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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NUMBER 000-30421
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HANMI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4788120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3660 WILSHIRE BOULEVARD 90010
SUITE PH-A ZIP CODE (Zip code)
LOS ANGELES, CA 90010
(Address of principal executive
offices)
(213) 382-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. /X/
As of March 1, 2001, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $142,358,640.
Number of shares of common stock of the registrant outstanding as of
March 1, 2001: 7,443,589 shares
The following documents are incorporated by reference herein:
PART OF
FORM 10
INTO WHICH
DOCUMENT INCORPORATED INCORPORATED
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Definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed within 120 days of the
fiscal year ended December 31, 2000....................... Part III
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PART I
ITEM 1. BUSINESS
GENERAL
Hanmi Financial Corporation ("Hanmi Financial" or the "Company") is a
Delaware corporation incorporated on March 14, 2000 pursuant to a Plan of
Reorganization and Agreement of Merger to be the holding company for Hanmi Bank
(the "Hanmi Bank"). The Company became the holding company for Hanmi Bank in
June, 2000, and is subject to the Bank Holding Company Act of 1956, as amended.
The principal office of Hanmi Financial is located at 3660 Wilshire
Boulevard, Suite PH-A, Los Angeles, California 90010, and its telephone number
is (213) 382-2200.
Hanmi Bank, the sole subsidiary of the Company, was incorporated under the
laws of the State of California on August 24, 1981, and 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 Bank 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.
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 general business banking with its
primary market encompassing the multi-ethnic population of the Los Angeles,
Orange and San Diego counties. 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. The Hanmi Bank currently has eleven full-service branch
offices located in Los Angeles, Orange and San Diego counties. Of the eleven
offices, Hanmi Bank opened eight as de novo branches and acquired the other
three through acquisition.
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 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 has. 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 has also resulted in increased
competition in financial services markets.
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, Rowland Heights, San Diego and Gardena. 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,
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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 is 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 on loans. 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 purposes. 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 also 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 business cash flow and, thus, may be subject to
adverse conditions in the general economy or in a specific industry.
SMALL BUSINESS ADMINISTRATION GUARANTEED LOANS
Hanmi Bank originates loans qualifying for guarantees issued by the United
States SBA, an independent agency of the federal government. The SBA guarantees
on such loans currently range from 75% to 85% 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 $1.3 million. Hanmi Bank typically requires that SBA loans be secured
by business assets and by first or second deeds of trust on any available real
property. SBA loans have terms ranging from 7 to 25 years depending on the use
of the proceeds. To qualify for a SBA loan, a borrower must demonstrate the
capacity to service and repay the loan, 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 2000, Hanmi Bank originated
$42 million of SBA loans and sold $27 million. 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,
Hanmi Bank may be obligated to repurchase the loans (for a period of 90 days
after the sale) if the loans fail to comply with certain representations and
warranties given by Hanmi Bank. Hanmi Bank retains the obligation to service the
SBA loans, for which it receives the servicing fees. Those unsold portions of
the SBA loans that remain owned by Hanmi Bank are included in its balance sheet.
As of
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December 31, 2000, Hanmi Bank had $54 million in SBA loans remaining on its
balance sheet, and was servicing $66 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 laws and regulations
affecting the holding of real estate, environmental conditions, governmental and
other use restrictions, development of competitive properties and increasing
vacancy rates. Hanmi 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, in
addition to cash flow from the business. The majority of the properties securing
these loans are located in Los Angeles and Orange counties.
Hanmi Bank's commercial real estate loans are principally secured by
owner-occupied commercial and industrial buildings. Generally, these types of
loans are made for a period of up to seven years, with monthly payments based
upon a portion of the principal plus interest, and with a loan-to-value ratio of
65% 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
25 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 obtains corporate or
individual 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 approved. 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 an amount equal to
the outstanding loan balance, subject to applicable laws that may limit the
amount of hazard insurance a lender can require to replace such improvements.
Hanmi Bank's lending policies generally limit the loan-to-value ratio on
mortgage loans secured by commercial 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 the Bank's base lending rate;
- minimum cash equity of 35% of project cost;
- advance of anticipated interest costs during construction; advance of
fees;
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- 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 making permanent loans 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.
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. 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.
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
4
dependent on the borrower's continuing financial stability, and thus is more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, various federal and state laws, including bankruptcy
and insolvency laws, often limit the amount which the lender can recover on
loans to individuals. Loans to individuals may also give rise to claims and
defenses by a consumer borrower against the lender on these loans, and a
borrower may be able to assert these claims and defenses against any assignee of
the note that the borrower has against the seller of the underlying collateral.
OFF-BALANCE SHEET COMMITMENTS
As part of its service to its small to medium sized business customers,
Hanmi Bank from time to time issues formal commitments and lines of credit.
These commitments can be either secured or unsecured. They may be in the form of
revolving lines of credit for seasonal working capital needs. However, these
commitments may also take the form of commercial letters 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 of December 31, 2000, Hanmi
Bank had commitments to extend credit of approximately $92.5 million,
obligations under commercial letters of credit of approximately $25.5 million,
and obligations under standby letters of credit of approximately $5.5 million,
and other obligations under guaranteed credit cards of $2 million.
The following table shows the distribution of the Hanmi Bank's undisbursed
loan commitments of the dates indicated:
DECEMBER 31,
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2000 1999
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(IN THOUSANDS)
Commitments to extend credit............................. $ 92,540 $70,208
Standby letters of credit................................ 5,533 3,277
Commercial letters of credit............................. 25,496 19,443
Guaranteed credit cards.................................. 2,004 1,554
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Total.................................................... $125,573 $94,482
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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, 2000, Hanmi Bank's authorized legal lending limits were
$14.8 million for unsecured loans plus an additional $9.8 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, 2000 totaled $98.4 million.
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The highest individual lending authority at 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 next highest lending authority is $350,000 for the Chief Retail
Lending Officer, and then $100,000 for Chief Commercial Lending Officer. All
other individual lending authority is substantially less.
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 recommending 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 upon
reports of independent appraisers and audits of accounts receivable or inventory
pledged as security.
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 OREO, it generally obtains an environmental review.
SUBSTANDARD AND DOUBTFUL LOANS--Hanmi Bank monitors all loans in the loan
portfolio to identify problem credits. Additionally, as an integral part of the
credit review process of Hanmi Bank, credit
6
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.
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
possess credit deficiencies or potential weaknesses deserving management's close
attention.
As of December 31, 2000, Hanmi Bank's classified loans consisted of
$12.0 million in the "substandard" category and $0.4 million in the "doubtful"
category. Hanmi Bank's $12.0 million of loans classified as a "substandard"
consisted of $1.3 million of non-performing loans/non-accrual loans.
Additionally, as of December 31, 2000, Hanmi Bank's loans categorized in the
"special mention" category consisted of $0.4 million of nonperforming loans.
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 believe 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, 2000 were $5.8 million, all
of which were also nonaccrual loans. Allowance for loan losses related to
impaired loans was $1.6 million at December 31, 2000.
Except as disclosed above, there were no assets as of December 31, 2000
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."
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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 using the
above factors 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 Federal Reserve
Bank of San Francisco performed a safety and soundness examination of Hanmi Bank
on February 20, 2001, as of December 31, 2000 and based on the exit interview
concluded made no substantial findings.
Hanmi Bank's Chief 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 quarterly basis.
EMPLOYEES
As of December 31, 2000, the Company has 285 full-time equivalent employees.
Hanmi Bank's employees are not represented by a union or covered by a 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.
INSURANCE
Hanmi Bank maintains financial institution bond and commercial insurance at
levels deemed adequate by the management to protect Hanmi Bank 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 service providers. Hanmi Bank competes for loans,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage 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 has.
8
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 laws 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 Financial and Hanmi Bank.
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, the Gramm-Leach Bliley Act was enacted, which
fundamentally restructures financial services industry in the United States.
Among other things, the Gramm-Leach Bliley Act permits affiliations among banks,
securities firms and insurance companies, 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 is subject to regulation under the Bank Holding Company Act.
Hanmi Financial is 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.
9
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 is 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.
Hanmi Financial has elected 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 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 is also be a bank holding company under the California
Financial Code. As such, Hanmi Financial and its subsidiary, Hanmi Bank, are
subject to examination by, and may be required to file reports with, the
California Commissioner of Financial Institutions.
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
10
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 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 is 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 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
11
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.
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, 2000, 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.
12
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.
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, 2000, 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
13
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 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.
14
EXECUTIVE OFFICERS OF HANMI FINANCIAL
The following table sets forth certain information as to each of the persons
who are currently executive officers of Hanmi Financial. Each of the persons set
forth below was elected by the Board in 2000.
BUSINESS EXPERIENCE
NAME AGE DURING PAST FIVE YEARS
- ---- -------- ----------------------
Chung Hoon Youk........................... 52 President and Chief Executive Officer(1)
Jung Chan Chang........................... 60 Senior Vice President and Chief Retail Lending
Officer(2)
Yong Ku Choe.............................. 57 Senior Vice President and Chief Financial Officer
Wun Hwa Choi.............................. 41 Senior Vice President and Chief Lending Officer(3)
David Kim................................. 35 Senior Vice President and Chief Credit
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 Manger in November 1998. Since 1993
he had 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.
15
ITEM 2. PROPERTIES
Hanmi Financial's principal office is located at 3660 Wilshire Boulevard,
Suite PH-A, Los Angeles, California. The office is leased pursuant to a 5-year
term lease, which expires on November 30, 2003.
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 Leased
18720 East Colima Road, Rowland Heights.................... Branch Leased
11754 East Artesia Boulevard, Artesia...................... Branch Leased
4637 Convoy Street, San Diego.............................. Branch Leased
3660 Wilshire Boulevard, Suite PH-A, Los Angeles........... Administrative(1)(2)(5) Leased
2001 W. Redondo Beach Boulevard, Gardena................... Branch 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
Hanmi Financial and Hanmi Bank consider its present facilities to be
sufficient for its current operations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Hanmi Financial nor Hanmi Bank is involved in any material legal
proceedings. Hanmi Bank, from time to time, is party to litigation which arises
in the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of Hanmi Bank. In the opinion of management, the resolution of any
such issues would not have a material adverse impact on the financial position,
results of operations, or liquidity of Hanmi Financial or Hanmi Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to stockholders
for a vote.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
MARKET PRICE FOR COMMON STOCK
Hanmi Financial was organized in March 2000. From March 2000 until the
reorganization (June 15, 2000) of Hanmi Bank resulting in Hanmi Bank becoming a
wholly-owned subsidiary of Hanmi Financial (the "Reorganization") no trading
market existed for the Hanmi Financial Common Stock. Prior to the Reorganization
the common stock of Hanmi Bank was not listed on any national stock exchange or
with Nasdaq. Immediately following the Reorganization the common stock of Hanmi
Financial was not listed on any national stock exchange or Nasdaq.
On January 29, 2001 the Common Stock of Hanmi Financial was accepted for
listing on the Nasdaq Stock Market.
The following table sets forth the high and low trading prices of Hanmi
Bank's common stock prior to the Reorganization for the quarters indicated based
on transactions of which management is aware. These quotes do not necessarily
include retail markups, markdowns, or commissions and do not necessarily
represent actual transactions. Additionally, there may have been transactions at
prices other than those shown below:
HIGH LOW DIVIDENDS*
---- --- ----------
1999
First Quarter.......................... $12.99 $10.75 11% stock dividend
Second Quarter......................... $14.41 $12.16
Third Quarter.......................... $15.54 $13.74
Fourth Quarter......................... $14.20 $10.92
2000
First Quarter.......................... $13.00 $11.00 11% stock dividend
Second Quarter (as of June 14, 2000)... $13.39 $10.71
- ------------------------
* Stock Dividends paid by Hanmi Bank prior to the Reorganization
The following table sets forth, for the periods indicated, the high and low
trading prices of Hanmi Financial's common stock since the Reorganization
(June 15, 2000) on transactions of which management is aware. These quotes do
not necessarily include retail markups, markdowns, or commissions and do not
necessarily represent actual transactions:
HIGH LOW
-------- --------
2000
Second Quarter (from June 15, 2000)....................... $12.39 $12.16
Third Quarter............................................. $14.25 $13.50
Fourth Quarter............................................ $16.50 $14.00
Hanmi Financial has approximately 1,170 stockholders of record.
17
DIVIDENDS
Since the date of its incorporation, Hanmi Financial has paid no cash
dividends. 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.
On March 1, 2001, Hanmi Financial declared a 12% stock dividend on its
common stock payable to stockholders of record on March 14, 2001.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical financial information,
including per share information as adjusted for the stock dividends declared by
the Company. This selected historical financial data should be read in
conjunction with the financial statements of the Company and the notes thereto
appearing elsewhere in this 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, 2000 are derived from the Company's
audited financial statements. In the opinion of management of the Company, the
information presented reflects all adjustments, including normal and recurring
accruals, considered necessary for a fair presentation of the results of such
periods.
