Table of Contents

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2005

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

(Address of Principal Executive Offices)
  90010

(Zip Code)

(213) 382-2200


(Registrant’s Telephone Number, Including Area Code)

Not Applicable


(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

     As of May 6, 2005, there were 49,629,807 outstanding shares of the issuer’s Common Stock.

 
 

 


HANMI FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2005
TABLE OF CONTENTS
                 
            Page
      PART I — FINANCIAL INFORMATION        
 
               
Item 1.   Financial Statements        
 
               
      Consolidated Statements of Financial Condition     1  
      Consolidated Statements of Income and Comprehensive Income     2  
      Consolidated Statements of Cash Flows     3  
      Notes to Consolidated Financial Statements     4  
 
               
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     7  
 
               
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     21  
 
               
Item 4.   Controls And Procedures     22  
 
               
      PART II — OTHER INFORMATION        
 
               
Item 1.   Legal Proceedings     23  
 
               
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     23  
 
               
Item 3.   Defaults Upon Senior Securities     23  
 
               
Item 4.   Submission of Matters to a Vote of Security Holders     23  
 
               
Item 5.   Other Information     23  
 
               
Item 6.   Exhibits     23  
 
               
            24  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands)
                 
    March 31,     December 31,  
    2005     2004  
ASSETS
               
Cash and Due from Banks
  $ 81,841     $ 55,164  
Federal Funds Sold and Securities Purchased Under Agreements to Resell
    77,000       72,000  
 
           
Cash and Cash Equivalents
    158,841       127,164  
Federal Reserve Bank Stock
    12,099       12,099  
Federal Home Loan Bank Stock
    9,862       9,862  
Securities Held to Maturity, at Amortized Cost (Fair Value: March 31, 2005 — $1,087; December 31, 2004 — $1,093)
    1,081       1,090  
Securities Available for Sale, at Fair Value
    422,808       417,883  
Loans Receivable, Net of Allowance for Loan Losses of $22,621 and $22,702 at March 31, 2005 and December 31, 2004, Respectively
    2,230,038       2,230,992  
Loans Held for Sale, at the Lower of Cost or Fair Value
          3,850  
Customers’ Liability on Acceptances
    4,776       4,579  
Premises and Equipment, Net
    20,728       19,691  
Accrued Interest Receivable
    11,432       10,029  
Deferred Income Taxes
    7,273       5,009  
Servicing Asset
    3,694       3,846  
Goodwill
    209,702       209,643  
Core Deposit Intangible
    10,744       11,476  
Bank-Owned Life Insurance — Cash Surrender Value
    22,073       21,868  
Other Assets
    14,208       15,107  
 
           
TOTAL ASSETS
  $ 3,139,359     $ 3,104,188  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
LIABILITIES:
               
Deposits:
               
Non-Interest-Bearing
  $ 769,852     $ 729,583  
Interest-Bearing:
               
Savings
    146,566       153,862  
Money Market Checking
    566,525       613,662  
Time Deposits of $100,000 or More
    832,928       756,580  
Other Time Deposits
    229,027       275,120  
 
           
Total Deposits
    2,544,898       2,528,807  
Accrued Interest Payable
    6,638       7,100  
Acceptances Outstanding
    4,776       4,579  
Other Borrowed Funds
    67,111       69,293  
Junior Subordinated Debentures
    82,406       82,406  
Other Liabilities
    25,080       12,093  
 
           
Total Liabilities
    2,730,909       2,704,278  
 
           
SHAREHOLDERS’ EQUITY:
               
Common Stock, $.001 Par Value; Authorized 200,000,000 Shares; Issued and Outstanding, 49,621,677 Shares and 49,330,704 Shares at March 31, 2005 and December 31, 2004, Respectively
    50       49  
Additional Paid-In Capital
    338,390       334,932  
Unearned Compensation
    (1,422 )      
Accumulated Other Comprehensive Income — Unrealized Gain on Securities Available for Sale and Interest Rate Swaps, Net of Income Taxes of ($2,362) and $744 at March 31, 2005 and December 31, 2004, Respectively
    (3,313 )     1,035  
Retained Earnings
    74,745       63,894  
 
           
Total Shareholders’ Equity
    408,450       399,910  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 3,139,359     $ 3,104,188  
 
           

See Accompanying Notes to Consolidated Financial Statements

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
                 
    Three Months Ended  
    March 31,  
    2005     2004  
Interest Income:
               
Interest and Fees on Loans
  $ 38,075     $ 18,180  
Interest on Investments
    4,648       3,796  
Interest on Federal Funds Sold
    335       22  
 
           
Total Interest Income
    43,058       21,998  
Interest Expense
    11,347       5,170  
 
           
Net Interest Income Before Provision for Credit Losses
    31,711       16,828  
Provision for Credit Losses
    136       900  
 
           
Net Interest Income After Provision for Credit Losses
    31,575       15,928  
 
           
Non-Interest Income:
               
Service Charges on Deposit Accounts
    3,730       2,667  
Trade Finance Fees
    945       805  
Remittance Fees
    468       257  
Other Service Charges and Fees
    730       261  
Bank-Owned Life Insurance Income
    205       114  
Increase in Fair Value of Derivatives
    419       80  
Other Income
    621       249  
Gain on Sales of Loans
    308       469  
Gain on Sales of Securities Available for Sale
    82       3  
 
           
Total Non-Interest Income
    7,508       4,905  
 
           
Non-Interest Expenses:
               
Salaries and Employee Benefits
    9,167       5,650  
Occupancy and Equipment
    2,231       1,385  
Data Processing
    1,165       820  
Supplies and Communication
    579       357  
Professional Fees
    479       270  
Advertising and Promotional Expense
    694       545  
Amortization of Core Deposit Intangible
    732       30  
Decrease in Fair Value of Embedded Option
    573        
Other Operating Expense
    1,785       1,307  
 
           
Total Non-Interest Expenses
    17,405       10,364  
 
           
Income Before Provision for Income Taxes
    21,678       10,469  
Provision for Income Taxes
    8,346       4,083  
 
           
NET INCOME
  $ 13,332     $ 6,386  
 
           
 
               
Earnings Per Share:
               
Basic
  $ 0.27     $ 0.23  
Diluted
  $ 0.27     $ 0.22  
Weighted-Average Shares Outstanding:
               
Basic
    49,460,375       28,403,188  
Diluted
    50,247,408       28,972,426  
Dividends Declared Per Share
  $ 0.05     $ 0.05  
 
               
COMPREHENSIVE INCOME:
               
Net Income
  $ 13,332     $ 6,386  
 
           
Other Comprehensive Income (Loss), Net of Tax:
               
Unrealized Gain (Loss) Arising During the Period
    (3,436 )     2,696  
Less Reclassification Adjustment for Realized Gain on Securities Available for Sale Included in Net Income
    (110 )     (386 )
Unrealized Gain (Loss) on Cash Flow Hedge
    (802 )     824  
 
           
Total Other Comprehensive Income (Loss), Net of Tax
    (4,348 )     3,134  
 
           
Total Comprehensive Income
  $ 8,984     $ 9,520  
 
           

See Accompanying Notes to Consolidated Financial Statements

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
                 
    Three Months Ended  
    March 31,  
    2005     2004  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 13,332     $ 6,386  
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Provided By Operating Activities:
               
