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, 2006
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)
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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.
Large Accelerated Filer o            Accelerated Filer þ            Non-Accelerated Filer o
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).       Yes o            No þ
     As of May 1, 2006, there were 48,872,578 outstanding shares of the issuer’s Common Stock.
 
 

 


Table of Contents

HANMI FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2006
TABLE OF CONTENTS
             
        Page  
 
  PART I — FINANCIAL INFORMATION        
 
           
  FINANCIAL STATEMENTS        
 
           
 
  Consolidated Statements of Financial Condition (Unaudited)     1  
 
  Consolidated Statements of Income (Unaudited)     2  
 
  Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Unaudited)     3  
 
  Consolidated Statements of Cash Flows (Unaudited)     4  
 
  Notes to Consolidated Financial Statements (Unaudited)     5  
 
           
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     12  
 
           
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     30  
 
           
  CONTROLS AND PROCEDURES     30  
 
           
 
  PART II — OTHER INFORMATION        
 
           
  LEGAL PROCEEDINGS     31  
 
           
  RISK FACTORS     31  
 
           
  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     31  
 
           
  DEFAULTS UPON SENIOR SECURITIES     31  
 
           
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     31  
 
           
  OTHER INFORMATION     31  
 
           
  EXHIBITS     31  
 
           
        32  
 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,  
    2006     2005  
ASSETS
               
Cash and Due From Banks
  $ 97,780     $ 103,477  
Federal Funds Sold and Securities Purchased Under Agreements to Resell
          60,000  
 
           
Cash and Cash Equivalents
    97,780       163,477  
Federal Reserve Bank Stock
    12,350       12,350  
Federal Home Loan Bank Stock
    12,380       12,237  
Securities Held to Maturity, at Amortized Cost (Fair Value: 2006 — $1,039; 2005 — $1,051)
    1,039       1,049  
Securities Available for Sale, at Fair Value
    429,845       442,863  
Loans Receivable, Net of Allowance for Loan Losses of $26,703 and $24,963 at March 31, 2006 and December 31, 2005, Respectively
    2,640,725       2,468,015  
Loans Held for Sale, at the Lower of Cost or Fair Value
    1,357       1,065  
Customers’ Liability on Acceptances
    14,010       8,432  
Premises and Equipment, Net
    20,565       20,784  
Accrued Interest Receivable
    14,398       14,120  
Other Real Estate Owned
    545        
Deferred Income Taxes
    9,344       9,651  
Servicing Asset
    4,035       3,910  
Goodwill
    209,058       209,058  
Core Deposit Intangible
    8,066       8,691  
Bank-Owned Life Insurance
    22,932       22,713  
Other Assets
    16,555       15,837  
 
           
 
               
TOTAL ASSETS
  $ 3,514,984     $ 3,414,252  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
LIABILITIES:
               
Deposits:
               
Noninterest-Bearing
  $ 748,530     $ 738,618  
Interest-Bearing:
               
Savings
    114,336       121,574  
Money Market Checking
    495,365       526,171  
Time Deposits of $100,000 or More
    1,188,982       1,161,950  
Other Time Deposits
    271,653       277,801  
 
           
Total Deposits
    2,818,866       2,826,114  
Accrued Interest Payable
    12,734       11,911  
Acceptances Outstanding
    14,010       8,432  
Other Borrowed Funds
    131,533       46,331  
Junior Subordinated Debentures
    82,406       82,406  
Other Liabilities
    16,231       12,281  
 
           
Total Liabilities
    3,075,780       2,987,475  
 
           
SHAREHOLDERS’ EQUITY:
               
Common Stock, $.001 Par Value; Authorized 200,000,000 Shares; Issued 50,019,216 Shares (48,856,216 Outstanding) at March 31, 2006 and Issued 49,821,798 Shares (48,658,798 Outstanding) at December 31, 2005
    50       50  
Additional Paid-In Capital
    341,027       339,991  
Unearned Compensation
          (1,150 )
Accumulated Other Comprehensive Loss — Unrealized Loss on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes of ($2,947) and ($1,671) at March 31, 2006 and December 31, 2005, Respectively
    (5,886 )     (4,383 )
Retained Earnings
    124,054       112,310  
 