SUMMARY FINANCIAL STATEMENTS
FOR THE YEAR ENDED AND AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
SUMMARY STATEMENT OF OPERATIONS DATA:
Interest income..................................... $ 72,515 $ 52,619 $ 42,728 $ 37,781 $ 33,193
Interest expense.................................... 30,891 18,847 15,730 12,876 11,312
---------- ---------- ---------- ---------- ----------
Net interest income before provision for possible
loan losses....................................... 41,624 33,772 26,998 24,905 21,881
Provision for possible loan losses.................. 2,250 1,000 3,050 2,650 1,850
Non-interest income................................. 14,710 12,522 10,305 8,945 7,902
Non-interest expense................................ 27,774 24,606 19,782 18,566 17,409
---------- ---------- ---------- ---------- ----------
Income before income taxes.......................... 26,310 20,688 14,471 12,634 10,524
Income tax expense.................................. 10,787 8,682 5,207 4,473 3,815
---------- ---------- ---------- ---------- ----------
Net income.......................................... 15,523 12,006 9,264 8,161 6,709
========== ========== ========== ========== ==========
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
SUMMARY STATEMENT OF FINANCIAL CONDITION:
Cash and due from Banks............................. 68,499 53,476 43,729 37,810 38,693
Net loans........................................... 620,522 474,650 331,286 288,970 243,676
Investment securities............................... 205,994 171,238 218,978 146,376 110,366
Short-term commercial paper......................... 54,908
Federal funds sold and securities purchased under
Agreements to resell.............................. 52,700 10,000 27,000 8,000 44,000
Other real estate owned............................. 671 1,090
Total assets........................................ 1,034,610 740,259 650,765 500,074 454,373
Total deposits...................................... 934,581 655,730 586,284 446,545 410,170
Total liabilities................................... 948,214 672,429 591,790 451,738 414,359
Total stockholders' equity.......................... 86,396 67,831 58,975 48,336 40,014
Average interest-earning assets..................... 788,516 614,028 488,266 421,698 379,711
Average total assets................................ 873,044 690,797 548,198 470,421 414,972
Average interest-earning liabilities................ 569,544 424,722 331,475 281,376 249,655
PER SHARE DATA:
Net income per share--Basic......................... $ 2.09 $ 1.62 $ 1.31 $ 1.18 $ 1.11
Net income per share--Diluted....................... $ 2.08 $ 1.62 $ 1.31 $ 1.15 $ 1.11
Book value per share................................ $ 11.62 $ 10.15 $ 9.84 $ 9.11 $ 8.40
Cash dividends...................................... 0.00 0.00 0.00 0.00 0.00
Common shares outstanding........................... 7,434,457 6,679,670 5,996,054 5,307,638 4,761,405
19
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
SELECTED PERFORMANCE RATIOS:
Return on average equity(1)......................... 19.81% 18.50% 16.71% 18.38% 18.39%
Return on average assets(2)......................... 1.78% 1.74% 1.69% 1.73% 1.62%
Net interest spread(3).............................. 3.77% 4.13% 4.01% 4.38% 4.26%
Net interest margin(4).............................. 5.28% 5.50% 5.53% 5.91% 5.82%
Average shareholders' equity to average total
assets............................................ 8.98% 9.39% 10.11% 9.44% 8.79%
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
SELECTED CAPITAL RATIO:
Tier 1 Capital to average total assets
Hanmi Financial 8.46%
Hanmi Bank 8.39% 9.20% 8.66% 9.85% 8.81%
Tier 1 Capital to total risk-weighted assets
Hanmi Financial 11.11%
Hanmi Bank 11.02% 12.63% 11.61% 12.29% 13.23%
Total Capital to total risk-weighted assets
Hanmi Financial 12.37%
Hanmi Bank 12.27% 13.88% 12.86% 13.55% 13.22%
SELECTED ASSET QUALITY RATIOS:
Nonperforming loans to total gross loans(5)......... 0.40% 0.62% 0.97% 1.15% 1.64%
Nonperforming assets to total gross loans (6)....... 0.40% 0.62% 1.16% 1.15% 2.07%
Net charge-offs (recoveries) to average total
loans............................................. 0.16% 0.19% 1.06% 0.76% 0.51%
Allowance for loan losses to total gross loans...... 1.89% 2.19% 3.05% 3.14% 3.49%
Efficiency ratio(7)................................. 49.31% 53.15% 53.03% 54.85% 58.45%
- ------------------------------
(1) Net income divided by average shareholders' equity.
(2) Net income divided by average total assets.
(3) Represents the average rate earned on interest-bearing assets less the
average rate paid to interest-bearing liabilities.
(4) Represents net interest income as percentage of average interest-earning
assets.
(5) Nonperforming loans consist of nonaccrual loans, loan past due 90 days or
more and restructured loans.
(6) Nonperforming assets consist of nonperforming loans (see footnote
(5) above) and other real estate owned.
(7) Represents the ratio of non-interest expense to the sum of net interest
income before provision for loan losses and total non-interest income
excluding securities gains and losses.
20
ITEM 7. 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 the Company as of and for the years ended
December 31, 2000, 1999 and 1998. The discussion should be read in conjunction
with the financial statements of the Company and the notes related thereto
presented elsewhere in this statement.
This discussion and analysis contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors discussed elsewhere in this statement.
OVERVIEW
Over the last three years, the Company has experienced significant growth in
assets and deposits and a substantial increase in profitability. Total assets
increased to $1,034.6 million at December 31, 2000 from $740.3 million and
$650.8 million at December 31, 1999, and 1998, respectively. Total gross loans
increased to $634.1 million at December 31, 2000 from $486.8 million and
$342.9 million at December 31, 1999 and 1998, respectively. Total deposits
increased to $934.6 million as of December 31, 2000 from $655.7 million and
$586.3 million at December 31, 1999 and 1998, respectively.
The Company's growth has been generated through internal operations and
expansion into new markets previously not serviced by the Company. In 2000, the
Company opened two new branches in Gardena and San Diego, California. These new
branches expanded the Company's branch network, broadened loan production and
brought the Company to the over $1 billion in total assets as of December 31,
2000.
For the year ended December 31, 2000, net income was $15.5 million,
representing an increase of $3.5 million or 29.2% from $12 million for the year
ended December 31, 1999. This translates to basic earnings per share of $2.09
and $1.62 for the year ended December 31, 2000 and 1999, respectively. The
increase in earnings was achieved through the increase in interest income and
the fee income generated. The significant increases in earnings during 2000 were
due to the expansion of the Company's lending activity in both the conventional
and SBA areas, and the gain recognized from the sale of one of branch premise.
For the year ended December 31, 1999, net income was $12 million as compared to
$9.3 million for 1998. This represents an increase in net profit of
$2.7 million, or 29.03%.
One of the Company's 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. The Company'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. The Company is a major SBA lender and actively markets the guaranteed
portion of the loans it generates to the secondary market. The Company also
generates substantial non-interest income, including transaction and loan
origination fees. The Company's non-interest expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses and other
operating expenses.
The Company's results of operations are significantly affected by its
provision for loan losses. Results of operations may also be affected by other
factors, including general economic and competitive conditions, mergers and
acquisitions of other financial institutions within the Company's market area,
changes in interest rates, government policies and actions of regulatory
agencies.
21
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
The Company'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. The Company'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. The Company'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 the Company's 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 the Company's 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 Bank.
For the year ended December 31, 2000 and 1999, the Company's net interest
income was $41.6 million and $33.8 million, respectively. The net interest rate
spread and net interest margin for the year ended December 31, 2000 were 3.77%
and 5.28%, respectively, compared to 4.13% and 5.50%, respectively, for the year
ended December 31, 1999. The net interest margin for the year ended
December 31, 2000 was lower than the net interest margin for the comparable 1999
period due to increase in interest rate paid to the deposits. The yield on
interest earning asset has been increased 63 basis points, but, at the same
time, the interest paid to interest-bearing liability rose to 5.42% from 4.44%,
or 98 basis points, which resulted in decrease of both interest spread and
interest margin.
Average interest earning assets increased to $788.5 million in 2000 from
$614.0 million in 1999, which represents 28.4% increase. Average net loans
increased to $555.0 million in 2000 from $396.6 million in 1999. As a result,
total loan interest income grew by 44.9% in 2000 on an annual basis, helped by a
slight increase in average yields on net loans from 10.01% in 1999 to 10.36% in
2000. The average interest rate charged on loans increased reflecting the
interest hike by Federal Reserve Bank during the first two quarters in 2000 and
the last two quarters in year 1999.
Average interest-bearing liabilities grew by 34.1% in 2000 to
$569.5 million as compared to $424.7 million in 1999. The average interest rate
the Company paid for interest-bearing liabilities went up by 98 basis points in
2000 even though average annual prime rate increased only by 31 basis points,
and caused by severe competition among the peer group banks in the same
community. As a result, the net interest rate spread and net interest margin
dropped to 3.77% and 5.28% respectively in 2000, from 4.13% and 5.50%,
respectively in 1999.
22
The following tables show the Company'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:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000 1999
-------------------------------- -------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/
BALANCE EXPENSE RATE/YIELD BALANCE EXPENSE
-------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Earning assets:
Net loans(1)............... $555,045 $ 57,516 10.36% $396,607 $39,684
Municipal securities(2).... 17,840 1,031 5.78% 12,815 774
Obligations of other
U.S. govt................ 94,804 6,248 6.59% 103,439 6,314
Other debt securities...... 66,686 4,122 6.18% 74,293 4,472
Federal funds sold......... 49,462 3,261 6.59% 25,953 1,329
Commercial paper........... 4,680 337 7.20%
Interest-earning
deposits................. 921 46
-------- -------- ----- -------- -------
Total interest earning
assets:.................... 788,517 72,515 9.20% 614,028 52,619
-------- -------- ----- -------- -------
Non-interest earning Assets:
Cash and due from banks.... 53,930 50,803
Premises and equipment,
net...................... 8,867 9,103
Other real estate owned.... 170 303
Accrued interest
Receivable............... 255,137 4,658
Customer liability......... 2,124
Other assets............... 13,880 11,902
-------- --------
Total non-interest earning
assets..................... 84,527 76,769
-------- --------
Total assets................. $873,044 $690,797
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities
Deposits:
Money market............. $ 98,114 $ 3,632 3.70% $ 94,506 $ 3,108
Savings.................. 57,844 2,322 4.01% 54,655 2,035
Time certificates of
deposits $100,000 or
more................... 167,858 10,114 6.03% 105,326 6,091
Other time deposits...... 242,791 14,613 6.02% 163,058 7,243
Other borrowing.......... 2,937 210 7.15% 7,177 370
-------- -------- ----- -------- -------
Total interest-bearing
liabilities............ 569,544 30,891 5.42% 424,722 18,847
-------- -------- ----- -------- -------
Non-interest-bearing
liabilities
Demand deposits............ 213,606 194,907
Other liabilities.......... 11,531 6,272
-------- --------
Total
non-interest-bearing
liabilities............ 225,137 201,179
Stockholders' equity......... 78,363 64,896
-------- --------
Total liabilities and
Shareholders' equity....... $873,044 $690,797
======== ========
Net interest income.......... $ 41,624 $33,772
======== =======
Net interest spread(3)....... 3.77%
Net interest margin(4)....... 5.28%
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1999
---------- --------------------------------
INTEREST
AVERAGE AVERAGE INCOME/ AVERAGE
RATE/YIELD BALANCE EXPENSE RATE/YIELD
---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Earning assets:
Net loans(1)............... 10.01% $291,841 $ 30,821 10.56%
Municipal securities(2).... 6.04% 7,401 466 6.30%
Obligations of other
U.S. govt................ 6.10% 85,244 5,300 6.22%
Other debt securities...... 6.02% 66,702 4,146 6.22%
Federal funds sold......... 5.12% 35,452 1,909 5.38%
Commercial paper...........
Interest-earning
deposits................. 4.99% 1,626 86 5.29%
----- -------- -------- -----
Total interest earning
assets:.................... 8.57% 488,266 42,728 8.75%
----- -------- -------- -----
Non-interest earning Assets:
Cash and due from banks.... 37,504
Premises and equipment,
net...................... 6,191
Other real estate owned.... 687
Accrued interest
Receivable............... 4,030
Customer liability.........
Other assets............... 11,520
--------
Total non-interest earning
assets..................... 59,932
--------
Total assets................. $548,198
========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities
Deposits:
Money market............. 3.29% $ 76,155 $ 2,506 3.29%
Savings.................. 3.72% 40,258 1,652 4.10%
Time certificates of
deposits $100,000 or
more................... 5.78% 92,784 5,074 5.47%
Other time deposits...... 4.44% 121,469 6,466 5.32%
Other borrowing.......... 5.16% 809 32 3.96%
----- -------- -------- -----
Total interest-bearing
liabilities............ 4.44% 331,475 15,730 4.75%
----- -------- -------- -----
Non-interest-bearing
liabilities
Demand deposits............ 154,869
Other liabilities.......... 6,410
--------
Total
non-interest-bearing
liabilities............ 161,279
Stockholders' equity......... 55,444
--------
Total liabilities and
Shareholders' equity....... $548,198
========
Net interest income.......... $ 26,998
========
Net interest spread(3)....... 4.13% 4.01%
Net interest margin(4)....... 5.50% 5.53%
- ------------------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1.6, $1.7 and $1.3 million for the year ended
December 31, 2000, 1999 and 1998, 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) Represents the average rate earned on interest-bearing assets less the
average rate paid to interest-bearing liabilities
(4) Represents net interest income as percentage of average interest-earning
assets.
23
The following table sets forth, for the periods indicated, the dollar amount
of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average daily balances (volume) or changes in average daily interest rates
(rate). The variances attributable to both the volume and rate changes have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amount of the changes in each
FOR THE YEAR ENDED, FOR THE YEAR ENDED,
2000 VS. 1999 1999 VS. 1998
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
EARNING ASSETS--INTEREST INCOME:
Loans, net(1)................................ $15,853 $ 1,979 $17,832 $11,064 $(2,201) $8,863
Municipal securities(2)...................... 206 51 257 341 (33) 308
Obligations of other U.S. governmental
agencies................................... (455) 388 (67) 1,131 (117) 1,014
Other debt securities........................ (458) 109 (349) 472 (146) 326
Federal funds sold........................... 1,203 730 1,933 (511) (70) (581)
Commercial paper............................. 337 -- 337
------- ------- ------- ------- ------- ------
Interest-earning deposits.................... (47) -- (47) (37) (2) (39)
======= ======= ======= ======= ======= ======
Total...................................... $16,639 $ 3,257 $19,896 $12,460 $(2,569) $9,891
DEPOSITS AND BORROWED FUNDS:
Interest expense:
Money market deposits........................ $ 119 $ 406 $ 525 $ 604 $ (2) $ 602
Savings deposits............................. 119 168 287 591 (208) 383
Time certificates of deposit $100,000 more... 3,616 408 4,024 686 331 1,017
Other time deposits.......................... 3,542 3,827 7,369 2,214 (1,437) 777
Other borrowing.............................. (219) 58 (161) 252 86 338
------- ------- ------- ------- ------- ------
Total...................................... $ 7,177 $ 4,867 $12,044 $ 4,347 $(1,230) $3,117
------- ------- ------- ------- ------- ------
Change in net interest income.................. $ 9,462 $(1,610) $ 7,852 $ 8,113 $(1,339) $6,774
======= ======= ======= ======= ======= ======
- ------------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1.6, $1.7 and $1.3 million for the year ended
December 31, 2000, 1999 and 1998, 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, 2000, the provision for loan losses was
$2.25 million, compared to $1.0 million for the year ended December 31, 1999, an
increase of 125%. This increase was attributable to the Company's increased
volume of loans, especially in commercial and industrial loans; increase of
$112.1 million or 40.2%, which has higher loan loss risk associated than other
loans. When the General Valuation Allowance ("GVA") was estimated, both U.S.
economic in general and the outlooks on the community economy where the Company
is located, were taken into consideration. (Further analysis on GVA is disclosed
in Allowance for Loan Losses section in this statement.)