Depreciation and Amortization of Premises and Equipment
    685       461  
Amortization of Premiums and Discounts on Investments
    (168 )     915  
Amortization of Core Deposit Intangible
    732       30  
Amortization of Unearned Compensation
    393        
Provision for Credit Losses
    136       900  
Federal Reserve Bank Stock and Federal Home Loan Bank Stock Dividend
          (43 )
Gain on Sales of Securities Available for Sale
    (82 )     (3 )
Change in Fair Value of Derivatives
    (154 )     (80 )
Gain on Sales of Loans
    (308 )     (469 )
Loss on Sales of Premises and Equipment
    15       7  
Deferred Tax (Benefit) Provision
    (6,279 )     1,167  
Origination of Loans Held for Sale
    (1,204 )     (6,223 )
Proceeds from Sales of Loans Held for Sale
    5,320       4,882  
Change In:
               
(Increase) Decrease in Accrued Interest Receivable
    (1,403 )     96  
Increase in Cash Surrender Value of Bank-Owned Life Insurance
    (205 )     (114 )
Decrease (Increase) in Other Assets
    795       (4,415 )
Decrease in Accrued Interest Payable
    (462 )     (1,562 )
Increase (Decrease) in Other Liabilities
    13,202       (1,276 )
 
           
Net Cash and Cash Equivalents Provided By Operating Activities
    24,345       659  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from Matured or Called Securities Available for Sale
    41,121       28,115  
Proceeds from Matured or Called Securities Held to Maturity
    9       57  
Proceeds from Sale of Securities Available for Sale
    1,442       34,907  
Net Decrease (Increase) in Loans Receivable
    996       (33,707 )
Purchases of Securities Available for Sale
    (47,238 )     (7,777 )
Purchases of Premises and Equipment, Net
    (1,737 )     (160 )
 
           
Net Cash and Cash Equivalents (Used In) Provided By Investing Activities
    (5,407 )     21,435  
 
           
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Increase in Deposits
    16,091       31,131  
Proceeds from Exercise of Stock Options
    1,311       952  
Cash Dividends Paid
    (2,481 )     (1,426 )
Decrease in Other Borrowed Funds
    (2,182 )     (64,639 )
 
           
Net Cash and Cash Equivalents Provided By (Used In) Financing Activities
    12,739       (33,982 )
 
           
Net Increase (Decrease) in Cash and Cash Equivalents
    31,677       (11,888 )
Cash and Cash Equivalents, Beginning of Year
    127,164       62,595  
 
           
 
               
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 158,841     $ 50,707  
 
           
 
               
Supplemental Disclosures of Cash Flow Information:
               
Interest Paid
  $ 10,885     $ 6,732  
Income Taxes Paid
  $ 4,457     $ 5,094  

See Accompanying Notes to Consolidated Financial Statements

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

NOTE 1 — HANMI FINANCIAL CORPORATION

     Hanmi Financial Corporation (“Hanmi Financial”, “we” or “our”) is a Delaware corporation that is the holding company for Hanmi Bank (the “Bank”) and is subject to the Bank Holding Company Act of 1956, as amended.

     Hanmi Bank, our primary subsidiary, is a commercial bank licensed by the California Department of Financial Institutions. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act, up to applicable limits thereof. The Bank is a member of the Federal Reserve System.

     Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank. Hanmi Bank is a community bank conducting general business banking with its primary market encompassing the multi-ethnic population of Los Angeles, Orange, San Diego, San Francisco and Santa Clara counties. Hanmi Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. Hanmi Bank’s client base reflects the multi-ethnic composition of these communities. The Bank is a California state-chartered, FDIC-insured financial institution.

     On April 30, 2004, we completed the acquisition of Pacific Union Bank (“PUB”), a $1.2 billion (assets) commercial bank headquartered in Los Angeles that also served primarily the Korean-American community. As of March 31, 2005, the Bank maintained a branch network of 22 locations, serving individuals and small-sized to medium-sized businesses in Los Angeles and surrounding areas.

NOTE 2 — BASIS OF PRESENTATION

     In the opinion of management, the consolidated financial statements of Hanmi Financial Corporation and subsidiary reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim period ended March 31, 2005, but are not necessarily indicative of the results that will be reported for the entire year. In the opinion of management, the aforementioned consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America. The interim information should be read in conjunction with our 2004 Annual Report on Form 10-K.

     Descriptions of our significant accounting policies are included in “Note 1 Summary of Significant Accounting Policies” in our 2004 Annual Report on Form 10-K. Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.

     On January 20, 2005, our Board of Directors declared a two-for-one stock split, to be effected in the form of a 100 percent common stock dividend. The new shares were distributed on February 15, 2005 to shareholders of record on the close of business on January 31, 2005. All share and per share amounts for the prior period have been restated to reflect the stock dividend.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Continued)

NOTE 3 — EMPLOYEE STOCK-BASED COMPENSATION

     Our employee stock-based compensation arrangements are measured under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for the stock option plan, as stock options were granted at fair value at the date of grant. Had compensation expense for the stock option plan been determined based on the fair values estimated using the Black-Scholes model at the grant dates for previous awards, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:

                 
    Three Months Ended  
    March 31,  
    2005     2004  
    (Dollars in Thousands;  
    Except Per Share Data)  
Net Income:
               
As Reported
  $ 13,332     $ 6,386  
Compensation Expense
    285       151  
 
           
Pro Forma
  $ 13,047     $ 6,235  
 
           
 
               
Earnings Per Share:
               
As Reported:
               
Basic
  $ 0.27     $ 0.23  
Diluted
  $ 0.27     $ 0.22  
Pro Forma:
               
Basic
  $ 0.26     $ 0.22  
Diluted
  $ 0.26     $ 0.22  

     In February 2005, 100,000 shares of restricted stock were granted to Dr. Sung Won Sohn, our Chief Executive Officer. 20,000 of these shares vested immediately, and an additional 20,000 shares will vest each year over the next four years on the anniversary date of the grant provided that Dr. Sohn is still employed by us. The market value of the shares awarded totaled $1,815,000 and has been recorded as a separate component of shareholders’ equity. Unearned compensation is being amortized against income over the four-year vesting period. For the three months ended March 31, 2005, $393,000 of compensation expense was recognized in the consolidated statements of income.

NOTE 4 — EARNINGS PER SHARE

     Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Continued)

NOTE 4 — EARNINGS PER SHARE (Continued)

     The following table presents a reconciliation of the components used to derive basic and diluted EPS for the periods indicated.

                         
            Weighted-        
            Average     Per  
    Income     Shares     Share  
    (Numerator)     (Denominator)     Amount  
Three Months Ended March 31, 2005:
                       
Basic EPS — Income Available to Common Shareholders
  $ 13,332       49,460,375     $ 0.27  
Effect of Dilutive Securities — Options and Warrants
          787,033        
 
                 
Diluted EPS — Income Available to Common Shareholders
  $ 13,332       50,247,408     $ 0.27  
 
                 
 
                       
Three Months Ended March 31, 2004:
                       
Basic EPS — Income Available to Common Shareholders
  $ 6,386       28,403,188     $ 0.23  
Effect of Dilutive Securities — Options
          569,238       (0.01 )
 
                 
Diluted EPS — Income Available to Common Shareholders
  $ 6,386       28,972,426     $ 0.22  
 
                 

     As of March 31, 2005, there were 125,554 options outstanding that were not included in the computation of diluted EPS because their exercise price was greater than the quarterly average market price of the common shares and, therefore, the effect would be anti-dilutive. There were no anti-dilutive options as of March 31, 2004.

NOTE 5 — OFF-BALANCE SHEET COMMITMENTS

     As part of the service to our small-sized and medium-sized business customers, Hanmi Bank issues formal loan 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 and standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by Hanmi Bank to guarantee the performance of a customer to a third party.