           
 
    459,245       446,818  
Less Treasury Stock, at Cost; 1,163,000 Shares at March 31, 2006 and December 31, 2005
    (20,041 )     (20,041 )
 
           
Total Shareholders’ Equity
    439,204       426,777  
 
           
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 3,514,984     $ 3,414,252  
 
           
See Accompanying Notes to Consolidated Financial Statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
                 
    Three Months Ended  
    March 31,  
    2006     2005  
INTEREST INCOME:
               
Interest and Fees on Loans
  $ 52,637     $ 38,226  
Interest on Investments
    5,099       4,648  
Interest on Federal Funds Sold
    289       335  
 
           
Total Interest Income
    58,025       43,209  
 
           
 
               
INTEREST EXPENSE:
               
Interest on Deposits
    19,591       9,811  
Interest on Borrowings
    2,089       1,536  
 
           
Total Interest Expense
    21,680       11,347  
 
           
 
               
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
    36,345       31,862  
Provision for Credit Losses
    2,960       136  
 
           
 
               
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
    33,385       31,726  
 
           
 
               
NON-INTEREST INCOME:
               
Service Charges on Deposit Accounts
    4,231       3,730  
Trade Finance Fees
    1,071       945  
Remittance Fees
    488       468  
Other Service Charges and Fees
    534       579  
Bank-Owned Life Insurance Income
    218       205  
Increase in Fair Value of Derivatives
    225       419  
Other Income
    643       621  
Gain on Sales of Loans
    839       308  
Gain on Sales of Securities Available for Sale
    5       82  
 
           
Total Non-Interest Income
    8,254       7,357  
 
           
 
               
NON-INTEREST EXPENSES:
               
Salaries and Employee Benefits
    9,161       9,167  
Occupancy and Equipment
    2,318       2,231  
Data Processing
    1,215       1,165  
Professional Fees
    668       479  
Advertising and Promotion
    646       694  
Supplies and Communication
    636       579  
Amortization of Core Deposit Intangible
    625       732  
Decrease in Fair Value of Embedded Options
    102       573  
Other Operating Expenses
    2,068       1,785  
 
           
Total Non-Interest Expenses
    17,439       17,405  
 
           
 
               
INCOME BEFORE INCOME TAXES
    24,200       21,678  
Income Taxes
    9,398       8,346  
 
           
 
               
NET INCOME
  $ 14,802     $ 13,332  
 
           
 
               
EARNINGS PER SHARE:
               
Basic
  $ 0.30     $ 0.27  
Diluted
  $ 0.30     $ 0.27  
 
               
WEIGHTED-AVERAGE SHARES OUTSTANDING:
               
Basic
    48,714,435       49,460,375  
Diluted
    49,318,397       50,247,408  
 
               
DIVIDENDS DECLARED PER SHARE
  $ 0.06     $ 0.05  
 
               
See Accompanying Notes to Consolidated Financial Statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(Dollars in Thousands)
                                                                                 
    Common Stock - Number of Shares     Shareholders’ Equity  
                                                    Accumulated                      
                                    Additional             Other             Treasury     Total  
            Treasury             Common     Paid-in     Unearned     Comprehensive     Retained     Stock,     Shareholders’  
    Issued     Stock     Outstanding     Stock     Capital     Compensation     Income (Loss)     Earnings     at Cost     Equity  
BALANCE — DECEMBER 31, 2004
    49,330,704             49,330,704     $ 49     $ 334,932     $     $ 1,035     $ 63,894     $     $ 399,910  
 
