UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
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For the Fiscal
Year Ended December 31, 2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
To
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Commission File
Number: 000-30421
HANMI FINANCIAL
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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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)
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(213)
382-2200
(Registrants Telephone
Number, Including Area Code)
Securities Registered Pursuant to
Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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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:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
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 x
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No 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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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x
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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o
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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 x
As of June 30, 2010, the aggregate market value of the
common stock held by non-affiliates of the Registrant was
approximately $59,235,000. 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, 2011 was 151,258,390 shares.
Documents Incorporated By Reference Herein:
Registrants Definitive Proxy Statement for its 2011 Annual
Meeting of Stockholders, which will be filed within
120 days of the fiscal year ended December 31, 2010,
is incorporated by reference into Part III of this report
(or information will be provided by amendment to this
Form 10-K).
HANMI
FINANCIAL CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
TABLE OF
CONTENTS
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). All statements in this
Form 10-K
other than statements of historical fact are
forward looking statements for purposes
of federal and state securities laws, including, but not limited
to, statements about anticipated future operating and financial
performance, our allowance for credit losses and conditions of
our loan portfolio, financial position and liquidity, business
strategies, regulatory and competitive outlook, investment and
expenditure plans, capital and financing needs and availability,
plans and objectives of management for future operations,
developments regarding our securities purchase agreement with
Woori, and other similar forecasts and statements of expectation
and statements of assumption underlying any of the foregoing.
You can generally 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, including, but not limited to:
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our ability to continue as going concern;
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closure of Hanmi Bank and appointment of the Federal Deposit
Insurance Corporation as receiver;
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failure to complete the transaction contemplated by the
securities purchase agreement with Woori Finance Holdings Co.,
Ltd.;
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failure to raise enough capital to support our operations or
meet our regulatory requirements;
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failure to maintain adequate levels of capital to support our
operations;
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a significant number of customers failing to perform under their
loans and other terms of credit agreements;
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our compliance with and the effect of regulatory orders we have
entered into and potential future supervisory or governmental
actions 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 and restrictions on taking
brokered 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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1
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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 financial markets that may result in 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;
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global hostilities, acts of war or terrorism, including but not
limited to, conflict between North and South Korea;
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the effects of climate change and attendant regulation on our
customers and borrowers;
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the effects of litigation against us;
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significant government regulations, legislation and potential
changes thereto; and
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other risks described herein and in the other reports and
statements we file with the SEC.
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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.
2
PART I
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 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 pursuant to the California
Financial Code (Financial Code) 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, 2010, the Bank maintained a
branch network of 27 full-service branch offices in California
and one loan production office (LPO) in 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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2010
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2009
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2008
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(Dollars in Thousands)
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Interest and Fees on Loans
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$
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137,328
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80.8
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%
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$
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173,318
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80.1
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%
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$
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223,942
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82.6
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Interest and Dividends on Investments
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6,631
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3.9
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%
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8,634
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4.0
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%
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14,022
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5.2
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%
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Other Interest Income
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553
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0.3
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%
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2,195
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1.0
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%
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219
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0.1
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%
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Service Charges on Deposit Accounts
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14,049
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8.3
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%
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17,054
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7.9
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%
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18,463
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6.8
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%
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Other Non-Interest Income
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11,357
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6.7
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%
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15,056
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7.0
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%
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14,391
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5.3
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%
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Total Revenues
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$
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169,918
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100.0
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%
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$
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216,257
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100.0
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%
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$
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271,037
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100.0
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%
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Going
Concern
We are required by federal regulatory authorities to maintain
adequate levels of capital to support our operations. In order
to comply with the Final Order (as defined below), the Bank is
also required to increase its capital and maintain certain
regulatory capital ratios prior to certain dates specified in
the Final Order. By July 31, 2010, the Bank was required to
increase its contributed equity capital by not less than an
additional $100 million and maintain a ratio of tangible
stockholders equity to total tangible assets of at least
9.0 percent.
3
In addition, the Bank was also required to maintain a ratio of
tangible stockholders equity to total tangible assets of
at least 9.5 percent at December 31, 2010 and until
the Final Order is terminated. As a result of the successful
completion of the registered rights and best efforts offering in
July 2010, the capital contribution requirement set forth in the
Final Order was satisfied. However, the tangible capital ratio
requirement set for in the Final Order has not been satisfied at
December 31, 2010. Further, should our asset quality
continue to erode and require significant additional provision
for credit losses, resulting in added future net operating
losses at the Bank, or should we otherwise fail to be
profitable, our capital levels will additionally decline
requiring the raising of more capital than the amount currently
required to satisfy our agreements with our regulators. An
inability to raise additional capital when needed or comply with
the terms of the Final Order or Written Agreement (as defined
below), raises substantial doubt about our ability to continue
as a going concern.
Our independent registered public accounting firm in their audit
report for fiscal year 2010 has expressed substantial doubt
about our ability to continue as a going concern. Continued
operations may depend on our ability to comply with the
regulatory orders we are subject to, as discussed in greater
detail below.
Regulatory
Enforcement Action
On November 2, 2009, the Board of Directors of the Bank
consented to the issuance of a Final Order (the Final
Order) from the DFI. On the same date, Hanmi Financial and
the Bank entered into a Written Agreement (the Written
Agreement) with the FRB. The Final Order and the Written
Agreement contain substantially similar provisions. The Final
Order and the Written 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 Written
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 Final Order and the Written 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 Final Order
and the Written 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.
The Board and management intend to continue their efforts in
cooperation with the FRB and the DFI to comply with all
provisions in the Final Order and the Written Agreement.
Under the Final Order, the Bank is also required to increase its
capital and maintain certain regulatory capital ratios prior to
certain dates specified in the Order. By July 31, 2010, the
Bank was required to increase its contributed equity capital by
not less than an additional $100 million. The Bank was
required to maintain a ratio of tangible shareholders
equity to total tangible assets as follows:
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Ratio of Tangible Shareholders
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Date
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Equity to Total Tangible Assets
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By July 31, 2010
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Not Less Than 9.0 Percent
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From December 31, 2010 and Until the Final Order is
Terminated
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Not Less Than 9.5 Percent
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4
If the Bank is not able to maintain the capital ratios
identified in the Final Order, it must notify the DFI, and Hanmi
Financial and the Bank are required to notify the FRB if their
respective capital ratios fall below those set forth in the
capital plan to be submitted to the FRB. On July 27, 2010,
we completed a registered rights and best efforts offering by
which we raised $116.8 million in net proceeds. As a
result, we satisfied the $100 million capital contribution
requirement set forth in the Final Order. However, the Bank had
tangible stockholders equity to total tangible assets
ratio of 8.59 percent as of December 31, 2010, below
the requirement set forth in the Final Order. Accordingly, we
notified the DFI and the FRB of this lower ratio. Our inability
to comply with the capital ratios identified in the Final Order
raises substantial doubt about our ability to continue as a
going concern.
Agreement
with Woori
On May 25, 2010, we entered into a definitive securities
purchase agreement with Woori Finance Holdings Co., Ltd.
(Woori). The agreement with Woori, as amended,
provides that upon satisfaction of all conditions to closing, we
will issue 175 million shares of common stock to Woori at a
purchase price per share of $1.20, for aggregate gross
consideration of $210 million. The agreement with Woori
currently permits us to raise capital from other sources and is
terminable at will by either party. The transaction with Woori
remains subject to regulatory approval and other conditions to
closing. We cannot provide any assurance whether regulatory
approvals will be obtained or whether we will close the
transaction with Woori at all.
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 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.
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
(OREO) because of foreclosures on loans.
5
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.
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.
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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.
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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.
7
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, 2010, the Bank had $123.8 million
of SBA loans in its portfolio, and was servicing
$191.3 million of SBA loans sold to investors.
8
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 (U.S.). A substantial portion of this
business involves California-based customers engaged in import
activities.
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.
9
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, 2010,
the Banks authorized legal lending limits for loans to one
borrower were $60.1 million for unsecured loans plus an
additional $40.1 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.
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 analyzes its 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 California Department of Financial Institutions (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
10
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, 2010, the Bank had 431 full-time
employees and 28 part-time employees, and Chun-Ha and All
World had 39 full-time employees and one part-time
employee. 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.
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.
Other institutions, including brokerage firms, credit card
companies and retail establishments, offer banking services to
consumers in competition with the Bank, 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
11
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
Legislative and Regulatory Developments
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.
From December 2007 through June 2009, the U.S. economy was
in recession. Business activity across a wide range of
industries and regions in the U.S. was greatly reduced.
Although economic conditions have improved, certain sectors,
such as real estate, remain weak and unemployment remains high.
Local governments and many businesses are still in serious
difficulty due to reduced consumer spending and continued
liquidity challenges in the credit markets. In response to this
economic downturn an financial industry instability, legislative
and regulatory initiatives were, and are expected to continue to
be, introduced and implemented, which substantially intensify
the regulation of the financial services industry.
The
Dodd-Frank Wall Street Reform and Consumer Protection
Act
The landmark Dodd-Frank Wall Street Reform and Consumer
Protection Act financial reform legislation
(Dodd-Frank), which became law on July 21,
2010, significantly revised and expanded the rulemaking,
supervisory and enforcement authority of federal bank
regulators. Dodd-Frank followed other legislative and regulatory
initiatives in 2008 and 2009 in response to the economic
downturn and financial industry instability. Dodd-Frank impacts
many aspects of the financial industry and, in many cases, will
impact larger and smaller
12
financial institutions and community banks differently over
time. Dodd-Frank includes, among other things, the following:
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(i)
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the creation of a Financial Services Oversight Counsel to
identify emerging systemic risks and improve interagency
cooperation;
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(ii)
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expanded FDIC resolution authority to conduct the orderly
liquidation of certain systemically significant non-bank
financial companies in addition to depository institutions;
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(iii)
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the establishment of strengthened capital and liquidity
requirements for banks and bank holding companies, including
minimum leverage and risk-based capital requirements no less
than the strictest requirements in effect for depository
institutions as of the date of enactment;
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(iv)
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the requirement by statute that bank holding companies serve as
a source of financial strength for their depository institution
subsidiaries;
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(v)
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enhanced regulation of financial markets, including the
derivative and securitization markets, and the elimination of
certain proprietary trading activities by banks;
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(vi)
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the termination of investments by the U.S. Treasury under
TARP;
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(vi)
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the elimination and phase out of trust preferred securities
(TRUPS) from Tier 1 capital with certain exceptions;
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(vii)
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a permanent increase of the previously implemented temporary
increase of FDIC deposit insurance to $250,000 and an extension
of federal deposit coverage until January 1, 2013 for the
full net amount held by depositors in non-interesting bearing
transaction accounts;
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(ix)
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authorization for financial institutions to pay interest on
business checking accounts;
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(x)
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changes in the calculation of FDIC deposit insurance
assessments, such that the assessment base will no longer be the
institutions deposit base, but instead, will be its
average consolidated total assets less its average tangible
equity and an increase in the minimum insurance ratio for the
Deposit Insurance Fund (DIF) from 1.15% to 1.35%;
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(xi)
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the elimination of remaining barriers to de novo interstate
branching by banks;
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(xii)
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expanded restrictions on transactions with affiliates and
insiders under Section 23A and 23B of the Federal Reserve
Act and lending limits for derivative transactions, repurchase
agreements and securities lending and borrowing transactions;
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(xiii)
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the transfer of oversight of federally chartered thrift
institutions to the Office of the Comptroller of the Currency
and state chartered savings banks to the FDIC, and the
elimination of the Office of Thrift Supervision;
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(xiv)
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provisions that affect corporate governance and executive
compensation at most United States publicly traded companies,
including financial institutions, including (1) stockholder
advisory votes on executive compensation, (2) executive
compensation clawback requirements for companies
listed on national securities exchanges in the event of
materially inaccurate statements of earnings, revenues, gains or
other criteria, (3) enhanced independence requirements for
compensation committee members, and (4) authority for the
SEC to adopt proxy access rules which would permit stockholders
of publicly traded companies to nominate candidates for election
as director and have those nominees included in a companys
proxy statement; and
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(xv)
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the creation of a Consumer Financial Protection Bureau, which is
authorized to promulgate consumer protection regulations
relating to bank and non-bank financial products and examine and
enforce these regulations on banks with more than
$10 billion in assets.
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We cannot predict the extent to which the interpretations and
implementation of this wide-ranging federal legislation by
regulations and in supervisory policies and practices may affect
us. Many of the requirements of Dodd-Frank will be implemented
over time and most will be subject to regulations to be
implemented or which will not become fully effective for several
years. There can be no assurance that these or future reforms
(such as possible new standards for commercial real estate
lending (CRE) or new stress testing guidance for all
banks) arising out of these regulations and studies and reports
required by Dodd-Frank will not significantly increase our
compliance or other operating costs and earnings or otherwise
have a significant impact on our business, financial condition
and results of operations. Dodd-Frank will likely result in more
stringent capital, liquidity and leverage requirements on us and
may otherwise adversely affect our business. For example, the
provisions that affect the payment of interest on demand
deposits and interchange fees are likely to increase the costs
associated with deposits as well as place limitations on certain
revenues those deposits may generate. Provisions that revoke the
Tier 1 capital treatment of trust preferred securities and
otherwise require revisions to the capital requirements of Hanmi
Financial and the Bank could require Hanmi Financial and the
Bank to seek other sources of capital in the future. As a result
of the changes required by Dodd-Frank, the profitability of our
business activities may be impacted and we may be required to
make changes to certain of our business practices. These changes
may also require us to invest significant management attention
and resources to evaluate and make any changes necessary to
comply with new statutory and regulatory requirements.
Some of the regulations required by various sections of
Dodd-Frank have been proposed and some adopted in final,
including the following notices of proposed rulemakings
(NPRs)
and/or
interim or final rules for the following sections of Dodd-Frank:
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Risk Based Capital Guidelines Market Risk
(Section 171) Final Rule
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Orderly Liquidation (Section 209) Initial Final
Rule
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Implement Changes to DIF Assessment Base
(Section 331) NPR
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Designated Reserve Ratio and Restoration Plan for the Deposit
Insurance Fund (Sections 332 and 334) Final Rule
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$250,000 Deposit Insurance Coverage Limit
(Section 335) Final Rule
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Unlimited coverage for Non-Interest Bearing Deposits
(Section 343) Final Rule
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Incentive-based Compensation (Section 956) FDIC
NPR.
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EESA and
ARRA
Through its authority under the Emergency Economic Stabilization
Act of 2008 (EESA), as amended by the American
Recovery and Reinvestment Act of 2009 (ARRA), the
U.S. Treasury (Treasury) implemented the TARP
Capital Purchase Program (the TARP CPP), a program
designed to temporarily inject capital into financial
institutions. In order to participate in the TARP CPP, financial
institutions were required to adopt certain standards for
executive compensation and corporate governance. The ARRA
included a wide variety of programs intended to stimulate the
economy and provide for extensive infrastructure, energy,
health, and education needs and imposed certain new, more
stringent executive compensation and corporate expenditure
14
limits on all current and future TARP recipients until the
U.S. Treasury is repaid. The executive compensation
standards under ARRA 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 U.S. Treasury to be inconsistent
with the purposes of TARP or otherwise contrary to the 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 stockholder meetings of a non-binding
Say on Pay stockholder vote on the compensation of
executives. Hanmi Financial and the Bank elected not to
participate in the TARP CPP.
Federal
Banking Agency Compensation Guidelines
Guidelines adopted by the federal banking agencies pursuant to
the FDI Act prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director
or principal stockholder. In June 2010, the federal bank
regulatory agencies jointly issued additional comprehensive
guidance on incentive compensation policies (the Incentive
Compensation Guidance) intended to ensure that the
incentive compensation policies of banking organizations do not
undermine the safety and soundness of such organizations by
encouraging excessive risk-taking. The Incentive Compensation
Guidance, which covers all employees that have the ability to
materially affect the risk profile of an organization, either
individually or as part of a group, is based upon the key
principles that a banking organizations incentive
compensation arrangements should (i) provide incentives
that do not encourage risk-taking beyond the organizations
ability to effectively identify and manage risks, (ii) be
compatible with effective internal controls and risk management,
and (iii) be supported by strong corporate governance,
including active and effective oversight by the
organizations board of directors. Any deficiencies in
compensation practices that are identified may be incorporated
into the organizations supervisory ratings, which can
affect its ability to make acquisitions or perform other
actions. The Incentive Compensation Guidance provides that
enforcement actions may be taken against a banking organization
if its incentive compensation arrangements or related
risk-management control or governance processes pose a risk to
the organizations safety and soundness and the
organization is not taking prompt and effective measures to
correct the deficiencies.
On February 7, 2011, the Board of Directors of the Federal
Deposit Insurance Corporation (FDIC) approved a joint proposed
rulemaking to implement Section 956 of the Dodd-Frank for
banks with $1 billion or more in assets. Section 956
prohibits incentive-based compensation arrangements that
encourage inappropriate risk taking by covered financial
institutions and are deemed to be excessive, or that may lead to
material losses. The proposed rule would move the
U.S. closer to aspects of international compensation
standards by 1) requiring deferral of a substantial portion
of incentive compensation for executive officers of particularly
large institutions described above; 2) prohibiting
incentive-based compensation arrangements for covered persons
that would encourage inappropriate risks by providing excessive
compensation; 3) prohibiting incentive-based compensation
arrangements for covered persons that would expose the
institution to inappropriate risks by providing compensation
that could lead to a material financial loss; 4) requiring
policies and procedures for incentive-based compensation
arrangements that are commensurate with the size and
15
complexity of the institution; and 5) requiring annual
reports on incentive compensation structures to the
institutions appropriate Federal regulator. A joint rule
making proposal will be published for comment by all of the
banking agencies and the Securities and Exchange Commission (the
SEC), among other agencies.
The scope, content and application of the U.S. banking
regulators policies on incentive compensation continue to
evolve in the aftermath of the economic downturn. It cannot be
determined at this time whether compliance with such policies
will adversely affect the ability of Hanmi Financial and the
Bank to hire, retain and motivate key employees.
