAL OF HANMI FINANCIAL YEAR 2000 STOCK OPTION PLAN..... 80
Summary of Plan........................................... 80
Administration............................................ 80
Eligibility............................................... 80
Option Price.............................................. 81
Adjustments Upon Changes In Common Stock; Reorganization,
Merger, Consolidation................................... 81
Expiration, Termination and Transfer of Options........... 81
Termination and Amendment of the Plan..................... 82
Federal Income Tax Consequences........................... 82
Comparison to the Hanmi Bank Incentive Plan............... 83
New Plan Benefits......................................... 84
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 84
OTHER BUSINESS.............................................. 85
LEGAL MATTERS............................................... 85
EXPERTS..................................................... 85
WHERE YOU CAN FIND MORE INFORMATION......................... 85
iii
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION
Q: WHY IS THIS REORGANIZATION PROPOSED?
A: The Board of Directors of Hanmi Bank believes that the bank holding company
structure will provide greater flexibility in terms of operations, expansion,
and diversification.
Q: WHAT WILL I RECEIVE IN THIS REORGANIZATION?
A: You will have the right to receive one share of Hanmi Financial common stock
for each share of Hanmi Bank common stock that you own immediately prior to the
reorganization.
Q: HOW DO I VOTE?
A: Simply indicate on your proxy card how you want to vote and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the Hanmi Bank annual meeting. HANMI BANK'S
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
REORGANIZATION.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not vote your shares for you unless you provide instructions
to your broker on how to vote. It is important therefore that you follow the
directions provided by your broker regarding how to instruct your broker to vote
your shares. If you fail to instruct your broker on how to vote your shares, the
effect will be the same as a vote against the reorganization.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE REORGANIZATION TO ME?
A: You are generally not expected to incur federal income tax as a result of the
reorganization. To review the tax consequences to Hanmi Bank shareholders in
greater detail, see pages 17 through 18. THE TAX CONSEQUENCES OF THE
REORGANIZATION TO YOU WILL DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR
TAX ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE
REORGANIZATION TO YOU.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at the
annual meeting. If your shares are held in your name you may do this in one of
three ways. First, you may send a written notice stating that you would like to
revoke your proxy. Second, you may complete and submit a new proxy card. If you
choose either of these two methods, you must submit your notice of revocation or
your new proxy card to Hanmi Bank's secretary. Third, you may attend the meeting
and vote in person. Simply attending the Hanmi Bank's annual meeting, however,
will not revoke your proxy. If you have instructed a broker to vote your shares,
you must follow directions received from your broker to change your vote or to
vote at the Hanmi Bank annual meeting.
Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. After the reorganization is completed, you will receive written
instructions for exchanging your stock certificates.
Q: WHEN YOU DO EXPECT THIS REORGANIZATION TO BE COMPLETED?
A: We are currently working to complete the reorganization in June of 2000.
Q: WHY HAVE YOU SENT THIS DOCUMENT AND WHO CAN HELP ANSWER MY QUESTIONS?
A: This proxy statement/prospectus contains important information regarding this
proposed reorganization, as well as information about Hanmi Bank and Hanmi
Financial. We urge you to read this proxy statement/prospectus carefully,
including its appendices. You may also want to review the documents listed under
"WHERE CAN YOU FIND MORE INFORMATION" on page 85.
If you have more questions about the reorganization or the annual meeting, you
should contact:
Yong Ku Choe
Hanmi Bank
Senior Vice President and Chief Financial Officer
3660 Wilshire Boulevard, Suite PH-A
Los Angeles, California 90010
(213) 382-2200
SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. WE URGE YOU TO
READ THIS ENTIRE DOCUMENT, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF HANMI BANK TO FULLY
UNDERSTAND THE REORGANIZATION.
FORMATION OF A BANK HOLDING COMPANY WHICH WILL OWN HANMI BANK
The Board of Directors is asking you to vote on a proposal to organize a
bank holding company, Hanmi Financial, which will own Hanmi Bank. The new
corporate structure will permit Hanmi Financial and Hanmi Bank greater
flexibility in terms of operations, expansion and diversification. In addition,
it will allow us to:
- Offer new services.
- Enjoy access to new markets.
- Participate in activities which are not permissible for Hanmi Bank to
engage in directly.
We have attached the reorganization agreement as Appendix A at the back of
this proxy statement/prospectus. We encourage you to read the reorganization
agreement, as it is the legal document that governs the transaction.
In the reorganization, Hanmi Bank will continue in its operations as
presently conducted under its management, but Hanmi Bank will be a wholly owned
subsidiary of Hanmi Financial.
THE COMPANIES
HANMI FINANCIAL CORPORATION
Hanmi Financial Corporation has not engaged in any business since its
incorporation on March 14, 2000. After the reorganization, Hanmi Financial will
become a registered bank holding company, whose principal asset will be its
stockholdings in Hanmi Bank.
HANMI BANK
Hanmi Bank is a California state-chartered bank. Hanmi Bank engages in the
commercial banking business in greater Los Angeles and Orange Counties of
California.
HANMI MERGER CO.
Hanmi Merger Co. is a California corporation newly organized as a wholly
owned subsidiary of Hanmi Financial on March 21, 2000. Hanmi Merger Co.'s sole
purpose is to merge into Hanmi Bank to facilitate the reorganization. Hanmi
Merger Co. will disappear after the reorganization.
THE MANAGEMENT OF HANMI BANK WILL CONTINUE AFTER THE REORGANIZATION
The directors and officers of Hanmi Bank will continue to be directors and
officers of Hanmi Bank following the reorganization. After the reorganization,
the present directors of Hanmi Bank will continue to be directors of Hanmi
Financial, certain of the officers of Hanmi Bank will also serve as officers of
Hanmi Financial.
2
YOU WILL RECEIVE ONE SHARE OF HANMI FINANCIAL COMMON STOCK FOR EACH SHARE OF
HANMI BANK COMMON STOCK YOU OWN.
If the reorganization is approved, we will exchange your Hanmi Bank common
stock shares for common stock shares in Hanmi Financial. You will receive one
share of Hanmi Financial stock for each share of your Hanmi Bank common stock
you own immediately prior to the reorganization.
WE NEED YOUR APPROVAL
In order to complete the reorganization, we need the approval of owners of
at least a majority of the outstanding shares of common stock of Hanmi Bank. As
of May 1, 2000, the date on which a person must be a stockholder to be entitled
to vote, there were approximately 7,414,186 shares of common stock outstanding
and entitled to vote. Therefore, we will need the owners of at least
approximately 7,414,187 shares to vote in favor of the reorganization. The board
of directors of Hanmi Bank unanimously recommends voting in favor of the
reorganization. Approval of the reorganization is not dependent on the approval
of the Hanmi Financial Corporation Year 2000 Stock Option Plan.
THE DIRECTORS AND EXECUTIVE OFFICERS INTEND TO VOTE IN FAVOR OF THE
REORGANIZATION
Hanmi Bank's directors, executive officers, and their affiliates, who
beneficially owned in the aggregate approximately (on a diluted basis) 36.07%
(as of December 31, 1999) of the outstanding shares of Hanmi Bank common stock,
intend to vote for the approval of the reorganization.
SHAREHOLDERS DO NOT HAVE DISSENTERS' APPRAISAL RIGHTS
If you vote against the reorganization or do not vote, you will NOT be
entitled to dissenters' appraisal rights.
THE REORGANIZATION WILL BE TAX-FREE TO YOU
The reorganization will be tax-free to Hanmi Bank shareholders for federal
income tax purposes. The reorganization will also be tax-free to Hanmi Bank and
Hanmi Financial for federal income tax purposes. However, because tax matters
are complicated, and tax results may vary among shareholders, we urge you to
contact your own tax advisor to understand fully how the reorganization will
affect you.
SIGNIFICANT DIFFERENCES BETWEEN HANMI FINANCIAL AND HANMI BANK
Hanmi Financial's charter documents contain certain provisions that Hanmi
Bank's charter documents do not have relating to the board of directors and
certain business combinations, all of which may be deemed to have
"anti-takeover" effects, including a "classified" board of directors,
elimination of action by written consent of shareholders, supermajority vote for
certain business combinations, elimination of cumulative voting and a two-thirds
vote to approve or amend certain provisions of the certificate of incorporation.
These Hanmi Financial charter document provisions could adversely affect the
market price of Hanmi Financial common stock. See "Comparison of the Rights of
Holders of Hanmi Financial Common Stock and Hanmi Bank Common Stock."
BENEFITS TO DIRECTORS AND OFFICERS OF THE REORGANIZATION
The reorganization will not directly provide any substantive benefits to
directors and officers of Hanmi Bank, who will continue to be directors and
officers of Hanmi Financial.
3
EXISTING OPTIONS TO ACQUIRE HANMI BANK COMMON STOCK WILL BE ENTITLED TO PURCHASE
HANMI FINANCIAL COMMON STOCK AFTER THE REORGANIZATION.
After the reorganization is completed all of the obligations of Hanmi Bank
under the Hanmi Bank 1992 Stock Option Plan will become obligations of Hanmi
Financial on the same terms and conditions, with the exception that the
securities issued pursuant to the Hanmi Bank 1992 Stock Option Plan will be
Hanmi Financial common stock.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the reorganization will be
treated similarly to a "pooling of interests," which means Hanmi Bank's assets
and liabilities will be carried forward at their previously recorded amounts,
without change, as the consolidated assets and liabilities of Hanmi Financial
following the reorganization.
REGULATORY APPROVALS
We cannot complete the reorganization unless it is approved or exempted by
the Board of Governors of the Federal Reserve System, FDIC and the California
Department of Financial Institutions.
Hanmi Bank and Hanmi Financial have filed all of the required applications
or notices with the Board of Governors of the Federal Reserve System, the FDIC,
and the California Department of Financial Institutions.
As of the date of this document, the Board of Governors of the Federal
Reserve Systems, the FDIC and the California Department of Financial
Institutions have not granted their waivers or confirmed that no approval or
waiver is required. While we do not know of any reason that we would not be able
to obtain the necessary approvals, exemptions or waivers in a timely manner, we
cannot be certain when or if we will obtain them.
HANMI FINANCIAL YEAR 2000 STOCK OPTION PLAN
SUMMARY OF THE PLAN
The Hanmi Financial Year 2000 Stock Option Plan is designed to replace the
Hanmi Bank 1992 Stock Option Plan and is identical to the Hanmi Bank 1992 Stock
Option Plan in all material respects, except that the Hanmi Financial Year 2000
Stock Option Plan reserves 1,482,837 shares of Hanmi Financial common stock for
options and the Hanmi Bank 1992 Stock Option Plan reserves 320,397 shares of
Hanmi Bank common stock for options. See "Approval of Hanmi Financial
Corporation Year 2000 Stock Option Plan."
VOTE REQUIRED
A majority of the outstanding shares of Hanmi Bank, as prospective
shareholders of Hanmi Financial, are being asked to approve the Hanmi Financial
Year 2000 Stock Option Plan. However, if the reorganization is not consummated,
the votes for the Hanmi Financial Year 2000 Stock Option Plan will be counted as
votes to approve an amendment to the Hanmi Bank Stock Option Plan to increase
the number of shares to be issued under the plan to 1,482,837. Approval of the
Hanmi Financial Year 2000 Stock Option Plan is not conditioned on the approval
of the reorganization.
4
SUMMARY FINANCIAL INFORMATION
The following table presents selected historical financial information,
including per share information as adjusted for the stock dividends declared by
Hanmi Bank. This selected historical financial data should be read in
conjunction with the financial statements of Hanmi Bank and the notes thereto
appearing elsewhere in this registration statement and the information contained
in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION". The selected historical financial data as of and for each of the
years in the five years ended December 31, 1999, are derived from Hanmi Bank's
audited financial statements. In the opinion of Management of Hanmi Bank, the
information presented reflects all adjustments considered necessary for a fair
presentation of the results of such periods.
SUMMARY FINANCIAL INFORMATION
FOR THE YEAR ENDED AND AS OF DECEMBER 31,
(dollars in thousand, except for per share data)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SUMMARY STATEMENT OF OPERATIONS DATA:
Interest income.............................. $52,619 $42,728 $37,781 $33,193 $30,708
Interest expense............................. 18,847 15,730 12,876 11,312 9,358
------- ------- ------- ------- -------
Net interest income before provision for
possible loan losses....................... 33,772 26,998 24,905 21,881 21,350
------- ------- ------- ------- -------
Provision for possible loan losses........... 1,000 3,050 2,650 1,850 7,960
Noninterest income........................... 12,522 10,305 8,945 7,902 8,732
Noninterest expense.......................... 24,606 19,782 18,566 17,409 16,914
------- ------- ------- ------- -------
Income before income taxes................... 20,688 14,471 12,634 10,524 5,208
Income tax expense........................... 8,682 5,207 4,473 3,815 2,027
------- ------- ------- ------- -------
Net income................................. $12,006 $ 9,264 $ 8,161 $ 6,709 $ 3,181
======= ======= ======= ======= =======
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SUMMARY STATEMENT OF FINANCIAL CONDITION:
Cash and due from Banks................. $ 53,476 $ 43,729 $ 37,810 $ 38,693 $ 28,194
Net loans(1)............................ 474,650 331,286 288,370 243,676 208,895
Total investment securities............. 171,238 218,978 146,376 110,366 81,857
Federal funds sold and securities
purchased under agreements to
resell................................ 10,000 27,000 8,000 44,000 58,000
Other real estate owned................. 671 1,090 742
Total assets............................ 740,260 650,765 500,074 454,373 391,921
Total deposits.......................... 655,730 586,284 446,545 410,171 355,993
Total liabilities....................... 672,429 591,790 451,738 414,359 358,578
Total shareholders' equity.............. 67,831 58,975 48,336 40,014 33,343
Average interest earning assets......... 614,028 488,266 421,698 379,711 326,209
Average total assets.................... 690,797 548,198 470,421 414,972 360,522
Average interest bearing liabilities.... 424,722 331,475 281,376 249,655 208,172
5
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Net income per share--Basic...... $ 1.80 $ 1.45 $ 1.31 $ 1.30 $ 0.60
Net income per share--Diluted.... $ 1.80 $ 1.45 $ 1.27 $ 1.28 $ 0.59
Book value per share............. $ 10.15 $ 9.84 $ 9.11 $ 8.40 $ 7.56
Cash dividends................... 0.00 0.00 0.00 0.00 0.00
Common shares outstanding........ 6,679,670 5,996,054 5,307,638 4,761,405 4,408,845
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SELECTED PERFORMANCE RATIOS:
Return on average equity(2)............................ 18.50% 16.71% 18.38% 18.39% 9.63%
Return on average assets(3)............................ 1.74% 1.69% 1.73% 1.62% 0.88%
Net interest spread(4)................................. 4.13% 4.01% 4.38% 4.26% 4.87%
Net interest margin(5)................................. 5.50% 5.53% 5.91% 5.82% 6.51%
Efficiency ratio(6).................................... 53.15% 53.03% 54.78% 58.45% 56.23%
Average shareholders' equity to average total assets... 9.39% 10.11% 9.44% 8.79% 9.17%
SELECTED CAPITAL RATIOS:
Tier 1 capital to average total assets................. 9.20% 8.66% 9.85% 8.81% 8.51%
Tier 1 capital to total risk-weighted assets........... 12.63% 11.61% 12.29% 13.23% 12.32%
Total capital to total risk-weighted assets............ 13.88% 12.86% 13.55% 13.22% 12.32%
SELECTED ASSET QUALITY RATIOS:
Nonperforming loans to total gross loans(7)............ 0.62% 0.97% 1.15% 1.64% 4.51%
Nonperforming assets to total gross loans and other
real estate owned(8)................................. 0.62% 1.16% 1.15% 2.07% 4.84%
Net charge-offs to average total loans................. 0.19% 1.06% 0.76% 0.51% 2.51%
Allowance for loan losses to total gross loans......... 2.18% 3.04% 3.13% 3.47% 3.75%
- ------------------------
(1) Represents the sum of loans receivable, net of allowance for loan losses,
and loans held for sale, at the lower of cost or market.
(2) Net income divided by average shareholders' equity.
(3) Net income divided by average total assets.
(4) Represents the average rate earned on interest-bearing assets less the
average rate paid to interest-bearing liabilities
(5) Represents net interest income as percentage of average interest-earning
assets.
(6) Represents the ratio of noninterest expense to the sum of net interest
income before provision for loan losses and total noninterest income
excluding securities gains and losses.
(7) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(8) Nonperforming assets consist of nonperforming loans (see footnote
(7) above) and other real estate owned.
6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION WE PROVIDE IN THIS PROXY
STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE
DECIDING WHETHER TO VOTE FOR THE REORGANIZATION. THESE ARE NOT THE ONLY RISKS WE
FACE. SOME RISKS ARE NOT YET KNOWN TO US AND THERE ARE OTHERS WE DO NOT
CURRENTLY BELIEVE ARE MATERIAL BUT COULD LATER TURN OUT TO BE SO. ALL OF THESE
COULD IMPAIR OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE BECAUSE OF GENERAL MARKET CONDITIONS OR
IF ANY OR ALL OF THESE RISKS CAME TO PASS, AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT. IN EVALUATING THE RISKS OF INVESTING IN US, YOU SHOULD ALSO
EVALUATE THE OTHER INFORMATION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS.
WE COULD BE NEGATIVELY IMPACTED BY A DOWNTURN IN ECONOMIC CONDITIONS IN
ASIA. Most of our trade finance activities are related to trade with Asia, but
all of our loans are made to companies domiciled in the United States.
Consequently, we do not have direct credit exposure to economic conditions in
Asia. Adverse economic and political conditions in Asia, including currency
devaluation, crises in leadership succession, or military conflict, may increase
our exposure to economic and transfer risk. Transfer risk may increase because
of an entity's incapacity to obtain the foreign exchange needed to meet its
obligations or to provide liquidity. Although our operations have not been
adversely affected by the fiscal crisis in Asia which began in 1998, we cannot
assure you that this crisis or in a similar crisis our financial condition and
results of operations would not be negatively impacted.
FUTURE SALES OF SECURITIES COULD DIMINISH THE INTERESTS OF OUR
SHAREHOLDERS. If we raise additional funds or make acquisitions by issuing
equity or convertible debt securities, the percentage ownership of our
shareholders will be diluted. Also, any new securities could have rights,
preferences and privileges senior to those of our common stock. We currently do
not have any commitments for additional financing. We cannot be certain that
additional financing will be available in the future to the extent required or
that, if available, it will be made on acceptable terms.
DETERIORATION OF ECONOMIC CONDITIONS IN SOUTHERN CALIFORNIA COULD ADVERSELY
AFFECT OUR LOAN PORTFOLIO AND REDUCE THE DEMAND FOR OUR SERVICES. We focus our
business in Southern California, primarily in the greater Los Angeles and Orange
County areas. In the early 1990's, the California economy experienced an
economic recession that increased the level of delinquencies and losses [for
Hanmi Bank and] many of the state's other financial institutions. Another
recession could occur. An economic slow-down in Southern California could have
the following consequences, any of which could reduce our net income:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Claims and lawsuits may increase;
- Demand for Hanmi Bank's products and services may decline;
- Collateral for loans made by Hanmi Bank, especially real estate, may
decline in value, in turn reducing customers' borrowing power, reducing
the value of assets associated with problem loans and reducing collateral
coverage of Hanmi Bank's existing loans.
A DOWNTURN IN THE REAL ESTATE MARKET COULD SERIOUSLY IMPAIR OUR LOAN
PORTFOLIO. As of December 31, 1999, approximately 63% percent of the value of
our loan portfolio consisted of loans secured by various types of real estate.
Most of our real property collateral is located in Southern California. If real
estate values decline significantly, especially in California, higher vacancies
and other factors could harm the financial condition of our borrowers, the
collateral for our loans will provide less security, and we would be more likely
to suffer losses on defaulted loans.
7
ENVIRONMENTAL LAWS COULD FORCE US TO PAY FOR ENVIRONMENTAL PROBLEMS. The
cost of cleaning up or paying damages and penalties associated with
environmental problems could increase our operating expenses. When a borrower
defaults on a loan secured by real property, we often purchase the property in
foreclosure or accept a deed to the property surrendered by the borrower. We may
also take over the management of commercial properties whose owners have
defaulted on loans. We also own and lease premises where our branches and other
facilities are located. While we have lending, foreclosure and facilities
guidelines intended to exclude properties with an unreasonable risk of
contamination, hazardous substances may exist on some of the properties that
Hanmi Bank owns, manages or occupies. We face the risk that environmental laws
could force us to clean the properties at our own expense. It may cost much more
to clean a property than the property is worth. We could also be liable for
pollution generated by a borrower's operations if we took a role in managing
those operations after a default. We may also find it difficult or impossible to
sell contaminated properties. To date, Hanmi Bank has not been required to pay
any amounts toward the cost of cleaning up or paying damages and penalties
associated with environmental problems.
BECAUSE OUR BRANCHES ARE CONCENTRATED IN SOUTHERN CALIFORNIA, HANMI BANK
FACES RISKS CAUSED BY NATURAL DISASTERS, INCLUDING EARTHQUAKES. A major
earthquake could result in material loss to us. Our operations are concentrated
in Southern California, especially the greater Los Angeles and Orange County
areas. A significant percentage of our loans are secured by real estate.
California is an earthquake-prone region. We have a disaster-recovery plan with
offsite data processing resources located in New Jersey. However, our properties
and most of the real and personal property securing loans in our portfolio are
in Southern California. Many of our borrowers could suffer uninsured property
damage, experience interruption of their businesses or lose their jobs after an
earthquake. Those borrowers might not be able to repay their loans, and the
collateral for loans could decline significantly in value. Unlike a bank with
operations that are more geographically diversified, we are vulnerable to
greater losses if an earthquake, fire, flood or other natural catastrophe occurs
in Southern California.
LOAN LOSS RESERVES MAY NOT COVER ACTUAL LOANS LOSSES. If the actual loan
losses exceed the amount reserved, it will hurt our business. We try to limit
the risk that borrowers will fail to repay loans by carefully underwriting the
loans. Losses nevertheless occur. We create reserves for estimated loan losses
in our accounting records. We base these allowances on estimates of the
following:
- industry standards;
- historical experience with our loans;
- evaluation of current and predicted economic conditions;
- regular reviews of the quality mix and size of the overall loan portfolio;
- regular reviews of delinquencies; and
- the quality of the collateral underlying our loans.
AN INCREASE IN NON-PERFORMING ASSETS WOULD REDUCE OUR INCOME AND INCREASE
OUR EXPENSES. If the level of non-performing assets rises in the future, it
could adversely affect our operating results. Non-performing assets are mainly
loans on which the borrowers are not making their required payments.
Non-performing assets also include loans that have been restructured to permit
the borrower to have smaller payments and real estate that has been acquired
through foreclosure of unpaid loans. To the extent that our assets are
non-performing, we have less cash available for lending and other activities.
WE HAVE SPECIFIC RISKS ASSOCIATED WITH SMALL BUSINESS ADMINISTRATION
LOANS. Hanmi Bank has generally sold the guaranteed portion of Small Business
Administration ("SBA") loans in the secondary
8
market. There can be no assurance that Hanmi Bank will be able to continue
originating these loans, or that a secondary market will exist for, or that
Hanmi Bank will continue to realize premiums upon the sale of, the guaranteed
portions of the SBA loans. The federal government presently guarantees 70% to
95% of the principal amount of each qualifying SBA loan. There can be no
assurance that the federal government will maintain the SBA program, or if it
does, that such guaranteed portion will remain at its current funding level.
Furthermore, there can be no assurance that Hanmi Bank will retain its preferred
lender status, which, subject to certain limitations, allows Hanmi Bank to
approve and fund SBA loans without the necessity of having the loan approved in
advance by the SBA, or that if it does, the federal government will not reduce
the amount of such loans which can be made by Hanmi Bank. Hanmi Bank believes
that its SBA loan portfolio does not involve more than a normal risk of
collection. However, since Hanmi Bank has sold the guaranteed portion of
substantially all of its SBA loan portfolio, Hanmi Bank incurs a pro rata credit
risk on the nonguaranteed portion of the SBA loans since Hanmi Bank shares pro
rata with the SBA in any recoveries. In the event of default on an SBA loan,
Hanmi Bank's pursuit of remedies against a borrower is subject to SBA approval,
and where the SBA establishes that its loss is attributable to deficiencies in
the manner in which the loan application has been prepared and submitted, the
SBA may decline to honor its guarantee with respect to Hanmi Bank's SBA loans or
it may seek the recovery of damages from Hanmi Bank. The SBA has never declined
to honor its guarantees with respect to its SBA loans, although no assurance can
be given that the SBA would not attempt to do so in the future.
YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES IN THE FUTURE IF AN ACTIVE
TRADING MARKET FOR OUR STOCK DOES NOT DEVELOP. Presently there is not an active
trading market for Hanmi Bank common stock, and we do not expect an active
trading market for Hanmi Financial common stock. Hanmi Financial common stock
will be traded "over-the-counter." This means the common stock is not listed for
trading on any stock exchange (the New York Stock Exchange is the largest) or on
NASDAQ. As a result, your ability to sell your shares of common stock will be
negatively impaired. If you want to sell your Hanmi Financial common stock, you
may encounter delay or have to accept a reduced price. We expect that the
trading market for Hanmi Financial common stock will be limited.
BECAUSE THE PRICE OF OUR COMMON STOCK MAY VARY WIDELY, WHEN YOU DECIDE TO
SELL IT, YOU MAY ENCOUNTER A DELAY OR HAVE TO ACCEPT A REDUCED PRICE. The price
of Hanmi Financial common stock may fluctuate widely, depending on many factors.
Some of these factors have little to do with the operating results or our
intrinsic worth of Hanmi Bank or Hanmi Financial. For example, the market value
of Hanmi Financial common stock may be affected by the trading volume of the
shares, announcements of expanded services by us or our competitors, general
banks in the banking industry, general price and volume fluctuations in the
stock market, acquisition of related companies, variations in quarterly
operating results, and the dilutive effects of future issuances of common or
convertible preferred stock. Also, if the trading market for Hanmi Financial
common stock remains limited, that may exaggerate changes in market value,
leading to more price volatility than would occur in a more active trading
market.
NO CASH DIVIDENDS IN THE FORESEEABLE FUTURE. We do not intend to pay cash
dividends on Hanmi Financial's common stock in the foreseeable future. Instead,
we intend to reinvest our earnings in our business. In addition, to pay
dividends to our shareholders, Hanmi Financial would need to obtain funds from
Hanmi Bank, its subsidiary. Their ability, in turn, to pay dividends to us is
limited by California law and federal banking law. In particular, Hanmi Bank may
not pay a dividend that exceeds either of the following:
- Hanmi Bank's retained earnings; or
- Hanmi Bank's net income for its last three fiscal years, minus the amount
of any prior dividend during those three years.
9
With the approval of the regulators, a bank may pay dividends above specified
limits, but not more than the greater of the bank's retained earnings, its net
income for its last fiscal year, or its net income for the current fiscal year.
Even if we were able to meet the dividend test described above, we might not be
able to pay dividends if the result would cause our capital to fall below
federal capital standards that apply to banks.
BECAUSE MANAGEMENT WILL OWN A LARGE NUMBER OF SHARES OF OUR STOCK,
MANAGEMENT MAY BE ABLE TO INFLUENCE DECISIONS. Upon successful completion of
the registration, the present directors and executive officers of Hanmi
Financial will, in the aggregate, beneficially own approximately 36.07% of our
outstanding common stock. Consequently, Hanmi Financial's directors and
executive officers will have the ability to significantly affect the election of
the directors and have a significant effect on the outcome of corporate actions
requiring shareholder approval. Such concentration may also have the effect of
delaying or preventing a change in control of Hanmi Financial.
BECAUSE FEDERAL AND STATE BANKING LAWS IMPOSE REQUIREMENTS FOR THE CHANGE IN
CONTROL OF HANMI FINANCIAL AND HANMI BANK, A SIGNIFICANT CHANGE IN OUR OWNERSHIP
COULD BE MADE MORE DIFFICULT. Federal and State Bank regulations could delay and
possibly discourage a potential acquirer who would have been willing to pay a
premium price to purchase a large block of our common stock. That in turn could
decrease the value of our common stock and the price that you receive if you
sell your shares in the future. Federal bank regulators must approve before
anyone can buy enough voting stock to exercise control over a bank holding
company like us. A shareholder must apply for regulatory approval to own
10 percent or more of our common stock, unless the shareholder can show that he
or she will not actually exert control over us. In no case under Federal law can
a shareholder own more than 25 percent of our stock without applying for
regulatory approval. Under the California Financial Code, no person may acquire
"control" of a California licensed bank or bank holding company unless the
Commissioner of the California Department of Financial Institutions approves the
transaction. Under California law "control" means the exercise of 25% or more of
the voter power of Hanmi Financial or the power to exercise control over the
management and policies of Hanmi Financial. Any person who owns or controls 10%
of the Hanmi Financial common stock is presumed under California law to control
Hanmi Financial.
BECAUSE OF CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS, A CHANGE IN CONTROL
OF OUR CORPORATION OR OUR MANAGEMENT COULD BE DELAYED OR PREVENTED. These
provisions make it more difficult for another company to acquire us, which could
reduce the market price of our common stock and the price that you receive if
you sell your shares in the future. These provisions include the following:
- A provision requiring a two-thirds vote when shareholders approve certain
amendments to the charter and bylaws;
- A requirement that shareholders give advance notice of matters to be
raised at a meeting of shareholders;
- A requirement that certain acquisition transactions not approved by the
board of directors receive the approval of two-thirds of the outstanding
shares;
- Staggered terms of office for members of the board of directors; and
- A provision that requires that stockholder action be taken only at an
annual or special meeting.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this proxy statement/prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans,"
10
"intends," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to differ from those
expressed or implied by the forward-looking statement. These factors include,
among other things, those listed under "Risk Factors" and the following:
- general economic and business conditions in those areas in which Hanmi
Bank operates;
- demographic changes;
- competition;
- fluctuations in interest rates;
- changes in business strategy or development plans;
- changes in governmental regulation;
- credit quality;
- the availability of capital to fund the expansion of Hanmi Financial and
Hanmi Bank's business;
- changes in the securities markets; and,
- other factors referenced in this proxy statement/prospectus or the
documents incorporated herein by reference.
Given these uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. Hanmi Bank and Hanmi Financial disclaim any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS
OR OTHER INFORMATION REFERRED TO IN THIS DOCUMENT. NEITHER HANMI FINANCIAL OR
HANMI BANK HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH OTHER OR DIFFERENT
INFORMATION. THIS PROXY STATEMENT/PROSPECTUS IS DATED MAY 10, 2000. YOU SHOULD
NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS TO
SHAREHOLDERS NOR THE ISSUANCE OF HANMI FINANCIAL COMMON STOCK FOR HANMI BANK
COMMON STOCK IN THE REORGANIZATION SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
11
THE ANNUAL MEETING OF HANMI BANK
GENERAL
An annual meeting of the shareholders of Hanmi Bank will be held at the
Sheraton Universal Hotel, 333 Universal Terrace Parkway, Universal City,
California 91608 on Wednesday, May 31, 2000 at 10:30 a.m., local time.
At the annual meeting, the holders of the common stock of Hanmi Bank will
vote on
- the approval of the principal terms of the reorganization;
- the election of eleven persons to serve as directors until the 2001 annual
meeting;
- approve the Hanmi Financial Corporation Year 2000 Stock Option Plan; and
- such other business as may properly come before the annual meeting or any
adjournments or postponements thereof.
RECORD DATE; SOLICITATION OF PROXIES
The close of business on May 1, 2000 has been selected as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
annual meeting. At that date, there were approximately 7,414,186 outstanding
shares of Hanmi Bank common stock entitled to vote at the annual meeting.
In addition to soliciting proxies by mail, officers, directors and employees
of Hanmi Bank, without receiving any additional compensation, may solicit
proxies by telephone, fax, in person or by other means. Arrangements will also
be made with brokerage firms and other custodians, nominees and fiduciaries to
forward proxy solicitation materials to the beneficial owners of Hanmi Bank
common stock held of record by such persons, and Hanmi Bank will reimburse such
brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. Hanmi Bank will
pay all expenses related to printing and filing of this proxy statement/
prospectus, including all filing fees of the Securities and Exchange Commission.
The required quorum for the transaction of business at the annual meeting is
a majority of the shares of Hanmi Bank common stock entitled to vote at the
annual meeting. Shares voted in a matter are treated as being present for
purposes of establishing a quorum. Abstentions and broker nonvotes will be
counted for determining a quorum, but will not be counted for purposes of
determining the number of votes cast "FOR" or "AGAINST" any matter.
REVOCABILITY OF PROXIES
Any holder of Hanmi Bank common stock may revoke a proxy at any time before
it is voted by filing with the secretary of Hanmi Bank an instrument revoking
the proxy or by returning a duly executed proxy bearing a later date, or by
attending the annual meeting and voting in person. Any such filing should be
made to the attention of the Secretary, Hanmi Bank, 3660 Wilshire Boulevard,
Los Angeles, California 90010. Attendance at the annual meeting will not by
itself constitute revocation of a proxy.
MATTERS TO BE CONSIDERED AT THE MEETING
PROPOSAL NO. 1--APPROVAL OF THE REORGANIZATION. At the annual meeting, you
will be asked to approve the principal terms of the reorganization and the
reorganization agreement. A vote of a majority of the outstanding shares of
Hanmi Bank common stock entitled to be cast at the annual meeting is required to
approve the merger. AFTER CAREFUL CONSIDERATION, HANMI BANK'S BOARD OF
DIRECTORS, BY UNANIMOUS VOTE OF THE DIRECTORS, HAS DETERMINED THAT THE
REORGANIZATION IS IN THE BEST
12
INTERESTS OF THE SHAREHOLDERS OF HANMI BANK. ACCORDINGLY, THE HANMI BANK BOARD
HAS UNANIMOUSLY APPROVED THE REORGANIZATION. YOUR BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 2--ELECTION OF DIRECTORS. At the annual meeting you will also
be asked to elect eleven persons to serve as directors.
