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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 
     
     x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2010
or
     o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                 To                
 
Commission File Number:          000-30421     
 
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
     
Delaware   95-4788120
 
     (State or Other Jurisdiction of Incorporation or Organization)        (I.R.S. Employer Identification No.)
3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California
 
90010
 
(Address of Principal Executive Offices)
  (Zip Code)
 
(213) 382-2200
 
(Registrant’s Telephone Number, Including Area Code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value
  NASDAQ “Global Select Market”
 
 
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 Registrant’s 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):
                 
Large accelerated filer
  o       Accelerated filer   x
Non-accelerated filer
  o   (Do not check if a smaller reporting company)   Smaller reporting company   o
 
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: Registrant’s 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
 
                 
       
Page
 
    1  
 
             
      Business     3  
      Risk Factors     32  
      Unresolved Staff Comments     45  
      Properties     46  
      Legal Proceedings     47  
      Removed and Reserved     47  
 
PART II
             
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     47  
      Selected Financial Data     50  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     53  
      Quantitative and Qualitative Disclosures About Market Risk     87  
      Financial Statements and Supplementary Data     87  
      Changes In and Disagreements With Accountants on Accounting and Financial Disclosure     87  
      Controls and Procedures     87  
      Other Information     91  
 
PART III
             
      Directors, Executive Officers and Corporate Governance     91  
      Executive Compensation     91  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     91  
      Certain Relationships and Related Transactions, and Director Independence     92  
      Principal Accountant Fees and Services     92  
 
PART IV
             
      Exhibits, Financial Statement Schedules     93  
          Index to Consolidated Financial Statements     94  
          Report of Independent Registered Public Accounting Firm     95  
          Consolidated Balance Sheets as of December 31, 2010 and 2009     96  
            97  
            98  
            99  
          Notes to Consolidated Financial Statements     100  
    163  
       
    164  
 EX-4
 EX-10.29
 EX-10.30
 EX-10.35
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements under “Item 1. Business,” “Item 7. Management’s 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:
 
  •     our ability to continue as going concern;
 
  •     closure of Hanmi Bank and appointment of the Federal Deposit Insurance Corporation as receiver;
 
  •     failure to complete the transaction contemplated by the securities purchase agreement with Woori Finance Holdings Co., Ltd.;
 
  •     failure to raise enough capital to support our operations or meet our regulatory requirements;
 
  •     failure to maintain adequate levels of capital to support our operations;
 
  •     a significant number of customers failing to perform under their loans and other terms of credit agreements;
 
  •     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;
 
  •     fluctuations in interest rates and a decline in the level of our interest rate spread;
 
  •     failure to attract or retain deposits and restrictions on taking brokered deposits;
 
  •     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;
 
  •     adverse changes in domestic or global financial markets, economic conditions or business conditions;
 
  •     regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;
 
  •     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;
 
  •     failure to attract or retain our key employees;


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  •     adequacy of our allowance for loan losses;
 
  •     credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
 
  •     volatility and disruption in financial, credit and securities markets, and the price of our common stock;
 
  •     deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
 
  •     competition in our primary market areas;.
 
  •     demographic changes in our primary market areas;
 
  •     global hostilities, acts of war or terrorism, including but not limited to, conflict between North and South Korea;
 
  •     the effects of climate change and attendant regulation on our customers and borrowers;
 
  •     the effects of litigation against us;
 
  •     significant government regulations, legislation and potential changes thereto; and
 
  •     other risks described herein and in the other reports and statements we file with the SEC.
 
For additional information concerning risks we face, see “Item 1A. Risk Factors,” “Item 7. Management’s 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.


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PART I
 
ITEM 1.   BUSINESS
 
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 Bank’s 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 Bank’s 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 Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. The Bank’s 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 Bank’s 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:
 
                                                 
    Year Ended December 31,  
    2010     2009     2008  
    (Dollars in Thousands)  
 
Interest and Fees on Loans
  $ 137,328       80.8 %   $ 173,318       80.1 %   $ 223,942       82.6 %
Interest and Dividends on Investments
    6,631       3.9 %     8,634       4.0 %     14,022       5.2 %
Other Interest Income
    553       0.3 %     2,195       1.0 %     219       0.1 %
Service Charges on Deposit Accounts
    14,049       8.3 %     17,054       7.9 %     18,463       6.8 %
Other Non-Interest Income
    11,357       6.7 %     15,056       7.0 %     14,391       5.3 %
                                                 
                                                 
Total Revenues
  $  169,918        100.0 %   $  216,257        100.0 %   $  271,037        100.0 %
                                                 
 
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.


