UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Transition Period From ___________________ To
___________________
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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95-4788120 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
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90010 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(213) 382-2200
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $0.001 Par Value
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NASDAQ Global Select Market |
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Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o |
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(Do Not Check if a Smaller Reporting Company) |
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the common stock held by
non-affiliates of the Registrant was approximately $80,729,000. For purposes of the foregoing
calculation only, in addition to affiliated companies, all directors and officers of the
Registrant have been deemed affiliates.
Number of shares of common stock of the Registrant outstanding as of March 1, 2010 was
51,182,390 shares.
Documents Incorporated By Reference Herein: Registrants Definitive Proxy Statement for
its Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year
ended December 31, 2009, is incorporated by reference into Part III of this report.
HANMI FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
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Page |
Cautionary Note Regarding Forward-Looking Statements |
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1 |
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PART I |
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Business
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2 |
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Risk Factors
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31 |
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Unresolved Staff Comments
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41 |
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Properties
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41 |
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Legal Proceedings
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42 |
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Submission of Matters to a Vote of Security Holders
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42 |
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PART II |
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Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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42 |
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Selected Financial Data
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44 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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47 |
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Quantitative and Qualitative Disclosures About Market Risk
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76 |
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Financial Statements and Supplementary Data
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76 |
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Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
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76 |
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Controls and Procedures
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76 |
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Other Information
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81 |
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PART III |
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Directors, Executive Officers and Corporate Governance
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81 |
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Executive Compensation
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81 |
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Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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81 |
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Certain Relationships and Related Transactions, and Director Independence
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82 |
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Principal Accounting Fees and Services
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82 |
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PART IV |
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Exhibits, Financial Statement Schedules
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82 |
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Index to Consolidated Financial Statements
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83 |
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Report of Independent Registered Public Accounting Firm
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84 |
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Consolidated Balance Sheets as of December 31, 2009 and 2008
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85 |
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Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008
and 2007
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86 |
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Consolidated Statements of Changes in Stockholders Equity and Comprehensive
Income for the Years Ended December 31, 2009, 2008 and 2007
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87 |
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2009,
2008 and 2007
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88 |
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Notes to Consolidated Financial Statements
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89 |
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Signatures |
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143 |
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Exhibit Index |
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144 |
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EX-23 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Item 1. Business, Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this Form 10-K constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
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 because of:
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failure to continue as a going concern; |
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failure to maintain adequate levels of capital and liquidity to support our operations; |
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a significant number of our customers failing to perform under their loans and other
terms of credit agreements; |
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the effect of regulatory orders we have entered into and potential future supervisory
action against us or Hanmi Bank; |
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fluctuations in interest rates and a decline in the level of our interest rate spread; |
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failure to attract or retain deposits; |
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sources of liquidity available to us and to Hanmi Bank becoming limited or our
potential inability to access sufficient sources of liquidity when needed or the
requirement that we obtain government waivers to do so; |
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adverse changes in domestic or global financial markets, economic conditions or
business conditions; |
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regulatory restrictions on Hanmi Banks ability to pay dividends to us and on our
ability to make payments on our obligations; |
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significant reliance on loans secured by real estate and the associated vulnerability
to downturns in the local real estate market, natural disasters and other variables
impacting the value of real estate; |
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failure to attract or retain our key employees; |
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failure to maintain our status as a financial holding company; |
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adequacy of our allowance for loan losses; |
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credit quality and the effect of credit quality on our provision for credit losses and
allowance for loan losses; |
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volatility and disruption in financial, credit and securities markets, and the price of
our common stock; |
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deterioration in the financial markets that may result in other-than-temporary
impairment charges relating to our securities portfolio; |
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competition in our primary market areas; |
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demographic changes in our primary market areas; and |
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significant government regulations, legislation and potential changes thereto. |
For additional information concerning risks we face, see Item 1A. Risk Factors, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Interest
Rate Risk Management and " Capital Resources and Liquidity. We undertake no obligation to update
these forward-looking statements to reflect events or circumstances that occur after the date on
which such statements were made, except as required by law.
1
PART I
Written Agreement and Final Order
On November 2, 2009, the members of the Board of Directors of Hanmi Bank (the Bank)
consented to the issuance of a Final Order (the Order) from the California Department of
Financial Institutions (the DFI). On the same date, Hanmi Financial and the Bank entered into a
Written Agreement (the Agreement) with the Federal Reserve Bank of San Francisco (the FRB). The
Order and the Agreement contain substantially similar provisions.
The Order and the Agreement require the Board of Directors of the Bank to prepare and submit
written plans to the DFI and the FRB that address the following items: (i) strengthening board
oversight of the management and operation of the Bank; (ii) strengthening credit risk management
practices; (iii) improving credit administration policies and procedures; (iv) improving the Banks
position with respect to problem assets; (v) maintaining adequate reserves for loan and lease
losses; (vi) improving the capital position of the Bank and, with respect to the Agreement, of
Hanmi; (vii) improving the Banks earnings through a strategic plan and a budget for 2010; (viii)
improving the Banks liquidity position and funds management practices; and (ix) contingency
funding. In addition, the Order and the Agreement place restrictions on the Banks lending to
borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or
collect certain problem loans. The Order and the Agreement also require the Bank to review and
revise its allowance for loan and lease losses consistent with relevant supervisory guidance. The
Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or
making certain changes to its business without prior approval from the DFI, and the Bank and Hanmi
must obtain prior approval from the FRB prior to declaring and paying dividends.
Under the Order, the Bank is also required to increase its capital and maintain certain
regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank
will be required to increase its contributed equity capital by not less than an additional $100
million. The Bank will be required to maintain a ratio of tangible shareholders equity to total
tangible assets as follows:
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Ratio of Tangible Shareholders |
Date |
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Equity to Total Tangible Assets |
By December 31, 2009
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Not Less Than 7.0 Percent |
By July 31, 2010
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Not Less Than 9.0 Percent |
From December 31, 2010 and Until the Order is Terminated
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Not Less Than 9.5 Percent |
If the Bank is not able to maintain the capital ratios identified in the Order, it must
notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital
ratios fall below those set forth in the capital plan to be submitted to the FRB. As of December
31, 2009, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholders equity to
total tangible assets ratio of 7.13 percent. As of December 31, 2008, the Bank had a Tier 1
leverage ratio of 8.85 percent and tangible stockholders equity to total tangible assets ratio of
8.68 percent. See Note 15 Regulatory Matters for further details regarding the Order and
Agreement.
Going Concern
As previously mentioned, we are required by federal regulatory authorities to maintain
adequate levels of capital to support our operations. As part of the recently issued DFI Final
Order, the Bank is also required to increase its capital and maintain certain regulatory capital
ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be required
to increase its contributed equity capital by not less than an additional $100 million.
We have also committed to the FRB to adopt a consolidated capital plan to augment and maintain
a sufficient capital position. Our existing capital resources may not satisfy our capital
requirements for the foreseeable future and may not be sufficient to offset any problem assets.
Further, should our asset quality erode and require significant additional provision for credit
losses, resulting in consistent net operating losses at the Bank, our capital levels will decline
and we will need to raise capital to satisfy our agreements with the Regulators.
Our ability to raise additional capital will depend on conditions in the capital markets at
that time, which are
2
outside our control, and on our financial performance. Accordingly, we cannot be certain of our
ability to raise additional capital on terms acceptable to us. Our inability to raise additional
capital or comply with the terms of the Order and the Agreement raises substantial doubt about our
ability to continue as a going concern.
General
Hanmi Financial Corporation (Hanmi Financial, we, us or our) is a Delaware corporation
incorporated on March 14, 2000 to be the holding company for the Bank. Hanmi Financial became the
holding company for the Bank in June 2000 and is subject to the Bank Holding Company Act of 1956,
as amended (BHCA). Hanmi Financial also elected financial holding company status under the BHCA
in 2000. Our principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los
Angeles, California 90010, and our telephone number is (213) 382-2200.
The Bank, our primary subsidiary, is a state chartered bank incorporated under the laws of the
State of California on August 24, 1981, and licensed by the DFI on December 15, 1982. The Banks
deposit accounts are insured under the Federal Deposit Insurance Act (FDI Act) up to applicable
limits thereof, and the Bank is a member of the Federal Reserve System. The Banks headquarters is
located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010.
The Bank is a community bank conducting general business banking, with its primary market
encompassing the Korean-American community as well as other communities in the multi-ethnic
populations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San
Francisco Bay area, and the Silicon Valley area in Santa Clara County. The Banks full-service
offices are located in business areas where many of the businesses are run by immigrants and other
minority groups. The Banks client base reflects the multi-ethnic composition of these communities.
At December 31, 2009, the Bank maintained a branch network of 27 full-service branch offices in
California and two loan production offices (LPOs) in Virginia and Washington.
Our other subsidiaries are Chun-Ha Insurance Services, Inc. (Chun-Ha) and All World
Insurance Services, Inc. (All World), which were acquired in January 2007. Founded in 1989,
Chun-Ha and All World are insurance agencies that offer a complete line of insurance products,
including life, commercial, automobile, health, and property and casualty.
The Banks revenues are derived primarily from interest and fees on our loans, interest and
dividends on our securities portfolio, and service charges on deposit accounts. A summary of
revenues for the periods indicated follows:
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Year Ended December 31, |
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2009 |
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2008 |
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2007 |
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(Dollars in Thousands) |
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Interest and Fees on Loans |
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$ |
173,318 |
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80.1 |
% |
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$ |
223,942 |
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82.6 |
% |
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$ |
261,992 |
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81.6 |
% |
Interest and Dividends on Investments |
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8,634 |
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4.0 |
% |
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14,022 |
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5.2 |
% |
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17,867 |
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5.6 |
% |
Other Interest Income |
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2,195 |
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1.0 |
% |
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219 |
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0.1 |
% |
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1,037 |
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0.3 |
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Service Charges on Deposit Accounts |
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17,054 |
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7.9 |
% |
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18,463 |
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6.8 |
% |
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18,061 |
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5.6 |
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Other Non-Interest Income |
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15,056 |
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7.0 |
% |
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14,391 |
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5.3 |
% |
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21,945 |
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6.9 |
% |
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Total Revenues |
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$ |
216,257 |
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100.0 |
% |
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$ |
271,037 |
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100.0 |
% |
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$ |
320,902 |
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100.0 |
% |
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Market Area
The Bank historically has provided its banking services through its branch network to a wide
variety of small- to medium-sized businesses. Throughout the Banks service areas, competition is
intense for both loans and deposits. While the market for banking services is dominated by a few
nationwide banks with many offices operating over a wide geographic areas, the Banks primary
competitors are relatively smaller community banks that focus their marketing efforts on
Korean-American businesses in the Banks service areas. Substantially all of our assets are located
in, and substantially all of our revenues are derived from clients located within California.
3
Lending Activities
The Bank originates loans for its own portfolio and for sale in the secondary market. Lending
activities include real estate loans (commercial property, construction and residential property),
commercial and industrial loans (commercial term loans, commercial lines of credit, SBA loans and
international trade finance), and consumer loans.
Real Estate Loans
Real estate lending involves risks associated with the potential decline in the value of the
underlying real estate collateral and the cash flow from income-producing properties. Declines in
real estate values and cash flows can be caused by a number of factors, including adversity in
general economic conditions, rising interest rates, changes in tax and other laws and regulations
affecting the holding of real estate, environmental conditions, governmental and other use
restrictions, development of competitive properties and increasing vacancy rates. When real estate
values decline, the Banks real estate dependence increases the risk of loss both in the Banks
loan portfolio and any holdings of other real estate owned because of foreclosures on loans.
Commercial Property
The Bank offers commercial real estate loans. These loans are generally collateralized by
first deeds of trust. For these commercial real estate loans, the Bank generally obtains formal
appraisals in accordance with applicable regulations to support the value of the real estate
collateral. All appraisal reports on commercial mortgage loans are reviewed by an Appraisal Review
Officer. The review generally covers an examination of the appraisers assumptions and methods that
were used to derive a value for the property, as well as compliance with the Uniform Standards of
Professional Appraisal Practice (the USPAP). The Bank first looks to cash flow from the borrower
to repay the loan and then to cash flow from other sources. The majority of the properties securing
these loans are located in Los Angeles County and Orange County.
The Banks commercial real estate loans are principally secured by investor-owned commercial
buildings and owner-occupied commercial and industrial buildings. Generally, these types of loans
are made for a period of up to seven years based on a longer amortization period. These loans
usually have a loan-to-value ratio at time of origination of 65 percent or less, using an
adjustable rate indexed to the prime rate appearing in the West Coast edition of The Wall Street
Journal (WSJ Prime Rate) or the Banks prime rate (Bank Prime Rate), as adjusted from time to
time. The Bank also offers fixed-rate commercial real estate loans, including hybrid-fixed rate
loans that are fixed for one to five years and convert to adjustable rate loans for the remaining
term. Amortization schedules for commercial real estate loans generally do not exceed 25 years.
Payments on loans secured by investor-owned and owner-occupied properties are often dependent
upon successful operation or management of the properties. Repayment of such loans may be subject
to a greater extent to the risk of adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks in a variety of ways, including limiting the size of such loans
in relation to the market value of the property and strictly scrutinizing the property securing the
loan. The Bank manages these risks in a variety of ways, including vacancy and interest rate hike
sensitivity analysis at the time of loan origination and quarterly risk assessment of the total
commercial real estate secured loan portfolio that includes most recent industry trends. When
possible, the Bank also obtains corporate or individual guarantees from financially capable
parties. Representatives of the Bank visit all of the properties securing the Banks real estate
loans before the loans are approved. The Bank requires title insurance insuring the status of its
lien on all of the real estate secured loans when a trust deed on the real estate is taken as
collateral. The Bank also requires the borrower to maintain fire insurance, extended coverage
casualty insurance and, if the property is in a flood zone, flood insurance, in an amount equal to
the outstanding loan balance, subject to applicable laws that may limit the amount of hazard
insurance a lender can require to replace such improvements. We cannot assure that these procedures
will protect against losses on loans secured by real property.
4
Construction
The Bank finances the construction of multifamily, low-income housing, commercial and
industrial properties within its market area. The future condition of the local economy could
negatively affect the collateral values of such loans. The Banks construction loans typically have
the following characteristics:
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maturities of two years or less; |
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a floating rate of interest based on the Bank Prime Rate or the WSJ Prime Rate; |
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minimum cash equity of 35 percent of project cost; |
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reserve of anticipated interest costs during construction or advance of fees; |
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first lien position on the underlying real estate; |
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loan-to-value ratios at time of origination generally not exceeding 65 percent; and |
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recourse against the borrower or a guarantor in the event of default. |
The Bank does, on a case-by-case basis, commit to making permanent loans on the property with
loan conditions that command strong project stability and debt service coverage. Construction loans
involve additional risks compared to loans secured by existing improved real property. These
include the following:
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the uncertain value of the project prior to completion; |
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the inherent uncertainty in estimating construction costs, which are often beyond the
borrowers control; |
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construction delays and cost overruns; |
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possible difficulties encountered in connection with municipal or other governmental
regulations during construction; and |
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the difficulty in accurately evaluating the market value of the completed project. |
Because 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 the Bank is
forced to foreclose on a project prior to or at completion due to a default, there can be no
assurance that the Bank will be able to recover all of the unpaid balance of, or accrued interest
on, the loans as well as the related foreclosure and holding costs. In addition, the Bank may be
required to fund additional amounts to complete a project and may have to hold the property for an
indeterminable period. The 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 Property
The Bank originates fixed-rate and variable-rate mortgage loans secured by one- to four-family
properties with amortization schedules of 15 to 30 years and maturities of up to 30 years. The loan
fees charged, interest rates and other provisions of the Banks residential loans are determined by
an analysis of the Banks cost of funds, cost of origination, cost of servicing, risk factors and
portfolio needs. The Bank may sell some of the mortgage loans that it originates to secondary
market participants. The typical turn-around time from origination to sale is between 30 and 90
days. The interest rate and the price of the loan are typically agreed to prior to the loan
origination.
Commercial and Industrial Loans
The 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, and loan maturities are normally 12 to 60 months.
The Bank requires a credit underwriting before considering any extension of credit. The Bank
finances primarily small and middle market businesses in a wide spectrum of industries. Commercial
and industrial loans consist of credit lines for operating needs, loans for equipment purchases and
working capital, and various other business purposes.
5
As compared to consumer lending, commercial lending entails significant additional risks.
These loans typically involve larger loan balances, are generally dependent on the cash flow of the
business and may be subject to adverse conditions in the general economy or in a specific industry.
Short-term business loans generally are intended to finance current operations and typically
provide for principal payment at maturity, 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 the Bank to take collateral whenever possible, regardless of
the loan purpose(s). Collateral may include liens on inventory, accounts receivable, fixtures and
equipment, leasehold improvements and real estate. When real estate is the primary collateral, the
Bank obtains formal appraisals in accordance with applicable regulations to support the value of
the real estate collateral. Typically, the 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
their obligations to the Bank debt, but also all outstanding business debt, without liquidating the
collateral, based on historical earnings or reliable projections.
Commercial Term Loans
The Bank finances small and middle-market businesses in a wide spectrum of industries
throughout California. The Bank offers term loans for a variety of needs, including loans for
working capital, purchases of equipment, machinery or inventory, business acquisitions, renovation
of facilities, and refinancing of existing business-related debts. These loans have repayment terms
of up to seven years.
Commercial Lines of Credit
The Bank offers lines of credit for a variety of short-term needs, including lines of credit
for working capital, account receivable and inventory financing, and other purposes related to
business operations. Commercial lines of credit usually have a term of 12 months or less.
SBA Loans
The Bank originates loans qualifying for guarantees issued by the U.S. SBA, an independent
agency of the Federal Government. The SBA guarantees on such loans currently range from 75 percent
to 90 percent of the principal. The Bank typically requires that SBA loans be secured by business
assets and by a first or second deed of trust on any available real property. When the loan is
secured by a first deed of trust on real property, the Bank generally obtains appraisals in
accordance with applicable regulations. SBA loans have terms ranging from 5 to 20 years depending
on the use of the proceeds. To qualify for a SBA loan, a borrower must demonstrate the capacity to
service and repay the loan, without liquidating the collateral, based on historical earnings or
reliable projections.
The Bank normally sells to unrelated third parties a substantial amount of the guaranteed
portion of the SBA loans that it originates. When the Bank sells a SBA loan, it has a right to
repurchase the loan if the loan defaults. If the Bank repurchases a loan, the Bank will make a
demand for guarantee purchase to the SBA. The Bank retains the right to service the SBA loans, for
which it receives servicing fees. The unsold portions of the SBA loans that remain owned by the
Bank are included in loans receivable on the Consolidated Balance Sheets. As of December 31, 2009,
the Bank had $139.5 million of SBA loans in its portfolio, and was servicing $233.1 million of SBA
loans sold to investors.
International Trade Finance
The Bank offers a variety of international finance and trade services and products, including
letters of credit, import financing (trust receipt financing and bankers acceptances) and export
financing. Although most of our trade finance activities are related to trade with Asian countries,
all of our loans are made to companies domiciled in the United States. A substantial portion of
this business involves California-based customers engaged in import activities.
6
Consumer Loans
Consumer loans are extended for a variety of purposes, including automobile loans, secured and
unsecured personal loans, home improvement loans, home equity lines of credit, overdraft protection
loans, unsecured lines of credit and credit cards. Management assesses the borrowers
creditworthiness and ability to repay the debt through a review of credit history and ratings,
verification of employment and other income, review of debt-to-income ratios and other measures of
repayment ability. Although creditworthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of the collateral, if any, to the
proposed loan amount. Most of the Banks loans to individuals are repayable on an installment
basis.
Any repossessed collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance, because the collateral is more likely to suffer damage
or depreciation. The remaining deficiency often does not warrant further collection efforts against
the borrower beyond obtaining a deficiency judgment. In addition, the collection of loans to
individuals is dependent on the borrowers continuing financial stability, and thus is more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, various
federal and state laws, including bankruptcy and insolvency laws, often limit the amount that the
lender can recover on loans to individuals. Loans to individuals may also give rise to claims and
defenses by a consumer borrower against the lender on these loans, and a borrower may be able to
assert against any assignee of the note these claims and defenses that the borrower has against the
seller of the underlying collateral.
Off-Balance Sheet Commitments
As part of its service to its small- to medium-sized business customers, the Bank from time to
time issues formal commitments and lines of credit. These commitments can be either secured or
unsecured. They may be in the form of revolving lines of credit for seasonal working capital needs
or may take the form of commercial letters of credit or standby letters of credit. Commercial
letters of credit facilitate import trade. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Lending Procedures and Loan Limits
Loan applications may be approved by the Board of Directors Loan Committee, or by the Banks
management or lending officers to the extent of their lending authority. Individual lending
authority is granted to the Chief Credit Officer and certain additional officers, including
District Leaders. Loans for which direct and indirect borrower liability exceeds an individuals
lending authority are referred to the Banks Management Credit Committee and, for those in excess
of the Management Credit Committees approval limits, to the Board of Directors Loan Committee.
Legal lending limits are calculated in conformance with the California Financial Code, which
prohibits a bank from lending to any one individual or entity or its related interests on an
unsecured basis any amount that exceeds 15 percent of the sum of stockholders equity plus the
allowance for loan losses, capital notes and any debentures, plus an additional 10 percent on a
secured basis. At December 31, 2009, the Banks authorized legal lending limits for loans to one
borrower were $55.9 million for unsecured loans plus an additional $37.3 million for specific
secured loans. However, the Bank has established internal loan limits that are lower than the legal
lending limits.
The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to certain
underwriting practices. The review of each loan application includes analysis of the applicants
experience, prior credit history, income level, cash flow, financial condition, tax returns, cash
flow projections, and the value of any collateral to secure the loan, based upon reports of
independent appraisers and/or audits of accounts receivable or inventory pledged as security. In
the case of real estate loans over a specified amount, the review of collateral value includes an
appraisal report prepared by an independent Bank-approved appraiser. All appraisal reports on
commercial real property secured loans are reviewed by an Appraisal Review Officer. The review
generally covers an examination of the appraisers assumptions and methods that were used to derive
a value for the property, as well as compliance with the USPAP.
7
Allowance for Loan Losses, Allowance for Off-Balance Sheet Items and Provision for Credit Losses
The 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
economic conditions. In addition, the Bank maintains an allowance for off-balance sheet items
associated with unfunded commitments and letters of credit, which is included in other liabilities
on the Consolidated Balance Sheets.
The Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses
and analyzes the allowance for loan losses on a quarterly basis. In addition, as an integral part
of the quarterly credit review process of the Bank, the allowance for loan losses and allowance for
off-balance sheet items are reviewed for adequacy. The DFI and/or the Board of Governors of the
Federal Reserve System (the FRB) may require the Bank to recognize additions to the allowance for
loan losses through a provision for credit losses based upon their assessment of the information
available to them at the time of their examinations.
Deposits
The Bank raises funds primarily through its network of branches and broker deposits. The Bank
attracts deposits by offering a wide variety of transaction and term accounts and personalized
customer service. Accounts offered include business and personal checking accounts, savings
accounts, negotiable order of withdrawal (NOW) accounts, money market accounts and certificates
of deposit.
Website
We maintain an Internet website at www.hanmi.com. We make available free of charge on
the website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and any amendments thereto, as soon as reasonably practicable after we file such reports
with the Securities and Exchange Commission (SEC). None of the information on or hyperlinked from
our website is incorporated into this Annual Report on Form 10-K (Report). These reports and
other information on file can be inspected and copied at the public reference facilities of the SEC
at 100 F Street, N.E., Washington D.C., 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that
contains the reports, proxy and information statements and other information we file with them. The
address of the site is www.sec.gov.
Employees
As of December 31, 2009, the Bank had 454 full-time employees and 19 part-time employees and
Chun-Ha and All World had 36 full-time employees. Our employees are not represented by a union or
covered by a collective bargaining agreement. We believe that our employee relations are
satisfactory.
Insurance
We maintain financial institution bond and commercial insurance at levels deemed adequate by
management to protect Hanmi Financial from certain litigation and other losses.
Competition
The banking and financial services industry in California generally, and in the Banks market
areas specifically, are highly competitive. The increasingly competitive environment faced by banks
is primarily the result of changes in laws and regulation, changes in technology and product
delivery systems, new competitors in the market, and the accelerating pace of consolidation among
financial service providers. We compete for loans, deposits and customers with other commercial
banks, savings institutions, securities and brokerage companies, mortgage companies, real estate
investment trusts, insurance companies, finance companies, money market funds, credit unions and
other non-bank financial service providers. Some of these competitors are larger in total assets
and capitalization, have greater access to capital markets, including foreign-ownership, and/or
offer a broader range of financial services.
8
Among the advantages that the major banks have over the Bank is their ability to finance
extensive advertising campaigns and to allocate their investment assets to the regions with the
highest yield and demand. Many of the major commercial banks operating in the Banks service areas
offer specific services (for instance, trust services) that are not offered directly by the Bank.
By virtue of their greater total capitalization, these banks also have substantially higher lending
limits.
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 for the acquisition of deposits.
The Banks major competitors are relatively smaller community banks that focus their marketing
efforts on Korean-American businesses in the Banks service areas. These banks compete for loans
primarily through the interest rates and fees they charge and the convenience and quality of
service they provide to borrowers. The competition for deposits is primarily based on the interest
rate paid and the convenience and quality of service.
In order to compete with other financial institutions in its service area, the Bank relies
principally upon local promotional activity, including advertising in the local media, personal
contacts, direct mail and specialized services. The Banks promotional activities emphasize the
advantages of dealing with a locally owned and headquartered institution attuned to the particular
needs of the community.
Economic Developments, Legislation and Regulatory Initiatives
Future profitability, like that of most financial institutions, is primarily dependent on
interest rate differentials and credit quality. In general, the difference between the interest
rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, and the
interest rates received by us on our interest-earning assets, such as loans extended to our
customers and securities held in our investment portfolio, will comprise the major portion of our
earnings. These rates are highly sensitive to many factors that are beyond our control, such as
inflation, recession and unemployment, and the impact that future changes in domestic and foreign
economic conditions might have on us cannot be predicted.
Our business is also influenced by the monetary and fiscal policies of the Federal Government
and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary
policies (with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities, by adjusting the required level of reserves
for depository institutions subject to its reserve requirements, and by varying the target federal
funds and discount rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of bank loans, investments and deposits and affect interest
earned on interest-earning assets and interest paid on interest-bearing liabilities. The nature and
impact on us of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, federal and state legislation is enacted that may have the effect of
materially increasing the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial services providers, such as
recent federal legislation permitting affiliations among commercial banks, insurance companies and
securities firms. We cannot predict whether or when any potential legislation will be enacted, and
if enacted, the effect that it, or any implementing regulations, would have on our financial
condition or results of operations. In addition, the outcome of any investigations initiated by
state authorities or litigation raising issues may result in necessary changes in our operations,
additional regulation and increased compliance costs.
9
Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market
and the securitization markets for such loans and other factors have resulted in uncertainty in the
financial markets in general and a related general economic downturn, which continued through 2008
and are anticipated to continue throughout 2010. Dramatic declines in the housing market, with
decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the
credit performance of mortgage and residential construction loans and resulted in significant
write-downs of assets by many financial institutions. In addition, the values of real estate
collateral supporting many commercial as well as residential loans have declined and may continue
to decline. General downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of commercial and consumer
credit, resulting in additional write-downs. Concerns over the stability of the financial markets
and the economy have resulted in decreased lending by financial institutions to their customers and
to each other. This market turmoil and tightening of credit has led to increased commercial and
consumer delinquencies, lack of customer confidence, increased market volatility and widespread
reduction in general business activity. Competition among depository institutions for deposits has
increased significantly. Bank and bank holding company stock prices have been significantly
negatively affected, as has the ability of banks and bank holding companies to raise capital or
borrow in the debt markets compared to recent years. The bank regulatory agencies have been very
aggressive in responding to concerns and trends identified in examinations, and this has resulted
in the increased issuance of formal and informal enforcement orders and other supervisory actions
requiring that institutions take action to address credit quality, liquidity and risk management,
and capital adequacy, as well as other safety and soundness concerns.
On November 2, 2009, the members of the Board of Directors of the Bank consented to the
issuance of the Order from the DFI. On the same date, Hanmi Financial and the Bank entered into the
Agreement with the FRB. The Order and the Agreement contain substantially similar provisions. The
Order and the Agreement require the Board of Directors of the Bank to prepare and submit written
plans to the DFI and the FRB that address the following items: (i) strengthening board oversight of
the management and operation of the Bank; (ii) strengthening credit risk management practices;
(iii) improving credit administration policies and procedures; (iv) improving the Banks position
with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi)
improving the capital position of the Bank and, with respect to the Agreement, of Hanmi; (vii)
improving the Banks earnings through a strategic plan and a budget for 2010; (viii) improving the
Banks liquidity position and funds management practices; and (ix) contingency funding. In
addition, the Order and the Agreement place restrictions on the Banks lending to borrowers who
have adversely classified loans with the Bank and requires the Bank to charge off or collect
certain problem loans. The Order and the Agreement also require the Bank to review and revise its
allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also
prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain
changes to its business without prior approval from the DFI, and the Bank and Hanmi must obtain
prior approval from the FRB prior to declaring and paying dividends.
Under the Order, the Bank is also required to increase its capital and maintain certain
regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank
will be required to increase its contributed equity capital by not less than an additional $100
million. The Bank will be required to maintain a ratio of tangible shareholders equity to total
tangible assets as follows:
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Ratio of Tangible Shareholders |
Date |
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Equity to Total Tangible Assets |
By December 31, 2009
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Not Less Than 7.0 Percent |
By July 31, 2010
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Not Less Than 9.0 Percent |
From December 31, 2010 and Until the Order is Terminated
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Not Less Than 9.5 Percent |
If the Bank is not able to maintain the capital ratios identified in the Order, it must
notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital
ratios fall below those set forth in the capital plan to be submitted to the FRB. Our inability to
comply with the capital ratios identified in the Order raises substantial doubt about our ability
to continue as a going concern.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed
into law by President Obama. The ARRA includes a wide variety of programs intended to stimulate the
economy and provide for extensive infrastructure, energy, health and education needs. In addition,
the ARRA imposes certain new executive compensation and corporate expenditure limits on all current
and future TARP recipients until the institution has repaid the Treasury, which is now permitted
under the ARRA without penalty and without the need to
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raise new capital, subject to the Treasurys consultation with the recipients appropriate
regulatory agency.
The executive compensation standards are more stringent than those currently in effect under
the TARP CPP or those previously proposed by the Treasury. The new standards include (but are not
limited to): (i) prohibitions on bonuses, retention awards and other incentive compensation, other
than restricted stock grants which do not fully vest during the TARP period up to one-third of an
employees total annual compensation; (ii) prohibitions on golden parachute payments for departure
from a company; (iii) an expanded clawback of bonuses, retention awards and incentive compensation
if payment is based on materially inaccurate statements of earnings, revenues, gains or other
criteria; (iv) prohibitions on compensation plans that encourage manipulation of reported earnings;
(v) retroactive review of bonuses, retention awards and other compensation previously provided by
TARP recipients if found by the Treasury to be inconsistent with the purposes of the TARP or
otherwise contrary to public interest; (vi) required establishment of a company-wide policy
regarding excessive or luxury expenditures; and (vii) inclusion in a participants proxy
statements for annual shareholder meetings of a non-binding Say on Pay shareholder vote on the
compensation of executives.
On February 25, 2009, the first day the CAP program was initiated, the Treasury released the
actual terms of the program, stating that the purpose of the CAP is to restore confidence
throughout the financial system that the nations largest banking institutions have a sufficient
capital cushion against larger than expected future losses, should they occur due to severe
economic environment, and to support lending to creditworthy borrowers. Under the CAP terms,
eligible U.S. banking institutions with assets in excess of $100 billion on a consolidated basis
are required to participate in coordinated supervisory assessments, which are forward-looking
stress test assessments to evaluate the capital needs of the institution under a more challenging
economic environment. Should this assessment indicate the need for the bank to establish an
additional capital buffer to withstand more stressful conditions, these larger institutions may
access the CAP immediately as a means to establish any necessary additional buffer or they may
delay the CAP funding for six months to raise the capital privately. Eligible U.S. banking
institutions with assets below $100 billion may also obtain capital from the CAP. The CAP program
does not replace the TARP CPP, but is an additional program to the TARP CPP, and is open to
eligible institutions regardless of whether they participated in the TARP CPP. The deadline to
apply to the CAP is May 25, 2009. Recipients of capital under the CAP will be subject to the same
executive compensation requirements as if they had received the TARP CPP.
We applied to participate in the TARP CPP for an investment of up to $105 million from the
Federal Government in December 2008, but we withdrew our application in June 2009.
The EESA also increased Federal Deposit Insurance Corporation (FDIC) deposit insurance on
most accounts from $100,000 to $250,000 through the end of 2013. In addition, the FDIC has
implemented two temporary liquidity programs to: (i) provide deposit insurance for the full amount
of most noninterest-bearing transaction accounts (the Transaction Account Guarantee) through the
end of 2013; and (ii) guarantee certain unsecured debt of financial institutions and their holding
companies through June 2012 under a temporary liquidity guarantee program (the Debt Guarantee
Program and together the TLGP).
Hanmi Financial and the Bank did not elect to opt out of the Debt Guarantee Program. The FDIC
charges systemic risk special assessments to depository institutions that participate in the
TLGP. The FDIC has recently proposed that Congress give the FDIC expanded authority to charge fees
to those holding companies that benefit directly and indirectly from the FDIC guarantees.
Supervision and Regulation
General
We are extensively regulated under both federal and certain state laws. Regulation and
supervision by the federal and state banking agencies is intended primarily for the protection of
depositors and the Deposit Insurance Fund (DIF) administered by the FDIC, and not for the benefit
of stockholders. Set forth below is a summary description of the key laws and regulations that
relate to our operations. These descriptions are qualified in their entirety by reference to the
applicable laws and regulations.