The board of directors has nominated the following persons to serve as
directors:
Eung Kyun Ahn Richard B. C. Lee
I Joon Ahn Chang Kyu Park
Stuart S. Ahn Joseph K. Rho
George S. Chey Won R. Yoon
Ki Tae Hong Chung Hoon Youk
Joon H. Lee
In the election of directors, shareholders may vote their shares
cumulatively if, prior to the voting, a shareholder present and voting at the
annual meeting gives notice to the chairman of the meeting that he or she
intends to vote cumulatively. If any shareholder of Hanmi Bank gives such
notice, then all shareholders will be entitled to cumulate their votes.
Cumulative voting allows a shareholder to cast a number of votes equal to the
number of shares held in his or her name as of the record date, multiplied by
the number of directors to be elected. This total number of votes may be cast
for one nominee, or distributed among as many nominees or in whatever proportion
as the shareholder chooses. If cumulative voting is declare at the meeting, the
proxy holders will have discretion to cumulate the votes represented by any
proxy delivered under this proxy statement/prospectus, and vote them in
accordance with the recommendations of Hanmi Bank's management.
PROPOSAL NO. 3--APPROVAL OF THE HANMI FINANCIAL YEAR 2000 STOCK OPTION
PLAN. At the annual meeting you will be asked to approve the Hanmi Financial
Year 2000 Stock Option as prospective shareholders, of Hanmi Financial. The
Hanmi Financial Year 2000 Stock Option Plan is identical to the Hanmi Bank 1992
Stock Option Plan in all material respects, except that it increases the number
of shares available for the grant of options from 320,397 to 1,482,837.
PROPOSAL 1
BANK HOLDING COMPANY REORGANIZATION
The board of directors of Hanmi Bank has approved a plan of reorganization
under which the business of Hanmi Bank will be conducted as a wholly-owned
subsidiary of Hanmi Financial Corporation.
REASONS FOR THE REORGANIZATION
A bank holding company form of organization will increase the corporate and
financial flexibility of the businesses operated by Hanmi Bank through the
combined business of Hanmi Bank and Hanmi Financial Corporation. Examples are:
- Flexibility in responding to evolving changes in the banking and financial
services industries and meeting the competition of other financial
institutions;
- Greater operating and financial flexibility and expansion into a broader
range of financial services and other business activities;
- More alternatives for raising capital under changing conditions in
financial and monetary markets;
- More flexible capital structure by increasing the number of authorized
common stock and the authorization of preferred stock for issuance from
time to time to raise additional capital;
13
- Flexibility for acquiring or establishing other banking operations;
- By permitting Hanmi Financial to maintain the separate existence of other
business interests from Hanmi Bank;
- Engage in other activities that are closely related to banking, either
directly, or indirectly through newly formed subsidiaries or by acquiring
companies already established in such fields;
- Enhance Hanmi Bank's ability to satisfy ever changing and expanding needs
of present customers for banking and banking-related services and to
continue to attract new customers for financial services.
ORGANIZATIONAL TRANSACTIONS
At the direction of the board of directors of Hanmi Bank, Hanmi Financial
was incorporated under the laws of the State of Delaware on March 14, 2000 for
the purpose of becoming a bank holding company by acquiring all of the
outstanding Hanmi Bank common stock. Hanmi Bank currently owns 100% of the
outstanding capital stock of Hanmi Financial.
At the direction of the board of directors of Hanmi Bank and Hanmi
Financial, Hanmi Merger Co. was incorporated under the laws of the State of
California on March 21, 2000 for the purpose of merging with Hanmi Bank in order
to facilitate the reorganization. Prior to the effective time of the
reorganization, Hanmi Financial will be the sole shareholder of Hanmi
Merger Co.
Upon consummation of the reorganization, Hanmi Merger Co. will be merged
with and into Hanmi Bank with Hanmi Bank being the surviving entity of the
merger. The shares of Hanmi Merger Co. common stock held by Hanmi Financial will
be converted into Hanmi Bank common stock. Concurrently with the merger, the
capital stock of Hanmi Financial held by Hanmi Bank will be canceled and the
Hanmi Bank common stock held by Hanmi Bank shareholders will be converted to
Hanmi Financial common stock.
TERMS OF THE PLAN OF REORGANIZATION
CONVERSION. At the effective time of the reorganization, the shares of
common stock of Hanmi Bank, Merger Co., and Hanmi Financial, parties to the plan
of reorganization, will be converted and exchanged as described below:
- Each share of Hanmi Bank common stock issued and outstanding immediately
prior to the effective time of the reorganization will, at the effective
time of the reorganization, automatically become and be converted into the
right to receive one share of Hanmi Financial common stock.
- Each share of Hanmi Merger Co. common stock issued and outstanding
immediately prior to the effective time of the reorganization will, on and
after the effective time of the reorganization, be converted into one
share of Hanmi Bank common stock and, as a result, at the effective time
of the reorganization, all of the common stock of Hanmi Bank will be owned
by Hanmi Financial.
- Each share of Hanmi Financial common stock issued and outstanding
immediately prior to the effective time of the reorganization will, at the
effective time of the reorganization, be canceled.
At the effective time of the reorganization, Hanmi Bank shareholders will
become the shareholders of Hanmi Financial. As shareholders of Hanmi Financial,
they will have essentially the same rights to govern Hanmi Financial's
activities as they have with respect to Hanmi Bank; however, as shareholders of
Hanmi Financial, they will not be entitled to vote on matters requiring the
approval of Hanmi Bank shareholders. Shareholders of Hanmi Financial will be
entitled to vote with respect to matters affecting Hanmi Financial which will
own 100% of the voting rights in Hanmi Bank. A discussion of those rights is
contained in the section entitled "Comparison of Hanmi Bank Common Stock and
Hanmi Financial Common Stock."
14
EFFECTIVE TIME OF THE REORGANIZATION. The reorganization will be effective
at the time the plan of reorganization is filed in the office of the Secretary
of State of California. The effective time of the reorganization will not occur
until:
- all requisite board of directors, shareholder, and regulatory approvals
and consents for the reorganization are obtained;
- expiration of our applicable regulatory waiting periods;
- the satisfaction of all of the requirements of law and conditions
specified in the plan of reorganization or the approvals of regulatory
agencies.
We currently anticipate that the reorganization will occur shortly following
the annual meeting. There is no requirement that the reorganization must occur
by a specific date.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION. The plan of
reorganization provides that the directors of Hanmi Bank immediately prior to
the effective time of the reorganization will be directors of Hanmi Bank
immediately after the reorganization. Additionally, the officers and other
employees of Hanmi Bank immediately prior to the effective time of the
reorganization will all be employed in substantially the same capacities by
Hanmi Bank immediately after the reorganization. Directors and executive
officers of Hanmi Bank and their affiliates are the beneficial owners of
2,362,854 shares (34.98% of the issued and outstanding shares) of Hanmi Bank
common stock.
EMPLOYEE BENEFITS. Upon consummation of the reorganization, the Hanmi Bank
Stock Option Plan will be terminated. All options issued under Hanmi Bank Stock
Option Plan will be converted into the right to receive options pursuant to the
Hanmi Financial Year 2000 Plan upon identical terms and conditions, and for an
identical exercise price. Hanmi Financial will assume all of the Hanmi Bank's
obligations with respect to the outstanding options. The Hanmi Financial Year
2000 Plan proposes to reserve 741,400 shares of Hanmi Financial common stock for
options. See "Approval of Hanmi Financial Corporation Year 2000 Stock Option
Plan."
All other employee benefits and benefit plans of Hanmi Bank in effect
immediately prior to the effective time of the reorganization will be unchanged
by the reorganization, except that any plan which refers to Hanmi Bank common
stock will, following consummation of the reorganization, be deemed to refer
instead to Hanmi Financial common stock and will become the employee benefits
and benefit plans solely of Hanmi Bank.
CONDITIONS TO THE REORGANIZATION. The obligations of each of the parties to
the plan of reorganization to consummate the reorganization are subject to the
satisfaction on or before the effective time of the reorganization, of the
following conditions:
- approval of the terms of the reorganization including the plan of
reorganization, by the shareholders of Hanmi Bank owning at least a
majority of the capital stock of Hanmi Bank;
- approval of the plan of reorganization by a majority of the outstanding
shares of Hanmi Financial and Merger Co.;
- approval by a majority of the board of directors of Hanmi Bank, Hanmi
Financial and Hanmi Merger Co.;
- all consents and approvals prescribed by law, for the consummation of the
reorganization; and
- all other requirements prescribed by law which are necessary for the
consummation of the Reorganization including, but not limited to, the
expiration of any applicable waiting periods under bank regulatory laws.
The directors of Hanmi Bank, Hanmi Merger Co., and Hanmi Financial have
unanimously approved the plan of reorganization. Hanmi Bank, as the sole
shareholder of Hanmi Financial, and Hanmi Financial, as the sole shareholder of
Hanmi Merger Co., have approved the plan of
15
reorganization. Hanmi Financial has filed an application for prior approval to
become a bank holding company pursuant to Section 3(a)(5) of the Bank Holding
Company Act with the Federal Reserve Board and an application to acquire control
of Hanmi Bank under Section 700 of the California Financial Code with the
Commissioner of the California Department of Financial Institutions. In
addition, Hanmi Bank and Merger Co. have filed applications for approval of the
merger with the FDIC and the Commissioner.
TERMINATION OF PLAN OF REORGANIZATION. The plan of reorganization may be
terminated before the effective time of the reorganization for any of the
following:
- the number of shares voting against the reorganization is such that the
board of directors of Hanmi Bank determines that it is inadvisable to
consummate the reorganization;
- any action, consent, or approval, governmental or otherwise, necessary to
permit Hanmi Bank to conduct all or any part of the business activities of
Hanmi Bank prior to the effective time of the reorganization, are not
obtained;
- for any other reason the consummation of the reorganization is not
advisable in the opinion of the board of directors of Hanmi Bank,.
If the holders of a majority of the outstanding shares of Hanmi Bank common
stock fail to approve the reorganization, or the transaction is otherwise
terminated, then the business of Hanmi Bank would continue to operate under the
ownership of its existing shareholders.
EXCHANGE OF SHARE CERTIFICATES
As soon as practicable after consummation of the reorganization, U.S. Stock
Transfer, the exchange agent for Hanmi Financial will mail to each holder of
record of Hanmi Bank common stock immediately prior to the reorganization, a
letter of transmittal which is to be used by each such Hanmi Bank shareholder to
return to U.S. Stock Transfer the stock certificates representing Hanmi Bank
common stock owned by him or her. As soon as practicable after receiving such
certificates from a Hanmi Bank shareholder, together with the duly executed
letter of transmittal and any other items specified by the letter of
transmittal, U.S. Stock Transfer will deliver to such Hanmi Bank shareholder new
certificates evidencing the appropriate number of shares of Hanmi Financial
common stock.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL FORM AND INSTRUCTIONS.
COSTS OF REORGANIZATION
The costs of the reorganization to Hanmi Financial and Hanmi Bank are
estimated at approximately $200,000. If the reorganization is consummated, costs
of the reorganization will be assumed and paid, to the extent properly
allocated, by Hanmi Financial and Hanmi Bank. In the event the reorganization is
not consummated, such costs as have been incurred, including the cost of
organizing Hanmi Financial will be assumed and paid by Hanmi Bank.
REGULATORY APPROVALS
Federal and California laws and regulations provide that certain acquisition
transactions, such as the reorganization, may not be consummated unless approved
in advance by applicable regulatory authorities. The plan of reorganization
provides that Hanmi Financial, Hanmi Bank, and Merger Co. will proceed
expeditiously and cooperate fully to obtain any consents and approvals and in
the taking of any other action and the satisfaction of all requirements
necessary to complete the reorganization. These consents and actions include
preparing and submitting applications required to be filed with the FDIC, the
Commissioner of the California Department of Financial Institutions and the
Federal
16
Reserve Board. Receipt of all requisite regulatory approvals and consents is a
condition precedent to the consummation of the reorganization.
Applications for regulatory review and approval of the reorganization have
been filed.
Although we are not aware of any reason why the requisite approvals of and
consents to the reorganization would not be granted, we can not give any
assurance that approvals and consents will be obtained or that, if obtained,
such approvals and consents will not include conditions which would be of a type
that would relieve Hanmi Financial, Hanmi Bank, or Merger Co. from their
obligation to consummate the reorganization.
DISSENTING SHAREHOLDERS' RIGHTS
Pursuant to the provisions of California law, shareholders of Hanmi Bank
will not have dissenting rights in the reorganization. Shareholders of a
California chartered bank are entitled to dissenters' rights to the same extent
as shareholders of a California corporation. California law generally grants
shareholders dissenters' rights in transactions that are required to be approved
by shareholders. However, under California law, in a transaction, such as the
reorganization, where a vote of shareholders is only required because the shares
to be received in the transaction have different rights, preferences,
privileges, or restrictions, no dissenting shareholders' rights are available.
ACCOUNTING TREATMENT
Because the reorganization is a reorganization with no change in ownership
interests, the consolidated financial statements of Hanmi Financial and the
consolidated financial statements of Hanmi Bank will retain the former bases of
accounting of Hanmi Bank and will be substantially identical to Hanmi Bank's
consolidated financial statements prior to the reorganization.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is limited to the material federal income tax
consequences of the proposed reorganization and does not discuss state, local,
or foreign tax consequences or all of the tax consequences that might be
relevant to an individual shareholder of Hanmi Bank.
Hanmi Financial believes that the reorganization will qualify for federal
income tax purposes as a tax free reorganization under the Internal Revenue Code
of 1986, as amended (the "Code"). This belief is based on an opinion received
from the law firm of Buchalter, Nemer, Fields & Younger, a professional
corporation and is conditioned upon the accuracy of certain assumptions made by
counsel. The opinion is based on current law and assumes that the reorganization
is consummated as described herein. Neither this summary nor the opinion of
Buchalter, Nemer, Fields & Younger, a professional corporation, is binding on
the IRS and no ruling from the IRS has been sought or will be sought with
respect to such tax consequences. The opinion, which is filed as an exhibit to
the Registration Statement, provides that:
(a) No gain or loss will be recognized by Hanmi Bank, Merger Co., or
Hanmi Financial as a result of the reorganization;
(b) No gain or loss will be recognized by the shareholders of Hanmi Bank
upon receipt of Hanmi Financial common stock in exchange for their shares of
Hanmi Bank common stock pursuant to the reorganization;
(c) The basis of the Hanmi Financial common stock received by the
shareholders of Hanmi Bank pursuant to the reorganization will be the same
as the basis of the shares of Hanmi Bank common stock surrendered in
exchange therefor;
(d) The holding period of the Hanmi Financial common stock received by
shareholders of Hanmi Bank pursuant to the reorganization will include the
holding period of the Hanmi Bank
17
common stock surrendered in exchange therefor, provided that such Hanmi Bank
common stock is held as a capital asset on the date of consummation of the
reorganization; and
(e) A holder of an outstanding option granted under the Hanmi Bank 1992
Stock Option Plan will not recognize income, gain, or loss solely as a
result of the exchange of the outstanding option for an identical option
issued under the Hanmi Financial Year 2000 Stock Option Plan;
HANMI BANK'S SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
SPECIFIC TAX CONSEQUENCES TO THEM OF THE REORGANIZATION INCLUDING TAX RETURN
REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN, AND OTHER APPLICABLE TAX LAWS.
RESTRICTIONS ON AFFILIATES
The obligation of Hanmi Bank and Hanmi Financial to consummate the
reorganization is subject to the condition that each person who is an
"affiliate" of Hanmi Bank for purposes of Rule 144 promulgated under the
Securities Act of 1933 ("Securities Act"), execute and deliver a letter to the
effect that, among other things such person will not dispose of any shares of
Hanmi Financial common stock to be received by such affiliate pursuant to the
plan of reorganization:
- in violation of the Securities Act or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder (and,
accordingly, that any public offering or sale of such shares will require
either registration under the Securities Act or compliance with the resale
provision of Rule 145 promulgated under the Securities Act or the
availability of another exemption from the registration requirements of
the Securities Act),
- prior to such time as financial results covering at least 30 days of
post-merger combined operations have been published; and
- such person consents to the placing of a legend on the certificate
evidencing such shares referring to the issuance of such shares in a
transaction to which Rule 145 is applicable and to the giving of
stop-transfer instructions to Hanmi Financial's transfer agent with
respect to such certificates.
For purposes of Rules 144 and 145, affiliates include Hanmi Bank's directors
and executive officers.
RECOMMENDATIONS
Hanmi Bank's board of directors has reviewed the plan of reorganization and
agreement of merger and believes that, for the reasons set forth in this proxy
statement/prospectus, the proposed reorganization, is fair to and in the best
interests of Hanmi Bank and its shareholders. On March 8, 2000, Hanmi Bank's
board of directors unanimously approved the plan of reorganization and
recommended that the plan of reorganization be submitted to Hanmi Bank
shareholders for their approval. THE BANK'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT HANMI BANK SHAREHOLDERS APPROVE THE PLAN OF REORGANIZATION.
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HANMI FINANCIAL STOCK
Hanmi Financial is authorized by its articles of incorporation to issue
50,000,000 shares of .001 par value common stock and 10,000,000 shares of
preferred stock of .001 par value. Holders of Hanmi Financial common stock are
entitled to one vote, in person or by proxy, for each shares of stock held of
record in the shareholder's name on the books of Hanmi Financial as of the
record date on any matter submitted to the vote of the shareholders. Shares of
Hanmi Financial common stock may not be voted cumulatively in connection with
the election of directors.
Each share of Hanmi Financial stock has the same rights, privileges and
preferences as every other share and will share equally in Hanmi Financial net
assets upon liquidation or dissolution. Hanmi Financial stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all of the issued
and outstanding shares of common stock are fully paid and nonassessable.
Hanmi Financial shareholders are entitled to dividends when, as and if
declared by Hanmi Financial's board of directors out of funds legally available
therefor and after satisfaction of the prior rights of holders of outstanding
preferred stock, if any.
The transfer agent and registrar for Hanmi Financial common stock is
U.S. Stock Transfer.
In connection with the 10,000,000 shares of preferred stock authorized in
the articles of incorporation, the Hanmi Financial board of directors has sole
authority to determine the terms of any one or more series of preferred stock,
including voting rights, conversion rates, and liquidation preferences.
COMPARISON OF HANMI FINANCIAL COMMON STOCK
AND HANMI BANK COMMON STOCK
Hanmi Bank is a California banking corporation and the rights of its
shareholders are governed by the California Financial Code, the California
General Corporation Law, and its articles of incorporation and bylaws. As
shareholders of Hanmi Financial, you will have, in some cases, different rights
since the rights of Hanmi Financial shareholders are governed by the Delaware
General Corporation Law and Hanmi Financial's certificate of incorporation and
bylaws.
The following subsections discuss certain differences between rights of
holders of Hanmi Financial common stock and Hanmi Bank common stock.
CLASSIFICATION OF BOARD OF DIRECTORS; FILLING VACANCIES
Hanmi Bank's articles of incorporation do not permit its board of directors
to be divided into classes with any class having a term of office of longer than
one year. Each director of Hanmi Bank must be elected annually. Hanmi Bank's
bylaws also provide that any vacancy occurring in the board, except in the case
of removal, may be filled by a majority of the remaining directors. The
shareholders may elect a director or directors at any time to fill any vacancy
or vacancies not filled by the directors, except in the case of removal, at a
meeting of shareholders or otherwise by their majority written consent. A
vacancy created by removal may only be filled by the shareholders at a meeting
of shareholders or otherwise by the unanimous written consent.
CLASSIFICATION OF BOARD. The Hanmi Financial certificate of incorporation
provides for a classified board of directors. A classified board is one in which
some, but not all, of the directors are elected on a rotating basis each year.
The Hanmi Financial board of directors is divided into three classes, each of
which contains approximately one-third of the whole number of the members of the
board. The members of each class are elected for a term of three years, with the
terms of office of all members of one class expiring each year so that
approximately one-third of the total number of directors is elected each year.
The classified board is intended to provide for continuity of the board of
directors and may
19
have the effect of making it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the board of directors
without consent of the incumbent board of directors of Hanmi Financial.
FILLING VACANCIES. The Hanmi Financial certificate of incorporation also
provides that any vacancy occurring in the board, including a vacancy created by
an increase in the number of directors, shall be filled by a vote of two-thirds
of the directors then in office and any director so chosen shall hold office for
a term expiring at the annual meeting of stockholders at which the term of the
class to which the director has been chosen expires.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
The Hanmi Financial certificate of incorporation provides that amendments to
certificate must be approved by a majority vote of its board of directors and
also by a majority of the outstanding shares of its voting stock, provided,
however, that under certain circumstances, an affirmative vote of at least
two-thirds of the outstanding voting stock entitled to vote is required to amend
or repeal certain provisions of certificate, including the provisions relating
to approval of certain business combinations, the number and classification of
directors, action by written consent, director and officer indemnification by
the Hanmi Financial limitation of liability, and amendment of Hanmi Financial's
bylaws by shareholders.
VOTING RIGHTS
Holders of Hanmi Bank common stock are entitled to one vote, in person or by
proxy, for each share of stock held of record in the shareholder's name on the
books of Hanmi Bank as of the record date on any matter submitted to the vote of
the shareholders. In connection with the election of directors, shares of Hanmi
Bank common stock are entitled to be voted cumulatively if a candidate's or
candidates' name(s) have been properly placed in nomination prior to the voting
and a shareholder present at the shareholders' meeting has given notice of his
or her intention to vote his or her shares cumulatively. If a shareholder has
given such notice, all shareholders may cumulate their votes for candidates in
nomination. Cumulative voting entitles a shareholder to give one nominee as many
votes as is equal to the number of directors to be elected multiplied by the
number of shares of Hanmi Bank common stock owned by such shareholder, or to
distribute his or her votes on the same principle between two or more nominees
as he or she deems appropriate.
Holders of Hanmi Financial common stock are also entitled to one vote for
each share of stock held. However, cumulative voting does not apply in
connection with the election of Hanmi Financial directors and the candidates
receiving the highest number of affirmative votes up to the number of directors
to be elected will be elected.
ACTION BY WRITTEN CONSENT
Holders of Hanmi Bank common stock are entitled to take action in the
absence of a stockholders' meeting by written consent. Holders of Hanmi
Financial common stock are entitled to take action only at a special or annual
meeting of stockholders, and may not take action by written consent.
DIVIDEND RESTRICTIONS
Since Hanmi Bank is a state-chartered bank, its ability to pay dividends or
make distributions to its shareholders is subject to restrictions set forth in
the California Financial Code. The California Financial Code provides that
neither a bank nor any majority-owned subsidiary of a bank may make a
distribution to its shareholders in an amount which exceeds the lesser of:
- the bank's retained earnings; or
20
- the bank's net income for its last three fiscal years, less the amount of
any distributions made by the bank or by the any majority-owned subsidiary
of the bank to the shareholders of the bank during such period.
Notwithstanding the previous provision, a bank may, with the prior approval
of the Commissioner of Financial Institutions make a distribution to the
shareholders of the bank in an amount not exceeding the greatest of (1) its
retained earnings; (2) its net income for its last fiscal year; or (3) the net
income of the bank for its current fiscal year. If the Commissioner finds that
the shareholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order
the bank to refrain from making a proposed distribution.
Hanmi Financial's ability to pay cash dividends is limited by the ability of
Hanmi Bank to pay dividends and the provisions of Delaware law, which permits
the payment of dividends from surplus or, if no surplus exists, from net profits
for the fiscal year in which the dividends is declared and the preceding fiscal
year. However, if Hanmi Financial were determined to be a quasi-California
corporation as defined pursuant to Section 2115 of the CGCL, different and more
restrictive limitations on the payment of dividends would apply.
Pursuant to Section 2115 of the California General Corporation Law under
certain circumstances, certain provisions of the CGCL may be applied to foreign
corporations qualified to do business in California notwithstanding the law of
the jurisdiction where the corporation is incorporated. Such a corporation is
referred to as a "quasi-California" corporation. Hanmi Financial has qualified
to do business in the State of California. Section 2115 is applicable to foreign
corporations which have more than half of the their stockholders of record
residing in California and more than half of their business deriving from
California. Initially, Hanmi Financial's sole business will be managing its
investment in its wholly-owned subsidiary, Hanmi Bank, which has substantially
all of its property, employees, and operations in California. If Hanmi Financial
were determined to be a quasi-California corporation, it would have to comply
with California law with respect to, among other things, distributions to
stockholders. Under the California General Corporation Law, a corporation is
prohibited from paying dividends unless:
- the retained earnings of the corporation immediately prior to the
distribution exceeds the amount of the distribution;
- the assets of the corporation exceed 1 1/4 times its liabilities; or
- the current assets of the corporation exceed its current liabilities, but
if the average pre-tax net earnings of the corporation before interest
expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current
assets of the corporation must exceed 1 1/4 times its current liabilities.
REMOVAL OF DIRECTORS
Under California law, any director or the entire board of directors may be
removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote. However, no individual director may be
removed, unless the entire board is removed, if the number of votes cast against
such removal would be sufficient to elect the director under cumulative voting.
Under Delaware law, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote at an election of directors. In the case of a Delaware corporation
having cumulative voting, if less than the entire board is to be removed, a
director may not be removed without cause, if the number of shares voted against
such removal would be sufficient to elect the director under cumulative voting.
A director of a corporation with a classified board of directors may be removed
only for cause, unless the certificate of incorporation otherwise provides. The
certificate of
21
incorporation of Hanmi Financial provides for a classified board of directors,
but does not provide for cumulative voting. The Hanmi Financial certificate of
incorporation permits a director to be removed with or without cause upon a vote
of a majority of the outstanding shares.
INDEMNIFICATION AND LIMITATION OF LIABILITY
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with some exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty. There are, nonetheless, some material differences between the laws of the
two states respecting indemnification and limitation of liability.
The certificate of incorporation of Hanmi Financial eliminates the liability
of directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director to the fullest extent permissible under
Delaware law, as such law exists currently or as it may be amended in the
future. Hanmi Bank does not have a comparable provision in its articles of
incorporation.
Under Delaware law, a corporation may not eliminate or limit director
monetary liability for:
- breaches of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law;
- the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
- transactions in which the director received an improper personal benefit.
Such limitation of liability provisions also may not limit a director's
liability for violation of or otherwise relieve Hanmi Financial or its directors
from the necessity of complying with federal or state securities laws, or affect
the availability of non-monetary remedies such as injunctive relief or
rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions:
- no indemnification may be made when a person is adjudged liable to the
corporation in the performance of that person's duty to the corporation
and its shareholders unless a court determines the person is entitled to
indemnify for expenses, and then indemnification may be made only to the
extent that such court shall determine, and
- no indemnification may be made without court approval in respect of
amounts paid or expenses incurred in settling or otherwise disposing of a
threatened or pending action or amounts incurred in defending a pending
action that is settled or otherwise disposed of without court approval.
California law requires indemnification when the individual has defended the
action on the merits successfully. Delaware law, on the other hand, requires
indemnification regardless of whether there has been a successful defense on the
merits.
Delaware law generally permits indemnification of expenses, including
attorney's fees, actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation.
22
Without court approval, however, no indemnification may be made in respect
of any derivative action in which such person is adjudged liable for negligence
or misconduct in the performance of his or her duty to the corporation. Delaware
law requires indemnification of expenses when the individual being indemnified
has successfully defended any action, claim, issue, or matter, on the merits or
otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Delaware law and California law, if such director or
officer undertakes to repay any amounts advanced if it is ultimately determined
that he or she is not entitled to indemnification. In addition, the laws of both
states authorize a corporation's purchase of indemnity insurance for the benefit
of its officers, directors, employees and agents whether or not the corporation
would have the power to indemnify against the liability covered by the policy.
California law permits a California corporation to provide rights to
indemnification beyond those provided therein to the extent such additional
indemnification is authorized in the corporation's articles of incorporation.
Thus, if so authorized, rights to indemnification may be provided by agreements
or bylaw provisions that make mandatory the permissive indemnification provided
by California law.
Under California law, there are two limitations on providing additional
rights to indemnification:
- indemnification is not permitted for acts, omissions or transactions from
which a director of a California corporation may not be relieved of
personal liability, and
- indemnification is not permitted in circumstances where California law
expressly prohibits it.
Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. By contrast to California law, Delaware
law does not require authorizing provisions in the certificate of incorporation
and does not contain express prohibitions on indemnification in certain
circumstances. Limitations on indemnification may be imposed by a court,
however, based on principles of public policy.
INSPECTION OF SHAREHOLDER LIST
Both California and Delaware law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interests as
a shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons holding an
aggregate of 5% or more of a corporation's voting shares, or shareholders
holding an aggregate of 1% or more of such shares who have filed a Schedule 14B
under the Securities and Exchange Commission proxy rules. Under California law,
the absolute right of inspection also applies to a corporation formed under the
laws of any other state if its principal executive offices are in California or
if it customarily holds meetings of its board in California. Delaware does not
provide for any such absolute right of inspection.
CALIFORNIA AND DELAWARE LAW SHAREHOLDER VOTING IN MERGERS AND OTHER ACQUISITIONS
Both California and Delaware law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers. Unless the corporation provides otherwise in its certificate of
incorporation, Delaware law does not require a stockholder vote of the surviving
corporation in a merger if:
- the merger agreement does not amend the existing certificate of
incorporation;
- each share of the stock of the surviving corporation outstanding
immediately before the effective date of the merger is an identical
outstanding or treasury share after the merger; and
- either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into common stock are to be
issued or delivered under the plan of merger, or the authorized unissued
shares or the treasury shares of common stock of the surviving corporation
to be issued or delivered under the plan of merger plus those initially
23
issuable upon conversion of any other shares, securities or obligations to
be issued or delivered under the plan do not exceed 20% of the shares of
common stock of the constituent corporation outstanding immediately prior
to the effective date of the merger.
California law contains a similar exception to its voting requirements for
reorganizations where shareholders of the corporation or the corporation itself,
or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than 5/6 of the voting power
of the surviving or acquiring corporation, or its parent entity.
Both California law and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With some exceptions, California law also requires that mergers,
reorganizations, some sales of assets, and similar transactions be approved by a
majority vote of each class of shares outstanding. In contrast, Delaware law
generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares. As a result, shareholder approval of these
transactions may be easier to obtain under Delaware law for companies which have
more than one class of shares outstanding.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of the common stock of the corporation
or its affiliate unless all of the holders of the common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances, Section 203 of Delaware General Corporation Code does
provide similar protection against coercive two-tiered bids for a corporation in
which the stockholders are not treated equally.
California law provides that, except in certain circumstances when a tender
offer or a proposal for a reorganization or for a sale of assets is made by an
interested party, an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to shareholders.
This fairness opinion requirement does not apply to a corporation that does not
have shares held of record by at least 100 persons, or to a transaction that has
been qualified under California state securities laws. Furthermore, if a tender
of shares or vote is sought under an interested party's proposal and a later
proposal is made by another party at least 10 days prior to the date of
acceptance of the interested party proposal, the shareholders must be informed
of the later offer and be afforded a reasonable opportunity to withdraw any
vote, consent or proxy, or to withdraw any tendered shares. Delaware law has no
comparable provision.
SHAREHOLDER DERIVATIVE SUITS
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that various tests are met. Under Delaware
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time of the
transaction in question or if his or her stock thereafter devolved upon him or
her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
APPRAISAL RIGHTS
Under both California and Delaware law, a shareholder of a corporation
participating in some major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant
24
to which such shareholder may receive cash in the amount of the fair market
value of his or her shares in lieu of the consideration he or she would
otherwise receive in the transaction.
Under Delaware law, the fair market value is determined exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, and appraisal rights are not available:
- with respect to the sale, lease or exchange of all or substantially all of
the assets of a corporation;
- with respect to a merger or consolidation by a corporation the shares of
which are either listed on a national securities exchange (or NASD
national market) or are held of record by more than 2,000 holders, if such
stockholders receive only shares of the surviving corporation or shares of
any other corporation that are either listed on a national securities
exchange (or national market) or held of record by more than 2,000
holders, plus cash in lieu of fractional shares of such corporations; or
- to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the
merger under certain provisions of Delaware law.
The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Federal Reserve generally
do not have such appraisal rights unless the holders of at least 5% of the class
of outstanding shares claim the right of the corporation or any law restricts
the transfer of such shares. Appraisal rights are also unavailable if the
shareholders of a corporation or the corporation itself, or both, immediately
prior to the reorganization will own immediately after the reorganization equity
securities constituting more than 5/6 of the voting power of the surviving or
acquiring corporation, or its parent entity. California law generally affords
appraisal rights in sale of asset reorganizations.
DISSOLUTION
Under California law, shareholders holding 50% or more of the total voting
power may authorize a corporation's dissolution, with or without the approval of
the corporation's board of directors, and this right may not be modified by the
articles of incorporation.
Under Delaware law, unless the board of directors approves the proposal to
dissolve, the dissolution must be approved by all the stockholders entitled to
vote on the dissolution. Only if the dissolution is initially approved by the
board of directors may it be approved by a simple majority of the outstanding
shares of the corporation's stock entitled to vote. In the event of such a
board-initiated dissolution, Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority, greater than a
simple majority, voting requirement in connection with dissolutions. Hanmi
Financial's certificate of incorporation contains no such supermajority
requirement, however, and a majority of the outstanding shares entitled to vote,
voting at a meeting at which a quorum is present, would be sufficient to approve
a dissolution of Hanmi Financial that had previously been approved by its board.