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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 Bank’s 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 Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Final Order and the Written Agreement place restrictions on the Bank’s 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 shareholder’s equity to total tangible assets as follows:
 
     
    Ratio of Tangible Shareholder’s
Date   Equity to Total Tangible Assets
 
By July 31, 2010
  Not Less Than 9.0 Percent
From December 31, 2010 and Until the Final Order is Terminated
  Not Less Than 9.5 Percent


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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 stockholder’s 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 Bank’s 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 Bank’s primary competitors are relatively smaller community banks that focus their marketing efforts on Korean-American businesses in the Bank’s 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 Bank’s real estate dependence increases the risk of loss both in the Bank’s loan portfolio and any holdings of other real estate owned (“OREO”) because of foreclosures on loans.


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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 appraiser’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s construction loans typically have the following characteristics:
 
  •     maturities of two years or less;
 
  •     a floating rate of interest based on the Bank Prime Rate or the WSJ Prime Rate;
 
  •     minimum cash equity of 35 percent of project cost;
 
  •     reserve of anticipated interest costs during construction or advance of fees;


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  •     first lien position on the underlying real estate;
 
  •     loan-to-value ratios at time of origination generally not exceeding 65 percent; and
 
  •     recourse against the borrower or a guarantor in the event of default.
 
The Bank does, on a case-by-case basis, commit to making permanent loans on the property with loan conditions that command strong project stability and debt service coverage. Construction loans involve additional risks compared to loans secured by existing improved real property. These include the following:
 
  •     the uncertain value of the project prior to completion;
 
  •     the inherent uncertainty in estimating construction costs, which are often beyond the borrower’s control;
 
  •     construction delays and cost overruns;
 
  •     possible difficulties encountered in connection with municipal or other governmental regulations during construction; and
 
  •     the difficulty in accurately evaluating the market value of the completed project.
 
Because of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, or accrued interest on, the loans as well as the related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period. The Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risk in construction lending. Among other things, qualified and bonded third parties are engaged to provide progress reports and recommendations for construction disbursements. No assurance can be given that these procedures will prevent losses arising from the risks described above.
 
Residential Property
 
The Bank originates fixed-rate and variable-rate mortgage loans secured by one- to four-family properties with amortization schedules of 15 to 30 years and maturities of up to 30 years. The loan fees charged, interest rates and other provisions of the Bank’s residential loans are determined by an analysis of the Bank’s 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.


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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.


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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 borrower’s 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 Bank’s loans to individuals are repayable on an installment basis.
 
Any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance, because the collateral is more likely to suffer damage or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, the collection of loans to individuals is dependent on the borrower’s continuing financial stability, and thus 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 Bank’s 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 individual’s lending authority are referred to the Bank’s Management Credit Committee and, for those in excess of the Management Credit Committee’s approval limits, to the Board of Directors’ Loan Committee.


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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 Bank’s 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 applicant’s 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 appraiser’s 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


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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 Bank’s 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 Bank’s 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 Bank’s major competitors are relatively smaller community banks that focus their marketing efforts on Korean-American businesses in the Bank’s 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


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services. The Bank’s 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


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financial institutions and community banks differently over time. Dodd-Frank includes, among other things, the following:
 
  (i)  the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation;
 
  (ii)  expanded FDIC resolution authority to conduct the orderly liquidation of certain systemically significant non-bank financial companies in addition to depository institutions;
 
  (iii)  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;
 
  (iv)  the requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;
 
  (v)  enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks;
 
  (vi)  the termination of investments by the U.S. Treasury under TARP;
 
  (vi)  the elimination and phase out of trust preferred securities (TRUPS) from Tier 1 capital with certain exceptions;
 
  (vii)  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;
 
  (ix)  authorization for financial institutions to pay interest on business checking accounts;
 
  (x)  changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be the institution’s 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%;
 
  (xi)  the elimination of remaining barriers to de novo interstate branching by banks;
 
  (xii)  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;
 
  (xiii)  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;
 
  (xiv)  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 company’s proxy statement; and


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  (xv)  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.
 