Provisions to the allowance for loan losses are made quarterly, in
anticipation of future 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
24
allocations according to type with larger percentages applied to loans deemed to
be of a higher risk. These percentages are determined by the Company's prior
experience.
BALANCE AT THE END OF PERIOD OF
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
TOTAL TOTAL TOTAL
RESERVE GROSS RESERVE GROSS RESERVE GROSS
APPLICABLE TO: AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -------------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate:
Construction................... $ 274 $ 8,543 $ 28 $ 3,512 $ 30 $ 2,304
Commercial property............ 959 147,810 1,422 125,842 1,519 85,126
Residential property........... 48,192 39,787 22,112
Commercial and Industrial...... 6,415 391,093 5,492 278,958 5,279 200,161
Consumer....................... 503 38,486 395 38,682 278 33,200
General Valuation Allowance.... 3,587 3,287 3,317
------- ------- -------
TOTAL RESERVE................ 11,976 634,123 10,624 486,781 10,423 342,903
BALANCE AT THE END OF PERIOD OF
-----------------------------------------
1997 1996
------------------- -------------------
TOTAL TOTAL
RESERVE GROSS RESERVE GROSS
APPLICABLE TO: AMOUNT LOANS AMOUNT LOANS
- -------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate:
Construction................... $ 2 $ -- $ 80 $ 3,869
Commercial property............ 2,179 62,680 1,821 54,135
Residential property...........
Commercial and Industrial...... 4,668 202,723 3,845 162,222
Consumer....................... 373 33,557 570 33,604
General Valuation Allowance.... 2,125 2,500
------ ------
TOTAL RESERVE................ 9,347 298,960 8,816 253,830
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 the Company'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, the Company may sustain loan losses, in any particular period, that
are sizable in relation to the allowance, or exceed the allowance. In addition,
the Company'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 the Company's
non-interest income for the years indicated:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts.............. $ 8,957 $ 8,374 $ 6,066
Gain on sale of loans............................ 1,233 895 1,322
Gain on sale of fixed assets..................... 1,112 7
Loans servicing income........................... 1,276 1,094 1,008
Other service charges and fees................... 1,750 1,642 1,508
Other income..................................... 383 517 394
------- ------- -------
Total........................................ $14,711 $12,522 $10,305
======= ======= =======
As a result of the Company'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 the Company's revenue.
25
For the year ended December 31, 2000, non-interest income was $14.7 million, an
increase of $2.2 million or 17.6% increase from $12.5 million for the year ended
December 31, 1999.
The Company 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. The Company constantly reviews service charges to
maximize service charge income while still maintaining a competitive edge. The
service charges on deposit account increased by $583,000 or 6.96%, and
$2.3 million or 38.05% for 2000 from 1999 and 1999 from 1998, respectively. The
slight increase was mainly due to the expansion of branch network, which was
mitigated with proportional decrease in demand deposit due to increase in
interest bearing deposits during 2000 triggered by increase in interest rate.
Gain on the sale of SBA guaranteed loans was approximately $1.23 million in
2000 compared to $895,000 and $1.32 millions in 1999 and 1998, respectively,
representing increase of 37.7% and decrease of 32.2% for the year ended
December 31, 2000 and 1999, respectively. Increase/decreases in the gain on sale
of loans resulted exclusively from the Company's increase/decrease activity on
SBA guaranteed loans. The Company sells the guaranteed portion of the SBA loans
in government securities secondary markets, while the Company retains servicing
rights. During 2000, the secondary market for these loans was more active than
in 1999. The Company sold approximately $21.5 million loans recognizing 5.4%
premiums over the principle sold.
The Company sold one of the branch premises due to planned relocation of
that branch in year 2001. The building was sold for $4.3 million, recognizing
gain of $1.1 million.
As a part of the Company's continuing effort to expand non-interest income,
the Company introduced non-depository products to customer, such as mutual funds
and annuities, in December 2000. The Company anticipates generating income from
such activity in 2001.
NON-INTEREST EXPENSE
The following table sets forth the breakdown of non-interest expense for the
years indicated:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits................... $14,248 $12,369 $10,712
Occupancy and equipment.......................... 3,249 2,678 2,495
Data processing.................................. 2,067 1,978 1,460
Supplies and communications...................... 1,351 1,134 825
Professional fees................................ 933 1,099 934
Advertising and promotional expenses............. 1,721 1,420 1,011
Loan referral fee................................ 507 944 331
Other............................................ 3,698 2,984 2,014
------- ------- -------
Total........................................ $27,774 $24,606 $19,782
======= ======= =======
Total non-interest expense increased by $3.17 million or 12.9% in 2000. The
increase in 2000 was primarily due to branch extension in 2000. Two new branches
were added to the Company'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.
26
Management anticipates that non-interest expense will continue to grow in
the coming years as the expansion plan is implemented. However, the Company will
make an effort to reduce the growth rate of expenses to the lowest possible
level in order to maximize profitability.
PROVISION FOR INCOME TAXES
For the year ended December 31, 2000, the Company made a provision for
income taxes of $10.8 million on net income before tax of $26.3 million,
representing an effective tax rate of 41%, compared to a provision of
$8.7 million on pretax net income of $20.7 million, representing an effective
tax rate of 42%, for 1999. The lower tax rate in 2000 compared to 1999 was
primarily due to an investment made in a Low-income Housing project, which the
Company made through Bank of America at the end of 1998, and recognized income
tax credit of approximately $118,000 for the 2000 tax year. It is the Company's
intention that such investment will be made continuously as part of an effort to
lower the effective tax rate and to obtain the credit under Community
Reinvestment Act.
As indicated in Note 7 to the Notes to the Financial Statements, income tax
expense is the sum of two components, namely, current tax expense and deferred
tax 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 the Company's temporary differences involve recognizing
substantially more expenses in its financial statements than it has been allowed
to deduct for taxes, and therefore the Company normally has a net deferred tax
asset. At December 31, 2000, 1999 and 1998, the Company had net deferred tax
assets of $5.1 million, $5.6 million and $2.4 million, respectively.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total gross loans increased by $147.3 million or 30% in 2000. Total gross
loans comprised 61% of total assets at December 31, 2000 compared with 65.8%,
and 52.7% at December 31, 1999, and 1998, respectively.
The table on the following page sets forth the composition of the Company's
loan portfolio by major category. Commercial and industrial loans comprised the
largest portion of the total loan portfolio, representing 61.7% of total loans
at December 31, 2000, as compared with 57.3%, and 58.4% of total loans at
December 31, 1999, and 1998, respectively.
The loan portfolio also includes the unsold portion of SBA loans, which
totaled approximately $12.8 million, $18.5 million, and $2.4 million at
December 31, 2000, 1999, and 1998, respectively. SBA loans comprise the major
portion of the growth in the commercial and industrial loan portfolio. More than
50% of the Company's commercial loans are supported by real estate collateral to
reduce potential loss exposure to the Company 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. The Company directs its efforts
to avoiding concentration in any of the areas mentioned.
27
Real estate loans were $204.5 million and $169.1 million at December 31,
2000 and December 31, 1999, respectively, representing 32.3% and 34.8%,
respectively, of the total loan portfolio. Real estate loans are extended to
finance the purchase and/or improvement of commercial real estate and
residential property. The properties may be either user owned or for investment
purposes. The Company 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.
The Company does not actively pursue consumer installment loans, which
historically have represented less than 10% of the total loan portfolio. The
majority of installment loans are centered in automobile loans, which the
Company provides as a service to existing clients.
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,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real estate
Construction............................ $ 8,543 $ 3,512 $ 2,304 $ 3,869
Commercial property..................... 147,810 125,842 85,126 $ 62,680 54,135
Residential Property.................... 48,192 39,787 22,112
Commercial and industrial(1).............. 391,093 278,958 200,161 202,723 162,222
Installment Loans......................... 38,486 38,682 33,200 33,557 33,604
Total gross loans....................... $634,124 $486,781 $342,903 $298,960 $253,830
======== ======== ======== ======== ========
- ------------------------
(1) Loans for sale were included at the lower of cost or market.
The following table sets forth the percentage distribution of loans in each
category as of the dates indicated:
PERCENTAGE DISTRIBUTION OF LOANS AS OF DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Real estate
Construction.................................. 1.35% 0.72% 0.67% 1.52%
Commercial property........................... 23.31% 25.85% 24.83% 20.97% 21.33%
Residential property.......................... 7.60% 8.17% 6.45%
Commercial and industrial....................... 61.67% 57.31% 58.37% 67.81% 63.91%
Installment loans............................... 6.07% 7.95% 9.68% 11.22% 13.24%
------ ------ ------ ------ ------
Total gross loans............................. 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
As of December 31, 2000 and 1999, the Company had commitments to extend
credit of $92.5 million and $70.2 million, and obligations under standby letters
of credit of approximately $5.5 million and $3.3 million, and obligations under
commercial letters of credit of $25.5 million and $19.4 million, and under
credit card loans of approximately $2.0 million and $1.6 million, respectively.
Based upon the Company's historical experience, the outstanding loan commitments
are expected to remain relatively stable throughout the year.
28
The table below shows the maturity distribution of the Company's outstanding
loans as of December 31, 2000. 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 $2.16 million at December 31, 2000.
AFTER ONE BUT
WITHIN ONE WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
---------- ------------- ---------- --------
Real estate
Construction................................... $ 8,543 $ 8,543
Commercial property............................ 24,618 26,835 $ 95,841 147,294
Residential property........................... 18,358 5,785 23,400 47,543
Commercial and industrial........................ 252,703 5,358 132,109 390,170
Installment loans................................ 7,029 31,385 38,414
-------- ------- -------- --------
Total.......................................... $311,251 $69,363 $251,350 $631,964
======== ======= ======== ========
Loans with variable interest rates............... 299,432 44,206 128,714 472,352
Loans with predetermined interest rates.......... 11,819 25,157 122,636 159,612
-------- ------- -------- --------
$311,251 $69,363 $251,350 $631,964
======== ======= ======== ========
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 ("OREO"). Loans
are generally placed on non-accrual status when they become 90 days past due
unless Management believes the loan is adequately collateralized and in the
process of collection. Loans may be restructured by Management when a borrower
has experienced some change in financial status, causing an inability to meet
the original repayment terms, and where the Company believes the borrower will
eventually overcome those circumstances and repay the loan in full. OREO
consists of properties acquired by foreclosure or similar means that Management
intends to offer for sale.
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, the Company 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.
The Company's non-performing loans were $2.6 million at December 31, 2000,
compared to $3.0 million, and $3.3 million at December 31, 1999, and 1998,
respectively, representing decrease of 15% in 2000, and 9% in 1999.
At December 31, 2000, 1999 and 1998, total non-performing assets including
OREO were $2.6 million, $3.0 million, and $4.0 million, respectively, which
represented a decrease of 15% in year 2000, and 23.9% in year 1999. During these
same periods, total loans increased by 30.7% in 2000 from 1999, and 41.9% in
1999 from 1998.
As a result, the ratio of non-performing assets to total loans and OREO
decreased to .4% at December 31, 2000, from .62% at December 31, 1999, and from
1.16% at December 31, 1998. At December 31, 2000, the Company had no OREO.
29
The following table provides information with respect to the components of
the Company's non-performing assets as of December 31 of the years indicated:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:(1)
Real estate:
Construction.................................... $ $ $ $ $ 511
Commercial property............................. 516 206 675 892 2,834
Residential Property............................ 649 1,023 1,367 426 505
Commercial and industrial 923 1,536 762 1,203 72
Installment....................................... 71 188 308 103 182
------ ------ ------ ------ ------
Total............................................. 2,159 2,953 3,112 2,624 4,104
------ ------ ------ ------ ------
Loans 90 days or more past due and still accruing(as
to principal or interest):
Real estate:
Construction....................................
Commercial property.............................
Residential Property............................ 3
Commercial and industrial......................... 391 79 26 45
Installment.......................................
------ ------ ------ ------ ------
Total........................................... 394 79 26 45
------ ------ ------ ------ ------
Restructured loans:(2)
Real estate:
Consumer and industrial........................... 200 779
Installment.......................................
------ ------ ------ ------ ------
Total........................................... 200 779
------ ------ ------ ------ ------
Total nonperforming loans....................... 2,553 3,032 3,312 3,429 4,149
------ ------ ------ ------ ------
Other real estate owned............................. 670 1,090
------ ------ ------ ------ ------
Total nonperforming assets...................... $2,553 $3,032 $3,982 $3,429 $5,239
====== ====== ====== ====== ======
Nonperforming loans as a percentage of total
loans............................................. 0.40% 0.62% 0.97% 1.15% 1.64%
Nonperforming assets as a percentage of total loans
and other real estate owned....................... 0.40% 0.62% 1.16% 1.15% 2.06%
- ------------------------
(1) During the fiscal year ended December 31, 2000, approximately $37,140 of
interest income related to these loans was included in net income.
(2) A "restructured loan" is one the terms of which were renegotiated to provide
a reduction on 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 the respected fiscal
year, were negligible. Additionally interest income would have been
negligible, 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.
ALLOWANCE FOR LOAN LOSSES
Maintaining an adequate level of allowance for loan losses has been one of
the Company management's critical concerns, especially to the extent that the
allowance is commensurate with
30
estimated and known, as well as inherent, risks in the portfolio. Although the
adequacy of the allowance is reviewed on a quarterly basis, ongoing assessments
of the risks inherent in the portfolio are performed on a more frequent basis
and future additions may be required depending on the outcome of the continuing
evaluation of the risks in the loan portfolio.