OTHER ATTRIBUTES OF THE STOCK OF HANMI FINANCIAL
Hanmi Financial is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the right of its
25
stockholders. Certain provisions of the California Corporations Code become
applicable to a corporation incorporated outside of California, however, if
- the corporation transacts intrastate business in California and the
average of its California property, payroll and sales factors (as defined
in the California Revenue and Taxation Code) with respect to it is more
than 50% during its latest fiscal year,
- more than one-half of its outstanding voting securities are held of record
by persons having addresses in California, and
- the corporation is not otherwise exempt.
An exemption is provided if the corporation has outstanding securities
(i) listed on the New York Stock Exchange or the American Stock Exchange or
(ii) qualified for trading as a national market security on the National
Association of Securities Dealers Automated Quotation System if such corporation
has at least 800 holders of its equity securities as of the record date of its
most recent annual meeting of stockholders (a "Listed Corporation").
Since approximately 50% of the Company's activities occur in California,
certain provisions of California corporate law may apply to the Company, as
described above.
Except as discussed herein, provisions of California law which could be
applicable to Hanmi Financial if the Company meets these tests and is not exempt
include, without limitation:
- restrictions on the use of a classified board of directors law,
- cumulative voting in elections of directors, and
- right to take action by written consent.
26
RESTRICTIONS ON ACQUISITION OF HANMI FINANCIAL
The following discussion is a summary of the material provisions of
California and Federal laws and regulations and Delaware corporate law, as well
as the certificate of incorporation and bylaws of Hanmi Financial, relating to
stock ownership and transfers, the board of directors, and business
combinations, all of which may be deemed to have "anti-takeover" effects. The
description of these provisions is necessarily general and reference should be
made to the actual laws and regulations and to the certificate of incorporation
and bylaws of Hanmi Financial.
CALIFORNIA AND FEDERAL BANKING LAW
Federal law prohibits a person or group of persons "acting in concert" from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been given 60 days prior written notice of such proposed acquisition and
within that time period the Federal Reserve Board has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued. An acquisition may be made
prior to the expiration of the disapproval period if the Federal Reserve Board
issues written notice of its intent not to disapprove the action. Under a
rebutable presumption established by the Federal Reserve Board, the acquisition
of more than 10% of a class of voting stock of a bank with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(such as the Hanmi Financial common stock), would under the circumstances set
forth in the presumption, constitute the acquisition, of control. In addition,
any "company" would be required to obtain the approval of the Federal Reserve
Board under the BHC Act, before acquiring 25% (5% in the case of an acquiror
that is, or is deemed to be, a bank holding company) or more of the outstanding
common stock, or such lesser number of shares as constitute control.
Under the California Financial Code, no person may acquire control of a
California licensed bank or a bank holding company unless the Commissioner for
the California Department of Financial Institutions approved the transaction. A
person would be deemed to have acquired control of Hanmi Financial under this
state law if such person, has the power:
- to vote 25% or more of the voting power of Hanmi Financial, or
- to direct the management and policies of Hanmi Financial.
For purposes of this law, a person who owns or controls 10% or more of the
Hanmi Financial common stock would be presumed to control Hanmi Financial.
DELAWARE LAW
In recent years, a number of states have adopted special laws designed to
make some "unfriendly" corporate takeovers, or other transactions involving a
corporation and one or more of its significant shareholders, more difficult.
Under Section 203 of the Delaware General Corporation Law, some "business
combinations" with "interested stockholders" of Delaware corporations are
subject to a 3-year moratorium, unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With some
exceptions, an interested stockholder is a person or entity who or which owns:
- individually or with or through some other persons or entities, 15% or
more of the corporation's outstanding voting stock. This includes any
rights to acquire stock pursuant to an option, warrant agreement,
arrangement or understanding, or upon the exercise of conversion or
exchange rights, and stock with respect to which the person has voting
rights only, or
27
- is an affiliate or associate of the corporation and was the owner,
individually or with or through some other persons or entities, of 15% or
more of such voting stock at any time within the previous three years.
Section 203, broadly defines the term "business combination" to include:
- mergers with or caused by the interested stockholder,
- sales or other dispositions to the interested stockholder, with
exceptions, of assets of the corporation or of a majority-owned subsidiary
equal in aggregate market value to 10% or more of the aggregate market
value of either the corporation's consolidated assets or all of its
outstanding stock;
- the issuance or transfer by the corporation or a majority-owned subsidiary
of stock of the corporation or the subsidiary to the interested
stockholder, except for some transfers in a conversion or exchange or a
pro rata distribution or some other transactions, none of which increase
the interested stockholder's proportionate ownership of any class or
series of the corporation's or such subsidiary's stock or of the
corporation's voting stock); or
- receipt by the interested stockholder (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial benefits provided by, or through the corporation or a
subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder, the board of directors approves either the business
combination, or the transaction that resulted in the person or entity
becoming an interested stockholder;
- upon consummation of the transaction that made him or her an interested
stockholder the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction
commenced. In calculating the 85% ownership, shares owned by directors who
are also officers of the target corporation and shares held by employee
stock plans that do not give employee participants the right to decide
confidentially whether to accept a tender or exchange offer will be
excluded; or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by 66 2/3% of the outstanding voting
stock not owned by the interested stockholder.
Section 203 only applies to some publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange;
- quoted on an interdealer quotation system of a registered national
securities association; or
- held of record by more than 2,000 stockholders.
A Delaware corporation that is not publicly held may nevertheless elect to
be governed by Section 203. Hanmi Financial has so elected.
Section 203 would encourage any potential acquiror to negotiate with the
Hanmi Financial board of directors. Section 203 also might have the effect of
limiting the ability of a potential acquiror to make a two-tiered bid for Hanmi
Financial in which all stockholders would not be treated equally. The
application of Section 203 to Hanmi Financial would confer upon the Hanmi
Financial board of directors the power to reject a proposed business combination
in some circumstances, even though a potential acquirer may be offering a
substantial premium for Hanmi Financial's shares over the then-current market
price. Section 203 would also discourage some potential acquirors unwilling to
comply with its provisions.
28
CONSIDERATION OF FACTORS OTHER THAN PRICE IN ACQUISITIONS
The Hanmi Financial certificate of incorporation provides that, when
evaluating any proposed tender or exchange offer for Hanmi Financial's equity
security or any proposed merger or consolidation with any other person or the
sale of all or substantially all of the property of Hanmi Financial, the board
of directors may consider the best interests of Hanmi Financial as a whole,
including without limitation: the social, economic and legal effects on the
customers, employees, suppliers and other constituents and on the communities in
which Hanmi Financial and its subsidiaries conducts its business and on the
ability of Hanmi Financial to fulfill its objectives as a financial institution
holding company.
This provision could, under some circumstances, permit the Hanmi Financial
board of directors to disapprove a tender offer or other business combination
transaction that might otherwise be beneficial to the Hanmi Financial
shareholders, particularly if such a transaction would have a strong adverse
impact on the employees of Hanmi Financial, or the communities in which Hanmi
Financial has operations. Hanmi Bank's articles of incorporation do not contain
a comparable provision.
VOTING ON INTERESTED PARTY BUSINESS COMBINATIONS
Under California law, business combinations, including, mergers,
consolidations, and sales of substantially all of the assets of a corporation
must, subject to certain exceptions, be approved by the vote of the holders of a
majority of the outstanding shares of common stock and any other affected class
of stock.
Hanmi Financial's certificate of incorporation changes the majority vote
requirement and also requires the approval of the holders of at least two-thirds
of Hanmi Financial's outstanding shares of voting stock to approve certain
"Business Combinations" (as defined in the certificate of incorporation)
involving an "Interested Stockholder" (as defined in the certificate of
incorporation) except in cases where the proposed transaction has been approved
in advance by two-thirds of those members of Hanmi Financial's board of
directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the person became an Interested Stockholder.
The term "Interested Stockholder" is defined to include any individual,
corporation, partnership, or other person or entity which, together with its
"Affiliates" and "Associates" (in the certificate of incorporation),
beneficially owns in the aggregate percent (10%) or more of the outstanding
shares of voting stock of Hanmi Financial, and any Affiliate or Associate of any
such individual, corporation, partnership, or other person or entity.
This provision of Hanmi Financial certificate applies to any "Business
Combination," which is defined to include:
- any merger or consolidation of Hanmi Financial or any of its subsidiaries
with or into any Interested Stockholder;
- any merger or consolidation of an Interested Stockholder with or into
Hanmi Financial or a subsidiary of Hanmi Financial;
- any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to any Interested Stockholder of assets of Hanmi Financial or
any subsidiary having a fair market value of $1 million or more;
- the adoption of any plan or proposal for the liquidation or dissolution of
Hanmi Financial proposed by or on behalf of any Interested Stockholder;
- any reclassification of securities or recapitalization, or any merger or
consolidation of Hanmi with any of its subsidiaries of any similar
transaction, which has the effect of increasing the
29
percentage of the outstanding shares of Hanmi Financial which are owned by
an Interested Stockholder;
- the issuance of any securities to an Interested Stockholder of Hanmi
Financial or a subsidiary of Hanmi Financial as having a fair market value
of $1,000,000; or
- any agreement or other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations, and sales of substantially all of the assets of a
corporation must, subject to certain exception, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of Hanmi
Financial and any other affected class of stock. The increased stockholder vote
required to approve a business combination may have the effect of foreclosing
mergers and other business combinations which a majority of stockholders deem
desirable and place the power to prevent such a merger or combination in the
hands of a minority of stockholders.
TAKEOVER PROVISIONS IN HANMI FINANCIAL'S CERTIFICATE OF INCORPORATION AND BYLAWS
Hanmi Financial's certificate of incorporation and bylaws contain certain
provisions that deal with matters of corporate governance and certain rights of
shareholders which are different from those of Hanmi Bank inasmuch as they might
be deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the board of directors but which individual Hanmi Financial shareholders may
deem to be in their best interest or in which shareholder may receive a
substantial premium for their shares over then current market prices. As a
result, Hanmi Financial shareholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of an incumbent board of directors or management of Hanmi
Financial more difficult.
The following description of certain of the provisions of the certificate of
incorporation and bylaws of Hanmi Financial is necessarily general, and
reference should be made in each case to such documents, which are contained as
exhibits to Hanmi Financial filings with the Securities and Exchange Commission.
See "HOW YOU CAN OBTAIN FURTHER INFORMATION" to how to obtain a copy of these
documents.
BOARD OF DIRECTORS. As discussed in "Classification of Board of Directors;
Filling Vacancies; Removal of Directors," Hanmi Financial has a "classified"
board of directors divided into three classes so that approximately one-third of
the total number of directors are elected each year. The classified board of
directors is intended to provide for continuity of the Hanmi Financial board of
directors and to make it more difficult and time consuming for a shareholder
group to fully use its voting power to gain control of the board of directors
without consent of the incumbent board of directors of Hanmi Financial.
SPECIAL SHAREHOLDER MEETINGS; ACTION BY WRITTEN CONSENT. Hanmi Financial's
certificate of incorporation and by-laws provide that any action required or
permitted to be taken by the shareholders of Hanmi Financial shall be taken only
at a duly called annual or special meeting of the shareholders and may not be
taken by written consent. Special meetings may only be called by the board of
directors, the chairman of the board of directors or the president of Hanmi
Financial, or by holders of more than 10% of the outstanding shares. These
provisions could have the effect of delaying, until the next annual
shareholders' meeting, shareholder actions which are favored by the holders of a
majority of the outstanding voting securities of Hanmi Financial.
CUMULATIVE VOTING. Hanmi Financial's certificate of incorporation does not
permit cumulative voting in the election of directors. Cumulative voting may
assist a shareholder or group of shareholders to elect a representative or
representatives to the board of directors in order to express their views.
30
AUTHORIZED SHARES. Hanmi Financial's certification of incorporation
authorize the issuance of 30,000,000 shares of common stock and 10,000,000
shares of preferred stock. The shares of common stock and preferred stock were
authorized to provide Hanmi Financial's board of directors with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and the exercise of employee stock
options. However, these additional authorized shares may also be used by the
board of directors consistent with its fiduciary duty to deter future attempts
to gain control of Hanmi Financial. As a result of the ability to fix voting
rights for a series of preferred stock, the board has the power, to the extent
consistent with its fiduciary duties to issue a series of preferred stock to
persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks to control Hanmi
Financial, and thereby assist members of management to retain their positions.
Hanmi Financial's board has no present plans for the issuance of additional
shares, other than the issuance of shares of Hanmi Financial common stock upon
exercise of stock options and in the reorganization.
SHAREHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH INTERESTED
SHAREHOLDERS. As discussed above, Hanmi Financial's certificate of
incorporation requires the approval of the holders of at least 66 2/3% of Hanmi
Financial's outstanding shares of voting stock to approve certain "Business
Combinations" involving an "Interested Stockholder" except in cases where the
proposed transaction has been approved in advance by a majority of those members
of Hanmi Financial's board of directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder, as described more fully above. The increased
shareholder vote required to approve this kind of business combination may have
the effect of foreclosing mergers and other business combinations which a
majority of shareholders deem desirable and place the power to prevent such a
merger or combination in the hands of a minority of shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Certain amendments to
Hanmi Financial certificate of incorporation must be approved by a majority vote
of its board of directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of at least
66 2/3% of the outstanding voting stock entitled to vote is required to amend or
repeal certain provisions of the certificate, including the provisions relating
to approval of certain business combinations, the number and classifications of
directors, director and officer indemnification by Hanmi Financial and amendment
of Hanmi Financial's bylaws and articles of incorporation. Hanmi Financial
bylaws may be amended by its board of directors, or by a vote of 66 2/3% of the
total votes eligible to be voted at a duly constituted meeting of shareholders.
The bylaws may also be amended or repealed by a majority vote of the board of
directors. Such 66.66% shareholder vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
preferred stock that might be outstanding at the time any such amendments are
submitted to the shareholders.
SHAREHOLDER NOMINATIONS. Hanmi Financial's bylaws provide that for
nominations for the board of directors or for other business to be properly
brought by a shareholder before a meeting of shareholders, the shareholder must
first have given timely notice thereof in writing to the secretary of Hanmi
Financial. To be timely, a shareholder's notice generally must be delivered not
less than 60 days nor more than 90 days prior to the annual meeting. If the
meeting is not an annual meeting, the notice must generally be delivered not
more than ninety days prior to the special meeting and not later than the later
of 60 days prior to the special meeting or ten days following the day on which
public announcement of the meeting is first made by Hanmi Financial. The notice
must contain, among other things, certain information about the shareholder
delivering the notice and, as applicable, background about the nominee or a
description of the proposed business to be brought before the meeting.
31
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF HANMI FINANCIAL'S CERTIFICATION OF
INCORPORATION AND BYLAWS. The board of directors of Hanmi Financial believes
that the provisions described above are prudent and will reduce Hanmi
Financial's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its board of directors. The
board of directors believes these provisions are in the best interest of Hanmi
Financial and its shareholders. In the judgment of the board of directors, Hanmi
Financial's board will be in the best position to determine the true value of
Hanmi Financial and to negotiate more effectively for what may be in the best
interest of its shareholders. Accordingly, the board of directors believes that
it is in the best interest of Hanmi Financial and its shareholders to encourage
potential acquirors to negotiate directly with the board of directors of Hanmi
Financial and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the board of
directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of Hanmi
Financial and which is in the best interest of all shareholders.
Attempts to acquire control of financial institutions have recently become
increasingly common. Takeover attempts which have not been negotiated with and
approved by the board of directors present to shareholders the risks of a
takeover on terms which may be less favorable than might otherwise be available.
A transaction which is negotiated and approved by the board of directors, on the
other hand, can be carefully planned and undertaken at an opportune time in
order to obtain maximum value of Hanmi Financial and its shareholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of Hanmi Financial's
assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to incur great expense. Although a
tender offer or other takeover attempt may be made at a price substantially
above the current market prices, such offers are sometimes made for less than
all of the outstanding shares of a target company. As a result, shareholders may
be presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining shareholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive Hanmi
Financial's remaining shareholders of benefits of certain protective provisions
of the Securities Exchange Act of 1934, if the number of beneficial owners
became less than the 300 thereby allowing for Exchange Act deregistration.
Despite the belief of Hanmi Financial as to the benefits to shareholders of
these provisions of Hanmi Financial's certificate of incorporation, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by Hanmi Financial's board of directors, but
pursuant to which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, shareholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of Hanmi Financial's board of
directors and of management more difficult. The board of directors of Hanmi
Financial, however, has concluded that the potential benefits outweigh the
possible disadvantages.
32
MARKET PRICE OF HANMI BANK COMMON STOCK
The common stock of Hanmi Bank is not listed on any national stock exchange
or with Nasdaq. Trading in the stock has not been extensive and such trades
which have occurred would not constitute an active trading market. As of May 1,
2000, there were approximately 240 shareholders of record. The management of
Hanmi Bank is aware of two securities dealers who maintain an inventory and make
a market in Hanmi Bank common stock-Sutro & Co. and Hoeffer & Arnett.
The following tables sets forth the high and low trading prices of Hanmi
Bank's common stock for the quarters indicated based on transactions of which
management is aware. These quotes do not necessarily include retail markups,
markdowns, or commissions and not necessarily represent actual transactions.
Additionally, there may have been transactions at prices other than those shown
below:
HIGH LOW
-------- --------
1998
First Quarter............................................. $16.64 $12.84
Second Quarter............................................ $18.26 $15.62
Third Quarter............................................. $16.03 $11.36
Fourth Quarter............................................ $12.07 $ 9.74
1999
First Quarter............................................. $12.99 $10.75
Second Quarter............................................ $14.41 $12.16
Third Quarter............................................. $15.54 $13.74
Fourth Quarter............................................ $14.20 $10.92
2000
First Quarter (as of February 29, 2000)................... $13.00 $11.49
DIVIDENDS
HANMI FINANCIAL
Since the date of its incorporation, Hanmi Financial has paid no dividends.
After completion of the reorganization, the amount and timing of future
dividends will be determined by its board of directors and will 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 which 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 which restrict the amount available for cash dividends depending
upon the earnings, financial condition and cash needs of Hanmi Bank, as well as
general business conditions.
To the extent Hanmi Financial receives cash dividends from Hanmi Bank, it
presently intends to retain these funds for future growth and expansion. Hanmi
Financial does presently intend to follow the same policy of paying stock
dividends followed by Hanmi Bank. (see below)
HANMI BANK
Since 1985, Hanmi Bank has consistently paid an annual stock dividend to its
shareholders. The following table sets forth information concerning all annual
stock dividends paid since 1995:
YEAR STOCK DIVIDEND
- ---- --------------
2000.. 11%
1999.. 11%
1998.. 9%
1997.. 11%
1996.. 8%
1995.. 5%
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This discussion presents management's analysis of the results of operations
and financial condition of Hanmi Bank as of and for the years ended
December 31, 1999, 1998 and 1997. The discussion should be read in conjunction
with the audited financial statements of Hanmi Bank and the notes related
thereto presented elsewhere in this proxy statement/prospectus (see "FINANCIAL
STATEMENTS" herein).
This discussion and analysis contains forward-looking statements that
involve risks and uncertainties. Hanmi Bank's actual results could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors discussed elsewhere in this registration statement (see "RISK
FACTORS" and "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS" herein).
OVERVIEW
Over the last three years, Hanmi Bank has experienced significant growth in
assets and deposits and a substantial increase in profitability. Total assets
increased to $740.3 million at December 31, 1999 from $650.8 million and $
500.1 million at December 31, 1998, and 1997, respectively. Total gross loans,
including those held for sale, increased to $486.8 million at December 31, 1999
from $342.9 million, and $299.0 million at December 31, 1998 and 1997,
respectively. Total deposits increased to $655.7 million as of December 31, 1999
from $586.3 million and $446.5 million at December 31, 1998 and 1997,
respectively.
Hanmi Bank's growth has been generated through internal operations and
expansion into new markets previously not serviced by Hanmi Bank. In 1998, the
Bank acquired First Global Bank, which was a savings bank primarily engaged in
residential mortgage lending. This acquisition expanded Hanmi Bank's branch
network, broadened loan production and brought Hanmi Bank much closer to
$1 billion in total assets. This acquisition added three new branches to the
existing six-branch network. Two of the branches are located in Cerritos and in
Rowland Heights in California, bringing added convenience to our customers
residing or doing business in these areas. The Cerritos branch also effectively
bridges the gap between our Los Angeles branches and the Garden Grove branch.
Also, Hanmi Bank has more products and services to offer in those market areas.
For the year ended December 31, 1999, net income was $12.0 million,
representing an increase of $2.7 million or 29% from $9.3 million for the year
ended December 31, 1998. This resulted in basic earnings per share of $1.80 and
$1.45 for the year ended December 31, 1999 and 1998, respectively. The increase
in earnings was achieved through an increase in net interest income and the fee
income generated. For the year ended December 31, 1998, net income was
$9.3 million as compared to $8.2 million for 1997. Net profit increased
$1.1 million or 13.5%. The significant increases in earnings during 1999 was
primarily due to the expansion of our lending activity in both the conventional
and SBA areas through the acquisition of First Global Bank.
One of our primary sources of revenue is net interest income, which is the
difference between interest and fees derived from earning assets and interest
paid on liabilities obtained to fund those assets. Hanmi Bank's net interest
income is affected by changes in the volume of interest-earning assets and
interest-bearing liabilities. It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities. Another
significant source of income is the gain on the sale of SBA loans. We are a SBA
lender and actively markets the guaranteed portion of the loans it generates to
the secondary market. Hanmi Bank also generates substantial non-interest income,
including transaction and loan origination fees. Hanmi Bank's non-interest
expenses consist primarily of employee compensation and benefits, occupancy and
equipment expenses and other operating expenses. Hanmi Bank's results of
operations are significantly affected by its provision for loan losses. Results
of
34
operations may also be affected by other factors, including general economic and
competitive conditions, mergers and acquisitions of other financial institutions
within Hanmi Bank's market area, changes in interest rates, government policies
and actions of regulatory agencies.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Hanmi Bank's earnings depend largely upon the difference between the income
received from its loan portfolio and other interest-earning assets and the
interest paid on deposits. The difference is "net interest income." The net
interest income, when expressed as a percentage of average total interest-
earning assets, is referred to as the net interest margin. Hanmi Bank's net
interest income is affected by the change in the level and the mix of
interest-earning assets and interest-bearing liabilities, referred to as volume
changes. Hanmi Bank's net interest income is also affected by changes in the
yields earned on assets and rates paid on liabilities, referred to as rate
changes. Interest rates charged on our loans are affected principally by 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, legislative tax policies,
the governmental budgetary matters, and the actions of the Federal Reserve
Board.
For the year ended December 31, 1999 and 1998, Hanmi Bank's net interest
income was $33.7 million and $27.0 million, respectively. The net interest rate
spread and net interest margin for the year ended December 31, 1999 were 4.13%
and 5.50%, respectively, compared to 4.01% and 5.53%, respectively, for the year
ended December 31, 1998. The net interest margin for the year ended
December 31, 1999 was lower than for the comparable 1998 period due to the
relatively larger increase in the loan portfolio compared to lower-yielding
assets. Average net loans increased by 35.9% over the year, significantly higher
than the 25.8% increase in average total interest earning assets.
Average interest earning assets increased to $614.0 million in 1999 from
$488.3 million in 1998, which represents 25.8% increase. Average net loans
increased to $396.6 million in 1999 from $291.8 million in 1998. As a result,
total loan interest income grew by 28.8% in 1999 on an annual basis, despite a
slight reduction in average yields on net loans from 10.56% in 1998 to 10.01% in
1999. The average interest rate charged on loans decreased reflecting the
competition among lenders who aggressively pursued a limited number of quality
loans with lower rates.
Average interest-bearing liabilities grew by 28.1% in 1999 to
$424.7 million as compared to $331.5 million in 1998. The average interest rate
Hanmi Bank paid for interest-bearing liabilities decreased 31 basis points in
1999 reflecting a decrease in average annual prime rate of 31 basis points. The
net interest rate spread in 1999 increased to 4.13% from 4.01% in 1998. The net
interest margin decreased to 5.50% in 1999 from 5.53% in 1998, resulting from
the combination of lower yields earned on average assets and lower interest
rates paid on deposits.
35
The following tables show Hanmi Bank's 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:
DECEMBER 31
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE(4) EXPENSE RATE/YIELD BALANCE(4) EXPENSE RATE/YIELD
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Earning assets:
Net loans,(1)............... $396,607 $39,684 10.01% $291,841 $30,821 10.56%
Municipal securities,(2).... 12,815 774 6.04% 7,401 466 6.30%
Obligations of other U.S.
govt...................... 103,439 6,314 6.10% 85,244 5,300 6.22%
Other debt securities....... 74,293 4,472 6.02% 66,702 4,146 6.22%
Federal funds sold.......... 25,953 1,329 5.12% 35,452 1,909 5.38%
Interest-earning deposits... 921 46 4.99% 1,626 86 5.29%
-------- ------- ------ -------- ------- -----
Total interest earning
assets................ 614,028 52,619 8.57% 488,266 42,728 8.75%
-------- ------- ------ -------- ------- -----
Non-interest earning assets:
Cash and due from banks..... 50,803 37,504
Premises and equipment,
net....................... 9,103 6,191
Other real estate owned..... 303 687
Accrued interest
receivable................ 4,658 4,030
Other assets(3)............. 11,902 11,520
-------- --------
Total non-interest
earning assets........ 76,769 59,932
-------- --------
TOTAL ASSETS.................... $690,797 $548,198
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities--
Deposits:
Money market.............. $ 94,506 $ 3,108 3.29% $ 76,155 $ 2,506 3.29%
Savings................... 54,655 2,035 3.72% 40,258 1,652 4.10%
Time certificates of
deposit over $100,000... 105,326 6,091 5.78% 92,784 5,074 5.47%
Other time deposits....... 163,058 7,243 4.44% 121,469 6,466 5.32%
Other borrowing........... 7,177 370 5.16% 809 32 3.96%
-------- ------- ------ -------- ------- -----
Total interest-bearing
liabilities........... 424,722 18,847 4.44% 331,475 15,730 4.75%
-------- ------- ------ -------- ------- -----
Non-interest-bearing
liabilities:
Demand deposits............. 194,907 154,869
Other liabilities........... 6,272 6,410
-------- --------
Total
non-interest-bearing
liabilities........... 201,179 161,279
-------- --------
Shareholders' equity............ 64,896 55,444
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $690,797 $548,198
======== ========
Net interest income............. $33,772 $26,998
======= =======
Net interest spread,(3)......... 4.13% 4.01%
Net interest margin,(4)......... 5.50% 5.53%
DECEMBER 31
----------------------------------
1997
----------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE(4) EXPENSE RATE/YIELD
---------- -------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Earning assets:
Net loans,(1)............... $261,298 $28,194 10.79%
Municipal securities,(2).... 2,124 134 6.31%
Obligations of other U.S.
govt...................... 81,722 4,831 5.91%
Other debt securities....... 53,037 3,272 6.17%
Federal funds sold.......... 23,517 1,350 5.74%
Interest-earning deposits... 0 0 0
-------- ------- -----
Total interest earning
assets................ 421,698 37,781 8.96%
-------- ------- -----
Non-interest earning assets:
Cash and due from banks..... 31,064
Premises and equipment,
net....................... 6,062
Other real estate owned..... 507
Accrued interest
receivable................ 3,699
Other assets(3)............. 7,391
--------
Total non-interest
earning assets........ 48,723
--------
TOTAL ASSETS.................... $470,421
========
LIABILITIES AND SHAREHOLDERS' EQ
Interest-bearing liabilities--
Deposits:
Money market.............. $ 77,809 $ 2,696 3.46%
Savings................... 33,672 1,366 4.06%
Time certificates of
deposit over $100,000... 74,982 4,014 5.35%
Other time deposits....... 94,913 4,801 5.06%
Other borrowing........... 0 0 0
-------- ------- -----
Total interest-bearing
liabilities........... 281,376 12,877 4.58%
-------- ------- -----
Non-interest-bearing
liabilities:
Demand deposits............. 138,545
Other liabilities........... 6,088
--------
Total
non-interest-bearing
liabilities........... 144,633
--------
Shareholders' equity............ 44,412
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $470,421
========
Net interest income............. $24,905
=======
Net interest spread,(3)......... 4.38%
Net interest margin,(4)......... 5.91%
- ------------------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1.7, $1.3 and $1.2 million for the year ended
December 31, 1999, 1998 and 1997, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis.
(3) Interest-only strip is not included in investment securities available for
sale, but included in other assets.
(4) Average amount is calculated on a daily basis.
36
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:
INCREASES (DECREASES) INCREASES(DECREASES)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------------ ------------------------------
FOR THE YEAR ENDED, FOR THE YEAR ENDED,
1999 VS. 1998 1998 VS. 1997
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Earning assets--Interest income:
Loans, net(1)................................ $11,064 $(2,201) $8,863 $3,296 $(669) $2,627
Municipal securities(2)...................... 341 (33) 308 333 (1) 332
Obligations of other U.S. governmental....... 1,131 (117) 1,014 208 261 469
Other debt securities........................ 472 (146) 326 843 31 874
Federal funds sold........................... (511) (70) (581) 685 (126) 559
Interest-earning deposits.................... (37) (2) (39) 86 86
------- ------- ------ ------ ----- ------
Total.......................................... $12,460 $(2,569) $9,891 $5,365 $(418) $4,947
======= ======= ====== ====== ===== ======
Interest bearing liabilities
Interest expense:
Money market deposits...................... $ 604 $ (2) $ 602 $ (57) $(133) $ (190)
Savings deposits........................... 591 (208) 383 267 19 286
Time certificates of deposit over
$100,000................................. 686 331 1,017 953 107 1,060
Other time deposits........................ 2,214 (1,437) 777 1,343 322 1,665
Other borrowing............................ 252 86 338 32 32
------- ------- ------ ------ ----- ------
Total.......................................... $ 4,347 $(1,230) $3,117 $2,538 $ 315 $2,853
------- ------- ------ ------ ----- ------
Change in net interest income.................. $ 8,113 $(1,339) $6,774 $2,827 $(733) $2.094
======= ======= ====== ====== ===== ======
- ------------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1.7, $1.3 and $1.2 million for the year ended
December 31, 1999, 1998 and 1997, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 1999, the provision for loan losses was $
1.0 million, compared to $3.1 million for the year ended December 31, 1998, a
decrease of 67.7%. This decrease was attributable to Hanmi Bank's decreasing
charge-off trend combined with decreasing non-performing loans.
Provisions to the allowance for loan losses are made quarterly, in
anticipation of probable loan losses. The quarterly provision is calculated on a
predetermined formula to ensure adequacy as the portfolio grows. The formula is
composed of various components. The reserve is determined by assigning specific
reserves for all classified loans. All loans that are not classified are then
given certain
37
allocations according to type with larger percentages applied to loans deemed to
be of a higher risk. These percentages are determined by Hanmi Bank's prior
experience.
BALANCE AT THE END OF PERIOD
--------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- --------
TOTAL TOTAL TOTAL
RESERVE GROSS RESERVE GROSS RESERVE GROSS RESERVE
APPLICABLE TO: AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
- -------------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate
Construction................... 28 3,513 30 2,304 2 80
Commercial property............ 901 125,842 1,230 85,126 2,179 62,680 1,821
Residential property........... 521 39,787 289 22,112
Commercial and industrial...... 5,492 260,457 5,279 197,759 4,668 202,723 3,845
Consumer....................... 395 38,682 278 33,200 373 33,557 570
Unallocated.................... 3,287 3,317 2,125 2,500
Loans held for sale (1)........ 18,501 2,402
Total reserve.................... 10,624 486,782 10,423 342,903 9,347 298,960 8,816
BALANCE AT THE END OF PERIOD
------------------------------
1996 1995
-------- -------------------
TOTAL TOTAL
GROSS RESERVE GROSS
APPLICABLE TO: LOANS AMOUNT LOANS
- -------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate
Construction................... 3,869 74 4,702
Commercial property............ 54,135 1,693 50,127
Residential property...........
Commercial and industrial...... 162,222 3,575 127,340
Consumer....................... 33,604 530 36,350
Unallocated.................... 2,324
Loans held for sale (1)........
Total reserve.................... 253,830 8,196 218,519
- ------------------------------
o
(1) Loans held for sale were valued at the lower of cost or market.
The allowance is based on estimates and ultimate future losses may vary from
current estimates. Management anticipates the continued stabilization of the
economy in segments of Hanmi Bank's market area. However, 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 Bank's borrowers. As
a result, Hanmi Bank may sustain loan losses, in any particular period, that are
sizable in relation to the allowance, or exceed the allowance. In addition,
Hanmi Bank's asset quality may deteriorate through a number of possible factors,
including:
- rapid growth;
- failure to enforce underwriting standards;
- failure to maintain appropriate underwriting standards;
- failure to maintain an adequate number of qualified loan personnel; and
- failure to identify and monitor potential problem loans.
Based on these and other factors, loan losses may be substantial in relation
to the allowance or exceed the allowance.
NON-INTEREST INCOME
The following table sets forth the various components of Hanmi Bank's
non-interest income for the years indicated:
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts............... $ 8,374 $ 6,066 $4,896
Gain on sale of loans............................. 895 1,322 1,112
Loan servicing income............................. 1,094 1,008 1,461
Other service charges and fees.................... 1,642 1,508 1,228
Other income...................................... 517 401 248
------- ------- ------
Total......................................... $12,522 $10,305 $8,945
======= ======= ======
38
As a result of Hanmi Bank's effort to diversify its sources of income,
non-interest income has increased in the past several years and has become a
very significant part of Hanmi Bank's revenue. For the year ended December 31,
1999, non-interest income was $12.5 million, an increase of 21.5% from
$10.3 million for the year ended December 31, 1998.