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From time to time, federal and state legislation is enacted that may have the effect of
materially increasing the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial services providers. Several
proposals for legislation that could substantially intensify the regulation of the financial
services industry (including a possible comprehensive overhaul of the financial institutions
regulatory system) are expected to be introduced and possibly enacted in the new Congress in
response to the current economic downturn and financial industry instability. Other legislative and
regulatory initiatives that could affect us and the Bank and the banking industry in general are
pending, and additional initiatives may be proposed or introduced, before the Congress, the
California legislature and other governmental bodies in the future. Such proposals, if enacted, may
further alter the structure, regulation and competitive relationship among financial institutions,
and may subject us and the Bank to increased regulation, disclosure and reporting requirements. In
addition, the various bank regulatory agencies often adopt new rules, regulations and policies to
implement and enforce existing legislation. It cannot be predicted whether, or in what form, any
such legislation or regulations or changes in policies may be enacted or the extent to which the
business of the Bank would be affected thereby.
Hanmi Financial
As a bank and financial holding company, we are subject to regulation and examination by the
FRB under the BHCA. Accordingly, we are subject to the FRBs authority to:
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require periodic reports and such additional information as the FRB may require. |
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require us to maintain certain levels of capital. See Capital Standards. |
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require that bank holding companies serve as a source of financial and managerial
strength to subsidiary banks and commit resources as necessary to support each subsidiary
bank. A bank holding companys failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the FRB to be an unsafe
and unsound banking practice or a violation of FRB regulations, or both. |
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terminate an activity or terminate control of or liquidate or divest certain
subsidiaries, affiliates or investments if the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any bank subsidiary. |
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take formal or informal enforcement action or issue other supervisory directives and
assess civil money penalties for non-compliance under certain circumstances. |
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regulate provisions of certain bank holding company debt, including the authority to
impose interest ceilings and reserve requirements on such debt and require prior approval
to purchase or redeem our securities in certain situations. |
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limit or prohibit and require FRB prior approval of the payment of dividends. |
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require financial holding companies to divest non-banking activities or subsidiary
banks if they fail to meet certain financial holding company standards. |
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approve acquisitions and mergers with other banks or savings institutions and consider
certain competitive, management, financial and other factors in granting these approvals.
Similar California and other state banking agency approvals may also be required. |
A bank holding company is required to file with the FRB annual reports and other information
regarding its business operations and those of its non-banking subsidiaries. It is also subject to
supervision and examination by the FRB. Examinations are designed to inform the FRB of the
financial condition and nature of the operations of the bank holding company and its subsidiaries
and to monitor compliance with the BHCA and other laws affecting the operations of bank holding
companies. To determine whether potential weaknesses in the condition or operations of bank holding
companies might pose a risk to the safety and soundness of their subsidiary banks, examinations
focus on whether a bank holding company has adequate systems and internal controls in place to
manage the risks inherent in its business, including credit risk, interest rate risk, market risk
(for example, from changes in value of portfolio instruments and foreign currency), liquidity risk,
operational risk, legal risk and reputation risk.
12
Bank holding companies may be subject to potential enforcement actions by the FRB 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 FRB. Enforcement actions may include the issuance of
cease and desist orders, the imposition of civil money penalties, the requirement to meet and
maintain specific capital levels for any capital measure, the issuance of directives to increase
capital, formal and informal agreements, or removal and prohibition orders against officers or
directors and other institution-affiliated parties.
Regulatory Restrictions on Dividends; Source of Strength
Hanmi Financial is regarded as a legal entity separate and distinct from its other
subsidiaries. The principal source of our revenue is dividends received from the Bank. Various
federal and state statutory provisions limit the amount of dividends the Bank can pay to Hanmi
Financial without regulatory approval. It is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common stock only out of income available over the
past year and only if prospective earnings retention is consistent with the organizations expected
future needs and financial condition. The policy provides that bank holding companies should not
maintain a level of cash dividends that undermines the bank holding companys ability to serve as a
source of strength to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of
financial strength to each of its banking subsidiaries and commit resources to their support. Such
support may be required at times when, absent this Federal Reserve Board policy, a holding company
may not be inclined to provide it. As discussed below, a bank holding company, in certain
circumstances, could be required to guarantee the capital plan of an undercapitalized banking
subsidiary.
In the event of a bank holding companys bankruptcy under Chapter 11 of the United States
Bankruptcy Code, the trustee will be deemed to have assumed, and is required to cure immediately,
any deficit under any commitment by the debtor holding company to any of the federal banking
agencies to maintain the capital of an insured depository institution, and any claim for breach of
such obligation will generally have priority over most other unsecured claims.
Activities Closely Related to Banking
The Bank Holding Company Act prohibits a bank holding company, with certain limited
exceptions, from acquiring direct or indirect ownership or control of any voting shares of any
company which is not a bank or from engaging in any activities other than those of banking,
managing or controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these prohibitions allows the
acquisition of interests in companies whose activities are found by the Federal Reserve Board, by
order or regulation, to be so closely related to banking or managing or controlling banks, as to be
a proper incident thereto. These activities include, among other things, numerous services and
functions performed in connection with lending, investing, and financial counseling and tax
planning. In approving acquisitions by bank holding companies of companies engaged in
banking-related activities, the Federal Reserve Board considers a number of factors, and weighs the
expected benefits to the public (such as greater convenience and increased competition or gains in
efficiency) against the risks of possible adverse effects (such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound banking practices).
The Federal Reserve Board is also empowered to differentiate between activities commenced de novo
and activities commenced through acquisition of a going concern.
13
Gramm-Leach Bliley Act; Financial Holding Companies
The Gramm-Leach-Bliley Financial Modernization Act of 1999, revised and expanded the
provisions of the Bank Holding Company Act by including a new section that permits a bank holding
company to elect to become a financial holding company to engage in a full range of activities that
are financial in nature. The qualification requirements and the process for a bank holding
company that elects to be treated as a financial holding company require that all of the subsidiary
banks controlled by the bank holding company at the time of election to become a financial holding
company must be and remain at all times well-capitalized and well managed. Hanmi Financial has
previously elected to be a financial holding company.
The Gramm-Leach-Bliley Act further requires that, in the event that the bank holding company
elects to become a financial holding company, the election must be made by filing a written
declaration with the appropriate Federal Reserve Bank that:
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states that the bank holding company elects to become a financial holding company; |
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provides the name and head office address of the bank holding company and each
depository institution controlled by the bank holding company; |
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certifies that each depository institution controlled by the bank holding company is
well-capitalized as of the date the bank holding company submits its declaration; |
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provides the capital ratios for all relevant capital measures as of the close of the
previous quarter for each depository institution controlled by the bank holding company;
and |
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certifies that each depository institution controlled by the bank holding company is
well managed as of the date the bank holding company submits its declaration. |
The bank holding company must have also achieved at least a rating of satisfactory record of
meeting community credit needs under the Community Reinvestment Act during the institutions most
recent examination.
Financial holding companies may engage, directly or indirectly, in any activity that is
determined to be:
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incidental to such financial activity; or |
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complementary to a financial activity provided it does not pose a substantial risk to the
safety and soundness of depository institutions or the financial system generally.
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The Gramm-Leach-Bliley Act specifically provides that the following activities have been
determined to be financial in nature: lending, trust and other banking activities; insurance
activities; financial or economic advisory services; securitization of assets; securities
underwriting and dealing; existing bank holding company domestic activities; existing bank holding
company foreign activities and merchant banking activities. In addition, the Gramm-Leach-Bliley
Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand
the list of financial or incidental activities, but requires consultation with the United
States Treasury Department, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Pursuant to the Gramm-Leach-Bliley Act, Chun-Ha and All World qualify as financial
subsidiaries. Under the Gramm-Leach-Bliley Act, in order to elect and retain financial holding
company status, all depository institution subsidiaries of a bank holding company must be well
capitalized, well managed, and, except in limited circumstances, be in satisfactory compliance with
the Community Reinvestment Act (CRA). Failure to sustain compliance with these requirements or
correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks
or require all activities to conform to those permissible for a bank holding company. Pursuant to
the terms of the Agreement with the FRB, we have agreed to take certain corrective action pursuant
to these Gramm-Leach-Bliley Act requirements.
14
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated parties and establish
procedures and practices to protect customer data from unauthorized access. Hanmi Financial and
its subsidiaries have established policies and procedures to assure our compliance with all privacy
provisions of the Gramm-Leach-Bliley Act.
Safe and Sound Banking Practices
Bank holding companies are not permitted to engage in unsafe and unsound banking practices.
The Federal Reserve Boards Regulation Y, for example, generally requires a holding company to give
the Federal Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration paid for any
repurchases or redemptions in the preceding year, is equal to 10% or more of the companys
consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that
the transaction would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could take the position
that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies
and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which
constitute violations of laws or regulations, and can assess civil money penalties for certain
activities conducted on a knowing and reckless basis, if those activities caused a substantial loss
to a depository institution. The penalties can be as high as $1 million for each day the activity
continues.
Annual Reporting; Examinations
We are required to file annual 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 examine a bank holding company or any of its subsidiaries, and charge the
company for the cost of such the examination.
Capital Adequacy Requirements
The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate
the capital adequacy of certain large bank holding companies. Prior to March 30, 2006, these
capital guidelines were applicable to all bank holding companies having $150 million or more in
assets on a consolidated basis. However, effective March 30, 2006, the Federal Reserve Board
amended the asset size threshold to $500 million for purposes of determining whether a bank holding
company is subject to the capital adequacy guidelines. Hanmi Financial currently has consolidated
assets in excess of $500 million and is therefore subject to the Federal Reserve Boards capital
adequacy guidelines.
Under the guidelines, specific categories of assets are assigned different risk weights, based
generally on the perceived credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a risk-weighted asset base. The guidelines require a
minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of
Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. To be considered
well-capitalized, a bank holding company must maintain, on a consolidated basis, (i) a Tier 1
risk-based capital ratio of at least 6.0%, and (ii) a total risk-based capital ratio of 10.0% or
greater. As of December 31, 2009, our Tier 1 risk-based capital ratio was 6.76% and our total
risk-based capital ratio was 9.12%. Accordingly, we and the Bank both qualified as adequately
capitalized as of December 31, 2009.
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage
ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The
leverage ratio is a companys Tier 1 capital divided by its average total consolidated assets.
Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but
other bank holding companies are required to maintain a leverage ratio of at least 4.0%. As of
December 31, 2009, our leverage ratio was 5.82%.
15
The federal banking agencies risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified criteria. The federal
bank regulatory agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines
also provide that banking organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions, substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
As described previously, the Bank is also required to increase its capital and maintain
certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010,
the Bank will be required to increase its contributed equity capital by not less than an additional
$100 million. The Bank will be required to maintain a ratio of tangible shareholders equity to
total tangible assets as follows:
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Ratio of Tangible Shareholders |
Date |
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Equity to Total Tangible Assets |
By December 31, 2009
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Not Less Than 7.0 Percent |
By July 31, 2010
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Not Less Than 9.0 Percent |
From December 31, 2010 and Until the Order is Terminated
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Not Less Than 9.5 Percent |
If the Bank is not able to maintain the capital ratios identified in the Order, it must
notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital
ratios fall below those set forth in the capital plan to be submitted to the FRB. Our inability to
comply with the capital ratios identified in the Order raises substantial doubt about our ability
to continue as a going concern. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of
6.69 percent and tangible stockholders equity to total tangible assets ratio of 7.13 percent.
Imposition of Liability for Undercapitalized Subsidiaries
Bank regulators are required to take prompt corrective action to resolve problems associated
with insured depository institutions whose capital declines below certain levels. In the event an
institution becomes undercapitalized, it must submit a capital restoration plan. The capital
restoration plan will not be accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiarys compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository institutions holding
company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the
lesser of 5% of the institutions assets at the time it became undercapitalized or the amount
necessary to cause the institution to be adequately capitalized. The bank regulators have
greater power in situations where an institution becomes significantly or critically
undercapitalized or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior Federal Reserve Board
approval of proposed dividends, or might be required to consent to a consolidation or to divest the
troubled institution or other affiliates.
Acquisitions by Bank Holding Companies
The Bank Holding Company Act requires every bank holding company to obtain the prior approval
of the Federal Reserve Board before it may acquire all, or substantially all, of the assets of any
bank, or ownership or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to
consider the financial and managerial resources and future prospects of the bank holding company
and the banks concerned, the convenience and needs of the communities to be served, and various
competitive factors.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from acquiring control
of a bank holding company unless the Federal Reserve Board has been notified and has not objected
to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act would, under the circumstances set forth
in the presumption, constitute acquisition of control.
16
In addition, any company is required to obtain the approval of the Federal Reserve Board under
the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank
holding company) or more of the outstanding common stock of the company, or otherwise obtaining
control or a controlling influence over the company.
Cross-guarantees
Under the Federal Deposit Insurance Act, or FDIA, a depository institution (which definition
includes both banks and savings associations), the deposits of which are insured by the FDIC, can
be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2)
any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution
in danger of default. Default is defined generally as the appointment of a conservator or a
receiver and in danger of default is defined generally as the existence of certain conditions
indicating that default is likely to occur in the absence of regulatory assistance. In some
circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC),
cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured
depository institutions in a holding company structure. Any obligation or liability owed by a
subsidiary bank to its parent company is subordinated to the subsidiary banks cross-guarantee
liability with respect to commonly controlled insured depository institutions. The Bank is
currently the only FDIC-insured depository institution subsidiary of Hanmi Financial.
Because Hanmi Financial is a legal entity separate and distinct from the Bank, its right to
participate in the distribution of assets of any subsidiary upon the subsidiarys liquidation or
reorganization will be subject to the prior claims of the subsidiarys creditors. In the event of a
liquidation or other resolution of the Bank, the claims of depositors and other general or
subordinated creditors of the Bank would be entitled to a priority of payment over the claims of
holders of any obligation of the Bank to its shareholders, including any depository institution
holding company (such as Hanmi Financial) or any shareholder or creditor of such holding company.
Anti-Terrorism Legislation
In the wake of the tragic events of September 11th, on October 26, 2001, the President signed
into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001. Also known as the Patriot Act, the law enhances the powers
of the federal government and law enforcement organizations to combat terrorism, organized crime,
and money laundering. The Patriot Act significantly amends and expands the application of the Bank
Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity
reporting rules, and enhanced anti-money laundering programs.
Under the Patriot Act, financial institutions are subject to prohibitions against specified
financial transactions and account relationships as well as enhanced due diligence and know your
customer standards in their dealings with foreign financial institutions and customers. For
example, the enhanced due diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
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to conduct enhanced scrutiny of account relationships to guard against money laundering
and report any suspicious transaction; |
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to ascertain the identity of the nominal and beneficial owners of, and the source of
funds deposited into, each account as needed to guard against money laundering and report
any suspicious transactions; |
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to ascertain for any foreign bank, the shares of which are not publicly traded, the
identity of the owners of the foreign bank, and the nature and extent of the ownership
interest of each such owner; and |
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to ascertain whether any foreign bank provides correspondent accounts to other foreign banks
and, if so, the
identity of those foreign banks and related due diligence information. |
17
Under the Patriot Act, financial institutions must also establish anti-money laundering
programs. The Patriot Act sets forth minimum standards for these programs, including: (i) the
development of internal policies, procedures and controls; (ii) the designation of a compliance
officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test
the adequacy of such programs.
In addition, the Patriot Act requires bank regulatory agencies to consider the record of a bank in
combating money laundering activities in their evaluation of bank and bank holding company merger
or acquisition transactions. Regulations proposed by the U.S. Department of the Treasury to effect
certain provisions of the Patriot Act provide that all transaction or other correspondent accounts
held by a U.S. financial institution on behalf of any foreign bank must be closed within 90 days
after the final regulations are issued, unless the foreign bank has provided the U.S. financial
institution with a means of verification that the institution is not a shell bank. Proposed
regulations interpreting other provisions of the Patriot Act continue to be issued.
Under the authority of the Patriot Act, the Secretary of the Treasury adopted rules on
September 26, 2002 increasing the cooperation and information sharing among financial institutions,
regulators, and law enforcement authorities regarding individuals, entities and organizations
engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or
money laundering activities. Under those rules, a financial institution is required to:
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expeditiously search its records to determine whether it maintains or has maintained
accounts, or engaged in transactions with individuals or entities, listed in a request
submitted by the Financial Crimes Enforcement Network (FinCEN); |
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notify FinCEN if an account or transaction is identified; |
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designate a contact person to receive information requests; |
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limit use of information provided by FinCEN to (i) reporting to FinCEN, (ii) determining
whether to establish or maintain an account or engage in a transaction, and (iii) assisting the financial
institution in complying with the Bank Secrecy Act; and |
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maintain adequate procedures to protect the security and confidentiality of FinCEN requests. |
Under the new rules, a financial institution may also share information regarding individuals,
entities, organizations, and countries for purposes of identifying and, as appropriate, reporting
activities that it suspects may involve possible terrorist activity or money laundering. Such
information-sharing is protected under a safe harbor if the financial institution: (i) notifies
FinCEN of its intention to share information, even when sharing with an affiliated financial
institution; (ii) takes reasonable steps to verify that, prior to sharing, the financial
institution or association of financial institutions with which it intends to share information has
submitted a notice to FinCEN; (iii) limits the use of shared information to identifying and
reporting on money laundering or terrorist activities, determining whether to establish or maintain
an account or engage in a transaction, or assisting it in complying with the Bank Security Act; and
(iv) maintains adequate procedures to protect the security and confidentiality of the information.
Any financial institution complying with these rules will not be deemed to have violated the
privacy requirements discussed above.
The Secretary of the Treasury also adopted a rule on September 26, 2002 intended to prevent
money laundering and terrorist financing through correspondent accounts maintained by U.S.
financial institutions on behalf of foreign banks. Under the rule, financial institutions:
(i) are prohibited from providing correspondent accounts to foreign shell banks; (ii) are required
to obtain a certification from foreign banks for which they maintain a correspondent account
stating the foreign bank is not a shell bank and that it will not permit a foreign shell bank to
have access to the U.S. account; (iii) must maintain records identifying the owner of the foreign
bank for which they may maintain a correspondent account and its agent in the United States
designated to accept services of legal process; and (iv) must terminate correspondent accounts of
foreign banks that fail to comply with or fail to contest a lawful request of the Secretary of the
Treasury or the Attorney General of the United States, after being notified by the Secretary or
Attorney General.
18
Sarbanes-Oxley Act of 2002
In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, which implemented legislative reforms intended to address corporate and
accounting fraud. The Sarbanes-Oxley Act contains reforms of various business practices and
numerous aspects of corporate governance. Most of these requirements have been implemented
pursuant to regulations issued by the SEC. The following is a summary of certain key provisions of
the Sarbanes-Oxley Act.
In addition to the establishment of a new accounting oversight board that enforces auditing,
quality control and independence standards and is funded by fees from all registered public
accounting firms and publicly traded companies, the Sarbanes-Oxley Act places restrictions on the
scope of services that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client requires pre-approval by the
clients audit committee. Also, the Sarbanes-Oxley Act makes certain changes to the requirements
for partner rotation after a period of time. The Sarbanes-Oxley Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic
reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly
violate this certification requirement. Furthermore, counsel is required to report evidence of a
material violation of securities laws or a breach of fiduciary duties to the companys chief
executive officer or its chief legal officer, and, if such officer does not appropriately respond,
to report such evidence to the audit committee or other similar committee of the board of directors
or the board itself.
Under this law, longer prison terms apply to corporate executives who violate federal
securities laws; the period during which certain types of suits can be brought against a company or
its officers is extended and bonuses issued to top executives prior to restatement of a companys
financial statements are now subject to disgorgement if such restatement was due to corporate
misconduct. Executives are also prohibited from insider trading during retirement plan blackout
periods, and loans to company executives (other than loans by financial institutions permitted by
federal rules or regulations) are restricted. In addition, the legislation accelerates the time
frame for disclosures by public companies, as they must immediately disclose any material changes
in their financial condition or operations. Directors and executive officers required to report
changes in ownership in a companys securities must now report any such change within two business
days of the change.
The Sarbanes-Oxley Act increases responsibilities and codifies certain requirements relating
to audit committees of public companies and how they interact with the companys registered public
accounting firm. Audit committee members must be independent and are barred from accepting
consulting, advisory or other compensatory fees from the company. In addition, companies are
required to disclose whether at least one member of the committee is a financial expert (as such
term is defined by the SEC) and if not, why not. A companys registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if the companys chief
executive officer, chief financial officer, controller, chief accounting officer or any person
serving in equivalent positions had been employed by such firm and participated in the audit of
such company during the one-year period preceding the audit initiation date. The Sarbanes-Oxley
Act also prohibits any officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate or mislead any
independent public or certified accountant engaged in the audit of the companys financial
statements for the purpose of rendering the financial statements materially misleading.
Furthermore, the Sarbanes-Oxley Act increases the protection for employees of publicly traded
companies who provide evidence of fraud, by increasing relief for compensatory damages in civil
cases and penalties in criminal cases.
19
The Sarbanes-Oxley Act also has provisions relating to inclusion of certain internal control
reports and assessments by management in the annual report to stockholders. Hanmi Financial is
required to include an internal control report containing managements assertions regarding the
effectiveness of its internal control structure and procedures over financial reporting. The
internal control report must include statements regarding managements responsibility for
establishing and maintaining adequate internal control over financial reporting; managements
assessment as to the effectiveness of the companys internal control over financial reporting,
based on managements evaluation of it as of year-end; and of the framework used as criteria for
evaluating the effectiveness of the companys internal control over financial reporting. The law
also requires the companys registered public accounting firm that issues the audit report to
attest to, and report on the companys internal controls over financial reporting in accordance
with standards for attestation engagements issued or adopted by the Public Company Accounting
Oversight Board.
Securities Registration
Our securities are registered with the SEC under the Exchange Act. As such, we are subject to
the information, proxy solicitation, insider trading, corporate governance, and other requirements
and restrictions of the Exchange Act.
The Bank
As a California commercial bank whose deposits are insured by the FDIC, the Bank is subject to
regulation, supervision and regular examination by the DFI and by the FRB. As a member bank, the
Bank is a stockholder of the FRBof San Francisco. Specific federal and state laws and regulations
that are applicable to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of deposited funds,
their activities relating to dividends, investments, loans, the nature and amount of and collateral
for certain loans, borrowings, capital requirements, certain check-clearing activities, branching,
and mergers and acquisitions. Supervision, examination and enforcement actions by these agencies
are generally intended to protect depositors, creditors, borrowers and the DIF and generally is not
intended for the protection of stockholders.
If, as a result of an examination, the DFI or the FRB should determine that the financial
condition, capital resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Banks operations are unsatisfactory or that the Bank or its management is violating
or has violated any law or regulation, the DFI and the FRB, and separately the FDIC as insurer of
the Banks deposits, have residual authority to:
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require affirmative action to correct any conditions resulting from any violation or
practice; |
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direct an increase in capital or establish specific minimum capital ratios; |
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restrict the Banks growth geographically, by products and services or by mergers and
acquisitions; |
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enter into informal non-public or formal public memoranda of understanding or written
agreements; enjoin unsafe and unsound practices and issue cease and desist orders to take
corrective action; |
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remove officers and directors and assess civil monetary penalties; and |
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take possession and close and liquidate the Bank. |
As discussed above, on October 8, 2008, the Bank entered into a MOU with the Regulators to
address certain issues raised in the Banks most recent regulatory examination by the DFI on March
10, 2008. The MOU has been superseded by the Order issued by the DFI, and the Agreement with the
FRB, each of which were issued effective as of November 2, 2009.
20
Permissible Activities and Subsidiaries
Under the California Financial Code, California banks have all the powers of a California
corporation, subject to the general limitation of state bank powers under the FDI Act to those
permissible for national banks. California banks may engage in the commercial banking business,
which generally encompasses lending, deposit-taking and all other kinds of banking business in
which banks, including national banks, customarily engage in the United States. Further, California
banks may form subsidiaries to engage in the many so-called closely related to banking or
non-banking activities commonly conducted by national banks in operating subsidiaries. Federal
law prohibits the Bank and its subsidiaries from engaging in any banking activities in which a
national bank cannot engage, unless the activity is found by the FDIC not to pose a significant
risk to the DIF. This prohibition does not extend to those activities in which the Bank (or a
subsidiary of the Bank) is authorized under state law to engage as agent, advisor, custodian,
administrator or trustee for its customer.
In addition, under the GLBA, the Bank may engage in expanded financial activities through
specially qualified financial subsidiaries to the same extent as a national bank. In order to
form a financial subsidiary, the Bank must be and remain well-capitalized and well-managed and in
satisfactory compliance with the CRA, and would be subject to the same capital deduction, risk
management and affiliate transaction rules that apply to financial subsidiaries of national banks.
Generally, a financial subsidiary is permitted to engage in activities, as may a financial holding
company, that are financial in nature or incidental thereto, even though they are not permissible
for the national bank to conduct directly within the bank. However, a bank financial subsidiary may
not engage as principal in underwriting insurance (other than credit life insurance), issue
annuities, or engage in real estate development or investment or merchant banking. Presently, the
Bank has no financial subsidiaries.
In September 2007, the SEC and the FRB finalized joint rules required by the Financial
Services Regulatory Relief Act of 2006 to implement exceptions provided in the GLBA for securities
activities that banks may conduct without registering with the SEC as a securities broker or moving
such activities to a broker-dealer affiliate. The FRBs final Regulation R provides exceptions for
networking arrangements with third party broker-dealers and authorizes compensation for bank
employees who refer and assist retail and high net worth bank customers with their securities,
including sweep accounts to money market funds, and with related trust, fiduciary, custodial and
safekeeping needs. The final rules, which became effective in 2009, are not expected to have a
material effect on the current securities activities that the Bank currently conducts for
customers.
Brokered deposits
Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending
on their capital classification. Well-capitalized banks are permitted to accept brokered
deposits, but all banks that are not well-capitalized could be restricted to accept such
deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to
accept brokered deposits if the FDIC determines that acceptance of such deposits would not
constitute an unsafe or unsound banking practice with respect to the bank. Deposits obtained from
financial intermediaries, so-called brokered deposits, represented approximately 7.40 percent of
the Banks total deposits as of December 31, 2009. As previously mentioned, the Bank is not
currently well-capitalized and therefore is restricted from accepting brokered deposits. As of
December 31, 2009, brokered deposits were $203.5 million. All brokered deposits are currently
scheduled to mature on or prior to June 30, 2010.
21
Community Reinvestment Act
Under the Community Reinvestment Act, or CRA, as implemented by the Congress in 1977, a
financial institution has a continuing and affirmative obligation, consistent with its safe and
sound operation, to help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institutions discretion to develop the types of
products and services that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires federal examiners, in connection with the examination of a financial
institution, to assess the institutions record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by such institution. The
CRA also requires all institutions to make public disclosure of their CRA ratings. Hanmi Financial
has a Compliance Committee, which oversees the planning of products, and services offered to the
community, especially those aimed to serve low and moderate income communities. The Federal
Reserve rated the Bank as outstanding in meeting community credit needs under the CRA at its most
recent examination for CRA performance.
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, bank holding
companies and banks generally have the ability to acquire or merge with banks in other states, and,
subject to certain state restrictions, banks may also acquire or establish new branches outside
their home states. Interstate branches are subject to certain laws of the states in which they are
located. The Bank presently has no interstate branches.
Federal Home Loan Bank System
The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San
Francisco. Among other benefits, each Federal Home Loan Bank (FHLB) serves as a reserve or
central bank for its members within its assigned region and makes available loans or advances to
its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB
system. Each FHLB makes available loans or advances to its members in compliance with the policies
and procedures established by the Board of Directors of the individual FHLB. Each member of the
FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a
membership stock requirement with an initial cap of $25 million (100 percent of membership asset
value as defined), or (ii) an activity based stock requirement (based on percentage of outstanding
advances). At December 31, 2009, the Bank was in compliance with the FHLBs stock ownership
requirement and our investment in FHLB capital stock totaled $30.7 million. The total borrowing
capacity available based on pledged collateral and the remaining available borrowing capacity as of
December 31, 2009 were $571.2 million and $415.9 million, respectively.
Federal Reserve System
The FRB requires all depository institutions to maintain noninterest-bearing reserves at
specified levels against their transaction accounts (primarily checking and non-personal time
deposits). At December 31, 2009, the Bank was in compliance with these requirements.
22
Capital Standards
At December 31, 2009, Hanmi Financial and the Banks capital ratios exceed the minimum
percentage requirements to be deemed adequately capitalized institutions. See Notes to
Consolidated Financial Statements, Note 15 Regulatory Matters.
Hanmi Financial and the Bank are subject to capital adequacy guidelines that incorporate both
risk-based and leverage capital requirements. These capital adequacy guidelines define capital in
terms of core capital elements, or Tier 1 capital, and supplemental capital elements, or Tier 2
capital. Tier 1 capital is generally defined as the sum of the core capital elements less goodwill
and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on
available-for-sale investment securities carried at fair value. The following items are included as
core capital elements: (i) common shareholders equity; (ii) qualifying non-cumulative perpetual
preferred stock and related surplus, including trust preferred securities (but not in excess of 25
percent of Tier 1 capital); and (iii) minority interests in the equity accounts of consolidated
subsidiaries. Supplementary capital elements include: (i) allowance for loan and lease losses (but
not more than 1.25 percent of an institutions risk-weighted assets); (ii) perpetual preferred
stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments,
perpetual debt and mandatory convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus. The maximum amount of supplemental capital
elements that qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital.
The minimum required ratio of qualifying total capital to total risk-weighted assets, or the
total risk-based capital ratio, is 8.0 percent, at least one-half of which must be in the form of
Tier 1 capital, and the minimum required ratio of Tier 1 capital to total risk-weighted assets, or
the Tier 1 risk-based capital ratio, is 4.0 percent. Risk-based capital ratios are calculated to
provide a measure of capital that reflects the degree of risk associated with a banking
organizations operations for both transactions reported on the balance sheet as assets, and
transactions, such as letters of credit and recourse arrangements, which are recorded as
off-balance sheet items. Under the risk-based capital guidelines, the 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 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such
as business loans.
The risk-based capital requirements also take into account concentrations of credit (i.e.,
relatively large proportions of loans involving one borrower, industry, location, collateral or
loan type) and the risks of non-traditional activities (those that have not customarily been part
of the banking business). The regulations require institutions with high or inordinate levels of
risk to operate with higher minimum capital standards and authorize the regulators to review an
institutions management of such risks in assessing an institutions capital adequacy. The
risk-based capital regulations also include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a banks capital adequacy. Interest rate risk is the
exposure of a banks current and future earnings and equity capital arising from adverse movements
in interest rates. While interest rate risk is inherent in a banks role as financial intermediary,
it introduces volatility to bank earnings and to the economic value of the institution. Bank
holding companies and banks engaged in significant trading activity (trading assets constituting 10
percent or more of total assets, or $1 billion or more) may also be subject to the market risk
capital guidelines and be required to incorporate additional market and interest rate risk
components into their risk-based capital standards. Neither Hanmi Financial nor the Bank is
currently subject to the market risk capital rules.
Hanmi Financial and the Bank are also required to maintain a leverage capital ratio designed
to supplement the risk-based capital guidelines. Banks and bank holding companies that have
received the highest rating of the five categories used by regulators to rate banks and that are
not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital
(net of all intangibles) to adjusted average total assets of at least 3.0 percent. All other
institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above
the 3.0 percent minimum, for a minimum of 4.0 percent to 5.0 percent. Pursuant to federal
regulations, banks must maintain capital levels commensurate with the level of risk to which they
are exposed, including the volume and severity of problem loans. Federal regulators may, however,
set higher capital requirements when a banks particular circumstances warrant. As of December 31,
2009, the Banks leverage capital ratio was 6.69 percent, and Hanmi Financials leverage capital
ratio was 5.82 percent, both ratios exceeding regulatory minimums.
23
As of December 31, 2009, the regulatory capital guidelines and the actual capital ratios for
Hanmi Financial and the Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Guidelines |
|
|
Actual |
|
|
|
Adequately |
|
|
Well |
|
|
Hanmi |
|
|
Hanmi |
|
|
|
Capitalized |
|
|
Capitalized |
|
|
Bank |
|
|
Financial |
|
Total Risk-Based Capital Ratio |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
9.07 |
% |
|
|
9.12 |
% |
Tier 1 Risk-Based Capital Ratio |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
7.77 |
% |
|
|
6.76 |
% |
Tier 1 Leverage Ratio |
|
|
4.00 |
% |
|
|
5.00 |
% |
|
|
6.69 |
% |
|
|
5.82 |
% |
The current risk-based capital guidelines that apply to Hanmi Financial and the Bank are
based upon the 1988 capital accord of the International Basel Committee on Banking Supervision, a
committee of central banks and bank supervisors/regulators from the major industrialized countries
that develops broad policy guidelines for use by each countrys supervisors in determining the
supervisory policies they apply. A new international accord, referred to as Basel II, which
emphasizes internal assessment of credit, market and operational risk, supervisory assessment and
market discipline in determining minimum capital requirements, became mandatory for large or core
international banks outside the United States in 2008 (total assets of $250 billion or more or
consolidated foreign exposures of $10 billion or more); is optional for others, and if adopted,
must first be complied with in a parallel run for two years along with the existing Basel I
standards. In January 2009, the Basel Committee proposed to reconsider regulatory capital
standards, supervisory and risk-management requirements and additional disclosures in the final new
accord in response to recent worldwide developments.