The Company's total allowance for loan losses consists of two
components--formula allowance and general valuation allowance. For formula
allowance, Bank has been utilizing migration analysis software, Reserve Trac,
and the individual loan review analysis methodology.
The formula allowance is calculated on a quarterly basis using Reserve Trac
and uses net losses incurred by the Bank during the preceding five years. Then
the model calculates loss factors for every classification category (i.e. pass,
special mention, substandard, and doubtful) for each loan type, except consumer
loans (auto, mortgage and credit cards) which are analyzed as homogeneous loan
pools. These calculated loss factors are then applied to outstanding loan
balances, unused commitments, and off-balance sheet exposures, such as letters
of credit. In addition, minimum loss rates, which are calculated based on net
charge-off ratios during the past eight quarters including the current quarter,
are also utilized as a self-correcting mechanism to compensate for the lack of
historical loss information on certain loan types and to reduce differences
between estimated and actual observed losses. The individual loan review
analysis method is the other axis of the allowance allocation process, applying
specific monitoring policies and procedures in analyzing the existing loan
portfolio.
The results from the above two analyses are thereafter compared to various
analyses such as peer group comparisons and the federal regulatory interagency
policy for loan and lease losses. Further assignments are made based on general
and specific economic conditions, as well as performance trends within specific
portfolio segments and individual concentrations of credit.
The allowance for loan losses of $12.0 million at December 31, 2000
comprised of the General Valuation Allowance ("GVA") in the amount of
$3.6 million, or 30.0% of the total allowance. This compares to the GVA of
$3.3 million, or 30.9% of $10.6 million as of December 31, 1999. As the current
conditions do not necessarily follow the trail of historical loss rates, GVA has
been set aside as a reserve for inherent risk of the loan portfolio to minimize
the risk related to the margin of imprecision inherent in the estimation of the
assigned allowance for credit losses. This year's GVA percentage is comparable
to that of last year, and in addition this year's GVA of $3.6 million, is deemed
adequate in light of various U.S. economy conditions and outlooks as stated
below.
CONSUMPTION--In an inevitable reaction to retail sales' upsurge and wage and
salary income's shrinkage in previous years, the annual increase of retail sales
has since decreased to 3.9% in the quarter-ended January 2001. The Fed Funds
rate cutback from 5.5% in August 1998 to 4.75% in December 1998 triggered an
acceleration of consumer spending which continued until the yearly increase of
retail sales topped at 10.6% in 2000's first quarter. However, wage and salary
income's much slower 6.8% annual increase proved that consumer spending then
blistering pace was unsustainable. As the buildup of inventories continues to
outpace sales growth, it is hard to argue that the US economy is not facing some
sort of slowdown. Nevertheless, CPI in January 2001 reached 175.7, an increase
by 1.1 from December 2000, was the biggest increase in recent couple years, in
spite of weakened holiday sales compared to previous years.
In the fourth quarter, year-to-year business sales growth trailed
inventories growth by 2%, the widest such gap since the end of 1999, indicating
that the growth in inventories is accelerating while business sales are
decelerating. At the end of fourth quarter of last year, year-to-year growth of
inventories was around 1 1/2-percentage points above its five-year average. In
contrast, business sales growth was almost 1 1/2-percentage points below its
five-year average.
CONSUMER SENTIMENT--According to the University of Michigan's nationwide
survey, consumer sentiment has soured considerably in response to sharply higher
energy prices, the end of a great bull
31
market in equities, and a perceived slackening of the job market. Moreover, the
latest deterioration of confidence has been skewed towards a 23.6% drop since
November 2000 by consumer sentiment's expectations component, compared to a
shallower 11.3% slide by the consumer's assessment of current conditions.
PRODUCTION--In contrast to the 18% annualized advance for housing starts,
industrial production fell by 3.3% annualized from the quarter-ended
October 2000 to the quarter-ended January 2001. Industrial production has
entered its deepest quarter-to-quarter annualized contraction since the
1990/1991 recession. Downward revisions of corporate earnings estimates is
pretty much in parallel with January's 80.8% rate of industrial capacity
utilization which was the lowest since November 1992's 80.7%.
The year-over-year change of the capacity utilization rate most recently
peaked at +1.6 percentage points in 2000's 2nd quarter and has since dropped at
- -0.2 of a percentage point in the fourth quarter. January 2001's 80.2% rate of
industrial capacity utilization was down by 1.7 percentage points from a year
earlier. When capacity utilization fell by 2.9 percentage points from a year
earlier in December 1998, fourth-quarter 1998's profits from current production
sank by 5.8% yearly. The industrial production data showed the
quarter-to-quarter annualized growth of high-technology output dropping from
76.1% in April 2000 to 28.3% in January 2001. The latter was the flattest since
18.9% in 1998's second quarter. The quarter-to-quarter annualized growth of
high-tech production averaged 42.7% during 1996-2000.
So steep of a rise by the core PPI amid sluggish expenditures is troubling.
Producer Price Index in January 2001 was 141.6, an increase by 1.6 from
December 2000. This increase was also the biggest in the recent decade, either
percentage-wise or index-wise. The main reason is presumed to be because of sky
rocketing energy prices. The Company has already had a borrower that went in
Chapter 11 status because of high electricity costs, and expectations are that
more loans may become non-serviceable due to the same reason. In part, the Fed's
latest easing was intended to mitigate the loss of household purchasing power to
January's 21.6% year-to-year jump by the PPI's energy price component. However,
to the degree that Fed rate cuts succeed at accommodating higher energy prices,
overall price inflation risks ought to climb, especially after domestic spending
inevitably re-accelerates.
MONEY--The 9.2% annual increase of M2 monetary aggregate during the 3-months
ended January 2001 hints of a possible need to tighten monetary policy by
year-end. The annual increase of M2 has increased from 5.7% in July 2000 to 7%
in January 2001. In a long run, the 30-year Treasury yield has averaged 20 basis
points more than the 10-year yield. The currently above-average yield spread
between the 30-and 10-year Treasuries reflects expectations of faster economic
growth and higher inflation. Supporting this view is the downward pressure now
being put on the 30-year Treasury yield by expectations of the long Treasury
bond's eventual elimination.
STOCK PRICES--During 1998-1999, US corporate credit rating downgrades
outnumbered upgrades by a 1.58:1 margin in spite of 21.9% average annual
increase of the market value of common equity shares. In part, the latest
increase of high-yield bond defaults and the now much greater frequency of
downgrades relative to upgrades can be attributed to being too lenient on credit
risks in previous years. Besides, it turned out in many cases that the strong
stock price in 1993-1997 was casting out misleading signals on the
susceptibility of otherwise attractive fundamentals.
SUMMARY--As stated earlier, many economic index signals indicate at least a
slowdown or a possible recession of the U.S. economy in the near future, as well
as a possible deterioration of the
32
Company's credits portfolio. Considering all these factors, the Bank's GVA of
$3,590,753 or 30% of total allowance is deemed to adequately reflect the
aforementioned factors.
YEARS ENDED DECEMBER 31,
ALLOWANCE FOR LOAN LOSSES: ----------------------------------------------------
AT BEGINNING OF PERIOD 2000 1999 1998 1997 1996
- ------------------------------------------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCES......................................... $10,624 $10,423 $ 9,347 $8,816 $8,196
Actual charge-offs:
Real estate
Construction...............................
Commercial property........................ 79 430 852 1,127
Residential property....................... 73 104 463 470
Commercial and industrial...................... 1,383 1,432 3,642 1,429 1,308
Installment.................................... 399 417 310 538 745
------- ------- ------- ------ ------
Total...................................... 1,782 2,001 4,486 3,282 3,650
Recoveries on loans previously charged off:
Real estate
Construction............................... 30 -- --
Commercial property........................ 595 272 204 101
Residential property....................... 23 85 73 170
Commercial and industrial...................... 691 514 791 840 1,634
Installment.................................... 163 70 59 46 515
------- ------- ------- ------ ------
Total...................................... 884 1,202 1,207 1,163 2,420
------- ------- ------- ------ ------
Net loan charge-offs (recoveries)................ 898 799 3,279 2,119 1,230
Provision charged to operating expenses.......... 2,250 1,000 3,050 2,650 1,850
Additional reserve in conjunction with merger
of First Global Bank......................... 1,305
------- ------- ------- ------ ------
Balances at end of period........................ $11,976 $10,624 $10,423 $9,347 $8,816
======= ======= ======= ====== ======
RATIOS:
Net loan charge-offs to average total loans.... 0.16% 0.20% 1.09% 0.78% 0.53%
Net loan charge-offs to total loans at end of
period....................................... 0.14% 0.16% 0.96% 0.71% 0.48%
Allowance for loan losses to average total
loans........................................ 2.11% 2.61% 3.46% 3.46% 3.83%
Allowance for loan losses to total loans at end
of period.................................... 1.89% 2.18% 3.04% 3.13% 3.47%
Net loan charge-offs to allowance for loan
losses at end of period...................... 7.50% 7.52% 31.46% 22.67% 13.95%
Net loan charge-offs to provision charged to
operating expenses........................... 39.91% 79.90% 75.29% 79.96% 66.49%
Allowance for loan losses to nonperforming
loans........................................ 469.10% 350.40% 314.70% 338.29% 212.48%
The Company concentrates the majority of its earning assets in loans. In all
forms of lending there are inherent risks. The Company 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.
While the Company believes that its underwriting criteria are prudent,
outside factors can adversely impact credit quality. During the early 1990's the
severe recession impacted the Company's ability to collect loans. The
devastation of the 1994 earthquake further impacted loan repayment. A repeat of
these types of events could cause deterioration in the Company's loan portfolio.
33
Having experienced the problems mentioned above in the past, the Company has
attempted to mitigate collection problems by supporting its loans by fungible
collateral. Additionally, a significant portion of the portfolio is represented
by loans guaranteed by the SBA, which further reduces the Company's potential
for loss. The Company 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 the Company with a fresh look at its lending activities. In
addition to the Company's internal grading system, loans criticized by this
outside review are downgraded with appropriate reserves added if required.
As indicated above, the Company 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 the Company 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 the Company as of December 31, 2000
was primarily composed of US government agency, mortgage backed securities
(MBS), collateralized mortgage obligation (CMO), municipal bonds and corporate
bonds. The total investment portfolio increased to 19.9% of total assets at
December 31, 2000 from 23.1% at December 31, 1999 since the deposit growth rate
exceeded the loan growth rate in 2000. In 2000, the Company newly invested in
CMO in order to enhance the total return of investment and reduce the duration
of portfolio with the minimum credit risk. In addition, for the purpose of
lowering the effective tax rate, the Company increased bank qualified municipal
bonds and, abiding by regulatory compliance, purchased Community Reinvestment
Act bonds, which were broadly classified into MBS, CMO, and municipal bonds.
Compared to 1999, the Company diversified the portfolio in terms of products and
duration. As a result, average yield of investment portfolio has been improved
to 6.42% for the year ended December 31, 2000 from 5.95% for the year ended
December 31, 1999.
Investment securities available for sale were 61% of the total investment
portfolio as of December 31, 1999. But the ratio increased significantly to 89%
as of December 31, 2000, which is comparable with peer Companies. Except for
$980,000 of MBS floater and $5 million of floating rate notes, all investment
securities were based on predetermined interest rates. Management classifies
securities as available for sale to provide the Company with the flexibility to
move funds into loans as demand warrants. The Company held no derivative
securities of structural notes during any period presented.
Excluding holdings of government securities, there were no investments in
securities of nay one issuer exceeding 10% of the Company's stockholders' equity
at December 31, 2000, 1999 or 1998.
34
The following table summarizes the book value, market value and distribution
of the Company's investment securities as of the dates indicated:
INVESTMENT PORTFOLIO AS OF DECEMBER 31,
---------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
BOOK MARKET BOOK MARKET BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Governmental securities........... $ 11,000 $ 11,017 $ 15,963 $ 16,224
Obligations of other U.S. Governmental
agencies............................. $122,700 $122,697 86,584 82,436 82,909 83,241
Obligations of state and political
subdivision.......................... 24,578 24,608 14,797 14,617 11,103 11,370
Corporate bonds........................ 57,081 56,918 63,945 63,040 107,576 108,422
Other securities....................... 1,636 1,641 -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities............ $205,995 $205,864 $176,326 $171,110 $217,551 $219,257
======== ======== ======== ======== ======== ========
The following table summarizes the maturity schedule of the Company's
investment securities at book value and their weighted average yield at
December 31, 2000:
AFTER ONE AFTER FIVE YEARS
WITHIN BUT WITHIN BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS
------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Obligations of other U.S. Governmental
agencies.................................... $ 980 6.70% $ 73,662 6.76% $48,058 6.33%
Obligations of state and political
subdivisions(1)............................. 1,018 6.70% 13,742 6.83% 9,819 6.96%
Corporate bonds............................... 13,540 6.42% 35,381 6.92% 8,159 6.39%
Other securities.............................. -- -- 1,636 6.95% -- --%
------- ---- -------- ---- ------- ----
Total investment securities................... $15,538 6.46% $124,421 6.82% $66,036 6.43%
======= ==== ======== ==== ======= ====
- ------------------------
(1) The yield on obligations of state and political subdivision has not been
computed on a tax equivalent basis.
DEPOSITS
Total deposits at December 31, 2000, 1999 and December 31, 1998 was
$934.6 million, $655.7 million, and $586.3 million, respectively, representing
an increase of $278.9 million or 42.5% in 2000 and, $69.5 million or 11.9% in
1999. The significant increase in 2000 was primarily attributed to increased
marketing at existing branches and the addition of new branches. Also, the
interest increase by the Federal Reserve Board contributed to increased
deposits. This was evidenced in a proportional decrease in demand deposits, off
set by increases in interest-bearing deposits, especially in Time Deposits. At
December 31, 2000, 1999 and 1998, the total time deposits were outstanding at
$530.1 million, $314.2 million and $258.6 million, respectively, representing
increase of $215.9 million or 68.7% in 1999, and $55.6 million or 21.5% in 1999.