Hanmi Bank earns non-interest income from four major areas: service charges
on deposit accounts, gain on the sale of SBA loans, loan servicing income and
charges and fees generated from international trading finance.
Service charge income on deposit accounts increased with the growing deposit
volume and number of accounts. Hanmi Bank constantly reviews service charges to
maximize service charge income while still maintaining a competitive edge. The
service charges on deposit accounts increased by $2.3 million or 38.0%, and
$1.2 million or 23.9% for the year ended December 31, 1999 and 1998,
respectively. The increase in 1999 and 1998 was mainly due to the acquisition of
First Global Bank. Hanmi Bank assumed approximately $77.8 million in deposit.
Gain on the sale of SBA guaranteed loans was approximately $895,000 in 1999
compared to $1.3 million and $1.1 millions in 1998 and 1997, respectively,
representing decrease of 32.3% and increase of 18.9% for the year ended
December 31, 1998 and 1997, respectively. Decrease/increases in the gain on sale
of loans resulted exclusively from Hanmi Bank's decrease/increase activity on
SBA guaranteed loans. Hanmi Bank sells the guaranteed portion of the SBA loans
in government securities secondary markets, while Hanmi Bank retains servicing
rights. During 1999, the secondary market for these loans did not provide
sufficient premium and, therefore, Hanmi Bank is current holding SBA loans
originated in 1999 in its portfolio.
Hanmi Bank will continue to make an effort to expand non-interest income as
a major component of revenue in the foreseeable future.
NON-INTEREST EXPENSE
The following table sets forth the breakdown of non-interest expense for the
years indicated:
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits................... $12,369 $10,712 $ 9,568
Occupancy and equipment.......................... 2,678 2,495 2,512
Data processing.................................. 1,978 1,460 1,307
Professional fees................................ 1,099 934 897
Advertising and promotional expenses............. 1,420 1,011 919
Loan referral fee................................ 944 331 309
Other............................................ 4,118 2,839 3,054
Total........................................ $24,606 $19,782 $18,566
======= ======= =======
Total non-interest expense increased by $4.8 million or 24.4% in 1999. The
increase in 1999 was primarily due to the acquisition of First Global Bank.
Three new branches were added to Hanmi Bank's network, which required
substantial increases in staff (personnel expense) as well as additional rent
for the new locations. The business generated by the new branches created
additional personnel expense as the lending staff was augmented to support the
larger loan volume. The slight increase in 1998 resulted from the fact that the
merger was consummated at the end of year.
Management anticipates that non-interest expense will continue to grow in
the coming years as the expansion plan is implemented. However, Hanmi Bank will
make an effort to reduce the growth rate of expenses to the lowest possible
level in order to maximize profitability.
39
PROVISION FOR INCOME TAXES
For the year ended December 31, 1999, Hanmi Bank made a provision for income
taxes of $8.7 million on net income before tax of $20.7 million, representing an
effective tax rate of 42%, compared to a provision of $5.2 million on pretax net
income of $14.5 million, representing an effective tax rate of 36%, for 1998.
The relatively low tax rates in 1998 compared to 1999 were primarily due to
carried over tax benefits on state tax arising from being situated in the Los
Angeles Revitalization Zone. The Revitalization Zone tax benefit reduced the
effective state tax rates by 6% in 1998 and by 7% in 1997 respectively. The
Revitalization Zone tax credit has been expired in 1998. As indicated in Note 7
in the Notes to the Financial Statements, income tax expense is 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 due to the fact that
some items of income and expense are recognized in different years for income
tax purposes than in the financial statements. These recognition anomalies cause
"temporary differences;" eventually, all taxes due are paid.
Most of Hanmi Bank's temporary differences involve recognizing substantially
more expenses in its financial statements than it has been allowed to deduct for
taxes, and therefore Hanmi Bank normally has a net deferred tax asset. At
December 31, 1999, 1998 and 1997, Hanmi Bank had net deferred tax assets of
$5.6, $2.4 million and $2.6 million, respectively.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total gross loans increased by $143.9 million or 42% in 1999. Total gross
loans comprised 65.8% of total assets at December 31, 1999 compared with 52.7%,
and 59.8% at December 31, 1998, and 1997, respectively.
The table on the following page sets forth the composition of Hanmi Bank's
loan portfolio by major category. Commercial and industrial loans comprised the
largest portion of the total loan portfolio, representing 57.3% of total loans
at December 31, 1999, as compared with 58.4%, and 67.8% of total loans at
December 31, 1998, and 1997, respectively.
The loan portfolio also includes the unsold portion of SBA loans, which
totaled approximately $18.5 million and $2.4 million at December 31, 1999 and
December 31, 1998, respectively. SBA loans comprise the major portion of the
growth in the commercial and industrial loan portfolio. Approximately more than
53% of Hanmi Bank's commercial and industrial loans are supported by real estate
collateral to reduce potential loss exposure to Hanmi Bank in the event of
repayment difficulties by the borrower.
Commercial loans include term loans and revolving lines of credit. Term
loans have typical maturity of three years to five years and are extended to
finance the purchase of business entities, business equipment, leasehold
improvements, or for permanent working capital. SBA guaranteed loans usually
have 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. Hanmi Bank directs its efforts
to avoiding concentration in any one area.
Real estate loans were $169.1 million and $109.5 million at December 31,
1999 and December 31, 1998, respectively, representing 34.8% and 31.9%,
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.
40
The properties may be either user owned or for investment purposes. Hanmi
Bank adheres to the real estate loan guidelines set forth by the FDIC in 1993.
These guidelines include, among other things, fair review of appraisal value,
limitation on loan to value ratio, and minimum cash flow requirements to service
debt. The majority of the properties taken as collateral are located in Southern
California. After a major real estate recession in the first half of the 1990's,
property values have generally tended to increase over the past two years.
However, no assurance can be given that this trend will continue.
Hanmi Bank does not actively pursue consumer installment loans, which
historically have represented less than 11% of the total loan portfolio. The
majority of installment loans are centered in automobile loans, which Hanmi Bank
provides as a service to existing clients.
At December 31, 1999, there were no concentrations of loans greater than 10%
of total loans which are not otherwise disclosed as a category of loans in the
table below.
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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real estate
Construction............................ $ 3,513 $ 2,304 $ $ 3,869 $ 4,702
Commercial property..................... 125,842 85,126 62,680 54,135 50,127
Residential property.................... 39,787 22,112
Commercial and industrial................. 260,457 197,759 202,723 162,222 127,340
Installment Loans......................... 38,682 33,200 33,557 33,604 36,350
Loans held for sale(1).................... 18,501 2,402
-------- -------- -------- -------- --------
Total gross loans......................... 486,782 342,903 298,960 253,830 218,519
======== ======== ======== ======== ========
- ------------------------
(1) Loans held for sale were valued 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
DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Real estate
Construction................................... 0.72% 0.67% 1.52% 2.15%
Commercial property............................ 25.85% 24.83% 20.97% 21.33% 22.94%
Residential property........................... 8.17% 6.45%
Commercial and industrial........................ 53.50% 57.67% 67.81% 63.91% 58.27%
Installment Loans................................ 7.95% 9.68% 11.22% 13.24% 16.63%
Loans held for sale.............................. 3.81% .70%
------ ------ ------ ------ ------
Total gross loans................................ 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
As of December 31, 1999 and December 31, 1998, Hanmi Bank had commitments to
extend credit of $70.2 million and $47.6 million, and obligations under standby
letters of credit of approximately $3.3 million and $2.4 million, and
obligations under commercial letters of credit of $19.4 million and
$15.1 million, and under credit card loans of approximately $1.6 million and
$1.2 million, respectively. Based upon Hanmi Bank's historical experience, the
outstanding loan commitments are expected to remain relatively stable throughout
the year.
41
The following table shows the maturity distribution and repricing intervals
of Hanmi Bank's outstanding loans as of December 31, 1999. In addition, the
table shows the distribution of such loans as between those with variable or
floating interest rates and those with fixed or predetermined interest rates.
The table excludes non-accrual loans of $2.9 million, and includes unearned
income and deferred fees totaling $1.5 million at December 31, 1999.
AFTER ONE
BUT
WITHIN ONE WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
---------- ---------- ---------- --------
Real estate
Construction..................................... $ 1,727 $ 1,786 $ $ 3,513
Commercial property.............................. 2,798 48,564 74,480 125,842
Residential property............................. 1,346 38,441 39,787
Commercial and industrial.......................... 90,377 87,971 82,109 260,457
Installment Loan................................... 6,098 32,067 517 38,682
Loans held for sale................................ 146 772 17,583 18,501
-------- -------- -------- --------
Total.......................................... $101,146 $172,506 $213,130 $486,782
======== ======== ======== ========
Loans with variable interest rates................. 66,338 97,432 141,338 305,108
Loans with predetermined interest rates............ 34,808 75,074 71,792 181,674
-------- -------- -------- --------
$101,146 $172,506 $213,130 $486,782
======== ======== ======== ========
NON-PERFORMING ASSETS
Non-performing assets are comprised 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. 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 Hanmi Bank believes the borrower will
eventually overcome those circumstances and repay the loan in full. Other real
estated owned consists of properties acquired by foreclosure or similar means
that Management intends to offer for sale.
Management's 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, Hanmi Bank stops recognizing income from the
interest on the loan and reverses any uncollected interest that had been accrued
but unpaid. These loans may or may not be collateralized, but collection efforts
are continuously pursued.
Hanmi Bank's non-performing loans were $3.0 million at December 31, 1999,
compared to $3.3 million, and $3.4 million at December 31, 1998, and 1997,
respectively, representing a decrease of 9.1% in 1999, and 2.9% in 1998.
Total non-performing assets including other real estate owned decreased by
23.9% in 1999, and increase by 16.1% in 1998. At December 31, 1999, 1998 and
1997, total non-performing assets were $3.0 million, $4.0 million, and
$3.4 million, respectively. During these same periods, total loans increased by
41.9% in 1999, and 14.7% in 1998.
As a result, the ratio of non-performing assets to total loans and other
real estate owned decrease to .62% at December 31, 1999, from 1.16% at
December 31, 1998, and from 1.15% at December 31, 1997. Hanmi Bank's other real
estate owned was approximately $670,000 at December 31, 1998, which
42
was a negligible figure compared to the total loan portfolio, and there is no
other real estate owned at December 31, 1999.
The following table provides information with respect to the components of
Hanmi Bank's non-performing assets as of December 31 of the years indicated:
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:(1)
Real estate:
Construction................................ $ $ $ $ 511 $
Commercial property......................... 206 675 892 2,834 6,467
Residential property........................ 1,023 1,367 426 505 790
Commercial and industrial..................... 1,536 762 1,203 72 221
Installment................................... 188 308 103 182 500
------ ------ ------ ------ -------
Total....................................... 2,953 3,112 2,624 4,104 7,978
------ ------ ------ ------ -------
Loans 90 days or more past due and still
accruing (as to principal or interest):
Real estate:
Construction................................ 780
Commercial property......................... 757
Residential property........................
Commercial and industrial..................... 79 26 45
Installment................................... 31
------ ------ ------ ------ -------
Total....................................... 79 26 45 1,568
------ ------ ------ ------ -------
Restructured loans:(2)
Real estate:
Commercial and industrial..................... 200 779 246
Installment...................................
------ ------ ------ ------ -------
Total....................................... 200 779 246
------ ------ ------ ------ -------
Total nonperforming loans................... 3,032 3,312 3,429 4,149 9,792
------ ------ ------ ------ -------
Other real estate owned......................... 670 1,090 742
------ ------ ------ ------ -------
Total nonperforming assets.................. $3,032 $3,982 $3,429 $5,239 $10,534
====== ====== ====== ====== =======
Nonperforming loans as a percentage of total
loans......................................... 0.62% 0.97% 1.15% 1.64% 4.48%
Nonperforming assets as a percentage of total
loans and other real estate owned............. 0.62% 1.16% 1.15% 2.06% 4.80%
- ------------------------
(1) During the fiscal year ended December 31, 1999, 1998, and 1997,
approximately $388,000, $209,000 and $35,000 of interest income related to
these loans was included in net interest income. Additional interest income
of approximately $183,000, $311,000 and $253,000, respectively, for the year
ended December 31, 1999, 1998 and 1997, would have been included in net
interest income, if those loans had been paid in accordance with their
original terms and had been outstanding throughout the applicable period
then ended or, if not outstanding throughout the applicable period then
ended, since origination.
(2) A "restructured loan" is one the terms of which were renegotiated to provide
a reduction of deferral of interest or principal because of a reduction in
the financial position of the borrower. Interest income related to these
loans, which were included in net interest income for respected fiscal year,
were negligible. Additional interest income would have been negligible, if
those loans
43
had been paid in accordance with their original terms and had been
outstanding throughout the applicable period then ended or, if not
outstanding throughout the applicable period then ended, since origination.
ALLOWANCE FOR LOAN LOSSES
Hanmi Bank maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio. The allowance is based on ongoing, quarterly assessments
of the probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. The methodology for assessing
the appropriateness of the allowance consists of several key elements, which
include:
- the formula allowance,
- specific allowance for identified problem loans and portfolio segments.
- and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of those loans, pools of loans, or commitments. Change in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based on our historical loss experience and may be
adjusted for significant factors that, in management's judgement, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
described as follows:
- Problem graded loan loss factors are obtained from migration model that
tracks four years of historical loss experience.
- Pass grade loan loss factors are based on the average annual net
charge-off rate over a two-year period.
- Pooled loan loss factors, not individually graded loans, are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment, residential mortgage
loans, and automobile loans.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
- Loans graded "Special Mention" carry a minimum loss factor of 1%.
- Loans graded "Substandard" carry a minimum loss factor of 6%.
- Loans graded "Doubtful" carry a minimum loss factor of 30%
- Loans graded "Loss" are charged off.
The conditions evaluated in connection with the unallocated allowance
include the following condition that existed as of the balance sheet date:
- Changes in lending policies and procedures, including underwriting
standards and collection, charge off, and recovery practice.
- Changes in national and local economic and business condition and
developments, including the condition of various market segments.
44
- Changes in the nature and volume of the portfolio.
- Changes in the trend of the volume and severity of past due and classified
loans; and trends in the volume of non-accrual loans, troubled debt
restructuring and other loan modifications.
- The existence and effect of any concentrations of credit, and changes in
the level of such concentrations.
- The effect of external factors such as legal and regulatory requirements
on the level of estimated credit losses in the loan portfolio.
The management reviews these conditions quarterly in discussion with the
senior credit officer. If any of these conditions is evidenced by a specific
identifiable problem credit or portfolio segment as of the evaluation date, the
management's estimate of the effect of this condition may be reflected as a
specific allowance applicable to this credit or portfolio segment. Where any of
these conditions is not evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's evaluation of the
probable loss concerning this condition is reflected in the unallocated
allowance.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. The loss migration model that is used to establish the loan
loss factors for problem graded loans is designed to be self-correcting by
taking into account our recent loss experience. Similarly, by basing the pass
graded loan loss factors on loss experience over two years, the methodology is
designed to take our recent loss experience into account. Pooled loan loss
factors are adjusted quarterly based upon the level of net charge-offs expected
by management in the next twelve months. Furthermore, our methodology permits
adjustments to any loss factor used in the computation of the formula allowance
in the event that, in management's judgement, significant factors that affect
the collectibility of the portfolio as of the evaluation date are not reflected
in the loss factors. By assessing the probable estimated losses inherent in the
loan portfolio on a quarterly basis, we are able to adjust specific and inherent
loss estimates based upon any more recent information that has become available.
In addition, both Federal and state regulators, as an integral part of their
examination process, periodically review Hanmi Bank's allowance for loan loss
and may recommend additions based upon their evaluation of the portfolio at the
time of their examination. Management believes the allowance for loan losses is
currently at an adequate level to provide for potential losses in Hanmi Bank's
loan portfolio.
At December 31, 1999, the allowance for loan losses was $10.6 million. The
ratio of the allowance for loan losses to total gross loans is 2.2%. Net loans
charge-offs were approximately $799,000 for the year ended December 31, 1999,
compared to $3.3 million for the year ended December 31, 1998. The ratios of net
loan charge-off to average total loans were .2% and 1.1% in 1999 and 1998,
respectively. The difference between 1999 and 1998 was primarily due to high
quality of loans produced coupled with the strong U.S. economy in general and a
fast recovery from financial crises of Asia economies.
Hanmi Bank's net charge-off was reduced significantly in 1999, down from
$3.3 million and $2.1 million in 1998 and 1997 respectively. Hanmi Bank
experienced significantly higher charge-off in prior periods due to the impact
of the recession and real estate downturn in Southern California. There can be
no assurance that future economic or other factors will not adversely affect
Hanmi Bank's borrowers, or that Hanmi Bank's asset quality may not deteriorate
through rapid growth, failure to identify and monitor potential problem loans or
for other reasons, thereby causing loan losses to exceed the current allowance.
45
The table below summarizes, for the periods indicated, loan balances at the
end of each period and the daily averages during the period; changes in the
allowance for loan losses arising from loans charged off, recoveries on loans
previously charged off, and additions to the allowance which have been charged
against earnings; and certain ratios related to the allowance for loan losses:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCES:
Average total loans outstanding during
period................................ $407,171 $300,980 $270,063 $230,088 $223,769
Total gross loans outstanding at end of
period................................ 486,782 342,903 298,960 253,830 218,519
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balances at beginning of period........... 10,423 9,347 8,816 8,196 6,060
Actual charge-offs:
Real estate
Construction..........................
Commercial property................... 79 430 852 1,127 2,855
Residential property.................. 73 104 463 470 929
Commercial and industrial............... 1,432 3,642 1,429 1,308 2,574
Installment............................. 417 310 538 745 540
-------- -------- -------- -------- --------
Total................................. 2,001 4,486 3,282 3,650 6,898
RECOVERIES ON LOANS PREVIOUSLY CHARGED
OFF:
Real estate
Construction..........................
Commercial property................... 595 272 204 101 123
Residential property.................. 23 85 73 170 404
Commercial and industrial............... 514 791 840 1,634 451
Installment............................. 70 59 46 515 95
-------- -------- -------- -------- --------
Total................................. 1,202 1,207 1,163 2,420 1,073
-------- -------- -------- -------- --------
Net loan charge-offs...................... 799 3,279 2,119 1,230 5,825
-------- -------- -------- -------- --------
Provision charged to operating expenses... 1,000 3,050 2,650 1,850 7,960
Additional reserve in conjunction with
merger of First Global Bank........... 1,305
-------- -------- -------- -------- --------
Balances at end of period................. $ 10,624 $ 10,423 $ 9,347 $ 8,816 $ 8,195
RATIOS:
Net loan charge-offs to average total
loans................................... 0.20% 1.09% 0.78% 0.53% 2.60%
Allowance for loan losses to total gross
loans at end of period.................. 2.18% 3.04% 3.13% 3.47% 3.75%
Net loan charge-offs to allowance for loan
losses at end of period................. 7.52% 31.46% 22.67% 13.95% 71.08%
Allowance for loan losses to nonperforming
loans................................... 350.40% 314.70% 272.59% 212.49% 83.70%
Hanmi Bank concentrates the majority of its earning assets in loans. In all
forms of lending there are inherent risks. Hanmi Bank concentrates the
preponderance of its 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.
46
While Hanmi Bank believes that its underwriting criteria are prudent,
outside factors can adversely impact credit quality. During the early 1990's the
severe recession impacted Hanmi Bank's ability to collect loans. The devastation
of the 1994 in Northridge, California (County of Los Angeles, California)
earthquake further impacted loan repayment. A repeat of these types of events
could cause deterioration in Hanmi Bank's loan portfolio.
Having experienced the problems mentioned above in the past, Hanmi Bank has
attempted to mitigate problems by requiring secured loans. Additionally, a
significant portion of the portfolio is represented by loans guaranteed by the
SBA, which further reduces Hanmi Bank's potential for loss. Hanmi Bank also
utilizes outside credit review in an effort to maintain loan quality. Loans are
reviewed three times a year with new loans and those that are delinquent
receiving special attention. The use of this outside service provides Hanmi Bank
with a fresh review at its lending activities. In addition to Hanmi Bank's
internal grading system, loans criticized by this outside review are downgraded
with appropriate reserves added if required.
As indicated above, Hanmi Bank formally assesses 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 and the impact of potential
future events.
Although Management believes the allowance is adequate to absorb losses as
they arise, no assurance can be given that Hanmi Bank will not sustain losses in
any given period, which could be substantial in relation to the size of the
allowance.
INVESTMENT PORTFOLIO
The Investment portfolio maintained by Hanmi Bank as of December 31, 1999
was primarily composed of US treasury, US government agency, municipal bonds and
corporate bonds.
Credit criteria for U.S. governments and federal agency and federal
agency-sponsored securities are generally considered to have minimal credit
risk, and no credit investigation is required for these securities. All other
investments generally meet the following credit criteria when purchased:
- Commercial paper rated "A-2' by S&P and "P-2' by Moody's or better.
- Corporate bonds, must be rated either "A3" or "A-" and/or better.
- Local government securities are purchased only after the creditworthiness
of the issuer has been established, and must be rated better than
"Baa1/BBB+".
- Reverse Repurchase Agreements must be backed with U.S. Treasury or Federal
agency/Federal agency-sponsored securities, asset-backed securities
including mortgage-backed securities or corporate bonds that are rated "A"
or better. Also, the counterparties of Reverse Repurchase transactions
must be either approved by the Investment Committee of the Board or one of
the authorized dealers that are already approved by the Investment
Committee of the Board.
The total investment portfolio decreased to 23.1% of total assets at
December 31, 1999 from 33.6% at December 31, 1998 as Hanmi Bank funded more
loans in 1999 than in 1998. Since Hanmi Bank regards liquidity as the primary
objective of the investment portfolio and the loan demand has fluctuated for the
last three years, the investment portfolio has fluctuated despite the steady
growth of deposit. In 1998, Hanmi Bank increased its investment in US Agencies
and corporate bonds in order to improve profitability as well as extend
portfolio duration. In 1999, however, as it funded more loans
47
and focused more on its liquidity and regulatory requirements, Hanmi Bank sold
investment securities and invested to short-term commercial papers and Community
Reinvestment Acts bonds to meet regulatory requirements. As a result, average
yield of investment portfolio has been deteriorated to 6.1% for the year ended
December 31, 1999 from 6.3% for the year ended December 31, 1998.
Investment securities available for sale were 51% of the total investment
portfolio as of December 31, 1998. But the ratio increased significantly to 61%
as of December 31, 1999, which is comparable with peer banks. Except for
$1.1 million of US agency floater and $16.9 million of floating rate notes, all
fixed income investment securities were based on predetermined interest rates.
Management classifies securities as available for sale to provide Hanmi Bank
with the flexibility to move funds into loans as demand warrants. Hanmi Bank
held no derivative securities or structured notes during any period presented.
The following table summarizes the book value, market value and distribution
of Hanmi Bank's investment securities as of the dates indicated:
INVESTMENT PORTFOLIO AS OF DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
BOOK MARKET BOOK MARKET BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Government securities............. $ 11,000 $ 11,017 $ 15,963 $ 16,224 $ 55,905 $ 56,096
Obligation of other U.S. government
agencies............................. 86,584 82,436 82,909 83,241 28,199 28,254
Obligation of state and political
subdivision.......................... 14,797 14,617 11,103 11,370 2,600 3,659
Corporate bonds........................ 63,945 63,040 107,576 108,422 58,685 58,855
-------- -------- -------- -------- -------- --------
Total investment securities............ $176,326 $171,110 $217,551 $219,257 $145,389 $146,864
======== ======== ======== ======== ======== ========
Excluding holdings of government securities, there were no investments in
securities of any one issuer exceeding 10% of Hanmi Bank's stockholders' equity
at December 31, 1999, 1998 or 1997.
The following table summarizes the maturity schedule of Hanmi Bank's
investment securities and their weighted average yield at December 31, 1999:
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS
----------------- ----------------- ----------------- -----------------
YIELD YIELD YIELD YIELD
-------- -------- -------- --------
U.S. governmental securities............. 11,000 6.24%
Obligations of other U.S. governmental
agencies............................... 12,030 6.23% 30,748 6.04% 34,085 6.16% 9,721 6.32%
Obligations of state and political
subdivisions(1)........................ 0.00% 5,585 5.74% 3,427 5.64% 5,785 7.02%
Corporate bonds.......................... 23,020 6.35% 32,764 6.31% 8,161 6.69% 0.00%
------ ---- ------ ---- ------ ---- ------ ----
Total investment securities.......... 46,050 6.29% 69,097 6.14% 45,673 6.22% 15,506 6.58%
====== ==== ====== ==== ====== ==== ====== ====
- ------------------------
(1) The yield on tax-exempt income has not been computed on a tax equivalent
basis.
DEPOSITS
Total deposits at December 31, 1999, 1998 and December 31, 1997 were
$655.7 million, $586.3 million, and $446.3 million, respectively, representing
an increase of $69.5 million or 11.9% in 1999 and, $139.7 million or 31.3% in
1998. The increase in 1998 was primarily attributed to the
48
acquisition of First Global Bank. Average deposits for the year ended
December 31, 1999, 1998 and 1997 were $612.5 million, $485.5 million and
$419.9 million, respectively. Average deposits therefore increased by 26.1% in
1999 and 15.6% in 1998.
Deposits are Hanmi Bank's primary source of funds. As Hanmi Bank's need for
lendable funds has grown, dependence on time deposits has increased and so has
the interest Hanmi Bank has paid on time deposits. At December 31, 1999, 1998
and 1997, the total time deposits were $314.2 million, $258.6 million and
$185.2 million, respectively, representing an increase of $55.6 million or 21.5%
in 1999, and $73.3 million or 39.6% in 1998. The average rate paid on time
deposits in denominations of $100,000 or more was 5.78%, 5.47% and 5.35% for the
year ended December 31, 1999, 1998, and 1997, respectively.
As Hanmi Bank's client base is comprised primarily of commercial and
industrial accounts, balances carried by individual clients are generally higher
than at consumer-oriented banks. A number of clients carry deposit balances of
more than 1% of Hanmi Bank's total deposits, but no single customer had a
deposit balance of more than 5% of total deposits at December 31, 1999. Hanmi
Bank also accepts brokered deposits on a selective basis at prudent interest
rates to augment deposit growth. Outstanding balances on these brokered deposits
were approximately $19.8 million at December 31, 1999 that will be mature within
one year. Growth in this category is closely monitored by Management and will
only be a factor until the deposit growth of the new branches becomes adequate
to meet loan demand without being supplemented by brokered deposits.
The following tables summarize the distribution of average daily deposits
and the average daily rates paid for the periods indicated:
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Demand, noninterest-bearing................... $194,907 $154,869 $138,545
Money market.................................. 94,506 3.29% 76,155 3.29% 77,809 3.46%
Savings....................................... 54,655 3.72% 40,258 4.10% 33,672 4.06%
Time deposits of $100,000 or more............. 105,326 5.78% 92,784 5.47% 74,982 5.35%
Other time deposits........................... 163,058 4.44% 121,469 5.32% 94,913 5.06%
-------- ---- -------- ---- -------- ----
Total deposits................................ $612,452 3.02% $485,535 3.23% $419,921 3.07%
======== ==== ======== ==== ======== ====
The scheduled maturity of Hanmi Bank's time deposits in denominations of
$100,000 or greater at December 31 of the years indicated:
1999 1998 1997
$100,000 OR MORE -------- -------- --------
(DOLLARS IN THOUSANDS)
Three months or less........................................ $ 67,126 $ 63,559 $ 45,666
Over three months through twelve months..................... 54,595 47,929 40,199
Over twelve months.......................................... 1,767 3,414 1,433
-------- -------- --------
$123,488 $114,902 $ 87,298
======== ======== ========
INTEREST RATE RISK MANAGEMENT
Interest rate is a primary element for Hanmi Bank's market risk. Assets and
liabilities are priced based on market interest rate. Interest rate sensitivity
is a measure of the exposure to fluctuations in Hanmi Bank's future earnings
caused by fluctuations in interest rates. Such fluctuations result from the
mismatch in repricing characteristics of assets and liabilities at a specific
point in time. This mismatch, or interest rate sensitivity gap, represents the
potential mismatch in the change in the rate of accrual of
49
interest revenue and interest expense from a change in market interest rates.
Mismatches in interest rate repricing among assets and liabilities arise
primarily from the interaction of various customer businesses (i.e. types of
loans versus the types of deposits maintained) and from management's
discretionary investment and funds gathering activities. Interest rate change
affects the economic value of fixed income assets directly or indirectly. The
economic value of fixed income assets generally moves to the opposite direction
of the change in market interest rates. Hanmi Bank attempts to manage its
exposure to interest rate sensitivity. The level of interest rate risk can be
managed directly by changing the repricing and maturity characteristics of the
cash flows of specific assets or liabilities. To successfully manage interest
rate risk, Hanmi Bank uses various methods with which to measure existing and
future interest rate risk exposures. Repricing gap analysis, stress testing, and
simulation modeling are measurement techniques used to quantify interest rate
risk exposure.
50
The following table summarizes the most recent status of Hanmi Bank's gap
position.
AFTER THREE AFTER ONE
MONTH BUT YEAR BUT
WITHIN THREE WITHIN WITHIN AFTER NON SENSITIVE
MONTHS ONE YEAR FIVE YEARS FIVE YEARS ACCOUNT TOTAL
------------ ----------- ---------- ---------- ------------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Cash............................... $ 53,476 $ 53,476
Securities
Fixed............................ $ 983 $ 27,020 $ 69,097 $ 61,179 $158,279
Floating......................... 18,047 18,047
Unrealized loss.................. (5,088) (5,088)
Loans
Fixed............................ 18,380 16,428 75,074 71,792 181,674
Floating......................... 305,108 305,108
Unearned & Loan Loss Reserve....... (12,132) (12,132)
Federal funds sold................. 10,000 10,000
Interest-earning deposits.......... 100 100
Other assets....................... 30,795 25,719
-------- -------- -------- -------- -------- --------
Total.......................... 352,618 43,448 144,171 132,971 67,051 740,259
======== ======== ======== ======== ======== ========
LIABILITIES
Deposit
Demand deposit................... 193,165 193,165
Interest-bearing
Savings........................ 4,894 13,598 32,655 3,270 54,416
Time deposit $100,000 over..... 67,126 54,595 1,767 123,488
Other time deposits............ 91,088 98,024 1,484 103 190,699
Money market checking.......... 6,351 14,686 62,129 10,796 93,962
Accrued interest payable........... 3,157 3,157
Acceptance outstanding............. 1,829 1,829
Securities sold under repo......... 5,891 5,891
Other borrowed funds............... 4,500 4,500
Other liabilities.................. 1,321 1,321
-------- -------- -------- -------- -------- --------
Total.......................... 179,850 180,903 98,035 14,169 199,472 672,428
======== ======== ======== ======== ======== ========
Shareholders equity................ 67,831 67,831
-------- -------- -------- -------- -------- --------
Total.......................... $179,850 $180,903 $ 98,035 $ 14,169 $267,303 $740,259
======== ======== ======== ======== ======== ========
Cumulative Repricing............... $172,768 $ 35,313 $ 81,450 $200,252
as % of Total Assets............. 23.34% 4.77% 11.00% 27.05%
as % of Earning Assets........... 26.34% 5.38% 12.42% 30.53%
Hanmi Bank has determined that 90-days and one-year gap positions are the
most important in analyzing interest rate risk exposure to earnings. Based on
historical trends and performances, Hanmi Bank has determined that the ratio of
gap to earning assets should be within the range of plus or minus 20% in one
year. Hanmi Bank's internal static gap report indicated that the one-year gap
ratio to earning assets was 4.77% as of December 31, 1999, which complied with
Hanmi Bank's policy guideline. In three months, however, the 90-days gap
position is highly asset sensitive with 26.34% of earning assets.
51
Hanmi Bank understands that the spread between interest income earned on
earning assets and interest expense paid to interest-bearing liabilities is the
principal component of net interest income and that interest rate change affects
on Hanmi Bank's financial performance substantially. Accordingly, Hanmi Bank
tries to ensure capital protection through stable earnings over interest rate
fluctuation. In order to achieve stable earnings, Hanmi Bank manages its assets
and liabilities and closely monitors the percentage changes of net interest
income and equity value in relation with interest rate fluctuation within Hanmi
Bank's guidelines.
To supplement traditional gap analysis, Hanmi Bank performs simulation
modeling to estimate the potential effects of interest rate change. The
following table is one of the stress simulations performed by Hanmi Bank to
forecast the impact of interest rate change on Hanmi Bank's net interest income
and economic value of equity over the 12-months period ending December 31, 2000.