     The following table shows the distribution of the Hanmi Bank’s undisbursed loan commitments as of the dates indicated.

                 
    March 31,     December 31,  
    2005     2004  
    (In Thousands)  
Commitments to Extend Credit
  $ 419,368     $ 367,708  
Standby Letters of Credit
    47,506       47,901  
Commercial Letters of Credit
    59,137       49,699  
Unused Credit Card Lines
    10,271       14,324  
 
           
Total Undisbursed Loan Commitments
  $ 536,282     $ 479,632  
 
           

NOTE 6 — CURRENT ACCOUNTING MATTERS

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method that is currently used and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the Consolidated Statement of Income. SFAS No. 123R was to be effective as of the beginning of the third quarter of 2005; however, on April 14, 2005, the Securities and Exchange Commission adopted a new rule that deferred the required adoption date to the beginning of the first quarter of 2006. We have provided pro forma disclosures under SFAS No. 123 in “Note 3 — Employee Stock-Based Compensation.”

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition for the three months ended March 31, 2005. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004 and with the unaudited consolidated financial statements and notes thereto set forth in this Report.

CRITICAL ACCOUNTING POLICIES

     We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended December 31, 2004. 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 to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions that 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 our Board of Directors.

     We believe the allowance for loan losses and reserve for unfunded loan commitments are critical accounting policies that require significant estimates and assumptions that are particularly susceptible to significant change in the preparation of our financial statements. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition — Financial Condition — Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” for a description of the methodology used to determine the allowance for loan losses and reserve for unfunded loan commitments.

     During the year ended December 31, 2004, the application of Statement of Financial Accounting Standards No. 141, “Business Combinations,” to the purchase of Pacific Union Bank required significant estimates and assumptions. We engaged outside experts including appraisers to assist in estimating the fair values of certain assets acquired, particularly the loan portfolio, core deposit intangible asset, and fixed assets. The fair values of financial assets, including the investments portfolio, deposits and borrowings, were estimated by the Bank, using market data regarding securities market prices and interest rates. We also evaluated long-lived assets for impairment and recorded any necessary adjustments. In accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection With a Purchase Business Combination,” we recognized liabilities assumed for costs to involuntarily terminate employees of PUB and costs to exit activities of PUB under an exit plan approved by Hanmi Bank’s board of directors.

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SELECTED FINANCIAL DATA

     The following table sets forth certain selected financial data for the periods indicated.

                 
    Three Months Ended  
    March 31,  
    2005     2004  
    (Dollars in Thousands)  
Average Balances:
               
Average Gross Loans
  $ 2,239,174     $ 1,276,077  
Average Interest-Earning Assets
    2,736,771       1,683,721  
Average Total Assets
    3,103,486       1,779,240  
Average Deposits
    2,519,229       1,456,814  
Average Interest-Bearing Liabilities
    1,926,399       1,155,664  
Average Shareholders’ Equity
    406,067       142,773  
Average Tangible Equity (1)
    185,222       140,743  
 
               
Selected Performance Ratios:
               
Return on Average Total Assets (2) (3)
    1.74 %     1.44 %
Return on Average Shareholders’ Equity (2) (4)
    13.32 %     17.99 %
Return on Average Tangible Equity (2) (5)
    29.19 %     18.25 %
Net Interest Margin (6)
    4.70 %     4.02 %
Average Shareholders’ Equity to Average Total Assets
    13.08 %     8.02 %
Efficiency Ratio (7)
    44.38 %     47.69 %
Dividend Payout Ratio (9)
    18.52 %     21.74 %
 
               
Selected Capital Ratios: (10)
               
Tier 1 Capital to Average Total Assets:
               
Hanmi Financial
    9.41 %     10.75 %
Hanmi Bank
    9.25 %     7.92 %
Tier 1 Capital to Total Risk-Weighted Assets:
               
Hanmi Financial
    11.32 %     13.82 %
Hanmi Bank
    11.13 %     10.21 %
Total Capital to Total Risk-Weighted Assets:
               
Hanmi Financial
    12.34 %     15.66 %
Hanmi Bank
    12.16 %     11.21 %
Book Value Per Share (8) (11)
  $ 8.23     $ 5.20  
 
               
Selected Asset Quality Ratios:
               
Net Loan Charge-Offs to Average Total Gross Loans (12)
    0.01 %     0.58 %
Allowance for Loan Losses to Total Gross Loans at End of Period
    1.00 %     0.95 %
Allowance for Loan Losses to Non-Performing Loans
    327.9 %     238.0 %
Non-Performing Assets to Total Assets (13)
    0.22 %     0.30 %


(1)   Average tangible equity is calculated by subtracting average goodwill and average core deposit intangible assets from average shareholders’ equity.
(2)   Calculation based upon annualized net income.
(3)   Net income divided by average total assets.
(4)   Net income divided by average shareholders’ equity.
(5)   Net income divided by average tangible equity.
(6)   Represents net interest income before provision for credit losses as a percentage of average interest-earning assets.
(7)   The efficiency ratio is calculated as the ratio of total non-interest expenses to the sum of net interest income before provision for credit losses and total non-interest income including securities gains and losses.
(8)   2004 book value per share has been restated for a 100% stock dividend declared in January 2005.
(9)   Dividends declared per share divided by basic earnings per share.
(10)   The required ratios for a “well-capitalized” institution, as defined by regulations of the Board of Governors of the Federal Reserve System, are 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital.
(11)   Shareholders’ equity divided by common shares outstanding.
(12)   Calculation based upon annualized net loan charge-offs.
(13)   Non-performing assets consist of non-performing loans (non-accrual loans, loans past due 90 days or more and restructured loans) and other real estate owned.

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FORWARD-LOOKING STATEMENTS

     Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q 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. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement. For additional information concerning these factors, see our Form 10-K filed with the Securities and Exchange Commission on March 16, 2005 under the headings “Factors That May Affect Future Results of Operations,” “Interest Rate Risk Management” and “Liquidity and Capital Resources.” 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.

RESULTS OF OPERATIONS

Overview

     For the three months ended March 31, 2005, net income was $13.3 million, or $0.27 per diluted share, compared to $6.4 million, or $0.22 per diluted share, for the three months ended March 31, 2004. The 108.8 percent increase in net income for 2005 as compared to 2004 was primarily due to the acquisition of PUB. Net interest income before provision for credit losses increased $14.9 million, or 88.4 percent, due to ongoing growth in the loan portfolio as well as the newly acquired interest-earning assets from PUB. Non-interest income increased by $2.6 million, or 53.1 percent, mainly due to an increase in service charges on deposit accounts. Non-interest expenses increased by $7.0 million, or 67.9 percent, due to the additional salaries and employee benefits, occupancy, professional fees, and data processing expenses incurred during the post-merger integration period. The annualized return on average assets was 1.74 percent for the three months ended March 31, 2005, compared to a return on average assets of 1.44 percent for the same period of 2004, an increase of 30 basis points. The annualized return on average shareholders’ equity was 13.32 percent for the three months ended March 31, 2005, and return on average tangible equity was 29.19 percent, compared to 17.99 percent and 18.01 percent, respectively, for the same period in 2004.

Net Interest Income Before Provision for Credit Losses

     Our earnings depend largely upon the difference between the interest income received from the loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” 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. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as Federal economic policies, the general supply of money in the economy, income tax policies, governmental budgetary matters and the actions of the Federal Reserve Bank.