The Small
Business Jobs Act of 2010
The Small Business Jobs Act of 2010 makes available up to
$30 billion of funds for preferred stock capital
investments by the U.S. Treasury in banks with less than
$10 billion assets as of December 31, 2009 through the
Small Business Lending Fund (SBLF). Banks with up to
$1 billion assets may apply for up to 5% and banks with
more than $1 billion in assets, but less than
$10 billion, may apply for up to 3% of their risk-weighted
assets. In some cases, preferred stock issued under the SBLF may
be exchanged for preferred stock issued to the
U.S. Treasury for TARP CPP funds. Banks on or recently
removed from the FDIC problem bank list may not apply and banks
with other supervisory problems or enforcement actions may be
required to raise matching capital or may have their application
denied. The new law provides that the term of the preferred
stock is a maximum of 10 years and that the capital is to
receive Tier 1 treatment. The interest rate on the
preferred starts at 5% and may later range between 1% and 9%,
depending on, among other things, the amount of qualifying small
business loans which the recipient bank makes. The Bank has not
yet determined whether or not it will apply to participate in
the SBLF.
International
Capital and Liquidity Initiatives
The international Basel Committee on Banking Supervision (the
Basel Committee) is a committee of central banks and
bank supervisors and regulators from the major industrialized
countries. The Basel Committee develops broad policy guidelines
for use by each countrys supervisors in determining the
supervisory policies they apply. In December 2009, the Basel
Committee released two consultative documents proposing
significant changes to bank capital, leverage and liquidity
requirements in response to the economic downturn to enhance the
Basel II framework which had not yet been fully implemented
internationally and even less so in the United States. The Group
of Twenty Finance Ministers and Central Bank Governors (commonly
referred to as the G-20), including the United States, endorsed
the reform package, referred to as Basel III, and proposed phase
in timelines in November, 2010. Basel III provides for
increases in the minimum Tier 1 common equity ratio and the
minimum requirement for the Tier 1 capital ratio.
Basel III additionally includes a capital
conservation buffer on top of the minimum requirement
designed to absorb losses in periods of financial and economic
distress; and an additional required countercyclical buffer
percentage to be implemented according to a particular
nations circumstances. These capital requirements are
further supplemented under Basel III by a non-risk-based
leverage ratio. Basel III also reaffirms the Basel
Committees intention to introduce higher capital
requirements on securitization and trading activities at the end
of 2011.
The Basel III liquidity proposals have three main elements:
(i) a liquidity coverage ratio designed to meet
the banks liquidity needs over a
30-day time
horizon under an acute liquidity stress scenario, (ii) a
net stable funding ratio designed to promote more
medium and long-term funding over a one-year time horizon, and
(iii) a set of monitoring tools that the Basel Committee
indicates should be considered as the minimum types of
information that banks should report to supervisors.
16
Implementation of Basel III in the United States will
require regulations and guidelines by United States banking
regulators, which may differ in significant ways from the
recommendations published by the Basel Committee. It is unclear
how United States banking regulators will define
well-capitalized in their implementation of
Basel III and to what extent and when smaller banking
organizations in the United States will be subject to these
regulations and guidelines. Basel III standards, if
adopted, would lead to significantly higher capital
requirements, higher capital charges and more restrictive
leverage and liquidity ratios. United States banking regulators
must also implement Basel III in conjunction with the
provisions of Dodd-Frank related to increased capital and
liquidity requirements. Further, Dodd-Frank required minimum
leverage and risk-based capital requirements on a consolidated
basis for all depository institution holding companies and
insured depository institutions which may not be less than the
strictest requirements in effect for depository institutions as
of the date of enactment, July 21, 2010.
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 DIF administered by the FDIC, and not for the
benefit of stockholders. Set forth below is a summary
description of the principal laws and regulations that relate to
our operations. These descriptions are qualified in their
entirety by reference to the applicable laws and regulations.
Hanmi
Financial
As a bank and financial holding company, we are subject to
supervision 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 bank holding companies to maintain certain levels of
capital.
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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.
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restrict the ability of bank holding companies to obtain
dividends or other distributions from their subsidiary banks.
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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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require the prior approval of senior executive officers or
director changes and golden parachute payments, including change
in control agreements or new employment agreements with payment
terms which are contingent upon termination.
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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 of more than 5% of the voting shares of
another bank 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.
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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.
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.
The Federal Reserves view is that in serving as a source
of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of
financial stress or adversity and should maintain financial
flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding
companys failure to meet its
source-of-strength
obligations may constitute an unsafe and unsound practice or a
violation of the Federal Reserve Boards regulations, or
both. The
source-of-strength
doctrine most directly affects bank holding companies where a
bank holding companys subsidiary bank fails to maintain
adequate capital levels. In such a situation, the subsidiary
bank will be required by the banks federal regulator to
take prompt corrective action including obtaining a
guarantee by the bank holding company of a capital plan for
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and under capitalized bank subsidiaries. See Prompt
Corrective Action Regulations below. Additionally, if a
bank holding company has more than one bank subsidiary, the FDI
Act provides that each subsidiary bank may have
cross-guaranty liability for any loss incurred by
the FDIC in connection with the failure of another
commonly-controlled bank.
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. 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.
Regulatory
Restrictions on Activities
Subject to prior notice or FRB approval, bank holding companies
may generally engage in, or acquire shares of companies engaged
in, activities determined by the FRB to be so closely related to
banking or managing or controlling banks as to be a proper
incident thereto. Bank holding companies which elect and retain
financial holding company status pursuant to the
Gramm-Leach-Bliley Act of 1999 (GLBA) may engage in
these nonbanking activities and broader securities, insurance,
merchant banking and other activities that are determined to be
financial in nature or are incidental or
complementary to activities that are financial in nature without
prior Federal Reserve approval. Pursuant to GLBA and Dodd-Frank,
in order to elect and retain financial holding company status, a
bank holding company and all depository institution subsidiaries
of a bank holding company must be well capitalized, and well
managed, and, except in limited circumstances, depository
subsidiaries must be in satisfactory compliance with the
Community Reinvestment Act (CRA), which requires
banks to help meet the credit needs of the communities in which
they operate. 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. Hanmi Financial elected financial holding
company status and Chun-Ha and All World are considered
financial subsidiaries of Hanmi Financial. Hanmi Financial has
agreed with the FRB to take certain corrective action pursuant
to these GLBA requirements.
Hanmi Financial is also a bank holding company within the
meaning of Section 3700 of the California Financial Code.
Therefore, Hanmi Financial and any of its subsidiaries are
subject to examination by, and may be required to file reports
with, the DFI.
Privacy
Policies
Under the GLBA, 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 the Bank have established policies and
procedures to assure our compliance with all privacy provisions
of the GLBA.
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Capital
Adequacy Requirements
At December 31, 2010, Hanmi Financial and the Banks
capital ratios exceed the minimum percentage requirements to be
deemed well capitalized for regulatory purposes.
See Notes to Consolidated Financial Statements,
Note 1 Regulatory Matters and Going Concern
Consideration. The regulatory capital guidelines and
the actual capital ratios for Hanmi Financial and the Bank as of
December 31, 2010, were as follows:
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Regulatory Capital Guidelines
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Actual
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Adequately
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Well
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Hanmi
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Hanmi
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Capitalized
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Capitalized
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Bank
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Financial
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Total Risk-Based Capital Ratio
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8.00
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%
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10.00
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%
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12.22
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%
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12.32
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%
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Tier 1 Risk-Based Capital Ratio
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4.00
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%
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6.00
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%
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10.91
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%
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10.09
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%
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Tier 1 Leverage Ratio
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4.00
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%
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5.00
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%
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8.55
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%
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7.90
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%
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Bank holding companies and banks are subject to various
regulatory capital requirements administered by state and
federal banking agencies. Increased capital requirements are
expected as a result of Dodd-Frank and the Basel III
international supervisory developments. Capital adequacy
guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by
regulators about components, risk weighting, and other factors.
The current risk-based capital guidelines for bank holding
companies and banks adopted by the federal banking agencies are
expected 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, such as loans, and those recorded as off-balance
sheet items, such as commitments, letters of credit and recourse
arrangements. The risk-based capital ratio is determined by
classifying assets and certain off-balance sheet financial
instruments into weighted categories, with higher levels of
capital being required for those categories perceived as
representing greater risks and dividing its qualifying capital
by its total risk-adjusted assets and 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 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 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.
Qualifying capital is classified depending on the type of
capital:
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Tier I capital currently includes common equity
and trust preferred securities, subject to certain criteria and
quantitative limits. The capital received from trust preferred
offerings also qualifies as Tier I capital, subject to the
new provisions of Dodd-Frank. Under Dodd-Frank, depository
institution holding companies with more than $15 billion in
total consolidated assets as of December 31, 2009,
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will no longer be able to include trust preferred securities as
Tier 1 regulatory capital after of the end of a
3-year
phase-out period beginning 2013, and would need to replace any
outstanding trust preferred securities issued prior to
May 19, 2010 with qualifying Tier 1 regulatory capital
during the phase-out period. For institutions with less than
$15 billion in total consolidated assets, existing trust
preferred capital will still qualify as Tier 1. New issues
by small bank holding companies with less than $500 million
assets could still qualify as Tier 1, however the market
for any new trust preferred capital raises is uncertain.
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Tier II capital includes hybrid capital
instruments, other qualifying debt instruments, a limited amount
of the allowance for loan and lease losses, and a limited amount
of unrealized holding gains on equity securities. Following the
phase-out period under Dodd-Frank, trust preferred securities
will be treated as Tier II capital. The maximum amount of
supplemental capital elements that qualifies as Tier 2
capital is limited to 100 percent of Tier 1 capital.
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Tier III capital consists of qualifying
unsecured debt. The sum of Tier II and Tier III
capital may not exceed the amount of Tier I capital.
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Under the current capital guidelines, there are three
fundamental capital ratios: a total risk-based capital ratio, a
Tier 1 risk-based capital ratio and a Tier 1 leverage
ratio. To be deemed well capitalized a bank must
have a total risk-based capital ratio, a Tier 1 risk-based
capital ratio and a Tier 1 leverage ratio of at least 10%,
6% and 5%, respectively. At December 31, 2010, the
respective capital ratios of Hanmi Financial and the Bank
exceeded the minimum percentage requirements to be deemed
well-capitalized for regulatory purposes.
In addition to the requirements of Dodd-Frank and Basel III, the
federal banking agencies may change existing capital guidelines
or adopt new capital guidelines in the future. 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. FRB
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. Federal banking regulators may set higher
capital requirements when a banks particular circumstances
warrant and have required many banks and bank holding companies
subject to enforcement actions to maintain capital ratios in
excess of the minimum ratios otherwise required to be deemed
well capitalized. In such cases, the institutions may no longer
be deemed well capitalized and may therefore additionally be
subject to restrictions on taking brokered deposits. Hanmi
Financial and the Bank are subject to such requirements and
restrictions pursuant to the Written Agreement with the FRB.
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 total
assets of at least 3%. All other institutions are required to
maintain a leverage ratio of at least 100 to 200 basis
points above the 3% minimum, for a minimum of 4% to 5%. As of
December 31, 2010, the Banks leverage capital ratio
was 8.55 percent, and Hanmi Financials leverage
capital ratio was 7.90 percent, both ratios exceeding
regulatory minimums.
As described previously, the Bank was required to increase its
capital and maintain certain regulatory capital ratios prior to
certain dates specified in the Final Order. See
Item 1. Business Regulatory
Enforcement Action. for further details.
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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.
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.
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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.
Sarbanes-Oxley
Act
The Company is subject to the accounting oversight and corporate
governance requirements of the Sarbanes-Oxley Act of 2002,
including, among other things, required executive certification
of financial presentations, requirements for board audit
committees and their members, and disclosure to shareholders of
internal control reports and assessments by management regarding
financial reporting.
Securities
Registration
Hanmi Financials common stock is publicly held and listed
on the NASDAQ Stock Market (NASDAQ), and we are
subject to the periodic reporting, information, proxy
solicitation, insider trading, corporate governance and other
requirements and restrictions of the Securities Exchange Act of
1934 and the regulations of the SEC promulgated thereunder as
well as listing requirements of NASDAQ. Dodd-Frank includes the
following provisions that affect corporate governance and
executive compensation at most United States publicly traded
companies, including Hanmi Financial: (1) stockholder
advisory votes on executive compensation, (2) executive
compensation clawback requirements for companies
listed on national securities exchanges in the event of
materially inaccurate statements of earnings, revenues, gains or
other criteria similar to the requirements of the ARRA for TARP
CPP recipients (3) enhanced independence requirements for
compensation committee members, and (4) SEC authority to
adopt proxy access rules which would permit stockholders of
publicly traded companies to nominate candidates for election as
director and have those nominees included in a companys
proxy statement.
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 the
Banks primary Federal regulator, and must additionally
comply with certain applicable regulations of the Federal
Reserve. Specific federal and state laws and regulations which
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. California
banks are also subject to statutes and federal banking
regulations including Regulation O and Federal Reserve Act
Sections 23A and 23B and Regulation W, which restrict
or limit loans or extensions of credit to
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insiders, including officers directors and principal
shareholders, and loans or extension of credit by banks to
affiliates or purchases of assets from affiliates, including
parent bank holding companies, except pursuant to certain
exceptions and terms and conditions at least as favorable to
those prevailing for comparable transactions with unaffiliated
parties. Dodd-Frank expanded definitions and restrictions on
transactions with affiliates and insiders under Section 23A
and 23B and also lending limits for derivative transactions,
repurchase agreements and securities lending and borrowing
transactions.
Pursuant to the FDI Act and the Financial Code, California state
chartered commercial banks may generally engage in any activity
permissible for national banks. Therefore, the Bank may form
subsidiaries to engage in the many so-called closely
related to banking or nonbanking activities
commonly conducted by national banks in operating subsidiaries
or by non-bank subsidiaries of bank holding companies. Further,
pursuant to GLBA, California banks may conduct certain
financial activities in a subsidiary to the same
extent as may a national bank, provided the bank is and remains
well-capitalized, well-managed and in
satisfactory compliance with the CRA. The Bank currently has no
financial subsidiaries.
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;
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terminate the Banks deposit insurance, which would also
result in the revocation of the Banks license by the
DFI; and
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take possession and close and liquidate the Bank.
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As discussed above, the Bank entered into the Final Order issued
by the DFI, and the Written Agreement with the FRB, each of
which were issued effective as of November 2, 2009.
Brokered
deposits
Under the FDI Act, 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. As of December 31, 2010,
in compliance with the FRB Written Agreement, the Bank had no
brokered deposits.
Community
Reinvestment Act
Under the CRA, 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
24
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
satisfactory 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, as amended by Dodd-Frank, bank holding companies
and banks generally have the ability to acquire or merge with
banks in other states, and 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, 2010, the Bank was in compliance with the
FHLBs stock ownership requirement and our investment in
FHLB capital stock totaled $27.3 million. The total
borrowing capacity available based on pledged collateral and the
remaining available borrowing capacity as of December 31,
2010 were $444.2 million and $395.1 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, 2010, the Bank was in compliance
with these requirements.
Prompt
Corrective Action Regulations
The FDI Act requires the relevant federal banking regulator to
take prompt corrective action with respect to a
depository institution if that institution does not meet certain
capital adequacy standards, including requiring the prompt
submission of an acceptable capital restoration plan.
Supervisory actions by the appropriate federal banking regulator
under the prompt corrective action rules generally depend upon
an institutions classification within five capital
categories as defined in the regulations. The relevant capital
measures are the capital ratio, the Tier 1 capital ratio,
and the leverage ratio. However, the federal banking
25
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. These include 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.
A depository institutions capital tier under the prompt
corrective action regulations will depend upon how its capital
levels compare with various relevant capital measures and the
other factors established by the regulations. A bank will be:
(i) well capitalized if the institution has a
total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater, and a
leverage ratio of 5.0% or greater and is not subject to any
order or written directive by any such regulatory authority to
meet and maintain a specific capital level for any capital
measure; (ii) adequately capitalized if the
institution has a total risk-based capital ratio of 8.0% or
greater, a Tier 1 risk-based capital ratio of 4.0% or
greater, and a leverage ratio of 4.0% or greater and is not
well capitalized;
(iii) undercapitalized if the institution has a
total risk-based capital ratio that is less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0%, or a
leverage ratio of less than 4.0%; (iv) significantly
undercapitalized if the institution has a total risk-based
capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0%, or a leverage ratio of less
than 3.0%; and (v) critically undercapitalized
if the institutions tangible equity is equal to or less
than 2.0% of average quarterly tangible assets. An institution
may be downgraded to, or deemed to be in, a capital category
that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it
receives an unsatisfactory examination rating with respect to
certain matters.
The FDI Act generally prohibits a depository institution from
making any capital distributions (including payment of a
dividend) or paying any management fee to its parent holding
company if the depository institution would thereafter be
undercapitalized. Undercapitalized
institutions are subject to growth limitations and are required
to submit a capital restoration plan. The regulatory agencies
may not accept such a plan without determining, among other
things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institutions
capital. In addition, for a capital restoration plan to be
acceptable, the depository institutions parent holding
company must guarantee that the institution will comply with
such capital restoration plan. The bank holding company must
also provide appropriate assurances of performance. The
aggregate liability of the parent holding company is limited to
the lesser of (i) an amount equal to 5.0% of the depository
institutions total assets at the time it became
undercapitalized and (ii) the amount which is necessary (or
would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to
such institution as of the time it fails to comply with the
plan. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly
undercapitalized. Significantly
undercapitalized depository institutions may be subject to
a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain
circumstances, reclassify a well capitalized insured depository
institution as adequately capitalized. The FDI Act provides that
an institution may be reclassified if the appropriate federal
banking agency determines (after notice and opportunity for a
hearing) that the institution is in an unsafe or unsound
condition or deems the institution to be engaging in an unsafe
or unsound practice. The appropriate agency is also permitted to
require an adequately capitalized or undercapitalized
institution to comply with the supervisory provisions as if the
institution were in the next
26
lower category (but not treat a significantly undercapitalized
institution as critically undercapitalized) based on supervisory
information other than the capital levels of the institution.