The average rate paid on time deposits in denominations of $100,000 or more was
6.03%, 5.78% and 5.47% for the year ended December 31, 2000, 1999, and 1998,
respectively.
Average deposits for the year ended December 31, 2000, 1999 and 1998 were
$783 million, $612.5 million and $485.5 million, respectively. Average deposits
therefore grew by 27.3% in 2000 and 26.2% in 1999.
Deposits are the Company's primary source of funds. As the Company's need
for lendable funds has grown, dependence on time deposits has increased and so
has the interest the Company has paid
35
on time deposits. As the Company'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 the Company's total deposits, but no single
customer had a deposit balance of more than 5% of total deposits at
December 31, 2000.
The Company also accepts brokered deposits on a selective basis at prudent
interest rates to augment deposit growth. Outstanding balances on these brokered
deposits were approximately $20.5 million at December 31, 2000 and, out of this
amount, $495,000 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 branches becomes adequate to meet loan demand without being
supplemented by brokered deposits.
The tables below summarize the distribution of average daily deposits and
the average daily rates paid for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Demand, noninterest-bearing............ $213,606 $194,907 $154,869
Money market........................... 98,114 3.70% 94,506 3.29% 76,155 3.29%
Savings................................ 57,844 4.01% 54,655 3.72% 40,258 4.10%
Time deposits of $100,000 or more...... 167,858 6.03% 105,326 5.78% 92,784 5.47%
Other time deposits.................... 242,791 6.02% 163,058 4.44% 121,469 5.32%
-------- ---- -------- ---- -------- ----
Total deposits......................... $780,213 3.47% $612,452 3.02% $485,535 3.23%
======== ==== ======== ==== ======== ====
The scheduled maturity of the Company's time deposits in denominations of
$100,000 or greater at December 31 of the years indicated:
2000 1999 1998
$100,000 OR MORE -------- -------- --------
Three months or less.......................... $107,504 $ 67,126 $ 63,559
Over three months through six months.......... 63,120 23,736 21,783
Over six months through twelve months......... 53,226 30,859 26,146
Over twelve months............................ 23,734 1,767 3,414
-------- -------- --------
$247,584 $123,488 $114,902
======== ======== ========
INTEREST RATE RISK MANAGEMENT
Interest rate risk, also called market risk, indicates how much the Company
is exposed to the change in market interest rate. Interest rate change affects
the economic value of fixed income assets directly or indirectly. The market
value of fixed income bonds generally moves to the opposite direction of the
change in market interest rates. Interest rate risk management is to decrease or
increase the level of the Company's exposure to market interest rate. 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, the Company 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.
36
If the following table summarizes the most recent status of the Company's
gap position:
AFTER THREE
MONTHS AFTER ONE
BUT YEAR BUT
WITHIN THREE WITHIN WITHIN AFTER NON SENSITIVE
MONTHS ONE YEAR FIVE YEARS FIVE YEARS ACCOUNT TOTAL
------------ ----------- ---------- ---------- ------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from Bank............. $ 68,499 $ 68,499
Securities
Fixed............................ $ 9,126 $ 24,902 $112,089 $ 54,894 $ 201,011
Floating......................... 4,984 4,984
Loans
Fixed............................ 11,819 25,157 64,002 58,634 159,612
Floating......................... 452,936 7,061 12,355 472,352
Nonaccrual....................... 2,159 2,159
Unearned & LLR................... (13,601) (13,601)
Net Loans......................
Commercial paper................... 54,908 54,908
Federal funds sold................. 52,700 52,700
Other assets....................... 2,284 29,702 31,986
-------- ---------- ---------
Total............................ 558,757 57,120 188,446 113,528 86,759 1,034,610
======== ======== ======== ======== ========== =========
Cumulative....................... 588,757 645,877 834,323 947,851 1,034,610
======== ======== ======== ======== ==========
LIABILITIES
Deposit
Demand deposit................... 19,253 74,606 121,918 24,067 239,844
Interest-bearing
Savings........................ 7,098 21,295 39,042 3,550 70,985
Time deposit $100,000 and
over......................... 107,504 116,346 23,641 93 247,584
Other time deposits............ 171,675 107,095 3,794 -- 282,564
Money market checking.......... 7,079 32,155 47,211 7,159 93,604
Accrued interest payable........... 6,379 6,379
Acceptance outstanding............. 2,234 2,234
Other borrowed funds............... 2,302 2,302
Other liabilities.................. 2,718 2,718
-------- ---------
Total............................ 326,242 351,497 235,606 34,869 948,214
======== ======== ======== ======== =========
Shareholders equity................ 86,396 86,396
-------- -------- -------- -------- ---------- ---------
Total............................ 326,242 351,497 235,606 34,869 86,396 1,034,610
-------- -------- -------- -------- ---------- ---------
Cumulative....................... $326,242 $677,739 $913,345 $948,214 $1,034,610
======== ======== ======== ======== ========== =========
Cumulative interest rate
sensitivity gap ratio (based on
total assets).................... 262,515 (31,862) (79,022) (363)
as % of Total Assets............. 25.37% -3.08% -7.64% -0.04%
as % of Earning Assets........... 27.76% -3.37% -8.36% -0.04%
The Company has determined that 90-days and one-year gap positions are the
most important in analyzing on interest rate risk exposure to earnings. Based on
historical trends and performances, the Company has determined that the ratio of
gap to earning assets should be within the range of plus or
37
minus 35% of earning assets within three month and the range of plus or minus
20% within three to twelve months. The Company's internal static gap report
indicated that the one-year gap ratio to earning assets was -3.37% as of
December 31, 2000, which complied with the Company's policy guideline. In three
months, however, the 90-days gap position is highly asset sensitive with 27.76%
of earning assets.
The following table summarizes the most recent status of the Company's gap
position.
LESS THAN 3 MONTHS 3 TO 12 MONTHS
LESS THAN EQUAL TO THE LESS THAN EQUAL TO THE
SUM OF 35% OF SUM OF 20% OF
EARNING ASSETS EARNING ASSETS
----------------------- -----------------------
POLICY GUIDELINES 12/31/00 12/31/99 12/31/00 12/31/99
- ----------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cumulative Repricing................. $262,515 $175,628 $-31,862 $19,913
% of Total Assets.................... 25.37% 23.65% -3.08% 2.68%
% of Earning Assets.................. 27.76% 26.47% -3.37% 3.00%
The Company 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 the Company's financial performance substantially. Accordingly, the Company
tries to ensure capital protection through stable earnings over interest rate
fluctuation. In order to achieve stable earnings, the Company prudently 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 the Company's guidelines.
To supplement traditional gap analysis, the Company performs simulation
modeling to estimate the potential effects of interest rate change. The
following table is one of the stress simulations performed by the Company to
forecast the impact of interest rate change on the Company's net interest income
and economic value of equity over the 12-months period ending December 31, 2000.
Repricing gap analysis measures the static timing of repricing risk of
assets and liabilities. The Gap Analysis Report, as of December 31, 2000, showed
an improved position in the less than three-month position and a shift towards
liability sensitivity in the three to twelve month positions. Static Repricing,
as a percentage of Earnings Assets in the three to twelve month period, went
from 3.00% in 1999 to--3.37% in year 2000. In the three to twelve month period,
investments and loans remained at the similar level while liabilities, fuelled
by increase in demand deposit and certificate of deposit, increased. On the
other hand, as of December 31, 2000, securities and commercial paper in the less
than three-month period was $69 million compared to $34 million as of
December 31, 1999. In the one to five-year period, securities rose to
$112 million, a $59 million increase from the previous year. The Company's
position in the one to five year and the five-year plus periods improved during
the year 2000.
38
HYPOTHETICAL CHANGES IN INTEREST RATES
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
PROJECTED CHANGES(%) CHANGE IN AMOUNT EXPECTED AMOUNT
--------------------------------------------- ------------------- -------------------
ECONOMIC VALUE OF
CHANGE IN NET INTEREST INCOME EQUITY(1) NET ECONOMIC NET ECONOMIC
INTEREST --------------------- --------------------- INTEREST VALUE OF INTEREST VALUE OF
RATE(BPS) GUIDELINE PROJECTED GUIDELINE PROJECTED INCOME EQUITY INCOME EQUITY
- --------- --------- --------- --------- --------- -------- -------- -------- --------
200 25.00% 8.2% -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 -- 0.0% -- 0.0% 0 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
- ------------------------
(1) Defined as the value of all assets and liabilities as well as certain
off-balance sheet items, and the impact of a change in interest rates on the
value of these items.
Under the above stress simulation, for a 100 basis point decline in interest
rate, the Company may be exposed to a 4.2% decline in net interest income but a
12.5% increase in economic value of equity. For a 100 basis point increase in
interest rate, net interest income may increase by 4.3%, but economic 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 economic 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 economic value of equity may increase by 26.2%.
The above simulation as of December 31, 2000 indicate that projected change in
economic value of equity is off the Company's policy guideline when interest
rate decrease by 200 basis point. This was mainly caused by an increase of fixed
mortgage loans by $5.8 million in December 1999.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity of the Company is defined as an ability to supply cash as quickly
as needed without severely deteriorating its profitability. Major liquid assets
of the Company are cash available, federal funds sold and short-term investment
securities included in available for sale, which can be disposed of without
significant capital losses in ordinary business cycle. Liquidity may also be
supported by borrowed funds such as federal fund lines, repurchase agreements
and federal discount window. Thus, maintenance of high quality securities as
collateral for repurchase agreements is another key feature of liquidity
management. Liquidity risk may occur when the Company 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
better understand the Company's liquidity position and to avoid liquidity
crisis.
LIQUIDITY RATIO AND TRENDS
DECEMBER 31
------------------------------
CLASSIFICATION 2000 1999 1998
- -------------- -------- -------- --------
Short-term investments/Total assets......................... 14% 10% 13%
Net loans and standby L/C/Total Assets...................... 60% 64% 51%
Core deposits/Total assets.................................. 67% 74% 74%
Noncore funding/Total assets................................ 24% 14% 16%
Short-term investment/short-term noncore funding
dependence................................................ 60% 67% 85%
39
LIQUIDITY MEASURES
DECEMBER 31
------------------------------------
CLASSIFICATION GUIDELINES 2000 1999 1998
- -------------- ---------- -------- -------- --------
Loans/Deposits....................... Less than 80% 66% 74.2% 58.5%
Investment/Deposits.................. Less than 60% 34% 26.9% 37.1%
Loans & Investment/Deposits.......... Less than 125% 100% 101.1% 95.6%
The Company secures several lines of credit to borrow necessary funds when
liquidity problem may arise. As of December 31, 2000 the Company has federal
fund lines with Union Company of California, Wells Fargo Company, and City
National Company, amounting to $21 million. Also, the Company has several master
repurchase agreements with First Union Capital Market, Banc of America
Securities, Bear Stearns, Union Company of California, Merrill Lynch, Morgan
Stanley Dean Witter, Deutsche Company Securities, Inc., Prudential Securities,
and Societe Generale, which will furnish the liquidity to the Company in
consideration of bond collateral. Since the Company has enough investment
securities for collateral, the Company's management does not expect any problem
to borrow under the master repurchase agreements.
The primary source of capital for the Company for the past several years has
been internally generated capital through retained earnings. Total shareholders'
equity was $86.4 million at December 31, 2000, an increase of $18.6 million or
27% from $67.8 million at December 31, 1999 and an increase of $8.9 million or
15% from $58.9 million at December 31, 1998.
The Company is subject to various regulatory capital requirements
administered by the federal Company 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 the
Company's financial statements and operations. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company'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 the Company to maintain minimum ratios of Total Capital and Tier 1
Capital to total risk-weighted assets, and of 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. The Company had Total
Risk-Based and Tier 1 Risk-Based capital ratios of 12.37% and 13.88%, and 11.11%
and 12.86%, respectively at December 31, 2000 and 1999. The Company's Leverage
Capital Ratio was 8.46% and 9.20% at December 31, 2000 and 1999, respectively.
The Federal Reserve Bank ("FRB") and the California Department of Financial
Institutions (the "DFI") periodically examine the Company. As of December 31,
2000, the most recent notification from the FRB categorized the Company as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company 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 the Company's category.
ACCOUNTING MATTERS
In September 2000, SFAS No. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES", a replacement of FASB
Statement No. 125, was issued. It revises the
40
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of provision of SFAS No. 125 without reconsideration. SFAS No. 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The statement is effective for
recognition and reclassification of collateral and for disclosures related to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. It is not expected that the adoption of SFAS No. 140 will
have a material impact on the Company's results of operations, financial
position, or cash flows.
The Company adopted the provision of Statement of Financial Accounting
Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES", as amended by SFAS Nos. 137 and 138, as of January 1, 2001. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
The adoption of the provision of SFAS No. 133, as amended, did not have a
material impact on the results of operations or the financial position of the
Company.
Effective January 1, 1999, the Company adopted SFAS No. 130, "REPORTING
COMPREHENSIVE INCOME". Under the provisions of SFAS No. 130, an entity that
provides a full set of financial statements is required to report comprehensive
income in the presentation of its financial statements. The term "comprehensive
income" describes the total of all components of comprehensive income including
net income. "Other comprehensive income" refers to revenue, expense, and gain
and losses that are included in comprehensive income but are excluded from net
income as they have been recorded directly in equity under the provisions of
other FASB statements. The Company selected to present the comprehensive income
disclosure as a part of the statements of changes in stockholders' equity, by
identifying all of the elements of other comprehensive income including net
income. All comparative financial statements presented have been reclassified to
reflect application of the provisions of SFAS No. 130.
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "EARNINGS PER SHARE." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to all entities
with publicly held common stock. This statement provides a presentation of basic
EPS and diluted EPS. Basic EPS excludes dilution and 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.
IMPACT OF INFLATION; SEASONALITY
The primary impact of inflation on the Company is its effect on interest
rates. The Company's primary source of income is net interest income, which is
affected by changes in interest rates. The Company 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. The
Company's business is generally not seasonal.