As previously mentioned, by July 31, 2010, the Bank will be required to increase its
contributed equity capital by not less than an additional $100 million. See Notes to Consolidated
Financial Statements, Note 15 Regulatory Matters for further details.
Prompt Corrective Action Regulations
Federal law requires each federal banking agency to take prompt corrective action when a bank
falls below one or more prescribed minimum capital ratios. The federal banking agencies have, by
regulation, defined the following five capital categories:
|
|
|
Well Capitalized Total risk-based capital ratio of 10.0 percent, Tier 1 risk-based
capital ratio of 6.0 percent, and leverage capital ratio of 5.0 percent, and not subject to
any order or written directive by any regulatory authority to meet and maintain a specific
capital level for any capital measure; |
|
|
|
Adequately Capitalized Total risk-based capital ratio of 8.0 percent, Tier 1
risk-based capital ratio of 4.0 percent, and leverage capital ratio of 4.0 percent (or 3.0
percent if the institution receives the highest rating from its primary regulator); |
|
|
|
Undercapitalized Total risk-based capital ratio of less than 8.0 percent, Tier 1
risk-based capital ratio of less than 4.0 percent, or leverage capital ratio of less than
4.0 percent (or 3.0 percent if the institution receives the highest rating from its primary
regulator); |
|
|
|
Significantly Undercapitalized Total risk-based capital ratio of less than 6.0
percent, Tier 1 risk-based capital ratio of less than 3.0 percent, or leverage capital
ratio of less than 3.0 percent; and |
|
|
|
Critically Undercapitalized Tangible equity to total assets of less than 2.0
percent. |
A bank may be treated as though it were in the next lower capital category if, after notice
and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound
condition or practice so warrants, but no bank may be treated as critically undercapitalized
unless its actual capital ratio warrants such treatment.
Undercapitalized banks are required to submit capital restoration plans and, during any period
of capital inadequacy, may not pay dividends or make other capital distributions, are subject to
asset growth and expansion restrictions and may not be able to accept brokered deposits. At each
successively lower capital category, banks are subject to increased restrictions on operations.
24
The federal banking agencies have also adopted non-capital safety and soundness standards to
assist examiners in identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth operational and managerial standards relating
to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation,
(iii) credit underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and
(vii) compensation and benefits. In general, the standards are designed to assist the federal
banking agencies in identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet safety and soundness standards, the
appropriate federal banking agency may require the institution to submit a compliance plan and
institute enforcement proceedings if an acceptable compliance plan is not submitted or the
deficiency is not corrected.
Under the Order, the Bank is required to increase its capital and maintain certain regulatory
capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be
required to increase its contributed equity capital by not less than an additional $100 million.
See Note 15 Regulatory Matters for further details.
FDIC Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory
limits, of federally insured banks and savings institutions and safeguards the safety and soundness
of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to
prescribed limits for each depositor. Pursuant to the EESA, the maximum deposit insurance amount
has been increased from $100,000 to $250,000 through the end of 2013. The amount of FDIC
assessments paid by each DIF member institution is based on its relative risk of default as
measured by regulatory capital ratios and other supervisory factors. Pursuant to the Federal
Deposit Insurance Reform Act of 2005, the FDIC is authorized to set the reserve ratio for the DIF
annually at between 1.15 percent and 1.50 percent of estimated insured deposits. The FDIC may
increase or decrease the assessment rate schedule on a semi-annual basis. In an effort to restore
capitalization levels and to ensure the DIF will adequately cover projected losses from future bank
failures, the FDIC, in October 2008, proposed a rule to alter the way in which it differentiates
for risk in the risk-based assessment system and to revise deposit insurance assessment rates,
including base assessment rates.
On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system
and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points and due
to extraordinary circumstances, extended the time within which the reserve ratio must by returned
to 1.15 percent from five to seven years.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on
each insured depository institutions assets minus Tier 1 capital as of June 30, 2009. The amount
of the special assessment for any institution was limited to 10 basis points times the
institutions assessment base for the second quarter 2009. The special assessment was collected on
September 30, 2009.
Additionally, by participating in the transaction account guarantee program under the TLGP,
banks temporarily become subject to an additional assessment on deposits in excess of $250,000 in
certain transaction accounts and additionally for assessments from 50 basis points to 100 basis
points per annum depending on the initial maturity of the debt. Further, all FDIC-insured
institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued
by the Financing Corporation (FICO), an agency of the Federal Government established to
recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined quarterly,
averaged 0.0113 percent of insured deposits in fiscal 2008. These assessments will continue until
the FICO bonds mature in 2017.
The FDIC may terminate a depository institutions deposit insurance upon a finding that the
institutions financial condition is unsafe or unsound or that the institution has engaged in
unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the
banks depositors. The termination of deposit insurance for a bank would also result in the
revocation of the banks charter by the DFI.
25
Loans-to-One-Borrower
With certain limited exceptions, the maximum amount that a California bank may lend to any
borrower at any one time (including the obligations to the bank of certain related entities of the
borrower) may not exceed 25 percent (and unsecured loans may not exceed 15 percent) of the banks
stockholders equity, allowance for loan losses, and any capital notes and debentures of the bank.
Extensions of Credit to Insiders and Transactions with Affiliates
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or
extensions of credit to:
|
|
|
a bank or bank holding companys executive officers, directors and principal
stockholders (i.e., in most cases, those persons who own, control or have power to vote
more than 10 percent of any class of voting securities); |
|
|
|
any company controlled by any such executive officer, director or stockholder; or |
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|
any political or campaign committee controlled by such executive officer, director or
principal stockholder. |
Such loans and leases:
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|
must comply with loan-to-one-borrower limits; |
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|
|
require prior full board approval when aggregate extensions of credit to the person
exceed specified amounts; |
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|
must be made on substantially the same terms (including interest rates and collateral)
and follow credit-underwriting procedures no less stringent than those prevailing at the
time for comparable transactions with non-insiders; |
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|
must not involve more than the normal risk of repayment or present other unfavorable
features; and |
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|
in the aggregate limit not exceed the banks unimpaired capital and unimpaired surplus. |
California has laws and the DFI has regulations that adopt and apply Regulation O to the Bank.
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A
and 23B and FRB Regulation W on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other
securities thereof, the taking of such securities as collateral for loans, and the purchase of
assets of any affiliates. Affiliates include parent holding companies, sister banks, sponsored and
advised companies, financial subsidiaries and investment companies where the Banks affiliate
serves as investment advisor. Sections 23A and 23B and Regulation W generally:
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|
prevent any affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts; |
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|
|
limit such loans and investments to or in any affiliate individually to 10 percent of
the Banks capital and surplus; |
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|
|
limit such loans and investments to all affiliates in the aggregate to 20 percent of
the Banks capital and surplus; and |
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|
|
require such loans and investments to or in any affiliate to be on terms and under
conditions substantially the same or at least as favorable to the Bank as those prevailing
for comparable transactions with non-affiliated parties. |
Additional restrictions on transactions with affiliates may be imposed on the Bank under the
FDI Acts prompt corrective action regulations and the supervisory authority of the federal and
state banking agencies discussed above.
26
Dividends
Holders of Hanmi Financial common stock and preferred stock are entitled to receive dividends
as and when declared by the Board of Directors out of funds legally available therefore under the
laws of the State of Delaware. Delaware corporations such as Hanmi Financial may make distributions
to their stockholders out of their surplus, or out of their net profits for the fiscal year in
which the dividend is declared and for the preceding fiscal year. However, dividends may not be
paid out of a corporations net profits if, after the payment of the dividend, the corporations
capital would be less than the capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets.
The FRB has advised bank holding companies that it believes that payment of cash dividends in
excess of current earnings from operations is inappropriate and may be cause for supervisory
action. As a result of this policy, banks and their holding companies may find it difficult to pay
dividends out of retained earnings from historical periods prior to the most recent fiscal year or
to take advantage of earnings generated by extraordinary items such as sales of buildings or other
large assets in order to generate profits to enable payment of future dividends. In a February 2009
guidance letter, the FRB directed that a bank holding company should inform the FRB if it is
planning to pay a dividend that exceeds earnings for a given quarter or that could affect the
banks capital position in an adverse way. Further, the FRBs position that holding companies are
expected to provide a source of managerial and financial strength to their subsidiary banks
potentially restricts a bank holding companys ability to pay dividends. Hanmi Financial has agreed
with the FRB that it will not declare or pay any dividends or make any payments on its trust
preferred securities or any other capital distributions without the prior written consent of the
FRB.
The Bank is a legal entity that is separate and distinct from its holding company. Hanmi
Financial receives income through dividends paid by the Bank. Subject to the regulatory
restrictions described below, future cash dividends by the Bank will depend upon managements
assessment of future capital requirements, contractual restrictions and other factors.
The powers of the Board of Directors of the Bank to declare a cash dividend to its holding
company is subject to California law, which restricts the amount available for cash dividends to
the lesser of a banks retained earnings or net income for its last three fiscal years (less any
distributions to shareholders made during such period). Where the above test is not met, cash
dividends may still be paid, with the prior approval of the DFI, in an amount not exceeding the
greatest of: 1) retained earnings of the bank; 2) the net income of the bank for its last fiscal
year; or 3) the net income of the bank for its current fiscal year. Due to the Banks retained
deficit of $53.5 million as of December 31, 2008 and a net loss for years ended 2008 and 2009, the
Bank is restricted under California law from making dividends to Hanmi Financial without the prior
approval of the DFI. See Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities Dividends for a further discussion of
restrictions on the Banks ability to pay dividends to Hanmi Financial.
Under the terms of its FRB Written Agreement and DFI Final Order, the Bank is also prohibited
from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to
its business without prior approval from the FRB and DFI, and the Bank and Hanmi must obtain prior
approval from the FRB and DFI prior to declaring and paying dividends.
Bank regulators also have authority to prohibit a bank from engaging in business practices
considered to be unsafe or unsound. It is possible, depending upon the financial condition of a
bank and other factors, that regulators could assert that the payment of dividends or other
payments might, under certain circumstances, be an unsafe or unsound practice, even if technically
permissible.
27
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy Act (BSA) is a disclosure law that forms the basis of the Federal
Governments framework to prevent and detect money laundering and to deter other criminal
enterprises. Under the BSA, financial institutions such as the Bank are required to maintain
certain records and file certain reports regarding domestic currency transactions and cross-border
transportations of currency. Among other requirements, the BSA requires financial institutions to
report imports and exports of currency in the amount of $10,000 or more and, in general, all cash
transactions of $10,000 or more. The Bank has established a BSA compliance policy under which,
among other precautions, the Bank keeps currency transaction reports to document cash transactions
in excess of $10,000 or in multiples totaling more than $10,000 during one business day, monitors
certain potentially suspicious transactions such as the exchange of a large number of small
denomination bills for large denomination bills, and scrutinizes electronic funds transfers for BSA
compliance. The BSA also requires that financial institutions report to relevant law enforcement
agencies any suspicious transactions potentially involving violations of law.
The USA PATRIOT Act and its implementing regulations significantly expanded the anti-money
laundering and financial transparency laws in response to the terrorist attacks in September 2001.
The Bank has adopted additional comprehensive policies and procedures to address the requirements
of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can result in
public enforcement actions by the banking agencies, including the imposition of civil money
penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also
have serious reputation consequences for us and the Bank.
28
Consumer Laws
The Bank and Hanmi Financial are subject to many federal and state consumer protection laws
and regulations prohibiting unfair or fraudulent business practices, untrue or misleading
advertising and unfair competition, including:
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|
|
The Home Ownership and Equity Protection Act of 1994 requires extra disclosures and
consumer protections to borrowers from certain lending practices, such as practices deemed
to be predatory lending. |
|
|
|
Privacy policies are required by federal and state banking laws and regulations that
limit the ability of banks and other financial institutions to disclose non-public
information about consumers to non-affiliated third parties. The federal bank regulatory
agencies have adopted customer information security guidelines for safeguarding
confidential, personal customer information. The guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of Directors or an
appropriate committee thereof, to create, implement and maintain a comprehensive written
information security program designed to ensure the security and confidentiality of
customer information, protect against any anticipated threats or hazards to the security or
integrity of such information, and protect against unauthorized access or use of such
information that could result in substantial harm or inconvenience to any customer. |
|
|
|
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions
Act, requires financial firms to help deter identity theft, including developing
appropriate fraud response programs, and gives consumers more control of their credit data. |
|
|
|
The Equal Credit Opportunity Act generally prohibits discrimination in any credit
transaction, whether for consumer or business purposes, on the basis of race, color,
religion, national origin, sex, marital status, age (except in limited circumstances),
receipt of income from public assistance programs, or good faith exercise of any rights
under the Consumer Credit Protection Act. |
|
|
|
The Truth in Lending Act requires that credit terms be disclosed in a meaningful and
consistent way so that consumers may compare credit terms more readily and knowledgeably. |
|
|
|
The Fair Housing Act regulates many lending practices, including making it unlawful for
any lender to discriminate in its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap or familial status. |
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|
|
The CRA requires insured depository institutions, while operating safely and soundly,
to help meet the credit needs of their communities; directs the federal regulatory
agencies, in examining insured depository institutions, to assess a banks record of
helping meet the credit needs of its entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices and further requires the
agencies to take a financial institutions record of meeting its community credit needs
into account when evaluating applications for, among other things, domestic branches,
mergers or acquisitions, or holding company formations. In its most recently released
public reports, from September 2008, the Bank received an outstanding rating. |
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|
|
The Home Mortgage Disclosure Act includes a fair lending aspect that requires the
collection and disclosure of data about applicant and borrower characteristics as a way of
identifying possible discriminatory lending patterns and enforcing anti-discrimination
statutes. |
|
|
|
The Real Estate Settlement Procedures Act requires lenders to provide borrowers with
disclosures regarding the nature and cost of real estate settlements and prohibits certain
abusive practices, such as kickbacks. |
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|
|
The National Flood Insurance Act requires homes in flood-prone areas with mortgages
from a federally regulated lender to have flood insurance. |
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|
|
The Americans with Disabilities Act, in conjunction with similar California
legislation, requires employers with 15 or more employees and all businesses operating
commercial facilities or public accommodations to accommodate disabled employees and
customers. |
29
These laws and regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits, making loans,
collecting loans and providing other services. Failure to comply with these laws and regulations
can subject the Bank to various penalties, including, but not limited to, enforcement actions,
injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain
contractual rights.
Regulation of Subsidiaries
Non-bank subsidiaries are subject to additional or separate regulation and supervision by
other state, federal and self-regulatory bodies. Chun-Ha and All World are subject to the licensing
and supervisory authority of the California Commissioner of Insurance.
30
ITEM 1A. RISK FACTORS
Together with the other information on the risks we face and our management of risk contained
in this Report or in our other SEC filings, the following presents significant risks that may
affect us. Events or circumstances arising from one or more of these risks could adversely affect
our business, financial condition, operating results and prospects and the value and price of our
common stock could decline. The risks identified below are not intended to be a comprehensive list
of all risks we face and additional risks that we may currently view as not material may also
adversely impact our financial condition, business operations and results of operations.
Our independent registered public accounting firm has expressed substantial doubt about our
ability to continue as a going concern. Our independent registered public accounting firm in their
audit report for fiscal year 2009 has expressed substantial doubt about our ability to continue as
a going concern. Continued operations may depend on our ability to comply with the terms of the
Order and the financing or other capital required to do so may not be available or may not be
available on acceptable terms. Our audited financial statements were prepared under the assumption
that we will continue our operations on a going concern basis, which contemplates the realization
of assets and the discharge of liabilities in the normal course of business. Our financial
statements do not include any adjustments that might be necessary if we are unable to continue as a
going concern. If we cannot continue as a going concern, our shareholders will lose some or all of
their investment in Hanmi Financial.
We, and our independent registered public accounting firm, have identified a material weakness
in our internal control over financial reporting. Management and our independent registered public
accountants have identified a material weakness in our internal control over financial reporting
related to the allowance for loan losses. The identified deficiency that was considered a material
weakness related to managements policies and procedures for the monitoring and timely evaluation
of and revision to managements approach for assessing credit risk inherent in the Companys loan
portfolio to reflect changes in the economic environment.
While we are taking steps to address the identified material weakness and prevent additional
material weaknesses from occurring, there is no guarantee that these steps will be sufficient to
remediate the identified material weakness or prevent additional material weaknesses from
occurring. If we fail to remediate the material weakness, or if additional material weaknesses are
discovered in the future, we may fail to meet our future reporting obligations and our financial
statements may contain material misstatements. Any such failure could also adversely affect the
results of the periodic management evaluations and annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting.
Our operations may require us to raise additional capital in the future, but that capital may
not be available or may not be on terms acceptable to us when it is needed. We are required by
federal regulatory authorities to maintain adequate levels of capital to support our operations. As
part of the recently issued DFI Final Order, the Bank is also required to increase its capital and
maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July
31, 2010, the Bank will be required to increase its contributed equity capital by not less than an
additional $100 million. The Bank will be required to maintain a ratio of tangible shareholders
equity to total tangible assets as follows:
|
|
|
|
|
Ratio of Tangible Shareholders |
Date |
|
Equity to Total Tangible Assets |
By December 31, 2009
|
|
Not Less Than 7.0 Percent |
By July 31, 2010
|
|
Not Less Than 9.0 Percent |
From December 31, 2010 and Until the Order is Terminated
|
|
Not Less Than 9.5 Percent |
We have also committed to the FRB to adopt a consolidated capital plan to augment and
maintain a sufficient capital position. Our existing capital resources may not satisfy our capital
requirements for the foreseeable future and may not be sufficient to offset any problem assets.
Further, should our asset quality erode and require significant additional provision for credit
losses, resulting in consistent net operating losses at the Bank, our capital levels will decline
and we will need to raise capital to satisfy our agreements with the Regulators.
31
Our ability to raise additional capital will depend on conditions in the capital markets at
that time, which are outside our control, and on our financial performance. Accordingly, we cannot
be certain of our ability to raise additional capital on terms acceptable to us. Inability to raise
additional capital when needed, raises substantial doubt about our ability to continue as a going
concern.
On June 12, 2009, and subsequently amended on July 31, 2009 and September 28, 2009, we entered
into a Securities Purchase Agreement with Leading Investment & Securities Co., Ltd., a Korean
securities broker-dealer (LIS), providing for the sale of 8,079,612 unregistered shares of Hanmi
Financial common stock to LIS at a purchase price of $1.37 per share, resulting in gross proceeds
of $11.1 million. The initial phase of this transaction was completed on September 4, 2009,
resulting in an initial investment by LIS of $6.8 million. It is not expected that the remainder of
this transaction will be completed. Inability to raise additional capital through other sources
when needed, raises substantial doubt about our ability to continue as a going concern. In
addition, if we were to raise additional capital through the issuance of additional shares, our
stock price could be adversely affected, depending on the terms of any shares we were to issue.
We are restricted from accepting brokered deposits and offering interest rates on deposits
that are substantially higher than the prevailing rates in our market. Due to the Banks total
risk-based capital ratio that was 9.07 percent as of December 31, 2009 coupled with the regulatory
enforcement action with specific capital provisions, the Bank is considered to be adequately
capitalized under the regulatory framework for prompt corrective action. Section 29 of the
Federal Deposit Insurance Act (FDIA) limits the use of brokered deposits by institutions that are
less than well-capitalized and allows the FDIC to place restrictions on interest rates that
institutions may pay. Accordingly, we are restricted from accepting brokered deposits and offering
interest rates on deposits that are significantly higher than the prevailing rates in our market.
Our financial flexibility could be severely constrained if we are unable to renew our wholesale
funding or if adequate financing is not available in the future at acceptable rates of interest.
We may not have sufficient liquidity to continue to fund new loan originations, and we may need to
liquidate loans or other assets unexpectedly in order to repay obligations as they mature.
The Bank is subject to additional regulatory oversight as a result of a formal regulatory
enforcement action issued by the Federal Reserve Bank of San Francisco and the California
Department of Financial Institutions. The Bank was subject to an informal supervisory agreement (a
MOU) with the FRB of San Francisco and the California Department of Financial Institutions to
address certain issues raised in the Banks regulatory examination by the DFI on March 10, 2008.
The material terms of the MOU are discussed in Notes to Consolidated Financial Statements, Note 15
- - Regulatory Matters. As a result of the Banks recently completed examination by the FRB and DFI,
on November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of
the Order from the DFI. On the same date, Hanmi Financial and the Bank entered into the Agreement
with the FRB. The Order and the Agreement contain substantially similar provisions which are
described in greater detail in this Notes to Consolidated Financial Statements, Note 15
Regulatory Matters. Under the terms of the Order and Agreement, which were issued and became
effective on November 2, 2009, the Bank is required to implement certain corrective and remedial
measures under strict time frames and we can offer no assurance that the Bank will be able to meet
the deadlines imposed by the regulatory orders. The Order and Agreement will remain in effect until
modified, terminated, suspended or set aside by the FRB and DFI, as applicable.
These regulatory actions will remain in effect until modified, terminated, suspended or set
aside by the FRB or the DFI, as applicable. Failure to comply with the terms of these regulatory
actions within the applicable time frames provided could result in additional orders or penalties
from the FRB and the DFI, which could include further restrictions on our business, assessment of
civil money penalties on us and the Bank, as well as our respective directors, officers and other
affiliated parties, termination of deposit insurance, removal of one or more officers and/or
directors, the liquidation or other closure of the Bank and our ability to continue as a going
concern. Generally, these enforcement actions will be lifted only after subsequent examinations
substantiate complete correction of the underlying issues.
We may become subject to additional regulatory restrictions in the event that our regulatory
capital levels continue to decline. Although we and the Bank both qualified as adequately
capitalized under the regulatory framework for prompt corrective action as of December 31, 2009,
the additional regulatory restrictions resulting from the decline in our capital category, or any
further decline, could have a material adverse effect on our business, financial condition, results
of operations, cash flows and/or future prospects and our ability to continue as a going concern.
32
If a state member bank is classified as undercapitalized, the bank is required to submit a
capital restoration plan to the Federal Reserve. Pursuant to FDICIA, an undercapitalized bank is
prohibited from increasing its assets, engaging in a new line of business, acquiring any interest
in any company or insured depository institution, or opening or acquiring a new branch office,
except under certain circumstances, including the acceptance by the Federal Reserve of a capital
restoration plan for the bank. Furthermore, if a state non-member bank is classified as
undercapitalized, the FDIC may take certain actions to correct the capital position of the bank; if
a bank is classified as significantly undercapitalized or critically undercapitalized, the Federal
Reserve would be required to take one or more prompt corrective actions. These actions would
include, among other things, requiring sales of new securities to bolster capital; improvements in
management; limits on interest rates paid; prohibitions on transactions with affiliates;
termination of certain risky activities and restrictions on compensation paid to executive
officers. If a bank is classified as critically undercapitalized, FDICIA requires the bank to be
placed into conservatorship or receivership within 90 days, unless the Federal Reserve determines
that other action would better achieve the purposes of FDICIA regarding prompt corrective action
with respect to undercapitalized banks.
Under FDICIA, banks may be restricted in their ability to accept broker deposits, depending on
their capital classification. Well-capitalized banks are permitted to accept broker deposits, but
all banks that are not well-capitalized could be restricted to accept such deposits. The FDIC may,
on a case-by-case basis, permit banks that are adequately capitalized, such as the Bank, to accept
broker deposits if the FDIC determines that acceptance of such deposits would not constitute an
unsafe or unsound banking practice with respect to the bank. These restrictions could materially
and adversely affect our ability to access lower costs funds and thereby decrease our future
earnings capacity.
Our financial flexibility could be severely constrained if we are unable to renew our
wholesale funding or if adequate financing is not available in the future at acceptable rates of
interest. We may not have sufficient liquidity to continue to fund new loan originations, and we
may need to liquidate loans or other assets unexpectedly in order to repay obligations as they
mature. Our inability to obtain regulatory consent to accept or renew brokered deposits could have
a material adverse effect on our business, financial condition, results of operations, cash flows
and/or future prospects and our ability to continue as a going concern.
Finally, the capital classification of a bank affects the frequency of examinations of the
bank, the deposit insurance premiums paid by such bank, and the ability of the bank to engage in
certain activities, all of which could have a material adverse effect on our business, financial
condition, results of operations, cash flows and/or future prospects and our ability to continue as
a going concern. Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination of
every bank at least once every twelve months. An exception to this rule is made, however, that
provides that banks (i) with assets of less than $100.0 million, (ii) are categorized as
well-capitalized, (iii) were found to be well managed and its composite rating was outstanding
and (iv) has not been subject to a change in control during the last twelve months, need only be
examined by the FDIC once every 18 months.
We may elect or be compelled to seek additional capital in the future, but capital may not be
available when it is needed. We are required by federal and state regulatory authorities to
maintain adequate levels of capital to support our operations. In that regard, a number of
financial institutions have recently raised considerable amounts of capital as a result of
deterioration in their results of operations and financial condition arising from the turmoil in
the mortgage loan market, deteriorating economic conditions, declines in real estate values and
other factors, which may diminish our ability to raise additional capital.
33
Our ability to raise additional capital, if needed, will depend on conditions in the capital
markets, economic conditions and a number of other factors, many of which are outside our control,
and on our financial performance. Accordingly, we cannot be assured of our ability to raise
additional capital if needed or on terms acceptable to us. Inability to raise additional capital
when needed, raises substantial doubt about our ability to continue as a going concern.
Liquidity risk could impair our ability to fund operations and jeopardize our financial
condition. Liquidity is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a material adverse effect on our
liquidity. Our access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services industry in general.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity due to a market downturn or adverse regulatory action against us.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific
to us, such as a severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole as the recent turmoil faced by
banking organizations in the domestic and worldwide credit markets deteriorates.
Difficult economic and market conditions have adversely affected our industry. Dramatic
declines in the housing market, with decreasing home prices and increasing delinquencies and
foreclosures, have negatively impacted the credit performance of mortgage and construction loans
and resulted in significant write-downs of assets by many financial institutions. General downward
economic trends, reduced availability of commercial credit and increasing unemployment have
negatively impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and the economy have
resulted in decreased lending by financial institutions to their customers and to each other. This
market turmoil and tightening of credit has led to increased commercial and consumer deficiencies,
lack of customer confidence, increased market volatility and widespread reduction in general
business activity. Financial institutions have experienced decreased access to deposits and
borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence
in the financial markets may adversely affect our business, financial condition, results of
operations and stock price. We do not expect that the difficult conditions in the financial markets
are likely to improve in the near future. A worsening of these conditions would likely exacerbate
the adverse effects of these difficult market conditions on us and others in the financial
institutions industry. In particular, we may face the following risks in connection with these
events:
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We potentially face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business opportunities. |
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The process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of economic conditions and
how these economic conditions might impair the ability of our borrowers to repay their
loans. The level of uncertainty concerning economic conditions may adversely affect the
accuracy of our estimates, which may, in turn, impact the reliability of the process. |
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We may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC and reduced the
ratio of reserves to insured deposits. |
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Our liquidity could be negatively impacted by an inability to access the capital
markets, unforeseen or extraordinary demands on cash, or regulatory restrictions, which
could, among other things, materially and adversely affect our business, results of
operations and financial condition and our ability to continue as a going concern. |
34
If current levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition and results of operations and prospects as
a going concern. Recent legislative and regulatory initiatives to address difficult market and
economic conditions may not stabilize the U.S. banking system. On October 3, 2008, President Bush
signed into law the EESA and on February 17, 2009, President Obama signed the ARRA in response to
the current crisis in the financial sector. The Treasury and banking regulators are implementing a
number of programs under this legislation to address capital and liquidity issues in the banking
system. There can be no assurance, however, as to the actual impact that the EESA and the ARRA will
have on the financial markets, including the extreme levels of volatility and limited credit
availability currently being experienced. The failure of the EESA and the ARRA to help stabilize
the financial markets and a continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of operations, access to
capital and credit or the value of our securities.
U.S. and international financial markets and economic conditions could adversely affect our
liquidity, results of operations and financial condition. Global capital markets and economic
conditions continue to be adversely affected and the resulting disruption has been particularly
acute in the financial sector. Our capital ratios have been adversely affected and the cost and
availability of funds may be adversely affected by illiquid credit markets and the demand for our
products and services may decline as our borrowers and customers realize the impact of an economic
slowdown and recession. In addition, the severity and duration of these adverse conditions is
unknown and may exacerbate our exposure to credit risk and adversely affect the ability of
borrowers to perform under the terms of their lending arrangements with us. Accordingly, continued
turbulence in the U.S. and international markets and economy may adversely affect our liquidity,
financial condition, results of operations and profitability.
We have recently experienced an unexpected loss in our key management. Our Chief Credit
Officer passed away in October 2009. Our success depends in large part on our ability to attract
key people who are qualified and have knowledge and experience in the banking industry in our
markets and to retain those people to successfully implement our business objectives. The
unexpected loss of services of one or more of our key personnel or the inability to maintain
consistent personnel in management could have a material adverse impact on our business and results
of operations.
We may be required to make additional provisions for credit losses and charge off additional
loans in the future, which could adversely affect our results of operations and capital levels.
During the year ended December 31, 2009, we recorded a $196.4 million provision for credit losses
and charged off $125.4 million in loans, net of $2.8 million in recoveries. There has been a
general slowdown in the economy and in particular, in the housing market in areas of Southern
California where a majority of our loan customers are based. This slowdown reflects declining
prices and excess inventories of homes to be sold, which has contributed to a financial strain on
homebuilders and suppliers, as well as an overall decrease in the collateral value of real estate
securing loans. As of December 31, 2009, we had $1.0 billion in commercial real estate,
construction and residential property loans. Continuing deterioration in the real estate market
generally and in the residential property and construction segment in particular could result in
additional loan charge-offs and provisions for credit losses in the future, which could have an
adverse effect on our net income and capital levels.
Our allowance for loan losses may not be adequate to cover actual losses. A significant source
of risk arises from the possibility that we could sustain losses because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loans. The underwriting
and credit monitoring policies and procedures that we have adopted to address this risk may not
prevent unexpected losses that could have a material adverse effect on our business, financial
condition, results of operations and cash flows. We maintain an allowance for loan losses to
provide for loan defaults and non-performance. The allowance is also appropriately increased for
new loan growth. While we believe that our allowance for loan losses is adequate to cover inherent
losses, we cannot assure you that we will not increase the allowance for loan losses further or
that our regulators will not require us to increase this allowance.
35
Changes in economic conditions could materially hurt our business. Our business is directly
affected by changes in economic conditions, including finance, legislative and regulatory changes
and changes in government monetary and fiscal policies and inflation, all of which are beyond our
control. In 2009, the economic conditions in the markets in which our borrowers operate
deteriorated and the levels of loan delinquency and defaults that we experienced were substantially
higher than historical levels. If economic conditions continue to deteriorate, it may exacerbate
the following consequences:
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problem assets and foreclosures may increase; |
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demand for our products and services may decline; |
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low cost or non-interest bearing deposits may decrease; and |
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collateral for loans made by us, especially real estate, may decline in value. |
Our Southern California business focus and economic conditions in Southern California could
adversely affect our operations. The Banks operations are located primarily in Los Angeles and
Orange counties. Because of this geographic concentration, our results depend largely upon economic
conditions in these areas. The continued deterioration in economic conditions in the Banks market
areas, or a significant natural or man-made disaster in these market areas, could have a material
adverse effect on the quality of the Banks loan portfolio, the demand for its products and
services and on its overall financial condition and results of operations.
Our concentration in commercial real estate loans located primarily in Southern California
could have adverse effects on credit quality. As of December 31, 2009, the Banks loan portfolio
included commercial real estate and construction loans, primarily in Southern California, totaling
$965.9 million, or 34.2 percent of total gross loans. Because of this concentration, a continued
deterioration of the Southern California commercial real estate market could exacerbate adverse
consequences for the Bank. Among the factors that could contribute to such a continued decline are
general economic conditions in Southern California, interest rates and local market construction
and sales activity.
Our concentration in commercial and industrial loans could have adverse effects on credit
quality. As of December 31, 2009, the Banks loan portfolio included commercial and industrial
loans, primarily in Southern California, totaling $1.71 billion, or 60.8 percent of total gross
loans. Because of this concentration, a continued deterioration of the Southern California economy
could affect the ability of borrowers, guarantors and related parties to perform in accordance with
the terms of their loans, which could have adverse consequences for the Bank.
Our concentrations of loans in certain industries could have adverse effects on credit
quality. As of December 31, 2009, the Banks loan portfolio included loans to: 1) lessors of
non-residential buildings totaling $417.3 million, or 14.8 percent of total gross loans; 2)
borrowers in the accommodation industry totaling $413.4 million, or 14.7 percent of total gross
loans; and 3) gas stations totaling $343.1 million, or 12.2 percent of total gross loans. Most of
these loans are in Southern California. Because of these concentrations of loans in specific
industries, a continued deterioration of the Southern California economy overall, and specifically
within these industries, could affect the ability of borrowers, guarantors and related parties to
perform in accordance with the terms of their loans, which could have adverse consequences for the
Bank.
If a significant number of borrowers, guarantors or related parties fail to perform as
required by the terms of their loans, we could sustain losses. A significant source of risk arises
from the possibility that losses will be sustained because borrowers, guarantors or related parties
may fail to perform in accordance with the terms of their loans. We have adopted underwriting and
credit monitoring procedures and credit policies, including the establishment and review of the
allowance for loan losses, that management believes are appropriate to limit this risk by assessing
the likelihood of non-performance, tracking loan performance and diversifying our credit portfolio.
These policies and procedures, however, may not prevent unexpected losses that could have a
material adverse effect on our financial condition and results of operations. As described herein,
the Bank substantially increased its provision for credit losses in 2009, 2008 and 2007, as
compared to previous years, as a result of increases in historical loss factors, increased
charge-offs and migration of more loans into more adverse risk categories.