HYPOTHETICAL CHANGES IN INTEREST RATES
DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------
PROJECTED CHANGES (%)
--------------------------------------------- CHANGE IN AMOUNT EXPECTED AMOUNT
NET INTEREST INCOME FAIR VALUE OF EQUITY ------------------------- -------------------------
--------------------- --------------------- NET INTEREST FAIR VALUE NET INTEREST FAIR VALUE
GUIDELINE PROJECTED GUIDELINE PROJECTED INCOME EQUITY INCOME OF EQUITY
--------- --------- --------- --------- ------------ ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
Change in: Interest
rate(BPS)
200..................... 25.00% 8.6% -25.00% -21.8% 3,608 -15,339 45,687 55,059
100..................... 12.50% 4.3% -12.50% -11.4% 1,798 -8,016 43,877 62,382
0....................... 42,079 70,398
- -100.................... -12.50% -4.2% 12.50% 12.5% -1,785 8,791 40,294 79,189
- -200.................... -25.00% -8.5% 25.00% 26.2% -3,558 18,453 38,521 88,851
DECEMBER 31, 1998
-----------------------------------------------------------------------------------------------------
PROJECTED CHANGES (%)
--------------------------------------------- CHANGE IN AMOUNT EXPECTED AMOUNT
NET INTEREST INCOME FAIR VALUE OF EQUITY ------------------------- -------------------------
--------------------- --------------------- NET INTEREST FAIR VALUE NET INTEREST FAIR VALUE
GUIDELINE PROJECTED GUIDELINE PROJECTED INCOME EQUITY INCOME OF EQUITY
--------- --------- --------- --------- ------------ ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
Change in: Interest
rate(BPS)
200..................... 25.00% 8.37% -25.00% -21.26% 2,833 (15,462) 36,662 57,267
100..................... 12.50% 4.17% -12.50% -11.04% 1,411 (8,029) 35,241 64,700
0....................... 33,830 72,729
- -100.................... -12.50% -4.14% 12.50% 11.95% (1,401) 8,691 32,429 81,420
- -200.................... -25.00% -8.25% 25.00% 24.90% (2,792) 18,110 31,038 90,839
Under the above stress simulation, for a 100 basis point decline in interest
rate, Hanmi Bank may be exposed to a 4.2% decline in net interest income but a
12.5% increase in fair value of equity. For a 100 basis point increase in
interest rate, net interest income may increase by 4.3%, but fair value of
equity may decrease by 11.4%. For a 200 basis point increase in interest rate,
net interest income may increase by 8.6%, but fair value of equity may decrease
by 21.8%. For a 200 basis point decrease in interest rate, net interest income
may decrease by 8.5%, but fair value of equity may increase by 26.2%. The above
simulation as of December 31, 1999 indicates that projected change in fair value
of equity is off Hanmi Bank's policy guideline when interest rate decreases by
200 basis point. This was mainly caused by an increase of fixed mortgage loans
by $5.8 million in December 1999.
52
With the current extremely tight labor market and incessant growth of US
economy, which may touch off serious inflationary problem, the Federal Reserve
Bank closely monitor the two attributes and may raise interest rates. In turn,
these expected actions probably bolster the volatile circumstances. Since Hanmi
Bank restricts its expansion of fixed rate long-term loans in order to be safe
in these circumstances, the excessive projected change in economic value of
equity is expected to be cleared and within Hanmi Bank's guideline before the
first half of 2000.
The preceding simulation analysis does not represent a forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels, prepayments on loans and securities, changes
in deposit levels, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows and others. While
assumptions are developed based upon current economic and local market
conditions, Hanmi Bank cannot make any assurances as to the predictive nature of
these assumptions including how customer preferences or competitor influences
might change.
Also, as market conditions vary from those assumed in the simulation
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables. Furthermore, the
simulation analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of Hanmi Bank to fund customers' needs for
borrowing and deposits withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by Hanmi Bank to its customers. Hanmi Bank's
principal source of funds are deposits, loan and securities repayments, maturity
of securities, sales of securities available for sale and other funds provided
by operations. Liquidity may also be supported by borrowed funds such as federal
fund lines, repurchase agreements and federal discount window. Maintaining high
quality securities as collateral for repurchase agreements is another key
feature of liquidity management. Liquidity risk may occur when Hanmi Bank has
few short-term investment securities available for sale and/or is not capable of
raising funds quickly at acceptable rates in the money market. Also, a heavy and
sudden increase of cash demands in loans and deposits can cause a tight
liquidity position. Several indices are monitored on daily, monthly and
quarterly basis to monitor Hanmi Bank's liquidity position and to avoid a
liquidity crisis.
53
LIQUIDITY RATIO AND TRENDS
DECEMBER 31
------------------------------
CLASSIFICATION 1999 1998 1997
- -------------- -------- -------- --------
Short-term investments / Total assets....................... 10% 13% 15%
Net loans and standby letters of credit / Total Assets...... 64% 51% 58%
Core deposits / Total assets................................ 74% 74% 74%
Noncore funding / Total assets.............................. 14% 16% 18%
Short-term investment / short-term noncore funding
dependence................................................ 67% 85% 95%
LIQUIDITY MEASURES
DECEMBER 31
------------------------------
CLASSIFICATION BANK'S GUIDELINES 1999 1998 1997
- -------------- ----------------- -------- -------- --------
Loans/Deposits..................................... Less than 77% 74.2% 58.5% 66.9%
Investment/Deposits................................ Less than 50% 26.9% 37.1% 32.8%
Loans & Investment/Deposits........................ Less than 110% 101.1% 95.6% 99.7%
Hanmi Bank secures several lines of credit to borrow necessary funds when
liquidity problems may arise. As of December 31, 1999 Hanmi Bank has
$21 million in federal fund lines from several other banks. Also, Hanmi Bank has
several master repurchase agreements, which will furnish the liquidity to Hanmi
Bank in consideration of bond collateral. Since Hanmi Bank has enough investment
securities for collateral, Hanmi Bank's management does not expect any problem
to borrow under the master repurchase agreements.
The primary source of capital for Hanmi Bank for the past several years has
been internally generated through retained earnings. Total shareholders' equity
was $67.8 million at December 31, 1999, an increase of $8.9 million or 15.1%
from $58.9 million at December 31, 1998 and an increase of $10.6 million or
21.9% from $48.3 million at December 31, 1997.
Hanmi Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can trigger mandatory and possibly additional discretionary actions
by the regulators that, if undertaken, could have a material effect on Hanmi
Bank's financial statements and operations. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Hanmi Bank must meet
specific capital guidelines that involve quantitative measures of Hanmi Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Hanmi Bank's capital amounts and classification
are also subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Hanmi Bank to maintain minimum ratios of total capital to total
risk-weighted assets, Tier 1 Capital to total risk-weighted assets, and Tier 1
Capital to average assets. The minimum ratios for capital adequacy are 8% (Total
Risk-Based), 4% (Tier 1 Risk-Based) and 4% (Leverage Capital Ratio),
respectively. Hanmi Bank had Total Risk-Based and Tier 1 Risk-Based capital
ratios of 13.88% and 12.86%, and 12.63% and 11.61%, respectively at
December 31, 1999 and 1998. Hanmi Bank's Leverage Capital Ratio was 9.2% and
8.66% at December 31, 1999 and 1998, respectively. (See "REGULATION AND
SUPERVISION-Capital Adequacy Requirements" herein for exact definitions and
regulatory capital requirements.)
Hanmi Bank is periodically examined by the Federal Reserve Bank and the
California Department of Financial Institutions. As of December 31, 1999, the
most recent notification from the Federal Reserve Bank categorized Hanmi Bank as
"well capitalized" under the regulatory framework for
54
prompt corrective action. To be categorized as well capitalized Hanmi Bank must
maintain Total Risk-Based, Tier 1 Risk-Based, and Tier 1 Leverage Ratios of at
least 10%, 6%, and 5%, respectively. There are no conditions or events since
that notification which Management believes have changed Hanmi Bank's category.
On December 1994, Hanmi Bank agreed to enter a written agreement with the
Federal Reserve Bank of San Francisco. The restrictions imposed by the Federal
Reserve Board have been lifted in June 1999.
ACCOUNTING MATTERS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued and effective for fiscal year beginning after
December 31, 1999. Management of Hanmi Bank has not yet determined whether the
adoption of this standard will have a material impact on its results of
operations or financial position when adopted.
IMPACT OF INFLATION; SEASONALITY
The primary impact of inflation on Hanmi Bank is its effect on interest
rates. Hanmi Bank's primary source of income is net interest income, which is
affected by changes in interest rates. Hanmi Bank attempts to limit the impact
of inflation on its net interest margin through management of rate-sensitive
assets and liabilities and the analysis of interest rate sensitivity. The effect
of inflation on premises and equipment as well as non-interest expenses has not
been significant for the periods covered in this registration statement. Hanmi
Bank's business is generally not seasonal.
BUSINESS OF HANMI BANK
GENERAL
Hanmi Bank was incorporated under the laws of the State of California on
August 24, 1981, was licensed by the California Department of Financial
Institutions on December 15, 1982. Hanmi Bank's deposit accounts are insured
under the Federal Deposit Insurance Act up to applicable limits thereof, and is
a member of the Federal Reserve System. Hanmi Bank's headquarters office is
located at 3660 Wilshire Boulevard, Penthouse suite "A," Los Angeles, California
90010.
Hanmi Bank currently has nine full-service branch offices located in Los
Angeles County and Orange County in Southern California. Of the nine offices,
Hanmi Bank opened six as de novo branches and acquired the other three through
acquisition.
On September 30, 1998, Hanmi Bank acquired First Global Bank, f.s.b., Los
Angeles, California. First Global Bank had three branch offices, one branch
located in Los Angeles, one branch located in Cerritos and one branch located in
Rowland Heights in California. Hanmi Bank acquired approximately $44.9 million
in loans, and assumed approximately $77.8 million in deposits.
Hanmi Bank is a community bank conducting a general banking business with
its primary market encompassing the multi-ethnic population of the Los Angeles
County and Orange County area. Hanmi Bank's full-service offices are located in
business areas where many of the businesses are run by immigrants and other
minority groups. Hanmi Bank's client base reflects the multi-ethnic composition
of these communities (See footnote 16, "Business Segment Information," in
audited financial statements herein).
COMPETITION AND SERVICE AREA
The banking business on the West Coast is highly competitive with respect to
virtually all products and services and has become increasingly so in recent
years. With respect to commercial bank
55
competitors, major banks dominate the industry. Most such banks offer certain
services which Hanmi Bank does not offer directly (but some of which Hanmi Bank
offers through correspondent institutions) and by virtue of their greater total
capitalization, such banks also have substantially higher lending limits than
Hanmi Bank. In addition to commercial banks, Hanmi Bank competes with savings
institutions, credit unions, and numerous non-banking companies that offer money
market and mutual funds, wholesale finance, credit card, and other consumer
finance services, including on-line banking services and personal finance
software. Mergers between financial institutions, recently enacted federal and
state interstate banking laws, and technological innovation have also resulted
in increased competition in financial services markets (See
"BUSINESS--Competition" herein.).
Hanmi Bank has been providing its banking services primarily in the areas of
Koreatown in Los Angeles, the Mid-Wilshire commercial district and the downtown
central business district of Los Angeles and Garden Grove of Orange County in
Southern California. However, in recent years Hanmi Bank expanded its service
areas to Cerritos and Rowland Heights. In the Greater Los Angeles area, the
competition in Hanmi Bank's service areas is intense with respect to both loans
and deposits. While the market is dominated by a few mega banks with many
offices operating over a wide geographic area, as well as with savings banks,
thrift and loan associations, credit unions, mortgage companies, insurance
companies, and other lending institutions, Hanmi Bank's major competitors are
relatively smaller community banks which focus their marketing effort on
Korean-American businesses in Hanmi Bank's service areas.
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, real estate construction loans,
commercial real estate loans, residential mortgage loans, and consumer loans.
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 are in Los Angeles County and
Orange County. Loan maturities are normally 12 months to 60 months. Hanmi Bank
requires a complete re-analysis before considering any extension. Hanmi Bank
finances primarily small and middle market businesses in a wide spectrum of
industries. Short-term business loans are generally intended to finance current
transactions 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. Collateral may include liens on inventory, accounts receivable,
fixtures and equipment and, in some cases, leasehold improvements and real
estate. 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 all outstanding
business debt, exclusive of collateral, on the basis of 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
practices.
As compared to consumer lending, commercial lending entails significant
additional risks. These loans typically involve larger loan balances and are
generally dependent on the businesses cash flow and, thus, may be subject to
adverse conditions in the general economy or in a specific industry.
56
SMALL BUSINESS ADMINISTRATION ("SBA") 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% to 80% of the principal and accrued
interest. Under certain circumstances, the guarantee of principal and interest
may be less than 75%. In general, the guaranteed percentage is less than 75% for
loans over $1.0 million. Hanmi Bank typically requires that SBA loans be secured
by first or second lien deeds of trust on real property. SBA loans have terms
ranging from 7 to 25 years depending on the use of the proceeds. To qualify for
an SBA loan, a borrower must demonstrate the capacity to service and repay the
loan, exclusive of the collateral, on the basis of historical earnings or
reliable projections.
Hanmi Bank generally sells a substantial amount of the guaranteed portion of
the SBA Guaranteed loans that it originates. In 1999, Hanmi Bank originated
$49 million of SBA loans and sold $14 million. In 1998, Hanmi Bank originated
$31 million SBA loans and sold $15 million. When Hanmi Bank sells a SBA loan, it
generally retains the obligation to repurchase the loans for 90 days after the
sale, if the loans fail to comply with representations and warranties given by
Hanmi Bank. Hanmi Bank retains the obligation to service the SBA loans, for
which it receives a servicing fee. Those unsold portions of the SBA loans that
remain owned by Hanmi Bank are included in Hanmi Bank's balance sheet. At
December 31, 1999, Hanmi Bank had $56 million in SBA loans remaining on its
balance sheet, and was servicing $53 million of sold SBA loans.
LOANS SECURED BY REAL ESTATE
Real estate lending involves risks associated with the potential decline in
the value of 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 governmental and
other policies affecting the holding real estate, environmental conditions,
governmental and other use restrictions, development of competitive properties
and increasing vacancy rates. Hanmi Bank's real estate dependence increases the
risk of loss both in Hanmi Bank's loan portfolio and its holdings of other real
estate owned when real estate values decline.
COMMERCIAL MORTGAGE LOANS--Hanmi Bank offers commercial real estate loans.
Collateral includes first deeds of trust on real property. When real estate
collateral is owner-occupied, the value of the real estate collateral should be
supported by formal appraisals in accordance with applicable regulations. The
majority of the properties securing these loans are located in Los Angeles and
Orange Counties.
Hanmi Bank also provides commercial real estate loans principally secured by
owner-occupied or commercial and industrial buildings. Generally, these types of
loans are made for a period of up to five years, with monthly payments based on
a portion of the principal plus interest, and with a loan-to-value ratio of 65%
or less, using an adjustable rate indexed to the prime rate appearing in the
West Coast edition of THE WALL STREET JOURNAL. Hanmi Bank also offers fixed rate
loans. Amortization schedules for commercial loans generally do not exceed
20 years.
Payments on loans secured by such properties are often dependent on
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. Hanmi 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. When possible, Hanmi Bank also attempts to obtain
loan guarantees from financially capable parties. Hanmi Bank's lending personnel
inspect substantially all of the properties securing Hanmi Bank's real estate
loans before the loan is made.
57
Hanmi Bank requires title insurance insuring the status of its lien on all
of the real estate secured loans when a first trust deed on the real estate is
taken as collateral. Hanmi Bank also requires the borrower to maintain fire,
extended coverage casualty insurance and, if the property is in a flood zone,
flood insurance, in amount of equal to the outstanding loan balance, subject to
applicable law that may limit the amount of hazard insurance a lender can
require to the cost of replacing improvements. Hanmi Bank's lending policies
generally limit the loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 65% or the lesser of the appraised value or the
purchase price. Hanmi Bank 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, commercial and industrial properties within Hanmi Bank's market
area. The future condition of the local economy could negatively impact the
collateral values of such loans.
Hanmi Bank's construction loans typically have the following
characteristics:
- maturities of two years or less;
- a floating rate of interest based on Hanmi Bank's base lending rate;
- minimum cash equity of 35% of project cost;
- advance of anticipated interest costs during construction; advance of
fees;
- first lien position on the underlying real estate;
- loan-to-value ratios generally not exceeding 65%; and
- recourse against the borrower or a guarantor in the event of default.
Hanmi Bank does not typically commit to make the permanent loan on the
property unless the permanent loan is a government guaranteed loan. Hanmi Bank
does not participate in joint ventures or take an equity interest in connection
with its construction lending.
Construction loans involve additional risks compared to loans secured by
existing improved real property. These include the following:
- the uncertain value of the project prior to completion;
- the inherent uncertainty in estimating construction costs, which is often
beyond the control of the borrower; construction delays and cost overruns;
- possible difficulties encountered by municipal or other governmental
regulation during siting or construction; and
- the difficulty in accurately evaluating the market value of the completed
project.
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,
and 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.
58
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 Hanmi Bank's residential loans
are determined by an analysis of Hanmi Bank's cost of funds, cost of
origination, cost of servicing, risk factors and portfolio needs.
LOANS TO INDIVIDUALS
Loans to individuals, also termed 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, equity lines,
overdraft protection loans, and unsecured lines of credit. Management assesses
the borrower's 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 security, if any, to the proposed loan amount.
The bank generally makes these loans in amounts of 65% or less of the value of
collateral. An appraisal is obtained from a qualified real estate appraisal for
substantially all loans secured by real estate. Most of Hanmi Bank's loans to
individuals are repayable on an installment basis.
Loans to individuals generally entail greater risk than do residential
mortgage loans, particularly in the case of those loans that are unsecured or
secured by rapidly depreciating assets such as automobiles. In such cases, 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 borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, various federal and state laws, including
federal and state bankruptcy and insolvency laws, often limit the amount which
the lender can recover on loans to individuals. Loans to individuals may also
give rise to claims and defenses by a consumer loan borrower against the lender
on these loans, such as Hanmi Bank, and a borrower may be able to assert against
such assignee claims and defenses that it 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. However, these
commitments may also take the form of commercial letter of credit and 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. As December 31, 1999, Hanmi Bank
had commitments to extend credit of approximately $70.2 million, obligations
under commercial letters of credit of approximately $19.4 million, and
obligations under standby letters of credit of approximately $3.3 million, and
other obligations under guaranteed credit cards of $1.6 million.
59
The following table shows the distribution of Hanmi Bank's undisbursed loan
commitments of the dates indicated:
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Commitments to extend credit................................ $70,208 $47,632
Standby letters of credit................................... 3,277 2,360
Commercial letters of credit................................ 19,443 15,098
Guaranteed credit cards..................................... 1,554 1,165
------- -------
Total....................................................... $94,482 $66,255
======= =======
LENDING PROCEDURES AND LOAN APPROVAL PROCESS
Loan applications may be approved by the board of directors' loan committee,
and by Hanmi Bank's management and lending officers to the extent of their loan
authority. Individual lending authority is granted to the Chief Executive
Officer, the Chief Retail Lending Officer, Chief Commercial Lending Officer, and
branch and department managers. Loans for which direct and indirect borrower
liability would exceed an individual's lending authority are referred to Hanmi
Bank's management and, for those in excess of management's approval limits, to
the loan committee.
At December 31, 1999, Hanmi Bank's authorized legal lending limits were
$11.8 million for unsecured loans plus an additional $7.8 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 which exceeds 15% of primary
capital plus the allowance for loan losses on an unsecured basis, plus an
additional 10% on a secured basis. Hanmi Bank's primary capital plus allowance
for loan losses at December 31, 1999 totaled $78.5 million.
The highest individual lending authority in Hanmi Bank is the combined
administrative lending authority for unsecured and secured lending of
$1 million, which requires the approval and signatures of the Management Credit
Committee including the Chief Executive Officer and Chief Commercial Lending
Officer. The second highest lending authority is $100,000 for Chief Executive
Officer, $30,000 for Chief Commercial Lending Officer, and $350,000 for Chief
Retail Lending Officer. All other individual lending authority is substantially
less, with the next largest authority for secured loans being $20,000.
Lending limits are authorized for the Management Credit Committee, Chief
Executive Officer and other officers by the board of directors of Hanmi Bank.
The Chief Commercial Lending Officer is responsible for evaluating the authority
limits for individual credit officers and recommends lending limits for all
other officers to the board of directors for approval.
The review of each loan application includes the applicant's credit history,
income level and cash flow analysis, financial condition and the value of any
collateral to secure the loan. 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.
Hanmi Bank seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. These practices include analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers, valuation of collateral based on reports
of independent appraisers and audits of accounts receivable or inventory pledged
as security.
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ASSET QUALITY
NONPERFORMING ASSETS--Non performing assets include nonperforming loans and
other real estate owned.
NONPERFORMING LOANS--Nonperforming loans are those which the borrower fails
to perform in accordance with the original terms of the obligation and fall into
one of three categories:
NONACCRUAL LOANS--Hanmi Bank generally places loans on nonaccrual 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 in the process of collection. When loans are placed on
nonaccrual status, accrued but unpaid interest is reversed against the current
year's income. Interest income on nonaccrual loans is recorded on a cash basis.
Hanmi Bank may treat payments as interest income or return of principal
depending upon management's opinion of the ultimate risk of loss on the
individual loan. Cash payments are treated as interest income where management
believes the remaining principal balance is fully collectible. Additionally,
Hanmi Bank may place loans that are not 90 days past due on nonaccrual 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.
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 current
income. Interest is reported on a cash basis until the borrower's ability to
service the restructured loan in accordance with its terms is established.
OTHER REAL ESTATE OWNED (OREO)--This category of nonperforming assets
consists of real estate to which Hanmi Bank has taken title by foreclosure or by
taking a deed in lieu of foreclosure from the borrower. Before Hanmi Bank takes
title to other real estate owned, 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 of Hanmi Bank, credit reviews are performed by inside loan
review officers throughout the year to assure accuracy of documentation and the
identification of problem credits. The State of California Department of
Financial Institutions and the Federal Reserve Bank of San Francisco also review
Hanmi Bank and its loans during an annual safety and soundness examination.
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 of 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 makes 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 which may work
to the advantage and strengthening of the assets, its classification as an
estimated loss is deferred until its more exact status may be determined.
61
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 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 the realization too distant in the future to
justify retention as an asset on Hanmi Bank's books.
Another category, designated as "special mention," is maintained for loans
which do not currently expose Hanmi Bank to a significant degree of risk to
warrant classification in a "substandard," "doubtful" or "loss" category, but do
posses credit deficiencies or potential weaknesses deserving management's 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. Hanmi Bank charges off
an impaired loan at the time management believes the collection process has been
exhausted. Hanmi Bank measures impaired loans based on the present value of
future cash flows discounted at the loan's effective rate, the loan's observable
market price or the fair value of collateral if the loan is
collateral-dependent. Impaired loans at December 31, 1999 were $3.7 million, all
of which were also nonaccrual loans. Allowance for loan losses related to
impaired loans was $1.2 million at December 31, 1999.
Except as disclosed above, there were no assets as of December 31, 1999
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with the present loan repayment terms. However, it is always possible that
current credit problems may exist that may not have been discovered by
management. Please refer to "Allowance and Provisions for Loan Losses."
ALLOWANCE AND PROVISIONS FOR LOAN 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.
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 Hanmi Bank, the Allowance for Loan Losses is reviewed for adequacy.
Furthermore, the State of California Department of Financial Institutions and
Federal Reserve Bank of San Francisco review the adequacy of the Allowance for
Loan Losses in an annual safety and soundness examination. The State of
California Department of Financial Institutions and/or Federal Reserve Bank of
San Francisco may require Hanmi Bank to recognize additions to the Allowance for
Loan Losses based upon its judgment of the information available to it at the
time of its examination. The State of California Department of Financial
Institutions most recently reviewed Hanmi Bank on January 17, 2000 as of
December 31, 1999 and, based on the exit interview, concluded there were no
substantial findings.
Hanmi Bank's Senior Credit Administration Officer reports quarterly to Hanmi
Bank's board of directors and continuously reviews loan quality and loan
classifications. Such reviews assist the Board in establishing the level of
allowance for loan and lease losses. Hanmi Bank's board of directors reviews the
adequacy of the allowance on a monthly basis.
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PREMISES
The following table sets forth information about Hanmi Bank's banking
offices:
LOCATION TYPE OF OFFICE OWNED/LEASED
- ------------------------------------------------ -------------------- ------------
3737 W. Olympic Boulevard, Los Angeles Branch(3) Owned
2610 W. Olympic Boulevard, Los Angeles Branch Leased
950 South Los Angeles Street, Los Angeles Branch Leased
9820 Garden Grove Boulevard, Garden Grove Branch Owned
120 South Western Avenue, Los Angeles Branch Leased
3660 Wilshire Boulevard, Suite 103, Los Angeles Main Branch(4) Leased
3109 W. Olympic Boulevard, Los Angeles Branch(5) Owned
18720 East Colima Road, Rowland Heights Branch Leased
11754 East Artesia Boulevard, Artesia Branch Leased
7750 Daggett Street, Suite 200B, San Diego Loan Production(1) Leased
3660 Wilshire Boulevard, Suite PH-A, Los Angeles Administrative(1)(2) Leased
- ------------------------
(1) Deposits are not accepted at this facility
(2) Corporate Headquarters and SBA lending offices
(3) Auto Loan Center is located at this facility
(4) Trade Finance Dept. is located at this facility
(5) Residential Mortgage Center is located at this facility
Aggregate annual rentals for Hanmi Bank for leased premises were
approximately $1.1 million for the year ended December 31, 1999. Hanmi Bank
considers its present facilities to be sufficient for its current operations.
EMPLOYEES
As of December 31, 1999, Hanmi Bank has 258 full-time equivalent employees.
Hanmi Bank's employees are not represented by a union or covered by collective
bargaining agreement. Hanmi Bank has entered into a written employment agreement
with Chung Hoon Youk, its President and Chief Executive Officer. Hanmi Bank does
not have any other written contract with its other employees.
LITIGATION
From time to time, Hanmi Bank is involved in litigation as an incident to
its business. In the opinion of management, no such pending or threatened
litigation is likely to have a material adverse effect on Hanmi Bank's condition
or results of operations.
INSURANCE
Hanmi Bank maintains financial institution bond and commercial insurance at
levels deemed adequate by Hanmi Bank's management to protect it from certain
damage.
COMPETITION
The banking and financial services industry in California generally, and in
Hanmi Bank's 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, and the accelerating pace of
consolidation among financial services providers. Hanmi Bank competes for loans,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage
63
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions, and other nonbank 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
Hanmi Bank.
Among the advantages which 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 major
commercial banks operating in Hanmi Bank's service areas offer specific services
(for instance, trust and international banking services) which 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.
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, 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.
In order to compete with other financial institutions in its service area,
Hanmi Bank relies principally upon local promotional activity including:
- direct mail;
- advertising in the local media;
- personal contacts by its directors, officers, employees and stockholders;
and
- specialized services.
Hanmi Bank's promotional activities emphasize the advantages of dealing with
a locally-owned and headquartered institution attuned to the particular needs of
the community. For customers whose loan demands exceed Hanmi Bank's lending
limits, the bank attempts to arrange for the loan on the participation basis
with other financial institutions.
SUPERVISION AND REGULATION
GENERAL
Both federal and state law extensively regulate bank holding companies. This
regulation is intended primarily for the protection of depositors and the
deposit insurance fund and not for the benefit of shareholders of Hanmi
Financial. Set forth below is a summary description of the material laws and
regulations which relate to the operations of Hanmi Bank and will relate to the
operations of Hanmi Financial once the acquisition is consummated. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
On November 12, 1999, President Clinton signed into law the Gramm-Leach
Bliley Act, which fundamentally restructures the financial services industry in
the United States. Among other things, the Gramm-Leach Bliley Act permits
affiliations among banks, securities firms and insurance companies,
64
authorizes an unprecedented range of financial services to be conducted within a
"financial holding company" structure, and establishes "functional regulation"
as the framework for examination, supervision and licensing by state and federal
financial services regulators.
HANMI FINANCIAL
Hanmi Financial has applied to be a registered bank holding company. If the
application is approved, it will be subject to regulation under the Bank Holding
Company Act. Hanmi Financial will be required to file periodic reports with the
Federal Reserve Board and such additional information as the Federal Reserve
Board may require pursuant to the Bank Holding Company Act. The Federal Reserve
Board may conduct examinations of Hanmi Financial and its subsidiaries, which
will include Hanmi Bank.
The Federal Reserve Board may require that Hanmi Financial terminate an
activity or terminate control of or liquidate or divest subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. The Federal Reserve Board may also require Hanmi
Financial to file written notice and obtain approval from the Federal Reserve
Board prior to purchasing or redeeming its equity securities.
Under the Bank Holding Company Act and regulations adopted by the Federal
Reserve Board, a bank holding company and its nonbanking subsidiaries are
prohibited from requiring certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Further, the Federal Reserve Board requires Hanmi Financial to maintain capital
at or above stated levels. For more detail, please refer to "Capital Standards."
Hanmi Financial must obtain the prior approval of the Federal Reserve Board
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. The Federal Reserve Board must also give advanced approval for the
merger or consolidation of Hanmi Financial and another bank holding company.
Hanmi Financial will be prohibited by the Bank Holding Company Act, except
in statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% 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 its subsidiaries. However, Hanmi Financial, subject to
the prior approval of the Federal Reserve Board, may engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Under the legal authority of the Gramm-Leach Bliley Act, upon the Federal
Reserve Board's approval to become a bank holding company, Hanmi Financial
intends to file with the Federal Reserve Board an election to become a financial
holding company. Unlike a bank holding company, a financial holding company may
engage in a broad range of activities that are deemed by the Federal Reserve
Board as "financial in nature or incidental" to financial activities. Moreover,
even in the case where an activity cannot meet that test, the Federal Reserve
Board may approve the activity if the proposed activity is "complementary" to
financial activities and does not pose a risk to the safety and soundness of
depository institutions.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a
65
source of strength to its subsidiary banks, a bank holding company should stand
ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
Hanmi Financial will also be a bank holding company under the California
Financial Code. As such, Hanmi Financial and its subsidiary, Hanmi Bank, will be
subject to examination by, and may be required to file reports with, the
California Commissioner of Financial Institutions.
Additionally, Hanmi Financial has applied to have its securities registered
with the Securities and Exchange Commission under the Securities Exchange Act of
1933. As such, Hanmi Financial will be subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Securities Exchange Act of 1934.
HANMI BANK
Hanmi Bank, as a California licensed member bank, is subject to primary
supervision, periodic examination, and regulation by the California Commissioner
of Financial Institutions and the Federal Reserve Board. To a lesser extent,
Hanmi Bank is also subject to regulations promulgated by the Federal Deposit
Insurance Corporation. If, as a result of an examination of Hanmi Bank, the
Federal Reserve Board or the California Commissioner of Financial Institutions
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, or other aspects of Hanmi Bank's
operations are unsatisfactory or that Hanmi Bank or its management is violating
or has violated any law or regulation, various remedies are available to the
Federal Reserve Board as well as the California Commissioner of Financial
Institutions. These remedies include, among others, the power to terminate Hanmi
Bank's deposit insurance, 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 the growth of the bank, to assess
civil monetary penalties, and to remove officers and directors.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Hanmi Bank. State and
federal statutes and regulations relate to many aspects of Hanmi Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, Hanmi Bank is required to maintain capital at or above
stated levels. For more detail, please refer to "Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
Dividends from Hanmi Bank will constitute the principal source of income to
Hanmi Financial. Hanmi Financial is a legal entity separate and distinct from
Hanmi Bank. Hanmi Bank is subject to various statutory and regulatory
restrictions on its ability to pay dividends and will be subject to restrictions
on the payment of dividends to Hanmi Financial. In addition, the California
Commissioner of Financial Institutions and the Federal Reserve Board have the
authority to prohibit Hanmi Bank from paying dividends, depending upon Hanmi
Bank's financial condition, if the payment is deemed to constitute an unsafe or
unsound practice.
The Federal Reserve Board and the California Commissioner of Financial
Institutions also have authority to prohibit Hanmi Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of Hanmi Bank and other factors, that the Federal Reserve Board and the
California Commissioner of
66
Financial Institutions could assert that the payment of dividends or other
payments might, under some circumstances, constitute an unsafe or unsound
practice. Further, the Federal Deposit Insurance Corporation and the Federal
Reserve Board have established guidelines with respect to the maintenance of
appropriate levels of capital by banks or bank holding companies under their
jurisdiction. Compliance with the standards set forth in those guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which Hanmi Bank
or Hanmi Financial may pay. An insured depository institution is prohibited from
paying management fees to any controlling persons or, with limited exceptions,
making capital distributions if after the transaction the institution would be
undercapitalized. For more detail, please refer to "Prompt Corrective Regulatory
Action and Other Enforcement Mechanisms" and "Capital Standards" for a
discussion of these additional restrictions on capital distributions.
Hanmi Bank is subject to restrictions imposed by federal law on, among other
things, any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, Hanmi Financial or other affiliates, the purchase of, or
investments in, stock or other securities of Hanmi Financial, the taking of such
securities as collateral for loans, and the purchase of assets of Hanmi
Financial or other affiliates. Such restrictions prevent Hanmi Financial and
Hanmi Bank's other affiliates from borrowing from Hanmi Bank unless the loans
are secured by marketable obligations of designated amounts. Further, such
secured loans and investments by Hanmi Bank to or in Hanmi Financial or to or in
any other affiliate are limited, individually, to 10.0% of Hanmi Bank's capital
and surplus, and such secured loans and investments are limited, in the
aggregate, to 20.0% of Hanmi Bank's capital and surplus. California law may also
impose restrictions with respect to transactions involving Hanmi Financial and
other controlling persons of Hanmi Bank. The Gramm-Leach Bliley Act's provisions
slightly modify these rules to the extent that Hanmi Bank elects to form
"financial subsidiaries" that may engage in any new financial activities
authorized by the Gramm-Leach Bliley Act. Additional restrictions on
transactions with affiliates may be imposed on Hanmi Bank under the prompt
corrective action provisions of federal law. For more detail, please refer to
"Prompt Corrective Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
adopted risk-based minimum capital guidelines intended to provide a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and recourse arrangements,
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 0% for assets with low credit risk, such as U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. 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%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
67
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
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 below one or more
prescribed minimum capital ratios. Each federal banking agency, including the
Federal Reserve Board, has promulgated regulations defining the following five
categories in which an insured depository institution will be placed, based on
its capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. On
December 31, 1999, Hanmi Bank was deemed "well capitalized" for regulatory
purposes.
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.
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 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.