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:
 
  Risk Based Capital Guidelines – Market Risk (Section 171) – Final Rule
 
  Orderly Liquidation (Section 209) – Initial Final Rule
 
  Implement Changes to DIF Assessment Base (Section 331) – NPR
 
  Designated Reserve Ratio and Restoration Plan for the Deposit Insurance Fund (Sections 332 and 334) – Final Rule
 
  $250,000 Deposit Insurance Coverage Limit (Section 335) – Final Rule
 
  Unlimited coverage for Non-Interest Bearing Deposits (Section 343) – Final Rule
 
  Incentive-based Compensation (Section 956) – FDIC NPR.
 
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


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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 employee’s 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 participant’s 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 organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s 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 organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s 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 organization’s 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


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complexity of the institution; and 5) requiring annual reports on incentive compensation structures to the institution’s 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 country’s 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 nation’s circumstances. These capital requirements are further supplemented under Basel III by a non-risk-based leverage ratio. Basel III also reaffirms the Basel Committee’s 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 bank’s 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.


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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 FRB’s authority to:
 
  •     require periodic reports and such additional information as the FRB may require.
 
  •     require bank holding companies to maintain certain levels of capital.
 
  •     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.
 
  •     restrict the ability of bank holding companies to obtain dividends or other distributions from their subsidiary banks.
 
  •     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.
 
  •     take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for non-compliance under certain circumstances.
 
  •     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.
 
  •     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.
 
  •     require financial holding companies to divest non-banking activities or subsidiary banks if they fail to meet certain financial holding company standards.
 
  •     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.
 
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 organization’s 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 company’s ability to serve as a source of strength to its banking subsidiaries.
 
The Federal Reserve’s 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 company’s failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve Board’s regulations, or both. The source-of-strength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to maintain adequate capital levels. In such a situation, the subsidiary bank will be required by the bank’s 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 subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s 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 company’s 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 Bank’s 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:
 
                                 
    Regulatory Capital Guidelines   Actual
    Adequately
  Well
  Hanmi
  Hanmi
    Capitalized   Capitalized   Bank   Financial
 
Total Risk-Based Capital Ratio
    8.00 %     10.00 %     12.22 %     12.32 %
Tier 1 Risk-Based Capital Ratio
    4.00 %     6.00 %     10.91 %     10.09 %
Tier 1 Leverage Ratio
    4.00 %     5.00 %     8.55 %     7.90 %
 
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 organization’s 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 bank’s capital adequacy. Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from adverse movements in interest rates. While interest rate risk is inherent in a bank’s 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:
 
  •     “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.
 
  •     “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.
 
  •     “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.
 
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 bank’s 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 Bank’s leverage capital ratio was 8.55 percent, and Hanmi Financial’s 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 subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s 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 institution’s 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 bank’s 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 subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s 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 Financial’s 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 company’s 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 Bank’s 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 Bank’s 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 Bank’s deposits, have residual authority to:
 
  •     require affirmative action to correct any conditions resulting from any violation or practice;
 
  •     direct an increase in capital or establish specific minimum capital ratios;
 
  •     restrict the Bank’s growth geographically, by products and services or by mergers and acquisitions;
 
  •     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;
 
  •     remove officers and directors and assess civil monetary penalties;
 
  •     terminate the Bank’s deposit insurance, which would also result in the revocation of the Bank’s license by the DFI; and
 
  •     take possession and close and liquidate the Bank.
 
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


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income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s 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 institution’s 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 FHLB’s 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 institution’s 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


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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 institution’s 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 institution’s 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 institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s 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 institution’s 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


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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 FDIC’s 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 bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base alone, and requires the FDIC to increase the DIF’s 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 FDIC’s 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 FDIC’s 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


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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 FDIC’s Temporary Liquidity Guarantee Program) to the extent that all such debt exceeds 3 percent of the other insured depository institution’s 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 bank’s stockholders’ equity, allowance for loan losses, and any capital notes and debentures of the bank.
 