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     For the three months ended March 31, 2005, net interest income before provision for credit losses was $31.7 million. This represented an increase of $14.9 million, or 88.4 percent, over net interest income before provision for credit losses of $16.8 million for the three months ended March 31, 2004. The interest rate spread increased to 3.99 percent for the three months ended March 31, 2005, from 3.45 percent for the same period in 2004. The change was mainly due to an increase in rates received on loans and investments as we increased our prime rate by a total of 50 basis points during the first quarter. Approximately 88.9 percent of our loan portfolio is tied to our prime rate. We also emphasized spread income and disposed of certain low yielding assets in the first and second quarters of 2004 and reinvested the proceeds from the amortization of our investment portfolio into loan production. Average loans outstanding increased from 75.8 percent of average interest-earning assets in the first quarter of 2004 to 81.8 percent of average interest-earning assets in the first quarter of 2005. The net interest margin also increased by 68 basis points to 4.70 percent for the three months ended March 31, 2005, from 4.02 percent for the same period in 2004, due to an increase in the volume of interest-earning assets with higher interest rates.

     Total interest income increased $21.1 million, or 95.7 percent, to $43.1 million for the three months ended March 31, 2005, from $22.0 million for the three months ended March 31, 2004. The increase was mainly the result of an increase in the volume of interest-earning assets obtained through the acquisition of PUB. For the first quarter of 2005, average interest-earning assets increased by $1.0 billion, or 62.5 percent, to $2.7 billion, compared to $1.7 billion a year ago.

     Total interest expense increased $6.1 million, or 119.5 percent, to $11.3 million for the three months ended March 31, 2005, from $5.2 million for the three months ended March 31, 2004. The increase reflects an increase in interest-bearing liabilities related to the acquisition of PUB and higher interest rates paid to depositors. Average interest-bearing liabilities increased by $770.7 million, or 66.7 percent, to $1.9 billion, compared to $1.2 billion a year ago. The cost of average interest-bearing liabilities increased to 2.39 percent for the three months ended March 31, 2005, compared to 1.80 percent for the same period in 2004.

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     The following table presents the average balances of assets, liabilities and shareholders’ equity; the amount of interest income or interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.

                                                 
    Three Months Ended  
    March 31, 2005     March 31, 2004  
            Interest     Average             Interest     Average  
    Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate  
    (Dollars in Thousands)  
Assets
                                               
Interest-Earning Assets:
                                               
Gross Loans, Net of Unearned Income (1)
  $ 2,239,174     $ 38,075       6.90 %   $ 1,276,077     $ 18,180       5.73 %
Municipal Securities (2)
    74,050       776       6.54 %     66,066       709       6.64 %
Obligations of Other U.S. Government Agencies
    96,217       934       3.94 %     76,484       677       3.56 %
Other Debt Securities
    250,507       2,665       4.31 %     245,725       2,320       3.80 %
Equity Securities
    21,961       273       5.04 %     10,359       87       3.38 %
Federal Funds Sold
    54,862       335       2.48 %     8,054       22       1.10 %
Interest-Earning Deposits
                      956       3       1.26 %
 
                                       
Total Interest-Earning Assets
    2,736,771       43,058       6.38 %     1,683,721       21,998       5.25 %
 
                                       
Non-Interest-Earning Assets:
                                               
Cash and Cash Equivalents
    84,659                       63,013                  
Allowance for Loan Losses
    (22,730 )                     (12,446 )                
Premises and Equipment, Net
    20,292                       8,336                  
Accrued Interest Receivable
    11,105                       6,673                  
Other Assets
    273,389                       29,943                  
 
                                           
Total Non-Interest-Earning Assets
    366,715                       95,519                  
 
                                           
Total Assets
  $ 3,103,486                     $ 1,779,240                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity
                                               
Interest-Bearing Liabilities:
                                               
Deposits:
                                               
Money Market Checking
  $ 592,211       3,008       2.06 %   $ 261,001       1,010       1.56 %
Savings
    150,261       556       1.50 %     93,352       318       1.37 %
Time Deposits of $100,000 or More
    797,141       5,002       2.54 %     400,057       1,747       1.76 %
Other Time Deposits
    234,662       1,245       2.15 %     239,054       1,200       2.02 %
Other Borrowed Funds
    152,124       1,536       4.09 %     162,200       895       2.22 %
 
                                       
Total Interest-Bearing Liabilities
    1,926,399       11,347       2.39 %     1,155,664       5,170       1.80 %
 
                                       
Non-Interest-Bearing Liabilities:
                                               
Demand Deposits
    744,954                       463,350                  
Other Liabilities
    26,066                       17,453                  
 
                                           
Total Non-Interest-Bearing Liabilities
    771,020                       480,803                  
 
                                           
Total Liabilities
    2,697,419                       1,636,467                  
Shareholders’ Equity
    406,067                       142,773                  
 
                                           
Total Liabilities and Shareholders’ Equity
  $ 3,103,486                     $ 1,779,240                  
 
                                           
 
                                               
Net Interest Income
          $ 31,711                     $ 16,828          
 
                                           
 
                                               
Net Interest Spread (3)
                    3.99 %                     3.45 %
 
                                           
 
                                               
Net Interest Margin (4)
                    4.70 %                     4.02 %
 
                                           


(1)   Loans are net of deferred fees and related direct costs, but excluding the allowance for loan losses. Non-accrual loans are included in the average loan balance. Loan fees have been included in the calculation of interest income. Loan fees were $1.3 million and $0.9 million for the three months ended March 31, 2005 and 2004, respectively.
 
(2)   Yields on tax-exempt income have been computed on a tax-equivalent basis, using an effective marginal rate of 35%.
 
(3)   Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(4)   Represents annualized net interest income as a percentage of average interest-earning assets.

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     The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

                         
    Three Months Ended  
    March 31, 2005 vs. 2004  
    Increases (Decreases)  
    Due to Change in  
    Volume     Rate     Total  
            (In Thousands)          
Interest Income:
                       
Gross Loans, Net of Unearned Income
  $ 15,906     $ 3,989     $ 19,895  
Municipal Securities
    (21 )     88       67  
Obligations of Other U.S. Government Agencies
    189       68       257  
Other Debt Securities
    48       297       345  
Equity Securities
    131       55       186  
Federal Funds Sold
    258       55       313  
Interest-Earning Deposits
    (3 )           (3 )
 
                 
Total Interest Income
    16,508       4,552       21,060  
 
                 
Interest Expense:
                       
Money Market Checking
    1,605       393       1,998  
Savings
    209       29       238  
Time Deposits of $100,000 or More
    2,262       993       3,255  
Other Time Deposits
    (20 )     65       45  
Other Borrowed Funds
    (58 )     699       641  
 
                 
Total Interest Expense
    3,998       2,179       6,177  
 
                 
Change in Net Interest Income
  $ 12,510     $ 2,373     $ 14,883  
 
                 

Provision for Credit Losses

     Provisions to the allowance for loan losses and reserve for unfunded loan commitments are made quarterly, in anticipation of probable loan losses. The quarterly provision is based on the allowance need, which is calculated using a formula designed to provide adequate allowances for anticipated losses and reserves for unfunded loan commitments. The formula is composed of various components. The allowance is determined by assigning specific allowances for all classified loans. All loans that are not classified are then given certain allocations according to type with larger percentages applied to loans deemed to be of a higher risk. These percentages are determined based on the prior loss history by type of loan, adjusted for current economic factors. For the three months ended March 31, 2005, the provision for credit losses was $136,000, compared to $900,000 for the three months ended March 31, 2004, a decrease of 84.9 percent. The decrease in the provision for credit losses in the first quarter of 2005 resulted primarily from the low net charge-offs experienced in the first quarter of 2005, which caused historical loss percentages to decrease. As of March 31, 2005, total net charge-offs were $81,000, compared to $605,000 total net charge-offs in the fourth quarter of 2004 and $1.9 million in the first quarter of 2004.