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 Deposit Insurance Fund (the
DIF) up to prescribed limits for each depositor.
Pursuant to Dodd-Frank, the maximum deposit insurance amount has
been permanently increased to $250,000 and all
non-interest-bearing transaction accounts are insured through
December 31, 2012. 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. Due to the greatly increased number of bank
failures and losses incurred by DIF, as well as the recent
extraordinary programs in which the FDIC has been involved to
support the banking industry generally, the FDICs DIF was
substantially depleted and the FDIC has incurred substantially
increased operating costs. In November, 2009, the FDIC adopted a
requirement for institutions to prepay in 2009 their estimated
quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011, and 2012. The Bank prepaid its
assessments based on the calculations of the projected
assessments at that time.
Dodd-Frank changed the base for FDIC insurance assessments to a
banks average consolidated total assets minus average
tangible equity, rather than upon its deposit base alone, and
requires the FDIC to increase the DIFs reserves against
future losses. This will necessitate increased deposit insurance
premiums that are expected to be borne primarily by institutions
with assets of greater than $10 billion and with
significant balance sheet debt obligations in addition to
deposits liabilities.
As required by Dodd-Frank, the FDIC adopted a new DIF
restoration plan which became effective on January 1, 2011.
Among other things, the plan: (1) raises the minimum
designated reserve ratio, which the FDIC is required to set each
year, to 1.35 percent (from the former minimum of
1.15 percent) and removes the upper limit on the designated
reserve ratio (which was formerly capped at 1.5 percent)
and consequently on the size of the fund; (2) requires that
the fund reserve ratio reach 1.35 percent by
September 30, 2010 (rather than 1.15 percent by the
end of 2016, as formerly required); (3) requires that, in
setting assessments, the FDIC offset the effect of requiring
that the reserve ratio reach 1.35 percent by
September 30, 2020, rather than 1.15 percent by the
end of 2016 on insured depository institutions with total
consolidated assets of less than $10 million;
(4) eliminates the requirement that the FDIC provide
dividends from the fund when the reserve ratio is between
1.35 percent and 1.5 percent; and (5) continues
the FDICs authority to declare dividends when the reserve
ratio at the end of a calendar year is at least
1.5 percent, but grants the FDIC sole discretion in
determining whether to suspend or limit the declaration or
payment of dividends. The FDI Act continues to require that the
FDICs Board of Directors consider the appropriate level
for the designated reserve ratio annually and, if changing the
designated reserve ratio, engage in
notice-and-comment
rulemaking before the beginning of the calendar year. The FDIC
has set a long-term goal of getting its reserve ratio up to 2%
of insured deposits by 2027.
On February 7, 2011, the FDIC approved a final rule, as
mandated by Dodd-Frank, changing the deposit insurance
assessment system from one that is based on total domestic
deposits to one that is based on average consolidated total
assets minus average tangible equity. In addition, the final
rule creates a scorecard-based assessment system for larger
banks (those with more than $10 billion in assets) and
suspends dividend payments if the Deposit Insurance Fund reserve
ratio exceeds 1.5 percent, but provides for decreasing
27
assessment rates when the Deposit Insurance Fund reserve ratio
reaches certain thresholds. Larger insured depository
institutions will likely pay higher assessments to the Deposit
Insurance Fund than under the old system. Additionally, the
final rule includes a new adjustment for depository institution
debt whereby an institution would pay an additional premium
equal to 50 basis points on every dollar of long-term,
unsecured debt held as an asset that was issued by another
insured depository institution (excluding debt guaranteed under
the FDICs Temporary Liquidity Guarantee Program) to the
extent that all such debt exceeds 3 percent of the other
insured depository institutions Tier 1 capital. The
new rule is expected to take effect for the quarter beginning
April 1, 2011.
Our FDIC insurance expense totaled $10.5 million for 2010.
FDIC insurance expense includes deposit insurance assessments
and Financing Corporation (FICO) assessments related
to outstanding FICO bonds to fund interest payments on bonds to
recapitalize the predecessor to the DIF. These assessments will
continue until the FICO bonds mature in 2017. The FICO
assessment rates, which are determined quarterly, was 0.01060%
of insured deposits for the first quarter of fiscal 2010 and
0.01040% of insured deposits for each of the last three quarters
of fiscal 2010. The total FICO assessments in 2010 was $280,000.
We are generally unable to control the amount of premiums that
we are required to pay for FDIC insurance. If there are
additional bank or financial institution failures or if the FDIC
otherwise determines, we may be required to pay even higher FDIC
premiums than the recently increased levels. These announced
increases and any future increases in FDIC insurance premiums
may have a material and adverse effect on our earnings and could
have a material adverse effect on the value of, or market for,
our common stock.
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:
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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);
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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.
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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
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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.
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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, as amended by
Dodd-Frank, 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.
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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.
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
29
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 as set forth in the Financial Code, 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 2009 and 2010, the Bank is restricted under the
Financial Code 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 the FRB Written Agreement and the 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.
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.
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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.
Consumer
Laws
The Bank must comply with numerous consumer protection statutes
and implementing regulations, including the CRA, the Fair Credit
Reporting Act, as amended by the Fair and Accurate Credit
Transactions Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Fair Housing Act, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, the National
Flood Insurance Act, the Americans with Disabilities Act and
various federal and state privacy protection laws. Effective
July 1, 2010, a new federal banking rule under the
Electronic Fund Transfer Act prohibits financial
institutions from charging consumers fees for paying overdrafts
on automated teller machines and one-time debit card
transactions, submit to certain exceptions, unless a consumer
consents, or opts in, to the overdraft service for those type of
transactions. Noncompliance with these laws could subject the
Bank to lawsuits and could also result in administrative
penalties, including, fines and reimbursements. The Bank and
Hanmi Financial are also subject to federal and state laws
prohibiting unfair or fraudulent business practices, untrue or
misleading advertising and unfair competition.
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.
Dodd-Frank provides for the creation of the Bureau of Consumer
Financial Protection as an independent entity within the Federal
Reserve. This bureau is a new regulatory agency for United
States banks. It will have broad rulemaking, supervisory and
enforcement authority over consumer financial products and
services, including deposit products, residential mortgages,
home-equity loans and credit cards, and contains provisions on
mortgage-related matters such as steering incentives,
determinations as to a borrowers ability to repay and
prepayment penalties. The bureaus functions include
investigating consumer complaints, conducting market research,
rulemaking, supervising and examining banks consumer
transactions, and enforcing rules related to consumer financial
products and services. It is anticipated that the bureau will
begin regulating activities in 2011. Banks with less than
$10 billion in assets, such as the Bank, will continue to
be examined for compliance by their primary federal banking
agency.
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.
31
Going
Concern
As previously mentioned, we are required by federal regulatory
authorities to maintain adequate levels of capital to support
our operations. In order to comply with the Final Order, the
Bank is also required to increase its capital and maintain
certain regulatory capital ratios prior to certain dates
specified in the Final Order. By July 31, 2010, the Bank
was required to increase its contributed equity capital by not
less than an additional $100 million and maintain a ratio
of tangible stockholders equity to total tangible assets
of at least 9.0 percent. In addition, the Bank was also
required to maintain a ratio of tangible stockholders
equity to total tangible assets of at least 9.5 percent at
December 31, 2010 and until the Final Order is terminated.
As a result of the successful completion of the registered
rights and best efforts offering in July 2010, the capital
contribution requirement set forth in the Final Order was
satisfied. However, the tangible capital ratio requirement set
for in the Final Order has not been satisfied at
December 31, 2010. Further, should our asset quality
continue to erode and require significant additional provision
for credit losses, resulting in added future net operating
losses at the Bank, or should we otherwise fail to be
profitable, our capital levels will additionally decline
requiring the raising of more capital than the amount currently
required to satisfy our agreements with our regulators. An
inability to raise additional capital when needed or comply with
the terms of the Final Order or Written Agreement, raises
substantial doubt about our ability to continue as a going
concern.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the
normal course of business for the foreseeable future, and do not
include any adjustments to reflect the possible future effects
on the recoverability or classification of assets, and the
amounts or classification of liabilities that may result from
the outcome of any regulatory action including being placed into
receivership or conservatorship.
As set forth above, on May 25, 2010, we entered into a
definitive securities purchase agreement with Woori and are
currently awaiting final regulatory approval for the
applications filed by Woori in connection with the transactions
contemplated by the securities purchase agreement. We intend to
inject a substantial portion of the net proceeds from the Woori
transaction as new capital into Hanmi Bank. However, we cannot
provide assurance that we will be successful in consummating the
transaction with Woori.
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.
Risks
Relating to our Business and Ownership of Our Common
Stock
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 2010 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 Final Order and Written Agreement
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
32
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 stockholders will lose some or all of their
investment in us.
Our operations and regulatory capital needs require us to
enhance our capital position in the near term and may also
require us to raise additional capital in the
future. We are required by federal regulatory
authorities to maintain adequate levels of capital to support
our operations. As part of the Final Order, the Bank is also
required to increase its capital and maintain certain regulatory
capital ratios prior to certain dates specified in the Final
Order. The Bank is required to maintain a ratio of tangible
stockholders equity to total tangible assets as follows:
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Ratio of Tangible Shareholders
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Equity to Total Tangible Assets
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By July 31, 2010
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Not Less Than 9.0 Percent
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From December 31, 2010 and
Until the Final Order is Terminated
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Not Less Than 9.5 Percent
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At December 31, 2010, the Bank had a tangible
stockholders equity to total tangible assets ratio of
8.59%. Accordingly, we are not in compliance with the Final
Order. Pursuant to the Written Agreement, we are also required
to increase and maintain sufficient capital at the Company and
at Hanmi Bank that is satisfactory to the Federal Reserve Bank.
We have also committed to the Federal Reserve Bank 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. Even if we are
successful in completing the transaction with Woori, we may
still need to raise additional capital in the future to support
our operations. If the transaction with Woori is not
consummated, we will need to find alternative sources of
capital. Further, should our asset quality erode and require
significant additional provision for credit losses, resulting in
consistent net operating losses at Hanmi Bank, our capital
levels will decline and we will need to raise capital to satisfy
our agreements with the regulators and any future regulatory
orders or agreements we may be subject to.
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. 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.
The Bank is subject to additional regulatory oversight as
a result of a formal regulatory enforcement action issued by the
Federal Reserve Bank and the California Department of Financial
Institutions. On November 2, 2009, the members of
the Board of Directors of the Bank consented to the issuance of
the Final Order from the California Department Financial
Institutions. On the same date, we and the Bank entered into the
Written Agreement with the Federal Reserve Bank. Under the terms
of the Final Order and the Written Agreement, Hanmi Bank is
required to implement certain corrective and remedial measures
under strict time frames and we can offer no assurance that
Hanmi Bank will be able to meet the deadlines imposed by the
regulatory orders or any extensions of those deadlines.
These regulatory actions will remain in effect until modified,
terminated, suspended or set aside by the Federal Reserve Bank
or the California Department of Financial Institutions, as
applicable. Failure to comply with the terms of these regulatory
actions within the applicable time frames provided or any
extended
33
deadlines could result in additional orders or penalties from
the Federal Reserve Bank and the California Department of
Financial Institutions, 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. Therefore they are not expected to be lifted if and when
the Woori transaction is consummated.
We may become subject to additional regulatory
restrictions in the event that our regulatory capital levels
were to decline. We cannot provide any assurance
that our total risk-based capital ratio or other regulatory
capital ratios will not decline in the future such that Hanmi
Bank may be considered to be undercapitalized for
regulatory purposes. If a state member bank, like Hanmi Bank, is
classified as undercapitalized, the bank is required to submit a
capital restoration plan to the Federal Reserve Bank. Pursuant
to Federal Deposit Insurance Corporation Improvement Act, 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
Bank of a capital restoration plan for the bank. Pursuant to
Section 38 of the Federal Deposit Insurance Act and Federal
Reserve Board Regulation H, Hanmi Bank was previously
required to submit a capital restoration plan to the Federal
Reserve Bank that must be guaranteed by the Company as a result
of the previous decline in the Banks capital position.
Hanmi Bank is also subject to other restrictions pursuant to
Section 38 and Federal Reserve Board Regulation H,
including restrictions on dividends, asset growth and expansion
through acquisitions, branching or new lines of business and is
prohibited from paying certain management fees until its
improving capital ratios are deemed satisfactory by its
regulators. The Federal Reserve Bank also has the discretion to
impose certain other corrective actions pursuant to
Section 38 and Regulation H.
If a bank is classified as significantly undercapitalized, the
Federal Reserve Bank 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. These actions may also be taken by
the Federal Reserve Bank at any time on an undercapitalized bank
if it determines those restrictions are necessary. If a bank is
classified as critically undercapitalized, in addition to the
foregoing restrictions, the Federal Deposit Insurance
Corporation Improvement Act prohibits payment on any
subordinated debt and requires the bank to be placed into
conservatorship or receivership within 90 days, unless the
Federal Reserve Bank determines that other action would better
achieve the purposes of the Federal Deposit Insurance
Corporation Improvement Act regarding prompt corrective action
with respect to undercapitalized banks.
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.
The Bank is currently restricted from paying dividends to
us and we are restricted from paying dividends to stockholders
and from making any payments on our trust preferred
securities. The primary source of our income from
which we pay our obligations and distribute dividends to our
stockholders is from the receipt of dividends from Hanmi Bank.
The availability of dividends from Hanmi Bank is limited by
various statutes and regulations. Hanmi Bank currently has a
retained earnings deficit and has suffered net losses in
34
2010, 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 Hanmi Bank to
declare a dividend to us, with or without Commissioner approval.
In addition, Hanmi Bank is prohibited from paying dividends to
us unless it receives prior regulatory approval. Furthermore, we
agreed that we 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 Federal Reserve Bank. 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.
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, including brokered 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.
For example, the Federal Reserve Banks lending to Hanmi
Bank is limited as provided for in Regulation A
(12 C.F.R. 201). Currently, the Federal Reserve Bank will
not lend to Hanmi Bank for more than 60 days in any
120 day period and Hanmi Bank must maintain a minimum of
$20.7 million to offset the risk from Hanmi Banks
non-Fedwire activity. In addition, due to continued
deterioration in credit and capital, Hanmi Banks maximum
borrowing capacity from the Federal Home Loan Bank has been
reduced from 20% of total assets to 15% of total assets and the
maximum term has been reduced from 84 to 12 months.
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 a result of the recent turmoil faced by
banking organizations in the domestic and worldwide credit
markets.
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,
2010, we recorded a $122.5 million provision for credit
losses and gross charge-offs of $131.8 million in loans,
offset by recoveries of $9.9 million. For the year ended
December 31, 2010, we recognized net losses of
$88.0 million. 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, along with high unemployment. 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,
2010, we had $856.5 million 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,
along with high levels of unemployment, 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
35
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
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.
Our Southern California business focus and economic
conditions in Southern California could adversely affect our
operations. Hanmi Banks operations are
located primarily in Los Angeles and Orange counties. Because of
this geographic concentration, our results depend largely upon
economic conditions in these areas. The continued deterioration
in economic conditions in Hanmi Banks market areas,
continued high unemployment or a significant natural or man-made
disaster in these market areas, could have a material adverse
effect on the quality of Hanmi Banks loan portfolio, the
demand for its products and services and on its overall
financial condition and results of operations.
Our concentration in commercial real estate loans located
primarily in Southern California could have adverse effects on
credit quality. As of December 31, 2010, Hanmi
Banks loan portfolio included commercial real estate and
construction loans, primarily in Southern California, totaling
$793.9 million, or 35.0 percent of total gross loans.
Because of this concentration, a continued deterioration of the
Southern California commercial real estate market could affect
the ability of borrowers, guarantors and related parties to
perform in accordance with the terms of their loans. 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, 2010, Hanmi Banks loan portfolio
included commercial and industrial loans, primarily in Southern
California, totaling $1.36 billion, or 60.0 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 Hanmi Bank.
Our concentrations of loans in certain industries could
have adverse effects on credit quality. As of
December 31, 2010, Hanmi Banks loan portfolio
included loans to: 1) lessors of non-residential buildings
totaling $379.0 million, or 16.7% of total gross loans;
2) borrowers in the accommodation industry totaling
$321.7 million, or 14.2 percent of total gross loans;
and 3) gas stations totaling $287.6 million, or
12.7 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 material and adverse
consequences for Hanmi Bank.
The Woori investment is subject to conditions to closing
and may not close at all. The transactions
contemplated by the securities purchase agreement with Woori is
subject to numerous closing conditions, many of which are
outside of our control and might not be fulfilled. The
transaction with Woori must be approved by certain governmental
agencies, including the Federal Reserve Board, the California
Department of Financial Institutions (which has approved
Wooris application) and the Korean Financial Services
Commission, which could delay or prevent the closing. We cannot
assure you that the investment by Woori in us will close
36
in the near term or at all. If we fail to consummate the
transactions contemplated by the securities purchase agreement
and we otherwise fail to raise sufficient capital to satisfy the
terms of the Final Order and the Written Agreement, further
regulatory action could be taken against us and Hanmi Bank and
we may not be able to continue as a going concern. Failure to
comply with the terms of the regulatory orders within the
applicable time frames provided could result in additional
orders or penalties from the Federal Reserve Bank, the Federal
Deposit Insurance Corporation and the California Department of
Financial Institutions, which could include further restrictions
on our business, assessment of civil money penalties on us and
Hanmi 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 and the liquidation or other closure of Hanmi Bank.