36
Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of
risk from a downturn in our real estate markets. A downturn in our real estate markets could hurt
our business because many of our loans are secured by real estate. Real estate values and real
estate markets are generally affected by changes in national, regional or local economic
conditions, fluctuations in interest rates and the availability of loans to potential purchasers,
changes in tax laws and other governmental statutes, regulations and policies and acts of nature,
such as earthquakes and national disasters particular to California. Substantially all of our real
estate collateral is located in California. If real estate values continue to further decline, the
value of real estate collateral securing our loans could be significantly reduced. Our ability to
recover on defaulted loans by foreclosing and selling the real estate collateral would then be
diminished and we would be more likely to suffer losses on defaulted loans.
We are exposed to risk of environmental liabilities with respect to properties to which we
take title. In the course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties. We may be held
liable to a governmental entity or to third parties for property damage, personal injury,
investigation and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean-up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or remediation activities
could be substantial. In addition, if we are the owner or former owner of a contaminated site, we
may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If we become subject to significant
environmental liabilities, our business, financial condition, results of operations and prospects
could be adversely affected.
Our earnings are affected by changing interest rates. Changes in interest rates affect the
level of loans, deposits and investments, the credit profile of existing loans, the rates received
on loans and securities and the rates paid on deposits and borrowings. Significant fluctuations in
interest rates may have a material adverse effect on our financial condition and results of
operations. The current historically low interest rate environment resulted by the response to the
financial market crisis and the global economic recession in 2008 may affect our operating earnings
negatively.
We must manage our funding resources to enable us to meet our ongoing operations costs and our
deposit and borrowing obligations as they come due. Liquidity is essential to our business and any
inability to raise funds could have a substantial negative effect on our liquidity. Sources of
funds to meet our operating needs and obligations include deposits; interest and fee income on
loans and other products and services; earnings on our investment securities portfolio; revenue
from the sale or securitization of loans; new capital infusions and borrowings, such as from the
FHLB. Adverse regulatory developments or a decline in our financial condition or a decline in
financial market conditions generally, such as the recent turmoil faced by depository financial
institutions in the domestic and worldwide credit markets, or a decline in the financial condition
of the FHLB, could have a significant impact on our ability to meet our liquidity needs, including
our ability to attract deposits in an increasingly competitive environment. We cannot forecast if
or when market liquidity conditions will improve from current stresses, although it is our
expectation that the existing turmoil in the financial and credit markets may continue to affect
its performance at least throughout 2010.
The short-term and long-term impact of the new Basel II capital standards and the forthcoming
new capital rules to be proposed for non-Basel II U.S. banks is uncertain. As a result of the
recent deterioration in the global credit markets and the potential impact of increased liquidity
risk and interest rate risk, it is unclear what the short-term impact of the implementation of
Basel II may be or what impact a pending alternative standardized approach to the Basel II option
for non-Basel II U.S. banks may have on the cost and availability of different types of credit and
the potential compliance costs of implementing the new capital standards.
We are subject to government regulations that could limit or restrict our activities, which in
turn could adversely affect our operations. The financial services industry is subject to extensive
federal and state supervision and regulation. Significant new laws, changes in existing laws, or
repeals of existing laws may cause our results to differ materially. Further, federal monetary
policy, particularly as implemented through the Federal Reserve System, significantly affects
credit conditions and a material change in these conditions could have a material adverse affect on
our financial condition and results of operations.
37
Competition may adversely affect our performance. The banking and financial services
businesses in our market areas are highly competitive. We face competition in attracting deposits,
making loans, and attracting and retaining employees. The increasingly competitive environment is a
result of changes in regulation, changes in technology and product delivery systems, new
competitors in the market, and the pace of consolidation among financial services providers. Our
results in the future may differ depending upon the nature and level of competition.
The Bank is currently restricted from paying dividends to Hanmi Financial and Hanmi Financial
is restricted from paying dividends to stockholders and from making any payments on its trust
preferred securities. The primary source of Hanmi Financials income from which we pay Hanmi
Financial obligations and distribute dividends to our stockholders is from the receipt of dividends
from the Bank. The availability of dividends from the Bank is limited by various statutes and
regulations. The Bank currently has deficit retained earnings and has suffered net losses in 2009
and 2008, largely caused by provision for credit losses and goodwill impairments. As a result, the
California Financial Code does not provide authority for the Bank to declare a dividend to Hanmi
Financial, with or without Commissioner approval. In addition, the Bank is prohibited from paying
dividends to Hanmi Financial unless it receives prior regulatory approval. See Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations. Capital
Resources and Liquidity. Furthermore, Hanmi Financial has agreed that it will not pay any
dividends or make any payments on our outstanding $82.4 million of trust preferred securities or
any other capital distributions without the prior written consent of the FRB. We began to defer
interest payment on our trust preferred securities commencing with the interest payment that was
due on January 15, 2009. If we defer interest payments for more than 20 consecutive quarters under
any of our outstanding trust preferred instruments, then we would be in default under such trust
preferred arrangements and the amounts due under the agreements pursuant to which we issued our
trust preferred securities would be immediately due and payable. See Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
for a further discussion of restrictions on the Banks ability to pay dividends to Hanmi Financial.
We continually encounter technological change, and we may have fewer resources than many of
our competitors to continue to invest in technological improvements. The financial services
industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce costs. Our future success
will depend, in part, upon our ability to address the needs of our clients by using technology to
provide products and services that will satisfy client demands for convenience, as well as to
create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products
and services to our customers.
We rely on communications, information, operating and financial control systems technology
from third-party service providers, and we may suffer an interruption in those systems. We rely
heavily on third-party service providers for much of our communications, information, operating and
financial control systems technology, including our internet banking services and data processing
systems. Any failure or interruption of these services or systems or breaches in security of these
systems could result in failures or interruptions in our customer relationship management, general
ledger, deposit, servicing and/or loan origination systems. The occurrence of any failures or
interruptions may require us to identify alternative sources of such services, and we cannot assure
you that we could negotiate terms that are as favorable to us, or could obtain services with
similar functionality as found in our existing systems without the need to expend substantial
resources, if at all.
Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings
and capital from negative publicity or public opinion, is inherent in our business. Negative
publicity or public opinion could adversely affect our ability to keep and attract customers and
expose us to adverse legal and regulatory consequences. Negative public opinion could result from
our actual or perceived conduct in any number of activities, including lending practices, corporate
governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate
protection of customer information, and from actions taken by government regulators and community
organizations in response to that conduct.
38
The price of our common stock may be volatile or may decline. The trading price of our common
stock may fluctuate widely because of a number of factors, many of which are outside our control.
In addition, the stock market is subject to fluctuations in the share prices and trading volumes
that affect the market prices of the shares of many companies. These broad market fluctuations
could adversely affect the market price of our common stock. Among the factors that could affect
our stock price are:
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actual or anticipated quarterly fluctuations in our operating results and financial
condition; |
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changes in revenue or earnings estimates or publication of research reports and
recommendations by financial analysts; |
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failure to meet analysts revenue or earnings estimates; |
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speculation in the press or investment community; |
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strategic actions by us or our competitors, such as acquisitions or restructurings; |
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actions by institutional stockholders; |
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fluctuations in the stock price and operating results of our competitors; |
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general market conditions and, in particular, developments related to market conditions
for the financial services industry; |
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proposed or adopted legislative or regulatory changes or developments; |
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anticipated or pending investigations, proceedings or litigation that involve or affect
us; or |
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domestic and international economic factors unrelated to our performance. |
The stock market and, in particular, the market for financial institution stocks, has
experienced significant volatility recently. As a result, the market price of our common stock may
be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and
cause significant price variations to occur. The trading price of the shares of our common stock
and the value of our other securities will depend on many factors, which may change from time to
time, including, without limitation, our financial condition, performance, creditworthiness and
prospects, future sales of our equity or equity-related securities, and other factors identified
above in Cautionary Note Regarding Forward-Looking Statements. Current levels of market
volatility are unprecedented. The capital and credit markets have been experiencing volatility and
disruption for more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure on stock prices
and credit availability for certain issuers without regard to those issuers underlying financial
strength. A significant decline in our stock price could result in substantial losses for
individual stockholders and could lead to costly and disruptive securities litigation and potential
delisting from The NASDAQ Stock Market, Inc. (Nasdaq).
Your share ownership may be diluted by the issuance of additional shares of our common stock
in the future.
Your share ownership may be diluted by the issuance of additional shares of our common stock
in the future. First, we have adopted a stock option plan that provides for the granting of stock
options to our directors, executive officers and other employees. As of December 31, 2009,
743,958 shares of our common stock were issuable under options granted in connection with our stock
option plans. In addition, 3,000,000 shares of our common stock are reserved for future issuance
to directors, officers and employees under our stock option plan. It is probable that the stock
options will be exercised during their respective terms if the fair market value of our common
stock exceeds the exercise price of the particular option. If the stock options are exercised,
your share ownership will be diluted.
In addition, our amended and restated certificate of incorporation authorizes the issuance of
up to 200,000,000 shares of common stock, but does not provide for preemptive rights to the holders
of our common stock. Any authorized but unissued shares are available for issuance by our Board of
Directors. As a result, if we issue additional shares of common stock to raise additional capital
or for other corporate purposes, you may be unable to maintain your pro rata ownership in Hanmi
Financial.
39
Future sales of common stock by existing stockholders may have an adverse impact on the market
price of our common stock. Sales of a substantial number of shares of our common stock in the
public market, or the perception that large sales could occur, could cause the market price of our
common stock to decline or limit our future ability to raise capital through an offering of equity
securities. As of December 31, 2009, there were 51,182,390 shares of our common stock outstanding,
which are freely tradable without restriction or further registration under the federal securities
laws unless purchased or sold by our affiliates within the meaning of Rule 144 under the
Securities Act.
Holders of our junior subordinated debentures have rights that are senior to those of our
stockholders.
As of December 31, 2009, we had outstanding $82.4 million of trust preferred securities
issued by our subsidiary trusts. Payments of the principal and interest on the trust preferred
securities are conditionally guaranteed by us. The junior subordinated debentures underlying the
trust preferred securities are senior to our shares of common stock. As a result, we must make
payments on the junior subordinated debentures before any dividends can be paid on our common stock
and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior
subordinated debentures must be satisfied before any distributions can be made on our common stock.
We have the right to defer distributions on the junior subordinated debentures (and the related
trust preferred securities) for up to five years, during which time no dividends may be paid on our
common stock.
Anti-takeover provisions and state and federal law may limit the ability of another party to
acquire us, which could cause our stock price to decline. Various provisions of our certificate of
incorporation and by-laws could delay or prevent a third-party from acquiring us, even if doing so
might be beneficial to our stockholders. These provisions provide for, among other things, a
classified board of directors, supermajority voting approval for certain actions, limitation on
large stockholders taking certain actions and the authorization to issue blank check preferred
stock by action of the Board of Directors acting alone, thus without obtaining stockholder
approval. The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of
1978, as amended, together with federal regulations, require that, depending on the particular
circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not
disapproved prior to any person or entity acquiring control of a state member bank, such as the
Bank. These provisions may prevent a merger or acquisition that would be attractive to stockholders
and could limit the price investors would be willing to pay in the future for our common stock.
We may face other risks. From time to time, we detail other risks with respect to our business
and/or financial results in our filings with the SEC.
40
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Hanmi Financials principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A,
Los Angeles, California. The office is leased pursuant to a five-year term, which expires on
November 30, 2013.
The following table sets forth information about our offices as of December 31, 2009:
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Owned/ |
Office |
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Address |
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City/State |
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Leased |
Corporate Headquarters (1) |
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3660 Wilshire Boulevard, Penthouse Suite A |
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Los Angeles, CA |
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Leased |
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Branches: |
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Beverly Hills Branch |
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9300 Wilshire Boulevard, Suite 101 |
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Beverly Hills, CA |
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Leased |
Cerritos Artesia Branch |
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11754 East Artesia Boulevard |
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Artesia, CA |
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Leased |
Cerritos South Branch |
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11900 South Street, Suite 109 |
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Cerritos, CA |
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Leased |
Downtown Los Angeles Branch |
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950 South Los Angeles Street |
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Los Angeles, CA |
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Leased |
Fashion District Branch |
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726 East 12th Street, Suite 211 |
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Los Angeles, CA |
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Leased |
Fullerton Beach Branch |
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5245 Beach Boulevard |
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Buena Park, CA |
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Leased |
Garden Grove Brookhurst Branch |
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9820 Garden Grove Boulevard |
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Garden Grove, CA |
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Owned |
Garden Grove Magnolia Branch |
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9122 Garden Grove Boulevard |
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Garden Grove, CA |
|
Owned |
Gardena Branch |
|
2001 West Redondo Beach Boulevard |
|
Gardena, CA |
|
Leased |
Irvine Branch |
|
14474 Culver Drive, Suite D |
|
Irvine, CA |
|
Leased |
Koreatown Galleria Branch |
|
3250 West Olympic Boulevard, Suite 200 |
|
Los Angeles, CA |
|
Leased |
Koreatown Plaza Branch |
|
928 South Western Avenue, Suite 260 |
|
Los Angeles, CA |
|
Leased |
Northridge Branch |
|
10180 Reseda Boulevard |
|
Northridge, CA |
|
Leased |
Olympic Branch (2) |
|
3737 West Olympic Boulevard |
|
Los Angeles, CA |
|
Owned |
Olympic Kingsley Branch |
|
3099 West Olympic Boulevard |
|
Los Angeles, CA |
|
Owned |
Rancho Cucamonga Branch |
|
9759 Baseline Road |
|
Rancho Cucamonga, CA |
|
Leased |
Rowland Heights Branch |
|
18720 East Colima Road |
|
Rowland Heights, CA |
|
Leased |
San Diego Branch |
|
4637 Convoy Street, Suite 101 |
|
San Diego, CA |
|
Leased |
San Francisco Branch |
|
1469 Webster Street |
|
San Francisco, CA |
|
Leased |
Silicon Valley Branch |
|
2765 El Camino Real |
|
Santa Clara, CA |
|
Leased |
Torrance Crenshaw Branch |
|
2370 Crenshaw Boulevard, Suite H |
|
Torrance, CA |
|
Leased |
Torrance Del Amo Mall Branch |
|
21838 Hawthorne Boulevard |
|
Torrance, CA |
|
Leased |
Van Nuys Branch |
|
14427 Sherman Way |
|
Van Nuys, CA |
|
Leased |
Vermont Branch (3) |
|
933 South Vermont Avenue |
|
Los Angeles, CA |
|
Owned |
Western Branch |
|
120 South Western Avenue |
|
Los Angeles, CA |
|
Leased |
Wilshire Hobart Branch |
|
3660 Wilshire Boulevard, Suite 103 |
|
Los Angeles, CA |
|
Leased |
|
|
|
|
|
|
|
Departments: |
|
|
|
|
|
|
Commercial Loan Department (1) |
|
3660 Wilshire Boulevard, Suite 1050 |
|
Los Angeles, CA |
|
Leased |
Consumer Loan Center (1) |
|
3660 Wilshire Boulevard, Suite 424 |
|
Los Angeles, CA |
|
Leased |
Insurance & Wealth Management
Department (1) |
|
3660 Wilshire Boulevard, Suite 424 |
|
Los Angeles, CA |
|
Leased |
International Finance Department (1) |
|
933 South Vermont Avenue, 2nd Floor |
|
Los Angeles, CA |
|
Leased |
SBA Loan Center (1) |
|
3660 Wilshire Boulevard, Suite 116 |
|
Los Angeles, CA |
|
Leased |
|
|
|
|
|
|
|
LPOs and Subsidiaries: |
|
|
|
|
|
|
Northwest Region LPO (1) |
|
33110 Pacific Hwy South, Suite 4 |
|
Federal Way, WA |
|
Leased |
Virginia LPO (1) |
|
7535 Little River Turnpike, Suite 200B |
|
Annandale, VA |
|
Leased |
Chun-Ha/All World (1) |
|
12912 Brookhurst Street, Suite 480 |
|
Garden Grove, CA |
|
Leased |
Chun-Ha (1) |
|
3225 Wilshire Boulevard, Suite 1806 |
|
Los Angeles, CA |
|
Leased |
|
|
|
(1) |
|
Deposits are not accepted at this facility. |
|
(2) |
|
Training Facility is also located at this facility. |
|
(3) |
|
Administrative offices are also located at this facility. |
As of December 31, 2009, our consolidated investment in premises and equipment, net of
accumulated depreciation and amortization, totaled $18.7 million. Our total occupancy expense,
exclusive of furniture and equipment expense, was $5.6 million for the year ended December 31,
2009. Hanmi Financial and its subsidiaries consider their present facilities to be sufficient for
their current operations.
41
ITEM 3. LEGAL PROCEEDINGS
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises
in the ordinary course of business, such as claims to enforce liens, claims involving the
origination and servicing of loans, and other issues related to the business of Hanmi Financial and
its subsidiaries. In the opinion of management and in consultation with external legal counsel, the
resolution of any such issues would not have a material adverse impact on the financial condition,
results of operations, or liquidity of Hanmi Financial or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2009, no matters were submitted to stockholders for a vote.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
The following table sets forth, for the periods indicated, the high and low trading prices of
Hanmi Financials common stock for the last two years as reported on the Nasdaq Global Select
Market under the symbol HAFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
|
Cash Dividend |
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
1.86 |
|
|
$ |
1.10 |
|
|
|
|
|
Third Quarter |
|
$ |
1.92 |
|
|
$ |
1.22 |
|
|
|
|
|
Second Quarter |
|
$ |
2.65 |
|
|
$ |
1.21 |
|
|
|
|
|
First Quarter |
|
$ |
3.00 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
5.19 |
|
|
$ |
1.65 |
|
|
|
|
|
Third Quarter |
|
$ |
6.77 |
|
|
$ |
4.65 |
|
|
|
|
|
Second Quarter |
|
$ |
7.79 |
|
|
$ |
5.20 |
|
|
$0.03 Per Share |
First Quarter |
|
$ |
9.82 |
|
|
$ |
6.80 |
|
|
$0.06 Per Share |
Holders
Hanmi Financial had 324 registered stockholders of record as of February 1, 2010.
Dividends
Hanmi Financial has agreed with the FRB that it will not pay any cash dividends to its
stockholders without prior consent of the FRB. The Bank is also required to seek prior approval
from the Regulators to pay cash dividends to Hanmi Financial. The ability of Hanmi Financial to pay
dividends to its stockholders is also directly dependent on the ability of the Bank to pay
dividends to us. Section 642 of the California Financial Code provides that neither a California
state-chartered bank nor a majority-owned subsidiary of a bank can pay dividends to its
stockholders in an amount which exceeds the lesser of (a) the retained earnings of the bank or (b)
the net income of the bank for its last three fiscal years, in each case less the amount of any
previous distributions made during such period.
As a result of the net loss incurred by the Bank in recent years, the Bank is currently not
able to pay dividends to Hanmi Financial under Section 642. However, Financial Code Section 643
provides, alternatively, that, notwithstanding the foregoing restriction, dividends in an amount
not exceeding the greatest of (a) the retained earnings of the bank; (b) the net income of the bank
for its last fiscal year or (c) the net income of the bank for its current fiscal year may be
declared with the prior approval of the California Commissioner of Financial Institutions. The Bank
had a retained deficit of $171.7 million as of December 31, 2009.
42
Due to the net losses for 2009 and 2008, FRB approval is required for payment of bank
dividends to Hanmi Financial in 2009. FRB Regulation H Section 208.5 provides that the Bank must
obtain FRB approval to declare and pay a dividend if the total of all dividends declared during the
calendar year, including the proposed dividend, exceeds the sum of the Banks net income during the
current calendar year and the retained net income of the prior two calendar years. On August 29,
2008, we announced the suspension of our quarterly cash dividend. As a result of our existing
regulatory agreements, we are required to obtain regulatory approval prior to the Bank or Hanmi
Financial declaring any dividends to its respective shareholders.
Performance Graph
The following graph shows a comparison of stockholder return on Hanmi Financials common stock
with the cumulative total returns for: 1) the Nasdaq Composite® (U.S.) Index; 2) the
Standard and Poors (S&P) 500 Financials Index; and 3) the SNL Bank $1B-$5B Index, which was
compiled by SNL Financial LC of Charlottesville, Virginia. The graph assumes an initial investment
of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of
possible future performance. The performance graph shall not be deemed incorporated by reference to
any general statement incorporating by reference this Report into any filing under the Securities
Act of 1933 or under the Exchange Act, except to the extent that we specifically incorporate this
information by reference, and shall not otherwise be deemed filed under such Acts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Index |
|
Symbol |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Hanmi Financial |
|
HAFC |
|
$ |
100.00 |
|
|
$ |
100.50 |
|
|
$ |
128.13 |
|
|
$ |
50.39 |
|
|
$ |
12.57 |
|
|
$ |
7.32 |
|
Nasdaq Composite |
|
^IXIC |
|
$ |
100.00 |
|
|
$ |
101.37 |
|
|
$ |
111.02 |
|
|
$ |
121.91 |
|
|
$ |
72.49 |
|
|
$ |
104.30 |
|
S&P 500 Financials |
|
S5FINL |
|
$ |
100.00 |
|
|
$ |
106.30 |
|
|
$ |
126.41 |
|
|
$ |
103.47 |
|
|
$ |
47.36 |
|
|
$ |
55.27 |
|
SNL Bank $1B-$5B |
|
|
|
$ |
100.00 |
|
|
$ |
98.29 |
|
|
$ |
113.74 |
|
|
$ |
82.85 |
|
|
$ |
68.77 |
|
|
$ |
49.26 |
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of 2009, there were no purchases of equity securities by Hanmi
Financial or its affiliates. As of December 31, 2009, there was no current plan authorizing
purchases of equity securities by Hanmi Financial or its affiliates.
43
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial information, including per share
information as adjusted for the stock dividends and stock splits declared by us. This selected
historical financial data should be read in conjunction with our consolidated financial statements
and the notes thereto appearing elsewhere in this Report and the information contained in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations. The
selected historical financial data as of and for each of the years in the five years ended December
31, 2009 is derived from our audited financial statements. In the opinion of management, the
information presented reflects all adjustments, including normal and recurring accruals, considered
necessary for a fair presentation of the results of such periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in Thousands, Except for Per Share Data) |
|
SUMMARY STATEMENTS OF OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income |
|
$ |
184,147 |
|
|
$ |
238,183 |
|
|
$ |
280,896 |
|
|
$ |
260,189 |
|
|
$ |
200,941 |
|
Interest Expense |
|
|
82,918 |
|
|
|
103,782 |
|
|
|
129,110 |
|
|
|
106,946 |
|
|
|
62,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Before Provision for Credit Losses |
|
|
101,229 |
|
|
|
134,401 |
|
|
|
151,786 |
|
|
|
153,243 |
|
|
|
138,091 |
|
Provision for Credit Losses |
|
|
196,387 |
|
|
|
75,676 |
|
|
|
38,323 |
|
|
|
7,173 |
|
|
|
5,395 |
|
Non-Interest Income |
|
|
32,110 |
|
|
|
32,854 |
|
|
|
40,006 |
|
|
|
36,963 |
|
|
|
31,450 |
|
Non-Interest Expense |
|
|
90,354 |
|
|
|
195,027 |
|
|
|
189,929 |
|
|
|
77,313 |
|
|
|
70,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Provision (Benefit) for Income Taxes |
|
|
(153,402 |
) |
|
|
(103,448 |
) |
|
|
(36,460 |
) |
|
|
105,720 |
|
|
|
93,945 |
|
Provision (Benefit) for Income Taxes |
|
|
(31,125 |
) |
|
|
(1,355 |
) |
|
|
24,302 |
|
|
|
40,370 |
|
|
|
36,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(122,277 |
) |
|
$ |
(102,093 |
) |
|
$ |
(60,762 |
) |
|
$ |
65,350 |
|
|
$ |
57,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY BALANCE SHEETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
154,110 |
|
|
$ |
215,947 |
|
|
$ |
122,398 |
|
|
$ |
138,501 |
|
|
$ |
163,477 |
|
Total Investment Securities |
|
|
133,289 |
|
|
|
197,117 |
|
|
|
350,457 |
|
|
|
391,579 |
|
|
|
443,912 |
|
Net Loans (1) |
|
|
2,674,064 |
|
|
|
3,291,125 |
|
|
|
3,241,097 |
|
|
|
2,837,390 |
|
|
|
2,469,080 |
|
Total Assets |
|
|
3,162,706 |
|
|
|
3,875,816 |
|
|
|
3,983,657 |
|
|
|
3,725,243 |
|
|
|
3,414,252 |
|
Total Deposits |
|
|
2,749,327 |
|
|
|
3,070,080 |
|
|
|
3,001,699 |
|
|
|
2,944,715 |
|
|
|
2,826,114 |
|
Total Liabilities |
|
|
3,012,962 |
|
|
|
3,611,901 |
|
|
|
3,613,101 |
|
|
|
3,238,873 |
|
|
|
2,987,923 |
|
Total Stockholders Equity |
|
|
149,744 |
|
|
|
263,915 |
|
|
|
370,556 |
|
|
|
486,370 |
|
|
|
426,329 |
|
Tangible Equity |
|
|
146,362 |
|
|
|
258,965 |
|
|
|
256,548 |
|
|
|
272,412 |
|
|
|
208,580 |
|
Average Net Loans (1) |
|
|
3,044,395 |
|
|
|
3,276,142 |
|
|
|
3,049,775 |
|
|
|
2,721,229 |
|
|
|
2,359,439 |
|
Average Investment Securities |
|
|
188,325 |
|
|
|
271,802 |
|
|
|
368,144 |
|
|
|
414,672 |
|
|
|
418,750 |
|
Average Interest-Earning Assets |
|
|
3,611,009 |
|
|
|
3,653,720 |
|
|
|
3,494,758 |
|
|
|
3,214,761 |
|
|
|
2,871,564 |
|
Average Total Assets |
|
|
3,717,179 |
|
|
|
3,866,856 |
|
|
|
3,882,891 |
|
|
|
3,602,181 |
|
|
|
3,249,190 |
|
Average Deposits |
|
|
3,109,322 |
|
|
|
2,913,171 |
|
|
|
2,989,806 |
|
|
|
2,881,448 |
|
|
|
2,632,254 |
|
Average Borrowings |
|
|
341,514 |
|
|
|
591,930 |
|
|
|
355,819 |
|
|
|
221,347 |
|
|
|
165,482 |
|
Average Interest-Bearing Liabilities |
|
|
2,909,014 |
|
|
|
2,874,470 |
|
|
|
2,643,296 |
|
|
|
2,367,389 |
|
|
|
2,046,227 |
|
Average Stockholders Equity |
|
|
225,708 |
|
|
|
323,462 |
|
|
|
492,637 |
|
|
|
458,227 |
|
|
|
417,813 |
|
Average Tangible Equity |
|
|
221,537 |
|
|
|
264,490 |
|
|
|
275,036 |
|
|
|
242,362 |
|
|
|
198,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share Basic |
|
$ |
(2.57 |
) |
|
$ |
(2.23 |
) |
|
$ |
(1.27 |
) |
|
$ |
1.34 |
|
|
$ |
1.18 |
|
Earnings (Loss) Per Share Diluted |
|
$ |
(2.57 |
) |
|
$ |
(2.23 |
) |
|
$ |
(1.27 |
) |
|
$ |
1.32 |
|
|
$ |
1.16 |
|
Book Value Per Share (2) |
|
$ |
2.93 |
|
|
$ |
5.75 |
|
|
$ |
8.08 |
|
|
$ |
9.91 |
|
|
$ |
8.76 |
|
Tangible Book Value Per Share (3) |
|
$ |
2.86 |
|
|
$ |
5.64 |
|
|
$ |
5.59 |
|
|
$ |
5.55 |
|
|
$ |
4.29 |
|
Cash Dividends Per Share |
|
|
|
|
|
$ |
0.09 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.20 |
|
Common Shares Outstanding (4) |
|
|
51,182,390 |
|
|
|
45,905,549 |
|
|
|
45,860,941 |
|
|
|
49,076,613 |
|
|
|
48,658,798 |
|
|
|
|
(1) |
|
Loans receivable, net of allowance for loan losses and deferred loan fees. |
|
(2) |
|
Total stockholders equity divided by common shares outstanding. |
|
(3) |
|
Tangible equity divided by common shares outstanding. |
|
(4) |
|
On January 20, 2005, our Board of Director declared a two-for-one stock split and
new shares were distributed on February 15, 2005. |
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
SELECTED PERFORMANCE RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets (4) |
|
|
(3.29 |
%) |
|
|
(2.64 |
%) |
|
|
(1.56 |
%) |
|
|
1.81 |
% |
|
|
1.78 |
% |
Return on Average Stockholders Equity (5) |
|
|
(54.17 |
%) |
|
|
(31.56 |
%) |
|
|
(12.33 |
%) |
|
|
14.26 |
% |
|
|
13.83 |
% |
Return on Average Tangible Equity (6) |
|
|
(55.19 |
%) |
|
|
(38.60 |
%) |
|
|
(22.09 |
%) |
|
|
26.96 |
% |
|
|
29.11 |
% |
Net Interest Spread (7) |
|
|
2.28 |
% |
|
|
2.95 |
% |
|
|
3.20 |
% |
|
|
3.65 |
% |
|
|
4.02 |
% |
Net Interest Margin (8) |
|
|
2.84 |
% |
|
|
3.72 |
% |
|
|
4.39 |
% |
|
|
4.83 |
% |
|
|
4.89 |
% |
Efficiency Ratio (9) |
|
|
67.76 |
% |
|
|
116.60 |
% |
|
|
99.03 |
% |
|
|
40.65 |
% |
|
|
41.41 |
% |
Dividend Payout Ratio (10) |
|
|
|
|
|
|
(4.05 |
%) |
|
|
(18.11 |
%) |
|
|
18.02 |
% |
|
|
16.84 |
% |
Average Stockholders Equity to Average Total Assets |
|
|
6.07 |
% |
|
|
8.36 |
% |
|
|
12.69 |
% |
|
|
12.72 |
% |
|
|
12.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED CAPITAL RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Total Risk-Weighted Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial |
|
|
9.12 |
% |
|
|
10.79 |
% |
|
|
10.65 |
% |
|
|
12.55 |
% |
|
|
12.04 |
% |
Hanmi Bank |
|
|
9.07 |
% |
|
|
10.70 |
% |
|
|
10.59 |
% |
|
|
12.28 |
% |
|
|
11.98 |
% |
Tier 1 Capital to Total Risk-Weighted Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial |
|
|
6.76 |
% |
|
|
9.52 |
% |
|
|
9.40 |
% |
|
|
11.58 |
% |
|
|
11.03 |
% |
Hanmi Bank |
|
|
7.77 |
% |
|
|
9.44 |
% |
|
|
9.34 |
% |
|
|
11.31 |
% |
|
|
10.96 |
% |
Tier 1 Capital to Average Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial |
|
|
5.82 |
% |
|
|
8.93 |
% |
|
|
8.52 |
% |
|
|
10.08 |
% |
|
|
9.11 |
% |
Hanmi Bank |
|
|
6.69 |
% |
|
|
8.85 |
% |
|
|
8.47 |
% |
|
|
9.85 |
% |
|
|
9.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED ASSET QUALITY RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans to Total Gross Loans (11) |
|
|
7.77 |
% |
|
|
3.62 |
% |
|
|
1.66 |
% |
|
|
0.50 |
% |
|
|
0.41 |
% |
Non-Performing Assets to Total Assets (12) |
|
|
7.76 |
% |
|
|
3.17 |
% |
|
|
1.37 |
% |
|
|
0.38 |
% |
|
|
0.30 |
% |
Net Loan Charge-Offs to Average Total Gross Loans |
|
|
3.88 |
% |
|
|
1.38 |
% |
|
|
0.73 |
% |
|
|
0.17 |
% |
|
|
0.12 |
% |
Allowance for Loan Losses to Total Gross Loans |
|
|
5.14 |
% |
|
|
2.11 |
% |
|
|
1.33 |
% |
|
|
0.96 |
% |
|
|
1.00 |
% |
Allowance for Loan Losses to Non-Performing Loans |
|
|
66.19 |
% |
|
|
58.23 |
% |
|
|
80.05 |
% |
|
|
193.86 |
% |
|
|
246.40 |
% |
|
|
|
(4) |
|
Net income (loss) divided by average total assets. |
|
(5) |
|
Net income (loss) divided by average stockholders equity. |
|
(6) |
|
Net income (loss) divided by average tangible equity. |
|
(7) |
|
Average yield earned on interest-earning assets less average rate paid on
interest-bearing liabilities. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent |
|
(8) |
|
Net interest income before provision for credit losses divided by average
interest-earning assets. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent |
|
(9) |
|
Total non-interest expense divided by the sum of net interest income before
provision for credit losses and total non-interest income. |
|
(10) |
|
Dividends declared per share divided by basic earnings (loss) per share. |
|
(11) |
|
Non-performing loans consist of non-accrual loan and loans past due 90 days or more
still accruing interest. |
|
(12) |
|
Non-performing assets consist of non-performing loans and other real estate owned. |
Non-GAAP Financial Measures
Return on Average Tangible Equity
Return on average tangible equity is supplemental financial information determined by a method
other than in accordance with U.S. generally accepted accounting principles (GAAP). This non-GAAP
measure is used by management in the analysis of Hanmi Financials performance. Average tangible
equity is calculated by subtracting average goodwill and average other intangible assets from
average stockholders equity. Banking and financial institution regulators also exclude goodwill
and other intangible assets from stockholders equity when assessing the capital adequacy of a
financial institution. Management believes the presentation of this financial measure excluding the
impact of these items provides useful supplemental information that is essential to a proper
understanding of the financial results of Hanmi Financial, as it provides a method to assess
managements success in utilizing tangible capital. This disclosure should not be viewed as a
substitution for results determined in accordance with GAAP, nor is it necessarily comparable to
non-GAAP performance measures that may be presented by other companies.