41
FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-K constitute forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity,
performance or achievements to differ from those expressed or implied by the
forward-looking statement. These factors include the following:
- General economic and business conditions in those areas in which the
Company operates and in Asia;
- Demographic changes;
- Competition for loans and deposits;
- Fluctuations in interest rates;
- Risks of natural disasters related to the Company's real estate portfolio;
- Risks associated with SBA Loans;
- Changes in governmental regulation;
- Credit quality;
- The availability of capital to fund the expansion of the Company's
business; and
- Changes in the securities markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in the
Hanmi Bank's portfolio, see, "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations--Interest Rate Risk
Management and Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be filed as a part of this report are
set forth on pages 44 through 68.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of Hanmi Financial is incorporated by reference from the
section entitled "Election of Directors" of the Hanmi Financial's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on April 18,
2001 and which will be filed with the Commission within 120 days after the close
of the Hanmi Financial fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the section entitled "Executive Compensation" of the Hanmi Financial
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
April 18, 2001 and which will be filed with the Commission within 120 days after
the close of the Hanmi Financial fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the sections entitled "Beneficial
Ownership of Principal Stockholders and Management" of the Hanmi Financial's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
April 18, 2001 and which will be filed with the Commission within 120 days after
the close of the Hanmi Financial fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference from the section entitled "Certain Transactions" of
the Hanmi Financial definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 18, 2001 and which will be filed with the
Commission within 120 days after the close of the Hanmi Financial fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The Financial Statements required to be filed hereunder are
listed in the Index to Financial Statements on page 44 of this report.
(2) The following additional information for the years 2000, 1999 and
1998 is submitted herewith:
All schedules are omitted because they are not applicable, not material
or because the information is included in the financial statements or the
notes thereto.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2000.
(c) The Exhibits required to be filed with this report are listed in the
exhibit index included herein at page 70.
43
HANMI FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Independent Auditors' Report................... 45
Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999................................ 46
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... 47
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998...... 48
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 50
Notes to Consolidated Financial Statements.................. 51
44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hanmi Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of Hanmi Financial Corporation and subsidiary as of December 31, 2000
and 1999 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of Hanmi Financial Corporation's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
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
consolidated 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 consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Hanmi Financial
Corporation and subsidiary as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
February 16, 2001
45
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
2000 1999
-------------- ------------
ASSETS
Cash and due from banks................................... $ 68,499,310 $ 53,476,084
Federal funds sold and securities purchased under resale
agreements (Note 2)..................................... 52,700,000 10,000,000
Short-term commercial paper............................... 54,907,810
-------------- ------------
Cash and cash equivalents............................... 176,107,120 63,476,084
Interest-bearing deposits in other financial
institutions............................................ 100,000
Federal Reserve Bank stock................................ 1,954,350 1,686,400
Federal Home Loan Bank stock.............................. 693,290
Securities held to maturity, at amortized cost (fair
value: 2000--$22,196,256; 1999--$66,096,359)
(Note 3)................................................ 22,327,268 66,223,744
Securities available for sale, at fair value (Note 3)..... 183,667,407 105,014,142
Interest-only strips--at fair value....................... 393,611 352,330
Loans receivable, net of allowance for loan losses:
2000--$11,975,589; 1999--$10,623,544 (Note 4)........... 607,675,521 456,149,108
Loans held for sale, at the lower of cost or market....... 12,846,294 18,500,604
Customers' liability on acceptances....................... 2,233,936 1,829,140
Premises and equipment, net (Note 5)...................... 6,689,372 8,939,038
Accrued interest receivable............................... 6,851,654 4,961,222
Deferred income taxes, net (Note 7)....................... 5,060,456 5,607,888
Servicing asset........................................... 1,555,765 1,500,171
Goodwill and intangible assets............................ 2,432,218 2,680,012
Other assets.............................................. 4,121,819 3,239,562
-------------- ------------
TOTAL....................................................... $1,034,610,081 $740,259,445
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6):
Noninterest-bearing....................................... $ 239,843,517 $193,164,758
Interest-bearing:
Savings................................................. 70,984,726 54,416,283
Time deposits of $100,000 or more....................... 247,584,281 123,487,676
Other time deposits..................................... 282,564,457 190,699,245
Money market checking................................... 93,604,222 93,962,062
-------------- ------------
Total deposits........................................ 934,581,203 655,730,024
Accrued interest payable.................................. 6,379,466 3,156,828
Acceptances outstanding................................... 2,233,936 1,829,140
Securities sold under repurchase agreement................ 5,891,500
Treasury, tax, and loan remittances....................... 2,301,839 4,500,000
Other liabilities......................................... 2,717,610 1,321,166
-------------- ------------
Total liabilities..................................... 948,214,054 672,428,658
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
SHAREHOLDERS' EQUITY (Notes 3, 8, and 9):
Preferred stock--$.001 par value; authorized, 10,000,000
shares; issued and outstanding, none.................... -- --
Common stock--$.001 par value; authorized, 50,000,000
shares; issued and outstanding, 7,434,457 shares in 2000
and 6,679,670 shares in 1999............................ 7,434 6,680
Additional paid-in capital................................ 65,415,033 56,205,347
Accumulated other comprehensive income:
Unrealized loss on securities available for sale, net of
taxes of $(174,017) and $(2,009,445) in 2000 and 1999,
respectively........................................... (243,591) (3,078,544)
Unrealized gain (loss) on interest-only strip, net of
taxes of $(39,365) and $8,981 in 2000 and 1999,
respectively........................................... (55,035) 13,471
Retained earnings......................................... 21,272,186 14,683,833
-------------- ------------
Total shareholders' equity............................ 86,396,027 67,830,787
-------------- ------------
TOTAL....................................................... $1,034,610,081 $740,259,445
============== ============
See accompanying notes to consolidated financial statements.
46
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
INTEREST INCOME:
Interest and fees on loans................................ $57,516,377 $39,684,335 $30,820,739
Interest on securities and interest-bearing deposits in
other financial institutions............................ 11,738,334 11,606,223 9,998,676
Interest on federal funds sold and securities purchased
under agreements to resell.............................. 3,260,720 1,328,467 1,908,906
----------- ----------- -----------
Total interest income................................... 72,515,431 52,619,025 42,728,321
INTEREST EXPENSE (Notes 6 and 12)........................... 30,891,239 18,846,862 15,730,176
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES........ 41,624,192 33,772,163 26,998,145
PROVISION FOR LOAN LOSSES (Note 4).......................... 2,250,000 1,000,000 3,050,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 39,374,192 32,772,163 23,948,145
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts....................... 8,957,219 8,373,867 6,065,793
Gain on sale of loans..................................... 1,232,787 894,854 1,321,767
Gain on sale of securities................................ 177,642 238,465
Gain on sale of fixed assets.............................. 1,112,150 6,714
Loan servicing income..................................... 1,275,760 1,094,208 1,008,104
Other service charges and fees............................ 1,749,916 1,642,048 1,508,029
Other income.............................................. 383,040 339,089 156,397
----------- ----------- -----------
Total noninterest income................................ 14,710,872 12,521,708 10,305,269
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits (Note 11).................. 14,248,029 12,368,596 10,712,087
Occupancy and equipment (Note 13)......................... 3,248,778 2,678,406 2,494,536
Other real estate owned................................... 27,011 102,136
Data processing........................................... 2,067,190 1,977,788 1,460,214
Deposit insurance premiums................................ 166,818 75,351 67,429
Professional fees......................................... 932,983 1,099,248 934,164
Advertising............................................... 1,721,046 1,419,798 1,010,932
Office supplies........................................... 847,251 725,488 496,256
Communications............................................ 503,870 409,078 328,396
Other operating........................................... 4,038,230 3,825,369 2,175,867
----------- ----------- -----------
Total noninterest expenses.............................. 27,774,195 24,606,133 19,782,017
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 26,310,869 20,687,738 14,471,397
INCOME TAX PROVISION (Note 7)............................... 10,787,456 8,682,000 5,207,000
----------- ----------- -----------
NET INCOME.................................................. $15,523,413 $12,005,738 $ 9,264,397
=========== =========== ===========
EARNINGS PER SHARE (Note 8):
Basic..................................................... $ 2.09 $ 1.62 $ 1.31
Diluted................................................... $ 2.08 $ 1.62 $ 1.31
See accompanying notes to consolidated financial statements.
47
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF SHARES COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
OUTSTANDING STOCK CAPITAL EARNINGS INCOME (LOSS) INCOME
----------- -------- ----------- ----------- -------------- --------------
BALANCE, JANUARY 1, 1998................ 5,307,638 $5,308 $38,338,689 $ 9,989,704 $ 2,172
Stock options exercised............... 210,870 211 1,026,237
Stock dividend........................ 477,546 477 7,668,912 (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 5,996 47,033,838 11,582,236 352,361
Stock options exercised............... 24,198 24 270,026
Stock dividend........................ 659,418 660 8,901,483 (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 6,680 56,205,347 14,683,833 (3,065,073)
Stock bonus........................... 20,271 20 278,705
Stock dividend........................ 734,516 734 8,930,981 (8,935,060)
Comprehensive income:
Net income.......................... 15,523,413 $15,523,413
Change in unrealized gain on
securities available for sale, net
of tax............................ 2,834,953 2,834,953
Change in unrealized gain on
interest-only strips, net of
tax............................... (68,506) (68,506)
-----------
Total comprehensive income........ $18,289,860
---------- ------ ----------- ----------- ---------- ===========
BALANCE, DECEMBER 31, 2000.............. 7,434,457 $7,434 $65,415,033 $21,272,186 $ (298,626)
========== ====== =========== =========== ==========
(Continued)
See accompanying notes to consolidated financial statements.
48
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---------- ----------- --------
Disclosures of reclassification amounts for December 31:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during period,
net of tax expense (benefit) of $1,827,798 in 2000,
$(2,298,335) in 1999, and $333,960 in 1998.......... $2,834,953 $(3,307,360) $480,576
Less reclassification adjustment for gain 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 for
sale, net of tax expense (benefit) of $1,827,798 in
2000, $(2,371,168) in 1999, and $236,189 in 1998.... $2,834,953 $(3,412,169) $339,882
========== =========== ========
Unrealized gain (loss) on interest-only strips:
Unrealized holding gain arising during period, net of
tax (benefit) expense of $(59,287) in 2000, $(4,910)
in 1999, and $7,810 in 1998......................... $ (84,250) $ (7,366) $ 9,376
Less reclassification adjustment for loss included
in net income, net of tax benefit of $(10,941) in
2000,
$(1,460) in 1999, and $(647) in 1998................ (15,744) (2,101) (931)
---------- ----------- --------
Net change in unrealized gain (loss) on interest-only
strips, net of tax (benefit) expense of $(48,346) in
2000,
$(3,510) in 1999, and $7,163 in 1998................ $ (68,506) $ (5,265) $ 10,307
========== =========== ========
(Concluded)
See accompanying notes to consolidated financial statements.
49
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 15,523,413 $ 12,005,738 $ 9,264,397
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation and amortization........................... 610,613 1,592,658 1,537,907
Provision for loan losses............................... 2,250,000 1,000,000 3,050,000
Provision for other real estate owned losses............ 9,000 20,000
Deferred tax provision.................................. (1,232,020) (912,464) (387,356)
Stock compensation expense.............................. 278,725
Gain on sale of securities.............................. (177,642) (238,465)
(Gain) loss on disposition of premises and equipment.... (1,112,150) 23,283 (6,714)
Gain on sale of loans................................... (1,232,787) (894,854) (1,321,767)
Origination of loans held for sale...................... (15,804,455) (28,708,415) (16,190,714)
Proceeds from sale of loans held for sale............... 22,691,552 13,504,693 15,110,453
(Gain) loss on sale of other real estate owned.......... (47,325) (14,084) 22,644
Increase in accrued interest receivable................. (1,890,432) (311,022) (493,937)
(Increase) decrease in other assets..................... (960,303) 694,530 (1,158,052)
Increase (decrease) in accrued interest payable......... 3,222,638 (67,974) 964,137
Increase in other liabilities........................... 1,396,444 611,951 600,377
------------- ------------- -------------
Net cash and cash equivalents provided by (used in)
operating activities................................. 23,693,913 (1,644,602) 10,772,910
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable.......................... (154,341,755) (128,767,854) (744,896)
Purchase of Federal Reserve Bank stock.................... (267,950) (275,200) (260,850)
Purchase of Federal Home Loan Bank stock.................. (693,290)
Proceeds from interest-bearing deposits................... 100,000 2,081,000 1,090,000
Proceeds from matured, sold, or called securities
available for sale...................................... 17,467,591 19,908,245 35,124,879
Proceeds from matured or called securities held to
maturity................................................ 45,899,341 58,349,387 57,054,032
Purchases of securities available for sale................ (90,881,949) (20,960,263) (137,039,672)
Purchases of securities held to maturity.................. (1,977,672) (16,380,006) (25,966,208)
Proceeds from sale of other real estate owned............. 612,667 1,178,242 83,481
(Increase) decrease in interest-only strips............... (135,681) 42,913 (221,437)
Purchases of premises and equipment....................... (1,927,238) (719,722) (685,926)
Proceeds from disposition of premises and equipment....... 4,324,886 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........................................... (181,821,050) (85,493,758) (48,854,753)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................. 278,851,179 69,445,809 61,977,344
(Payment of) proceeds from securities sold under
repurchase agreements................................... (5,891,500) 5,891,500
(Payment of) proceeds from treasury, tax, and loan
remittances............................................. (2,198,161) 4,279,717
Cash paid for fractional shares on dividends.............. (3,345) (1,998) (2,476)
Proceeds from exercise of stock option.................... 270,050 1,026,448
------------- ------------- -------------
Net cash and cash equivalents provided by
financing activities................................ 270,758,173 79,885,078 63,001,316
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.......................................... 112,631,036 (7,253,282) 24,919,473
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR......................................... 63,476,084 70,729,366 45,809,893
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 176,107,120 $ 63,476,084 $ 70,729,366
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 27,668,602 $ 18,914,836 $ 14,766,039
Income taxes paid......................................... $ 10,600,000 $ 8,450,000 $ 5,387,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Transfer of loans to other real estate owned.............. $ 565,342 $ 502,658 $ 796,625
Transfer of retained earnings to common stock
and additional paid-in capital for stock dividend....... $ 8,935,060 $ 8,904,141 $ 7,671,865
See accompanying notes to consolidated financial statements.