Even if we were to consummate the transactions contemplated by
the securities purchase agreement with Woori, we may still need
to raise additional capital in the future and there can be no
assurance that we would be able to do so in the amounts required
and in a timely manner, or at all. Failure to raise sufficient
capital could have a material adverse effect on our business,
financial conditions and results of operations and subject us to
further regulatory restrictions or penalties.
Existing stockholders will experience substantial dilution
from the Woori investment or other capital raising
transactions. The Woori investment will involve the
issuance of a substantial number of shares of our common stock.
If the Woori investment is completed, current stockholders may
have less than a majority interest in us. If we raise capital
from other sources, we may also issue a substantial number of
shares of our common stock or securities convertible into common
stock. As a result of the sale of such a large number of shares
of our common stock, the market price of our common stock could
decline and we could experience dilution to earnings and book
value.
In the future we may decide or be required to raise
additional funds, which would cause then existing stockholders
to experience dilution. Even if we complete the
Woori investment, we may decide to raise additional funds
through public or private debt or equity financings for a number
of reasons, including in response to regulatory or other
requirements to meet our liquidity and capital needs, to finance
our operations and business strategy or for other reasons. If we
raise funds by issuing equity securities or instruments that are
convertible into equity securities, the percentage ownership of
our existing stockholders will further be reduced, the new
equity securities may have rights, preferences and privileges
superior to those of our common stock, and the market of our
common stock could decline.
Even after the Woori investment or any other capital
raising transactions, we may still be subject to continued
regulatory scrutiny. Even if we complete the Woori
investment (or other alternative capital raising transactions),
we cannot assure you whether or when the regulatory agreements
and orders we have entered into will be lifted or terminated.
Even if they are lifted or terminated in whole or in part, we
may still be subject to supervisory enforcement actions that
restrict our activities.
If the Woori investment is completed, we may have a
controlling stockholder who would be able to control certain
corporate matters. If the transactions with Woori
are consummated, Woori may become a controlling shareholder of
ours. As a result, and subject to compliance with applicable law
and our charter documents (subject to the limitations contained
in our securities purchase agreement with Woori), Woori may have
voting control of us, and, with control, would be able to
(i) elect all of the members of our Board of Directors;
(ii) adopt amendments to our charter documents; and
(iii) subject to the limitations set forth in the
securities purchase agreement regarding a cash-out merger,
control the vote on any merger, sale of assets or other
fundamental corporate transaction of the Company or Hanmi Bank
or the issuance of additional equity securities or incurrence of
debt, in each case without the approval of our other
stockholders. It will also be
37
impossible for a third party, other than Woori, to obtain
control of us through purchases of our common stock not
beneficially owned or controlled by Woori, which could have a
negative impact on our stock price. Furthermore, in pursuing its
economic interests, Woori may make decisions with respect to
fundamental corporate transactions that may be different than
the decisions of other stockholders. In addition, under the
rules applicable to NASDAQ, if another company owns more than
50% of the voting power of a listed company, that company is
considered a controlled company and exempt from
rules relating to independence of the Board of Directors and the
compensation and nominating committees. If the Woori investment
is completed, we may be a controlled company. Accordingly, we
would be exempt from certain corporate governance requirements
and our stockholders may not have all the protections that these
rules are intended to provide.
If the Woori investment is completed, the views of
Wooris ownership stake may adversely affect
us. Woori is also subject to regulatory oversight,
review and supervisory action (which can include fines or
penalties) by Korean banking authorities and
U.S. regulatory authorities as a result of its 100%
indirect controlling interest in Woori America Bank
headquartered in New York. Our business operations and expansion
plans could be negatively affected by regulatory concerns or
supervisory action in the U.S. and in Korea against Woori
and its affiliates. The views of Woori regarding possible new
businesses, strategies, acquisitions, divestitures or other
initiatives, including compliance and risk management processes,
may differ from ours. Additionally, Woori America Bank has
branches in California and competes with Hanmi Bank for
customers. Woori may take actions with respect to Woori America
Banks business in California or elsewhere that could be
disadvantageous to Hanmi Bank and to stockholders of Hanmi
Financial other than Woori. If the transaction with Woori are
consummated, this may delay or hinder us from pursuing
initiatives or cause us to incur additional costs and subject us
to additional oversight. Also, to the extent any directors,
officers or employees serve us and Woori at the same time that
could create or create the appearance of, conflicts of interest.
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
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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 Federal Deposit
Insurance Corporation premiums because market developments have
significantly depleted the deposit insurance fund of the Federal
Deposit Insurance Corporation 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.
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Instability in domestic and international financial
markets could adversely affect us. Global capital
markets and economic conditions are still unstable and the
resulting disruption has been particularly acute in the
financial sector. Recent legislative and regulatory initiatives
to address difficult market and economic conditions may not
stabilize the U.S. banking system. There can be no
assurance as to the actual impact regulatory initiatives will
have on the financial markets, including the extreme levels of
volatility and limited credit availability currently being
experienced. The failure of regulatory initiatives to help
stabilize the financial markets and a worsening of financial
market conditions could materially and adversely affect our
business, financial condition, results of operations, access to
capital, liquidity, the financial condition of our borrowers and
credit or the value of our securities.
Our success depends on our key
management. 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.
Our interest expense may increase following the repeal of
the Federal prohibition on payment of interest on demand
deposits. The federal prohibition on the ability of
financial institutions to pay interest on demand deposit
accounts was repealed as part of the Dodd-Frank Act. As a
result, beginning on July 21, 2011, financial institutions
could commence offering interest on demand deposits to compete
for clients. We do not yet know what interest rates other
institutions may offer. Our interest expense will increase and
our net interest margin will decrease if the Bank begins
offering interest on demand deposits to attract additional
customers or maintain current customers, which could have a
material adverse effect on our financial condition, net income
and results of operations.
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. The economic conditions in the markets in which many of
our borrowers operate have 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.
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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. The
Bank substantially increased its provision for credit losses in
the years ended December 31 2010, 2009 and 2008, 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.
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 the 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 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 material 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 materially and 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 caused by the
response to the financial market crisis and the global economic
recession may affect our operating earnings negatively.
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, including the recent enactment
of Dodd-Frank Act, changes in existing laws, or repeals of
existing laws may cause our results to differ materially from
historical and
40
projected performance. Further, federal monetary policy,
particularly as implemented through the Federal Reserve Board,
significantly affects credit conditions and a material change in
these conditions could have a material adverse impact on our
financial condition and results of operations.
Additional requirements imposed by the Dodd-Frank Act and
other regulations could adversely affect us. Recent
government efforts to strengthen the U.S. financial system
have resulted in the imposition of additional regulatory
requirements, including expansive financial services regulatory
reform legislation. Dodd-Frank, adopted in July 2010, sets out
sweeping regulatory changes. Changes imposed by the Dodd-Frank
include, among others: (i) new requirements on banking,
derivative and investment activities, including modified capital
requirements, the repeal of the prohibition on the payment of
interest on business demand accounts, and debit card
interchange fee requirements; (ii) corporate governance and
executive compensation requirements; (iii) enhanced
financial institution safety and soundness regulations,
including increases in assessment fees and deposit insurance
coverage; and (iv) the establishment of new regulatory
bodies, such as the Bureau of Consumer Financial Protection.
Certain provisions are effective immediately; however, much of
the Financial Reform Act is subject to further rulemaking
and/or
studies. As such, while we are subject to the legislation, we
cannot fully assess the impact of the Dodd-Frank until final
rules are implemented, which depending on the rule, could be
within six to 24 months from the enactment of the
Dodd-Frank, or later.
Current and future legal and regulatory requirements,
restrictions and regulations, including those imposed under
Dodd-Frank, may adversely impact our profitability and may have
a material and adverse effect on our business, financial
condition, and results of operations, may require us to invest
significant management attention and resources to evaluate and
make any changes required by the legislation and accompanying
rules and may make it more difficult for us to attract and
retain qualified executive officers and employees.
The FDICs restoration plan and the related increased
assessment rate could adversely affect our
earnings. As a result of a series of financial
institution failures and other market developments, the DIF has
been significantly depleted and reduced the ratio of reserves to
insured deposits. As a result of recent economic conditions and
the enactment of Dodd-Frank, the FDIC has increased the deposit
insurance assessment rates and thus raised deposit premiums for
insured depository institutions. If these increases are
insufficient for the DIF to meet its funding requirements,
further special assessments or increases in deposit insurance
premiums may be required which we may be required to pay. We are
generally unable to control the amount of premiums that we are
required to pay for FDIC insurance. If there are additional bank
or financial institution failures, we may be required to pay
even higher FDIC premiums than the recently increased levels.
Any future additional assessments, increases or required
prepayments in FDIC insurance premiums may materially adversely
affect our results of operations.
The impact of the new Basel III capital standards
will likely impose enhanced capital adequacy standards on
us. On September 12, 2010, the Group of
Governors and Heads of Supervision, the oversight body of the
Basel Committee, announced agreement on the calibration and
phase-in arrangements for a strengthened set of capital
requirements, known as Basel III, which were approved in
November 2010 by the G20 leadership. Basel III increases
the minimum Tier 1 common equity ratio to 4.5%, net of
regulatory deductions, and introduces a capital conservation
buffer of an additional 2.5% of common equity to risk-weighted
assets, raising the target minimum common equity ratio to 7%.
Basel III increases the minimum Tier 1 capital ratio
to 8.5% inclusive of the capital conservation buffer, increases
the minimum total capital ratio to 10.5% inclusive of the
capital buffer and introduces a countercyclical capital buffer
of up to 2.5% of common equity or other fully loss absorbing
capital for periods of excess credit growth. Basel III also
introduces a non-risk adjusted Tier 1 leverage ratio of 3%,
based on a measure of total exposure rather than total assets,
and
41
new liquidity standards. The Basel III capital and
liquidity standards will be phased in over a multi-year period.
The Federal Reserve will likely implement changes to the capital
adequacy standards applicable to us and the Bank which will
increase our capital requirements and compliance costs.
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, particularly in the
Korean-American
community. 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 be materially and adversely impacted depending
upon the nature and level of competition.
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.
We are dependent on key personnel and the loss of one or
more of those key personnel may materially and adversely affect
our prospects. Competition for qualified employees
and personnel in the banking industry is intense and there are a
limited number of qualified persons with knowledge of, and
experience in, the California community banking industry. The
process of recruiting personnel with the combination of skills
and attributes required to carry out our strategies is often
lengthy. In addition, legislation and regulations which impose
restrictions on executive compensation may make it more
difficult for us to retain and recruit key personnel. Our
success depends to a significant degree upon our ability to
attract and retain qualified management, loan
42
origination, finance, administrative, marketing and technical
personnel and upon the continued contributions of our management
and personnel. Failure to attract or retain such employees could
have a material adverse effect on our financial condition and
results of operations.
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:
|
|
|
|
|
developments relating to the Woori investment;
|
|
|
|
actual or anticipated quarterly fluctuations in our operating
results and financial condition;
|
|
|
|
changes in revenue or earnings estimates or publication of
research reports and recommendations by financial analysts;
|
|
|
|
failure to meet analysts revenue or earnings estimates;
|
|
|
|
speculation in the press or investment community;
|
|
|
|
strategic actions by us or our competitors, such as acquisitions
or restructurings;
|
|
|
|
actions by institutional stockholders;
|
|
|
|
fluctuations in the stock price and operating results of our
competitors;
|
|
|
|
general market conditions and, in particular, developments
related to market conditions for the financial services industry;
|
|
|
|
proposed or adopted legislative or regulatory changes or
developments;
|
|
|
|
anticipated or pending investigations, proceedings or litigation
that involve or affect us; or
|
|
|
|
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
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.
Your share ownership may be diluted by the issuance of
additional shares of our common stock in the
future. In addition to the substantial dilution you
will experience upon the completion of the Woori transaction,
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
43
officers and other employees. As of December 31, 2010,
3,066,891 shares of our common stock were issuable under
options granted in connection with our stock option plans and
stock warrants issued in connection with the registered rights
and best efforts offerings. In addition, 2,446,333 shares
of our common stock are reserved for future issuance to
directors, officers and employees under our stock option plans.
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
500,000,000 shares of common stock. Our Amended and
Restated Certificate of Incorporation 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 the Company.
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, including by Woori following completion
of the transaction with Woori 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.
Holders of our junior subordinated debentures have rights
that are senior to those of our stockholders. As of
December 31, 2010, 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. We commenced deferring
distributions on the junior subordinated debentures (and the
related trust preferred securities) with the payment that was
due on January 15, 2009.
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 Amended and Restated 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,
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 Federal Reserve Bank
approval must be obtained or notice must be furnished to the
Federal Reserve Bank 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.
Subject to the limitations set forth in the securities purchase
agreement with Woori regarding a cash-out merger, following the
completion of the transaction with Woori, Woori would control
the vote on any merger, sale of assets or other fundamental
corporate transaction of the Company or Hanmi Bank or the
issuance of additional equity securities or incurrence of debt,
in each case without the approval of our other stockholders.
44
It will also be impossible for a third party, other than Woori,
to obtain control of us through purchases of our common stock
not beneficially owned or controlled by Woori, which could have
a negative impact on our stock price. If Woori were to sell or
transfer shares of our common stock as a block, another person
or entity could become our controlling stockholder, subject to
any required regulatory approvals.
Our ability to use some or all of our net operating loss
carryforwards may be impaired. There is a
significant likelihood that the Woori investment will cause a
reduction in the value of our net operating loss carryforwards
(NOLs) realizable for income tax purposes.
Section 382 of the Internal Revenue Code imposes
restrictions on the use of a corporations NOLs, as well as
certain recognized built-in losses and other carryforwards,
after an ownership change occurs. A Section 382
ownership change occurs if one or more stockholders
or groups of stockholders who own at least 5% of our stock
increase their ownership by more than 50 percentage points
over their lowest ownership percentage within a rolling
three-year period. If an ownership change occurs,
Section 382 would impose an annual limit on the amount of
pre-change NOLs and other losses we can use to reduce our
taxable income generally equal to the product of the total value
of our outstanding equity immediately prior to the
ownership change and the applicable federal
long-term tax-exempt interest rate for the month of the
ownership change.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
45
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned/
|
Office
|
|
Address
|
|
City/State
|
|
Leased
|
|
Corporate Headquarters
(1)
|
|
3660 Wilshire Boulevard, Penthouse Suite A
|
|
Los Angeles, CA
|
|
Leased
|
Branches:
|
|
|
|
|
|
|
Beverly Hills Branch
|
|
9300 Wilshire Boulevard, Suite 101
|
|
Beverly Hills, CA
|
|
Leased
|
Cerritos Artesia Branch
|
|
11754 East Artesia Boulevard
|
|
Artesia, CA
|
|
Leased
|
Cerritos South Branch
|
|
11900 South Street, Suite 109
|
|
Cerritos, CA
|
|
Leased
|
Downtown Los Angeles Branch
|
|
950 South Los Angeles Street
|
|
Los Angeles, CA
|
|
Leased
|
Diamond Bar Branch
|
|
1101 Brea Canyon Road, Suite A-1
|
|
Diamond Bar, CA
|
|
Leased
|
Fashion District Branch
|
|
726 East 12th Street, Suite 211
|
|
Los Angeles, CA
|
|
Leased
|
Fullerton Beach Branch
|
|
5245 Beach Boulevard
|
|
Buena Park, CA
|
|
Leased
|
Garden Grove Brookhurst Branch
|
|
9820 Garden Grove Boulevard
|
|
Garden Grove, CA
|
|
Owned
|
Garden Grove Magnolia Branch
|
|
9122 Garden Grove Boulevard
|
|
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
|
Private Banking Department
(1)
|
|
3737 West Olympic Boulevard
|
|
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
|
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, 2010, our consolidated investment in
premises and equipment, net of accumulated depreciation and
amortization, totaled $17.6 million. Our total occupancy
expense, exclusive of furniture and
46
equipment expense, was $5.7 million for the year ended
December 31, 2010. Hanmi Financial and its subsidiaries
consider their present facilities to be sufficient for their
current operations.
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. REMOVED
AND RESERVED
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
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
1.28
|
|
|
$
|
0.86
|
|
|
|
|
|
Third Quarter
|
|
$
|
1.70
|
|
|
$
|
1.17
|
|
|
|
|
|
Second Quarter
|
|
$
|
4.26
|
|
|
$
|
1.26
|
|
|
|
|
|
First Quarter
|
|
$
|
2.83
|
|
|
$
|
1.02
|
|
|
|
|
|
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
|
|
|
|
|
|
Holders
Hanmi Financial had 619 registered stockholders of record as of
February 1, 2011.
Dividends
Hanmi Financial has agreed with the FRB that it will not pay any
cash dividends to its stockholders without the prior consent of
the FRB. The Bank is also required to seek prior approval from
its 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
47
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. Financial Code
Section 643 provides, alternatively, that, notwithstanding
the foregoing restriction set forth in Section 642,
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
$254.2 million as of December 31, 2010 and is not able
to pay dividends under Section 643.
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 stockholders.
It is the Federal Reserves policy that bank holding
companies should generally pay 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. It is also the Federal Reserves policy that
bank holding companies should not maintain dividend levels that
undermine their ability to be a source of strength to its
banking subsidiaries. Additionally, in consideration of the
current financial and economic environment, the Federal Reserve
has indicated that bank holding companies should carefully
review their dividend policy and has discouraged payment ratios
that are at maximum allowable levels unless both asset quality
and capital are very strong.
The junior subordinated debentures underlying our 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 began to defer distributions on our $82.4 million
of outstanding junior subordinated debentures (and related trust
preferred securities) commencing with the interest payment that
was due on January 15, 2009.
We currently do not have any present intention of paying cash
dividends to Hanmi Financial stockholders.
48
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.