45
The following table reconciles this non-GAAP performance measure to the GAAP performance
measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in Thousands) |
|
Average Stockholders Equity |
|
$ |
225,708 |
|
|
$ |
323,462 |
|
|
$ |
492,637 |
|
|
$ |
458,227 |
|
|
$ |
417,813 |
|
Less Average Goodwill and Average Other Intangible Assets |
|
|
(4,171 |
) |
|
|
(58,972 |
) |
|
|
(217,601 |
) |
|
|
(215,865 |
) |
|
|
(219,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Tangible Equity |
|
$ |
221,537 |
|
|
$ |
264,490 |
|
|
$ |
275,036 |
|
|
$ |
242,362 |
|
|
$ |
198,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Stockholders Equity |
|
|
(54.17 |
%) |
|
|
(31.56 |
%) |
|
|
(12.33 |
%) |
|
|
14.26 |
% |
|
|
13.83 |
% |
Effect of Average Goodwill and Average Other Intangible Assets |
|
|
(1.02 |
%) |
|
|
(7.04 |
%) |
|
|
(9.76 |
%) |
|
|
12.70 |
% |
|
|
15.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Tangible Equity |
|
|
(55.19 |
%) |
|
|
(38.60 |
%) |
|
|
(22.09 |
%) |
|
|
26.96 |
% |
|
|
29.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per Share
Tangible book value per share is supplemental financial information determined by a method
other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of
Hanmi Financials performance. Tangible book value per share is calculated by subtracting goodwill
and other intangible assets from total stockholders equity and dividing the difference by the
number of shares of common stock outstanding. Management believes the presentation of this
financial measure excluding the impact of these items provides useful supplemental information that
is essential to a proper understanding of the financial results of Hanmi Financial, as it provides
a method to assess managements success in utilizing tangible capital. This disclosure should not
be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily
comparable to non-GAAP performance measures that may be presented by other companies.
The following table reconciles this non-GAAP performance measure to the GAAP performance
measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in Thousands, Except Per Share Amounts) |
|
Total Stockholders Equity |
|
$ |
149,744 |
|
|
$ |
263,915 |
|
|
$ |
370,556 |
|
|
$ |
486,370 |
|
|
$ |
426,329 |
|
Less Goodwill and Other Intangible Assets |
|
|
(3,382 |
) |
|
|
(4,950 |
) |
|
|
(114,008 |
) |
|
|
(213,958 |
) |
|
|
(217,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Equity |
|
$ |
146,362 |
|
|
$ |
258,965 |
|
|
$ |
256,548 |
|
|
$ |
272,412 |
|
|
$ |
208,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share |
|
$ |
2.93 |
|
|
$ |
5.75 |
|
|
$ |
8.08 |
|
|
$ |
9.91 |
|
|
$ |
8.76 |
|
Effect of Goodwill and Other Intangible Assets |
|
|
(0.07 |
) |
|
|
(0.11 |
) |
|
|
(2.49 |
) |
|
|
(4.36 |
) |
|
|
(4.47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per Share |
|
$ |
2.86 |
|
|
$ |
5.64 |
|
|
$ |
5.59 |
|
|
$ |
5.55 |
|
|
$ |
4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion presents managements analysis of the financial condition and results of
operations as of and for the years ended December 31, 2009, 2008 and 2007. This discussion should
be read in conjunction with our Consolidated Financial Statements and the Notes related thereto
presented elsewhere in this Report. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in such forward-looking statements because of certain factors discussed elsewhere
in this Report. See Item 1A. Risk Factors.
CRITICAL ACCOUNTING POLICIES
We have established various accounting policies that govern the application of GAAP in the
preparation of our consolidated financial statements. Our significant accounting policies are
described in the Notes to Consolidated Financial Statements, Note 2 Summary of Significant
Accounting Policies. Certain accounting policies require us to make significant estimates and
assumptions that have a material impact on the carrying value of certain assets and liabilities,
and we consider these critical accounting policies. We use estimates and assumptions based on
historical experience and other factors that we believe to be reasonable under the circumstances.
Actual results could differ significantly from these estimates and assumptions, which could have a
material impact on the carrying value of assets and liabilities at the balance sheet dates and our
results of operations for the reporting periods. Management has discussed the development and
selection of these critical accounting policies with the Audit Committee of Hanmi Financials Board
of Directors.
Allowance for Loan Losses
We believe the allowance for loan losses and allowance for off-balance sheet items are
critical accounting policies that require significant estimates and assumptions that are
particularly susceptible to significant change in the preparation of our financial statements. Our
allowance for loan loss methodologies incorporate a variety of risk considerations, both
quantitative and qualitative, in establishing an allowance for loan loss that management believes
is appropriate at each reporting date. Quantitative factors include our historical loss experiences
on 9 segmented loan pools by risk rating, delinquency and charge-off trends, collateral values,
changes in non-performing loans, and other factors. Qualitative factors include the general
economic environment in our markets, delinquency and charge-off trends, and the change in
non-performing loans. Concentration of credit, change of lending management and staff, quality of
loan review system, and change in interest rate are other qualitative factors that are considered
in our methodologies. See Financial Condition Allowance for Loan Losses and Allowance for
Off-Balance Sheet Items, Results of Operations Provision for Credit Losses and Notes to
Consolidated Financial Statements, Note 2 Summary of Significant Accounting Policies for
additional information on methodologies used to determine the allowance for loan losses and
allowance for off-balance sheet items.
Loan Sales
We normally sell SBA and residential mortgage loans to secondary market investors. When SBA
guaranteed loans are sold, we generally retain the right to service these loans. We record a loan
servicing asset when the benefits of servicing are expected to be more than adequate compensation
to a servicer, which is determined by discounting all of the future net cash flows associated with
the contractual rights and obligations of the servicing agreement. The expected future net cash
flows are discounted at a rate equal to the return that would adequately compensate a substitute
servicer for performing the servicing. In addition to the anticipated rate of loan prepayments and
discount rates, other assumptions (such as the cost to service the underlying loans, foreclosure
costs, ancillary income and float rates) are also used in determining the value of the loan
servicing assets. Loan servicing assets are discussed in more detail in Notes to Consolidated
Financial Statements, Note2 Summary of Significant Accounting Policies and Note 5 Loans
presented elsewhere herein.
47
Investment Securities
The classification and accounting for investment securities are discussed in more detail in
Notes to Consolidated Financial Statements, Note 2 Summary of Significant Accounting Policies
presented elsewhere herein. Under FASB ASC 320, Investment, investment securities generally must
be classified as held-to-maturity, available-for-sale or trading. The appropriate classification is
based partially on our ability to hold the securities to maturity and largely on managements
intentions with respect to either holding or selling the securities. The classification of
investment securities is significant since it directly impacts the accounting for unrealized gains
and losses on securities. Unrealized gains and losses on trading securities flow directly through
earnings during the periods in which they arise. Investment securities that are classified as
held-to-maturity are recorded at amortized cost. Unrealized gains and losses on available-for-sale
securities are recorded as a separate component of stockholders equity (accumulated other
comprehensive income or loss) and do not affect earnings until realized or are deemed to be
other-than-temporarily impaired.
The fair values of investment securities are generally determined by reference to the average
of at least two quoted market prices obtained from independent external brokers or independent
external pricing service providers who have experience in valuing these securities. In obtaining
such valuation information from third parties, we have evaluated the methodologies used to develop
the resulting fair values. We perform a monthly analysis on the broker quotes received from third
parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures
include, but are not limited to, initial and on-going review of third party pricing methodologies,
review of pricing trends, and monitoring of trading volumes.
We are obligated to assess, at each reporting date, whether there is an other-than-temporary
impairment (OTTI) to our investment securities. Such impairment must be recognized in current
earnings rather than in other comprehensive income. The determination of other-than-temporary
impairment is a subjective process, requiring the use of judgments and assumptions. We examine all
individual securities that are in an unrealized loss position at each reporting date for
other-than-temporary impairment. Specific investment-related factors we examine to assess
impairment include the nature of the investment, severity and duration of the loss, the probability
that we will be unable to collect all amounts due, an analysis of the issuers of the securities and
whether there has been any cause for default on the securities and any change in the rating of the
securities by the various rating agencies. Additionally, we evaluate whether the creditworthiness
of the issuer calls the realization of contractual cash flows into question. Our impairment
assessment also takes into consideration factor that we do not intend to sell the security and it
is more likely than not it will be required to sell the security prior to recovery of its amortized
cost basis of the security. If the decline in fair value is judged to be other than temporary, the
security is written down to fair value which becomes the new cost basis and an impairment loss is
recognized.
For debt securities, the classification of other-than-temporary impairment depends on whether
we intend to sell the security or it more likely than not will be required to sell the security
before recovery of its costs basis, and on the nature of the impairment. If we intend to sell a
security or it is more likely than not it will be required to sell a security prior to recovery of
its cost basis, the entire amount of impairment is recognized in earnings. If we do not intend to
sell the security or it is more likely than not it will be required to sell the security prior to
recovery of its cost basis, the credit loss component of impairment is recognized in earnings and
impairment associated with non-credit factors, such as market liquidity, is recognized in other
comprehensive income net of tax. A credit loss is the difference between the cost basis of the
security and the present value of cash flows expected to be collected, discounted at the securitys
effective interest rate at the date of acquisition. The cost basis of an other-than-temporarily
impaired security is written down by the amount of impairment recognized in earnings. The new cost
basis is not adjusted for subsequent recoveries in fair value. Management does not believe that
there are any investment securities, other than those identified in the current and previous
periods, that are deemed other-than-temporarily impaired as of December 31, 2009 and 2008.
Investment securities are discussed in more detail in Notes to Consolidated Financial Statements,
Note 4 Securities presented elsewhere herein.
Income Taxes
We provide for income taxes using the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
48
The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As of December 2009, the
Company established a valuation allowance of $45.2 million against its existing net deferred tax
assets of $48.8 million. As of December 31, 2008 and 2007, no valuation allowance was required.
Income taxes are discussed in more detail in Notes to Consolidated Financial Statements, Note 2
Summary of Significant Accounting Policies and Note 12 Income Taxes presented elsewhere
herein.
49
EXECUTIVE OVERVIEW
For the years ended December 31, 2009, 2008 and 2007, we recognized net losses of $122.3
million, $102.1 million and $60.8 million, respectively. The losses in 2009 were primarily due to
provision for credit losses of $196.4 million. The losses in 2008 and 2007 were mainly caused by
goodwill impairment charges of $107.4 million and $102.9 million, respectively, coupled with
provisions for credit losses of $75.7 million and $38.3 million, respectively. For the years ended
December 31, 2009, 2008 and 2007, our diluted loss per share was ($2.57), ($2.23) and ($1.27),
respectively.
In 2009, the economic conditions in the markets in which our borrowers operate continued to
deteriorate and the levels of loan delinquency and defaults that we experienced were substantially
higher than historical levels. Given the challenging credit environment, our priorities have been
to manage the credit risk exposure through accelerating the resolution of problem loans and
enhancing various credit quality management programs. Our proactive resolution of problem loans
resulted in elevated charge-off levels especially during the second half of 2009. To proactively
identify problem loans at their earliest stage and to effectively manage them until resolution, the
notable changes we recently made to the credit department, among others, were to split review and
monitoring functions with sufficient resources to handle problem loans in time effective fashion.
Building on the changes that we implemented, we initiated additional programs, such as increased
extent and frequency of independent loan review and collateral reappraisals, to further strengthen
our loan grading systems and allowance for loan loss methodology. See Financial Condition
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items for additional information on
methodologies used to determine the allowance for loan losses. The combined impact of our proactive
credit risk management actions resulted in a substantial increase in the loan loss provision in
2009.
To prudently manage and maintain our capital levels, we deleveraged our balance sheet during
the most part of 2009 as demonstrated by an 18.4 percent or $713.1 million decrease in total assets
at December 31, 2009 relative to December 31, 2008. Our balance-sheet deleveraging strategy was
primarily focused on a careful reduction of loans and rate-sensitive deposits without creating a
liquidity risk. As a result of this strategy, total gross loans decreased by $542.8 million, or
16.1% to $2.82 billion at December 31, 2009 from $3.36 billion at December 31, 2008 mainly through
natural amortization and payoffs. With sufficient liquidity generated from the reduction in loans
and securities coupled with a strong surplus cash balance accumulated in the first half of 2009, we
were able to reduce our rate-sensitive time deposits, which were mostly high-cost promotional time
deposits that matured by the third quarter of 2009, brokered deposits and FHLB borrowings.
In an effort to improve our net interest margin and core deposit base, we launched a series of
core deposit campaigns throughout 2009, specifically enabling us to replace high-cost promotional
time deposits with low-cost deposit products. As a result, our core deposits (defined as demand,
money market and savings deposits) increased by $364.1 million, or 36.8% to $1.35 billion at
December 31, 2009 from $989.2 million at December 31, 2008, while total deposits decreased by
$320.8 million, or 10.4 percent, to $2.75 billion at December 31, 2009, compared to $3.07 billion
at December 31, 2008. This decrease in deposits primarily resulted from a $670.7 million decrease
in brokered deposits, partially offset by a $364.1 million increase in core deposits. Thanks to the
successful deposit campaigns, our quarterly net interest margin notably improved from 2.50 percent
in the first quarter of 2009 to 3.46 percent in the fourth quarter of 2009, exceeding the 3.38%
quarterly net interest margin posted in the fourth quarter of 2008. Despite the ongoing economic
challenges, we ended 2009 with a significant reduction in our reliance on wholesale funding and
adequate levels of liquidity and quarterly net interest margin.
Outlook for 2010
The economic recession continued to deepen into the first half of 2009, but has shown some
signs of improvement over the second half of 2009. Although the depth, breadth and duration of the
economic recovery remain unclear into 2010, we are cautiously optimistic about further improvement
in the economy and the real estate market during the second half of 2010.
Our overall objective is to reclaim our place as the leading community bank in the
Korean-American banking industry. We intend to continue to meet all regulatory orders imposed on
us. Although this continues to be a difficult period for us, we intend to restore the financial
soundness and safety of the Bank. To that end, we have identified the three strategic focus areas
for 2010, which include raising capital, sustaining liquidity and improving credit quality.
50
In regards to the capital order mandated by our regulators, the minimum capital requirement to
raise $100 million by July 31, 2010 is intended to bring the Banks tangible capital ratio to over
9%. With our solid franchise value driven by loyal customers and dedicated employees, we believe we
will be able to raise a sufficient level of capital within the required timeframe. However, there
can be no assurance that we will be successful in our efforts. While continuously making utmost
efforts to raise capital from investors, we will shift our focus from capital ratio management to
liquidity preservation.
With this change, we will continue to deleverage our long-term assets until the capital is
raised, while preserving our deposit base to maintain an adequate level of liquidity. Responding to
the interest rate restriction recently amended by the FDIC, we have launched new deposit products
with flexible and innovative features. We will also continue to deploy more products tailored to
meet the ever-changing needs of customers. In addition to our innovative retail product
orientation, we will continue to improve our customer service quality through various programs
including mystery shoppers and customer surveys. With the new products coupled with enhanced
customer service quality, we believe we will be able to preserve our deposit base and attract new
customers without compromising our net interest margin.
We expect our credit quality to remain a challenge for 2010 with elevated levels of problem
assets, reserves and charges-offs. A number of initiatives have been implemented in an effort to
minimize our continuously deteriorating credit quality. We will continue to refine our credit risk
management system to meet the changing external and internal environments.
RESULTS OF OPERATIONS
Net Interest Income, Net Interest Spread and Net Interest Margin
Our earnings depend largely upon the difference between the interest income received from our
loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings.
The difference is net interest income. The difference between the yield earned on
interest-earning assets and the cost of interest-bearing liabilities is net interest spread. Net
interest income, when expressed as a percentage of average total interest-earning assets, is
referred to as the net interest margin.
Net interest income is affected by the change in the level and mix of interest-earning assets
and interest-bearing liabilities, referred to as volume changes. Our net interest income also is
affected by changes in the yields earned on interest-earning assets and rates paid on
interest-bearing liabilities, referred to as rate changes. Interest rates charged on loans are
affected principally by the demand for such loans, the supply of money available for lending
purposes and competitive factors. Those factors are affected by general economic conditions and
other factors beyond our control, such as federal economic policies, the general supply of money in
the economy, income tax policies, governmental budgetary matters and the actions of the FRB.
51
The following table shows the average balances of assets, liabilities and stockholders
equity; the amount of interest income and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans, Net (1) |
|
$ |
3,157,133 |
|
|
$ |
173,318 |
|
|
|
5.49 |
% |
|
$ |
3,332,133 |
|
|
$ |
223,942 |
|
|
|
6.72 |
% |
|
$ |
3,080,544 |
|
|
$ |
261,992 |
|
|
|
8.50 |
% |
Municipal Securities (2) |
|
|
54,448 |
|
|
|
3,543 |
|
|
|
6.51 |
% |
|
|
63,918 |
|
|
|
4,180 |
|
|
|
6.54 |
% |
|
|
71,937 |
|
|
|
4,700 |
|
|
|
6.53 |
% |
Obligations of Other U.S.
Government Agencies |
|
|
24,417 |
|
|
|
1,108 |
|
|
|
4.54 |
% |
|
|
65,440 |
|
|
|
2,813 |
|
|
|
4.30 |
% |
|
|
116,701 |
|
|
|
4,963 |
|
|
|
4.25 |
% |
Other Debt Securities |
|
|
109,460 |
|
|
|
4,568 |
|
|
|
4.17 |
% |
|
|
142,444 |
|
|
|
6,574 |
|
|
|
4.62 |
% |
|
|
179,506 |
|
|
|
8,436 |
|
|
|
4.70 |
% |
Equity Securities |
|
|
41,399 |
|
|
|
656 |
|
|
|
1.58 |
% |
|
|
38,516 |
|
|
|
1,918 |
|
|
|
4.98 |
% |
|
|
26,228 |
|
|
|
1,413 |
|
|
|
5.39 |
% |
Federal Funds Sold |
|
|
84,363 |
|
|
|
326 |
|
|
|
0.39 |
% |
|
|
8,934 |
|
|
|
166 |
|
|
|
1.86 |
% |
|
|
19,746 |
|
|
|
1,032 |
|
|
|
5.23 |
% |
Term Federal Funds Sold |
|
|
95,822 |
|
|
|
1,718 |
|
|
|
1.79 |
% |
|
|
1,913 |
|
|
|
43 |
|
|
|
2.25 |
% |
|
|
96 |
|
|
|
5 |
|
|
|
5.21 |
% |
Interest-Earning Deposits |
|
|
43,967 |
|
|
|
151 |
|
|
|
0.34 |
% |
|
|
422 |
|
|
|
10 |
|
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets |
|
|
3,611,009 |
|
|
|
185,388 |
|
|
|
5.13 |
% |
|
|
3,653,720 |
|
|
|
239,646 |
|
|
|
6.56 |
% |
|
|
3,494,758 |
|
|
|
282,541 |
|
|
|
8.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
71,448 |
|
|
|
|
|
|
|
|
|
|
|
88,679 |
|
|
|
|
|
|
|
|
|
|
|
92,148 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(112,738 |
) |
|
|
|
|
|
|
|
|
|
|
(55,991 |
) |
|
|
|
|
|
|
|
|
|
|
(30,769 |
) |
|
|
|
|
|
|
|
|
Other Assets |
|
|
147,460 |
|
|
|
|
|
|
|
|
|
|
|
180,448 |
|
|
|
|
|
|
|
|
|
|
|
326,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Earning
Assets |
|
|
106,170 |
|
|
|
|
|
|
|
|
|
|
|
213,136 |
|
|
|
|
|
|
|
|
|
|
|
388,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,717,179 |
|
|
|
|
|
|
|
|
|
|
$ |
3,866,856 |
|
|
|
|
|
|
|
|
|
|
$ |
3,882,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
91,089 |
|
|
|
2,328 |
|
|
|
2.56 |
% |
|
$ |
89,866 |
|
|
|
2,093 |
|
|
|
2.33 |
% |
|
$ |
97,173 |
|
|
|
2,004 |
|
|
|
2.06 |
% |
Money Market Checking
and NOW Accounts |
|
|
507,619 |
|
|
|
9,786 |
|
|
|
1.93 |
% |
|
|
618,779 |
|
|
|
19,909 |
|
|
|
3.22 |
% |
|
|
452,825 |
|
|
|
15,446 |
|
|
|
3.41 |
% |
Time Deposits of $100,000
or More |
|
|
1,051,994 |
|
|
|
34,807 |
|
|
|
3.31 |
% |
|
|
1,045,968 |
|
|
|
43,598 |
|
|
|
4.17 |
% |
|
|
1,430,603 |
|
|
|
75,516 |
|
|
|
5.28 |
% |
Other Time Deposits |
|
|
916,798 |
|
|
|
29,325 |
|
|
|
3.20 |
% |
|
|
527,927 |
|
|
|
18,753 |
|
|
|
3.55 |
% |
|
|
306,876 |
|
|
|
15,551 |
|
|
|
5.07 |
% |
Federal Home Loan Bank
Advances |
|
|
257,529 |
|
|
|
3,399 |
|
|
|
1.32 |
% |
|
|
498,875 |
|
|
|
14,027 |
|
|
|
2.81 |
% |
|
|
237,733 |
|
|
|
12,156 |
|
|
|
5.11 |
% |
Other Borrowings |
|
|
1,579 |
|
|
|
2 |
|
|
|
0.13 |
% |
|
|
10,649 |
|
|
|
346 |
|
|
|
3.25 |
% |
|
|
35,680 |
|
|
|
1,793 |
|
|
|
5.03 |
% |
Junior Subordinated Debentures |
|
|
82,406 |
|
|
|
3,271 |
|
|
|
3.97 |
% |
|
|
82,406 |
|
|
|
5,056 |
|
|
|
6.14 |
% |
|
|
82,406 |
|
|
|
6,644 |
|
|
|
8.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing
Liabilities |
|
|
2,909,014 |
|
|
|
82,918 |
|
|
|
2.85 |
% |
|
|
2,874,470 |
|
|
|
103,782 |
|
|
|
3.61 |
% |
|
|
2,643,296 |
|
|
|
129,110 |
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits |
|
|
541,822 |
|
|
|
|
|
|
|
|
|
|
|
630,631 |
|
|
|
|
|
|
|
|
|
|
|
702,329 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
40,635 |
|
|
|
|
|
|
|
|
|
|
|
38,293 |
|
|
|
|
|
|
|
|
|
|
|
44,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Bearing
Liabilities |
|
|
582,457 |
|
|
|
|
|
|
|
|
|
|
|
668,924 |
|
|
|
|
|
|
|
|
|
|
|
746,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
3,491,471 |
|
|
|
|
|
|
|
|
|
|
|
3,543,394 |
|
|
|
|
|
|
|
|
|
|
|
3,390,254 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
225,708 |
|
|
|
|
|
|
|
|
|
|
|
323,462 |
|
|
|
|
|
|
|
|
|
|
|
492,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |
|
$ |
3,717,179 |
|
|
|
|
|
|
|
|
|
|
$ |
3,866,856 |
|
|
|
|
|
|
|
|
|
|
$ |
3,882,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
|
|
|
$ |
102,470 |
|
|
|
|
|
|
|
|
|
|
$ |
135,864 |
|
|
|
|
|
|
|
|
|
|
$ |
153,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread (3) |
|
|
|
|
|
|
|
|
|
|
2.28 |
% |
|
|
|
|
|
|
|
|
|
|
2.95 |
% |
|
|
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (4) |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
3.72 |
% |
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances for loans include non-accrual loans and net of deferred fees and
related direct costs. Loan fees have been included in the calculation of interest income. Loan
fees were $2.3 million, $2.4 million and $2.7 million for the years ended December 31, 2009,
2008 and 2007, respectively. |
|
(2) |
|
Computed on a tax-equivalent basis using an effective marginal rate of 35 percent. |
|
(3) |
|
Represents the average yield earned on interest-earning assets less the average rate
paid on interest-bearing liabilities. |
|
(4) |
|
Represents net interest income as a percentage of average interest-earning assets. |
52
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 vs. 2008 |
|
|
2008 vs. 2007 |
|
|
|
Increase (Decrease) |
|
|
Increase (Decrease) |
|
|
|
Due to Change in |
|
|
Due to Change in |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Interest and Dividend Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans, Net |
|
$ |
(11,281 |
) |
|
$ |
(39,343 |
) |
|
$ |
(50,624 |
) |
|
$ |
20,139 |
|
|
$ |
(58,189 |
) |
|
$ |
(38,050 |
) |
Municipal Securities |
|
|
(616 |
) |
|
|
(21 |
) |
|
|
(637 |
) |
|
|
(524 |
) |
|
|
4 |
|
|
|
(520 |
) |
Obligations of Other U.S. Government Agencies |
|
|
(1,854 |
) |
|
|
149 |
|
|
|
(1,705 |
) |
|
|
(2,202 |
) |
|
|
52 |
|
|
|
(2,150 |
) |
Other Debt Securities |
|
|
(1,419 |
) |
|
|
(587 |
) |
|
|
(2,006 |
) |
|
|
(1,713 |
) |
|
|
(149 |
) |
|
|
(1,862 |
) |
Equity Securities |
|
|
134 |
|
|
|
(1396 |
) |
|
|
(1,262 |
) |
|
|
619 |
|
|
|
(114 |
) |
|
|
505 |
|
Federal Funds Sold |
|
|
386 |
|
|
|
(226 |
) |
|
|
160 |
|
|
|
(398 |
) |
|
|
(468 |
) |
|
|
(866 |
) |
Term Federal Funds Sold |
|
|
1,686 |
|
|
|
(11 |
) |
|
|
1,675 |
|
|
|
43 |
|
|
|
(5 |
) |
|
|
38 |
|
Interest-Earning Deposits |
|
|
158 |
|
|
|
(17 |
) |
|
|
141 |
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Dividend Income |
|
|
(12,806 |
) |
|
|
(41,452 |
) |
|
|
(54,258 |
) |
|
|
15,974 |
|
|
|
(58,869 |
) |
|
|
(42,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
28 |
|
|
|
207 |
|
|
|
235 |
|
|
|
(158 |
) |
|
|
247 |
|
|
|
89 |
|
Money Market Checking and NOW Accounts |
|
|
(3,133 |
) |
|
|
(6,990 |
) |
|
|
(10,123 |
) |
|
|
5,382 |
|
|
|
(919 |
) |
|
|
4,463 |
|
Time Deposits of $100,000 or More |
|
|
250 |
|
|
|
(9,041 |
) |
|
|
(8,791 |
) |
|
|
(17,907 |
) |
|
|
(14,011 |
) |
|
|
(31,918 |
) |
Other Time Deposits |
|
|
12,603 |
|
|
|
(2,031 |
) |
|
|
10,572 |
|
|
|
8,835 |
|
|
|
(5,633 |
) |
|
|
3,202 |
|
Federal Home Loan Bank Advances and Other
Borrowings |
|
|
(5,231 |
) |
|
|
(5,741 |
) |
|
|
(10,972 |
) |
|
|
8,497 |
|
|
|
(8,073 |
) |
|
|
424 |
|
Junior Subordinated Debentures |
|
|
|
|
|
|
(1,785 |
) |
|
|
(1,785 |
) |
|
|
|
|
|
|
(1,588 |
) |
|
|
(1,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
4,517 |
|
|
|
(25,381 |
) |
|
|
(20,864 |
) |
|
|
4,649 |
|
|
|
(29,977 |
) |
|
|
(25,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income |
|
$ |
(17,323 |
) |
|
$ |
(16,071 |
) |
|
$ |
(33,394 |
) |
|
$ |
11,325 |
|
|
$ |
(28,892 |
) |
|
$ |
(17,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008 and 2007, net interest income before
provision for credit losses on a tax-equivalent basis was $102.5 million, $135.9 million and $153.4
million, respectively. The net interest spread and net interest margin for the year ended December
31, 2009 were 2.28 percent and 2.84 percent, respectively, compared to 2.95 percent and 3.72
percent, respectively, for the year ended December 31, 2008 and 3.20 percent and 4.39 percent,
respectively, for the year ended December 31, 2007. The decrease in net interest income in 2009 was
primarily due to the steep decrease of 400 basis points in the federal funds target rate since
December 2007 and the impact of a higher level of nonaccrual loans, partially offset by lower
deposit costs.
Average loans were $3.16 billion in 2009, as compared with $3.33 billion in 2008 and $3.08
billion in 2007, representing decrease of 5.3 percent and increase of 8.2 percent in 2009 and 2008,
respectively. Average interest-earning assets were $3.61 billion in 2009, as compared with $3.65
billion in 2008 and $3.49 billion in 2007, representing decrease of 1.2 percent and increase of 4.5
percent in 2009 and 2008, respectively. The $42.7 million decrease in average interest earning
assets in 2009 was attributable primarily to our preplanned deleveraging strategy. Consistent with
this strategy, the combined total of average interest-bearing liabilities and demand deposits
decreased by $54.3 million in 2009. In 2008, the majority of interest-earning assets growth was
funded by a $236.1 million increase in FHLB advances and other borrowings. Total average
interest-bearing liabilities grew by $34.5 million and $231.2 million, respectively, in 2009 and
2008.
53
The average yield on interest-earning assets decreased by 143 basis points to 5.13
percent in 2009, after 152 basis point decrease in 2008 to 6.56 percent from 8.08 percent in 2007,
primarily due to a decrease in loan portfolio yields. The average loan yield decreased by 123 basis
points to 5.49 percent in 2009, after 178 basis point decrease in 2008 to 6.72 percent from 8.50
percent in 2007, reflecting the impact of a decrease in federal funds target rate and an increase
in our overall level of nonaccrual loans. The average cost on interest-bearing liabilities also
decreased by 76 basis points to 2.85 percent in 2009, compared to a decrease of 127 basis points to
3.61 percent in 2008 from 4.88 percent in 2007. The decrease in 2009 was primarily due to the FRBs
lowering of rates and a continued shift in funding sources toward lowercost funds. Total average
core deposits, a low-cost source of funding, increased 10.18 percent to $2.06 billion in 2009 from
$1.87 billion in 2008. As a result, interest income decreased 22.6 percent to $185.4 million for
2009 from $239.6 million in 2008 and interest expense decreased 20.1 percent to $82.9 million for
2009 from $103.8 million in 2008. In 2008, interest income decreased by 15.7 percent to $239.6
million from $282.5 million in 2007 and interest expense decreased 19.6 percent to $103.8 million
from $129.1 million in 2007.
In 2009, net interest income on a tax-equivalent basis decreased by 24.6 percent to $102.5
million, compared to $135.9 million in 2008, due to decreases in average interest-earning assets
and interest earned, partially offset by a reduction in interest paid for interest-bearing
liabilities. In 2008, net interest income decreased by 11.4 percent to $135.9 million from $153.4
million in 2007, due mainly to decreases in interest earned and paid for interest-earning assets
and interest-bearing liabilities.
Provision for Credit Losses
For the year ended December 31, 2009, the provision for credit losses was $196.4 million,
compared to $75.7 million for the year ended December 31, 2008. The increase in the provision for
credit losses is attributable to increases in net charge-offs, non-performing loans and criticized
and classified loans, reflecting a continued severe economic downturn. Net charge-offs increased
$76.6 million, or 166.7 percent, from $46.0 million for the year ended December 31, 2008 to $122.6
million for the year ended December 31, 2009. Non-performing loans increased from $121.9 million,
or 3.62 percent of total gross loans, as of December 31, 2008 to $219.1 million, or 7.77 percent of
total gross loans, as of December 31, 2009. See Non-Performing Assets and Allowance for Loan
Losses and Allowance for Off-Balance Sheet Items for further details.
For the year ended December 31, 2008, the provision for credit losses was $75.7 million,
compared to $38.3 million for the year ended December 31, 2007. The increase in the provision for
credit losses is attributable to increases in the loan portfolio, net charge-offs, non-performing
loans and criticized and classified loans. The gross loan portfolio increased $76.3 million, or 2.3
percent, from $3.29 billion at December 31, 2007 to $3.36 billion at December 31, 2008. Net
charge-offs increased $23.3 million, or 103.1 percent, from $22.6 million for the year ended
December 31, 2007 to $46.0 million for the year ended December 31, 2008. Non-performing loans
increased from $54.5 million, or 1.66 percent of total gross loans, as of December 31, 2007 to
$121.9 million, or 3.62 percent of total gross loans, as of December 31, 2008. See Non-Performing
Assets and Allowance for Loan Losses and Allowance for Off-Balance Sheet Items for further
details.
54
Non-Interest Income
The following table sets forth the various components of non-interest income for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Service Charges on Deposit Accounts |
|
$ |
17,054 |
|
|
$ |
18,463 |
|
|
$ |
18,061 |
|
Insurance Commissions |
|
|
4,492 |
|
|
|
5,067 |
|
|
|
4,954 |
|
Remittance Fees |
|
|
2,109 |
|
|
|
2,194 |
|
|
|
2,049 |
|
Trade Finance Fees |
|
|
1,956 |
|
|
|
3,088 |
|
|
|
4,493 |
|
Other Service Charges and Fees |
|
|
1,810 |
|
|
|
2,365 |
|
|
|
2,527 |
|
Net Gain on Sales of Loans |
|
|
1,220 |
|
|
|
765 |
|
|
|
5,452 |
|
Bank-Owned Life Insurance Income |
|
|
932 |
|
|
|
952 |
|
|
|
933 |
|
Net Gain on Sales of Investment Securities |
|
|
1,833 |
|
|
|
77 |
|
|
|
|
|
Other-Than-Temporary Impairment Loss on Securities |
|
|
|
|
|
|
(2,410 |
) |
|
|
(1,074 |
) |
Other Operating Income |
|
|
704 |
|
|
|
2,293 |
|
|
|
2,611 |
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income |
|
$ |
32,110 |
|
|
$ |
32,854 |
|
|
$ |
40,006 |
|
|
|
|
|
|
|
|
|
|
|
We earn non-interest income from four major sources: service charges on deposit accounts,
insurance commissions, fees generated from international trade finance and gain on sales of loans.