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Non-Interest Income

     The following table sets forth the various components of non-interest income for the periods indicated:

                                 
    Three Months Ended        
    March 31,     Increase (Decrease)  
    2005     2004     Amount     Percentage  
    (Dollars in Thousands)  
Service Charges on Deposit Accounts
  $ 3,730     $ 2,667     $ 1,063       39.9 %
Trade Finance Fees
    945       805       140       17.4 %
Remittance Fees
    468       257       211       82.1 %
Other Service Charges and Fees
    730       261       469       179.7 %
Bank-Owned Life Insurance Income
    205       114       91       79.8 %
Increase in Fair Value of Derivatives
    419       80       339       423.8 %
Other Income
    621       249       372       149.4 %
Gain on Sales of Loans
    308       469       (161 )     (34.3 %)
Gain on Sales of Securities Available for Sale
    82       3       79       2,633.3 %
 
                       
Total Non-Interest Income
  $ 7,508     $ 4,905     $ 2,603       53.1 %
 
                       

     Non-interest income is earned from four major sources: service charges on deposit accounts, fees generated from international trade finance, gain on sales of loans, and gain on sales of securities available for sale. For the three months ended March 31, 2005, non-interest income was $7.5 million, an increase of 53.1 percent from $4.9 million for the three months ended March 31, 2004. The overall increase in non-interest income is due to the PUB merger, which closed on April 30, 2004.

     Service charges on deposit accounts increased by $1.1 million, or 39.9 percent, from $2.7 million for the three months ended March 31, 2004 to $3.7 million for three months ended March 31, 2005. Service charge income on deposit accounts increased with the higher deposit volume and number of accounts as a result of the PUB merger. Average deposits increased by 72.9 percent from $1.5 billion in 2004 to $2.5 billion in 2005. Service charges are constantly reviewed to maximize service charge income while still maintaining a competitive position.

     Fees generated from international trade finance increased by $140,000, or 17.4 percent, from $805,000 for the three months ended March 31, 2004 to $945,000 for the three months ended March 31, 2005. The increase was due to the PUB merger. Average trade finance loans increased by $22.7 million, or 39.0 percent, from $58.2 million in 2004 to $80.9 million in 2005.

     Gain on sales of loans decreased by $161,000, or 34.3 percent, from $469,000 for the three months ended March 31, 2004 to $308,000 for the three months ended March 31, 2005. The decrease in gain on sales of loans resulted from the decreased sales activity in SBA loans due to more loans being held in portfolio. The guaranteed portion of SBA loans is sold in the secondary markets with servicing rights retained.

     Other income increased by $372,000, or 149.4 percent, from $249,000 for the three months ended March 31, 2004 to $621,000 for the three months ended March 31, 2005 due to increases in credit card fee income and sales commissions from mutual funds and insurance products.

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Non-Interest Expenses

     The following table sets forth the breakdown of non-interest expenses for the periods indicated:

                                 
    Three Months Ended        
    March 31,     Increase (Decrease)  
    2005     2004     Amount     Percentage  
    (Dollars in Thousands)  
Salaries and Employee Benefits
  $ 9,167     $ 5,650     $ 3,517       62.2 %
Occupancy and Equipment
    2,231       1,385       846       61.1 %
Data Processing
    1,165       820       345       42.1 %
Supplies and Communications
    579       357       222       62.2 %
Professional Fees
    479       270       209       77.4 %
Advertising and Promotional Expense
    694       545       149       27.3 %
Amortization of Core Deposit Intangible
    732       30       702       2,340.0 %
Decrease in Fair Value of Embedded Option
    573             573       N/A  
Other Operating Expense
    1,785       1,307       478       36.6 %
 
                       
Total Non-Interest Expenses
  $ 17,405     $ 10,364     $ 7,041       67.9 %
 
                       

     For the three months ended March 31, 2005, non-interest expenses were $17.4 million, an increase of $7.0 million, or 67.9 percent, from $10.4 million for the three months ended March 31, 2004. This increase was primarily due to the PUB merger, which closed on April 30, 2004.

     Salaries and employee benefits expenses for the three months ended March 31, 2005 increased $3.5 million, or 62.2 percent, to $9.2 million from $5.7 million for the three months ended March 31, 2004. The increase was due to a 41.6 percent increase in the number of employees following the acquisition of PUB and a $1.3 million increase in bonus accruals.

     Occupancy and equipment expenses for the three months ended March 31, 2005 increased $846,000, or 61.1 percent, to $2.2 million from $1.4 million for the three months ended March 31, 2004, due to the acquisition of twelve former PUB branches.

     Data processing expense for the three months ended March 31, 2005 increased $345,000, or 42.1 percent, to $1.2 million from $0.8 million for the three months ended March 31, 2004. Additional expense was incurred mainly due to an increase in loans and deposits volume related to the acquisition.

     Core deposit premium amortization for the three months ended March 31, 2005 increased $702,000 to $732,000 from $30,000 for the three months ended March 31, 2004. The increase is attributable to the core deposits acquired from PUB.

     Other operating expenses for the three months ended March 31, 2005 increased $458,000, or 34.5 percent, to $1.8 million from $1.3 million for the three months ended March 31, 2004. The increases are primarily attributable to the increase in the number of employees following the acquisition of PUB.

Provision for Income Taxes

     For the three months ended March 31, 2005, we recognized provisions for income taxes of $8.3 million on net income before tax of $21.7 million, representing an effective tax rate of 38.5 percent.

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FINANCIAL CONDITION

Summary of Changes in Balance Sheets — March 31, 2005 Compared to December 31, 2004

     As of March 31, 2005, total assets were $3.14 billion, an increase of $35.2 million, or 1.1 percent, from the December 31, 2004 balance of $3.10 billion. The increase in assets was mainly funded by deposits, which increased by $16.1 million, or 0.6 percent, to $2.54 billion at March 31, 2005 from $2.53 billion at December 31, 2004. Loans remained relatively unchanged during the quarter. At March 31, 2005 and December 31, 2004, loans, net of unearned fees, allowance for loan losses and loans held for sale, totaled $2.23 billion. Investment securities increased $4.9 million, or 1.2 percent, to $423.9 million at March 31, 2005 from $419.0 million at December 31, 2004.

Investment Securities

     Securities are classified as held to maturity or available for sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Those securities that we have the ability and intent to hold to maturity are classified as “held to maturity securities.” All other securities are classified as “available for sale.” There were no trading securities at March 31, 2005. Securities classified as held 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 securities currently held consist primarily of U.S. agency securities, mortgage-backed securities, collateralized mortgage obligations and municipal bonds.

     As of March 31, 2005, held to maturity securities totaled $1.1 million and available for sale securities totaled $422.8 million, compared to $1.1 million and $417.9 million, respectively, at December 31, 2004.