TOTAL RETURN
PERFORMANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Index
|
|
Symbol
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Hanmi Financial
|
|
HAFC
|
|
$
|
100.00
|
|
|
$
|
127.49
|
|
|
$
|
49.80
|
|
|
$
|
12.42
|
|
|
$
|
7.24
|
|
|
$
|
8.87
|
|
Nasdaq Composite
|
|
IXIC
|
|
$
|
100.00
|
|
|
$
|
109.52
|
|
|
$
|
120.27
|
|
|
$
|
71.51
|
|
|
$
|
102.89
|
|
|
$
|
120.29
|
|
S&P 500 Financials
|
|
S5FINL
|
|
$
|
100.00
|
|
|
$
|
118.92
|
|
|
$
|
97.34
|
|
|
$
|
44.56
|
|
|
$
|
51.99
|
|
|
$
|
58.27
|
|
SNL Bank $1B-$5B
|
|
|
|
$
|
100.00
|
|
|
$
|
115.72
|
|
|
$
|
84.36
|
|
|
$
|
67.88
|
|
|
$
|
49.93
|
|
|
$
|
57.38
|
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
During the fourth quarter of 2010, there were no purchases of
Hanmi Financials equity securities by Hanmi Financial or
its affiliates. As of December 31, 2010, there was no
current plan authorizing purchases of Hanmi Financials
equity securities by Hanmi Financial or its affiliates.
49
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, 2010 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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in Thousands, Except for Per Share Data)
|
|
|
SUMMARY STATEMENTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income
|
|
$
|
144,512
|
|
|
$
|
184,147
|
|
|
$
|
238,183
|
|
|
$
|
280,896
|
|
|
$
|
260,189
|
|
Interest Expense
|
|
|
38,638
|
|
|
|
82,918
|
|
|
|
103,782
|
|
|
|
129,110
|
|
|
|
106,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Before Provision for Credit Losses
|
|
|
105,874
|
|
|
|
101,229
|
|
|
|
134,401
|
|
|
|
151,786
|
|
|
|
153,243
|
|
Provision for Credit Losses
|
|
|
122,496
|
|
|
|
196,387
|
|
|
|
75,676
|
|
|
|
38,323
|
|
|
|
7,173
|
|
Non-Interest Income
|
|
|
25,406
|
|
|
|
32,110
|
|
|
|
32,854
|
|
|
|
40,006
|
|
|
|
36,963
|
|
Non-Interest Expense
|
|
|
96,805
|
|
|
|
90,354
|
|
|
|
195,027
|
|
|
|
189,929
|
|
|
|
77,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Provision (Benefit) for Income Taxes
|
|
|
(88,021
|
)
|
|
|
(153,402
|
)
|
|
|
(103,448
|
)
|
|
|
(36,460
|
)
|
|
|
105,720
|
|
Provision (Benefit) for Income Taxes
|
|
|
(12
|
)
|
|
|
(31,125
|
)
|
|
|
(1,355
|
)
|
|
|
24,302
|
|
|
|
40,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(88,009
|
)
|
|
$
|
(122,277
|
)
|
|
$
|
(102,093
|
)
|
|
$
|
(60,762
|
)
|
|
$
|
65,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY BALANCE SHEETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
249,720
|
|
|
$
|
154,110
|
|
|
$
|
215,947
|
|
|
$
|
122,398
|
|
|
$
|
138,501
|
|
Total Investment Securities
|
|
|
413,963
|
|
|
|
133,289
|
|
|
|
197,117
|
|
|
|
350,457
|
|
|
|
391,579
|
|
Net Loans
(1)
|
|
|
2,121,067
|
|
|
|
2,674,064
|
|
|
|
3,291,125
|
|
|
|
3,241,097
|
|
|
|
2,837,390
|
|
Total Assets
|
|
|
2,907,148
|
|
|
|
3,162,706
|
|
|
|
3,875,816
|
|
|
|
3,983,657
|
|
|
|
3,725,243
|
|
Total Deposits
|
|
|
2,466,721
|
|
|
|
2,749,327
|
|
|
|
3,070,080
|
|
|
|
3,001,699
|
|
|
|
2,944,715
|
|
Total Liabilities
|
|
|
2,733,892
|
|
|
|
3,012,962
|
|
|
|
3,611,901
|
|
|
|
3,613,101
|
|
|
|
3,238,873
|
|
Total Stockholders Equity
|
|
|
173,256
|
|
|
|
149,744
|
|
|
|
263,915
|
|
|
|
370,556
|
|
|
|
486,370
|
|
Tangible Equity
|
|
|
171,023
|
|
|
|
146,362
|
|
|
|
258,965
|
|
|
|
256,548
|
|
|
|
272,412
|
|
Average Net Loans
(1)
|
|
|
2,368,369
|
|
|
|
3,044,395
|
|
|
|
3,276,142
|
|
|
|
3,049,775
|
|
|
|
2,721,229
|
|
Average Investment Securities
|
|
|
215,280
|
|
|
|
188,325
|
|
|
|
271,802
|
|
|
|
368,144
|
|
|
|
414,672
|
|
Average Interest-Earning Assets
|
|
|
2,981,878
|
|
|
|
3,611,009
|
|
|
|
3,653,720
|
|
|
|
3,494,758
|
|
|
|
3,214,761
|
|
Average Total Assets
|
|
|
2,998,507
|
|
|
|
3,717,179
|
|
|
|
3,866,856
|
|
|
|
3,882,891
|
|
|
|
3,602,181
|
|
Average Deposits
|
|
|
2,587,686
|
|
|
|
3,109,322
|
|
|
|
2,913,171
|
|
|
|
2,989,806
|
|
|
|
2,881,448
|
|
Average Borrowings
|
|
|
243,690
|
|
|
|
341,514
|
|
|
|
591,930
|
|
|
|
355,819
|
|
|
|
221,347
|
|
Average Interest-Bearing Liabilities
|
|
|
2,268,954
|
|
|
|
2,909,014
|
|
|
|
2,874,470
|
|
|
|
2,643,296
|
|
|
|
2,367,389
|
|
Average Stockholders Equity
|
|
|
137,968
|
|
|
|
225,708
|
|
|
|
323,462
|
|
|
|
492,637
|
|
|
|
458,227
|
|
Average Tangible Equity
|
|
|
135,171
|
|
|
|
221,537
|
|
|
|
264,490
|
|
|
|
275,036
|
|
|
|
242,362
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share Basic
|
|
$
|
(0.93
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
1.34
|
|
Earnings (Loss) Per Share Diluted
|
|
$
|
(0.93
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
1.32
|
|
Book Value Per Share
(2)
|
|
$
|
1.15
|
|
|
$
|
2.93
|
|
|
$
|
5.75
|
|
|
$
|
8.08
|
|
|
$
|
9.91
|
|
Tangible Book Value Per Share
(3)
|
|
$
|
1.13
|
|
|
$
|
2.86
|
|
|
$
|
5.64
|
|
|
$
|
5.59
|
|
|
$
|
5.55
|
|
Cash Dividends Per Share
|
|
|
|
|
|
|
|
|
|
$
|
0.09
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Common Shares Outstanding
|
|
|
151,198,390
|
|
|
|
51,182,390
|
|
|
|
45,905,549
|
|
|
|
45,860,941
|
|
|
|
49,076,613
|
|
|
|
|
(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. |
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
SELECTED PERFORMANCE RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets
(4)
|
|
|
(2.94
|
)%
|
|
|
(3.29
|
)%
|
|
|
(2.64
|
)%
|
|
|
(1.56
|
)%
|
|
|
1.81
|
%
|
Return on Average Stockholders Equity
(5)
|
|
|
(63.79
|
)%
|
|
|
(54.17
|
)%
|
|
|
(31.56
|
)%
|
|
|
(12.33
|
)%
|
|
|
14.26
|
%
|
Return on Average Tangible Equity
(6)
|
|
|
(65.11
|
)%
|
|
|
(55.19
|
)%
|
|
|
(38.60
|
)%
|
|
|
(22.09
|
)%
|
|
|
26.96
|
%
|
Net Interest Spread
(7)
|
|
|
3.15
|
%
|
|
|
2.28
|
%
|
|
|
2.95
|
%
|
|
|
3.20
|
%
|
|
|
3.65
|
%
|
Net Interest Margin
(8)
|
|
|
3.55
|
%
|
|
|
2.84
|
%
|
|
|
3.72
|
%
|
|
|
4.39
|
%
|
|
|
4.83
|
%
|
Efficiency Ratio
(9)
|
|
|
73.74
|
%
|
|
|
67.76
|
%
|
|
|
116.60
|
%
|
|
|
99.03
|
%
|
|
|
40.65
|
%
|
Dividend Payout Ratio
(10)
|
|
|
|
|
|
|
|
|
|
|
(4.05
|
)%
|
|
|
(18.11
|
)%
|
|
|
18.02
|
%
|
Average Stockholders Equity to Average Total Assets
|
|
|
4.60
|
%
|
|
|
6.07
|
%
|
|
|
8.36
|
%
|
|
|
12.69
|
%
|
|
|
12.72
|
%
|
SELECTED CAPITAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Total Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
12.32
|
%
|
|
|
9.12
|
%
|
|
|
10.79
|
%
|
|
|
10.65
|
%
|
|
|
12.55
|
%
|
Hanmi Bank
|
|
|
12.22
|
%
|
|
|
9.07
|
%
|
|
|
10.70
|
%
|
|
|
10.59
|
%
|
|
|
12.28
|
%
|
Tier 1 Capital to Total Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
10.09
|
%
|
|
|
6.76
|
%
|
|
|
9.52
|
%
|
|
|
9.40
|
%
|
|
|
11.58
|
%
|
Hanmi Bank
|
|
|
10.91
|
%
|
|
|
7.77
|
%
|
|
|
9.44
|
%
|
|
|
9.34
|
%
|
|
|
11.31
|
%
|
Tier 1 Capital to Average Total Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanmi Financial
|
|
|
7.90
|
%
|
|
|
5.82
|
%
|
|
|
8.93
|
%
|
|
|
8.52
|
%
|
|
|
10.08
|
%
|
Hanmi Bank
|
|
|
8.55
|
%
|
|
|
6.69
|
%
|
|
|
8.85
|
%
|
|
|
8.47
|
%
|
|
|
9.85
|
%
|
SELECTED ASSET QUALITY RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans to Total Gross Loans
(11)
|
|
|
7.45
|
%
|
|
|
7.77
|
%
|
|
|
3.62
|
%
|
|
|
1.66
|
%
|
|
|
0.50
|
%
|
Non-Performing Assets to Total Assets
(12)
|
|
|
5.95
|
%
|
|
|
7.76
|
%
|
|
|
3.17
|
%
|
|
|
1.37
|
%
|
|
|
0.38
|
%
|
Net Loan Charge-Offs to Average Total Gross Loans
|
|
|
4.79
|
%
|
|
|
3.88
|
%
|
|
|
1.38
|
%
|
|
|
0.73
|
%
|
|
|
0.17
|
%
|
Allowance for Loan Losses to Total Gross Loans
|
|
|
6.44
|
%
|
|
|
5.14
|
%
|
|
|
2.11
|
%
|
|
|
1.33
|
%
|
|
|
0.96
|
%
|
Allowance for Loan Losses to Non-Performing Loans
|
|
|
86.41
|
%
|
|
|
66.19
|
%
|
|
|
58.23
|
%
|
|
|
80.05
|
%
|
|
|
193.86
|
%
|
|
|
|
(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, including
loans held for sale, 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.
51
The following table reconciles this non-GAAP performance measure
to the GAAP performance measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Average Stockholders Equity
|
|
$
|
137,968
|
|
|
$
|
225,708
|
|
|
$
|
323,462
|
|
|
$
|
492,637
|
|
|
$
|
458,227
|
|
Less Average Goodwill and Average Other Intangible Assets
|
|
|
(2,797)
|
|
|
|
(4,171)
|
|
|
|
(58,972)
|
|
|
|
(217,601)
|
|
|
|
(215,865)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Tangible Equity
|
|
$
|
135,171
|
|
|
$
|
221,537
|
|
|
$
|
264,490
|
|
|
$
|
275,036
|
|
|
$
|
242,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Stockholders Equity
|
|
|
(63.79)%
|
|
|
|
(54.17)%
|
|
|
|
(31.56)%
|
|
|
|
(12.33)%
|
|
|
|
14.26%
|
|
Effect of Average Goodwill and Average Other Intangible Assets
|
|
|
(1.32)%
|
|
|
|
(1.02)%
|
|
|
|
(7.04)%
|
|
|
|
(9.76)%
|
|
|
|
12.70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Tangible Equity
|
|
|
(65.11%)
|
|
|
|
(55.19%)
|
|
|
|
(38.60%)
|
|
|
|
(22.09%)
|
|
|
|
26.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in Thousands, Except Per Share Amounts)
|
|
|
Total Stockholders Equity
|
|
$
|
173,256
|
|
|
$
|
149,744
|
|
|
$
|
263,915
|
|
|
$
|
370,556
|
|
|
$
|
486,370
|
|
Less Goodwill and Other Intangible Assets
|
|
|
(2,233)
|
|
|
|
(3,382)
|
|
|
|
(4,950)
|
|
|
|
(114,008)
|
|
|
|
(213,958)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Equity
|
|
$
|
171,023
|
|
|
$
|
146,362
|
|
|
$
|
258,965
|
|
|
$
|
256,548
|
|
|
$
|
272,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share
|
|
$
|
1.15
|
|
|
$
|
2.93
|
|
|
$
|
5.75
|
|
|
$
|
8.08
|
|
|
$
|
9.91
|
|
Effect of Goodwill and Other Intangible Assets
|
|
|
(0.02)
|
|
|
|
(0.07)
|
|
|
|
(0.11)
|
|
|
|
(2.49)
|
|
|
|
(4.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per Share
|
|
$
|
1.13
|
|
|
$
|
2.86
|
|
|
$
|
5.64
|
|
|
$
|
5.59
|
|
|
$
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
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, 2010, 2009 and 2008. This
discussion should be read in conjunction with our Consolidated
Financial Statements and the Notes related thereto presented
elsewhere in this Report. See also Cautionary Note
Regarding Forward-Looking Statements.
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 13 segmented loan pools by type and 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
53
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,
Note 2 Summary of Significant Accounting
Policies and Note 5
Loans presented elsewhere herein.
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
54
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, 2010 and 2009. Investment
securities are discussed in more detail in Notes to
Consolidated Financial Statements, Note 4
Investment 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.
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. During 2010, we established an
additional valuation allowance of $47.5 million, totaling
$92.7 million against our existing net deferred tax assets
of $92.7 million and recorded a net deferred tax assets
balance of zero. As of December 31, 2009, we established a
$45.2 million of valuation allowance against its existing
net deferred tax assets of $48.8 million and recorded a net
deferred tax assets balance of $3.6 million. At
December 31, 2008, we had net deferred tax assets of
$29.5 million and 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 11 Income Taxes
presented elsewhere herein.
EXECUTIVE
OVERVIEW
For the years ended December 31, 2010, 2009 and 2008, we
recognized net losses of $88.0 million, $122.3 million
and $102.1 million, respectively. The decline in net losses
for the year ended December 31, 2010 as compared to the
year ended December 31, 2009 was primarily the result of
lower levels of provision for credit losses of
$122.5 million compared to $196.4 million in 2009. Our
losses in 2008 were mainly caused by a goodwill impairment
charges of $107.4 million and a provision for credit losses
of $75.7 million. For the years ended December 31,
2010, 2009 and 2008, our diluted loss per share was ($0.93),
($2.57) and ($2.23), respectively.
On July 27, 2010, we successfully completed a
$120 million registered rights and best efforts offering to
strengthen our capital position. As a result, we satisfied the
$100 million capital contribution requirement set forth in
the Final Order and the Bank has met the threshold for being
considered well-capitalized for regulatory purposes
since September 30, 2010. However, the tangible capital
ratio requirement set forth in the Final Order has not been
satisfied as of December 31, 2010. Accordingly, we notified
the DFI and the FRB of such event. Based on submissions to and
consultations with our regulators, we believe that the Bank has
taken the required corrective action and has complied with
substantially all of the requirements of the Final Order
55
and the Written Agreement. For a further discussion of the
Banks capital condition and capital resources, see
Capital Resources and Liquidity.
We have made continuous efforts to improve our asset quality
through proactive loan monitoring, accelerated problem loan
resolutions, and sales of non-performing assets. In accordance
with our liquidity preservation strategy, funds raised from the
secondary stock offerings and sales of loans were placed into
highly liquid assets. As a result, we maintained a strong
liquidity position with $663.7 million in cash and
marketable securities as of December 31, 2010.
Significant financial highlights include (as of and for the year
ended December 31, 2010):
|
|
|
|
|
The Banks total risk-based capital ratio improved to
12.22% as of December 31, 2010 compared to 9.07% as of
December 31, 2009. The Banks tangible common equity
to tangible assets also improved to 8.59% as of
December 31, 2010 compared to 7.13% as of December 31,
2009.
|
|
|
|
Non-performing loans decreased to $169.0 million, or 7.45%
of total gross loans, as of December 31, 2010 compared to
$219.1 million, or 7.77% as of December 31, 2009. The
coverage ratio of the allowance to non-performing loans
increased to 86.41% as of December 31, 2010 compared to
66.19% as of December 31, 2009.
|
|
|
|
The cost of funds decreased through changes in the composition
of our deposit portfolio. The average funding cost decreased by
104 basis points to 1.36% for the year ended
December 31, 2010 compared to 2.40% for the year ended
December 31, 2009.
|
|
|
|
Net interest margin improved 71 basis points to 3.55% for
the year ended December 31, 2010 compared to 2.84% for the
year ended December 31 2009.
|
Outlook
for fiscal 2011
For 2011, our priorities will be to enhance our capital
position, continue to improve our credit quality and to comply
fully with all of the requirements of the Final Order and the
Written Agreement.
We believe that our proactive initiatives to manage credit risk
exposure have resulted in improvement of our asset quality over
the past several quarters. We are committed to refine our credit
risk management systems to meet the challenges of our changing
economic environment.
Based on our current liquidity position, we have begun to
consider strategic changes. We are currently planning to develop
innovative new products and services as well as generate quality
new loans to expand our existing customer base with the goal of
improving our profitability.