SAFETY AND SOUNDNESS STANDARDS
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 the following:
- internal controls, information systems and internal audit systems,
- loan documentation,
- credit underwriting,
- asset growth,
- earnings, and
- 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 do the following:
- conduct periodic asset quality reviews to identify problem assets,
- estimate the inherent losses in problem assets and establish reserves that
are sufficient to absorb estimated losses,
- compare problem asset totals to capital,
- take appropriate corrective action to resolve problem assets,
- consider the size and potential risks of material asset concentrations,
and
- provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset risk.
68
These new guidelines also establish 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
Hanmi Bank's deposit accounts are insured up to the maximum permitted by law
by the Federal Deposit Insurance Corporation's Bank Insurance Fund. Insurance of
deposits may be terminated by the Federal Deposit Insurance Corporation upon a
finding that an institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the Federal
Deposit Insurance Corporation or the institution's primary regulator.
The Federal Deposit Insurance Corporation charges an annual assessment for
the insurance of deposits, which as of December 31, 1999, ranged from 0 to 27
basis points per $100 of insured deposits, based on the risk a particular
institution poses to its deposit insurance fund. The risk classification is
based on an institution's capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996,
on January 1, 1997, banks began paying, in addition to their normal deposit
insurance premium as a member of the Bank Insurance Fund, an amount equal to
approximately 1.3 basis points per $100 of insured deposits toward the
retirement of the Financing Corporation bonds issued in the 1980s to assist in
the recovery of the savings and loan industry. Members of the Savings
Association Insurance Fund, by contrast, paid, in addition to their normal
deposit insurance premium, approximately 6.4 basis points. Under the Paperwork
Reduction Act, the Federal Deposit Insurance Corporation is not permitted to
establish Savings Association Insurance Fund assessment rates that are lower
than comparable Bank Insurance Fund assessment rates. As of January 1, 2000, the
rate paid to retire the Financing Corporation bonds for the members of the Bank
Insurance Fund and the Savings Association Insurance Fund is the same at 2.12
basis points in addition to the normal deposit insurance premium.
INTERSTATE BANKING AND BRANCHING
The Bank Holding Company Act permits bank holding companies from any state
to acquire banks and bank holding companies located in any other state, subject
to certain conditions, including certain nationwide- and state-imposed
concentration limits. Banks have the ability, subject to certain restrictions,
to acquire branches by acquisition or merger outside their home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to laws of the
states in which they are located. Competition may increase further as banks
branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Hanmi Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The Community Reinvestment Act generally requires
the federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low- and
moderate-income neighborhoods.
A bank's compliance with its Community Reinvestment Act obligations is based
on an institution's lending service and investment performance. When a bank
holding company applies for approval to acquire a bank or other bank holding
company, the Federal Reserve Board will review the assessment of each subsidiary
bank of the applicant bank holding company, and those records may be the basis
for denying the application. Based on examinations conducted October 4, 1999,
Hanmi Bank was rated satisfactory in complying with the Community Reinvestment
Act obligations. A bank also may be subject to substantial penalties and
corrective measures for violating fair lending laws. The federal
69
banking agencies may take compliance with those laws and Community Reinvestment
Act obligations into account when regulating and supervising other activities.
The Gramm-Leach Bliley Act requires that Hanmi Financial may not engage in new
financial activities or acquire a company that engages in newly permitted
activities, unless at the time the new activity is commenced or the company is
acquired, as the case may be, all insured institutions controlled by Hanmi
Financial are rated satisfactory with their respective Community Reinvestment
Act obligations.
FINANCIAL MODERNIZATION ACT
The Gramm-Leach Bliley Act eliminates many of the barriers that have
separated the insurance, securities, and banking industries since the Great
Depression. As a result, these three industries may more freely compete with
each other. The extent to which the changes made by the Gramm-Leach Bliley Act
to the structure and operation of the financial market place are unknown and it
is unclear how Hanmi Financial or Hanmi Bank will be affected. Additionally,
other legislation which could affect Hanmi Bank and the financial services
industry in general may be proposed in the future. Such proposals, if enacted,
may further alter the structure, regulation, and the competitive relationship
among financial institutions and financial intermediaries, and may subject Hanmi
Bank to increased regulation, disclosure and reporting requirements. Moreover,
the various banking regulatory agencies may propose rules and regulations to
implement and enforce current and future legislation. It cannot be predicted
whether, or in what form, any such legislation or regulations will be enacted or
the extent to which Hanmi Financial or Hanmi Bank would be affected.
70
MANAGEMENT OF HANMI FINANCIAL
DIRECTORS
The bylaws of Hanmi Financial require that Hanmi Financial have no less than
nine and no more than fifteen, directors with the actual number to be set by the
bylaws or a resolution of the board. The board of directors is currently set at
11 persons. The Hanmi Financial certificate of incorporation requires that
directors be divided into three classes, as nearly equal in number as possible,
each class to serve for a term of three years, with one-third of the directors
elected annually.
All directors of Hanmi Bank became directors of Hanmi Financial upon the
formation of Hanmi Financial. Directors of Hanmi Bank are elected annually.
Directors of Hanmi Bank are elected by the holders of Hanmi Bank common stock,
and upon consummation of the reorganization, Hanmi Financial will be the sole
shareholder of Hanmi Bank. Shareholders of Hanmi Financial will have no control,
other than their ability to vote in the election of directors of Hanmi
Financial, over the selection or election of directors to the board of Hanmi
Bank after the this annual meeting of shareholders of Hanmi Bank.
DIRECTOR COMPENSATION
Directors of Hanmi Financial are not compensated for service as directors of
Hanmi Financial.
EXECUTIVE OFFICER COMPENSATION
It is expected that until the officers of Hanmi Financial devote significant
time to the separate management of Hanmi Financial's business, which is not
expected to occur until such time as Hanmi Financial becomes actively involved
in additional businesses, the officers will only receive compensation for
services as directors, officers, and employees of Hanmi Bank, and no separate
compensation will be paid for their services to Hanmi Bank.
FOR INFORMATION ABOUT THE PERSONS WHO WILL SERVE AS DIRECTORS AND EXECUTIVE
OFFICERS OF HANMI FINANCIAL SEE "PROPOSAL 2--ELECTION OF HANMI BANK DIRECTORS",
BELOW.
PROPOSAL 2
ELECTION OF HANMI BANK DIRECTORS
The bylaws of Hanmi Bank provide that the number of directors shall be not
less than nine (9) nor more than seventeen (17) until changed by a bylaw
amending Hanmi Bank's bylaws, by the vote or written consent of the Hanmi Bank's
shareholders. The Hanmi Bank bylaws further provide that the exact number of
directors shall be fixed from time to time, within the foregoing range, by a
bylaw or amendment thereof by a resolution adopted by the vote or written
consent of Hanmi Bank's shareholders or by Hanmi Bank's board of directors. The
number of directors is presently fixed at eleven (11).
The persons named below will be nominated for election to the board of
directors to serve until the next annual meeting of shareholders and until their
successors shall be elected and qualified. Votes will be cast pursuant to the
enclosed proxy in such a way as to effect the election of all eleven
(11) nominees, or as many as possible under the rules of cumulative voting.
There will be one vacancy on the board [which will be filled by the board within
the next twelve months]. In the event that any of the nominees should be unable
to serve as a director, it is intended that the proxy will be voted for the
election of such substitute nominees, if any, as shall be designated by the
board of directors. The board of directors has no reason to believe that any of
the nominees will be unavailable to serve if elected. Additional nominations can
only be made by complying with the notice provision set forth in the bylaws of
Hanmi Bank, an extract of which is included in the Notice of Annual Meeting of
Shareholders
71
accompany this proxy statement/prospectus. This bylaw provision is designed to
give the board of directors advance notice of competing nominations, if any, and
the qualifications of nominees, and may have the effect of precluding
third-party nominations if the notice provisions are not followed.
None of the directors, nominees or principal officers of Hanmi Bank were
selected pursuant to any arrangement or understanding, other than with the
directors and principal officers of Hanmi Bank, acting within their capacities
as such. There are no family relationships between the directors and principal
officers of Hanmi Bank and none of the directors or principal officers of Hanmi
Bank serve as directors of any company which has a class of securities
registered under, or which is subject to the periodic reporting requirements of,
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940.
The following persons named below, all of who are present members of the
board of directors of Hanmi Bank, have been nominated for election. The table
below sets forth certain information, as of May 1, 2000, with respect to members
of the board of directors of Hanmi Bank.
PRINCIPAL OCCUPATION
NAME AND POSITION AGE FOR PAST FIVE YEARS DIRECTOR SINCE
- ----------------------- -------- --------------------------------------------- --------------
Eung Kyun Ahn 64 President, Ahn's Piano Co., Ltd., a musical 1981
Director instrument dealer
I Joon Ahn 61 President, Ace Fashion Co., a garment 1981
Director manufacturing company
Stuart S. Ahn 54 Architect and Principal of Ko-Am Co. Inc., an 1981
Director architectural and construction firm
George S. Chey 70 Chairman, Pan International Realty, Inc., a 1981
Director real estate brokerage and management firm
Ki Tae Hong 56 President, Pacom International, Inc., 1983
Director international trade of computer-related
products
Joon H. Lee 56 President, Bacco, a real estate investment 1989
Director and development company
Richard B. C. Lee 41 President, B C Textiles, Inc., an 1988
Director international trading co.
Chang Kyu Park 58 Pharmacist and Principal of Olympia Pharmacy 1983
Director
Joseph K. Rho 59 President, Olympic Golf School and Range, 1984
Chairman of the Board golf school and range
Won R. Yoon 64 Chief Surgeon, Olympic Western Medical Group 1981
Director
Chung Hoon Youk 51 President and Chief Executive Officer Hanmi 1999
Director Bank
THE BOARD OF DIRECTORS AND COMMITTEES
During 1999, the board of directors held 12 meetings. During 1999, none of
the directors attended less than 75% of the board meetings and meetings of
committees on which they served.
In addition to attending board meetings, certain of the directors serve on
committees of the board. The Hanmi Bank's board of directors has an Audit
Committee, a Loan Committee, and an Investment Committee.
The Audit Committee consists of Stuart S. Ahn, Ki Tae Hong, Joon Hyung Lee,
Richard B. C. Lee, Joseph K. Rho, and Won R. Yoon. The purpose of the Audit
Committee is to employ outside
72
auditors of Hanmi Bank to fulfill the legal and technical requirements necessary
to adequately protect the directors, shareholders, employees and depositors of
Hanmi Bank. The Audit Committee also meets with Hanmi Bank's internal auditor to
review Hanmi Bank's internal auditing program. It is also the responsibility of
the Audit Committee to recommend to the board of directors the selection of
independent accountants and to make certain that the independent accountants
have the necessary freedom and independence to freely examine all Hanmi Bank
records. The Audit Committee met 12 times during 1999.
Hanmi Bank's Loan Committee consists of Eung Kyun Ahn, I Joon Ahn, Stuart S.
Ahn, George S. Chey, Chang Kyu Park, Joseph K. Rho, and Chung H. Youk. The Loan
Committee establishes the loan policy, reviews loans made by management and
approves loans in excess of management's lending authority. The Loan Committee
met 37 times during 1999.
Hanmi Bank's Investment Committee consists of Stuart S. Ahn, George S. Chey,
Ki Tae Hong, Joon Hyung Lee, Richard B. C. Lee, and Won R. Yoon. The Investment
Committee establishes the investment policy and reviews Hanmi Bank's investment
activity. The Investment Committee met 12 times during 1999.
In addition, Hanmi Bank has Compliance and CRA, Planning and Business
Development, Credit Management Committee, and Executive Committees.
The board of directors does not have a standing Nominating Committee,
however, the procedures for nominating directors, other than by the board of
directors itself, are set forth in the bylaws and Notice of Annual Meeting of
Shareholders.
COMPENSATION OF NON-EXECUTIVE DIRECTORS
Directors who were not executive officers of Hanmi Bank were paid the
following in 1999:
(a) For each regular board meeting attended, the directors were paid $1,500
and for each special meeting and committee meeting, the directors were
paid $500 up to a maximum of $1,500 per month.
(b) In addition, the Chairman of the Board was paid $400 each month.
No additional compensation was paid to executive officers of Hanmi Bank for
attendance at board or committee meetings. Beginning in November 1999, directors
were paid for attendance at board meetings at the rate of $1,500 for each
regular board meeting attended and $500 for each special meeting and committee
meeting attended thereafter up to a maximum of $2,500 per month. In addition,
the Chairman of the Board received an additional $500 each month.
For the fiscal year ended December 31, 1999, the total paid to all other
directors for board and committee meetings attended was $260,450.
Each of the non-executive directors of Hanmi Bank received options to
purchase 3,885 shares of Hanmi Bank's common stock at an exercise price of
$13.85, the fair market value of the common stock on the date of grant. The
options were issued under the Hanmi Bank 1992 Stock Option Plan. The options
vest upon grant and expire on March 2, 2004.
73
EXECUTIVE OFFICERS
The following table sets forth certain information as to each of the persons
who are currently executive officers of Hanmi Bank.
BUSINESS EXPERIENCE YEAR FIRST APPOINTED
NAME AGE DURING PAST FIVE YEARS AS EXECUTIVE OFFICER
- --------------- -------- ---------------------------------------------- --------------------
Chung Hoon Youk 51 President and Chief Executive Officer(1) 1993
Jung Chan Chang 60 Senior Vice President and Chief Retail Lending 1996
Officer(2)
Yong Ku Choe 56 Senior Vice President and Chief Financial 1991
Officer
Wun Hwa Choi 40 Senior Vice President and Chief Commercial 1998
Lending Officer(3)
David Kim 35 Vice President and Senior Credit 1998
Administration Officer(4)
- ------------------------
(1) From October 1993 to May 1999, Mr. Youk held the position of Senior Vice
President and Chief Credit Officer for Hanmi Bank. In June 1999, he became
the President and Chief Executive Officer of Hanmi Bank.
(2) Mr. Chang became a Senior Vice President and the Chief Retail Lending
Officer in October 1998. Prior to his current position, Mr. Chang held
various management positions with Hanmi Bank since June 1985.
(3) Mr. Choi became Chief Commercial Lending Officer in 1999. Mr. Choi became a
Vice President and the Senior Operations Manager in November 1998. Since
1993 he has held various management positions with Hanmi Bank.
(4) Mr. Kim became a Vice President and the Senior Credit Administrative Officer
in November 1998. Since 1995 he has held various management positions with,
and is the General Legal Counsel for Hanmi Bank.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information as of February 1, 2000 pertaining
to beneficial ownership (as defined below) of Hanmi Bank's no par value common
stock, by (i) persons known to Hanmi Bank to own more than 5% of its common
stock, and (ii) individually, each of the executive officers of Hanmi Bank, its
current directors and nominees for the office of director, and (iii) all
directors and executive officers of Hanmi Bank as a group. The information
contained herein has been obtained from Hanmi Bank's records and from
information furnished to Hanmi Bank by each individual or entity. Management
knows of no persons who own, beneficially or of record, either individually or
with associates, more than five percent of Hanmi Bank's common stock, except as
set forth below.
74
The number of shares "beneficially owned" by a given shareholder are
determined under Securities and Exchange Commission Rules, and the designation
of ownership set forth below is not necessarily indicative of ownership for any
other purpose. In general, the beneficial ownership as set forth below includes
shares over which a director, director nominee, principal shareholder or
executive officer has sole or shared voting or investment power and certain
shares which such person has a vested right to acquire, under the stock options
or otherwise, within 60 days of the date hereof. The following information is as
of December 31, 1999.
BENEFICIAL OWNERSHIP
COMMON STOCK
BENEFICIARY OWNED
----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE
- ------------------------------------ --------- ----------
I Joon Ahn(1)(2) ........................................... 267,138 3.95%
Director
Stuart S. Ahn(1)(2) ........................................ 96,433 1.43%
Director
Eung Kyun Ahn(1)(2) ........................................ 229,291 3.39%
Director
Jung Chan Chang(3) ......................................... 9,470 0.14%
Senior Vice President and Chief Retail Lending Officer
Yong Ku Choe(4) ............................................ 38,242 0.57%
Senior Vice President and Chief Financial Officer
Wun Hwa Choi(5) ............................................ 5,266 0.08%
Sr. Vice President and Chief Commercial Lending Officer
George S. Chey(1) .......................................... 73,911 1.09%
Director
Ki Tae Hong(1)(2) .......................................... 70,167 1.04%
Director
David Kim(8) ............................................... 1,814 0.03%
Vice President and Senior Credit Administration Officer
Joon H. Lee(1) ............................................. 547,664 8.11%
Director
Richard B. C. Lee(1)(6) .................................... 202,025 2.99%
Director
Chang Kyu Park(1)(2) ....................................... 240,556 3.56%
Director
Joseph K. Rho(1)(2) ........................................ 266,052 3.94%
Chairman of the Board
Won R. Yoon(1)(2) .......................................... 375,376 5.56%
Director
Chung Hoon Youk ............................................ 16,533 0.24%
President and Chief Executive Officer and Director(7)
John H. Ahn(9) ............................................. 503,001 7.45%
Shareholder
All directors and executive officers as a group (15 in 2,436,938 36.07%
number)...................................................
- ------------------------
(1) Includes 3,885 shares issuable upon options issued under the Hanmi Bank 1992
Stock Option Plan at an exercise price of $13.85.
(2) Shares beneficial ownership with his spouse.
75
(3) Includes 6,533 shares issuable upon the exercise of options issued under the
Hanmi Bank 1992 Stock Option Plan at an exercise price of $12.71.
(4) Includes 6,533 shares issuable upon exercise of options issued under the
Hanmi Bank 1992 Stock Option Plan at an exercise price of $12.71.
(5) Includes 5,266 shares issuable upon exercise of options issued under the
Hanmi Bank 1992 Stock Option Plan at an exercise price of $12.71 (3,266
shares) and $16.50 (2,000 shares).
(6) Includes 6,876 shares held in the names of his children under the Uniform
Trust for Minor Act over which he exercises sole investment power.
(7) Includes 16,533 shares issuable upon exercise of options issued under the
Hanmi Bank 1992 Stock Option Plan at exercise price of $14.75 (10,000
shares) and $12.71 (6,533 shares).
(8) Includes 1,814 shares issuable upon options issued under the Hanmi Bank 1992
Stock Option Plan at an exercise price of $12.71.
(9) Mr. Ahn resides at 8592 Los Coyotes Drive, Buena Park, CA 90621.
EXECUTIVE COMPENSATION
Any executive officer serving as a director of Hanmi Bank does not receive
additional compensation for attending board and committee meetings, and such
attendance is remunerated by the compensation of such person in his capacity as
an executive officer of Hanmi Bank. For the fiscal year ended December 31, 1999,
the aggregate compensation paid or accrued for all executive officers of Hanmi
Bank, as a group (6 persons), for services rendered to Hanmi Bank in all
capacities was $792,980.
The following table set forth the cash compensation of the executive
officers of Hanmi Bank that had cash compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------------------------- AWARDS
FISCAL OTHER ANNUAL STOCK
NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS#
- ------------------------- -------- --------- -------- ------------------ ------------
Chung Hoon Youk ...................... 1999 $120,483 $19,643 $ 2,488 30,000
President and Chief Executive
Officer
Jung Chan Chang ...................... 1999 $104,784 $21,521 $10,800
Sr. Vice President and Chief Retail
Lending Officer
Yong Ku Choe ......................... 1999 $110,916 $21,892 $ 1,005
Sr. Vice President and Chief
Financial Officer
Wun Hwa Choi ......................... 1999 $ 80,766 $ 9,563 $ 8,400 10,000
Sr. Vice President and Chief
Commercial Lending Officer
Soo Bong Min (2) ..................... 1999 $ 96,863 $94,500 -- --
Former Chief Executive Officer
- ------------------------
(1) Hanmi Bank furnishes and plans to continue furnishing to certain officers
the use of bank-owned automobiles which are used primarily for Hanmi Bank
business purposes. Hanmi Bank has provided and plans to continue to provide
certain officers with certain specified life and medical insurance benefits.
Since the portions of the automobile expenses, insurance premiums
attributable to personal use, and other perquisites did not exceed the lower
of $50,000 or ten percent (10%) of the total annual salary reported in the
table per individual, such amounts have not been included in the foregoing
figures.
(2) Soo Bong Min resigned from Hanmi Bank in June, 1999.
76
EMPLOYMENT AGREEMENTS
Hanmi Bank entered into a three (3) year employment agreement with Soo Bong
Min effective April 20, 1997 which expired on April 20, 2000. Mr. Soon Bong Min
resigned in June 1999. Under the terms of the agreement, Mr. Min served as
President and Chief Executive Officer of Hanmi Bank at a base annual salary of
$189,000. In addition, Mr. Min received an annual bonus equal to four percent
(4%) of Hanmi Bank's profit before taxes which profits are over and above a 20%
return on the beginning primary capital for that year but the total bonus shall
not exceed the annual salary. Mr. Min also participated in accident, health and
life insurance benefits provided for all employees, as well as an additional
term life insurance policy in the amount of $150,000.
Hanmi Bank entered into a three (3) year employment agreement with Chung
Hoon Youk effective November 1, 1999 which will expire on November 1, 2002.
Under the terms of the agreement, Mr. Youk serves as President and Chief
Executive Officer of Hanmi Bank at a base annual salary of $200,000. In
addition, Mr. Youk receives an annual bonus equal to four percent (4%) of Hanmi
Bank's profit before taxes which profits are over and above a 20% return on the
beginning primary capital for that year but the total bonus may not exceed 50%
of his annual salary. Mr. Youk also participates in accident, health and life
insurance benefits provided for all employees as well as an additional term life
insurance policy in the amount of $150,000. Either Mr. Youk or Hanmi Bank may
terminate the employment agreement without cause at any time. If Hanmi Bank
terminates the agreement without cause, upon such termination, Hanmi Bank must
pay Mr. Youk his base salary, excluding any bonuses, for a period of six
(6) months or for the remaining duration of the term of the agreement, whichever
is less. Hanmi Bank must also compensate Mr. Youk for all accrued and unused
vacation leave at his then current daily salary rate. If Mr. Youk terminates the
agreement without cause, his base salary and bonus will immediately terminate on
the date the agreement is terminated.
HANMI BANK 1992 STOCK OPTION PLAN
The 1992 Stock Option Plan of Hanmi Bank adopted by the Board of Directors
on February 26, 1992 and approved by the shareholders at the 1992 annual
shareholders meeting (the "1992 Plan"), is intended to advance the interests of
Hanmi Bank by encouraging stock ownership on the part of its officers and
directors.
The 1992 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue code of 1986, as amended, and
non-qualified options, which are options not intended to qualify as incentive
stock options. Under the 1992 Plan, options for the acquisition of shares of
Hanmi Bank's common stock may be granted to directors, officers and employees of
Hanmi Bank. The 1992 Plan is administered by the full board of directors which
has sole discretion and authority, consistent with the provisions of the 1992
Plan, to determine which eligible participants will receive options, the time
when options will be granted, the terms of options granted and the number of
shares which will be subject to options granted under the applicable 1992 Plan.
77
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the persons listed in the Summary Compensation Table during the year
ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS(1) OPTION TERM(2)
------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED PRICE PER EXPIRATION
NAME OPTIONS GRANTED TO EMPLOYEES SHARE DATE(3) 5% ($) 10% ($)
- ---- --------------- ------------ --------- ---------- --------- ---------
Wun Hwa Choi....................... 10,000 12.5% $16.50 08/17/04 $45,600 $100,700
Chung Hoon Youk.................... 30,000 37.5% $14.75 10/31/02 $69,600 $146,400
- ------------------------
(1) Each of these options as granted pursuant to the 1992 Option Plan. Theses
options were granted at an exercise price equal to the fair market value of
the Hanmi Bank common stock as determined by the board of directors on the
date of grant.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent Hanmi Bank's estimate or projection of the
future common stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of Hanmi Bank's overall
market conditions and the option holders' continued employment through the
vesting period.
OPTIONS EXERCISED
The following table provides information relating to stock options exercised
by each of the persons named in the Summary Compensation Table during the year
ended December 31, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/99 AT 12/31/99 ($)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
- ---- ----------- ----------- ------------ ------------- ------------ -------------
Soo Bong Min.................. 24,198 $80,821 -- -- -- --
78
OPTIONS OUTSTANDING AS OF THE END OF THE YEAR
The following table sets forth certain information regarding stock options
held as of December 31, 1999 by each of the persons listed in the Summary
Compensation Table.
FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999(#) DECEMBER 31, 1999($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Chung Hoon Youk................................ 10,000 20,000 -- --
Chung Hoon Youk................................ 6,533 4,356 $11,690 $7,801
Jung Chan Chang................................ 6,533 4,356 $11,690 $7,801
Yong Ku Choe................................... 6,533 4,356 $11,690 $7,801
Wun Hwa Choi................................... 2,000 8,000 -- --
Wun Hwa Choi................................... 3,266 2,178 $ 5,842 $3,902
- ------------------------
(1) Calculated by determining the difference between the exercise price of such
option and the fair market value of the Hanmi Bank common stock at
December 31, 1999, multiplied by the total number of shares subject to the
option.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the Hanmi Bank's directors and executive officers and their
immediate families, as well as the companies with which they are associated, are
customers of, or have had banking transactions with, Hanmi Bank in the ordinary
course of Hanmi Bank's business, and Hanmi Bank expects to have banking
transactions with such persons in the future. In management's opinion, all loans
and commitments to lend included in such transactions were made in the ordinary
course of business, in compliance with applicable laws on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar creditworthiness and, in
the opinion of management, did not involve more than a normal risk of repayment
or presented other unfavorable features. The total amount of indebtedness owed
to Hanmi Bank by the principal officers and current directors of Hanmi Bank
(including associated companies) as of December 31, 1999 was approximately
$7.75 million.
79
PROPOSAL 3
APPROVAL OF HANMI FINANCIAL YEAR 2000 STOCK OPTION PLAN
SUMMARY OF PLAN
In 1992, the board of directors and shareholders of Hanmi Bank adopted the
Hanmi Bank 1992 Stock Option Plan in 1992. Pursuant to the Hanmi Bank Stock
Option Plan, officers, directors and employees of Hanmi Bank are eligible to
receive shares of Hanmi Bank common stock upon the exercise of options granted
under the plan. After the reorganization is completed, all obligations of Hanmi
Bank under the Hanmi Bank Stock Option Plan will become obligations of Hanmi
Financial on the same terms and conditions, with the exception that common stock
issued pursuant to the Hanmi Bank Stock Option Plan will become Hanmi Financial
common stock.
The purpose of the Hanmi Financial Year 2000 Stock Option Plan is to enable
Hanmi Financial to attract, retain and motivate officers, directors, and
employees by providing for or increasing their proprietary interests in Hanmi
Financial and, in the case of non-employee directors, to attract such directors
and further align their interests with those of the Hanmi Bank's shareholders by
providing or increasing their proprietary interests in Hanmi Financial.
The maximum number of shares of Hanmi Bank common stock that may be issued
pursuant to options granted under the Hanmi Bank Stock Option Plan is 283,537
(subject to adjustment to prevent dilution). As of the date of this proxy
statement/prospectus, 247,359 shares of Hanmi Bank common stock were subject to
options under the 1992 Plan. The maximum number of shares of Hanmi Financial
common stock that may be issued pursuant to options granted under the Hanmi
Financial Stock Option Plan is 1,482,837.
The board of directors believes the Hanmi Financial Stock Option Plan is
beneficial to Hanmi Financial, Hanmi Bank and the Hanmi Financial's shareholder
and prospective shareholders. The Hanmi Financial Plan is subject to approval of
the holders of a majority of the issued and outstanding shares of Hanmi Bank as
prospective shareholders of Hanmi Financial, subject to any required changes of
any regulatory agency.
Hanmi Financial intends to register the Hanmi Financial common stock
reserved for issuance under the Hanmi Financial Stock Option Plan with the
Securities and Exchange Commission prior to issuing any Hanmi Financial common
stock upon exercise thereof.
ADMINISTRATION
The Hanmi Financial Stock Option Plan is administered by a committee of
three or more directors appointed by the board of directors. The committee has
full and final authority to select the recipients of options and to grant such
options. Subject to the provisions of the plan, the committee has a wide degree
of flexibility in determining the terms and conditions of options and the number
of shares to be issued pursuant thereto, including conditioning the receipt or
vesting of options upon the achievement by Hanmi Bank and Hanmi Financial of
specified performance criteria. The expenses of administering the plan are borne
by Hanmi Financial.
ELIGIBILITY
Options may be granted to any person who, on the date of grant, is a
director of Hanmi Financial or any subsidiary (which would include Hanmi Bank),
all officers of Hanmi Financial or any subsidiary or an employee of Hanmi
Financial or any of its subsidiaries, except that:
- no options may be granted to any person possessing more than 10% of the
voting power of all classes of stock of Hanmi Financial or its
subsidiaries unless the exercise price is fixed at not less than 110% of
the fair market value on the date of grant and in the case of an incentive
option is also not exercisable after five years from the date of grant,
and
80
- no options may be granted to any person if such options are in excess of
10% of the issued or outstanding shares of Hanmi Financial.
Hanmi Financial may issue incentive options provided that the aggregate fair
market value (determine at the time the incentive option is granted) of the
common stock with respect to which incentive options are exercisable for the
first time by the optionee during any calendar year may not exceed $100,000. If
Hanmi Financial determines that any incentive option exceeds such maximum, the
incentive option will be considered to be non-qualified option and ineligible to
qualify for treatment as an incentive option under Section 422 of the Code to
the extent, but only to the extent, of such excess.
OPTION PRICE
The exercise price of each option will be determined by the committee and
will not be less than 100% of the fair market value of the Hanmi Financial
common stock subject on the date the option is granted; provided, however, that
the exercise price of the common stock subject to an option may not be less than
110% of such fair market value, if the optionee owns common stock possessing
more than 10% of the total combined voting power of all classes of stock of
Hanmi or any of its subsidiaries.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; REORGANIZATION, MERGER, CONSOLIDATION
If the outstanding shares of the common stock of Hanmi Financial are
increased, decreased, or changed into, or exchanged for a different number or
kind of shares or securities of Hanmi Financial, without receipt of
consideration by Hanmi Financial, through reorganization, merger,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation, or otherwise, an appropriate and proportionate adjustment shall
be made in the number and kind of shares as to which options may be granted. A
corresponding adjustment changing the number or kind of shares and the exercise
price per share allocated to unexercised options, or portions thereof, which
shall have been granted prior to any such change shall likewise be made.
Adjustments will be made by the committee whose determination as to what
adjustments shall be made, and the extent thereof, shall be final and
conclusive. No fractional shares of stock will be issued on account of any such
adjustment.
If the Hanmi Financial shareholders adopt a plan of dissolution,
liquidation, or a reorganization, merger, consolidation in which Hanmi Financial
is not the surviving corporation, or sale of all or substantially all of the
assets of Hanmi Financial, options issued under the plan will become immediately
exercisable.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS
Subject to earlier termination as provided in the plan, each option granted
and all rights or obligations thereunder by its terms will expire on such date
as the committee may determine as set forth in such stock option agreement, but
not later than:
- 5 years from the date of grant in the case of any incentive option granted
to an optionee who owns (or is deemed to own pursuant to Section 424(d) of
the Code) common stock possessing more than 10% of the total combined
voting power of all classes of stock of Hanmi Financial or any of its
subsidiaries, and
- 10 years from the date of grant in the case of all other options.
Except in the event of termination of employment due to death, disability or
termination for "cause" (as determined by the committee which shall be binding
on the optionee), options will terminate 90 days after an optionee ceases to be
employed by Hanmi Financial or its subsidiaries unless the options by their
terms were scheduled to terminate earlier, but only as to such number of shares
as to which the option was exercisable on the date of termination. If
termination occurs by reason of disability or due to the optionee's death, the
period will be extended to one year. If employment is terminated for cause, the
options will terminate immediately.
81
An option by its terms may only be transferred by will or by laws of descent
and options shall be exercisable during the lifetime of the person to whom the
option is granted only by such person.
TERMINATION AND AMENDMENT OF THE PLAN
The Hanmi Financial Stock Option Plan will terminate in 2010, or upon such
earlier date determined by the board. The Hanmi Financial Stock Option Plan will
also terminate upon liquidation, reorganization, merger or consolidation of
Hanmi Financial. No options may be granted under the Hanmi Financial Stock
Option Plan after it is terminated.
The Hanmi Financial Stock Option Plan may be amended by the board of
directors at any time. However, except as otherwise provided in the plan, no
amendment will be effective unless the amendment is approved by a vote of a
majority of the outstanding shares of the common stock of Hanmi Financial,
represented in person or by proxy and entitled to vote, at a meeting of the
shareholders of Hanmi Financial and any adjournment or postponement thereof if
the amendment will:
- materially modify the requirements as to eligibility for participation;
- increase the number of shares reserved for options;
- change the exercise price for any options, lengthen the term during which
options may be granted; or
- materially increase the number of shares reserved for options granted to
nonemployee directors.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal income
tax consequences of the options and rights to be granted under the Hanmi
Financial Stock Option Plan, and is based on existing federal law (including
administration, regulations and rulings) which is subject to change, in some
cases retroactively. This discussion is also qualified by the particular
circumstances of individual optionees, which may substantially alter or modify
the federal income tax consequences herein discussed. Each employee should
consult his or her tax advisor with respect to the specific tax consequences of
his or her participation in the Hanmi Financial Stock Option Plan.
Generally, when an option qualifies as an incentive option under
Section 422 of the Code:
- an optionee will not realize taxable income either upon the grant or the
exercise of the option,
- any gain or loss upon a "qualifying disposition" of the shares acquired by
the exercise of the option will be treated as capital gain or loss, and
- no deduction will be allowed to Hanmi Financial for federal income tax
purposes in connection with the grant or exercise of an incentive option
or a qualifying disposition of the shares.