                                                 
    March 31, 2005     December 31, 2004  
                    Unrealized                     Unrealized  
    Amortized     Fair     Gain     Amortized     Fair     Gain  
    Cost     Value     (Loss)     Cost     Value     (Loss)  
    (In Thousands)  
Held to Maturity:
                                               
Municipal Bonds
  $ 691     $ 691     $     $ 691     $ 691     $  
Mortgage-Backed Securities
    390       396       6       399       402       3  
 
                                   
Total Held to Maturity
  $ 1,081     $ 1,087     $ 6     $ 1,090     $ 1,093     $ 3  
 
                                   
Available for Sale:
                                               
Mortgage-Backed Securities
  $ 154,584     $ 153,302     $ (1,282 )   $ 148,706     $ 149,174     $ 468  
U.S. Government Agency Securities
    99,451       98,302       (1,149 )     89,345       89,677       332  
Collateralized Mortgage Obligations
    87,835       86,222       (1,613 )     93,172       92,539       (633 )
Municipal Bonds
    72,535       72,792       257       71,771       73,616       1,845  
Corporate Bonds
    8,344       8,222       (122 )     8,380       8,444       64  
Other Securities
    3,999       3,968       (31 )     4,437       4,433       (4 )
 
                                   
Total Available for Sale
  $ 426,748     $ 422,808     $ (3,940 )   $ 415,811     $ 417,883     $ 2,072  
 
                                   

     The amortized cost and estimated fair value of investment securities at March 31, 2005, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2035, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

                                 
    Available for Sale     Held to Maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
    (In Thousands)  
Within One Year
  $ 4,806     $ 4,779     $     $  
Over One Year Through Five Years
    91,496       90,445              
Over Five Years Through Ten Years
    21,884       21,675       691       691  
Over Ten Years
    66,143       66,385       390       396  
 
                       
 
    184,329       183,284       1,081       1,087  
 
                       
Mortgage-Backed Securities
    154,584       153,302              
Collateralized Mortgage Obligations
    87,835       86,222              
 
                       
 
    242,419       239,524              
 
                       
 
  $ 426,748     $ 422,808     $ 1,081     $ 1,087  
 
                       

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Loan Portfolio

     All loans are carried at face amount, less principal repayments collected, net of deferred loan origination fees and costs, and the allowance for loan losses. Interest on all loans is accrued daily on a simple interest basis. Once a loan is placed on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. Loans are placed on non-accrual status when principal and interest on a loan is past due 90 days or more, unless a loan is both well secured and in the process of collection.

     The following table shows the loan composition by type, including loans held for sale, as of the dates indicated.

                                 
    March 31,     December 31,     Increase (Decrease)  
    2005     2004     Amount     Percentage  
    (Dollars in Thousands)  
Real Estate Loans:
                               
Commercial Property
  $ 751,346     $ 783,539     $ (32,193 )     (4.1 %)
Construction
    94,583       92,521       2,062       2.2 %
Residential Property
    78,588       80,786       (2,198 )     (2.7 %)
 
                       
Total Real Estate Loans
    924,517       956,846       (32,329 )     (3.4 %)
 
                       
Commercial and Industrial Loans:
                               
Commercial Term Loans
    790,554       754,108       36,446       4.8 %
Commercial Lines of Credit
    217,060       201,940       15,120       7.5 %
SBA Loans (1)
    174,542       166,285       8,257       5.0 %
International Loans
    66,067       95,936       (29,869 )     (31.1 %)
 
                       
Total Commercial and Industrial Loans
    1,248,223       1,218,269       29,954       2.5 %
 
                       
Consumer Loans
    84,527       87,526       (2,999 )     (3.4 %)
 
                       
Total Loans — Gross
    2,257,267       2,262,641       (5,374 )     (0.2 %)
Unearned Income on Loans, Net of Costs
    (4,608 )     (5,097 )     489       (9.6 %)
Allowance for Loan Losses
    (22,621 )     (22,702 )     81       (0.4 %)
 
                       
Net Loans Receivable
  $ 2,230,038     $ 2,234,842     $ (4,804 )     (0.2 %)
 
                       


(1)   Amount includes loans held for sale, at the lower of cost or market, of $0 and $3.9 million at March 31, 2005 and December 31, 2004, respectively.

     At March 31, 2005 and December 31, 2004, loans, net of unearned fees, allowance for loan losses and loans held for sale, totaled $2.23 billion. Real estate loans, composed of commercial property, residential property and construction loans, decreased $32.3 million, or 3.4%, to $924.5 million at March 31, 2005 from $956.8 million at December 31, 2004. The decrease in the real estate loan portfolio reflects management’s emphasis on controlling exposure to an excessive concentration in commercial real estate loans.

     Total commercial and industrial loans, composed of domestic commercial property and lines of credit, trade financing and SBA loans, were $1.25 billion at March 31, 2005, which represented an increase of $30.0 million, or 2.5%, from $1.22 billion at December 31, 2004. The increase was primarily due to growth in commercial term loans, commercial lines of credit and SBA loans, partly offset by a decrease of $30.0 million in international loans that was due to normal seasonal fluctuations as these loans have historically decreased during the first quarter.

     Consumer loans decreased $3.0 million, or 3.4%, to $84.5 million at March 31, 2005 from $87.5 million at December 31, 2004.

     At March 31, 2005, accruing loans 90 days past due or more were $500,000, an increase of $292,000 from $208,000 at December 31, 2004. Non-accrual loans were $6.4 million at March 31, 2005, a $0.6 million increase compared to $5.8 million at December 31, 2004. The increase was due to $3.3 million of loans migrating to non-performing status, partially offset by $2.7 million loans returned to performing status.

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     The table below shows the composition of non-performing assets as of the dates indicated.

                 
    March 31,     December 31,  
    2005     2004  
    (In Thousands)  
Non-Accrual Loans
  $ 6,398     $ 5,806  
Loans 90 Days or More Past Due and Still Accruing
    500       208  
 
           
Total Non-Performing Loans
    6,898       6,014  
Other Real Estate Owned
           
 
           
Total Non-Performing Assets
  $ 6,898     $ 6,014  
 
           

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

     The allowance for loan losses and reserve for unfunded loan commitments are maintained at levels that management believes are adequate to absorb probable loan losses inherent in various financial instruments. The adequacy of each of the allowance and the reserve is determined through periodic evaluations of the loan portfolio and other pertinent factors, which are inherently subjective as the process calls for various significant estimates and assumptions. Among other factors, the estimates involve the amounts and timing of expected future cash flows and fair value of collateral on impaired loans, estimated losses on loans based on historical loss experience, various qualitative factors, and uncertainties in estimating losses and inherent risks in the various credit portfolios, which may be subject to substantial change.

     On a quarterly basis, we utilize a classification migration model and individual loan review analysis tools as starting points for determining the adequacy of the allowance for loan losses and reserve for unfunded loan commitments. Our loss migration analysis tracks twelve quarters of loan losses to determine historical loss experience in every classification category (i.e., “pass,” “special mention,” “substandard” and “doubtful”) for each loan type, except consumer loans (automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. The individual loan review analysis is the other part of the allowance allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolios. Further assignments are made based on general and specific economic conditions, as well as performance trends within specific portfolio segments and individual concentrations of credit.

     As of March 31, 2005, the allowance for loan losses was $22.6 million, a decrease of $0.1 million, or 0.4%, compared to $22.7 million at December 31, 2004. The decrease in the allowance for loan losses was primarily due to low net charge-offs experienced in the first quarter of 2005, which caused historical loss percentages to decrease. As of March 31, 2005, the reserve for unfunded loan commitments was $1.9 million, an increase of $0.1 million, or 7.6%, compared to $1.8 million at December 31, 2004.

     The loan loss estimation is based on historical losses, and specific allocations of the allowance are performed on a quarterly basis. Adjustments to allowance allocations for specific segments of the loan portfolio may be made as a result thereof, based on the accuracy of forecasted loss amounts and other loan-related or policy-related issues.