We continue to evaluate available options to enhance our capital
position. Responding to the rapidly changing economy, the
additional capital from the Woori transaction or alternative
sources may be necessary to provide us with adequate capital
resources to support our business, our level of problem assets
and our operations and to comply with the regulatory orders we
are subject to.
RESULTS
OF OPERATIONS
Net
Interest Income, Net Interest Spread and Net Interest
Margin
Our earnings depend largely upon net interest
income, which is 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 between the yield earned on
interest-earning assets and the cost of interest-bearing
liabilities is net
56
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.
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
57
and interest-bearing liabilities; and the net interest spread
and the net interest margin for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
(Dollars in Thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans, Net
(1)
|
|
$
|
2,544,472
|
|
|
$
|
137,328
|
|
|
|
5.40
|
%
|
|
$
|
3,157,133
|
|
|
$
|
173,318
|
|
|
|
5.49
|
%
|
|
$
|
3,332,133
|
|
|
$
|
223,942
|
|
|
|
6.72
|
%
|
Municipal Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,746
|
|
|
|
189
|
|
|
|
5.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Exempt
(2)
|
|
|
6,909
|
|
|
|
346
|
|
|
|
5.01
|
%
|
|
|
54,448
|
|
|
|
3,543
|
|
|
|
6.51
|
%
|
|
|
63,918
|
|
|
|
4,180
|
|
|
|
6.54
|
%
|
Obligations of Other U.S. Government Agencies
|
|
|
69,112
|
|
|
|
1,952
|
|
|
|
2.82
|
%
|
|
|
24,417
|
|
|
|
1,108
|
|
|
|
4.54
|
%
|
|
|
65,440
|
|
|
|
2,813
|
|
|
|
4.30
|
%
|
Other Debt Securities
|
|
|
135,513
|
|
|
|
3,733
|
|
|
|
2.75
|
%
|
|
|
109,460
|
|
|
|
4,568
|
|
|
|
4.17
|
%
|
|
|
142,444
|
|
|
|
6,574
|
|
|
|
4.62
|
%
|
Equity Securities
|
|
|
37,437
|
|
|
|
532
|
|
|
|
1.42
|
%
|
|
|
41,399
|
|
|
|
656
|
|
|
|
1.58
|
%
|
|
|
38,516
|
|
|
|
1,918
|
|
|
|
4.98
|
%
|
Federal Funds Sold
|
|
|
10,346
|
|
|
|
52
|
|
|
|
0.50
|
%
|
|
|
84,363
|
|
|
|
326
|
|
|
|
0.39
|
%
|
|
|
8,934
|
|
|
|
166
|
|
|
|
1.86
|
%
|
Term Federal Funds Sold
|
|
|
8,342
|
|
|
|
33
|
|
|
|
0.40
|
%
|
|
|
95,822
|
|
|
|
1,718
|
|
|
|
1.79
|
%
|
|
|
1,913
|
|
|
|
43
|
|
|
|
2.25
|
%
|
Interest-Earning Deposits
|
|
|
166,001
|
|
|
|
468
|
|
|
|
0.28
|
%
|
|
|
43,967
|
|
|
|
151
|
|
|
|
0.34
|
%
|
|
|
422
|
|
|
|
10
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets
|
|
|
2,981,878
|
|
|
|
144,633
|
|
|
|
4.85
|
%
|
|
|
3,611,009
|
|
|
|
185,388
|
|
|
|
5.13
|
%
|
|
|
3,653,720
|
|
|
|
239,646
|
|
|
|
6.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
67,492
|
|
|
|
|
|
|
|
|
|
|
|
71,448
|
|
|
|
|
|
|
|
|
|
|
|
88,679
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
(176,103
|
)
|
|
|
|
|
|
|
|
|
|
|
(112,738
|
)
|
|
|
|
|
|
|
|
|
|
|
(55,991
|
)
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
125,240
|
|
|
|
|
|
|
|
|
|
|
|
147,460
|
|
|
|
|
|
|
|
|
|
|
|
180,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Earning Assets
|
|
|
16,629
|
|
|
|
|
|
|
|
|
|
|
|
106,170
|
|
|
|
|
|
|
|
|
|
|
|
213,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,998,507
|
|
|
|
|
|
|
|
|
|
|
$
|
3,717,179
|
|
|
|
|
|
|
|
|
|
|
$
|
3,866,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
119,754
|
|
|
|
3,439
|
|
|
|
2.87
|
%
|
|
$
|
91,089
|
|
|
|
2,328
|
|
|
|
2.56
|
%
|
|
$
|
89,866
|
|
|
|
2,093
|
|
|
|
2.33
|
%
|
Money Market Checking and NOW Accounts
|
|
|
464,864
|
|
|
|
4,936
|
|
|
|
1.06
|
%
|
|
|
507,619
|
|
|
|
9,786
|
|
|
|
1.93
|
%
|
|
|
618,779
|
|
|
|
19,909
|
|
|
|
3.22
|
%
|
Time Deposits of $100,000 or More
|
|
|
1,069,600
|
|
|
|
19,529
|
|
|
|
1.83
|
%
|
|
|
1,051,994
|
|
|
|
34,807
|
|
|
|
3.31
|
%
|
|
|
1,045,968
|
|
|
|
43,598
|
|
|
|
4.17
|
%
|
Other Time Deposits
|
|
|
371,046
|
|
|
|
6,504
|
|
|
|
1.75
|
%
|
|
|
916,798
|
|
|
|
29,325
|
|
|
|
3.20
|
%
|
|
|
527,927
|
|
|
|
18,753
|
|
|
|
3.55
|
%
|
Federal Home Loan Bank Advances
|
|
|
158,531
|
|
|
|
1,366
|
|
|
|
0.86
|
%
|
|
|
257,529
|
|
|
|
3,399
|
|
|
|
1.32
|
%
|
|
|
498,875
|
|
|
|
14,027
|
|
|
|
2.81
|
%
|
Other Borrowings
|
|
|
2,753
|
|
|
|
53
|
|
|
|
1.93
|
%
|
|
|
1,579
|
|
|
|
2
|
|
|
|
0.13
|
%
|
|
|
10,649
|
|
|
|
346
|
|
|
|
3.25
|
%
|
Junior Subordinated Debentures
|
|
|
82,406
|
|
|
|
2,811
|
|
|
|
3.41
|
%
|
|
|
82,406
|
|
|
|
3,271
|
|
|
|
3.97
|
%
|
|
|
82,406
|
|
|
|
5,056
|
|
|
|
6.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities
|
|
|
2,268,954
|
|
|
|
38,638
|
|
|
|
1.70
|
%
|
|
|
2,909,014
|
|
|
|
82,918
|
|
|
|
2.85
|
%
|
|
|
2,874,470
|
|
|
|
103,782
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
|
562,422
|
|
|
|
|
|
|
|
|
|
|
|
541,822
|
|
|
|
|
|
|
|
|
|
|
|
630,631
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
29,163
|
|
|
|
|
|
|
|
|
|
|
|
40,635
|
|
|
|
|
|
|
|
|
|
|
|
38,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest-Bearing Liabilities
|
|
|
591,585
|
|
|
|
|
|
|
|
|
|
|
|
582,457
|
|
|
|
|
|
|
|
|
|
|
|
668,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,860,539
|
|
|
|
|
|
|
|
|
|
|
|
3,491,471
|
|
|
|
|
|
|
|
|
|
|
|
3,543,394
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
137,968
|
|
|
|
|
|
|
|
|
|
|
|
225,708
|
|
|
|
|
|
|
|
|
|
|
|
323,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
2,998,507
|
|
|
|
|
|
|
|
|
|
|
$
|
3,717,179
|
|
|
|
|
|
|
|
|
|
|
$
|
3,866,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
$
|
105,995
|
|
|
|
|
|
|
|
|
|
|
$
|
102,470
|
|
|
|
|
|
|
|
|
|
|
$
|
135,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread
(3)
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
2.28
|
%
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
2.84
|
%
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1.8 million,
$2.3 million and $2.4 million for the years ended
December 31, 2010, 2009 and 2008, 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. |
58
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,
|
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
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
|
|
$
|
(33,111
|
)
|
|
$
|
(2,879
|
)
|
|
$
|
(35,990
|
)
|
|
$
|
(11,281
|
)
|
|
$
|
(39,343
|
)
|
|
$
|
(50,624
|
)
|
Municipal Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
189
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Exempt
|
|
|
(2,530
|
)
|
|
|
(667
|
)
|
|
|
(3,197
|
)
|
|
|
(616
|
)
|
|
|
(21
|
)
|
|
|
(637
|
)
|
Obligations of Other U.S. Government Agencies
|
|
|
1,393
|
|
|
|
(549
|
)
|
|
|
844
|
|
|
|
(1,854
|
)
|
|
|
149
|
|
|
|
(1,705
|
)
|
Other Debt Securities
|
|
|
935
|
|
|
|
(1,770
|
)
|
|
|
(835
|
)
|
|
|
(1,419
|
)
|
|
|
(587
|
)
|
|
|
(2,006
|
)
|
Equity Securities
|
|
|
(60
|
)
|
|
|
(64
|
)
|
|
|
(124
|
)
|
|
|
134
|
|
|
|
(1,396
|
)
|
|
|
(1,262
|
)
|
Federal Funds Sold
|
|
|
(350
|
)
|
|
|
76
|
|
|
|
(274
|
)
|
|
|
386
|
|
|
|
(226
|
)
|
|
|
160
|
|
Term Federal Funds Sold
|
|
|
(909
|
)
|
|
|
(776
|
)
|
|
|
(1,685
|
)
|
|
|
1,686
|
|
|
|
(11
|
)
|
|
|
1,675
|
|
Interest-Earning Deposits
|
|
|
349
|
|
|
|
(32
|
)
|
|
|
317
|
|
|
|
158
|
|
|
|
(17
|
)
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Dividend Income
|
|
|
(34,094
|
)
|
|
|
(6,661
|
)
|
|
|
(40,755
|
)
|
|
|
(12,806
|
)
|
|
|
(41,452
|
)
|
|
|
(54,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
798
|
|
|
|
313
|
|
|
|
1,111
|
|
|
|
28
|
|
|
|
207
|
|
|
|
235
|
|
Money Market Checking and NOW Accounts
|
|
|
(766
|
)
|
|
|
(4,084
|
)
|
|
|
(4,850
|
)
|
|
|
(3,133
|
)
|
|
|
(6,990
|
)
|
|
|
(10,123
|
)
|
Time Deposits of $100,000 or More
|
|
|
574
|
|
|
|
(15,852
|
)
|
|
|
(15,278
|
)
|
|
|
250
|
|
|
|
(9,041
|
)
|
|
|
(8,791
|
)
|
Other Time Deposits
|
|
|
(12,972
|
)
|
|
|
(9,849
|
)
|
|
|
(22,821
|
)
|
|
|
12,603
|
|
|
|
(2,031
|
)
|
|
|
10,572
|
|
Federal Home Loan Bank Advances
|
|
|
(1,068
|
)
|
|
|
(965
|
)
|
|
|
(2,033
|
)
|
|
|
(5,069
|
)
|
|
|
(5,559
|
)
|
|
|
(10,628
|
)
|
Other Borrowings
|
|
|
2
|
|
|
|
49
|
|
|
|
51
|
|
|
|
(162
|
)
|
|
|
(182
|
)
|
|
|
(344
|
)
|
Junior Subordinated Debentures
|
|
|
|
|
|
|
(460
|
)
|
|
|
(460
|
)
|
|
|
|
|
|
|
(1,785
|
)
|
|
|
(1,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
(13,432
|
)
|
|
|
(30,848
|
)
|
|
|
(44,280
|
)
|
|
|
4,517
|
|
|
|
(25,381
|
)
|
|
|
(20,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income
|
|
$
|
(20,662
|
)
|
|
$
|
24,187
|
|
|
$
|
3,525
|
|
|
$
|
(17,323
|
)
|
|
$
|
(16,071
|
)
|
|
$
|
(33,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, net
interest income before provision for credit losses on a
tax-equivalent basis was $106.0 million,
$102.5 million and $135.9 million, respectively. The
net interest spread and net interest margin for the year ended
December 31, 2010 were 3.15 percent and
3.55 percent, respectively, compared to 2.28 percent
and 2.84 percent, respectively, for the year ended
December 31, 2009 and 2.95 percent and
3.72 percent, respectively, for the year ended
December 31, 2008. The increase in net interest income in
2010 as compared to 2009 was primarily due to lower deposit
costs resulting from the replacement of high-cost promotional
time deposits with low-cost deposit products through the changes
in the composition of our deposit portfolio. The decrease in net
interest income in 2009 as compared to 2008 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 $2.54 billion in 2010, as compared with
$3.16 billion in 2009 and $3.33 billion in 2008,
representing a decrease of 19.4 percent and a decrease of
5.3 percent in 2010 and 2009, respectively. Average
interest-earning assets were $2.98 billion in 2010, as
compared with $3.61 billion in 2009 and $3.65 billion
in 2008, representing a decrease of 17.4 percent and
decrease of 1.2 percent in 2010 and 2009, respectively. The
$629.1 million decrease in average interest earning assets
in 2010 was a direct result of our deleveraging strategy
implemented since early 2009. Average investment securities were
$215.3 million in 2010, as compared with
$188.3 million in 2009 and $271.8 million in 2008,
representing an increase of 14.3 percent
59
and a decrease of 30.7 percent in 2010 and 2009,
respectively. Despite significant pressure on yields on
interest-earning assets, the increase in investment securities
in 2010 was due to the increased investment in short-term
instruments to maintain a strong level of liquidity. The
decrease in average investment securities in 2009 as compared to
2008 was a direct result of our balance sheet deleveraging
strategy. Consistent with the balance sheet deleveraging
strategy implemented in early 2009, the average interest-bearing
liabilities decreased by $640.1 million in 2010 as compared
to 2009. Average FHLB advances were $158.5 million in 2010,
as compared with $257.5 million in 2009 and
$498.9 million in 2008, representing a decrease of
38.4 percent and a decrease of 48.4 percent in 2010
and 2009, respectively.
The average yield on interest-earning assets decreased by
28 basis points to 4.85 percent in 2010, after a
143 basis point decrease in 2009 to 5.13 percent from
6.56 percent in 2008, primarily due to a decrease in loan
portfolio yields and lower yields on investment securities in
the current low interest rate environment. The average loan
yield decreased by 9 basis points to 5.40 percent in
2010, after a 123 basis point decrease in 2009 to
5.49 percent from 6.72 percent in 2008, reflecting an
increase in our overall level of nonaccrual loans. Our interest
income forgone on nonaccrual loans increased by
$1.5 million, or 18.7 percent from $7.9 million
in 2009 to $9.4 million in 2010. In 2008, the interest
income forgone on nonaccrual loans was $1.9 million. The
average yield on investment securities decreased by
201 basis points to 2.89 percent in 2010, compared to
4.90 percent in 2009 and decreased by 9 basis points
in 2009, compared to 4.99 percent in 2008. The average cost
on interest-bearing liabilities significantly decreased by
115 basis points to 1.70 percent in 2010, compared to
a decrease of 76 basis points to 2.85 percent in 2009
from 3.61 percent in 2008. This decrease was primarily due
to a continued shift in funding sources toward lower-cost funds
through disciplined deposit pricing while reducing wholesale
funds and rate sensitive deposits. During the first six months
of 2010, total brokered deposits of $203.5 million matured.
We had no brokered deposits at December 31, 2010. As a
result, interest income decreased 22.0 percent to
$144.6 million for 2010 from $185.4 million in 2009
and interest expense decreased 53.4 percent to
$38.6 million for 2010 from $82.9 million in 2009. In
2009, interest income decreased by 22.6 percent to
$185.4 million from $239.6 million in 2008 and
interest expense decreased 20.1 percent to
$82.9 million from $103.8 million in 2008.
In 2010, net interest income on a tax-equivalent basis increased
by 3.44 percent to $106.0 million, compared to
$102.5 million in 2009, due to decreases in
interest-bearing liabilities and interest paid , partially
offset by decreases in average interest-earning assets and
interest earned. In 2009, net interest income on a
tax-equivalent basis decreased by 24.6 percent to
$102.5 million from $135.9 million in 2008, 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, 2010, the provision for
credit losses was $122.5 million, compared to
$196.4 million for the year ended December 31, 2009.
The decrease in the provision for credit losses is attributable
to decreases in net charge-offs and problem loans, reflecting
the improvement in asset quality through aggressive management
of our problem asset. Net charge-offs decreased
$0.7 million, or 0.6 percent, from $122.6 million
for the year ended December 31, 2009 to $121.9 million
for the year ended December 31, 2010. Non-performing loans
decreased from $219.1 million, or 7.77 percent of
total gross loans, as of December 31, 2009 to
$169.0 million, or 7.45 percent of total gross loans,
as of December 31, 2010. 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, 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
60
attributable to deterioration in credit quality including
increases in net charge-offs and problem loans. 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.
Non-Interest
Income
We earn non-interest income from five major sources: service
charges on deposit accounts, insurance commissions, remittance
fees, fees generated from international trade finance and other
service changes. In addition, we sell certain assets primarily
for risk and liquidity management purposes.
The following table sets forth the various components of
non-interest income for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In Thousands)
|
|
|
Service Charges on Deposit Accounts
|
|
$
|
14,049
|
|
|
$
|
17,054
|
|
|
$
|
18,463
|
|
Insurance Commissions
|
|
|
4,695
|
|
|
|
4,492
|
|
|
|
5,067
|
|
Remittance Fees
|
|
|
1,968
|
|
|
|
2,109
|
|
|
|
2,194
|
|
Trade Finance Fees
|
|
|
1,523
|
|
|
|
1,956
|
|
|
|
3,088
|
|
Other Service Charges and Fees
|
|
|
1,516
|
|
|
|
1,810
|
|
|
|
2,365
|
|
Bank-Owned Life Insurance Income
|
|
|
942
|
|
|
|
932
|
|
|
|
952
|
|
Net Gain on Sales of Loans
|
|
|
514
|
|
|
|
1,220
|
|
|
|
765
|
|
Net Gain on Sales of Investment Securities
|
|
|
122
|
|
|
|
1,833
|
|
|
|
77
|
|
Other-Than-Temporary
Impairment Loss on Securities
|
|
|
(790
|
)
|
|
|
|
|
|
|
(2,410
|
)
|
Other Operating Income
|
|
|
867
|
|
|
|
704
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income
|
|
$
|
25,406
|
|
|
$
|
32,110
|
|
|
$
|
32,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, non-interest income
was $25.4 million, a decrease of 20.9 percent from
$32.1 million for the year ended December 31, 2009.