50
HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Hanmi Financial Corporation and
subsidiary are in accordance with accounting principles generally accepted in
the United States of America and conform to practices within the banking
industry. A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Hanmi Financial Corporation (the "Company") and its wholly owned
subsidiary, Hanmi Bank (the "Bank"), after elimination of all material
intercompany transactions and balances.
The Company was formed as a holding company of the Bank and registered with
the Securities and Exchange Commission under the Securities Act of 1933 on
March 17, 2000. Subsequent to the formation of the Company, each of the Bank's
shares was exchanged for one share of the Company with an equal value.
The Company's primary operations are related to traditional banking
activities, including the acceptance of deposits and the lending and investing
of money through operation of the Bank. The Bank is a California
state-chartered, FDIC-insured financial institution. The Bank maintains a branch
network of eleven locations, serving individuals and small- to medium-sized
businesses in Los Angeles and surrounding areas.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and due
from banks, federal funds sold, securities purchased under resale agreements,
and short-term commercial paper, all of which have maturities of 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 Company 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
51
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 estimated life of the loan as an adjustment to
yield. Upon sales of such loans, the Company 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 a range of 11 percent to 12 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 Company has
capitalized $374,870 and $357,286 of servicing assets at December 31, 2000 and
1999, respectively, and amortized $319,276, $357,311, and $181,666 during the
years ended December 31, 2000, 1999, and 1998, respectively. Management
periodically evaluates the servicing asset for impairment. Impairment, if it
occurs, is recognized in a valuation allowance in the period of impairment.
Interest-only strips are recorded based on the present value of the excess
of total servicing fee over the contractually specified servicing fee for the
estimated life of the loan, calculated using the same assumptions as noted
above. Such interest-only strips are accounted for at the estimated fair value,
with unrealized gains or losses recorded as adjustments 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 Company 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
52
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.
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 consolidated financial
statements.
STOCK-BASED COMPENSATION--Compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock. Pro
forma disclosure of net income and earnings per share is provided as if the fair
value-based method had been applied (Note 8).
EARNINGS PER SHARE--Basic earnings per share ("EPS") is computed by dividing
earnings available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings. EPS data for 1999 and
1998 was retroactively restated reflecting the 2000 stock dividend.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company 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 accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS--The Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and
138, as of January 1, 2001. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The adoption of the provisions of SFAS No. 133, as amended,
did not have a material impact on the results of operations or the financial
position of the Company.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," a replacement of FASB
Statement No. 125, was issued. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without reconsideration. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The statement is effective for recognition and reclassification
of collateral and for disclosures related to securitization transactions and
collateral for fiscal years ending after December 15, 2000. It is not expected
that the adoption of SFAS No. 140 will have a material impact on the Company's
results of operations, financial position, or cash flows.
53
RECLASSIFICATIONS--Certain reclassifications were made to the prior year's
presentation to conform to the current year's presentation.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company purchases government agency securities under agreements to
resell the same securities ("reverse repurchase agreement") with primary
dealers. Amounts advanced under these agreements represent short-term invested
cash. Securities subject to the reverse repurchase agreements are held in the
name of the Company by dealers who arrange the transactions.
In the event that the fair market value of securities decreases below the
carrying amount of the related reverse repurchase agreement, the counterparties
are required to designate an equivalent value of additional securities in the
name of the Company.
The balance outstanding with the primary dealers, who also held the
designated collateral underlying such agreements, was $10,000,000 at
December 31, 2000, all of which the Company agreed to resell on February 5,
2001. The largest balance outstanding during 2000 was $10,000,000, and the
average interest rate received during 2000 was 6.46 percent. The average balance
outstanding during 2000 was $10,000,000.
3. SECURITIES
The following is a summary of the securities held to maturity at
December 31:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ---------- ------------ -----------
2000
Corporate bonds............................. $12,584,473 $ 163,130 $12,421,343
Municipal bonds............................. 3,815,545 $ 29,593 3,845,138
Mortgage-backed securities.................. 4,291,382 2,278 4,289,104
Assets-backed securities.................... 1,635,868 4,803 1,640,671
----------- -------- ------------ -----------
$22,327,268 $ 34,396 $ 165,408 $22,196,256
=========== ======== ============ ===========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ---------- ----------- -----------
1999
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
=========== ======== =========== ===========
54
The following is a summary of securities available for sale at December 31:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
2000 COST GAIN LOSS VALUE
- ---- ------------ ---------- ----------- ------------
U.S. agencies...................... $ 65,011,480 $ 872,794 64,138,686
Corporate bonds.................... 44,371,985 $124,488 44,496,473
Municipal bonds.................... 20,657,828 105,602 20,763,430
Mortgage-backed securities......... 10,996,868 61,823 10,935,045
Collateralized mortgage
obligation....................... 43,046,854 286,919 43,333,773
------------ -------- ----------- ------------
$184,085,015 $517,009 $ 934,617 $183,667,407
============ ======== =========== ============
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
============ ======== ========== ============
The amortized cost and estimated fair value of securities at December 31,
2000, 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
2000 COST FAIR VALUE
- ---- ------------ ------------
Held to maturity:
Due within one year.................................... $ 2,540,085 $ 2,545,658
Due after one year through five years.................. 12,356,758 12,213,541
Due after five years through ten years................. 5,406,626 5,403,644
Due after ten years.................................... 2,023,799 2,033,413
------------ ------------
$ 22,327,268 $ 22,196,256
============ ============
Available for sale:
Due within one year.................................... $ 7,030,428 $ 6,998,294
Due after one year through five years.................. 117,489,786 118,062,654
Due after five years through ten years................. 41,377,936 40,518,450
Due after ten years.................................... 18,186,865 18,088,009
------------ ------------
$184,085,015 $183,667,407
============ ============
Securities with carrying values of approximately $75,608,000 and $12,057,200
at December 31, 2000 and 1999, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
At December 31, 2000, the Company held a Southern California Edison ("SCE")
corporate bond in its held to maturity portfolio with amortized cost of
approximately $1,000,000. On January 15, 2001, such investment matured, and SCE
defaulted on the repayment. The Company wrote down its cost basis on the
investment to fair value, recognizing a loss of approximately $3,000 at
December 31, 2000, as the Company's management considered such decline of market
value as an other than temporary condition.
55
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable consist of the following at December 31:
2000 1999
------------ ------------
Commercial loans......................................... $378,246,515 $260,455,798
Real estate loans........................................ 204,544,860 169,142,247
Installment loans........................................ 38,485,921 38,682,397
------------ ------------
621,277,296 468,280,442
Allowance for loan losses................................ (11,975,589) (10,623,544)
Deferred loan fees....................................... (1,626,186) (1,507,790)
------------ ------------
Loans receivable, net.................................... $607,675,521 $456,149,108
============ ============
At December 31, 2000 and 1999, the Company serviced loans sold to
unaffiliated parties in the amounts of approximately $66,983,000 and
$54,413,000, respectively.
Management believes that, as of December 31, 2000, 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 Company'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, 2000 and 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:
2000 1999 1998
----------- ----------- -----------
Balance, beginning of year.................... $10,623,544 $10,423,425 $ 9,346,879
Provision for loan losses..................... 2,250,000 1,000,000 3,050,000
Allowance acquired in business acquisition.... 1,305,249
Loans charged off............................. (1,782,054) (2,001,442) (4,486,253)
Recoveries of charge-offs..................... 884,099 1,201,561 1,207,550
----------- ----------- -----------
Balance, end of year.......................... $11,975,589 $10,623,544 $10,423,425
=========== =========== ===========
At December 31, 2000 and 1999, the Company had classified approximately
$5,764,000 and $3,721,000, respectively, of its loans as impaired with specific
reserves of $1,625,429 and $1,206,283, respectively. Impaired loans without
specific reserves at December 31, 1999 were approximately $155,000. There were
no impaired loans without specific reserves at December 31, 2000. The average
recorded investment in impaired loans during the years ended December 31, 2000,
1999, and 1998 approximated $11,012,000, $5,746,000, and $7,956,000,
respectively. Interest income of approximately $1,123,000, $585,000, and
$572,000 was recognized on impaired loans during the years ended December 31,
2000, 1999, and 1998, respectively.
56
The following is an analysis of all loans to officers and directors of the
Company and their affiliates. All such loans were made under terms that are
consistent with the Company's normal lending policies.
2000 1999
----------- ----------
Outstanding balance, beginning of year...................... $ 7,753,456 $4,440,405
Credit granted, including renewals.......................... 323,841 3,485,574
Repayments.................................................. (1,041,532) (172,523)
----------- ----------
Outstanding balance, end of year............................ $ 7,035,765 $7,753,456
=========== ==========
Income from these loans totaled approximately $712,304 and $667,909 for the
years ended December 31, 2000 and 1999, respectively, and is reflected in the
accompanying consolidated statements of operations.
5. PREMISES AND EQUIPMENT
The following is a summary of the major components of premises and equipment
as of December 31:
2000 1999
----------- -----------
Land....................................................... $ 1,819,884 $ 3,653,319
Building and building improvements......................... 3,011,965 5,294,787
Furniture and equipment.................................... 5,341,139 4,901,549
Leasehold improvements..................................... 3,587,894 2,485,176
----------- -----------
13,760,882 16,334,831
Accumulated depreciation and amortization.................. (7,071,510) (7,395,793)
----------- -----------
$ 6,689,372 $ 8,939,038
=========== ===========
6. DEPOSITS
Time deposits by maturity are as follows at December 31, 2000 and 1999:
2000 1999
------------ ------------
Less than three months................................... $243,483,339 $158,214,065
After three to six months................................ 144,843,606 74,106,190
After six months to twelve months........................ 114,293,826 78,512,613
After twelve months...................................... 27,527,967 3,354,053
------------ ------------
Total.................................................... $530,148,738 $314,186,921
============ ============
57
A summary of interest expense on deposits is as follows for the years ended
December 31, 2000, 1999, and 1998:
2000 1999 1998
----------- ----------- -----------
Money market checking................. $ 3,842,458 $ 3,478,708 $ 2,511,924
Savings............................... 2,321,773 2,034,758 2,111,181
Time deposits of $100,000 or more..... 10,113,544 6,090,687 4,696,245
Other time deposits................... 14,613,464 7,242,709 6,410,826
----------- ----------- -----------
Total................................. $30,891,239 $18,846,862 $15,730,176
=========== =========== ===========
7. INCOME TAXES
A summary of income tax provision (benefit) for 2000, 1999, and 1998
follows:
2000 1999 1998
----------- ----------- ----------
Current:
Federal............................... $ 9,248,931 $ 7,578,454 $4,535,301
State................................. 2,770,545 2,016,010 1,059,055
----------- ----------- ----------
12,019,476 9,594,464 5,594,356
----------- ----------- ----------
Deferred:
Federal............................... (1,149,826) (1,004,360) (324,207)
State................................. (82,194) 91,896 (63,149)
----------- ----------- ----------
(1,232,020) (912,464) (387,356)
----------- ----------- ----------
Provision for income taxes.............. $10,787,456 $ 8,682,000 $5,207,000
=========== =========== ==========
As of December 31, 2000 and 1999, the federal and state deferred tax assets
(liabilities) are as follows:
2000 1999
---------- ----------
Deferred tax assets:
Loan loss provision................................ $4,116,623 $2,979,637
Unrealized loss on available-for-sale and
interest-only securities......................... 213,382 1,992,834
Depreciation....................................... 264,197 457,424
State taxes........................................ 750,995 515,675
---------- ----------
5,345,197 5,945,570
---------- ----------
Deferred tax liabilities:
Purchase accounting................................ (248,182) (252,257)
Others............................................. (36,559) (85,425)
---------- ----------
(284,741) (337,682)
---------- ----------
$5,060,456 $5,607,888
========== ==========
58
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:
2000 1999 1998
-------- -------- --------
Statutory tax (benefit) rate............................ 35.0% 35.0% 35.0%
State taxes, net of federal tax benefits................ 6.8 6.6 4.5
Other................................................... (0.8) 0.4 (3.5)
---- ---- ----
41.0% 42.0% 36.0%
==== ==== ====
8. SHAREHOLDERS' EQUITY
The Bank adopted a Stock Option Plan (the "Plan") in 1992, which was
replaced by the Hanmi Financial Corporation Year 2000 Stock Option Plan, under
which options to purchase shares of the Company's common stock may be granted to
key employees. The Plan provides that the option price shall not be less than
the fair value of the Company's stock on the effective date of the grant. After
ten years from grant, all unexercised options will expire.
The following is a summary of the transactions under the stock option plan
described above:
2000 1999 1998
--------------------- --------------------- ---------------------
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..... 247,359 $13.75 162,955 $15.96 372,610 $11.16
Prorate effect on options, due to
stock dividend........................... 27,210 12.39 17,925 14.38 33,535 10.24
Options granted............................ 250,000 14.25 122,735 15.15
Options exercised.......................... (24,198) 11.16 (210,990) 4.87
Options cancelled/expired.................. (19,158) 13.43 (32,058) 14.03 (32,200) 16.51
------- -------- --------
Options outstanding, end of year........... 505,411 13.27 247,359 13.75 162,955 15.96
======= ======== ========
Options exercisable at year-end............ 169,306 12.07 139,941 13.39 71,133 15.67
======= ======== ========
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------------------- ----------- ----------- -------- ----------- --------
$11.45 - $12.48 188,811 7.24 years $ 11.69 133,786 $11.58
$13.29 33,300 8.83 13.29 22,200 13.29
$14.25 - $14.86 283,300 9.59 14.32 13,320 14.86
---------- -------
505,411 8.66 years 13.27 169,306 12.07
========== =======
Had compensation cost for the Company'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
59
SFAS No. 123, the Company's net income and earnings per share for the years
ended December 31, 2000, 1999, and 1998 would have been reduced to the pro forma
amounts indicated below:
2000 1999 1998
----------- ----------- ----------
Net income:
As reported.......................... $15,523,413 $12,005,738 $9,264,397
Pro forma............................ $15,341,482 $11,677,320 $9,153,644
Earnings per share:
As reported:
Basic.............................. $ 2.09 $ 1.62 $ 1.31
Diluted............................ $ 2.08 $ 1.62 $ 1.31
Pro forma:
Basic.............................. $ 2.07 $ 1.58 $ 1.29
Diluted............................ $ 2.06 $ 1.57 $ 1.29
The estimated fair value of options granted was $4.01 per share in 2000 and
$3.86 per share in 1999. No options were granted in 1998.