Extensions of Credit to Insiders and Transactions with Affiliates
 
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to:
 
  •     a bank or bank holding company’s executive officers, directors and principal stockholders (i.e., in most cases, those persons who own, control or have power to vote more than 10 percent of any class of voting securities);
 
  •     any company controlled by any such executive officer, director or stockholder; or
 
  •     any political or campaign committee controlled by such executive officer, director or principal stockholder.
 
Such loans and leases:
 
  •     must comply with loan-to-one-borrower limits;
 
  •     require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
 
  •     must be made on substantially the same terms (including interest rates and collateral) and follow


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  credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;
 
  •     must not involve more than the normal risk of repayment or present other unfavorable features; and
 
  •     in the aggregate limit not exceed the bank’s unimpaired capital and unimpaired surplus.
 
California has laws and the DFI has regulations that adopt and apply Regulation O to the Bank.
 
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B, 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 Bank’s affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally:
 
  •     prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts;
 
  •     limit such loans and investments to or in any affiliate individually to 10 percent of the Bank’s capital and surplus;
 
  •     limit such loans and investments to all affiliates in the aggregate to 20 percent of the Bank’s capital and surplus; and
 
  •     require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the Bank as those prevailing for comparable transactions with non-affiliated parties.
 
Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDI Act’s 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 corporation’s net profits if, after the payment of the dividend, the corporation’s 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


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could affect the bank’s capital position in an adverse way. Further, the FRB’s position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company’s 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 management’s 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 bank’s 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 Bank’s 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 Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends” for a further discussion of restrictions on the Bank’s 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 Government’s 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 borrower’s ability to repay and prepayment penalties. The bureau’s 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.


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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.
 
ITEM 1A.   RISK FACTORS
 
Together with the other information on the risks we face and our management of risk contained in this Report or in our other SEC filings, the following presents significant risks that may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also adversely impact our financial condition, business operations and results of operations.
 
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


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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 stockholder’s equity to total tangible assets as follows:
 
     
    Ratio of Tangible Shareholder’s
Date   Equity to Total Tangible Assets
 
By July 31, 2010
  Not Less Than 9.0 Percent
From December 31, 2010 and Until the Final Order is Terminated
  Not Less Than 9.5 Percent
 
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


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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 Bank’s 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


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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 Bank’s 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 Bank’s non-Fedwire activity. In addition, due to continued deterioration in credit and capital, Hanmi Bank’s 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


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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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Woori’s 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


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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


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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 Woori’s 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 Bank’s 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:
 
  •     We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
 
  •     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.
 
  •     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.
 
  •     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.
 
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:
 
  •     problem assets and foreclosures may increase;
 
  •     demand for our products and services may decline;
 
  •     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.
 
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


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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 FDIC’s 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


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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


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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


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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.


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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 corporation’s 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.


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ITEM 2.  PROPERTIES
 
Hanmi Financial’s 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


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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 REGISTRANT’S 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 Financial’s 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


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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 Bank’s 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 Reserve’s 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 organization’s expected future needs and financial condition. It is also the Federal Reserve’s 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.


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Performance Graph
 
The following graph shows a comparison of stockholder return on Hanmi Financial’s common stock with the cumulative total returns for: 1) the Nasdaq Composite® (U.S.) Index; 2) the Standard and Poor’s (“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
 
(PERFORMANCE GRAPH)
 
                                                     
        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 Financial’s equity securities by Hanmi Financial or its affiliates. As of December 31, 2010, there was no current plan authorizing purchases of Hanmi Financial’s equity securities by Hanmi Financial or its affiliates.


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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. Management’s 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.
 


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    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 Financial’s 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 management’s 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.

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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 Financial’s 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 management’s 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  
                                         


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion presents management’s 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 Financial’s 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


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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 management’s 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


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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 security’s 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


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and the Written Agreement. For a further discussion of the Bank’s 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 Bank’s total risk-based capital ratio improved to 12.22% as of December 31, 2010 compared to 9.07% as of December 31, 2009. The Bank’s 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


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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


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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.


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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


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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


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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


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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.


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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.


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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.


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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


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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 management’s 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


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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,


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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  
                 


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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 loan’s 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.


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Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, 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 borrower’s 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


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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 loan’s effective interest rate or, as an expedient, at the loan’s 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.


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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