A disposition by an optionee of common stock acquired upon exercise of an
incentive option will constitute a qualifying disposition if it occurs more than
two years after the grant of the option, and one year after the transfer of the
shares to the optionee. If the common stock is disposed of by the optionee
before the expiration of those time limits, the transfer would be a
"disqualifying disposition" and the optionee, in general, will recognize
ordinary income in the year of the disqualifying disposition equal to the lesser
of:
(i) the aggregate fair market value of the shares, as of the date of
exercise, less the option price, or
(ii) the amount realized on the disqualifying disposition less the option
price.
Ordinary income from a disqualifying disposition will constitute ordinary
compensation income. Any gain in addition to the amount reportable as ordinary
income on a "disqualifying disposition" generally will be capital gain.
82
Capital gain recognized by an optionee on shares held more than one year
prior to disposition will be generally taxable at a maximum rate of 28%.
While the exercise of an incentive option does not result in current taxable
income, there are implications with regard to the alternative minimum tax. Upon
the exercise of an incentive option, the difference between the fair market
value of common stock on the date of exercise and the option price generally is
treated as an adjustment to taxable income in that taxable year for alternative
minimum tax purposes, as are a number of other items specified by the Code. Such
adjustments (along with tax preference items) form the basis for the alternative
minimum tax (presently at the rate of 26% on the first $175,000 of alternative
minimum taxable income and 28% on amounts in excess of $175,000 for
individuals), which may apply depending on the amount of the computed "regular
tax" of the employee for that year. Under certain circumstances the amount of
alternative minimum tax is allowed as a carry forward credit against regular tax
liability in subsequent years.
In the case of stock options which do not qualify as an incentive option, no
income generally is recognized by the optionee at the time of the grant of the
option. The optionee generally will recognize ordinary income at the time the
option is exercised equal to the aggregate fair market value of the shares
acquired less the option price. Ordinary income from an option will constitute
compensation for which withholding may be required under federal and state law.
Subject to special rules applicable when an optionee uses common stock to
exercise an option, shares acquired upon exercise of an option will have a tax
basis equal to their fair market value on the date on which ordinary income is
recognized and the holding period for the shares generally will begin on such
date. Upon subsequent disposition of the shares, the optionee normally will
recognize capital gain or loss.
Hanmi Financial will generally be entitled to a deduction equal to the
ordinary income (i.e., compensation) recognized by the optionee in the case of a
"disqualifying disposition" of shares of common stock received upon exercise of
an incentive option or in connection with the exercise of a non-qualified stock
option.
Federal income tax laws limit to $1,000,000 the annual amount publicly held
corporations may deduct for reasonable compensation paid to certain executive
officers (including compensation attributable to stock options) if such
reasonable compensation does not qualify as "performance based compensation" or
compensation paid on a "commission basis." The $1,000,000 limitation is
determined for each executive officer to which the deduction applies.
If, as a result of certain changes in control of Hanmi Financial, certain
employee options become immediately exercisable, the additional economic value
attributable to the acceleration may be deemed an "excess parachute payment" to
the extent the additional value (when combined with the value of other change of
control payments) equals or exceeds 300% of the employee's average annual
taxable compensation over the five calendar years preceding the change of
control. Any such excess over the employee's average annual taxable compensation
will be subject to a 20% excise tax. To the extent that an excess parachute
payment is not deductible and is paid to an executive officer whose compensation
is subject to the $1,000,000 deduction limitation rules, the $1,000,000
deduction limitation is reduced by such amount, but not below zero.
COMPARISON TO THE HANMI BANK INCENTIVE PLAN
The Hanmi Financial Stock Option Plan and the Hanmi Bank Stock Option Plan
are identical in all material respects, except that the Hanmi Financial Stock
Option Plan authorizes the issuance of up to 1,482,837 shares compared to the
Hanmi Bank Stock Option Plan which authorizes 320,397 shares.
83
NEW PLAN BENEFITS
The following table presents information on the number of shares with
respect to which options will be exchanged pursuant to the reorganization. All
grants outstanding under the Hanmi Bank Stock Option Plan immediately prior to
the reorganization will automatically be converted to grants under the Hanmi
Financial Plan upon consummation of the reorganization. No additional grants
under the Hanmi Financial Plan will be made in connection with the
reorganization.
HANMI FINANCIAL CORPORATION YEAR 2000 STOCK OPTION PLAN
NAME AND PRINCIPAL POSITION DOLLAR VALUE(1) NUMBER OF OPTIONS
- --------------------------- --------------- -----------------
Yong Ku Choe.......................................... 10,889
Jung Chan Chang....................................... 10,889
Chung Hoon Youk....................................... 40,889
Wun Hwa Choi.......................................... 15,444
David Kim............................................. 3,024
All Executive Officers as a group (5 persons)......... 81,135
All non-employee Directors as a group (10 persons).... 38,850
All non-executive officer employees as a group (31
persons)............................................ 127,374
- ------------------------
(1) The exercise price of options granted pursuant to the Hanmi Bank Stock
Option Plan was between $12.71 and $16.50 per share, which was equal to
the fair market value of the Hanmi Financial common stock on the date of
grant. Because there is no market for the Hanmi Financial common stock,
the dollar value of the option cannot be determined.
(See footnote (8) to the "Financial Statements.")
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Board of Directors of Hanmi Bank appointed Deloitte & Touche LLP as its
auditors to replace Kim & Lee Corporation ("Kim & Lee") on July 22, 1998. Kim &
Lee's report dated February 25, 1998 on Hanmi Bank's financial statements as of
and for the year ended December 31, 1997 did not include an adverse opinion or
disclaimer opinion nor was it qualified as to audit scope or accounting
principles.
During Hanmi Bank's fiscal year ended December 31, 1997 and subsequent
periods prior to appointing Deloitte & Touche LLP, there were no disagreements
with Kim & Lee on accounting principles or practices, financial statement
disclosure or auditing scope or procedures which, if not resolved to Kim & Lee's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report.
During Hanmi Bank's fiscal year ended December 31, 1997, and subsequent
period prior to appointing Deloitte & Touche LLP:
(a) Kim & Lee had not advised Hanmi Bank that there did not exist the
internal controls necessary for Hanmi Bank to develop reliable financial
statements;
(b) Kim & Lee has not advised Hanmi Bank that information had come to their
attention that had led them to no longer be able to rely on management's
representations, or that made Kim & Lee unwilling to be associated with
the financial statements prepared by management;
(c) Kim & Lee has not advised Hanmi Bank that they needed to expand
significantly the scope of their audit, or that information had come to
their attention during such period that if further investigated may (i)
materially impact the fairness or reliability of either previously
issued
84
audit report or the underlying financial statements, or the financial
statements to be issued covering the fiscal period subsequent to the
date of the most recent financial statements covered by an audit report
or (ii) cause Kim & Lee to be unwilling to rely on management's
representation or be associated with Hanmi Bank's financial statements;
and
(d) Kim & Lee had not advised Hanmi Bank that information has come to their
attention of the type described in subparagraph (c) above, the issue not
being resolved to their satisfaction prior to its dismissal.
OTHER BUSINESS
We are not aware of any business to come before the annual meeting other
than those matters described in this proxy statement/prospectus. However, if any
other matters should properly come before the annual meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.
LEGAL MATTERS
Certain legal matters with respect to Hanmi Financial, including the
validity of the shares of Hanmi Financial common stock to be issued in
connection with the reorganization, will be passed upon for Hanmi Financial by
Buchalter, Nemer, Fields & Younger, a professional corporation, Los Angeles,
California.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the two years in the period ended December 31, 1999, included in
this Registration Statement, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. The consolidated financial statements as of
December 31, 1997 and for the year in the period ended December 31, 1997,
included in this Registration Statement, have been audited by Kim & Lee
Corporation, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Hanmi Financial has filed with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act of 1933 relating to
the shares of Hanmi Financial common stock to be issued in connection with the
reorganization. This proxy statement/prospectus also constitutes the prospectus
of Hanmi Financial filed as part of the registration statement but does not
contain all the information set forth in the registration statement and exhibits
thereto. You may copy and read the registration statement and its exhibits at
the public reference, rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the Commission at (800) SEC-0330 for further information
on the public reference rooms. The Commission also maintains an Internet World
Wide Web site at "http://www.sec.gov" at which the registration statement and
exhibits are available.
85
HANMI BANK
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ F-2
Statements of Financial Condition as of December 31, 1999
and 1998.................................................. F-4
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997....................................... F-5
Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-6
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997....................................... F-8
Notes to Consolidated Financial Statements.................. F-9
Financial Statements of Hanmi Financial are not included because Hanmi
Financial has no assets and liabilities and has not conducted any business other
than of an organizational nature. All schedules are omitted because the required
information is not applicable or is included in the Financial Statements of
Hanmi Bank and the related notes.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hanmi Bank
Los Angeles, California
We have audited the accompanying statement of income of HANMI BANK (the
"Bank") and the related statements of changes in stockholders' equity and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the results of operation and cash flows for the year
ended December 31, 1997, of HANMI BANK in conformity with generally accepted
accounting principles.
/s/ Kim & Lee
Los Angeles, California
February 25, 1998
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hanmi Bank:
We have audited the accompanying statements of financial condition of Hanmi
Bank (the "Bank") as of December 31, 1999 and 1998 and the related statements of
operations, changes in shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of the Bank for the
year ended December 31, 1997 were audited by other auditors, whose report, dated
February 25, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of Hanmi Bank as of December 31, 1999 and 1998
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche, LLP
Los Angeles, California
February 18, 2000
F-3
HANMI BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
- ------ ------------ ------------
Cash and due from banks..................................... $ 53,476,084 $ 43,729,366
Federal funds sold and securities purchased under resale
agreements................................................ 10,000,000 27,000,000
------------ ------------
Cash and cash equivalents................................. 63,476,084 70,729,366
Interest-bearing deposits in other financial institutions... 100,000 2,181,000
Federal Reserve Bank stock.................................. 1,686,400 1,411,200
Securities held to maturity, at amortized cost (fair value:
1999--$66,096,359; 1998--$108,294,413) (Note 2)........... 66,223,744 107,195,247
Securities available for sale, at fair value (Note 2)....... 105,014,142 110,963,051
Interest-only strips--at fair value (amortized cost of
$329,878 and $372,791 in 1999 and 1998, respectively)..... 352,330 398,689
Loans receivable, net of allowance for loan losses:
1999--$10,623,544; 1998--$10,423,425 (Note 3)............. 456,149,108 328,883,912
Loans held for sale, at the lower of cost or market......... 18,500,604 2,402,028
Customers' liability on acceptances......................... 1,829,140 1,351,570
Premises and equipment, net (Note 4)........................ 8,939,038 9,144,979
Accrued interest receivable................................. 4,961,222 4,650,200
Other real estate owned..................................... 670,500
Deferred income taxes, net (Note 7)......................... 5,607,888 2,420,700
Servicing asset............................................. 1,500,171 1,500,175
Goodwill and intangible assets (Note 11).................... 2,680,012 2,927,807
Other assets................................................ 3,239,562 3,934,092
------------ ------------
TOTAL....................................................... $740,259,445 $650,764,516
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ------------ ------------
LIABILITIES:
Deposits (Note 5):
Noninterest-bearing....................................... $193,164,758 $191,725,999
Interest-bearing:
Savings................................................. 54,416,283 54,211,756
Time deposits of $100,000 or more....................... 123,487,676 114,901,908
Other time deposits..................................... 190,699,245 143,675,800
Money market checking................................... 93,962,062 81,768,752
------------ ------------
Total deposits........................................ 655,730,024 586,284,215
Accrued interest payable.................................... 3,156,828 3,224,802
Acceptances outstanding..................................... 1,829,140 1,351,570
Securities sold under repurchase agreement (Note 6)......... 5,891,500
Treasury, tax, and loan remittances......................... 4,500,000 220,283
Other liabilities........................................... 1,321,166 709,215
------------ ------------
Total liabilities..................................... 672,428,658 591,790,085
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY (Notes 2, 8, and 9):
Common stock--no par value; authorized, 10,000,000 shares;
issued and outstanding, 6,679,670 shares in 1999 and
5,996,054 shares in 1998................................ 56,212,027 47,039,834
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale,
net of taxes of
($2,001,815) and $258,831 in 1999 and 1998,
respectively........................................... (3,078,544) 333,625
Unrealized gain on interest-only strips, net of taxes of
$8,981 and $14,134 in 1999 and 1998, respectively...... 13,471 18,736
Retained earnings......................................... 14,683,833 11,582,236
------------ ------------
Total shareholders' equity............................ 67,830,787 58,974,431
------------ ------------
TOTAL....................................................... $740,259,445 $650,764,516
============ ============
See accompanying notes to financial statements.
F-4
HANMI BANK
STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
----------- ----------- -----------
INTEREST INCOME:
Interest and fees on loans.......................... $39,684,335 $30,820,739 $28,194,260
Interest on securities and interest-bearing deposits
in other financial institutions................... 11,606,223 9,998,676 8,236,867
Interest on federal funds sold and securities
purchased under agreements to resell.............. 1,328,467 1,908,906 1,350,219
----------- ----------- -----------
Total interest income........................... 52,619,025 42,728,321 37,781,346
INTEREST EXPENSE (Note 5)............................. 18,846,862 15,730,176 12,876,520
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES.............................................. 33,772,163 26,998,145 24,904,826
PROVISION FOR LOAN LOSSES (Note 3).................... 1,000,000 3,050,000 2,650,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES... 32,772,163 23,948,145 22,254,826
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts................. 8,373,867 6,065,793 4,895,546
Gain on sale of loans............................... 894,854 1,321,767 1,112,330
Gain on sale of securities.......................... 177,642 238,465
Loan servicing income............................... 1,094,208 1,008,104 1,461,274
Other service charges and fees...................... 1,642,048 1,508,029 1,227,627
Other income........................................ 339,089 163,111 248,266
----------- ----------- -----------
Total noninterest income........................ 12,521,708 10,305,269 8,945,043
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits (Note 12)............ 12,368,596 10,712,087 9,568,048
Occupancy and equipment (Note 13)................... 2,678,406 2,494,536 2,512,436
Other real estate owned............................. 27,011 102,136 54,229
Data processing..................................... 1,977,788 1,460,214 1,306,512
Deposit insurance premiums.......................... 75,351 67,429 49,488
Professional fees................................... 1,099,248 934,164 897,083
Advertising......................................... 1,419,798 1,010,932 919,379
Office supplies..................................... 725,488 496,256 573,416
Communications...................................... 409,078 328,396 299,330
Other operating..................................... 3,825,369 2,175,867 2,385,951
----------- ----------- -----------
Total noninterest expenses...................... 24,606,133 19,782,017 18,565,872
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................ 20,687,738 14,471,397 12,633,997
INCOME TAX PROVISION (Note 7)......................... 8,682,000 5,207,000 4,473,000
----------- ----------- -----------
NET INCOME............................................ $12,005,738 $ 9,264,397 $ 8,160,997
=========== =========== ===========
EARNINGS PER SHARE (Note 8):
Basic............................................... $ 1.80 $ 1.45 $ 1.31
Diluted............................................. $ 1.80 $ 1.45 $ 1.27
See accompanying notes to financial statements.
F-5
HANMI BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
ACCUMULATED
COMMON STOCK OTHER
------------------------ RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) INCOME
---------- ----------- ----------- ------------- -------------
BALANCE, JANUARY 1, 1997................ 4,761,405 $32,170,780 $ 7,877,686 $ (34,864)
Stock options exercised............... 20,388 126,000
Stock dividend........................ 525,845 6,047,217 (6,048,979)
Comprehensive income:
Net income.......................... 8,160,997 $ 8,160,997
Change in unrealized gain on
securities available for sale, net
of tax............................ 28,607 28,607
Change in unrealized gain on
interest-only strips, net of
tax............................... 8,429 8,429
-------------
Total comprehensive income........ $ 8,198,033
---------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1997.............. 5,307,638 38,343,997 9,989,704 2,172
Stock options exercised............... 210,990 1,026,448
Stock dividend........................ 477,546 7,669,389 (7,671,865)
Comprehensive income:
Net income.......................... 9,264,397 $ 9,264,397
Change in unrealized gain on
securities available for sale, net
of tax............................ 339,882 339,882
Change in unrealized gain on
interest-only strips, net of
tax............................... 10,307 10,307
-------------
Total comprehensive income........ $ 9,614,586
---------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1998.............. 5,996,054 47,039,834 11,582,236 352,361
Stock options exercised............... 24,198 270,050
Stock dividend........................ 659,418 8,902,143 (8,904,141)
Comprehensive income:
Net income.......................... 12,005,738 $ 12,005,738
Change in unrealized gain on
securities available for sale, net
of tax............................ (3,412,169) (3,412,169)
Change in unrealized gain on
interest-only strips, net of
tax............................... (5,265) (5,265)
-------------
Total comprehensive income........ $ 8,588,304
---------- ----------- ----------- ------------- =============
BALANCE, DECEMBER 31, 1999.............. 6,679,670 $56,212,027 $14,683,833 $ (3,065,073)
========== =========== =========== =============
(Continued)
See accompanying notes to financial statements.
F-6
HANMI BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
----------- -------- --------
Disclosures of reclassification amount for December 31:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gains (losses) arising during period,
net of tax expense (benefit) of $(2,298,335) in 1999,
$333,960 in 1998, and $19,879 in 1997................. $(3,307,360) $480,576 $28,607
Less reclassification adjustment for gains included in
net income, net of tax expense of $72,833 in 1999 and
$97,771 in 1998....................................... 104,809 140,694
----------- -------- -------
Net change in unrealized gain (loss) on securities
available for sale, net of tax expense (benefit) of
$(2,371,168) in 1999, $236,189 in 1998, and $19,879 in
1997.................................................. $(3,412,169) $339,882 $28,607
=========== ======== =======
Unrealized gain (loss) on interest-only strips:
Unrealized holding gain arising during period, net of
tax expense (benefit) of ($4,910) in 1999, $7,810 in
1998, and $6,851 in 1997.............................. $ (7,366) $ 9,376 $ 8,429
Less reclassification adjustment for gains (losses)
included in net income, net of tax expense (benefit)
of $(1,460) in 1999, $(647) in 1998, and $0 in 1997... (2,101) (931)
----------- -------- -------
Net change in unrealized gain (loss) on interest-only
strips, net of tax expense (benefit) of $(3,510) in
1999, $7,163 in 1998, and $6,851 in 1997.............. $ (5,265) $ 10,307 $ 8,429
=========== ======== =======
(Concluded)
See accompanying notes to financial statements.
F-7
HANMI BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 12,005,738 $ 9,264,397 $ 8,160,997
Adjustments to reconcile net income to net cash and cash
equivalents (used in) provided by operating activities:
Depreciation and amortization........................... 1,591,184 1,537,907 522,758
Provision for loan losses............................... 1,000,000 3,050,000 2,650,000
Provision for other real estate owned losses............ 9,000 20,000 92,886
Deferred tax provision.................................. (912,464) (387,356) (139,710)
Gain on sale of securities.............................. (177,642) (238,465)
Loss (gain) on disposition of premises and equipment.... 23,283 (6,714)
Gain on sale of SBA loans............................... (894,854) (1,321,767) (1,112,330)
Origination of loans held for sale...................... (28,708,415) (16,190,714)
Proceeds from sale of loans held for sale............... 13,504,693 15,110,453
(Gain) loss on sale of other real estate owned.......... (14,084) 22,644 (64,017)
Increase in accrued interest receivable................. (311,022) (493,937) (678,797)
Decrease (increase) in other assets..................... 694,530 (1,158,052) (956,319)
(Decrease) increase in accrued interest payable......... (67,974) 964,137 545,879
Increase (decrease) in other liabilities................ 611,951 600,377 (453,940)
------------ ------------ -----------
Net cash and cash equivalents (used in) provided by
operating activities................................ (1,646,076) 10,772,910 8,567,407
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable.......................... (128,767,854) (744,896) (46,220,620)
Purchase of Federal Reserve Bank stock.................... (275,200) (260,850) (185,200)
Proceeds from interest-bearing deposits................... 2,081,000 1,090,000
Proceeds from matured, sold, or called securities
available for sale...................................... 19,908,245 35,124,879
Proceeds from matured or called securities held to
maturity................................................ 58,349,387 57,054,032 29,550,000
Purchases of securities available for sale................ (20,960,263) (137,039,672) (14,924,536)
Purchases of securities held to maturity.................. (16,380,006) (25,966,208) (50,242,684)
Proceeds from sale of other real estate owned............. 1,178,242 83,481 1,131,847
Increase (decrease) in interest-only strips............... 42,913 (221,437) (187,559)
Purchases of premises and equipment....................... (719,722) (685,926) (803,104)
Proceeds from disposition of premises and equipment....... 49,500 16,600
Consideration paid in business combination................ (8,854,021)
Cash and cash equivalents acquired from business
combination............................................. 31,549,265
------------ ------------ -----------
Net cash and cash equivalents used in investing
activities.......................................... (85,493,758) (48,854,753) (81,881,856)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................. $ 69,445,809 $ 61,977,344 $36,374,643
Proceeds from securities sold under repurchase
agreements.............................................. 5,891,500
Proceeds from treasury, tax, and loan remittances......... 4,279,717
Cash dividends paid....................................... (1,998) (2,476) (1,762)
Proceeds from exercise of stock option.................... 270,050 1,026,448 58,395
------------ ------------ -----------
Net cash and cash equivalents provided by financing
activities.......................................... 79,885,078 63,001,316 36,431,276
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (7,253,282) 24,919,473 (36,883,173)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 70,729,366 45,809,893 82,693,066
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 63,476,084 $ 70,729,366 $45,809,893
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 18,914,836 $ 14,766,039 $12,331,000
Income taxes paid......................................... $ 8,450,000 $ 5,387,000 $ 5,350,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING, OPERATING AND
FINANCING ACTIVITIES:
Transfer of loans to other real estate owned.............. $ 502,658 $ 796,625 $ 335,987
Transfer of retained earnings to common stock for stock
dividend................................................ $ 8,904,141 $ 7,671,865 $ 6,048,979
See accompanying notes to financial statements.
F-8
HANMI BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hanmi Bank (the "Bank") is a California state-chartered, FDIC-insured
financial institution. The Bank maintains a branch network of nine locations,
serving individuals and small to medium-sized businesses in the Los Angeles and
surrounding areas. The accounting and reporting policies of the Bank are in
accordance with generally accepted accounting principles and conform to the
general practices in the banking industry.
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 less than 90 days.
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS--Interest-bearing
deposits in other financial institutions mature within one year and are carried
at cost.
SECURITIES--Securities are classified into three categories and accounted
for as follows:
(i) Securities that the Bank has the positive intent and ability to hold to
maturity are classified as "held to maturity" and reported at amortized
cost;
(ii) 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
(iii) 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
deferred taxes.
Accreted discounts and amortized premiums on investment securities are
included in interest income, and unrealized and realized gains or losses related
to holding or selling of securities are calculated using the specific
identification method.
LOANS--Interest on loans is credited to income as earned and is accrued only
if deemed collectible. Accrual of interest is discontinued when a loan is over
90 days delinquent or if management believes that collection is highly
uncertain. Generally, payments received on nonaccrual loans are recorded as
principal reductions. Interest income is recognized on nonaccrual loans after
all principal has been repaid or an improvement in the condition of the loan has
occurred that would warrant resumption of interest accruals. Nonrefundable fees,
net of incremental costs, associated with the origination or acquisition of
loans are deferred and recognized as an adjustment of the loan yield over the
life of the loan in a manner that approximates the interest method. Other loan
fees and charges, representing service costs for the prepayment of loans, for
delinquent payments or for miscellaneous loan services, are recorded as income
when collected.
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 market 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. A portion of the gains on sale of SBA loans is recognized as
noninterest income at the time of the sale. The remaining portion of the gain is
deferred and amortized over the remaining life of the loan as an
F-9
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adjustment to yield. Upon sales of such loans, the Bank receives a fee for
servicing the loans. The servicing asset is recorded based on the present value
of the contractually specified servicing fee, net of servicing cost, for the
estimated life of the loan, discounted by the rate of the related note plus
1 percent and a range of CPR from 6 percent to 16 percent. The servicing asset
is amortized in proportion to and over the period of estimated servicing income.
The Bank has capitalized $357,286 and $422,856 of servicing assets at
December 31, 1999 and 1998, respectively, and amortized $357,311, $181,666, and
$122,364 during the years ended December 31, 1999, 1998, and 1997, respectively.
Management periodically evaluates the servicing asset for impairment.
Impairment, if it occurs, is recognized in a valuation allowance in the period
of impairment. No impairment existed at December 31, 1999 and 1998.
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 the estimated fair value,
with unrealized gain or loss recorded as an adjustment in accumulated other
comprehensive income in shareholders' equity.
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.
ALLOWANCE FOR LOAN LOSSES--Loan losses are charged, and recoveries are
credited, to the allowance account. Additions to the allowance account are
charged to the provision for loan 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 loan losses as an
adjustment to the allowance for loan losses. Impairment is measured either based
on the present value of the loan's expected future cash flows or the estimated
fair value of the collateral.
The Bank evaluates 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.
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 3 to 30 years. Leasehold
improvements are capitalized and amortized on the straight-line method over the
term of the lease or the estimated useful lives of the improvements, whichever
is shorter. An accelerated method of depreciation is followed, as appropriate,
for federal income tax purposes.
F-10
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED--Other real estate owned, which represents real
estate acquired through foreclosure in satisfaction of commercial and real
estate loans, is stated at fair value less estimated selling costs of the real
estate. Loan balances in excess of the fair value of the real estate acquired at
the date of acquisition are charged to the allowance for loan losses. Any
subsequent operating expenses or income, reduction in estimated fair values, and
gains or losses on disposition of such properties are charged or credited to
current operations.
GOODWILL AND INTANGIBLE ASSETS--Goodwill represents the excess of cost over
the fair value of net assets acquired. Goodwill is amortized on a straight-line
basis over a period of up to 15 years. Core deposit premiums arise from the
acquisition of deposits and are amortized on a straight-line basis over the
estimated life of the deposit base acquired, currently seven years.
INCOME TAXES--Deferred income tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
STOCK-BASED COMPENSATION--Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," encourages all
entities to adopt a fair value method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value method prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
whereby compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options granted under the Bank's
stock option plan have no intrinsic value at the grant date, and under Opinion
No. 25 no compensation cost is recognized for them. The Bank has elected to
continue with the accounting methodology in Opinion No. 25 and, as a result, has
provided pro forma disclosures of net income and earnings per share and other
disclosures as if the fair value method of accounting had been applied (see
Note 8).
EARNINGS PER SHARE--Basic EPS is computed by dividing earnings available to
common stockholders 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. EPS data for 1998 and 1997 was retroactively
restated reflecting the 1999 stock dividend.
IMPAIRMENT OF LONG-LIVED ASSETS--The Bank evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the estimated future cash
flows (undiscounted and without interest charges) from the use of an asset are
less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated sale value.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The preparation
of financial statements in conformity with generally accepted accounting
principles 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.
F-11
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1999, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of Financial
Accounting Standards Board Statement No. 133," effective upon issuance. SFAS
No. 137 amended the implementation of SFAS No. 133 from fiscal quarters of all
fiscal years beginning after June 15, 1999 to June 15, 2000. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting.
The key criterion for hedge accounting is that the hedging relationship must
be highly effective in achieving offsetting changes in fair value or cash flows.
Management of the Bank does not believe the adoption of this standard will have
a material impact on the results of operations or financial position when
adopted.
RECLASSIFICATIONS--Certain reclassifications were made to the prior year's
presentation to conform to the current year presentation.
2. SECURITIES
The following is a summary of the securities held to maturity at
December 31:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1999 COST GAIN LOSS VALUE
- ---- ------------ ---------- ---------- ------------
U.S. Treasury bond.......... $ 10,999,706 $ 17,188 $ 11,016,894
U.S. agencies............... 17,197,971 5,471 $ 93,615 17,109,827
Corporate bonds............. 33,605,121 2,635 257,574 33,350,182
Municipal bonds............. 4,420,946 229,074 30,564 4,619,456
------------ ---------- -------- ------------
$ 66,223,744 $ 254,368 $381,753 $ 66,096,359
============ ========== ======== ============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAIN LOSS VALUE
- ---- ------------ ---------- ---------- ------------
U.S. Treasury bond.......... $ 15,962,986 $ 261,077 $ -- $ 16,224,063
U.S. agencies............... 19,433,090 260,213 19,693,303
SBA loan pool
certificates.............. 244,893 22,794 267,687
Corporate bonds............. 68,291,516 430,733 68,722,249
Municipal bonds............. 3,262,762 124,349 3,387,111
------------ ---------- -------- ------------
$107,195,247 $1,099,166 $ -- $108,294,413
============ ========== ======== ============
F-12
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
2. SECURITIES (CONTINUED)
The following is a summary of securities available for sale at December 31:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1999 COST GAIN LOSS VALUE
- ---- ------------ ---------- ---------- ------------
U.S. agencies............... $ 69,385,296 $ 247 $4,059,047 $ 65,326,496
Corporate bonds............. 30,340,377 167 650,671 29,689,873
Municipal bonds............. 10,376,458 111,759 490,444 9,997,773
------------ -------- ---------- ------------
$110,102,131 $112,173 $5,200,162 $105,014,142
============ ======== ========== ============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAIN LOSS VALUE
- ---- ------------ ---------- ---------- ------------
U.S. agencies............... $ 63,232,498 $163,831 $ 116,308 $ 63,280,021
Corporate bonds............. 39,284,067 465,036 49,452 39,699,651
Municipal bonds............. 7,839,896 160,082 16,599 7,983,379
------------ -------- ---------- ------------
$110,356,461 $788,949 $ 182,359 $110,963,051
============ ======== ========== ============
The amortized cost and estimated fair value of securities at December 31,
1999, by contractual maturity, are shown below. 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.
AMORTIZED ESTIMATED
1999 COST FAIR VALUE
- ---- ------------ ------------
Held to maturity:
Due within one year............................ $ 34,065,836 $ 34,071,824
Due after one year through five years.......... 24,197,534 23,932,356
Due after five years through ten years......... 5,452,558 5,423,911
Due after ten years............................ 2,507,816 2,668,268
------------ ------------
$ 66,223,744 $ 66,096,359
============ ============
Available for sale:
Due within one year............................ $ 11,986,034 $ 11,936,000
Due after one year through five years.......... 44,899,452 43,516,170
Due after five years through ten years......... 40,219,052 37,216,797
Due after ten years............................ 12,997,593 12,345,175
------------ ------------
$110,102,131 $105,014,142
============ ============
Securities with carrying values of approximately $12,057,200 and $9,961,000
at December 31, 1999 and 1998, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
F-13
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable consist of the following at December 31:
1999 1998
------------ ------------
Commercial loans................................. $260,455,798 $197,759,612
Real estate loans................................ 169,142,247 109,542,142
Installment loans................................ 38,682,397 33,199,606
------------ ------------
468,280,442 340,501,360
Allowance for loan losses........................ (10,623,544) (10,423,425)
Deferred loan fees............................... (1,507,790) (1,194,023)
------------ ------------
Loans receivable, net............................ $456,149,108 $328,883,912
============ ============
At December 31, 1999 and 1998, the Bank serviced loans sold to unaffiliated
parties in the amounts of approximately $54,413,000 and $51,866,000,
respectively.
Management believes that, as of December 31, 1999, the allowance for loan
losses is adequate to provide for losses inherent in the loan portfolio.
However, the allowance is an estimate that is inherently uncertain and depends
on the outcome of future events. Management's estimates are based on previous
loan loss experience; volume, growth, and composition of the loan portfolio; the
value of collateral; and current economic conditions. The Bank's lending is
concentrated in consumer, commercial, construction, and real estate loans in
greater Los Angeles. Although management believes the level of the allowance as
of December 31, 1999 is adequate to absorb 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.
Activity in the allowance for loan losses is as follows:
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year............. $10,423,425 $ 9,346,879 $ 8,815,889
Provision for loan losses.............. 1,000,000 3,050,000 2,650,000
Allowance acquired in business
acquisition.......................... 1,305,249
Loans charged off...................... (2,001,442) (4,486,253) (3,282,219)
Recoveries of charge-offs.............. 1,201,561 1,207,550 1,163,209
----------- ----------- -----------
Balance, end of year................... $10,623,544 $10,423,425 $ 9,346,879
=========== =========== ===========
At December 31, 1999 and 1998, the Bank had classified approximately
$3,721,000 and $3,978,000, respectively, of its loans as impaired with specific
reserves of $1,206,283 and $720,000, respectively. Impaired loans without
specific reserves at December 31, 1999 and 1998 were approximately $155,000 and
$466,000, respectively. The average recorded investment in impaired loans during
the years ended December 31, 1999, 1998, and 1997 approximated $5,746,000,
$7,956,000, and $5,718,000, respectively. Interest income of approximately
$585,000, $572,000, and $375,000 was recognized on impaired loans during the
years ended December 31, 1999, 1998, and 1997, respectively.
F-14
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following is an analysis of all loans to officers and directors of the
Bank and their affiliates. All such loans were made under terms that are
consistent with the Bank's normal lending policies.
1999 1998
---------- -----------
Outstanding balance, beginning of year.............. $4,440,405 $ 3,879,796
Credit granted, including renewals.................. 3,485,574 1,969,477
Repayments.......................................... (172,523) (1,408,868)
---------- -----------
Outstanding balance, end of year.................... $7,753,456 $ 4,440,405
========== ===========
Income from these loans totaled approximately $667,909 and $309,000 for the
years ended December 31, 1999 and 1998, respectively, and is reflected in the
accompanying statements of operations.