For the year ended December 31, 2009, non-interest income was $32.1 million, a decrease of 2.3
percent from $32.9 million for the year ended December 31, 2008. The slight decrease in
non-interest income for 2009 is primarily attributable to decreases in service charges on deposit
accounts, trade finance fee, and other income, partially offset by a net gain on sales of
investment securities and the absence of OTTI loss on securities recognized in 2008. For the year
ended December 31, 2008, non-interest income was $32.9 million, a decrease of 17.8 percent from
$40.0 million for the year ended December 31, 2007. The overall decrease in non-interest income for
2008 is primarily due to lower gain on sales of loans, and increase in OTTI loss on securities and
lower trade finance fee income.
Service charges on deposit accounts decreased $1.4 million, or 7.6 percent, in 2009 compared
to 2008 and increased $402,000, or 2.2 percent, in 2008 compared to 2007. The decrease was
primarily due to a decrease in account analysis fees, reflecting a decrease in the number of
accounts subject to account analysis fees, partially offset by an increase in account analysis fees
started from March 2009. Service charge income on deposit accounts increased in 2008 primarily due
to an increase of $1.2 million in NSF charges, partially offset by a decrease of $644,000 in
account analysis fee income.
Insurance commissions decreased $575,000, or 11.3 percent, in 2009 compared to 2008 and
increased $113,000, or 2.3 percent, in 2008 compared to 2007. The decrease in 2009 was primarily
attributable to a decreased demand for insurance products due to a sluggish economy.
Remittance fees slightly decreased $85,000, or 3.9 percent, in 2009 compared to 2008 and
increased $145,000, or 7.1 percent, in 2008 compared to 2007 due primarily to a decline in
transaction volumes.
Fees generated from international trade finance decreased by 36.7 percent from $3.1 million in
2008 to $2.0 million in 2009 and decreased by 31.3 percent from $4.5 million in 2007 to $3.1
million in 2008. The decreases in 2009 and 2008 were primarily attributable to a decline in export
letter of credit volume due to the continuation of stressed conditions in the international trade
market.
Other service charges and fees decreased $555,000, or 23.5 percent, in 2009 compared to 2008
and decreased $162,000, or 6.4 percent, in 2008 compared to 2007. The decrease was primarily due to
a decrease in loan servicing income.
Gain on sales of loans was $1.2 million in 2009, compared to $765,000 in 2008 and $5.5 million
in 2007, representing an increase of 59.5 percent in 2009 and a decrease of 86.0 percent in 2008.
In 2009, the increase in gain on sales of loans resulted from increased sales activity in SBA
loans, reflecting a recovery in the SBA secondary market. In 2008, the lower gain on sales of loans
was primarily due to a depressed secondary market for SBA loans and lower premiums, which decreased
to 3.3 percent in 2008 compared to 4.3 percent in 2007. During 2009, there were $37.3 million of
SBA loans sold, compared to $23.3 million in 2008 and $116.6 million in 2007.
55
Net gain on sales of investment securities increased $1.8 million in 2009 compared to 2008 and
increased $77,000 in 2008 compared to 2007. There was no sale of investment securities in 2007. In
2009, we realized a $1.8 million net gain on sale of investment securities as part of our
balance-sheet deleveraging plan as well as a repositioning of the investment portfolio to
substantially reduce municipal bonds in response to our inability to realize tax benefits offered
by the bonds in the near future. Proceeds from the sale of investment securities provided
additional liquidity to reduce wholesale funds.
We have periodically evaluated our investments for OTTI. We recorded no OTTI charge in 2009.
However, in 2008, we recorded an OTTI charge of $2.4 million related to an impairment loss on a
Lehman Brothers corporate bond. During 2007, we recorded an OTTI charge of $1.1 million to write
down the value of an investment in CRA preferred securities to their estimated fair value.
Other operating income decreased by $1.6 million, or 69.3 percent, from $2.3 million in 2008
to $704,000 in 2009. The decrease was attributable primarily to the absence of a $1.0 million
refund of a previously paid legal and consulting fee to outside vendors and a decrease of $230,000
in income on sales of mutual fund. In 2007, other operating income included change in fair value of
derivatives of $683,000 and gain on sale of other real estate owned of $226,000.
Non-Interest Expense
The following table sets forth the breakdown of non-interest expense for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Salaries and Employee Benefits |
|
$ |
33,101 |
|
|
$ |
42,209 |
|
|
$ |
47,036 |
|
Occupancy and Equipment |
|
|
11,239 |
|
|
|
11,158 |
|
|
|
10,494 |
|
Deposit Insurance Premiums and Regulatory Assessments |
|
|
10,418 |
|
|
|
3,713 |
|
|
|
587 |
|
Data Processing |
|
|
6,297 |
|
|
|
5,799 |
|
|
|
6,390 |
|
Other Real Estate Owned Expense |
|
|
5,890 |
|
|
|
390 |
|
|
|
8 |
|
Professional Fees |
|
|
4,099 |
|
|
|
3,539 |
|
|
|
2,468 |
|
Advertising and Promotion |
|
|
2,402 |
|
|
|
3,518 |
|
|
|
3,630 |
|
Supplies and Communications |
|
|
2,352 |
|
|
|
2,518 |
|
|
|
2,592 |
|
Loan-Related Expense |
|
|
1,947 |
|
|
|
790 |
|
|
|
674 |
|
Amortization of Other Intangible Assets |
|
|
1,568 |
|
|
|
1,958 |
|
|
|
2,324 |
|
Other Operating Expenses |
|
|
11,041 |
|
|
|
12,042 |
|
|
|
10,835 |
|
Impairment Loss on Goodwill |
|
|
|
|
|
|
107,393 |
|
|
|
102,891 |
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense |
|
$ |
90,354 |
|
|
$ |
195,027 |
|
|
$ |
189,929 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, non-interest expense was $90.4 million, a decrease
of $104.7 million, or 53.7 percent, from $195.0 million for the year ended December 31, 2008. The
decrease in 2009 was primarily due to the absence of $107.4 million in impairment loss on goodwill
recognized in 2008 and a decrease of $9.1 million in salaries and employee benefits, partially
offset by an increase of $6.7 million in FDIC insurance assessments and an increase of $5.5 million
in other real estate owned expense. For the year ended December 31, 2008, non-interest expense was
$195.0 million, an increase of $5.1 million, or 2.7 percent, from $189.9 million for the year ended
December 31, 2007. The increase in 2008 was primarily the result of an impairment loss on goodwill
of $107.4 million, compared to $102.9 million in 2007. At December 31, 2009, we had no remaining
goodwill recorded on our balance sheet.
Salaries and employee benefits expense for 2009 decreased by $9.1 million, or 21.6 percent, to
$33.1 million from $42.2 million for 2008, as the direct results of an employee reduction in August
2008 of approximately ten percent, lower incentive compensation, and the reversal of a $2.5 million
previously accrued liability on a post-retirement death benefit through an amendment to the
bank-owned life insurance policy in 2009. At December 31, 2009, the Company had a total of 509
employees, compared with 563 employees at December 31, 2008.
56
Deposit insurance premiums and regulatory assessments increased $6.7 million, or 180.6
percent, from $3.7 million in 2008 to $10.4 million in 2009. The increase was due to higher
assessment rates for FDIC insurance on deposits beginning in the second quarter of 2009 and an
increase in the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per
depositor and fully insured on all noninterest-bearing deposit accounts until December 31, 2013. In
addition, there was a special one-time assessment of $1.8 million during the second quarter of
2009. The FDIC imposed a 5 basis point special assessment on each insured institutions assets
minus Tier 1 capital as of June 30, 2009 to maintain public confidence in the federal deposit
insurance system.
Other real estate owned expense increased $5.5 million from $390,000 in 2008 to $5.9 million
in 2009. The increase was due primarily to $1.7 million expenses incurred for two foreclosed
California properties (a condominium project in Oakland and a private golf course in Fallbrook), a
$3.1 million provision for valuation allowance, and a $211,000 loss on the sale of other real
estate owned.
Loan-related expense increased $1.2 million, or 146.5 percent, from $790,000 in 2008 to $1.9
million in 2009. The increase was primarily due to an $850,000 expense related to a legal
settlement on a loan and an increase of $190,000 in appraisal expense.
Income Taxes
For the year ended December 31, 2009, a tax benefit of $31.1 million was recognized on pre-tax
losses of $153.4 million, representing an effective tax benefit rate of 20.3 percent, compared to a
tax benefit of $1.4 million recognized on pre-tax losses of $103.4 million, representing an
effective tax benefit rate of 1.3 percent, for 2008, and income taxes of $24.3 million recognized
on a pre-tax loss of $36.5 million, representing an effective tax rate of 66.7 percent, for 2007.
The effective tax rates for 2008 and 2007 include impairment losses on goodwill of $107.4 million
and $102.9 million, respectively, which are not deductible for tax purposes.
During 2009, we made investments in various tax credit funds totaling $6.2 million and
recognized $1.1 million of income tax credits earned from qualified low-income housing investments.
We recognized an income tax credit of $908,000 for the tax year 2008 from $6.1 million in such
investments and recognized an income tax credit of $775,000 for the tax year 2007 from $5.8 million
in such investments. We intend to continue to make such investments as part of an effort to lower
the effective tax rate and to meet our community reinvestment obligations under the CRA.
As indicated in Notes to Consolidated Financial Statements, Note 12 Income Taxes, income
taxes are the sum of two components: current tax expense and deferred tax expense (benefit).
Current tax expense is the result of applying the current tax rate to taxable income. The deferred
portion is intended to account for the fact that income on which taxes are paid differs from
financial statement pretax income because certain items of income and expense are recognized in
different years for income tax purposes than in the financial statements. These differences in the
years that income and expenses are recognized cause temporary differences.
Most of our temporary differences involve recognizing more expenses in our financial
statements than we have been allowed to deduct for taxes, and therefore we normally have a net
deferred tax asset. As of December 2009, we established a valuation allowance of $45.2 million
against its existing net deferred tax assets of $48.8 million. The remaining net deferred tax asset
of $3.6 million represents the amount of benefit we will receive in the future based on the
carryback of future taxable losses against 2008 taxable income. At December 31, 2008 and 2007, we
had net deferred tax assets of $29.5 million and $18.5 million, respectively.
57
FINANCIAL CONDITION
Investment Portfolio
The composition of our investment portfolio reflects our investment strategy of providing a
relatively stable source of interest income while maintaining an appropriate level of liquidity.
The investment portfolio also provides a source of liquidity by pledging as collateral or through
repurchase agreement and collateral for certain public funds deposits.
As of December 31, 2009, the investment portfolio was composed primarily of mortgage-backed
securities, U.S. Government agency securities, collateralized mortgage obligations, asset-backed
securities and municipal bonds. Investment securities available for sale were 99.3 percent, 99.5
percent and 99.7 percent of the total investment portfolio as of December 31, 2009, 2008 and 2007,
respectively. Most of the securities held carried fixed interest rates. Other than holdings of U.S.
Government agency securities, there were no investments in securities of any one issuer exceeding
10 percent of stockholders equity as of December 31, 2009, 2008 or 2007.
As of December 31, 2009, securities available for sale were $132.4 million, or 4.2 percent of
total assets, compared to $196.2 million, or 5.1 percent of total assets, as of December 31, 2008.
Securities available for sale decreased in 2009 as part of our balance-sheet deleveraging plan as
well as a repositioning of the investment portfolio to substantially reduce municipal bonds in
response to our inability to realize tax benefits offered by the bonds in the near future.
Proceeds from the sale of investment securities provided additional liquidity to reduce wholesale
funds. In 2009, 2008 and 2007, we purchased $89.4 million, $25.4 million and $45.0 million,
respectively, of U.S. Government agency securities, corporate bonds and mortgage-backed securities
to replenish the portfolio for principal repayments in the form of calls, prepayments and scheduled
amortization and to maintain an asset mix consistent with our strategic direction.
The following table summarizes the amortized cost, fair value and distribution of investment
securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio as of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds |
|
$ |
696 |
|
|
$ |
696 |
|
|
$ |
695 |
|
|
$ |
695 |
|
|
$ |
694 |
|
|
$ |
694 |
|
Mortgage-Backed Securities (1) |
|
|
173 |
|
|
|
175 |
|
|
|
215 |
|
|
|
215 |
|
|
|
246 |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Held to Maturity |
|
$ |
869 |
|
|
$ |
871 |
|
|
$ |
910 |
|
|
$ |
910 |
|
|
$ |
940 |
|
|
$ |
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities (1) |
|
$ |
65,218 |
|
|
$ |
66,332 |
|
|
$ |
77,515 |
|
|
$ |
78,860 |
|
|
$ |
99,332 |
|
|
$ |
99,198 |
|
U.S. Government Agency Securities |
|
|
33,325 |
|
|
|
32,763 |
|
|
|
17,580 |
|
|
|
17,700 |
|
|
|
104,893 |
|
|
|
105,089 |
|
Collateralized Mortgage Obligations (2) |
|
|
12,520 |
|
|
|
12,789 |
|
|
|
36,204 |
|
|
|
36,162 |
|
|
|
51,881 |
|
|
|
51,418 |
|
Asset-Backed Securities |
|
|
8,127 |
|
|
|
8,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds |
|
|
7,369 |
|
|
|
7,359 |
|
|
|
58,987 |
|
|
|
58,313 |
|
|
|
69,907 |
|
|
|
71,751 |
|
Other Securities |
|
|
3,925 |
|
|
|
4,195 |
|
|
|
4,684 |
|
|
|
4,958 |
|
|
|
3,925 |
|
|
|
3,835 |
|
Equity Securities |
|
|
511 |
|
|
|
794 |
|
|
|
511 |
|
|
|
804 |
|
|
|
|
|
|
|
|
|
Corporate Bonds (3) |
|
|
|
|
|
|
|
|
|
|
355 |
|
|
|
169 |
|
|
|
18,295 |
|
|
|
18,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Available for Sale |
|
$ |
130,995 |
|
|
$ |
132,420 |
|
|
$ |
195,836 |
|
|
$ |
196,966 |
|
|
$ |
348,233 |
|
|
$ |
349,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateralized by residential mortgages and guaranteed by U.S. government sponsored
entities. |
|
(2) |
|
Collateralized by residential mortgages and guaranteed by U.S. government sponsored
entities, except for two private-label securities held as of December 31, 2008 with an
unrealized loss totaling $42,000. The two private-label securities were sold during the year
ended December 31, 2009. |
|
(3) |
|
Balances presented for amortized cost, representing one corporate bond, were net of
an OTTI charge of $2.4 million, which was related to a credit loss, as of December 31, 2008.
Therefore, the adoption of a new accounting standard did not require a reclassification for
the non-credit portion of previously recognized OTTI from the opening balance of retained
earnings to other comprehensive income as of March 31, 2009. The corporate bond was sold
during the year ended December 31, 2009. |
58
|
|
The following table summarizes the contractual maturity schedule for investment securities,
at amortized cost, and their weighted-average yield as of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year But |
|
|
After Five Years But |
|
|
|
|
|
|
Within One Year |
|
|
Within Five Years |
|
|
Within Ten Years |
|
|
After Ten Years |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(Dollars in Thousands) |
|
Mortgage-Backed
Securities |
|
$ |
2,287 |
|
|
|
4.29 |
% |
|
$ |
6,506 |
|
|
|
4.24 |
% |
|
$ |
5,355 |
|
|
|
4.45 |
% |
|
$ |
51,243 |
|
|
|
4.35 |
% |
U.S. Government Agency
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,999 |
|
|
|
4.10 |
% |
|
|
23,326 |
|
|
|
5.57 |
% |
Collateralized Mortgage
Obligations |
|
|
3,386 |
|
|
|
4.00 |
% |
|
|
3,811 |
|
|
|
4.09 |
% |
|
|
5,323 |
|
|
|
3.95 |
% |
|
|
|
|
|
|
|
|
Asset-Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,440 |
|
|
|
4.43 |
% |
|
|
2,687 |
|
|
|
4.51 |
% |
Municipal Bonds (1) |
|
|
|
|
|
|
|
|
|
|
695 |
|
|
|
7.06 |
% |
|
|
2,869 |
|
|
|
6.13 |
% |
|
|
4,501 |
|
|
|
6.65 |
% |
Other Securities |
|
|
3,925 |
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511 |
|
|
|
|
|
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,598 |
|
|
|
3.81 |
% |
|
$ |
11,012 |
|
|
|
4.37 |
% |
|
$ |
28,986 |
|
|
|
4.40 |
% |
|
$ |
82,268 |
|
|
|
4.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The yield on municipal bonds has been computed on a tax-equivalent basis, using an
effective marginal rate of 35 percent. |
We perform periodic reviews for impairment in accordance with FASB ASC 320. Gross
unrealized losses on investment securities available for sale, the estimated fair value of the
related securities and the number of securities aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position, were as follows
as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding Period |
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Gross |
|
|
Estimated |
|
|
Number |
|
|
Gross |
|
|
Estimated |
|
|
Number |
|
|
Gross |
|
|
Estimated |
|
|
Number |
|
Investment Securities |
|
Unrealized |
|
|
Fair |
|
|
of |
|
|
Unrealized |
|
|
Fair |
|
|
of |
|
|
Unrealized |
|
|
Fair |
|
|
of |
|
Available for Sale |
|
Losses |
|
|
Value |
|
|
Securities |
|
|
Losses |
|
|
Value |
|
|
Securities |
|
|
Losses |
|
|
Value |
|
|
Securities |
|
|
|
(In Thousands) |
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities |
|
$ |
144 |
|
|
$ |
14,584 |
|
|
|
3 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
144 |
|
|
$ |
14,584 |
|
|
|
3 |
|
Municipal Bonds |
|
|
12 |
|
|
|
303 |
|
|
|
1 |
|
|
|
80 |
|
|
|
793 |
|
|
|
1 |
|
|
|
92 |
|
|
|
1,096 |
|
|
|
2 |
|
U.S. Government Agency
Securities |
|
|
562 |
|
|
|
32,764 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562 |
|
|
|
32,764 |
|
|
|
6 |
|
Other Securities |
|
|
24 |
|
|
|
1,976 |
|
|
|
2 |
|
|
|
39 |
|
|
|
961 |
|
|
|
1 |
|
|
|
63 |
|
|
|
2,937 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
742 |
|
|
$ |
49,627 |
|
|
|
12 |
|
|
$ |
119 |
|
|
$ |
1,754 |
|
|
|
2 |
|
|
$ |
861 |
|
|
$ |
51,381 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities |
|
$ |
158 |
|
|
$ |
10,631 |
|
|
|
42 |
|
|
$ |
33 |
|
|
$ |
5,277 |
|
|
|
4 |
|
|
$ |
191 |
|
|
$ |
15,908 |
|
|
|
46 |
|
Municipal Bonds |
|
|
968 |
|
|
|
35,614 |
|
|
|
66 |
|
|
|
119 |
|
|
|
1,749 |
|
|
|
4 |
|
|
|
1,087 |
|
|
|
37,363 |
|
|
|
70 |
|
Collateralized Mortgage
Obligations |
|
|
36 |
|
|
|
4,569 |
|
|
|
4 |
|
|
|
143 |
|
|
|
5,903 |
|
|
|
4 |
|
|
|
179 |
|
|
|
10,472 |
|
|
|
8 |
|
Other Securities |
|
|
72 |
|
|
|
929 |
|
|
|
1 |
|
|
|
40 |
|
|
|
1,960 |
|
|
|
2 |
|
|
|
112 |
|
|
|
2,889 |
|
|
|
3 |
|
Corporate Bonds |
|
|
186 |
|
|
|
169 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
169 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,420 |
|
|
$ |
51,912 |
|
|
|
114 |
|
|
$ |
335 |
|
|
$ |
14,889 |
|
|
|
14 |
|
|
$ |
1,755 |
|
|
$ |
66,801 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All individual securities that have been in a continuous unrealized loss position for 12
months or longer as of December 31, 2009 and 2008 had investment grade ratings upon purchase. The
issuers of these securities have not established any cause for default on these securities and the
various rating agencies have reaffirmed these securities long-term investment grade status as of
December 31, 2009. These securities have fluctuated in value since their purchase dates as market
interest rates have fluctuated.
We are required to assess whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its anticipated recovery. We do
not intend to sell these securities and it is not more likely than not that we will be required to
sell the investments before the recovery of its amortized cost bases. Therefore, in managements
opinion, all securities that have been in a continuous unrealized loss position for the past 12
months or longer as of December 31, 2009 and 2008 are not other-than-temporarily impaired, and
therefore, no impairment charges as of December 31, 2009 and 2008 are warranted.
59
Loan Portfolio
Total gross loans decreased by $542.8 million, or 16.1 percent, in 2009 and increased by $76.3
million, or 2.3 percent, in 2008. Total gross loans represented 89.2 percent of total assets at
December 31, 2009, compared with 86.8 percent and 82.5 percent at December 31, 2008 and 2007,
respectively. The overall decrease in total gross loans is attributable to managements balance
sheet deleveraging strategy by carefully evaluating credits that are subject to renewal and
accepting only those that are of the highest quality, as well as loan charge-offs and transfers to
other real estate owned.
Commercial and industrial loans were $1.71 billion and $2.10 billion at December 31, 2009 and
2008, respectively, representing 60.8 percent and 62.4 percent, respectively, of total gross loans.
Commercial loans include term loans and revolving lines of credit. Term loans typically have a
maturity of three to seven years and are extended to finance the purchase of business entities,
owner-occupied commercial property, business equipment, leasehold improvements or for permanent
working capital. SBA guaranteed loans usually have a longer maturity (5 to 20 years). Lines of
credit, in general, are extended on an annual basis to businesses that need temporary working
capital and/or import/export financing. These borrowers are well diversified as to industry,
location and their current and target markets.
Real estate loans were $1.04 billion and $1.18 billion at December 31, 2009 and 2008,
respectively, representing 37.0 percent and 35.1 percent, respectively, of total gross loans. Real
estate loans are extended to finance the purchase and/or improvement of commercial real estate and
residential property. The properties generally are investor-owned, but may be for user-owned
purposes. Underwriting guidelines include, among other things, an appraisal in conformity with the
USPAP, limitations on loan-to-value ratios, and minimum cash flow requirements to service debt. The
majority of the properties taken as collateral are located in Southern California.
60
The following table sets forth the amount of total loans outstanding in each category as
of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loans Outstanding as of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In Thousands) |
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property |
|
$ |
839,598 |
|
|
$ |
908,970 |
|
|
$ |
795,675 |
|
|
$ |
757,428 |
|
|
$ |
733,650 |
|
Construction |
|
|
126,350 |
|
|
|
178,783 |
|
|
|
215,857 |
|
|
|
202,207 |
|
|
|
152,080 |
|
Residential Property (1) |
|
|
77,149 |
|
|
|
92,361 |
|
|
|
90,375 |
|
|
|
81,758 |
|
|
|
88,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans |
|
|
1,043,097 |
|
|
|
1,180,114 |
|
|
|
1,101,907 |
|
|
|
1,041,393 |
|
|
|
974,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans |
|
|
1,420,034 |
|
|
|
1,611,449 |
|
|
|
1,599,853 |
|
|
|
1,202,612 |
|
|
|
945,210 |
|
Commercial Lines of Credit |
|
|
101,159 |
|
|
|
214,699 |
|
|
|
256,978 |
|
|
|
225,630 |
|
|
|
224,271 |
|
SBA Loans (2) |
|
|
139,531 |
|
|
|
178,399 |
|
|
|
118,528 |
|
|
|
171,631 |
|
|
|
155,491 |
|
International Loans |
|
|
53,488 |
|
|
|
95,185 |
|
|
|
119,360 |
|
|
|
126,561 |
|
|
|
106,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans |
|
|
1,714,212 |
|
|
|
2,099,732 |
|
|
|
2,094,719 |
|
|
|
1,726,434 |
|
|
|
1,431,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans (3) |
|
|
63,303 |
|
|
|
83,525 |
|
|
|
90,449 |
|
|
|
100,121 |
|
|
|
92,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans |
|
$ |
2,820,612 |
|
|
$ |
3,363,371 |
|
|
$ |
3,287,075 |
|
|
$ |
2,867,948 |
|
|
$ |
2,497,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, 2008, 2007, 2006 and 2005, residential mortgage loans held
for sale totaling $0, $0, $310,000, $630,000 and $1.1 million, respectively, were included at
the lower of cost or fair value. |
|
(2) |
|
As of December 31, 2009, 2008, 2007, 2006 and 2005, SBA loans held for sale totaling
$5.0 million, $37.4 million, $6.0 million, $23.2 million and $0, respectively, were included
at the lower of cost or fair value. |
|
(3) |
|
Consumer loans include home equity lines of credit. |
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, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property |
|
|
29.8 |
% |
|
|
27.0 |
% |
|
|
24.2 |
% |
|
|
26.4 |
% |
|
|
29.4 |
% |
Construction |
|
|
4.5 |
% |
|
|
5.3 |
% |
|
|
6.6 |
% |
|
|
7.1 |
% |
|
|
6.1 |
% |
Residential Property |
|
|
2.7 |
% |
|
|
2.8 |
% |
|
|
2.7 |
% |
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans |
|
|
37.0 |
% |
|
|
35.1 |
% |
|
|
33.5 |
% |
|
|
36.3 |
% |
|
|
39.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans |
|
|
50.3 |
% |
|
|
47.9 |
% |
|
|
48.7 |
% |
|
|
41.9 |
% |
|
|
37.8 |
% |
Commercial Lines of Credit |
|
|
3.6 |
% |
|
|
6.4 |
% |
|
|
7.8 |
% |
|
|
7.9 |
% |
|
|
9.0 |
% |
SBA Loans |
|
|
4.9 |
% |
|
|
5.3 |
% |
|
|
3.6 |
% |
|
|
6.0 |
% |
|
|
6.2 |
% |
International Loans |
|
|
2.0 |
% |
|
|
2.8 |
% |
|
|
3.6 |
% |
|
|
4.4 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans |
|
|
60.8 |
% |
|
|
62.4 |
% |
|
|
63.7 |
% |
|
|
60.2 |
% |
|
|
57.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
2.2 |
% |
|
|
2.5 |
% |
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the distribution of undisbursed loan commitments as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Commitments to Extend Credit |
|
$ |
262,821 |
|
|
$ |
386,785 |
|
Standby Letters of Credit |
|
|
17,225 |
|
|
|
47,289 |
|
Commercial Letters of Credit |
|
|
13,544 |
|
|
|
29,177 |
|
Unused Credit Card Lines |
|
|
23,408 |
|
|
|
16,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Undisbursed Loan Commitments |
|
$ |
316,998 |
|
|
$ |
480,163 |
|
|
|
|
|
|
|
|
61
The table below shows the maturity distribution and repricing intervals of outstanding
loans as of December 31, 2009. In addition, the table shows the distribution of such loans between
those with floating or variable interest rates and those with fixed or predetermined interest
rates. The table includes non-accrual loans of $219.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year But |
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Within |
|
|
After |
|
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property |
|
$ |
703,955 |
|
|
$ |
135,643 |
|
|
$ |
|
|
|
$ |
839,598 |
|
Construction |
|
|
126,350 |
|
|
|
|
|
|
|
|
|
|
|
126,350 |
|
Residential Property |
|
|
19,463 |
|
|
|
52,401 |
|
|
|
5,285 |
|
|
|
77,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans |
|
|
849,768 |
|
|
|
188,044 |
|
|
|
5,285 |
|
|
|
1,043,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans |
|
|
1,075,332 |
|
|
|
344,702 |
|
|
|
|
|
|
|
1,420,034 |
|
Commercial Lines of Credit |
|
|
101,159 |
|
|
|
|
|
|
|
|
|
|
|
101,159 |
|
SBA Loans |
|
|
136,269 |
|
|
|
3,262 |
|
|
|
|
|
|
|
139,531 |
|
International Loans |
|
|
53,488 |
|
|
|
|
|
|
|
|
|
|
|
53,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans |
|
|
1,366,248 |
|
|
|
347,964 |
|
|
|
|
|
|
|
1,714,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
61,954 |
|
|
|
1,349 |
|
|
|
|
|
|
|
63,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans |
|
$ |
2,277,970 |
|
|
$ |
537,357 |
|
|
$ |
5,285 |
|
|
$ |
2,820,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans With Predetermined Interest Rates |
|
$ |
412,984 |
|
|
$ |
512,365 |
|
|
$ |
5,285 |
|
|
$ |
930,634 |
|
Loans With Variable Interest Rates |
|
$ |
1,864,986 |
|
|
$ |
24,992 |
|
|
$ |
|
|
|
$ |
1,889,978 |
|
As of December 31, 2009, the loan portfolio included the following concentrations of
loans to one type of industry that were greater than 10 percent of total gross loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
Percentage of Total |
|
Industry |
|
December 31, 2009 |
|
|
Gross Loans Outstanding |
|
|
|
(In Thousands) |
|
|
|
|
|
Lessors of Non-Residential Buildings |
|
$ |
417,266 |
|
|
|
14.8 |
% |
Accommodation/Hospitality |
|
$ |
413,380 |
|
|
|
14.7 |
% |
Gasoline Stations |
|
$ |
343,100 |
|
|
|
12.2 |
% |
There was no other concentration of loans to any one type of industry exceeding 10
percent of total gross loans outstanding.
Non-Performing Assets
Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due
and still accruing interest. Non-performing assets consist of non-performing loans and OREO. Loans
are placed on non-accrual status when, in the opinion of management, the full timely collection of
principal or interest is in doubt. Generally, the accrual of interest is discontinued when
principal or interest payments become more than 90 days past due, unless management believes the
loan is adequately collateralized and in the process of collection. However, in certain instances,
we may place a particular loan on non-accrual status earlier, depending upon the individual
circumstances surrounding the loans delinquency. When an asset is placed on non-accrual status,
previously accrued but unpaid interest is reversed against current income. Subsequent collections
of cash are applied as principal reductions when received, except when the ultimate collectibility
of principal is probable, in which case interest payments are credited to income. Non-accrual
assets may be restored to accrual status when principal and interest become current and full
repayment is expected. Interest income is recognized on the accrual basis for impaired loans not
meeting the criteria for non-accrual. OREO consists of properties acquired by foreclosure or
similar means that management intends to offer for sale.
Managements classification of a loan as non-accrual is an indication that there is reasonable
doubt as to the full collectibility of principal or interest on the loan; at this point, we stop
recognizing income from the interest on the loan and reverse any uncollected interest that had been
accrued but unpaid. These loans may or may not be collateralized, but collection efforts are
continuously pursued.
62
Except for non-performing loans set forth below, our management is not aware of any loans as
of December 31, 2009 and 2008 for which known credit problems of the borrower would cause serious
doubts as to the ability of such borrowers to comply with their present loan repayment terms, or
any known events that would result in the loan being designated as non-performing at some future
date. Our management cannot, however, predict the extent to which a deterioration in general
economic conditions, real estate values, increases in general rates of interest, or changes in the
financial condition or business of borrower may adversely affect a borrowers ability to pay.
The following table provides information with respect to the components of non-performing
assets as of December 31 for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
Non-Performing Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property |
|
$ |
58,927 |
|
|
$ |
8,160 |
|
|
$ |
2,684 |
|
|
$ |
246 |
|
|
$ |
|
|
Construction |
|
|
15,185 |
|
|
|
38,163 |
|
|
|
24,118 |
|
|
|
|
|
|
|
|
|
Residential Property |
|
|
3,335 |
|
|
|
1,350 |
|
|
|
1,490 |
|
|
|
|
|
|
|
474 |
|
Commercial and Industrial Loans |
|
|
140,931 |
|
|
|
73,007 |
|
|
|
25,729 |
|
|
|
13,862 |
|
|
|
9,574 |
|
Consumer Loans |
|
|
622 |
|
|
|
143 |
|
|
|
231 |
|
|
|
105 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Accrual Loans |
|
|
219,000 |
|
|
|
120,823 |
|
|
|
54,252 |
|
|
|
14,213 |
|
|
|
10,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 Days or More Past Due and Still Accruing
(as to Principal or Interest): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans |
|
|
|
|
|
|
989 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
67 |
|
|
|
86 |
|
|
|
77 |
|
|
|
2 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans 90 Days or More Past Due and Still
Accruing (as to Principal or Interest) |
|
|
67 |
|
|
|
1,075 |
|
|
|
227 |
|
|
|
2 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Loans |
|
|
219,067 |
|
|
|
121,898 |
|
|
|
54,479 |
|
|
|
14,215 |
|
|
|
10,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned |
|
|
26,306 |
|
|
|
823 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Assets |
|
$ |
245,373 |
|
|
$ |
122,721 |
|
|
$ |
54,766 |
|
|
$ |
14,215 |
|
|
$ |
10,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a Percentage of Total Gross Loans |
|
|
7.77 |
% |
|
|
3.62 |
% |
|
|
1.66 |
% |
|
|
0.50 |
% |
|
|
0.41 |
% |
Non-Performing Assets as a Percentage of Total Assets |
|
|
7.76 |
% |
|
|
3.17 |
% |
|
|
1.37 |
% |
|
|
0.38 |
% |
|
|
0.30 |
% |
Non-accrual loans totaled $219.0 million as of December 31, 2009, compared to $120.8
million as of December 31, 2008, representing a 81.3 percent increase. Delinquent loans (defined as
30 days or more past due) were $186.3 million as of December 31, 2009, compared to $128.5 million
as of December 31, 2008, representing a 45.0 percent increase. We believe that the increases in
non-performing loans and delinquent loans are attributable primarily to a current economic
recession that is affecting some of our borrowers ability to honor their commitments.