The decrease in non-interest income for 2010 is primarily
attributable to decreases in service charges on deposit
accounts, a net gain on sales of loans and investment
securities, and impairment loss on investment securities. The
service charges on deposit accounts decreased $3.0 million,
or 17.6 percent, to $14.0 million in 2010 compared to
$17.1 million in 2009 due to the shrinkage in the deposit
portfolio under our deleveraging strategy in the slowed economy.
Impairment loss on investment securities of $790,000 resulted
from a write-down of equity securities, acquired prior to 2004
for Community Reinvestment Act purposes, upon recapitalization
of the issuer of such equity securities. The net gain on sale of
loans decreased by $706,000 in 2010 compared to 2009 as a result
of lower sales volume. In 2009, we sold accumulated inventory of
SBA loans upon the recovery of the SBA secondary market. The net
gain on sales of investment securities also decreased by
$1.7 million in 2010 compared to 2009. The aforementioned
higher level of sales transaction of loans and investment
securities in 2009 was a direct result of our balance-sheet
deleveraging strategy. The additional liquidity from such sale
of assets allowed us to reduce wholesale funds.
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 decrease in non-interest income for 2009 was primarily
attributable to decreases in various service charges that
resulted from our deleveraging strategy in the slowed economy.
In addition, other operating income in 2009 decreased
substantially to $704,000, as compared to $2.3 million in
2008, which included a $1.0 million income for the refund
of a previously paid legal and consulting fee to outside
vendors. Such decreases were partially offset by the
aforementioned gain
61
on sales of assets in 2009. In 2009, we did not have any OTTI
charge as opposed to 2008 in which we recorded a
$2.4 million impairment loss on a Lehman Brothers corporate
bond.
Non-Interest
Expense
The following table sets forth the breakdown of non-interest
expense for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
$
|
36,730
|
|
|
$
|
33,101
|
|
|
$
|
42,209
|
|
Occupancy and Equipment
|
|
|
10,773
|
|
|
|
11,239
|
|
|
|
11,158
|
|
Deposit Insurance Premiums and Regulatory Assessments
|
|
|
10,756
|
|
|
|
10,418
|
|
|
|
3,713
|
|
Other Real Estate Owned Expense
|
|
|
10,679
|
|
|
|
5,890
|
|
|
|
390
|
|
Data Processing
|
|
|
5,931
|
|
|
|
6,297
|
|
|
|
5,799
|
|
Professional Fees
|
|
|
3,521
|
|
|
|
4,099
|
|
|
|
3,539
|
|
Directors and Officers Liability Insurance
|
|
|
2,865
|
|
|
|
1,175
|
|
|
|
397
|
|
Advertising and Promotion
|
|
|
2,394
|
|
|
|
2,402
|
|
|
|
3,518
|
|
Supplies and Communications
|
|
|
2,302
|
|
|
|
2,352
|
|
|
|
2,518
|
|
Loan-Related Expense
|
|
|
1,147
|
|
|
|
1,947
|
|
|
|
790
|
|
Amortization of Other Intangible Assets
|
|
|
1,149
|
|
|
|
1,568
|
|
|
|
1,958
|
|
Other Operating Expenses
|
|
|
8,558
|
|
|
|
9,866
|
|
|
|
11,645
|
|
Impairment Loss on Goodwill
|
|
|
|
|
|
|
|
|
|
|
107,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense
|
|
$
|
96,805
|
|
|
$
|
90,354
|
|
|
$
|
195,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, non-interest expense
was $96.8 million, anincrease of $6.5 million, or
7.1 percent, from $90.4 million for the year ended
December 31, 2009. The increase in 2010 was primarily due
to the increases in OREO expense, salaries, and employee
benefits. OREO expense increased by $4.8 million to
$10.7 million in 2010 as compared with $5.9 million in
2009, due primarily to a $5.6 million additional provision
for our OREO valuation allowance. Salaries and employee benefits
expense for 2010 also increased by $3.6 million, or
11.0 percent, to $36.7 million for 2010 from
$33.1 million for 2009 due primarily to a $1.2 million
compensation expense for the payments associated with an
employee retention plan. Furthermore, the 2009 expense was lower
than usual due to the $2.5 million reversal of
post-retirement death benefit liabilities upon amendments of our
bank-owned life insurance policies. We also had a substantial
increase in directors and officers liability insurance premiums
due to the change in risk categories of the Bank. Such increases
were partially offset by decreases in loan-related expense and
other operating expense.
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. Excluding the goodwill impairment
loss, non-interest expense was $87.6 million, which marked
only a $2.7 million increase in 2009. Such increase was due
primarily to the increases in FDIC insurance assessments due to
the higher assessment rates for FDIC insurance on deposits and a
$1.8 million special assessment charged in 2009. OREO
expense also increased by $5.5 million from $390,000 in
2008 to $5.9 million in 2009, due primarily to a
$3.1 million provision for OREO valuation allowance. Such
increases more than offset a $9.1 million decrease in
salaries and employee benefits in 2009 and other cost savings
efforts. 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
aforementioned reversal of a $2.5 million associated with a
post-retirement death benefit.
62
Income
Taxes
For the year ended December 31, 2010, a tax benefit of
$12,000 was recognized on pre-tax losses of $88.0 million,
representing an effective tax benefit rate of 0.01percent,
compared to a tax benefit of $31.1 million recognized on
pre-tax losses of $153.4 million, representing an effective
tax benefit rate of 20.3 percent, for 2009 and 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. The effective tax rate for 2008
includes impairment losses on goodwill of $107.4 million,
which are not deductible for tax purposes.
During 2010, we made investments in various tax credit funds
totaling $6.5 million and recognized $1.1 million of
income tax credits earned from qualified low-income housing
investments. We recognized an income tax credit of
$1.1 million for the tax year of 2009 from
$6.2 million in such investments and recognized an income
tax credit of $908,000 for the tax year 2008 from
$6.1 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 11 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 had a net
deferred tax asset. 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. During 2010, we established an
additional valuation allowance of $47.5 million , totaling
$92.7 million against its existing net deferred tax assets
of $92.7 million and recorded a net deferred tax assets
balance of zero at December 31, 2010. As of
December 31, 2009, we established a $45.2 million
valuation allowance against its existing net deferred tax assets
of $48.8 million and recorded a net deferred tax assets
balance of $3.6 million. At December 31, 2008, we had
net deferred tax assets of $29.5 million and no valuation
allowance was required.
FINANCIAL
CONDITION
Investment
Portfolio
Investment securities are classified as held to maturity or
available for sale in accordance with GAAP. Those securities
that we have the ability and the intent to hold to maturity are
classified as held to maturity. All other securities
are classified as available for sale. There were no
trading securities as of December 31, 2010, 2009, and 2008.
Securities classified as hold to maturity are stated at cost,
adjusted for amortization of premiums and accretion of
discounts, and available for sale securities are stated at fair
value. 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.
63
As of December 31, 2010, the investment portfolio was
composed primarily of collateralized mortgage obligations,
U.S. Government agency securities, mortgage-backed
securities, municipal bonds and corporate bonds. Investment
securities available for sale were 99.8 percent,
99.3 percent and 99.5 percent of the total investment
portfolio as of December 31, 2010, 2009 and 2008,
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, 2010, 2009 or 2008.
As of December 31, 2010, securities available for sale were
$413.1 million, or 14.2 percent of total assets,
compared to $132.4 million, or 4.2 percent of total
assets, as of December 31, 2009. Securities available for
sale increased in 2010, due mainly to our liquidity-preservation
and earnings-enhancement strategies that we put additional funds
from capital raise and sales of loans into marketable
securities. In 2010, 2009 and 2008, we purchased
$448.4 million, $89.4 million and $25.4 million,
respectively, of various types of marketable securities to
replenish the portfolio for principal repayments in the form of
calls, prepayments and scheduled amortization and to maintain an
investment portfolio mix and size consistent with our capital
market expectations and asset-liability management strategies.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
|
Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
696
|
|
|
$
|
696
|
|
|
$
|
696
|
|
|
$
|
696
|
|
|
$
|
695
|
|
|
$
|
695
|
|
Mortgage-Backed Securities
(1)
|
|
|
149
|
|
|
|
151
|
|
|
|
173
|
|
|
|
175
|
|
|
|
215
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Held to Maturity
|
|
$
|
845
|
|
|
$
|
847
|
|
|
$
|
869
|
|
|
$
|
871
|
|
|
$
|
910
|
|
|
$
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligations
|
|
$
|
139,053
|
|
|
$
|
137,193
|
|
|
$
|
12,520
|
|
|
$
|
12,789
|
|
|
$
|
36,204
|
|
|
$
|
36,162
|
|
U.S. Government Agency Securities
|
|
|
114,066
|
|
|
|
113,334
|
|
|
|
33,325
|
|
|
|
32,763
|
|
|
|
17,580
|
|
|
|
17,700
|
|
Mortgage-Backed Securities
(1)
|
|
|
108,436
|
|
|
|
109,842
|
|
|
|
65,218
|
|
|
|
66,332
|
|
|
|
77,515
|
|
|
|
78,860
|
|
Municipal Bonds
|
|
|
22,420
|
|
|
|
21,028
|
|
|
|
7,369
|
|
|
|
7,359
|
|
|
|
58,987
|
|
|
|
58,313
|
|
Corporate Bonds
(2)
|
|
|
20,449
|
|
|
|
20,205
|
|
|
|
|
|
|
|
|
|
|
|
355
|
|
|
|
169
|
|
Asset-Backed Securities
|
|
|
7,115
|
|
|
|
7,384
|
|
|
|
8,127
|
|
|
|
8,188
|
|
|
|
|
|
|
|
|
|
Other Securities
|
|
|
3,305
|
|
|
|
3,259
|
|
|
|
3,925
|
|
|
|
4,195
|
|
|
|
4,684
|
|
|
|
4,958
|
|
Equity Securities
(3)
|
|
|
647
|
|
|
|
873
|
|
|
|
511
|
|
|
|
794
|
|
|
|
511
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Available for Sale
|
|
$
|
415,491
|
|
|
$
|
413,118
|
|
|
$
|
130,995
|
|
|
$
|
132,420
|
|
|
$
|
195,836
|
|
|
$
|
196,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateralized by residential
mortgages and guaranteed by U.S. government sponsored
entities. |
|
(2) |
|
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. The corporate bond was sold during
the year ended December 31, 2009. |
|
(3) |
|
Balances presented for amortized
cost, representing two corporate bonds, were net of an OTTI
charge of $790,000, which was related to a credit loss, as of
December 31, 2010. We recorded an OTTI charge of $790,000
to write down the value of one investment security to its fair
value during the year ended December 31, 2010. |
64
The following table summarizes the contractual maturity schedule
for investment securities, at amortized cost, and their
weighted-average yield as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Collateralized Mortgage Obligations
|
|
$
|
1,450
|
|
|
|
4.49
|
%
|
|
$
|
90,396
|
|
|
|
2.45
|
%
|
|
$
|
36,830
|
|
|
|
2.78
|
%
|
|
$
|
10,377
|
|
|
|
2.79
|
%
|
U.S. Government Agency Securities
|
|
|
|
|
|
|
|
|
|
|
96,999
|
|
|
|
1.72
|
%
|
|
|
17,067
|
|
|
|
2.81
|
%
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
|
1,973
|
|
|
|
4.34
|
%
|
|
|
84,113
|
|
|
|
2.50
|
%
|
|
|
22,499
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
Municipal Bonds
(1)
|
|
|
|
|
|
|
|
|
|
|
696
|
|
|
|
7.06
|
%
|
|
|
2,877
|
|
|
|
5.57
|
%
|
|
|
19,543
|
|
|
|
4.13
|
%
|
Corporate Bonds
|
|
|
|
|
|
|
|
|
|
|
17,449
|
|
|
|
2.22
|
%
|
|
|
3,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
Asset-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,824
|
|
|
|
4.55
|
%
|
|
|
2,290
|
|
|
|
4.78
|
%
|
Other Securities
|
|
|
3,305
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,728
|
|
|
|
3.87
|
%
|
|
$
|
289,653
|
|
|
|
2.20
|
%
|
|
$
|
87,097
|
|
|
|
3.39
|
%
|
|
$
|
32,858
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The yield on municipal bonds has
been computed on a tax-equivalent basis, using an effective
marginal rate of 35 percent. |
The amortized cost of mortgage-backed securities and
collateralized mortgage obligations are presented by expected
average life, rather than contractual maturity, in the preceding
table. Expected maturities may differ from contractual
maturities because borrowers have the right to prepay underlying
loans without prepayment penalties.
In accordance with FASB ASC 320,
Investments Debt and Equity Securities,
amended current
other-than-temporary
impairment (OTTI) guidance, we periodically evaluate
our investments for OTTI. For the twelve months ended
December 31, 2010, we recorded $790,000 in OTTI in earnings
on an
available-for-sale
security.
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, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligations
|
|
$
|
2,330
|
|
|
$
|
99,993
|
|
|
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
2,330
|
|
|
$
|
90,993
|
|
|
|
20
|
|
U.S. Government Agency Securities
|
|
|
830
|
|
|
|
69,266
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
830
|
|
|
|
69,266
|
|
|
|
14
|
|
Mortgage-Backed Securities
|
|
$
|
731
|
|
|
$
|
62,738
|
|
|
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
731
|
|
|
$
|
62,738
|
|
|
|
16
|
|
Municipal Bonds
|
|
|
1,440
|
|
|
|
16,907
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,440
|
|
|
|
16,907
|
|
|
|
11
|
|
Corporate Bonds
|
|
|
257
|
|
|
|
17,210
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
17,210
|
|
|
|
5
|
|
Other Securities
|
|
|
3
|
|
|
|
1,997
|
|
|
|
2
|
|
|
|
43
|
|
|
|
957
|
|
|
|
1
|
|
|
|
46
|
|
|
|
2,954
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,591
|
|
|
$
|
268,111
|
|
|
|
68
|
|
|
$
|
43
|
|
|
$
|
957
|
|
|
|
1
|
|
|
$
|
5,634
|
|
|
$
|
269,068
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
|
562
|
|
|
|
32,764
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
|
32,764
|
|
|
|
6
|
|
Mortgage-Backed Securities
|
|
$
|
144
|
|
|
$
|
14,584
|
|
|
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
144
|
|
|
$
|
14,584
|
|
|
|
3
|
|
Municipal Bonds
|
|
|
12
|
|
|
|
303
|
|
|
|
1
|
|
|
|
80
|
|
|
|
793
|
|
|
|
1
|
|
|
|
92
|
|
|
|
1,096
|
|
|
|
2
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on investments in U.S. agencies
securities were caused by interest rate increases subsequent to
the purchase of these securities. The contractual terms of these
investments do not permit the issuer to settle the securities at
a price less than par. Because the Bank does not intend to sell
the securities in
65
this class and it is not likely that the Bank will be required
to sell these securities before recovery of their amortized cost
basis, which may include holding each security until contractual
maturity, the unrealized losses on these investments are not
considered
other-than-temporarily
impaired.
The unrealized losses on obligations of political subdivisions
were caused by changes in market interest rates or the widening
of market spreads subsequent to the initial purchase of these
securities. Management monitors published credit ratings of
these securities and no adverse ratings changes have occurred
since the date of purchase of obligations of political
subdivisions which are in an unrealized loss position as of
December 31, 2010. Because the decline in fair value is
attributable to changes in interest rates or widening market
spreads and not credit quality, and because the Bank does not
intend to sell the securities in this class and it is not more
likely than not that the Bank will be required to sell these
securities before recovery of their amortized cost basis, which
may include holding each security until maturity, the unrealized
losses on these investments are not considered
other-than-temporarily
impaired.
Of the residential mortgage-backed securities and collateralized
mortgage obligations portfolio in an unrealized loss position at
December 31, 2010, all of them are issued and guaranteed by
governmental sponsored entities. The unrealized losses on
residential mortgage-backed securities and collateralized
mortgage obligations were caused by changes in market interest
rates or the widening of market spreads subsequent to the
initial purchase of these securities, and no concerns regarding
the underlying credit of the issuers or the underlying
collateral. It is expected that these securities will not be
settled at a price less than the amortized cost of each
investment. Because the decline in fair value is attributable to
changes in interest rates or widening market spreads and not
credit quality, and because the Bank does not intend to sell the
securities in this class and it is not likely that the Bank will
be required to sell these securities before recovery of their
amortized cost basis, which may include holding each security
until contractual maturity, the unrealized losses on these
investments are not considered
other-than-temporarily
impaired.
In the opinion of management, all securities that have been in a
continuous unrealized loss position for the past 12 months
or longer as of December 31, 2010 and 2009 are not
other-than-temporarily
impaired, and therefore, no impairment charges as of
December 31, 2010 and 2009 are warranted.
Investment securities available for sale with carrying values of
$118.0 million and $91.6 million as of
December 31, 2010 and 2009, respectively, were pledged to
secure FHLB advances, public deposits and for other purposes as
required or permitted by law.