4. PREMISES AND EQUIPMENT
The following is a summary of the major components of premises and equipment
as of December 31:
1999 1998
----------- -----------
Land............................................... $ 3,653,319 $ 3,653,319
Building and building improvements................. 5,294,787 5,245,191
Furniture and equipment............................ 4,901,549 5,606,994
Leasehold improvements............................. 2,485,176 2,847,593
----------- -----------
16,334,831 17,353,097
Accumulated depreciation and amortization.......... (7,395,793) (8,208,118)
----------- -----------
$ 8,939,038 $ 9,144,979
=========== ===========
5. DEPOSITS
Time deposits by maturity are as follows at December 31, 1999 and 1998:
1999 1998
------------ ------------
Less than three months........................... $158,214,065 $127,111,712
After three to six months........................ 74,106,190 62,812,095
After six months to twelve months................ 78,512,613 59,965,141
After twelve months.............................. 3,354,053 8,688,760
------------ ------------
Total............................................ $314,186,921 $258,577,708
============ ============
F-15
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
5. DEPOSITS (CONTINUED)
A summary of interest expense on deposits is as follows for the years ended
December 31, 1999, 1998, and 1997:
1999 1998 1997
----------- ----------- -----------
Money market checking................. $ 3,478,708 $ 2,511,924 $ 2,695,672
Savings............................... 2,034,758 2,111,181 1,365,838
Time deposits of $100,000 or more..... 6,090,687 4,696,245 4,013,915
Other time deposits................... 7,242,709 6,410,826 4,801,095
----------- ----------- -----------
Total................................. $18,846,862 $15,730,176 $12,876,520
=========== =========== ===========
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively borrowings
secured by investment securities. The securities sold under the terms of the
agreements are safekept for the Bank by the registered primary securities
dealers who arrange the transactions. The maximum balance outstanding during
1999 was $30,274,000, and the weighted average interest rate at December 31,
1999 was 5.4 percent. The average balance outstanding during 1999 was
$17,936,898, and the weighted average interest rate received during 1999 was
5.5 percent.
7. INCOME TAXES
A summary of income tax provision (benefit) for 1999, 1998, and 1997
follows:
1999 1998 1997
----------- ---------- ----------
Current:
Federal................................ $ 7,578,454 $4,535,301 $4,362,505
State.................................. 2,016,010 1,059,055 250,205
----------- ---------- ----------
9,594,464 5,594,356 4,612,710
----------- ---------- ----------
Deferred:
Federal................................ (1,004,360) (324,207) (89,505)
State.................................. 91,896 (63,149) (50,205)
----------- ---------- ----------
(912,464) (387,356) (139,710)
----------- ---------- ----------
Provision for income taxes............... $ 8,682,000 $5,207,000 $4,473,000
=========== ========== ==========
F-16
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
7. INCOME TAXES (CONTINUED)
As of December 31, 1999 and 1998, the federal and state deferred tax assets
(liabilities) are as follows:
1999 1998
---------- ----------
Deferred tax asset:
Loan loss provision................................ $2,979,637 $2,613,301
Unrealized loss on available-for-sale and
interest-only securities......................... 1,992,834
Depreciation....................................... 457,424 382,966
State taxes........................................ 515,675 144,333
---------- ----------
5,945,570 3,140,600
Deferred tax liabilities:
Purchase accounting................................ (252,257) (294,596)
Unrealized gain on available-for-sale and
interest-only securities......................... (272,965)
Others............................................. (85,425) (152,339)
---------- ----------
(337,682) (719,900)
---------- ----------
$5,607,888 $2,420,700
========== ==========
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:
1999 1998 1997
-------- -------- --------
Statutory tax (benefit) rate......................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits............. 6.6 4.5 1.0
Other................................................ 0.4 (3.5) (0.6)
---- ---- ----
42.0% 36.0% 35.4%
==== ==== ====
8. SHAREHOLDERS' EQUITY
The Bank adopted a Stock Option Plan (the "Plan") in 1992, under which
options to purchase shares of the Bank's common stock may be granted to key
employees. The Plan provides that the option price shall not be less than
100 percent of the fair value of the Bank's stock on the effective date of the
grant. After ten years from grant, all unexercised options will expire.
F-17
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
8. SHAREHOLDERS' EQUITY (CONTINUED)
The following is a summary of the transactions under the stock option plans
described above:
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE
--------- --------- --------- --------- --------- ---------
Options outstanding, beginning of
year.................................. 162,955 $15.96 372,610 $11.16 194,358 $ 5.88
Prorate effect on options, due to stock
dividend.............................. 17,925 14.38 33,535 10.24 19,140 5.27
Options granted......................... 122,735 15.15 179,500 17.50
Options exercised....................... (24,198) 11.16 (210,990) 4.87 (20,388) 6.18
Options cancelled/expired............... (32,058) 14.03 (32,200) 16.51
------- -------- -------
Options outstanding, end of year........ 247,359 13.75 162,955 15.96 372,610 11.16
------- -------- -------
Options exercisable at year-end......... 139,941 13.39 71,133 15.67 231,677 7.26
------- -------- -------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ----------- ----------- -------- --------------- --------
$12.71 - $16.50...... 247,359 8.65 $13.75 139,941 $13.39
Had compensation cost for the Bank's stock option plan been determined based
on the fair values at the grant dates for awards under the plan consistent with
the fair value method of SFAS No. 123, the Bank's net income and earnings per
share for the years ended December 31, 1999, 1998, and 1997 would have been
reduced to the pro forma amounts indicated below:
1999 1998 1997
----------- ---------- ----------
Net income:
As reported........................... $12,005,738 $9,264,397 $8,160,997
Pro forma............................. $11,677,320 $9,153,644 $8,040,253
Earnings per share:
As reported:
Basic............................... $ 1.80 $ 1.45 $ 1.31
Diluted............................. $ 1.80 $ 1.45 $ 1.27
Pro forma:
Basic............................... $ 1.75 $ 1.43 $ 1.29
Diluted............................. $ 1.75 $ 1.43 $ 1.26
The estimated fair value of options granted was $4.29 per share in 1999 and
$2.58 per share in 1997.
F-18
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
8. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average fair value of options granted under the Bank's fixed
stock option plan in 1999 and 1997 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends yield, expected volatility of 21 percent and
22 percent to 25 percent in 1999 and 1997, respectively, expected lives of three
to five years and two to three years in 1999 and 1997, respectively, and
risk-free interest rate of 6.37 percent and 5.5 percent to 5.9 percent in 1999
and 1997, respectively.
9. REGULATORY MATTERS
On December 7, 1994, the Bank entered into a written agreement with the
Federal Reserve Bank of San Francisco. In 1999, all requirements of the
agreement were met and the agreement was terminated.
The Bank is subject to various regulatory capital requirements administered
by the federal banking 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 the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's 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 the Bank to maintain minimum ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes that, as of December 31, 1999 and 1998, the Bank meets all
capital adequacy requirements to which it is subject.
The Bank is periodically examined by the Federal Reserve Board and the
Department of Financial Institutions. As of December 31, 1999, the most recent
notification from the Federal Reserve Board categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. Even
though the Bank maintained capital levels sufficient to be "well capitalized" at
December 31, 1998, the regulatory agreement, which has been terminated, limited
its rating to "adequately capitalized." To be categorized as "well capitalized"
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification which management believes have changed the institution's
category.
The Bank may not pay dividends or make any other capital distribution if,
after making the distribution, the Bank would be under capitalized. Based on the
current financial status of the Bank, the Bank believes that such limitations
and restrictions will not impair the Bank's ability to continue to pay
dividends.
F-19
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
9. REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table.
TO BE CATEGORIZED
AS WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------- -------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- --------- -------- -----------
(DOLLARS IN THOUSANDS)
As of December 31, 1999:
greater% greater%
than or than or
equal equal
Total capital (to risk-weighted assets)...... $74,967 13.88% $43,207 to8.0 $54,008 to10.0
greater% greater%
than or than or
equal equal
Tier I capital (to risk-weighted assets)..... $68,216 12.63% $21,603 to4.0 $32,405 to 6.0
greater% greater%
than or than or
equal equal
Tier I capital (to average assets)........... $68,216 9.20% $29,648 to4.0 $37,059 to 5.0
As of December 31, 1998:
greater% greater%
than or than or
equal equal
Total capital (to risk-weighted assets)...... $61,640 12.86% $38,345 to8.0 $47,932 to10.0
greater% greater%
than or than or
equal equal
Tier I capital (to risk-weighted assets)..... $55,651 11.61% $19,173 to4.0 $28,760 to 6.0
greater% greater%
than or than or
equal equal
Tier I capital (to average assets)........... $55,651 8.66% $25,075 to4.0 $32,131 to 5.0
The average reserve balances required to be maintained with the Federal
Reserve Board were approximately $9,235,550 and $9,489,000 for the years ended
December 31, 1999 and 1998, respectively.
10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations at December 31, 1999, 1998, and 1997:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
1999
Basic EPS--
Income available to common shareholders................... $12,005,738 6,667,803 $ 1.80
Effect of Dilutive Securities--Options...................... 19,002
----------- --------- ------
Diluted EPS--
Income available to common shareholders................... $12,005,738 6,686,805 $ 1.80
=========== ========= ======
1998
Basic EPS--
Income available to common shareholders................... $ 9,264,397 6,379,401 $ 1.45
Effect of Dilutive Securities--Options...................... 1,886
----------- --------- ------
Diluted EPS--
Income available to common shareholders................... $ 9,264,397 6,381,287 $ 1.45
=========== ========= ======
1997
Basic EPS--
Income available to common shareholders................... $ 8,160,997 6,253,147 $ 1.31
Effect of Dilutive Securities--Options...................... 148,498 (0.04)
----------- --------- ------
Diluted EPS--
Income available to common shareholders................... $ 8,160,997 6,401,645 $ 1.27
=========== ========= ======
F-20
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
11. GOODWILL AND INTANGIBLE ASSETS
On September 30, 1998, Hanmi Bank acquired First Global Bank f.s.b. for
$8,854,021. Hanmi Bank's intangible assets resulting from the acquisition, which
was accounted for as a purchase, are summarized as follows:
1999 1998
---------- ----------
Core deposit premiums, net........................... $ 522,649 $ 613,544
Goodwill, net........................................ 2,157,363 2,314,262
The balance of core deposit premiums is being amortized over its remaining
useful life, currently seven years. Amortization expense for core deposit
premiums was $90,895 and $22,724 for the years ended December 31, 1999 and 1998,
respectively. Amortization expense for goodwill was $156,899 and $39,225 for the
years ended December 31, 1999 and 1998, respectively.
12. RETIREMENT PLAN
The Bank has a profit sharing and a 401(k) plan for the benefit of
substantially all of its employees. Contributions to the profit sharing plan are
determined by the Board of Directors. No contributions were made in 1999, 1998,
and 1997.
The Bank matches 75 percent of participant contributions to the 401(k) plan
up to 8 percent of each 401(k) plan participants' annual compensation. The Bank
made contributions to the 401(k) plan for the years ended December 31, 1999,
1998, and 1997 of approximately $254,000, $190,000, and $160,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Hanmi Bank leases its premises under noncancelable operating leases. At
December 31, 1999, future minimum rental commitments under these leases and
other operating leases are as follows:
YEAR AMOUNT
- ---- ----------
2000........................................................ $1,168,433
2001........................................................ 902,978
2002........................................................ 782,312
2003........................................................ 655,463
2004........................................................ 189,615
Thereafter.................................................. 129,490
----------
$3,828,291
==========
Rental expense recorded under such leases in 1999, 1998, and 1997 amounted
to approximately $1,112,000, $971,000, and $890,000, respectively.
In the normal course of business, the Bank is involved in various legal
claims. Management has reviewed all legal claims against the Bank with outside
legal counsel and has taken into consideration the views of such counsel as to
the outcome of the claims. In management's opinion, the final disposition of all
such claims will not have a material adverse effect on the financial position
and results of operations of the Bank.
F-21
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its 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
statements of financial condition. The Bank's exposure to credit loss in the
event of nonperformance by the other party to commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for extending loan facilities to
customers. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty.
Collateral held varies but may include accounts receivable; inventory;
property, plant and equipment; and income-producing properties. At December 31,
1999 and 1998, the Bank had commitments to extend credit of approximately
$70,208,000 and $47,632,000, obligations under standby letters of credit of
approximately $3,277,000 and $2,360,000, commercial letters of credit of
approximately $19,433,000 and $15,098,000, and commitments for credit card loans
of approximately $1,554,000 and $1,165,000, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Bank 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.
F-22
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts the Bank 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, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents........... $ 63,476,084 $ 63,476,084 $ 70,729,366 $ 70,729,366
Interest-bearing deposits in other
financial institutions............ 100,000 100,000 2,181,000 2,181,000
Federal Reserve Bank stock.......... 1,686,400 1,686,400 1,411,200 1,411,200
Securities held to maturity......... 66,223,744 66,096,359 107,195,247 108,294,413
Securities available for sale....... 105,014,142 105,014,142 110,963,051 110,963,051
Interest-only strips................ 352,330 352,330 398,689 398,689
Loans receivable, net............... 456,149,108 445,341,000 328,883,912 325,459,000
Loans held for sale................. 18,500,604 19,794,000 2,402,028 2,559,970
Accrued interest receivable......... 4,961,222 4,961,222 4,650,200 4,650,200
Liabilities:
Noninterest-bearing deposits........ $193,164,758 $193,164,758 $191,725,999 $191,725,999
Interest-bearing deposits........... 462,565,266 452,782,000 394,558,216 387,693,000
Securities sold under repurchase
agreement......................... 5,891,500 5,891,500
Treasury, tax, and loan
remittances....................... 4,500,000 4,500,000 220,283 220,283
Accrued interest payable............ 3,156,828 3,156,828 3,224,802 3,224,802
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:
CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair value due
to the short-term nature of these investments.
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS--The carrying
amounts approximate fair value due to the short-term nature of these
investments.
SECURITIES--The fair value of securities is generally obtained from market
bids from similar or identical securities, or obtained from independent
securities brokers or dealers.
INTEREST-ONLY STRIPS--The fair value of interest-only strips is calculated
by Bank management based on the present value of the excess of total
servicing fees over the contractually specified servicing fees, discounted
at the rate of the related note plus one percent.
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
F-23
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
discount rates that approximate the pricing of loans collateralized by
similar commercial properties. The fair value of nonperforming loans at
December 31, 1999, 1998, and 1997 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. The carrying amount of accrued interest
receivable approximates its fair value.
FEDERAL RESERVE BANK STOCK--The carrying amount approximates fair value, as
the stocks may be sold back to the Federal Reserve Bank at carrying value.
DEPOSITS--The fair value of nonmaturity deposits is the amount payable on
demand at the reporting date. Nonmaturity deposits include
noninterest-bearing demand deposits, savings accounts, super NOW accounts,
and money market demand accounts. 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. The carrying amount of accrued interest
payable approximates its fair value.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS--The carrying amounts
approximate fair value due to the short-term nature of these instruments.
TREASURY, TAX AND LOAN REMITTANCES--The carrying amounts approximate fair
value due to the short-term nature of these instruments.
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, 1999 and 1998.
The fair value estimates presented herein are based on pertinent information
available to management at December 31, 1999 and 1998. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
F-24
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows:
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999
Net interest income........................ $7,777 $7,998 $8,732 $9,265
Provision for credit losses................ 400 600
Net income................................. 2,928 3,184 3,202 2,692
Basic earnings per common share............ 0.44 0.48 0.48 0.40
Diluted earnings per share................. 0.44 0.48 0.48 0.40
1998
Net interest income........................ $6,496 $6,405 $6,689 $7,408
Provision for credit losses................ 1,000 1,350 700
Net income................................. 2,503 2,388 2,811 1,562
Basic earnings per common share............ 0.39 0.37 0.44 0.25
Diluted earnings per share................. 0.39 0.37 0.44 0.25
16. BUSINESS SEGMENT INFORMATION
The following disclosure about segments of the Bank is made in accordance
with the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Bank segregates its operations into
three primary segments: Banking Operations, Trade Finance Services ("TFS"), and
Small Business Administration Lending Services ("SBA"). The Bank determines the
operating results of each segment based on an internal management system that
allocates certain expenses to each segment.
BANKING OPERATIONS--The Bank provides lending products, including
commercial, installment, and real estate loans to its customers.
TRADE FINANCE SERVICES--The Trade Finance department allows the Bank's
import/export customers to handle their international transactions. Trade
finance products include the issuance and collection of letters of credit,
international collection, and import/export financing.
F-25
HANMI BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
16. BUSINESS SEGMENT INFORMATION (CONTINUED)
SMALL BUSINESS ADMINISTRATION LENDING SERVICES--The SBA department provides
customers of the Bank access to the United States SBA guaranteed lending
program.
BUSINESS SEGMENT
-------------------------------------------------------
BANKING
1999 OPERATIONS TFS SBA BANK
- ---- ------------ ----------- ----------- ------------
Net interest income............. $ 29,655,386 $ 1,335,736 $ 2,781,041 $ 33,772,163
Less provision for loan
losses........................ 970,672 29,328 1,000,000
Other operating income.......... 9,585,732 1,947,664 988,312 12,521,708
------------ ----------- ----------- ------------
Net revenue..................... 38,270,446 3,283,400 3,740,025 45,293,871
Other operating expenses........ 20,806,576 1,707,090 2,092,467 24,606,133
------------ ----------- ----------- ------------
Earnings before taxes........... $ 17,463,870 $ 1,576,310 $ 1,647,558 $ 20,687,738
============ =========== =========== ============
Total assets.................... $655,511,868 $26,688,760 $58,058,817 $740,259,445
============ =========== =========== ============
BUSINESS SEGMENT
-------------------------------------------------------
BANKING
1998 OPERATIONS TFS SBA BANK
- ---- ------------ ----------- ----------- ------------
Net interest income............. $ 23,577,235 $ 1,599,819 $ 1,821,091 $ 26,998,145
Less provision for loan
losses........................ 2,893,285 676 156,039 3,050,000
Other operating income.......... 6,990,284 1,917,289 1,397,696 10,305,269
------------ ----------- ----------- ------------
Net revenue..................... 27,674,234 3,516,432 3,062,748 34,253,414
Other operating expenses........ 16,628,536 1,792,272 1,361,209 19,782,017
------------ ----------- ----------- ------------
Earnings before taxes........... $ 11,045,698 $ 1,724,160 $ 1,701,538 $ 14,471,397
============ =========== =========== ============
Total assets.................... $597,421,594 $26,992,258 $26,350,664 $650,764,516
============ =========== =========== ============
BUSINESS SEGMENT
-------------------------------------------------------
BANKING
1997 OPERATIONS TFS SBA BANK
- ---- ------------ ----------- ----------- ------------
Net interest income............. $ 22,046,290 $ 1,457,087 $ 1,401,449 $ 24,904,826
Less provision for loan
losses........................ 2,486,880 163,120 2,650,000
Other operating income.......... 5,433,069 2,321,497 1,190,477 8,945,043
------------ ----------- ----------- ------------
Net revenue..................... 24,992,479 3,778,585 2,428,806 31,199,869
Other operating expenses........ 15,739,286 1,687,325 1,139,261 18,565,872
------------ ----------- ----------- ------------
Earnings before taxes........... $ 9,253,193 $ 2,091,259 $ 1,289,545 $ 12,633,997
============ =========== =========== ============
Total assets.................... $452,507,857 $31,589,822 $15,976,123 $500,073,802
============ =========== =========== ============
F-26
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER
This Plan of Reorganization and Agreement of Merger is dated as of
April 15, 2000 ("Agreement"), by and between Hanmi Bank ("Bank"), Hanmi Merger
Co., Inc. ("Merger Co."), and Hanmi Financial Corporation ("Company").
RECITALS AND UNDERTAKINGS
A. Bank is a California banking corporation with its principal office in
the City of Los Angeles, California. Merger Co. is a corporation organized and
existing under the laws of the State of California with its principal offices in
the City of Los Angeles, California. Company is a corporation organized and
existing under the laws of the State of Delaware with its principal offices in
the City of Los Angeles, California.
B. As of date hereof, Bank had 10,000,000 shares of common stock, no par
value per share ("Bank Common Stock"), authorized and approximately 7,414,400
shares issued and outstanding.
C. As of the date hereof, Merger Co. has 100 shares of common stock, no par
value per share ("Merger Co. Common Stock"), authorized, and at the time of the
merger referred to herein 100 of such shares of Merger Co. Common Stock will be
outstanding, all of which outstanding shares will be owned by Company.
D. As of the date hereof, Company has 60,000,000 shares of capital stock
authorized, of which 50,000,000 shares are common stock, $0.001 par value per
share ("Company Common Stock"), and 10,000,000 shares are preferred stock,
$0.001 par value per share ("Company Preferred Stock"), of which 100 shares of
Company Common Stock will be outstanding and no shares of Company Preferred
Stock will be outstanding at the time of the merger referred to herein.
E. The Boards of Directors of Bank and Merger Co. have, respectively,
approved this Agreement and authorized its execution; and the Board of Directors
of Company has approved this Agreement and has authorized the Company to join in
and be bound by this Agreement, and authorized the undertakings and
representations made herein by Company.
NOW, THEREFORE, in consideration of the promises and the mutual covenants,
agreements, and undertakings of the parties herein set forth and for the purpose
of prescribing the terms and conditions of the merger, the parties hereto agree
as follows:
SECTION 1
GENERAL
1.1 THE MERGER. On the Effective Date, Merger Co. shall be merged with and
into Bank, which shall be the surviving corporation (the "Surviving
Corporation") and a subsidiary of Company (the "Merger"). The name of the
Surviving Corporation shall be "Hanmi Bank."
1.2 EFFECTIVE DATE. The Merger shall become effective, and actions to
consummate the Merger shall commence, at the close of business on the date (the
"Effective Date") upon which an executed counterpart of this Agreement (as
amended, if necessary, to conform to any requirements of law or governmental
authority or agency, which requirements are not materially in contravention of
any of the substantive terms hereof) shall have been filed with the Office of
the Secretary of State of the State of California, in accordance with Section
1103 of the California Corporations Code.
1.3 ARTICLES OF INCORPORATION, BYLAWS, CERTIFICATE OF AUTHORITY, AND
DEPOSIT INSURANCE COVERAGE. At the close of business on the Effective Date, the
Articles of Incorporation of Bank, as in effect immediately prior to such time
on the Effective Date, shall be and remain the Articles of Incorporation of the
Surviving Corporation; the Bylaws of Bank shall be and
A-1
remain the Bylaws of the Surviving Corporation until altered, amended or
repealed; the Certificate of Authority of Bank issued by the Commissioner of
Financial Institutions of the State of California shall be and remain the
Certificate of Authority of the Surviving Corporation; and Bank insurance of
deposits coverage by the Federal Deposit Insurance Corporation shall be and
remain the deposit insurance of the Surviving Corporation.
1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the close of
business on the Effective Date, the directors and officers of Bank immediately
prior to such time on the Effective Date shall be and remain the directors and
officers of the Surviving Corporation. Directors of the Surviving Corporation
shall serve until the next Annual Meeting of Shareholders of the Surviving
Corporation or until such time as their successors are elected and have
qualified.
1.5 EFFECT OF THE MERGER.
(a) ASSETS AND RIGHTS. At the close of business on the Effective Date
and thereafter, all rights, privileges, franchises and property of Merger
Co., and all debts and liabilities due or to become due to Merger Co.,
including things in action and every interest or asset of conceivable value
or benefit, shall be deemed fully and finally and without any right of
reversion transferred to and vested in the Surviving Corporation without
further act or deed, and the Surviving Corporation shall have and hold the
same in its own right as fully as the same was possessed and held by Merger
Co.
(b) LIABILITIES. At the close of business on the Effective Date and
thereafter, all debts, liabilities, and obligations due or to become due of,
and all claims and demands for any cause existing against, Merger Co. shall
be and become the debts, liabilities or obligations of, or the claims and
demands against, the Surviving Corporation in the same manner as if the
Surviving Corporation had itself incurred or become liable for them.
(c) CREDITORS' RIGHTS AND LIENS. At the close of business on the
Effective Date and thereafter, all rights of creditors of Merger Co., and
all liens upon the property of Merger Co., shall be preserved unimpaired,
and shall be limited to the property affected by such liens immediately
prior to the Effective Date.
(d) PENDING ACTIONS. At the close of business on the Effective Date
and thereafter, any action or proceeding pending by or against Merger Co.
shall not be deemed to have abated or been discontinued, but may be pursued
to judgment with the full right to appeal or review. Any such action or
proceeding may be pursued as if the Merger had not occurred, or with the
Surviving Corporation substituted in place of Merger Co., as the case may
be.
1.6 FURTHER ASSURANCES. Bank and Merger Co. each agree that at any time,
or from time to time, as and when requested by the Surviving Corporation, or by
its successors and assigns, it will execute and deliver, or cause to be executed
and delivered, in its name by its last acting officers, or by the corresponding
officers of the Surviving Corporation, all such conveyances, assignments,
transfers, deeds or other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, its successors or assigns
may deem necessary or desirable in order to evidence the transfer, vesting or
devolution of any property right, privilege or franchise or to vest or perfect
in or confirm to the Surviving Corporation, its successors and assigns, title to
and possession of all the property rights, privileges, powers, immunities,
franchises and interests referred to in this Section 1, or otherwise to carry
out the intent and purposes of this Agreement.
A-2
SECTION 2
TREATMENT OF CAPITAL STOCK
2.1 STOCK OF MERGER CO. At the close of business on the Effective Date,
each share of Merger Co. Common Stock issued and outstanding immediately prior
thereto shall, by virtue of the Merger, be deemed to be exchanged for and
converted into one share of fully paid nonassessable Bank Common Stock as the
Surviving Corporation.
2.2 STOCK OF BANK. At the close of business on the Effective Date, each
share of Bank Common Stock issued and outstanding immediately prior thereto
shall, by virtue of the merger described herein, and without any action on the
part of the holder thereof, be exchanged for and converted into one share of
fully paid nonassessable Company Common Stock, in accordance with the provisions
of Section 2.3.
2.3 EXCHANGE OF STOCK BY BANK SHAREHOLDERS. The conversion of the shares
of Bank provided in Section 2.2 above shall occur automatically at the close of
business on the Effective Date without action by the holders thereof. Each share
certificate evidencing ownership of shares of Bank Common Stock thereupon shall
be deemed to evidence the same number of shares of Company Common Stock. Each
holder of shares of Bank Common Stock may but is not required to surrender such
holder's share certificate or certificates to the Company, or an Exchange Agent
appointed by the Company, and shall be entitled to receive in exchange therefor
a certificate or certificates representing the number of shares into which such
holder's shares theretofore represented by a certificate or certificates so
surrendered shall have been converted.
2.4 EMPLOYEE STOCK OPTIONS AND INCENTIVES. At the close of business on the
Effective Date, the Company will assume Bank's rights and obligations under
Bank's 1992 Employee Stock Option Plan (the "Plan") and under each of the
outstanding options previously granted under the Plan (each such option existing
immediately prior to the Effective Date being an "existing option" and each such
option so assumed by the Company being called an "assumed option"), by which
assumption all rights of a grantee of an existing option relating to Bank Common
Stock shall become the same right with respect to Company Common Stock on a one
for one basis. Each assumed option, subject to such modification as may be
required, shall constitute a continuation of the existing option substituting
the Company for Bank. The price per share of Company Common Stock at which the
assumed option may be exercised shall be the price as was applicable to the
purchase of Hanmi Bank Common Stock pursuant to the existing option, and all
other terms and conditions applicable to the assumed options shall, except as
herein provided, be unchanged. Upon consummation of the Merger, the Plan shall
be terminated and assumed options shall become options made pursuant to
Company's Year 2000 Employee Stock Option Plan.
2.5 STOCK OF COMPANY. At the close of business on the Effective Date, each
share of Company Common Stock issued and outstanding immediately prior thereto
shall, by virtue of the Merger described herein, be cancelled.
SECTION 3
OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE OF MERGER
3.1 STOCKHOLDER APPROVALS. As soon as practicable, this Agreement shall be
duly submitted to stockholders of Bank, Merger Co. and Company for the purpose
of considering and acting upon this Agreement in the manner required by law.
Each of the parties shall use its best efforts to obtain the requisite approval
of its stockholders to this Agreement and the transactions contemplated herein.
A-3
3.2 REGULATORY APPROVALS. Each of the parties hereto shall execute and
file with the appropriate regulatory authorities all necessary documents and
instruments and shall take every reasonable and necessary step and action to
comply with and to secure such regulatory approval of this Agreement and the
transactions contemplated herein as may be required by all applicable statutes,
rules and regulations, including without limitation the consents and approvals
referred to in Sections 4.1(b) and 4.1(d).
SECTION 4
CONDITIONS PRECEDENT, TERMINATION, AND PAYMENT OF EXPENSES
4.1 CONDITIONS PRECEDENT TO THE MERGER. Consummation of the Merger is
subject to satisfaction of the following conditions:
(a) Ratification and confirmation of this Agreement by the respective
stockholders of Bank, Merger Co. and Company, in accordance with the
applicable provisions of law;
(b) Obtaining all other consents and approvals, on terms and conditions
satisfactory to each of the parties hereto, and satisfying all other
requirements, prescribed by law or otherwise, which are necessary for the
Merger to be consummated, including without limitation: approvals from the
Federal Deposit Insurance Corporation, the Commissioner of Financial
Institutions of the State of California, and the Board of Governors of the
Federal Reserve System under Hanmi Bank Holding Company Act of 1956,
approval from the California Commissioner of Corporations under the
California Corporate Securities Law of 1968 and authorizations, to the
extent necessary under applicable blue sky laws with respect to the
securities of the Company issued upon consummation of the merger, and the
declaration as effective by the Securities and Exchange Commission of a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the securities of the Company issuable
upon consummation of the Merger;
(c) Procuring all other consents or approvals, governmental or
otherwise, which in the opinion of counsel for Bank are or may be necessary
to permit or to enable the Surviving Corporation to conduct, upon and after
the Merger, all or any part of the business and other activities in which
Bank will be engaged up to the time of the Merger, in the same manner and to
the same extent Bank engages in such businesses and other activities
immediately prior to the Merger;
(d) Bank obtaining for Company prior to the Effective Date, a letter,
in form and substance satisfactory to legal counsel for Company, signed by
each person who is an "affiliate" of Bank for purposes of Rule 145
promulgated under the Securities Act, to the effect that (i) such person
will not dispose of any shares of Company Common Stock to be received in the
merger, in violation of the Securities Act or the rules and regulations
promulgated thereunder, and in any event such person will not dispose of
such shares prior to such time as financial results covering at least thirty
days of post-merger combined operations have been published, and (ii) such
person consents to the placing of a legend on the certificate(s) evidencing
such shares, restricting transfer of such shares and referring to the
issuance of such shares in a transaction in which Rule 145 applies and to
the giving of stop-transfer instructions to Company's transfer agent(s) with
respect to such certificate(s); and
(e) Performance by each of the parties hereto of all obligations under
this Agreement which are to be performed prior to the consummation of the
Merger.
A-4
4.2 TERMINATION OF THE MERGER. If any condition specified in Section 4.1
has not been fulfilled, or prior to the Effective Date a majority of the members
of the Board of Directors of any of the parties hereto has determined that:
(a) The number of shares of Bank Common Stock voting against the Merger
makes consummation of the Merger inadvisable; or
(b) Any action, suit, proceeding or claim relating to the Merger has
been instituted, made or threatened which makes consummation of the Merger
inadvisable; or
(c) For any other reason consummation of the Merger is inadvisable;
then this Agreement may be terminated at any time before the Merger becomes
effective. Upon termination, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of the parties or their respective directors,
officers, employees, agents or shareholders.
4.3 AMENDMENT, MODIFICATION, ETC. Bank, Company, and Merger Co., by mutual
consent of their respective boards of directors, to the extent permitted by
applicable law, may amend, modify, supplement, and interpret this Agreement in
such manner as may be mutually agreed upon by them in writing at any time before
or after adoption thereof by shareholders of Hanmi Bank, Company, and Merger
Co., as applicable; provided, however, that no such amendment, modification, or
supplementation shall change the number or kind of securities to be issued by
Company in exchange for each security of Bank, or any other principal term,
except by a vote of such shareholders as required by law.
4.4 EXPENSES OF THE MERGER. All expenses of the Merger, including, without
limitation, filing fees, printing costs, mailing costs, accountant's fees and
legal fees, shall be borne jointly by the Surviving Corporation and Company;
provided, however, that if the Merger is abandoned for any reason, then all of
such expenses shall be paid by Bank.
SECTION 5
MISCELLANEOUS
5.1 ENTIRE AGREEMENT. This Agreement embodies the entire agreement among
the parties and there have been and are no agreements, representations or
warranties among the parties with respect to the subject matter of this
Agreement other than those set forth herein or those provided for herein.
5.2 GOVERNING LAW. This Agreement has been executed in the State of
California and the laws of such State shall govern the validity and the
interpretation hereof and the performance by the parties hereto.
5.3 COUNTERPARTS. To facilitate the filing of this Agreement, any number
of counterparts hereof maybe executed and each such counterpart shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one instrument.
A-5
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Plan of
Reorganization and Agreement of Merger to be executed by their duly authorized
officers as of the day and year first above written.
HANMI BANK HANMI FINANCIAL CORPORATION
- -------------------------------------------- --------------------------------------------
Chung Hoon Youk Chung Hoon Youk
President and Chief Executive Officer President and Chief Executive Officer
- -------------------------------------------- --------------------------------------------
Secretary Secretary
HANMI MERGER CO., INC.
- --------------------------------------------
Chung Hoon Youk
President and Chief Executive Officer
- --------------------------------------------
Secretary
A-6