Non-performing loans increased by $97.2 million, or 79.7 percent, to $219.1 million as of
December 31, 2009, compared to $121.9 million as of December 31, 2008. The ratio of non-performing
loans to total gross loans also increased to 7.77 percent at December 31, 2009 from 3.62 percent at
December 31, 2008. During the same period, the allowance for loan losses increased by $74.0
million, or 104.3 percent, to $145.0 million from $71.0 million. The $97.2 million increase in
non-performing loans resulted primarily from increases of $50.7 million in commercial real estate
loans, $37.5 million in real estate secured commercial term loans, and $19.7 million in SBA loans,
partially offset by the $25.6 million decrease in construction loans. Of the $219.1 million
non-performing loans, approximately $200.7 million were impaired based on FASB ASC 310,
Receivables, which resulted in aggregate impairment reserve of $23.1 million as of December 31,
2009. This impairment reserve total is in addition to the charge-offs of $49.4 million from
impaired loans. The allowance for the collateral-dependent loans is calculated by the difference
between the outstanding loan balance and the value of the collateral as determined by recent
appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from
loan to loan based on the collateral coverage of the loan at the time of designation as
non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on
these loans on a quarterly basis and adjust the allowance accordingly.
63
As of December 31, 2009, $176.0 million, or 80.3 percent, of the $219.1 million of
non-performing loans were secured by real estate. As of December 31, 2008, $96.3 million, or 79.0
percent, of the $121.9 million of non-performing loans were secured by real estate. In light of
declining property values in the current economic downturn affecting the real estate markets, the
Bank continued to obtain current appraisals and factor in adequate market discounts on the
collateral to compensate for non-current appraisals. As of December 31, 2009, 2008 and 2007, we had
OREO of $26.3 million, $823,000 and $287,000, respectively.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
Provisions to the allowance for loan losses are made quarterly to recognize probable loan
losses. The quarterly provision is based on the allowance need, which is determined through
analysis involving quantitative calculations based on historic loss rates for general reserves and
individual impairment calculations for specific allocations to impaired loans as well as
qualitative adjustments.
To determine general reserve requirements, existing loans are divided into 10 general loan
pools of risk-rated loans (commercial real estate, construction, commercial term unsecured,
commercial term T/D secured, commercial line of credit, SBA, international, consumer
installment, consumer line of credit, and miscellaneous loans) as well as 3 homogenous loan pools
(residential mortgage, auto loans, and credit card). For risk-rated loans, migration analysis
allocates historical losses by loan pool and risk grade (pass, special mention, substandard, and
doubtful) to determine risk factors for potential loss inherent in the current outstanding loan
portfolio.
In the first quarter of 2008, we enhanced our migration analysis to better reflect the Banks
current loss profile. Our prior migration analysis utilized 28 quarters of evenly-weighted historic
losses. Our revised migration analysis utilizes 12-quarters of historic losses with 1.5 to 1
weighting given to the most recent six quarters.
As homogenous loans are bulk graded, risk grade is not factored into the historical loss
analysis; however, as with risk-rated loans, risk factor calculations are based on 12-quarter
historic loss analysis with 1.5 to 1 weighting given to the most recent six quarters.
Specific reserves are allocated for loans deemed impaired. FASB ASC 310, Receivables,
provides the definition of impairment: a loan is impaired when, based on current information and
events, it is probable that a bank is unable to collect all amounts due under the loan according to
the contractual terms of the loan documents. Loans that represent significant concentrations of
credit, material non-performing loans, insider loans and other material credit exposures are
subject to FASB ASC 310 impairment analysis.
Loans that are determined to be impaired under FASB ASC 310, are individually analyzed to
estimate the Banks exposure to loss based on the borrowers character, the current financial
condition of the borrower and the guarantor, the borrowers resources, the borrowers payment
history, repayment ability, debt servicing ability, action plan, the prevailing value of the
underlying collateral, the Banks lien position, general economic conditions, specific industry
conditions, outlook for the future, etc.
The loans identified as impaired are measured using one of the three methods of valuations:
(1) the present value of expected future cash flow or discounted cash flow, (2) the fair market
value of the collateral if the loan is collateral dependent, or (3) the loans observable market
price.
64
When determining the appropriate level for allowance for loan losses, the management considers
qualitative adjustments for any factors that are likely to cause estimated credit losses associated
with the Banks current portfolio to differ from historical loss experience, including but not
limited to:
|
|
|
changes in lending policies and procedures, including underwriting standards and
collection, charge-offs,
and recovery practice; |
|
|
|
|
changes in national and local economic and business conditions and developments,
including the condition
of various market segments; |
|
|
|
|
changes in the nature and volume of the portfolio; |
|
|
|
|
changes in the experience, ability, and depth of lending management and staff; |
|
|
|
|
changes in the trend of the volume and severity of past due and classified loans,
and trends in the volume
of non-accrual loans, troubled debt restructurings, charge-offs and other loan
modifications; |
|
|
|
|
changes in the quality of the Banks loan review system and the degree of oversight
by the Board of
Directors; |
|
|
|
|
the existence and effect of any concentrations of credit, and changes in the level
of such concentrations; |
|
|
|
|
transfer risk on cross-border lending activities; |
|
|
|
|
the effect of external factors such as competition and legal and regulatory
requirements as well as
declining collateral values on the level of estimated credit losses in the Banks current
portfolio. |
In order to systematically quantify the credit risk impact of trends and changes within the
loan portfolio, a credit risk matrix is utilized. The above factors are considered on a loan pool
by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit
risk matrix provides various scenarios with positive or negative impact on the asset portfolio
along with corresponding basis points for qualitative adjustments.
The following table reflects our allocation of allowance for loan and lease losses by loan
category as well as the loans receivable for each loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Allowance for Loan |
|
Allowance |
|
|
Loans |
|
|
Allowance |
|
|
Loans |
|
|
Allowance |
|
|
Loans |
|
|
Allowance |
|
|
Loans |
|
|
Allowance |
|
|
Loans |
|
Losses Applicable To |
|
Amount |
|
|
Receivable |
|
|
Amount |
|
|
Receivable |
|
|
Amount |
|
|
Receivable |
|
|
Amount |
|
|
Receivable |
|
|
Amount |
|
|
Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property |
|
$ |
19,149 |
|
|
$ |
839,598 |
|
|
$ |
5,587 |
|
|
$ |
908,970 |
|
|
$ |
2,269 |
|
|
$ |
795,675 |
|
|
$ |
2,101 |
|
|
$ |
757,428 |
|
|
$ |
2,043 |
|
|
$ |
733,650 |
|
Construction |
|
|
9,043 |
|
|
|
126,350 |
|
|
|
4,102 |
|
|
|
178,783 |
|
|
|
3,478 |
|
|
|
215,857 |
|
|
|
586 |
|
|
|
202,207 |
|
|
|
475 |
|
|
|
152,080 |
|
Residential Property (1) |
|
|
997 |
|
|
|
77,149 |
|
|
|
449 |
|
|
|
92,361 |
|
|
|
32 |
|
|
|
90,065 |
|
|
|
19 |
|
|
|
81,128 |
|
|
|
19 |
|
|
|
87,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans |
|
|
29,189 |
|
|
|
1,043,097 |
|
|
|
10,138 |
|
|
|
1,180,114 |
|
|
|
5,779 |
|
|
|
1,101,597 |
|
|
|
2,706 |
|
|
|
1,040,763 |
|
|
|
2,537 |
|
|
|
973,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
Industrial Loans (1) |
|
|
110,678 |
|
|
|
1,709,202 |
|
|
|
58,866 |
|
|
|
2,062,322 |
|
|
|
36,011 |
|
|
|
2,088,694 |
|
|
|
23,099 |
|
|
|
1,703,194 |
|
|
|
21,035 |
|
|
|
1,431,492 |
|
Consumer Loans |
|
|
2,690 |
|
|
|
63,303 |
|
|
|
1,586 |
|
|
|
83,525 |
|
|
|
1,821 |
|
|
|
90,449 |
|
|
|
1,752 |
|
|
|
100,121 |
|
|
|
1,391 |
|
|
|
92,154 |
|
Unallocated |
|
|
2,439 |
|
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,996 |
|
|
$ |
2,815,602 |
|
|
$ |
70,986 |
|
|
$ |
3,325,961 |
|
|
$ |
43,611 |
|
|
$ |
3,280,740 |
|
|
$ |
27,557 |
|
|
$ |
2,844,078 |
|
|
$ |
24,963 |
|
|
$ |
2,496,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans held for sale excluded. |
65
The following table sets forth certain information regarding our allowance for loan
losses and allowance for off-balance sheet items for the periods presented. Allowance for
off-balance sheet items is determined by applying reserve factors according to loan pool and grade
as well as actual current commitment usage figures by loan type to existing contingent liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
|
$ |
70,986 |
|
|
$ |
43,611 |
|
|
$ |
27,557 |
|
|
$ |
24,963 |
|
|
$ |
22,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-Offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
27,262 |
|
|
|
15,005 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans |
|
|
95,768 |
|
|
|
31,916 |
|
|
|
22,255 |
|
|
|
5,333 |
|
|
|
4,371 |
|
Consumer Loans |
|
|
2,350 |
|
|
|
1,231 |
|
|
|
876 |
|
|
|
796 |
|
|
|
827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-Offs |
|
|
125,380 |
|
|
|
48,152 |
|
|
|
23,330 |
|
|
|
6,129 |
|
|
|
5,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries on Loans Previously Charged Off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
406 |
|
|
|
|
|
Commercial and Industrial Loans |
|
|
2,650 |
|
|
|
1,979 |
|
|
|
494 |
|
|
|
957 |
|
|
|
2,193 |
|
Consumer Loans |
|
|
128 |
|
|
|
203 |
|
|
|
202 |
|
|
|
187 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries on Loans Previously Charged Off |
|
|
2,783 |
|
|
|
2,182 |
|
|
|
696 |
|
|
|
1,550 |
|
|
|
2,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Charge-Offs |
|
|
122,597 |
|
|
|
45,970 |
|
|
|
22,634 |
|
|
|
4,579 |
|
|
|
2,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision Charged to Operating Expense |
|
|
196,607 |
|
|
|
73,345 |
|
|
|
38,688 |
|
|
|
7,173 |
|
|
|
5,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year |
|
$ |
144,996 |
|
|
$ |
70,986 |
|
|
$ |
43,611 |
|
|
$ |
27,557 |
|
|
$ |
24,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Off-Balance Sheet Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
|
$ |
4,096 |
|
|
$ |
1,765 |
|
|
$ |
2,130 |
|
|
$ |
2,130 |
|
|
$ |
1,800 |
|
Provision Charged to Operating Expense |
|
|
(220 |
) |
|
|
2,331 |
|
|
|
(365 |
) |
|
|
|
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year |
|
$ |
3,876 |
|
|
$ |
4,096 |
|
|
$ |
1,765 |
|
|
$ |
2,130 |
|
|
$ |
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan Charge-Offs to Average Total Gross Loans |
|
|
3.88 |
% |
|
|
1.38 |
% |
|
|
0.73 |
% |
|
|
0.17 |
% |
|
|
0.12 |
% |
Net Loan Charge-Offs to Total Gross Loans at End of Period |
|
|
4.35 |
% |
|
|
1.37 |
% |
|
|
0.69 |
% |
|
|
0.16 |
% |
|
|
0.11 |
% |
Allowance for Loan Losses to Average Total Gross Loans |
|
|
4.59 |
% |
|
|
2.13 |
% |
|
|
1.41 |
% |
|
|
1.00 |
% |
|
|
1.05 |
% |
Allowance for Loan Losses to Total Gross Loans at End of Period |
|
|
5.14 |
% |
|
|
2.11 |
% |
|
|
1.33 |
% |
|
|
0.96 |
% |
|
|
1.00 |
% |
Net Loan Charge-Offs to Allowance for Loan Losses |
|
|
84.55 |
% |
|
|
64.76 |
% |
|
|
51.90 |
% |
|
|
16.62 |
% |
|
|
11.23 |
% |
Net Loan Charge-Offs to Provision Charged to Operating Expense |
|
|
62.36 |
% |
|
|
62.68 |
% |
|
|
58.50 |
% |
|
|
63.84 |
% |
|
|
55.36 |
% |
Allowance for Loan Losses to Non-Performing Loans |
|
|
66.19 |
% |
|
|
58.23 |
% |
|
|
80.05 |
% |
|
|
193.86 |
% |
|
|
246.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Gross Loans Outstanding During Period |
|
$ |
3,158,624 |
|
|
$ |
3,334,008 |
|
|
$ |
3,082,671 |
|
|
$ |
2,751,565 |
|
|
$ |
2,386,575 |
|
Total Gross Loans Outstanding at End of Period |
|
$ |
2,820,612 |
|
|
$ |
3,363,371 |
|
|
$ |
3,287,075 |
|
|
$ |
2,867,948 |
|
|
$ |
2,497,818 |
|
Non-Performing Loans at End of Period |
|
$ |
219,067 |
|
|
$ |
121,898 |
|
|
$ |
54,479 |
|
|
$ |
14,215 |
|
|
$ |
10,131 |
|
The allowance for loan losses increased by $74.0 million, or 104.3 percent, to $145.0
million at December 31, 2009 as compared to $71.0 million at December 31, 2008 and increased by
$27.4 million, or 62.8 percent, to $71.0 million at December 31, 2008 as compared to $43.6 million
at December 31, 2007. The allowance for loan losses as a percentage of total gross loans increased
to 5.14 percent as of December 31, 2009 from 2.11 percent as of December 31, 2008, compared to 1.33
percent as of December 31, 2007. Concurrently, the provision for credit losses increased by $123.3
million, or 168.1 percent, to $196.6 million at December 31, 2009 as compared to $73.3 million at
December 31, 2008 and increased by $34.7 million, or 89.6 percent, to $73.3 million at December 31,
2008 as compared to $38.7 million at December 31, 2007.
The increase in the allowance for loan losses in 2009 was due primarily to subsequent
increases in historical loss rates as a result of elevated levels of charge-offs as well as
migration of loans into more adverse risk rating categories. Due to this increase in reserve
factors derived from historic loss rates and migration of loans into adverse risk rating
categories, general reserves increased $54.5 million, or 153.1 percent, to $90.1 million at
December 31, 2009 as compared to $35.6 million at December 31, 2008. In addition, qualitative
adjustments were increased between 5 to 85 basis points for an average of 40 basis points across
all loan types. Accordingly, qualitative reserves increased $15.4 million, or 95.1 percent, to
$31.6 million at December 31, 2009 as compared to $16.2 million at December 31, 2008. As a result,
despite the decrease in overall loan balance of $542.8 million, or 16.1 percent, to $2.82 billion
at December 31, 2009 as compared to $3.36 billion at December 31, 2008, higher factors for both
general reserves and qualitative adjustments significantly increased allowance requirements.
66
The total impaired loans increased $79.3 million, or 65.3 percent, to $200.7 million at
December 31, 2009 as compared to $121.4 million at December 31, 2008. However, specific reserve
allocations associated with impaired loans only increased $4.9 million, or 26.9 percent, to $23.1
million at December 31, 2009 as compared to $18.2 million at December 31, 2008. The comparatively
low increase in impairment reserve was mainly due to timely charge-off of collateral dependant
loans that are 90 or more days past due. As the impairment reserve is mostly derived from
shortfalls in collateral dependant loans, the amount of required impairment reserve has been
limited due to charge-offs recorded.
For the year ending December 31, 2009, total charge-offs were $125.4 million, compared to
$48.2 million for the year ending December 31, 2008 and $23.3 million for the year ending December
31, 2007. Charge-offs in the loan pool of commercial term (T/D secured and unsecured) increased
$40.8 million to $64.4 million at December 31, 2009 as compared to $23.6 million at December 31,
2008. Charge-offs in commercial real estate loans increased $15.7 million to $16.0 million at
December 31, 2009 as compared to $300,000 at December 31, 2008. As property values have continued
to decrease, real estate secured loans, which had in prior years remained stable due to low initial
loan to values, lost equity and had to be charged-off. As a result, the Bank experienced
significant losses in secured loan pools that previously had minimal charge-offs. In addition to
Commercial Term and Real Estate loans, charge-offs in international loans increased $16.0 million
to $16.5 million at December 31, 2009 as compared to $500,000 at December 31, 2008. The increased
charge-offs within international loans was mainly due to losses, totaling $15.7 million, from three
specific borrowers.
The Bank also recorded in other liabilities an allowance for off-balance sheet exposure,
primarily unfunded loan commitments, of $3.9 million and $4.1 million at December 31, 2009 and
2008, respectively. The Bank closely monitors the borrowers repayment capabilities while funding
existing commitments to ensure losses are minimized. Based on managements evaluation and analysis
of portfolio credit quality and prevailing economic conditions, we believe these reserves are
adequate for losses inherent in the loan portfolio and off-balance sheet exposure as of December
31, 2009 and 2008.
Deposits
Total deposits at December 31, 2009, 2008 and 2007 were $2.75 billion, $3.07 billion and $3.00
billion, respectively, representing a decrease of $320.8 million, or 10.4 percent, in 2009 and an
increase of $68.4 million, or 2.3 percent, in 2008. At December 31, 2009, 2008 and 2007, total time
deposits outstanding were $1.40 billion, $2.08 billion and $1.78 billion, respectively,
representing 50.8 percent, 67.8 percent and 59.4 percent, respectively, of total deposits. During
2009, we successfully recaptured a substantial portion of the matured time deposits and raised new
retail deposits with low-cost core-deposit products. This deposit-portfolio rebalancing implemented
under the Banks de-leveraging strategy allowed some run-off of rate-sensitive deposits.
The table below summarizes the deposit balances by major category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Balance |
|
|
Percent |
|
|
Balance |
|
|
Percent |
|
|
Balance |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Demand, Noninterest-Bearing |
|
$ |
556,306 |
|
|
|
20.2 |
% |
|
$ |
536,944 |
|
|
|
17.5 |
% |
|
$ |
680,282 |
|
|
|
22.7 |
% |
Savings |
|
|
111,172 |
|
|
|
4.0 |
% |
|
|
81,869 |
|
|
|
2.7 |
% |
|
|
93,099 |
|
|
|
3.1 |
% |
Money Market Checking and NOW Accounts |
|
|
685,858 |
|
|
|
24.9 |
% |
|
|
370,401 |
|
|
|
12.1 |
% |
|
|
445,806 |
|
|
|
14.9 |
% |
Time Deposits of $100,000 or More |
|
|
815,190 |
|
|
|
29.8 |
% |
|
|
849,800 |
|
|
|
27.6 |
% |
|
|
1,441,683 |
|
|
|
47.9 |
% |
Other Time Deposits |
|
|
580,801 |
|
|
|
21.1 |
% |
|
|
1,231,066 |
|
|
|
40.1 |
% |
|
|
340,829 |
|
|
|
11.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
$ |
2,749,327 |
|
|
|
100.0 |
% |
|
$ |
3,070,080 |
|
|
|
100.0 |
% |
|
$ |
3,001,699 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and money market accounts increased by $334.8 million, or 36.9 percent,
in 2009 and decreased by $218.7 million, or 19.4 percent, in 2008. Core deposits (defined as
demand, money market and savings deposits) increased by $364.1 million, or 36.8 percent, to $1.35
billion as of December 31, 2009 from $989.2 million as of December 31, 2008. At December 31, 2009,
noninterest-bearing demand deposits represented 20.2 percent of total deposits compared to 17.5
percent at December 31, 2008. Despite the increased competitive pressures to build core deposits in
light of the current recessionary economic condition, we attribute the ability to maintain our core
deposit base to our strong brand awareness and marketing efforts in our service markets.
67
Brokered deposits decreased by $670.7 million from $874.2 million as of December 31, 2008 to
$203.5 million as of December 31, 2009. All of our brokered deposits as of December 31, 2009 will
mature in less than one year and the Bank is currently restricted from accepting brokered deposits
due to our capital classification. Brokered deposits are not a guaranteed source of funds, which
may affect our ability to raise necessary liquidity. We plan to continue to reduce the Banks
reliance on wholesale funding, including FHLB advances and brokered deposits, and build our deposit
base with long-term relationships. For additional discussion regarding our brokered deposits and
payment of interest rates on our deposits, see Interest Rate Risk Management Liquidity Hanmi
Bank.
Average deposits for the years ended December 31, 2009, 2008 and 2007 were $3.11 billion,
$2.91 billion and $2.99 billion, respectively. Average deposits increased by 6.7 percent in 2009
and decreased by 2.6 percent in 2008.On October 3, 2008, the FDIC deposit insurance limit on most
accounts was increased from $100,000 to $250,000. This increase is in effect through December 31,
2013. As of December 31, 2009, time deposits of more than $250,000 were $261.0 million.
The table below summarizes the distribution of average deposits and the average rates paid for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Demand, Noninterest-Bearing |
|
$ |
541,822 |
|
|
|
|
|
|
$ |
630,631 |
|
|
|
|
|
|
$ |
702,329 |
|
|
|
|
|
Savings |
|
|
91,089 |
|
|
|
2.56 |
% |
|
|
89,866 |
|
|
|
2.33 |
% |
|
|
97,173 |
|
|
|
2.06 |
% |
Money Market Checking and NOW Accounts |
|
|
507,619 |
|
|
|
1.93 |
% |
|
|
618,779 |
|
|
|
3.22 |
% |
|
|
452,825 |
|
|
|
3.41 |
% |
Time Deposits of $100,000 or More |
|
|
1,051,994 |
|
|
|
3.31 |
% |
|
|
1,045,968 |
|
|
|
4.17 |
% |
|
|
1,430,603 |
|
|
|
5.28 |
% |
Other Time Deposits |
|
|
916,798 |
|
|
|
3.20 |
% |
|
|
527,927 |
|
|
|
3.55 |
% |
|
|
306,876 |
|
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
$ |
3,109,322 |
|
|
|
2.45 |
% |
|
$ |
2,913,171 |
|
|
|
2.90 |
% |
|
$ |
2,989,806 |
|
|
|
3.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the maturity of time deposits of $100,000 or more at December
31 for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Three Months or Less |
|
$ |
344,901 |
|
|
$ |
238,695 |
|
|
$ |
958,917 |
|
Over Three Months Through Six Months |
|
|
246,116 |
|
|
|
246,087 |
|
|
|
289,293 |
|
Over Six Months Through Twelve Months |
|
|
219,739 |
|
|
|
338,233 |
|
|
|
188,890 |
|
Over Twelve Months |
|
|
4,434 |
|
|
|
26,785 |
|
|
|
4,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Time Deposits of $100,000 or More |
|
$ |
815,190 |
|
|
$ |
849,800 |
|
|
$ |
1,441,683 |
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances
FHLB advances and other borrowings mostly take the form of advances from the FHLB of San
Francisco and overnight federal funds. At December 31, 2009, advances from the FHLB were $154.0
million, a decrease of $268.2 million, or 63.5 percent, from the December 31, 2008 balance of
$422.2 million as we have been successfully executing a strategy replacing the usage of wholesale
funds with more stable customer deposits in 2009. As of December 31, 2009, there were no FHLB
advances with a remaining maturity of less than one year. See Note 10 FHLB Advances and Other
Borrowings for more details.
68
Junior Subordinated Debentures
During the first half of 2004, we issued two junior subordinated notes bearing interest at the
three-month London InterBank Offered Rate (LIBOR) plus 2.90 percent totaling $61.8 million and
one junior subordinated note bearing interest at the three-month LIBOR plus 2.63 percent totaling
$20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of
which were used to finance the purchase of PUB, totaled $82.4 million at December 31, 2009 and
2008. In October 2008, we committed to the FRB that no interest payments on the junior subordinated
debentures would be made without the prior written consent of the FRB. Therefore, in order to
preserve its capital position, Hanmi Financials Board of Directors has elected to defer quarterly
interest payments on its outstanding junior subordinated debentures until further notice, beginning
with the interest payment that was due on January 15, 2009. In addition, we are prohibited from
making interest payments on our outstanding junior subordinated debentures under the terms of our
recently issued regulatory enforcement actions without the prior written consent of the FRB and
DFI. Accrued interest payable on junior subordinated debentures amounted to $4.1 million and
$780,000 at December 31, 2009 and December 31, 2008, respectively. See Note 11 Junior
Subordinated Debentures for further details.
INTEREST RATE RISK MANAGEMENT
Interest rate risk indicates our exposure to market interest rate fluctuations. The movement
of interest rates directly and inversely affects the economic value of fixed-income assets, which
is the present value of future cash flow discounted by the current interest rate; under the same
conditions, the higher the current interest rate, the higher the denominator of discounting.
Interest rate risk management is intended to decrease or increase the level of our exposure to
market interest rates. The level of interest rate risk can be managed through such means as the
changing of gap positions and the volume of fixed-income assets. For successful management of
interest rate risk, we use various methods to measure existing and future interest rate risk
exposures, giving effect to historical attrition rates of core deposits. In addition to regular
reports used in business operations, repricing gap analysis, stress testing and simulation modeling
are the main measurement techniques used to quantify interest rate risk exposure.
69
The following table shows the status of our gap position as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
After One |
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
Three |
|
|
Year But |
|
|
|
|
|
|
|
|
|
|
|
|
Than |
|
|
Months |
|
|
Within |
|
|
After |
|
|
Non- |
|
|
|
|
|
|
Three |
|
|
But Within |
|
|
Five |
|
|
Five |
|
|
Interest- |
|
|
|
|
|
|
Months |
|
|
One Year |
|
|
Years |
|
|
Years |
|
|
Sensitive |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due from Banks |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,263 |
|
|
$ |
55,263 |
|
InterestBearing Deposits in Other Banks |
|
|
95,559 |
|
|
|
3,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,847 |
|
Investment Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
4,624 |
|
|
|
11,980 |
|
|
|
32,367 |
|
|
|
71,877 |
|
|
|
|
|
|
|
120,848 |
|
Floating Rate |
|
|
68 |
|
|
|
306 |
|
|
|
7,180 |
|
|
|
4,887 |
|
|
|
|
|
|
|
12,441 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
151,971 |
|
|
|
297,291 |
|
|
|
475,805 |
|
|
|
5,285 |
|
|
|
|
|
|
|
930,352 |
|
Floating Rate |
|
|
1,627,047 |
|
|
|
14,921 |
|
|
|
29,292 |
|
|
|
|
|
|
|
|
|
|
|
1,671,260 |
|
NonAccrual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,000 |
|
|
|
219,000 |
|
Deferred Loan Fees and Allowance
for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,548 |
) |
|
|
(146,548 |
) |
Federal Home Loan Bank and Federal
Reserve Bank Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,575 |
|
|
|
|
|
|
|
38,575 |
|
Other Assets |
|
|
|
|
|
|
26,408 |
|
|
|
|
|
|
|
6,785 |
|
|
|
129,475 |
|
|
|
162,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,879,269 |
|
|
$ |
354,194 |
|
|
$ |
544,644 |
|
|
$ |
127,409 |
|
|
$ |
257,190 |
|
|
$ |
3,162,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand NoninterestBearing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
556,306 |
|
|
$ |
556,306 |
|
Savings |
|
|
11,017 |
|
|
|
26,416 |
|
|
|
53,823 |
|
|
|
19,916 |
|
|
|
|
|
|
|
111,172 |
|
Money Market Checking and NOW
Accounts |
|
|
95,881 |
|
|
|
198,843 |
|
|
|
278,109 |
|
|
|
113,025 |
|
|
|
|
|
|
|
685,858 |
|
Time Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
648,555 |
|
|
|
741,664 |
|
|
|
5,767 |
|
|
|
5 |
|
|
|
|
|
|
|
1,395,991 |
|
Floating Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances |
|
|
150,197 |
|
|
|
606 |
|
|
|
3,175 |
|
|
|
|
|
|
|
|
|
|
|
153,978 |
|
Other Borrowings |
|
|
1,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,747 |
|
Junior Subordinated Debentures |
|
|
82,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,406 |
|
Other Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,504 |
|
|
|
25,504 |
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,744 |
|
|
|
149,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |
|
$ |
989,803 |
|
|
$ |
967,529 |
|
|
$ |
340,874 |
|
|
$ |
132,946 |
|
|
$ |
731,554 |
|
|
$ |
3,162,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing Gap |
|
$ |
889,466 |
|
|
$ |
(613,335 |
) |
|
$ |
203,770 |
|
|
$ |
(5,537 |
) |
|
$ |
(474,364 |
) |
|
$ |
|
|
Cumulative Repricing Gap |
|
$ |
889,466 |
|
|
$ |
276,131 |
|
|
$ |
479,901 |
|
|
$ |
474,364 |
|
|
$ |
|
|
|
$ |
|
|
Cumulative Repricing Gap as a
Percentage of Total Assets |
|
|
28.12 |
% |
|
|
8.73 |
% |
|
|
15.17 |
% |
|
|
15.00 |
% |
|
|
|
|
|
|
|
|
Cumulative Repricing Gap as a
Percentage of Interest-Earning Assets |
|
|
30.97 |
% |
|
|
9.61 |
% |
|
|
16.71 |
% |
|
|
16.51 |
% |
|
|
|
|
|
|
|
|
The repricing gap analysis measures the static timing of repricing risk of assets and
liabilities (i.e., a point-in-time analysis measuring the difference between assets maturing or
repricing in a period and liabilities maturing or repricing within the same period). Assets are
assigned to maturity and repricing categories based on their expected repayment or repricing dates,
and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no
maturity dates (demand deposits, savings, money market checking and NOW accounts) are assigned to
categories based on expected decay rates.
70
As of December 31, 2009, the cumulative repricing gap for the three-month period was
asset-sensitive position and 30.97 percent of interest-earning assets, which decreased from the
December 31, 2008 figure of 31.21 percent. The decrease was caused primarily by a decrease of
$351.0 million in fixed and floating rate loans with maturities or expected to reprice within three
months and a decrease of $130.0 million in overnight federal funds sold, partially offset by a
decrease of $210.8 million in FHLB advances with maturities or expected to reprice within three
months. The cumulative repricing gap for the twelve-month period was asset-sensitive position and
9.61 percent of interest-earning assets, which increased from the December 31, 2008 figure that was
liability-sensitive and 4.04 percent. The increase was caused primarily by a decrease of $534.3
million in fixed and floating rate time deposits with maturities or expected to reprice within
twelve months and a decrease of $260.5 million in FHLB advances with maturities or expected to
reprice within twelve months, partially offset by a decrease of $299.6 million in fixed and
floating rate loans with maturities or expected to reprice within twelve months and a decrease of
$130.0 million in overnight federal funds sold.
The following table summarizes the status of the cumulative gap position as of the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Three Months |
|
Less Than Twelve Months |
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
Cumulative Repricing Gap |
|
$ |
889,466 |
|
|
$ |
1,127,888 |
|
|
$ |
276,131 |
|
|
$ |
(145,945 |
) |
Percentage of Total Assets |
|
|
28.12 |
% |
|
|
29.10 |
% |
|
|
8.73 |
% |
|
|
(3.77 |
%) |
Percentage of Interest-Earning Assets |
|
|
30.97 |
% |
|
|
31.21 |
% |
|
|
9.61 |
% |
|
|
(4.04 |
%) |
The spread between interest income on interest-earning assets and interest expense on
interest-bearing liabilities is the principal component of net interest income, and interest rate
changes substantially affect our financial performance. We emphasize capital protection through
stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently
manage our assets and liabilities and closely monitor the percentage changes in net interest income
and equity value in relation to limits established within our guidelines.
To supplement traditional gap analysis, we perform simulation modeling to estimate the
potential effects of interest rate changes. The following table summarizes one of the stress
simulations performed to forecast the impact of changing interest rates on net interest income and
the market value of interest-earning assets and interest-bearing liabilities reflected on our
balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude
indicated). This sensitivity analysis is compared to policy limits, which specify the maximum
tolerance level for net interest income exposure over a one-year horizon, given the basis point
adjustment in interest rates reflected below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Shock Table |
|
|
Percentage Changes |
|
Change in Amount |
Change in |
|
Net |
|
Economic |
|
Net |
|
Economic |
Interest |
|
Interest |
|
Value of |
|
Interest |
|
Value of |
Rate |
|
Income |
|
Equity |
|
Income |
|
Equity |
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
200% |
|
|
11.08 |
% |
|
|
7.78 |
% |
|
$ |
15,414 |
|
|
$ |
23,345 |
|
100% |
|
|
5.44 |
% |
|
|
4.49 |
% |
|
$ |
7,575 |
|
|
$ |
13,468 |
|
(100%) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
(200%) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
(1) |
|
The table above only reflects the impact of upward shocks due to the fact
that a downward parallel shock of 100 basis points or more is not possible given that
some short-term rates are currently less than one percent. |
The estimated sensitivity does not necessarily represent our forecast and the results may
not be indicative of actual changes to our net interest income. These estimates are based upon a
number of assumptions including: the nature and timing of interest rate levels including yield
curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and
replacement of asset and liability cash flows. While the assumptions used are based on current
economic and local market conditions, there is no assurance as to the predictive nature of these
conditions, including how customer preferences or competitor influences might change.
71
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
In order to ensure adequate levels of capital, the Board continually assesses projected
sources and uses of capital in conjunction with projected increases in assets and levels of risk.
Management considers, among other things, earnings generated from operations, and access to capital
from financial markets through the issuance of additional securities, including common stock or
notes, to meet our capital needs. Total stockholders equity was $149.7 million at December 31,
2009, which represented a decrease of $114.2 million, or 43.3 percent, compared to $263.9 million
at December 31, 2008. The decrease was primarily due to provision for credit losses of $196.4
million during 2009.