The weighted-average fair value of options granted under the Company's fixed
stock option plan in 2000 and 1999 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, expected volatility of 14 percent and
21 percent in 2000 and 1999, respectively, expected lives of five years and
three to five years in 2000 and 1999, respectively, and risk-free interest rate
of 6.10 percent and 6.37 percent in 2000 and 1999, respectively.
9. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking regulatory agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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, 2000 and 1999,
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Bank must maintain minimum total risk-based, Tier 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.
60
The actual capital ratios of the Company and the Bank at December 31 are as
follows:
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------- ----------------------------------------
AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -----------------------------
(DOLLARS IN THOUSANDS)
As of December 31, 2000:
Total capital (to
risk-weighted assets)
Company.................. $93,565 12.37% $60,511 greater than/equal to 8.0%
Bank..................... $92,835 12.27% $60,528 greater than/equal to 8.0%
Tier I capital (to
risk-weighted assets)
Company.................. $84,078 11.11% $30,271 greater than/equal to 4.0%
Bank..................... $83,348 11.02% $30,253 greater than/equal to 4.0%
Tier I capital (to average
assets)
Company.................. $84,078 8.46% $39,753 greater than/equal to 4.0%
Bank..................... $83,348 8.39% $39,736 greater than/equal to 4.0%
As of December 31, 1999:
Total capital (to
risk-weighted assets)
Bank..................... $74,967 13.88% $43,207 greater than/equal to 8.0%
Tier I capital (to
risk-weighted assets)
Bank..................... $68,216 12.63% $21,603 greater than/equal to 4.0%
Tier I capital (to average
assets)
Bank..................... $68,216 9.20% $29,648 greater than/equal to 4.0%
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------------------------------
AMOUNT RATIO
-------- ------------------------------
(DOLLARS IN THOUSANDS)
As of December 31, 2000:
Total capital (to
risk-weighted assets)
Company.................. N/A
Bank..................... $75,660 greater than/equal to 10.0%
Tier I capital (to
risk-weighted assets)
Company.................. N/A
Bank..................... $45,380 greater than/equal to 6.0%
Tier I capital (to average
assets)
Company.................. N/A
Bank..................... $49,671 greater than/equal to 5.0%
As of December 31, 1999:
Total capital (to
risk-weighted assets)
Bank..................... $54,008 greater than/equal to 10.0%
Tier I capital (to
risk-weighted assets)
Bank..................... $32,405 greater than/equal to 6.0%
Tier I capital (to average
assets)
Bank..................... $37,059 greater than/equal to 5.0%
The average reserve balances required to be maintained with the Federal
Reserve Bank were approximately $1,141,244 and $9,235,550 for the years ended
December 31, 2000 and 1999, respectively.
61
10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators
(adjusted for the 2000 stock dividend) of the basic and diluted per share
computations at December 31, 2000, 1999, and 1998:
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
2000
Basic EPS--
Income available to common shareholders................ $15,523,413 7,423,405 $ 2.09
Effect of Dilutive Securities--
Options................................................ 23,191 (0.01)
----------- --------- ------
Diluted EPS--
Income available to common shareholders................ $15,523,413 7,446,596 $ 2.08
=========== ========= ======
1999
Basic EPS--
Income available to common shareholders................ $12,005,738 7,401,261 $ 1.62
Effect of Dilutive Securities--
Options................................................ 21,085
----------- --------- ------
Diluted EPS--
Income available to common shareholders................ $12,005,738 7,422,346 $ 1.62
=========== ========= ======
1998
Basic EPS--
Income available to common shareholders................ $ 9,264,397 7,081,136 $ 1.31
Effect of Dilutive Securities--
Options................................................ 2,094
----------- --------- ------
Diluted EPS--
Income available to common shareholders................ $ 9,264,397 7,083,230 $ 1.31
=========== ========= ======
11. RETIREMENT PLAN
The Company 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 2000, 1999,
and 1998.
The Company matches 75 percent of participant contributions to the 401(k)
plan up to 8 percent of each 401(k) plan participants' annual compensation. The
Company made contributions to the 401(k) plan for the years ended December 31,
2000, 1999, and 1998 of approximately $383,000, $254,000, and $190,000,
respectively.
12. DERIVATIVE FINANCIAL INSTRUMENTS
At December 31, 2000, the Bank has two off-balance-sheet interest rate swap
agreements, wherein the Bank receives fixed interest rates of 7.25 percent and
7.5 percent, at monthly and semiannual intervals, respectively, and pays
one-month LIBOR-based floating rates, at monthly intervals on both, on notional
amounts of $10,000,000 each. At December 31, 2000, the one-month LIBOR-based
floating rates were 6.54 percent and 6.61 percent. Net interest income from the
interest rate swaps was
62
$119,673 for the year ended December 31, 2000. These contracts are scheduled to
mature in August 2005 and September 2005, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases its premises under noncancelable operating leases. At
December 31, 2000, future minimum rental commitments under these leases and
other operating leases are as follows:
YEAR AMOUNT
- ---- -----------
2001................................................... $ 1,661,662
2002................................................... 1,493,396
2003................................................... 1,383,782
2004................................................... 935,635
2005................................................... 749,853
Thereafter............................................. 7,244,576
-----------
$13,468,904
===========
Rental expense recorded under such leases in 2000, 1999, and 1998 amounted
to approximately $1,287,000, $1,112,000, and $971,000, respectively.
In the normal course of business, the Company is involved in various legal
claims. Management has reviewed all legal claims against the Company 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 Company.
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, 2000 and 1999, the Bank had commitments to extend credit of
approximately $92,540,000 and $70,208,000, obligations under standby letters of
credit of approximately $5,533,000 and $3,277,000, commercial letters of credit
of approximately $25,496,000 and $19,433,000, and commitments for credit card
loans of approximately $2,004,000 and $1,554,000, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company 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.
63
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts the Company 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, 2000 DECEMBER 31, 1999
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents........... $176,107,120 $176,107,120 $ 63,476,084 $ 63,476,084
Interest-bearing deposits in other
financial institutions............ 100,000 100,000
Federal Reserve Bank stock.......... 1,954,350 1,954,350 1,686,400 1,686,400
Federal Home Loan Bank stock........ 693,290 693,290
Securities held to maturity......... 22,327,268 22,196,256 66,223,744 66,096,359
Securities available for sale....... 183,667,407 183,667,407 105,014,142 105,014,142
Interest-only strips................ 393,611 393,611 352,330 352,330
Loans receivable, net............... 607,675,521 611,050,000 456,149,108 445,341,000
Loans held for sale................. 12,846,294 13,553,000 18,500,604 19,794,000
Accrued interest receivable......... 6,851,654 6,851,654 4,961,222 4,961,222
Interest rate swaps gain............ 23,609
Liabilities:
Noninterest-bearing deposits........ $239,843,517 $239,843,517 $193,164,758 $193,164,758
Interest-bearing deposits........... 694,737,686 706,408,000 462,565,266 452,782,000
Securities sold under repurchase
agreement......................... 5,891,500 5,891,500
Treasury, tax, and loan
remittances....................... 2,301,839 2,301,839 4,500,000 4,500,000
Accrued interest payable............ 6,379,466 6,379,466 3,156,828 3,156,828
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 instruments.
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 Company 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 discount rates that approximate the pricing of loans
collateralized by similar commercial properties. The fair value of nonperforming
loans at December 31, 2000 and 1999 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.
64
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.
FEDERAL HOME LOAN BANK STOCK--The carrying amount approximates fair value,
as the stocks may be sold back to the Federal Home Loan 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, 2000 and 1999.
INTEREST RATE SWAPS GAIN--The fair value of interest rate swaps is based on
the quoted market prices obtained from an independence pricing service.
The fair value estimates presented herein are based on pertinent information
available to management at December 31, 2000 and 1999. 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 consolidated financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
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)
2000
Net interest income............................... $9,404 $10,368 $10,370 $11,482
Provision for credit losses....................... 400 600 600 650
Net income........................................ 3,660 3,753 3,847 4,263
Basic earnings per common share................... 0.49 0.51 0.52 0.57
Diluted earnings per share........................ 0.49 0.50 0.52 0.57
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................... 0.40 0.43 0.43 0.36
Diluted earnings per share........................ 0.40 0.43 0.43 0.36
65
16. BUSINESS SEGMENT INFORMATION
The following disclosure about segments of the Company is made in accordance
with the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company segregates its operations into
three primary segments: Banking Operations, Trade Finance Services ("TFS"), and
SBA. The Company determines the operating results of each segment based on an
internal management system that allocates certain expenses to each segment.
BANK OPERATIONS--The Bank provides lending products, including commercial,
installment, and real estate loans, to its customers.
TRADE FINANCE SERVICES--The Trade Finance Services department allows the
Company's import/ export customers to handle their international transactions.
TFS products include the issuance and collection of letters of credit,
international collection, and import/export financing.
66
SMALL BUSINESS ADMINISTRATION LENDING SERVICES--The SBA department provides
customers of the Bank access to the U.S. SBA guaranteed lending program.
BUSINESS SEGMENT
---------------------------------------------------
BANKING
OPERATIONS TFS SBA COMPANY
2000 ----------- ---------- ---------- -----------
Net interest income......... $36,366,228 $1,688,421 $3,569,543 $41,624,192
Less provision for loan
losses.................... 1,002,066 89,370 1,158,564 2,250,000
Other operating income...... 10,908,091 2,485,481 1,317,300 14,710,872
----------- ---------- ---------- -----------
Net revenue................. 46,272,253 4,084,532 3,728,279 54,085,064
Other operating expenses.... 24,513,949 1,591,890 1,668,356 27,774,195
----------- ---------- ---------- -----------
Earnings before taxes....... $21,758,304 $2,492,642 $2,059,923 $26,310,869
=========== ========== ========== ===========
BUSINESS SEGMENT
-------------------------------------------------------
BANKING
OPERATIONS TFS SBA COMPANY
1999 ------------ ----------- ----------- ------------
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
OPERATIONS TFS SBA COMPANY
1998 ------------ ----------- ----------- ------------
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.............. 16,628,537 1,792,272 1,361,208 19,782,017
------------ ----------- ----------- ------------
Earnings before taxes... $ 11,045,697 $ 1,724,160 $ 1,701,540 $ 14,471,397
============ =========== =========== ============
Total assets............ $597,421,594 $26,992,258 $26,350,664 $650,764,516
============ =========== =========== ============
67
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
DECEMBER 31,
2000
------------
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash...................................................... $ 768,958
Investment in Hanmi Bank.................................. 85,665,509
-----------
Total assets................................................ $86,434,467
===========
Liabilities................................................. $ 38,440
Shareholders' equity........................................ 86,396,027
-----------
Total liabilities and shareholders' equity.................. $86,434,467
===========
STATEMENT OF OPERATIONS
Equity in earnings of Hanmi Bank............................ $15,571,619
Other expense, net.......................................... (48,206)
-----------
Net income.................................................. $15,523,413
===========
STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income................................................ $15,523,413
-----------
Adjustments to reconcile net income to net cash used in
operating activities:
Earnings of Hanmi Bank.................................. (15,571,619)
Increase in liabilities................................. 38,440
-----------
Total adjustments......................................... (15,533,179)
Net cash used in operating activities..................... (9,766)
-----------
Cash flows from investing activities--Dividends received
from Hanmi Bank........................................... 500,000
-----------
Net cash provided by investing activities................. 500,000
-----------
Cash flows from financing activities--Proceeds from issuance
of common stocks.......................................... 278,724
-----------
Net cash provided by financing activities................. 278,724
-----------
Net increase in cash........................................ 768,958
Cash, beginning of year..................................... --
-----------
Cash, end of year........................................... $ 768,958
===========
******
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on March 26, 2001.
HANMI FINANCIAL CORPORATION
By: /s/ CHUNG HOON YOUK
-----------------------------------------
Chung Hoon Youk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of March 26, 2001.
/s/ CHUNG HOON YOUK /s/ YOUNG KU CHOE
- ------------------------------------------- -------------------------------------------
Chung Hoon Youk Young Ku Choe
PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
EXECUTIVE OFFICER) OFFICER(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ EUNG KYUN AHN /s/ RICHARD B. C. LEE
- ------------------------------------------- -------------------------------------------
Eung Kyun Ahn Richard B. C. Lee
/s/ I JOON AHN /s/ STUART S. AHN
- ------------------------------------------- -------------------------------------------
I Joon Ahn Stuart S. Ahn
/s/ GEORGE S. CHEY /s/ CHANG KYU PARK
- ------------------------------------------- -------------------------------------------
George S. Chey Chang Kyu Park
/s/ KI TAE HONG /s/ JOSEPH K. RHO
- ------------------------------------------- -------------------------------------------
Ki Tae Hong Joseph K. Rho
/s/ JOON H. LEE /s/ WON R. YOON
- ------------------------------------------- -------------------------------------------
Joon H. Lee Won R. Yoon
69
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
2 Plan of Reorganization and Merger Agreement between Hanmi
Financial Corporation ("Registrant"), Hanmi Bank, and
Hanmi Merger Co., Inc.(1)
3(i) Certificate of Incorporation of the Registrant(1)
3(ii) Bylaws of the Registrant(1)
4.1 Specimen certificate of registrant(1)
10.1 Employment Agreement with Chung Hoon Youk(1)
10.2 Hanmi Financial Corporation Year 2000 Stock Option(1)
21 Subsidiaries of the Registrant(1)
23.1 Consent of Deloitte & Touche LLP
- ------------------------
(1) Previously filed and incorporated by reference herein from Registrant's
Registration Statement on Form S-4 (No. 333-32770).
70