Loan
Portfolio
Total gross loans decreased by $552.9 million, or
19.6 percent, in 2010 and decreased by $542.8 million,
or 16.1 percent, in 2009. Total gross loans represented
78.0 percent of total assets at December 31, 2010,
compared with 89.2 percent and 86.8 percent at
December 31, 2009 and 2008, respectively. The overall
decrease in total gross loans is attributable to
managements balance sheet deleveraging strategy, which
includes a careful evaluation of credits that are subject to
renewal and acceptance of credits that management believes are
of high quality, as well as loan charge-offs and transfers to
other real estate owned.
Real estate loans were $856.5 million and
$1.04 billion at December 31, 2010 and 2009,
respectively, representing 37.8 percent and
37.0 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
66
flow requirements to service debt. The majority of the
properties taken as collateral are located in Southern
California.
Commercial and industrial loans were $1.36 billion and
$1.71 billion at December 31, 2010 and 2009,
respectively, representing 60.0 percent and
60.8 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.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
731,482
|
|
|
$
|
839,598
|
|
|
$
|
908,970
|
|
|
$
|
795,675
|
|
|
$
|
757,428
|
|
Construction
|
|
|
62,400
|
|
|
|
126,350
|
|
|
|
178,783
|
|
|
|
215,857
|
|
|
|
202,207
|
|
Residential Property
(1)
|
|
|
62,645
|
|
|
|
77,149
|
|
|
|
92,361
|
|
|
|
90,375
|
|
|
|
81,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
856,527
|
|
|
|
1,043,097
|
|
|
|
1,180,114
|
|
|
|
1,101,907
|
|
|
|
1,041,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
1,133,892
|
|
|
|
1,420,034
|
|
|
|
1,611,449
|
|
|
|
1,599,853
|
|
|
|
1,202,612
|
|
Commercial Lines of Credit
|
|
|
59,056
|
|
|
|
101,159
|
|
|
|
214,699
|
|
|
|
256,978
|
|
|
|
225,630
|
|
SBA Loans
(2)
|
|
|
123,750
|
|
|
|
139,531
|
|
|
|
178,399
|
|
|
|
118,528
|
|
|
|
171,631
|
|
International Loans
|
|
|
44,167
|
|
|
|
53,488
|
|
|
|
95,185
|
|
|
|
119,360
|
|
|
|
126,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans
|
|
|
1,360,865
|
|
|
|
1,714,212
|
|
|
|
2,099,732
|
|
|
|
2,094,719
|
|
|
|
1,726,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
(3)
|
|
|
50,300
|
|
|
|
63,303
|
|
|
|
83,525
|
|
|
|
90,449
|
|
|
|
100,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
$
|
2,267,692
|
|
|
$
|
2,820,612
|
|
|
$
|
3,363,371
|
|
|
$
|
3,287,075
|
|
|
$
|
2,867,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2007 and
2006, residential mortgage loans held for sale totaling $310,000
and $630,000, respectively, were included at the lower of cost
or fair value. |
|
(2)
|
|
As of December 31, 2010,
2009, 2008, 2007 and 2006, SBA loans held for sale totaling
$18.1 million, $5.0 million, $37.4 million,
$6.0 million and $23.2 million, respectively, were
included at the lower of cost or fair value. |
|
(3)
|
|
Consumer loans include home
equity lines of credit. |
As of December 31, 2010 and December 31, 2009, loans
receivable (including loans held for sale), net of deferred loan
fees and allowance for loan losses, totaled $2.12 billion
and $2.67 billion, respectively, a decrease of
$553.0 million, or 20.7 percent. Total gross loans
decreased by $552.9 million, or 19.6 percent, from
$2.82 billion as of December 31, 2009 to
$2.27 billion as of December 31, 2010, reflecting the
continued implementation of our deleveraging strategy.
During 2010, total new loan production and advances amounted to
$287.6 million. For the same period, we experienced
decreases in loans totaling $840.5 million, comprised of
$554.6 million in principal amortization and payoffs,
$131.8 million in charge-offs, $135.8 million in
problem loan sales, $5.3 million in SBA loan sales and
$13.0 million that were transferred to OREO. The
$286.1 million decrease in commercial term loans was
attributable to $90.1 million in problem loan sales,
$218.3 million in principal amortization and payoffs,
$70.3 million in charge-offs, and $5.6 million that
were transferred to OREO, partially offset by $98.2 million
of new loan production, for the year ended December 31,
2010.
Real estate loans, composed of commercial property, construction
loans and residential property, decreased $186.6 million,
or 17.9 percent, to $856.5 million as of
December 31, 2010 from $1.04 billion as of
December 31,
67
2009, representing 37.8 percent of total gross loans as of
December 31, 2010 and 37.0 percent of total gross
loans as of December 31, 2009, respectively. Commercial and
industrial loans, composed of owner-occupied commercial
property, trade finance, SBA and commercial lines of credit,
decreased $353.3 million, or 20.6 percent, to
$1.36 billion as of December 31, 2010 from
$1.71 billion as of December 31, 2009, representing
60.0 percent of total gross loans as of December 31,
2010 and 60.8 percent of total gross loans as of
December 31, 2009. Consumer loans decreased
$13.0 million, or 20.5 percent, to $50.3 million
as of December 31, 2010 from $63.3 million as of
December 31, 2009.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
32.3
|
%
|
|
|
29.8
|
%
|
|
|
27.0
|
%
|
|
|
24.2
|
%
|
|
|
26.4
|
%
|
Construction
|
|
|
2.8
|
%
|
|
|
4.5
|
%
|
|
|
5.3
|
%
|
|
|
6.6
|
%
|
|
|
7.1
|
%
|
Residential Property
|
|
|
2.7
|
%
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
37.8
|
%
|
|
|
37.0
|
%
|
|
|
35.1
|
%
|
|
|
33.5
|
%
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
50.0
|
%
|
|
|
50.3
|
%
|
|
|
47.9
|
%
|
|
|
48.7
|
%
|
|
|
41.9
|
%
|
Commercial Lines of Credit
|
|
|
2.6
|
%
|
|
|
3.6
|
%
|
|
|
6.4
|
%
|
|
|
7.8
|
%
|
|
|
7.9
|
%
|
SBA Loans
|
|
|
5.5
|
%
|
|
|
4.9
|
%
|
|
|
5.3
|
%
|
|
|
3.6
|
%
|
|
|
6.0
|
%
|
International Loans
|
|
|
1.9
|
%
|
|
|
2.0
|
%
|
|
|
2.8
|
%
|
|
|
3.6
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans
|
|
|
60.0
|
%
|
|
|
60.8
|
%
|
|
|
62.4
|
%
|
|
|
63.7
|
%
|
|
|
60.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
2.2
|
%
|
|
|
2.2
|
%
|
|
|
2.5
|
%
|
|
|
2.8
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
|
Commitments to Extend Credit
|
|
$
|
178,424
|
|
|
$
|
262,821
|
|
Standby Letters of Credit
|
|
|
15,226
|
|
|
|
17,225
|
|
Commercial Letters of Credit
|
|
|
11,899
|
|
|
|
13,544
|
|
Unused Credit Card Lines
|
|
|
24,649
|
|
|
|
23,408
|
|
|
|
|
|
|
|
|
|
|
Total Undisbursed Loan Commitments
|
|
$
|
230,198
|
|
|
$
|
316,998
|
|
|
|
|
|
|
|
|
|
|
68
The table below shows the maturity distribution and repricing
intervals of outstanding loans as of December 31, 2010. 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 $169.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
|
Year But
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
616,434
|
|
|
$
|
114,374
|
|
|
$
|
674
|
|
|
$
|
731,482
|
|
Construction
|
|
|
62,400
|
|
|
|
|
|
|
|
|
|
|
|
62,400
|
|
Residential Property
|
|
|
38,123
|
|
|
|
17,327
|
|
|
|
7,195
|
|
|
|
62,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans
|
|
|
716,957
|
|
|
|
131,701
|
|
|
|
7,869
|
|
|
|
856,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
968,645
|
|
|
|
164,273
|
|
|
|
974
|
|
|
|
1,133,892
|
|
Commercial Lines of Credit
|
|
|
59,047
|
|
|
|
9
|
|
|
|
|
|
|
|
59,056
|
|
SBA Loans
|
|
|
109,770
|
|
|
|
13,980
|
|
|
|
|
|
|
|
123,750
|
|
International Loans
|
|
|
44,167
|
|
|
|
|
|
|
|
|
|
|
|
44,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and Industrial Loans
|
|
|
1,181,629
|
|
|
|
178,262
|
|
|
|
974
|
|
|
|
1,360,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
48,605
|
|
|
|
1,695
|
|
|
|
|
|
|
|
50,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
$
|
1,947,191
|
|
|
$
|
311,658
|
|
|
$
|
8,843
|
|
|
$
|
2,267,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans With Predetermined Interest Rates
|
|
$
|
427,959
|
|
|
$
|
280,205
|
|
|
$
|
7,869
|
|
|
$
|
716,033
|
|
Loans With Variable Interest Rates
|
|
$
|
1,519,232
|
|
|
$
|
31,453
|
|
|
$
|
974
|
|
|
$
|
1,551,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, 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, 2010
|
|
Gross Loans Outstanding
|
|
|
(In Thousands)
|
|
|
|
Lessors of Non-Residential Buildings
|
|
$
|
379,043
|
|
|
|
16.7
|
%
|
Accommodation/Hospitality
|
|
$
|
321,735
|
|
|
|
14.2
|
%
|
Gasoline Stations
|
|
$
|
287,560
|
|
|
|
12.7
|
%
|
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.
69
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.
Except for non-performing loans set forth below, our management
is not aware of any loans as of December 31, 2010 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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
$
|
47,937
|
|
|
$
|
58,927
|
|
|
$
|
8,160
|
|
|
$
|
2,684
|
|
|
$
|
246
|
|
Construction
|
|
|
19,097
|
|
|
|
15,185
|
|
|
|
38,163
|
|
|
|
24,118
|
|
|
|
|
|
Residential Property
|
|
|
1,925
|
|
|
|
3,335
|
|
|
|
1,350
|
|
|
|
1,490
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
99,022
|
|
|
|
140,931
|
|
|
|
73,007
|
|
|
|
25,729
|
|
|
|
13,862
|
|
Consumer Loans
|
|
|
1,047
|
|
|
|
622
|
|
|
|
143
|
|
|
|
231
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Accrual Loans
|
|
|
169,028
|
|
|
|
219,000
|
|
|
|
120,823
|
|
|
|
54,252
|
|
|
|
14,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans 90 Days or More Past Due and Still Accruing (as to
Principal or Interest)
|
|
|
|
|
|
|
67
|
|
|
|
1,075
|
|
|
|
227
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Loans
(1)
(2)
|
|
|
169,028
|
|
|
|
219,067
|
|
|
|
121,898
|
|
|
|
54,479
|
|
|
|
14,215
|
|
Other Real Estate Owned
|
|
|
4,089
|
|
|
|
26,306
|
|
|
|
823
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Assets
|
|
$
|
173,117
|
|
|
$
|
245,373
|
|
|
$
|
122,721
|
|
|
$
|
54,766
|
|
|
$
|
14,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructured Performing Loans
|
|
$
|
47,395
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a Percentage of Total Gross Loans
|
|
|
7.45
|
%
|
|
|
7.77
|
%
|
|
|
3.62
|
%
|
|
|
1.66
|
%
|
|
|
0.50
|
%
|
Non-Performing Assets as a Percentage of Total Assets
|
|
|
5.95
|
%
|
|
|
7.76
|
%
|
|
|
3.17
|
%
|
|
|
1.37
|
%
|
|
|
0.38
|
%
|
|
|
|
(1)
|
|
Include troubled debt
restructured non-performing loans of $27.0 million,
$36.7 million, $24.2 million as of December 31,
2010, December 31, 2009 and December 31, 2008,
respectively. |
(2)
|
|
Include loans held for
sale. |
Non-accrual loans totaled $169.0 million as of
December 31, 2010, compared to $219.0 million as of
December 31, 2009, representing a 22.8 percent
decrease. Delinquent loans (defined as 30 days or more past
due) were $147.5 million as of December 31, 2010,
compared to $186.3 million as of December 31, 2009,
representing a 20.8 percent decrease. Non-performing loans
decreased by $50.0 million, or 22.8 percent, to
$169.0 million as of December 31, 2010, compared to
$219.1 million as of December 31, 2009. For the year
ended December 31, 2010, loans totaling $222.2 million
were placed on nonaccrual status. The additions to nonaccrual
loans of $222.2 million were offset by $131.5 million
in charge-offs, $107.8 million in sales of problem loans,
$6.1 million in principal paydowns and payoffs,
$14.7 million that were placed back to accrual status, and
$12.1 million that were transferred to OREO. The
$107.8 million in sales of problem loans were
70
primarily comprised of commercial property loans of
$47.1 million with related charge-offs of
$9.1 million, and commercial term loans of
$60.3 million with related charge-offs of
$12.2 million. There was no gain or loss recognized as any
deficiency between net proceeds and outstanding loan balances
were charged off prior to the sales of the loans. The
$50.0 million decrease in non-performing loans is
attributable primarily to the $39.7 million decrease in
non-performing commercial term loans, which make up
$63.0 million or 37.3 percent of the total
non-performing loans and $11.0 million decrease in
non-performing commercial property loans, which make up
$47.9 million or 28.4 percent of the total
non-performing loans as of December 31, 2010.
The ratio of non-performing loans to total gross loans decreased
to 7.45 percent at December 31, 2010 from
7.77 percent at December 31, 2009 due primarily to the
decrease in total gross loans. During the same period, the
allowance for loan losses increased by $1.1 million, or
0.7 percent, to $146.1 million from
$145.0 million. Of the $169.0 million non-performing
loans, approximately $149.5 million were impaired based on
the definition contained in FASB ASC310,
Receivables, which resulted in aggregate impairment
reserve of $15.3 million as of December 31, 2010. We
calculate our allowance for the collateral-dependent loans as
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.
As of December 31, 2010, $138.1 million, or
81.7 percent, of the $169.0 million of non-performing
loans were secured by real estate, compared to
$176.0 million, or 80.3 percent, of the
$219.1 million of non-performing loans as of
December 31, 2009. In light of declining property values in
the current economic recession 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, 2010, other real estate owned consisted
of eight properties, primarily located in California, with a
combined net carrying value of $4.1 million. For the year
ended December 31, 2010, fourteen properties, with a
carrying value of $13.0 million, were transferred from
loans receivable to other real estate owned and eighteen
properties, with a carrying value of $26.1 million, were
sold and a net loss of $196,000 was recognized. As of
December 31, 2009, other real estate owned consisted of
twelve properties with a combined net carrying value of
$26.3 million.
We evaluate loan impairment in accordance with applicable GAAP.
Loans are considered impaired when it is probable that we will
be unable to collect all amounts due according to the
contractual terms of the loan agreement, including scheduled
interest payments. Impaired loans are measured based on the
present value of expected future cash flows discounted at the
loans effective interest rate or, as an expedient, at the
loans observable market price or the fair value of the
collateral if the loan is collateral dependent, less costs to
sell. If the measure of the impaired loan is less than the
recorded investment in the loan, the deficiency will be charged
off against the allowance for loan losses or, alternatively, a
specific allocation will be established. Additionally, impaired
loans are specifically excluded from the quarterly migration
analysis when determining the amount of the allowance for loan
losses required for the period.
71
The following table provides information on impaired loans,
disaggregated by class of loan, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With No
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
Related
|
|
|
With an
|
|
|
|
|
|
Average
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Related
|
|
|
Recorded
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Allowance
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
17,606
|
|
|
$
|
18,050
|
|
|
$
|
6,336
|
|
|
$
|
11,270
|
|
|
$
|
1,543
|
|
|
$
|
21,190
|
|
Land
|
|
|
35,207
|
|
|
|
35,295
|
|
|
|
5,482
|
|
|
|
29,725
|
|
|
|
1,485
|
|
|
|
40,858
|
|
Other
|
|
|
11,357
|
|
|
|
11,476
|
|
|
|
10,210
|
|
|
|
1,147
|
|
|
|
33
|
|
|
|
15,342
|
|
Construction
|
|
|
17,691
|
|
|
|
17,831
|
|
|
|
13,992
|
|
|
|
3,699
|
|
|
|
280
|
|
|
|
12,311
|
|
Residential Property
|
|
|
1,926
|
|
|
|
1,990
|
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
2,383
|
|
Commercial and Industrial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
17,847
|
|
|
|
18,799
|
|
|
|
6,465
|
|
|
|
11,382
|
|
|
|
10,313
|
|
|
|
18,460
|
|
Secured by Real Estate
|
|
|
80,213
|
|
|
|
81,395
|
|
|
|
35,154
|
|
|
|
45,059
|
|
|
|
11,831
|
|
|
|
101,617
|
|
Commercial Lines of Credit
|
|
|
4,067
|
|
|
|
4,116
|
|
|
|
1,422
|
|
|
|
2,645
|
|
|
|
1,321
|
|
|
|
4,988
|
|
SBA Loans
|
|
|
17,715
|
|
|
|
18,544
|
|
|
|
7,112
|
|
|
|
10,603
|
|
|
|
2,122
|
|
|
|
23,213
|
|
International Loans
|
|
|
127
|
|
|
|
141
|
|
|
|
|
|
|
|
127
|
|
|
|
127
|
|
|
|
397
|
|
Consumer Loans
|
|
|
934
|
|
|
|
951
|
|
|
|
393
|
|
|
|
541
|
|
|
|
393
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204,690
|
|
|
$
|
208,588
|
|
|
$
|
88,492
|
|
|
$
|
116,198
|
|
|
$
|
29,448
|
|
|
$
|
241,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
19,233
|
|
|
$
|
19,430
|
|
|
$
|
17,170
|
|
|
$
|
2,063
|
|
|
$
|
120
|
|
|
$
|
15,834
|
|
Land
|
|
|
22,960
|
|
|
|
22,978
|
|
|
|
19,889
|
|
|
|
3,071
|
|
|
|
461
|
|
|
|
10,801
|
|
Other
|
|
|
16,640
|
|
|
|
16,924
|
|
|
|