Hanmi Financial and the Bank are deemed to be adequately capitalized as of December 31,
2009. Although there can be no assurance that we will be successful, the Board and management will
make their utmost efforts to raise a sufficient capital within the required timeframe.
Under the Order, the Bank is also required to increase its capital and maintain certain
regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank
will be required to increase its contributed equity capital by not less than an additional $100
million. The Bank will be required to maintain a ratio of tangible shareholders equity to total
tangible assets as follows:
|
|
|
|
|
Ratio of Tangible Shareholders |
Date |
|
Equity to Total Tangible Assets |
By December 31, 2009
|
|
Not Less Than 7.0 Percent |
By July 31, 2010
|
|
Not Less Than 9.0 Percent |
From December 31, 2010 and Until the Order is Terminated
|
|
Not Less Than 9.5 Percent |
If the Bank is not able to maintain the capital ratios identified in the Order, it must
notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital
ratios fall below those set forth in the capital plan to be submitted to the FRB. Inability to
comply with the capital ratios identified in the Order raises substantial doubt about our ability
to continue as a going concern. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of
6.69 percent and tangible stockholders equity to total tangible assets ratio of 7.13 percent.
Liquidity Hanmi Financial
Hanmi Financial is a company separate and apart from the Bank that must provide for its own
liquidity. Substantially all of Hanmi Financials revenues are obtained from dividends declared and
paid by the Bank. Under applicable California law, the Bank cannot make any distribution (including
a cash dividend) to its shareholder (Hanmi Financial) in an amount which exceeds the lesser of: (i)
the retained earnings of the Bank or (ii) the net income of the Bank for its last three fiscal
years, less the amount of any distributions made by the Bank to its shareholder during such period.
Notwithstanding the foregoing, with the prior approval of the California Commissioner of Financial
Institutions, the Bank may make a distribution (including a cash dividend) to Hanmi Financial in an
amount not exceeding the greatest of: (i) the retained earnings of the Bank; (ii) the net income of
the Bank for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year.
The Bank currently has deficit retained earnings and has suffered net losses in 2007, 2008 and
2009. See Dividends for further information. As a result, the California Financial Code does not
provide authority for the Bank to declare a dividend to Hanmi Financial, with or without
Commissioner approval. In addition, the Bank has been prohibited by the MOU described in Notes to
Consolidated Financial Statements, Note 15 Regulatory Matters, and continues to be prohibited by
the FRB Written Agreement and DFI Final Order, from paying dividends to Hanmi Financial unless it
receives prior regulatory approval.
72
Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate
liquid assets to meet its operating cash needs through December 31, 2010. On August 29, 2008, we
elected to suspend payment of quarterly dividends on our common stock in order to preserve our
capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on
its outstanding junior subordinated debentures until further notice, beginning with the interest
payment that was due on January 15, 2009. As of December 31, 2009, Hanmi Financials liquid assets,
including amounts deposited with the Bank, totaled $3.5 million, up from $2.2 million as of
December 31, 2008.
Liquidity Hanmi Bank
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet
its current obligations. The Banks primary funding source will continue to be deposits originated
through its branch platform. In 2009, the Bank deployed two deposit campaigns to increase new
deposits and reduce its reliance on wholesale funding to an optimum level.
Through the first deposit campaign promoted from December 2008 and early part of March 2009,
the Bank achieved the objectives of maintaining adequate liquidity and reducing its reliance on
wholesale funds. The second deposit campaign promoted during the third and fourth quarters of 2009
successfully recaptured a substantial portion of time deposits raised from the first deposit
campaign with low-cost core-deposit products . This deposit-portfolio rebalancing implemented under
the Banks de-leveraging strategy allowed some run-off of rate-sensitive deposits. As a result,
total deposits decreased by $320.8 million, or 10.4 percent, from $3.07 billion as of December 31,
2008 to $2.75 billion as of December 31, 2009. This decrease resulted primarily from a $340.1
million decrease in interest-bearing deposits, partially offset by a $19.4 million increase of
noninterest-bearing deposits. The Banks wholesale funds, consisting of Federal Home Loan Bank
(FHLB) advances and brokered deposits, significantly decreased by $938.9 million to
$357.5 million at December 31, 2009 from $1.30 billion at December 31, 2008.
Due to the Banks total risk-based capital ratio that was below 10% as of September 30, 2009
coupled with the regulatory enforcement action with a specific capital provision, the Bank is
considered to be adequately capitalized under the regulatory framework for prompt corrective
action. Section 29 of the Federal Deposit Insurance Act (FDIA) limits the use of brokered
deposits by institutions that are less than well-capitalized and allows the FDIC to place
restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a
final rule to implement new interest rate restrictions on institutions that are not well
capitalized. The rule, which became effective on January 1, 2010, limits the interest rate paid by
such institutions to 75 basis points above a national rate, as derived from the interest rate
average of all institutions. On December 4, 2009, the FDIC issued a Financial Institution Letter,
FIL-69-2009, which requires institutions that are not well capitalized to request a determination
from the FDIC whether they are operating in an area where rates paid on deposits are higher than
the national rate. The Financial Institution Letter allows the institutions that submit
determination requests by December 31, 2009 to follow the national rate for local customers by
March 1, 2010, if determined not to be operating in a high rate area. Regardless of the
determination, institutions must use the national rate caps to determine conformance for all
deposits outside the market area beginning January 1, 2010.
The Bank has been in compliance with the rate restriction for non-local customers since
January 2010. Since then, there has been no noticeable change in non-local deposits. The Bank is
also required to be in compliance with the national rate caps for local customers starting in March
2010. Our ability to compete for local deposits in the Korean-American community may be limited
due to the interest rate restriction. However, we believe that we will be able to compete
effectively against our competition with innovative products and quality customer service rather
than deposit rates.
The Banks primary source of borrowings is the FHLB, from which the Bank is eligible to borrow
up to 20 percent of its total assets. As of December 31, 2009, the total borrowing capacity
available based on pledged collateral and the remaining available borrowing capacity were $571.2
million and $415.9 million, respectively. The Banks FHLB borrowings as of December 31, 2009
totaled $154.0 million, representing 4.9 percent of total assets. As of March 12, 2010, the Banks
FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing
capacity were $355.0 million and $447.3 million, respectively. The amount that the FHLB is willing
to advance differs based on the quality and character of qualifying collateral pledged by the Bank,
and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB
from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund
maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans
73
and investment securities and
otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining
borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $143.7
million from the Federal Reserve Discount Window (the Fed Discount Window), to which the Bank
pledged loans with a carrying value of $400.4 million, and had no borrowings as of December 31,
2009. In August 2009, South Street Securities LLC extended a line of credit to the Bank for reverse
repurchase agreements up to a maximum of $100.0 million. This line of credit will continue for a
term of one year, and, unless amended or terminated, will automatically renew for successive
one-year terms.
On July 10, 2009, due to a deterioration in the Banks risk profile, the Borrower in Custody
Program of the Fed Discount Window in which the Bank has participated changed from the primary
credit program to the secondary credit program, which allows the Bank to request very short-term
credit (typically overnight) at a rate that is above the primary credit rate. As of March 12, 2010,
the Bank had $239.4 million available for use through the Fed Discount Window, as the Bank pledged
loans with a carrying value of $557.0 million, and there were no borrowings. As the Bank has
pledgeable loans, it will pledge additional loans to maintain an adequate level of borrowing line
with the Fed Discount Window.
Current market conditions have limited the Banks liquidity sources principally to secured
funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by
the FHLB or Federal Reserve Bank would not reduce the Banks borrowing capacity or that the Bank
would be able to continue to replace deposits at competitive rates. The Bank is currently
restricted from accepting brokered deposits as a funding source. As of December 31, 2009, brokered
deposits were $203.5 million, or 7.4 percent of total deposits. All brokered deposits are currently
scheduled to mature on or prior to June 30, 2010. In 2009, the Bank successfully replaced
$670.7 million of brokered. The Bank believes that it will be able to replenish the maturing
brokered deposits with retail deposits, as it demonstrated its ability to generate retail deposits
for the past twelve months. If the Bank is unable to replace these maturing deposits with new
deposits, the Bank believes that it has adequate liquidity resources to fund its obligations with
its secured funding outlets with the FHLB and Fed Discount Window.
OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized on the
Consolidated Balance Sheets. The Banks exposure to credit losses in the event of non-performance
by the other party to commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for extending loan facilities to
customers. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on
managements credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable; inventory; property, plant and
equipment; and income-producing or borrower-occupied properties. The following table shows the
distribution of undisbursed loan commitments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Commitments to Extend Credit |
|
$ |
262,821 |
|
|
$ |
386,785 |
|
Standby Letters of Credit |
|
|
17,225 |
|
|
|
47,289 |
|
Commercial Letters of Credit |
|
|
13,544 |
|
|
|
29,177 |
|
Unused Credit Card Lines |
|
|
23,408 |
|
|
|
16,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Undisbursed Loan Commitments |
|
$ |
316,998 |
|
|
$ |
480,163 |
|
|
|
|
|
|
|
|
74
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
More Than |
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year |
|
|
Three Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
and Less |
|
|
and Less |
|
|
More |
|
|
|
|
|
|
Less Than |
|
|
Than Three |
|
|
Than Five |
|
|
Than Five |
|
|
|
|
Contractual Obligations |
|
One Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Time Deposits |
|
$ |
1,389,983 |
|
|
$ |
5,974 |
|
|
$ |
29 |
|
|
$ |
5 |
|
|
$ |
1,395,991 |
|
Federal Home Loan Bank Advances and Other Borrowings |
|
|
1,747 |
|
|
|
150,000 |
|
|
|
3,978 |
|
|
|
|
|
|
|
155,725 |
|
Commitments to Extend Credit |
|
|
262,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,821 |
|
Junior Subordinated Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,406 |
|
|
|
82,406 |
|
Standby Letters of Credit |
|
|
17,184 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
17,225 |
|
Operating Lease Obligations |
|
|
5,401 |
|
|
|
8,532 |
|
|
|
5,390 |
|
|
|
7,344 |
|
|
|
26,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
1,677,136 |
|
|
$ |
164,547 |
|
|
$ |
9,397 |
|
|
$ |
89,755 |
|
|
$ |
1,940,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB ASC 105, Generally Accepted Accounting Principles The FASB ASC is the exclusive
authoritative reference for non-governmental U.S. GAAP for use in financial statements issued for
interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive
releases, which are also authoritative GAAP for SEC registrants. The contents of the Codification
will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set
forth. The FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the FASB ASC is non-authoritative.
FASB ASC 105 did not have a material the effect on our financial condition or results of
operations.
FASB ASC 810, Consolidations FASB ASC 810 amends the guidance related to the consolidation
of variable interest entities (VIEs). It requires reporting entities to evaluate former
qualifying special-purpose entities (QSPEs) for consolidation, changes the approach to
determining a VIEs primary beneficiary from a quantitative assessment to a qualitative assessment
designed to identify a controlling financial interest, and increases the frequency of required
reassessments to determine whether a company is the primary beneficiary of a VIE. It also
clarifies, but does not significantly change, the characteristics that identify a VIE. FASB ASC 810
requires additional year-end and interim disclosures for public and non-public companies that are
similar to the disclosures required by FASB ASC 810-10-50. FASB ASC 810 is effective as of the
beginning of a companys first fiscal year that begins after November 15, 2009 (January 1, 2010 for
calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPEs
and entities currently subject to the guidance related to the consolidation of VIEs will need to
be reevaluated under the amended consolidation requirements as of the beginning of the first annual
reporting period that begins after November 15, 2009. Early adoption is prohibited. We are
currently evaluating the effect that the provisions of FASB ASC 810 may have on our financial
condition and results of operations.
FASB ASC 860, Transfers and Servicing FASB ASC 860 amends the guidance related to the
accounting for transfers and servicing of financial assets and extinguishments of liabilities. It
eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained
interests are initially measured, and removes the guaranteed mortgage securitization
recharacterization provisions. FASB ASC 860 requires additional year-end and interim disclosures
for public and nonpublic companies that are similar to the disclosures required by FASB ASC
810-10-50. FASB ASC 860 is effective as of the beginning of a companys first fiscal year that
begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for
subsequent interim and annual reporting periods. FASB ASC 860s disclosure requirements must be
applied to transfers that occurred before and after its effective date. Early adoption is
prohibited. We are currently evaluating the effect that the provisions of FASB ASC 860 may have on
our financial condition and results of operations.
75
FASB ASC 855, Subsequent Events FASB ASC 855 addresses accounting and disclosure
requirements related to subsequent events. FASB ASC 855 requires management to evaluate subsequent
events through the date the financial statements are either issued or available to be issued,
depending on the companys expectation of whether it will widely distribute its financial
statements to its shareholders and other financial statement users. FASB ASC 855 is effective for
interim or annual financial periods ending after June 15, 2009 and should be applied prospectively.
The adoption of FASB ASC 855 did not have a material effect on our financial condition or results
of operations.
FASB ASU 2010-01, Equity (Topic 505), Accounting for Distributions to Shareholders with
Components of Stock and Cash ASU 2010-01 clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and is
required to be applied on a retrospective basis. Adoption of ASU 2010-01 did not have a significant
impact on the Companys consolidated financial statements.
FASB ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) ASU 2010-06 adds new
requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures
about purchases, sales, issuances and settlements relating to Level 3 measurements. It also
clarifies existing fair value disclosures about the level of disaggregation, entities will be
required to provide fair value measurement disclosures for each class of assets and liabilities,
and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010. Adoption of ASU 2010-06 is not expected to have a significant impact on the Companys
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in the Banks portfolio,
see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Interest Rate Risk Management and Capital Resources and Liquidity .
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
83 through 142
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that Hanmi Financial Corporation
(Hanmi Financial) files or submits under the Securities Exchange Act of 1934, as amended (the
Exchange Act) is recorded, processed, summarized, and reported within the time periods specified
in the SEC rules and forms. Disclosure controls and procedures include, among other processes,
controls and procedures designed to ensure that information required to be disclosed in the reports
that Hanmi Financial files or submits under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Hanmi Financial carried out an evaluation, under the supervision and with the participation of
management,
76
including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the companys disclosure controls and procedures as of December 31, 2009
pursuant to Exchange Act Rule 13a-15b. Based on that evaluation and the identification of the
material weakness in Hanmi Financials internal control over financial reporting as described below
under Managements Report on Internal Control over Financial Reporting, the Chief Executive
Officer and Chief Financial Officer have concluded that Hanmi Financials disclosure controls and
procedures were not effective as of December 31, 2009.
Managements Report on Internal Control Over Financial Reporting
Management of Hanmi Financial is responsible for establishing and maintaining adequate
internal control over financial reporting pursuant to the rules and regulations of the Securities
and Exchange Commission. Hanmi Financials internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. Internal control over financial reporting includes those
written policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles; |
|
|
|
|
provide reasonable assurance that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect
on the consolidated financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting form human failures. Internal control over financial reporting
can also be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features
of Hanmi Financials financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
As of December 31, 2009, Hanmi Financial carried out an evaluation, under the supervision and
with the participation of Management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of internal control over financial reporting pursuant to Rule
13a-15(c), as adopted by the SEC under the Exchange Act. In evaluating the effectiveness of the
internal control over financial reporting, management used the framework established in Internal
Control Integrated Framework, issued by the Committed of Sponsoring Organizations of the Treadway
Commission (COSO).
A material weakness is a control deficiency, or combination of control deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of Hanmi Financials annual or interim financial statements will not be
prevented or detected on a timely basis. Management identified the following a material weakness as
of December 31, 2009 related to managements policies and procedures for the monitoring and timely
evaluation of and revision to managements approach for assessing credit risk inherent in the
Companys loan portfolio to reflect changes in the economic environment. Specifically, neither the
internal loan review grading process control nor the information and communication control that are
designed to prompt senior managements review over the adequacy of the loan loss reserve factors
were operating effectively.
Based on our assessment and the criteria discussed above, Hanmi Financial has concluded that,
as of December 31, 2009, internal control over financial reporting was not effective as a result of
the aforementioned material weakness.
KPMG LLP, the independent registered public accounting firm that audited and reported on the
consolidated
77
financial statements of Hanmi Financial, has issued an adverse opinion on the effectiveness of the
Hanmi Financials internal control over financial reporting as of December 31, 2009.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2009, we implemented the following changes in our internal
control over financial reporting to address a previously reported material weakness:
|
|
We designed and implemented several key initiatives to significantly strengthen our
internal loan review function. These included: |
|
|
|
intensive review by the loan monitoring department to validate the
appropriateness of loan grades; |
|
|
|
|
expanded additional review of all loan grading changes by management
and senior loan officers; |
|
|
|
|
independent third party review to ensure the assessment of our internal
loan grades. |
|
We implemented several key changes to ensure the adequacy of allowance for loan losses.
These included: |
|
|
|
increasing qualitative adjustments based on current and potential loss
scenarios to sufficiently reflect deterioration in the asset portfolio as well as
economic decline; |
|
|
|
|
implementing more stringent assessment of restructured loans by
down-grading all such loans to Substandard; |
|
|
|
|
closely monitoring collateral dependent loans by continually obtaining
up to date valuations; |
|
|
|
|
adhering to more stringent requirements for charge-offs regards to
impaired loans. |
Our changes described above implemented during the fourth quarter of 2009 due to the
previously identified material weakness have materially affected such internal control over
financial reporting.
Remediation of Material Weakness
Hanmi Financial determined the following additional steps necessary to address the
aforementioned material weaknesses, including:
|
|
|
increasing management oversight of the loan portfolio by establishing two new
departments to primarily focus on performing quality control review and monitoring; |
|
|
|
|
providing intensive onsite review and training to loan officers and other
branch staffs by management; |
|
|
|
|
outsourcing to independent third parties for credit review to validate the
appropriateness of internal loan grading. |
We began to execute the remediation plans identified above in the fourth quarter of 2009, and
we believe our controls and procedures will continue to improve as a result of the further
implementation of these actions. However, there can be no assurances that our efforts will be
successful or that additional efforts will not be necessary by the Company to remediate this
material weakness.
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited Hanmi Financial Corporations (the Company) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Hanmi Financial Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial will not be prevented or detected on a
timely basis. Management identified and included in its assessment a material weakness related to
the allowance for loan losses that related to managements policies and procedures for the
monitoring and timely evaluation of and revision to managements approach for assessing credit risk
inherent in the Companys loan portfolio to reflect changes in the economic environment.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hanmi Financial Corporation and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in stockholders equity and comprehensive income, and cash flows for each of
the years in the three-year period ended December 31, 2009, and our report dated March 15, 2010
expressed an unqualified opinion on those consolidated financial statements. Our report contains an
explanatory paragraph that states the Company is operating under a formal supervisory agreement
with the Federal Reserve Bank of San Francisco and the California Department of Financial
Institutions. The agreement restricts certain operations and requires the Company to, among other
things, increase the contributed equity capital at Hanmi Bank by $100 million by July 31, 2010 and
achieve specific regulatory capital ratios by July 31, 2010 and December 31, 2010. The ability of
the Company to comply with the terms of this agreement and its requirements raises substantial
doubt about its ability to continue as a going concern. This
79
material weakness was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2009 consolidated financial statements, and this report does not affect
our report thereon.
In our opinion, because of the affect of the aforementioned material weakness on the
achievement of the objectives of the control criteria, the Company has not maintained effective
internal control over the financial reporting as of December 31, 2009, based on the criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organization of the Treadway Commission.
/s/ KPMG LLP
Los Angeles, California
March 15, 2010
80
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as hereinafter noted, the information concerning directors and officers of Hanmi
Financial is incorporated by reference from the sections entitled The Board of Directors and
Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance of Hanmi
Financials Definitive Proxy Statement for the Annual Meeting of Stockholders, which will be filed
with the SEC within 120 days after the close of Hanmi Financials fiscal year.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive
officer, principal financial and accounting officer, controller and other persons performing
similar functions. It will be provided to any stockholder without charge, upon the written request
of that stockholder. Such requests should be addressed to Judith Kim, Associate General Counsel,
Hanmi Financial Corporation, 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California
90010. It is also available on our website at www.hanmi.com.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the section
entitled Executive Compensation of Hanmi Financials Definitive Proxy Statement for the Annual
Meeting of Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi
Financials fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information regarding security ownership of certain beneficial owners and management and
related stockholder matters will appear under the caption Beneficial Ownership of Principal
Stockholders and Management in Hanmi Financials Definitive Proxy Statement for the Annual Meeting
of Stockholders and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information as of December 31, 2009 relating to equity
compensation plans of Hanmi Financial pursuant to which grants of options, restricted stock awards
or other rights to acquire shares may be granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
|
|
Number of Securities to be |
|
|
Weighted-Average |
|
|
Equity Compensation |
|
|
|
Issued Upon Exercise of |
|
|
Exercise Price of |
|
|
Plans (Excluding |
|
|
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Securities |
|
|
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Reflected in Column(a)) |
|
|
|
|
(a) |
|
|
|
(b) |
|
|
|
|
|
Equity Compensation Plans
Approved By Security Holders |
|
|
1,180,358 |
|
|
$ |
11.78 |
|
|
|
3,000,000 |
|
Equity Compensation Plans Not
Approved By Security Holders |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Compensation Plans |
|
|
1,180,358 |
|
|
$ |
11.78 |
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information concerning certain relationships and related transactions and director
independence is incorporated by reference from the sections entitled Certain Relationships and
Related Transactions and Director Independence of Hanmi Financials Definitive Proxy Statement
for the Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the
close of Hanmi Financials fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning Hanmi Financials principal accountants fees and services is
incorporated by reference from the section entitled Independent Accountants of Hanmi Financials
Definitive Proxy Statement for the Annual Meeting of Stockholders, which will be filed with the SEC
within 120 days after the close of Hanmi Financials fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
Financial Statements and Schedules |
|
(1) |
|
The Financial Statements required to be filed hereunder are listed in the Index
to Consolidated Financial Statements on page 83 of this Report. |
|
|
(2) |
|
All Financial Statement Schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial Statements. |
|
|
(3) |
|
The Exhibits required to be filed with this Report are listed in the Exhibit
Index included herein at pages 144 and 145. |
82
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
We have audited the accompanying consolidated balance sheets of Hanmi Financial Corporation
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders equity and comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hanmi Financial Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As further described in note 1 to the consolidated
financial statements, at December 31, 2009, the Company and its wholly-owned subsidiary Hanmi Bank,
are currently operating under a formal supervisory agreement (the Agreement) with the Federal
Reserve Bank of San Francisco and the California Department of Financial Institutions. The
Agreement restricts certain operations and requires the Company to, among other things, increase
the contributed equity capital at Hanmi Bank by $100 million by July 31, 2010 and achieve specified
regulatory capital ratios by July 31, 2010 and December 31, 2010. Failure to achieve all of the
agreements requirements may lead to additional regulatory actions including being placed into
receivership or conservatorship. The ability of the Company to comply with terms of this agreement
raises substantial doubt about the Companys ability to continue as a going concern. Managements
plans in regard to these matters also are described in note 1 to the consolidated financial
statements. The 2009 consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hanmi Financial Corporations internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 15, 2010 expressed an adverse opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 15, 2010
84
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and Due From Banks |
|
$ |
55,263 |
|
|
$ |
83,933 |
|
Interest-Bearing Deposits in Other Banks |
|
|
98,847 |
|
|
|
2,014 |
|
Federal Funds Sold |
|
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
154,110 |
|
|
|
215,947 |
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity, at Amortized Cost (Fair Value: 2009 $871; 2008 $910) |
|
|
869 |
|
|
|
910 |
|
Securities Available for Sale, at Fair Value |
|
|
132,420 |
|
|
|
196,207 |
|
Loans Receivable, Net of Allowance for Loan Losses of $144,996 and $70,986 at
December 31, 2009 and 2008, Respectively |
|
|
2,669,054 |
|
|
|
3,253,715 |
|
Loans Held for Sale, at the Lower of Cost or Fair Value |
|
|
5,010 |
|
|
|
37,410 |
|
Customers Liability on Acceptances |
|
|
994 |
|
|
|
4,295 |
|
Premises and Equipment, Net |
|
|
18,657 |
|
|
|
20,279 |
|
Accrued Interest Receivable |
|
|
9,492 |
|
|
|
12,347 |
|
Other Real Estate Owned |
|
|
26,306 |
|
|
|
823 |
|
Deferred Income Taxes |
|
|
3,608 |
|
|
|
29,456 |
|
Servicing Assets |
|
|
3,842 |
|
|
|
3,791 |
|
Other Intangible Assets |
|
|
3,382 |
|
|
|
4,950 |
|
Federal Home Loan Bank Stock, at Cost |
|
|
30,697 |
|
|
|
30,697 |
|
Federal Reserve Bank Stock, at Cost |
|
|
7,878 |
|
|
|
10,228 |
|
Income Taxes Receivable |
|
|
56,554 |
|
|
|
11,712 |
|
Bank-Owned Life Insurance |
|
|
26,408 |
|
|
|
25,476 |
|
Other Assets |
|
|
13,425 |
|
|
|
17,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,162,706 |
|
|
$ |
3,875,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-Bearing |
|
$ |
556,306 |
|
|
$ |
536,944 |
|
Interest-Bearing: |
|
|
2,193,021 |
|
|
|
2,533,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
2,749,327 |
|
|
|
3,070,080 |
|
|
|
|
|
|
|
|
|
|
Accrued Interest Payable |
|
|
12,606 |
|
|
|
18,539 |
|
Acceptances Outstanding |
|
|
994 |
|
|
|
4,295 |
|
Federal Home Loan Bank Advances |
|
|
153,978 |
|
|
|
422,196 |
|
Other Borrowings |
|
|
1,747 |
|
|
|
787 |
|
Junior Subordinated Debentures |
|
|
82,406 |
|
|
|
82,406 |
|
Other Liabilities |
|
|
11,904 |
|
|
|
13,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
3,012,962 |
|
|
|
3,611,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common Stock, $0.001 Par Value; Authorized 200,000,000 Shares; Issued 55,814,890
Shares (51,182,390 Shares Outstanding) and 50,538,049 Shares (45,905,549 Shares
Outstanding) at December 31, 2009 and 2008, Respectively |
|
|
56 |
|
|
|
51 |
|
Additional Paid-In Capital |
|
|
357,174 |
|
|
|
349,304 |
|
Unearned Compensation |
|
|
(302 |
) |
|
|
(218 |
) |
Accumulated Other Comprehensive Income Unrealized Gain on Securities Available
for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes of $602
and $473 at December 31, 2009 and 2008, Respectively |
|
|
859 |
|
|
|
544 |
|
Accumulated Deficit |
|
|
(138,031 |
) |
|
|
(15,754 |
) |
Treasury Stock, at Cost (4,632,500 Shares at December 31, 2009 and 2008) |
|
|
(70,012 |
) |
|
|
(70,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
149,744 |
|
|
|
263,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
3,162,706 |
|
|
$ |
3,875,816 |
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements.
85
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fees on Loans |
|
$ |
173,318 |
|
|
$ |
223,942 |
|
|
$ |
261,992 |
|
Taxable Interest on Investment Securities |
|
|
5,675 |
|
|
|
9,387 |
|
|
|
13,399 |
|
Tax-Exempt Interest on Investment Securities |
|
|
2,303 |
|
|
|
2,717 |
|
|
|
3,055 |
|
Interest on Term Federal Funds Sold |
|
|
1,718 |
|
|
|
43 |
|
|
|
5 |
|
Dividends on Federal Reserve Bank Stock |
|
|
592 |
|
|
|
692 |
|
|
|
704 |
|
Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements |
|
|
326 |
|
|
|
166 |
|
|
|
1,032 |
|
Interest on Interest-Bearing Deposits in Other Banks |
|
|
151 |
|
|
|
10 |
|
|
|
|
|
Dividends on Federal Home Loan Bank Stock |
|
|
64 |
|
|
|
1,226 |
|
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Dividend Income |
|
|
184,147 |
|
|
|
238,183 |
|
|
|
280,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Deposits |
|
|
76,246 |
|
|
|
84,353 |
|
|
|
108,517 |
|
Interest on Federal Home Loan Bank Advances |
|
|
3,399 |
|
|
|
14,027 |
|
|
|
12,156 |
|
Interest on Junior Subordinated Debentures |
|
|
3,271 |
|
|
|
5,056 |
|
|
|
6,644 |
|
Interest on Other Borrowings |
|
|
2 |
|
|
|
346 |
|
|
|
1,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
82,918 |
|
|
|
103,782 |
|
|
|
129,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME (LOSS) BEFORE PROVISION FOR CREDIT LOSSES |
|
|
101,229 |
|
|
|
134,401 |
|
|
|
151,786 |
|
Provision for Credit Losses |
|
|
196,387 |
|
|
|
75,676 |
|
|
|
38,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |
|
|
(95,158 |
) |
|
|
58,725 |
|
|
|
113,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Service Charges on Deposit Accounts |
|
|
17,054 |
|
|
|
18,463 |
|
|
|
18,061 |
|
Insurance Commissions |
|
|
4,492 |
|
|
|
5,067 |
|
|
|
4,954 |
|
Remittance Fees |
|
|
2,109 |
|
|
|
2,194 |
|
|
|
2,049 |
|
Trade Finance Fees |
|
|
1,956 |
|
|
|
3,088 |
|
|
|
4,493 |
|
Other Service Charges and Fees |
|
|
1,810 |
|
|
|
2,365 |
|
|
|
2,527 |
|
Net Gain on Sales of Loans |
|
|
1,220 |
|
|
|
765 |
|
|
|
5,452 |
|
Bank-Owned Life Insurance Income |
|
|
932 |
|
|
|
952 |
|
|
|
933 |
|
Net Gain on Sales of Investment Securities |
|
|
1,833 |
|
|
|
77 |
|
|
|
|
|
Other-Than-Temporary Impairment Loss on Securities |
|
|
|
|
|
|
(2,410 |
) |
|
|
(1,074 |
) |
Other Operating Income |
|
|
704 |
|
|
|
2,293 |
|
|
|
2,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income |
|
|
32,110 |
|
|
|
32,854 |
|
|
|
40,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits |
|
|
33,101 |
|
|
|
42,209 |
|
|
|
47,036 |
|
Occupancy and Equipment |
|
|
11,239 |
|
|
|
11,158 |
|
|
|
10,494 |
|
Deposit Insurance premiums and Regulatory Assessments |
|
|
10,418 |
|
|
|
3,713 |
|
|
|
587 |
|
Data Processing |
|
|
6,297 |
|
|
|
5,799 |
|
|
|
6,390 |
|
Other Real Estate Owned Expense |
|
|
5,890 |
|
|
|
390 |
|
|
|
8 |
|
Professional Fees |
|
|
4,099 |
|
|
|
3,539 |
|
|
|
2,468 |
|
Advertising and Promotion |
|
|
2,402 |
|
|
|
3,518 |
|
|
|
3,630 |
|
Supplies and Communications |
|
|
2,352 |
|
|
|
2,518 |
|
|
|
2,592 |
|
Loan-Related Expense |
|
|
1,947 |
|
|
|
790 |
|
|
|
674 |
|
Amortization of Other Intangible Assets |
|
|
1,568 |
|
|
|
1,958 |
|
|
|
2,324 |
|
Other Operating Expenses |
|
|
11,041 |
|
|
|
12,042 |
|
|
|
10,835 |
|
Impairment Loss on Goodwill |
|
|
|
|
|
|
107,393 |
|
|
|
102,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense |
|
|
90,354 |
|
|
|
195,027 |
|
|
|
189,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES |
|
|
(153,402 |
) |
|
|
(103,448 |
) |
|
|
(36,460 |
) |
Provision (Benefit) for Income Taxes |
|
|
(31,125 |
) |
|
|
(1,355 |
) |
|
|
24,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(122,277 |
) |
|
$ |
(102,093 |
) |
|
$ |
(60,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.57 |
) |
|
$ |
(2.23 |
) |
|
$ |
(1.27 |
) |
Diluted |
|
$ |
(2.57 |
) |
|
$ |
(2.23 |
) |
|
$ |
(1.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,570,361 |
|
|
|
45,872,541 |
|
|
|
47,787,213 |
|
Diluted |
|
|
47,570,361 |
|
|
|
45,872,541 |
|
|
|
47,787,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS DECLARED PER SHARE |
|
$ |
|
|
|
$ |
0.09 |
|
|
$ |
0.24 |
|
See
Accompanying Notes to Consolidated Financial Statements.
86
HANMI
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Number of Shares |
|
Stockholders Equity |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Retained |
|
|
Treasury |
|
|
Total |
|
|
|
Issued and |
|
|
Treasury |
|
|
Issued and |
|
|
Common |
|
|
Paid-in |
|
|
Unearned |
|
|
Comprehensive |
|
|
Earnings |
|
|
Stock, |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Shares |
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
Compensation |
|
|
Income (Loss) |
|
|
(Deficit) |
|
|
at Cost |
|
|
Equity |
|
BALANCE AT JANUARY 1, 2007 |
|
|
50,239,613 |
|
|
|
(1,163,000 |
) |
|
|
49,076,613 |
|
|
|
50 |
|
|
|
344,810 |
|
|
|
|
|
|
|
(3,200 |
) |
|
|
164,751 |
|
|
|
(20,041 |
) |
|
|
486,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued for Business Acquisitions |
|
|
102,181 |
|
|
|
|
|
|
|
102,181 |
|
|
|
|
|
|
|
2,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,198 |
|
Exercises of Stock Options and Stock Warrants |
|
|
132,647 |
|
|
|
|
|
|
|
132,647 |
|
|
|
|
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,164 |
|
Share-Based Compensation Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,880 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,891 |
|
Restricted Stock Awards |
|
|
19,000 |
|
|
|
|
|
|
|
19,000 |
|
|
|
|
|
|
|
256 |
|
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit from Exercise of Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|