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     We determine the appropriate overall allowance for loan losses and reserve for unfunded loan commitments based on the foregoing analysis, taking into account management’s judgment. The allowance methodology is reviewed on a periodic basis and modified as appropriate. Based on this analysis, including the aforementioned factors, we believe that the allowance for loan losses and reserve for unfunded loan commitments are adequate as of March 31, 2005.

                 
    Three Months Ended  
    March 31,     December 31,  
    2005     2004  
    (Dollars in Thousands)  
Allowance for Loan Losses:
               
Balance at Beginning of Period
  $ 22,702     $ 22,150  
 
           
Actual Charge-Offs
    (603 )     (1,040 )
Recoveries on Loans Previously Charged Off
    522       435  
 
           
Net Loan Charge-Offs
    (81 )     (605 )
 
           
Provision Charged to Operating Expenses
          1,157  
 
           
Balance at End of Period
  $ 22,621     $ 22,702  
 
           
 
               
Reserve for Unfunded Loan Commitments:
               
Balance at Beginning of Year
  $ 1,800     $ 1,800  
Provision Charged to Operating Expenses
    136        
 
           
Balance at End of Year
  $ 1,936     $ 1,800  
 
           
 
               
Ratios:
               
Net Loan Charge-Offs to Average Total Gross Loans (1)
    0.01 %     0.11 %
Net Loan Charge-Offs to Total Gross Loans at End of Period (1)
    0.01 %     0.11 %
Allowance for Loan Losses to Average Total Gross Loans
    1.01 %     1.00 %
Allowance for Loan Losses to Total Gross Loans at End of Period
    1.00 %     1.00 %
Net Loan Charge-Offs to Allowance for Loan Losses (1)
    1.45 %     10.60 %
Net Loan Charge-Offs to Provision Charged to Operating Expenses (1)
          208.02 %
Allowance for Loan Losses to Non-Performing Loans
    327.94 %     377.49 %
 
               
Balances:
               
Average Total Gross Loans Outstanding During Period
  $ 2,239,174     $ 2,269,170  
Total Gross Loans Outstanding at End of Period
  $ 2,257,267     $ 2,262,641  
Non-Performing Loans at End of Period
  $ 6,898     $ 6,014  


(1) Net loan charge-offs annualized to calculate the ratios.

     We concentrate the majority of our interest-earning assets in loans. In all forms of lending, there are inherent risks. We concentrate the preponderance of our loan portfolio in either commercial loans or real estate loans. A small part of the portfolio is represented by installment loans, primarily for the purchase of automobiles.

     While we believe that our underwriting criteria are prudent, outside factors can adversely impact credit quality. A portion of the portfolio is represented by loans guaranteed by the SBA, which further reduces the potential for loss. We also utilize credit review in an effort to maintain loan quality. Loans are reviewed throughout the year with special attention given to new loans and those loans that are classified as “special mention” and worse. In addition to our internal grading system, loans criticized by this credit review are downgraded with appropriate allowances added if required.

     Although management believes the allowance is adequate to absorb losses as they arise, no assurance can be given that we will not sustain losses in any given period, which could be substantial in relation to the size of the allowance.

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Deposits

     The following table shows the composition of deposits by type as of the dates indicated.

                                 
    March 31,     December 31,     Increase (Decrease)  
    2005     2004     Amount     Percentage  
            (Dollars in Thousands)          
Deposits:
                               
Non-Interest-Bearing
  $ 769,852     $ 729,583     $ 40,269       5.5 %
Interest-Bearing:
                               
Money Market Checking
    566,525       613,662       (47,137 )     (7.7 %)
Savings
    146,566       153,862       (7,296 )     (4.7 %)
Time Deposits of $100,000 or More
    832,928       756,580       76,348       10.1 %
Other Time Deposits
    229,027       275,120       (46,093 )     (16.8 %)
 
                       
Total Deposits
  $ 2,544,898     $ 2,528,807     $ 16,091       0.6 %
 
                       

     Core deposits (defined as demand, money market checking and savings deposits) decreased $14.2 million, or 0.9%, to $1.48 billion at March 31, 2005 from $1.50 billion at December 31, 2004. The $40.3 million increase in non-interest-bearing deposits was due to continued efforts to increase the net interest margin by changing the deposit composition mix between interest-bearing and non-interest-bearing accounts.

Borrowings

     Borrowings consist of advances from the Federal Home Loan Bank of San Francisco (“FHLB”) and junior subordinated debentures associated with trust preferred securities.

     At March 31, 2005 and December 31, 2004, advances from the FHLB were $66.3 million and $66.4 million, respectively. Junior subordinated debentures totaled $82.4 million at March 31, 2005 and December 31, 2004. Among the advances from the FHLB, short-term borrowings with a remaining maturity of less than one year were $25.0 million, and the weighted-average interest rate thereon was 3.81%.

LIQUIDITY AND CAPITAL RESOURCES

     Liquidity of the Bank is defined as the ability to supply cash as quickly as needed without causing a severe deterioration in its profitability. The Bank’s major liquidity on the asset side stems from available cash positions, Federal funds sold and short-term investments categorized as trading and/or available for sale securities, which can be disposed of without significant capital losses in the ordinary course of business. Liquidity sources on the liability side come from borrowing capacities, which include Federal funds lines, repurchase agreements and FHLB advances. Thus, maintenance of high quality loans and securities that can be used for collateral in repurchase agreements or other secured borrowings is another important feature of liquidity management.

     Liquidity risk may occur when the Bank has few short-duration securities available for sale and/or is not capable of raising funds as quickly as necessary at acceptable rates in the capital or money markets. Also, a heavy and sudden increase in cash demands for loans and/or deposits can tighten the liquidity position. Several ratios are reviewed on a daily, monthly and quarterly basis to manage the liquidity position and to preempt any liquidity crisis. Six specific statistics, which include the loans-to-assets ratio, off-balance sheet items and dependence on non-core deposits, foreign deposits, lines of credit and liquid assets, are reviewed regularly for liquidity management purposes.

     The maintenance of a proper level of liquid assets is critical for both the liquidity and the profitability of the Bank. Since the primary objective of the investment portfolio is to ensure proper liquidity of the Bank, management maintains appropriate levels of liquid assets to avoid exposure to higher than necessary liquidity risk.

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     At March 31, 2005, short-term investments totaled 5.8% of total assets, compared to 4.8% at December 31, 2004. Core deposits, expressed as a percentage of total assets, decreased slightly to 40.8% at March 31, 2005 from 41.1% at December 31, 2004, while short-term non-core funding as a percentage of total assets increased to 34.1% at March 31, 2005 from 33.2% at December 31, 2004. The ratio of short-term investments to short-term non-core funding increased to 27.3% at March 31, 2005 from 22.6% at December 31, 2004. Off-balance sheet items, primarily unused credit lines, as a percentage of total assets increased to 16.8% at March 31, 2005 from 15.0% at December 31, 2004.

     The Bank saw a drop-off in the demand for loans at the beginning of the first quarter of 2005, but the demand for loans increased toward the end of the quarter. Net loans as a percentage of total assets decreased slightly to 71.2% at March 31, 2005 from 71.9% at December 31, 2004.

     In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, cash generated from operations, and access to capital from financial markets or the issuance of additional securities, including common stock or notes, to meet our capital needs. Total shareholders’ equity was $408.5 million at March 31, 2005, which represented an increase of $8.5 million, or 2.1%, over total shareholders’ equity of $399.9 million at December 31, 2004.

     The regulatory agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8.0% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4.0%. In addition to the risk-based guidelines, regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio, of 4.0%. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio is 3.0%. In addition to these uniform risk-based capital guidelines that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

     At March 31, 2005, Hanmi Financial’s Tier 1 capital (shareholders’ equity plus junior subordinated debentures less intangible assets) was $271.0 million. This represented an increase of $80.1 million, or 41.9%, over Tier 1 capital of $190.9 million at March 31, 2004. At March 31, 2005, Hanmi Financial had a ratio of total capital to total risk-weighted assets of 12.34% and a ratio of Tier 1 capital to total risk-weighted assets of 11.32%. The Tier 1 leverage ratio was 9.41% at March 31, 2005.

     The capital ratios of Hanmi Financial and Hanmi Bank were as follows as of March 31, 2005:

                                                 
                    Minimum     Minimum to Be  
                    Regulatory     Categorized as  
    Actual     Requirement     “Well Capitalized”  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in Thousands)  
March 31, 2005
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 295,562       12.34 %   $ 191,550       8.00 %     N/A       N/A  
Hanmi Bank
  $ 290,563       12.16 %   $ 191,130       8.00 %   $ 238,913       10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 271,005       11.32 %   $ 95,775       4.00 %     N/A       N/A  
Hanmi Bank
  $ 266,006       11.13 %   $ 95,565       4.00 %   $ 143,348       6.00 %
Tier 1 Capital (to Average Total Assets):
                                               
Hanmi Financial
  $ 271,005       9.41 %   $ 115,234       4.00 %     N/A       N/A  
Hanmi Bank
  $ 266,006       9.25 %   $ 115,024       4.00 %   $ 143,780       5.00 %
 
                                               

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL

     Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate. Under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to fluctuations in market interest rate. The level of interest rate risk can be managed through the changing of gap positions and the volume of fixed-income assets and so forth. For successful management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.

     The following table shows the status of the gap position as of March 31, 2005:

                                                 
            After     After One                    
            Three     Year But                    
    Within     Months     Within     After     Non-        
    Three     But Within     Five     Five     Interest-        
    Months     One Year     Years     Years     Sensitive     Total  
    (Dollars in Thousands)  
Assets:
                                               
Cash (Non-Interest-Earning)
  $     $     $     $     $ 80,820     $ 80,820  
Cash (Interest-Earning)
    53,021                               53,021  
Securities Purchased Under Agreements to Resell
    25,000                               25,000  
Federal Reserve Bank and FHLB Stock
                      21,961             21,961  
Securities:
                                               
Fixed Rate
    39,375       57,157       142,546       123,801             362,879  
Floating Rate
    8,673       635       44,044       7,658             61,010  
Loans:
                                               
Fixed Rate
    21,536       39,587       110,947       49,195             221,265  
Floating Rate
    2,001,985       10,139       17,480                   2,029,604  
Non-Accrual
                            6,398       6,398  
Unearned Income, Allowance for Loan Losses and Discount
                            (27,229 )     (27,229 )
Derivatives
    (70,000 )           70,000                    
Other Assets
          22,073                   282,557       304,630  
 
                                   
Total Assets
  $ 2,079,590     $ 129,591     $ 385,017     $ 202,615     $ 342,546     $ 3,139,359  
 
                                   
 
                                               
Liabilities
                                               
Deposits:
                                               
Demand Deposits
  $ 79,423     $ 205,290     $ 416,276     $ 68,863     $     $ 769,852  
Savings
    19,759       43,330       73,073       10,404             146,566  
Money Market Checking
    74,601       185,788       240,535       65,601             566,525  
Time Deposits of $100,000 or More
    370,176       448,004       10,261       4,487             832,928  
Other Time Deposits
    94,724       121,273       9,136       3,894             229,027  
Other Borrowed Funds
    15,808       10,000       36,000       5,303             67,111  
Junior Subordinated Debentures
    82,406                               82,406  
Fair Value Swaps
    24,687       (24,687 )                        
Other Liabilities
                            36,494       36,494  
Shareholders’ Equity
                            408,450       408,450  
 
                                   
Total Liabilities and Shareholders’ Equity
  $ 761,584     $ 988,998     $ 785,281     $ 158,552     $ 444,944     $ 3,139,359  
 
                                   
 
                                               
Repricing Gap
  $ 1,318,006     $ (859,407 )   $ (400,264 )   $ 44,063     $ (102,398 )        
Cumulative Repricing Gap
  $ 1,318,006     $ 458,599     $ 58,335     $ 102,398     $          
Cumulative Repricing Gap as a Percentage of Total Assets
    41.98 %     14.61 %     1.86 %     3.26 %              
Cumulative Repricing Gap as a Percentage of Interest- Earning Assets
    47.50 %     16.53 %     2.10 %     3.69 %              

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     The repricing gap analysis measures the static timing of repricing risk of assets and liabilities, i.e., a point-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same time period. Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no maturity dates (demand deposits, savings and money market checking) are assigned to categories based on expected decay rates.

     On March 31, 2005, the cumulative repricing gap as a percentage of interest-earning assets in the less-than-three month period was 47.50%. This was a slight increase from the previous quarter’s figure of 46.00%. The increase was caused by a decrease in other time deposits. Derivatives of $70.0 million lessened the gap impact in the period. The cumulative repricing percentage in the three to twelve-month period also moved slightly higher, reaching 16.53%. In terms of fixed and floating gap positions, which are used internally to control repricing risk, the accumulated fixed gap position between assets and liabilities as a percentage of interest-earning assets was (20.21)%. The floating gap position in the less-than-one year period was 19.53%.

     The following table summarizes the status of the gap position as of the dates indicated:

                                 
    Less than Three Months     Three to Twelve Months  
    March 31,     December 31,     March 31,     December 31,  
    2005     2004     2005     2004  
    (Dollars in Thousands)  
Cumulative Repricing Gap
  $ 1,318,006     $ 1,274,507     $ 458,599     $ 451,176  
Percentage of Total Assets
    41.98 %     41.06 %     14.61 %     14.53 %
Percentage of Interest-Earning Assets
    47.50 %     46.00 %     16.53 %     16.29 %

     The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect the our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

CONTRACTUAL OBLIGATIONS

     There were no material changes to the contractual obligations described in our Annual Report on Form 10-K for the year ended December 31, 2004.

DIVIDENDS

     On March 19, 2005, we declared a quarterly cash dividend of $0.05 per common share for the first quarter of 2005. The dividend was paid on April 15, 2005. Future dividend payments are subject to the future earnings and legal requirements and the discretion of the Board of Directors.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     The Chief Executive Officer and Principal Financial Officer directly supervised and participated in evaluating the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005 and concluded that these controls and procedures were effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

     Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     From time to time, Hanmi Financial or Hanmi Bank is a party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel as to the current status of these claims or proceedings to which Hanmi Financial or Hanmi Bank is a party, management is of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the financial condition or results of operations of Hanmi Financial or Hanmi Bank.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS

             
    Exhibit    
    Number   Document
    31.1     Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
 
           
    31.2     Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
 
           
    32.1     Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
           
    32.2     Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

             
    HANMI FINANCIAL CORPORATION    
 
           
Date:May 10, 2005     
  By:   /s/ Sung Won Sohn, Ph.D.                        
   
      Sung Won Sohn, Ph.D.
President and Chief Executive Officer
   
 
           
                         
  By:
   
  /s/ Michael J. Winiarski
Michael J. Winiarski
Senior Vice President and Chief Financial Officer
   

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