                                                                               
Exercises of Stock Options
    190,973             190,973       1       1,310                               1,311  
Restricted Stock Award
    100,000             100,000             1,815       (1,815 )                        
Share-Based Compensation Expense
                                  393                         393  
Tax Benefit from Exercises of Stock Options
                            333                               333  
Cash Dividends
                                              (2,481 )           (2,481 )
 
                                                                               
Comprehensive Income:
                                                                               
Net Income
                                              13,332             13,332  
Change in Unrealized Loss on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Tax
                                        (4,348 )                 (4,348 )
 
                                                           
Total Comprehensive Income
                                                                            8,984  
 
                                                                             
 
                                                                               
BALANCE — MARCH 31, 2005
    49,621,677             49,621,677     $ 50     $ 338,390     $ (1,422 )   $ (3,313 )   $ 74,745     $     $ 408,450  
 
                                                           
 
                                                                               
BALANCE — DECEMBER 31, 2005
    49,821,798       (1,163,000 )     48,658,798     $ 50     $ 339,991     $ (1,150 )   $ (4,383 )   $ 112,310     $ (20,041 )   $ 426,777  
 
                                                                               
Cumulative Adjustment — Share-Based Compensation
                            (916 )     1,150                         234  
Exercises of Stock Options and Stock Warrants
    197,418             197,418             1,522                               1,522  
Share-Based Compensation Expense
                            101                               101  
Tax Benefit from Exercises of Stock Options
                            329                               329  
Cash Dividends
                                              (3,058 )           (3,058 )
 
                                                                               
Comprehensive Income:
                                                                               
Net Income
                                              14,802             14,802  
Change in Unrealized Loss on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Tax
                                        (1,503 )                 (1,503 )
 
                                                           
Total Comprehensive Income
                                                                            13,299  
 
                                                                             
 
                                                                               
BALANCE — MARCH 31, 2006
    50,019,216       (1,163,000 )     48,856,216     $ 50     $ 341,027     $     $ (5,886 )   $ 124,054     $ (20,041 )   $ 439,204  
 
                                                           
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,  
    2006     2005  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 14,802     $ 13,332  
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Provided By Operating Activities:
               
Depreciation and Amortization of Premises and Equipment
    709       685  
Amortization of Premiums and Accretion of Discounts on Investments, Net
    83       168  
Amortization of Core Deposit Intangible
    625       732  
Share-Based Compensation Expense
    101       393  
Provision for Credit Losses
    2,960       136  
Federal Home Loan Bank Stock Dividend
    (143 )      
Gain on Sales of Securities Available for Sale
    (5 )     (82 )
Increase in Fair Value of Derivatives
    (225 )     (419 )
Decrease in Fair Value of Embedded Options
    102       573  
Gain on Sales of Loans
    (839 )     (308 )
Loss on Sales of Premises and Equipment
    16       15  
Tax Benefit from Exercises of Stock Options
          333  
Deferred Tax Benefit
    (1,574 )     (6,279 )
Origination of Loans Held for Sale
    (22,374 )     (1,204 )
Proceeds from Sales of Loans Held for Sale
    22,921       5,320  
Increase in Accrued Interest Receivable
    (278 )     (1,403 )
Increase in Cash Surrender Value of Bank-Owned Life Insurance
    (219 )     (205 )
(Increase) Decrease in Other Assets
    (6,966 )     795  
Increase (Decrease) in Accrued Interest Payable
    823       (462 )
Increase in Other Liabilities
    13,304       12,225  
 
           
Net Cash and Cash Equivalents Provided By Operating Activities
    23,823       24,345  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from Matured or Called Securities Available for Sale
    11,082       41,121  
Proceeds from Matured or Called Securities Held to Maturity
    10       9  
Proceeds from Sales of Securities Available for Sale
    5,000       1,442  
Net (Increase) Decrease in Loans Receivable
    (175,670 )     996  
Purchases of Securities Available for Sale
    (6,183 )     (47,238 )
Purchases of Premises and Equipment
    (506 )     (1,737 )
 
           
Net Cash and Cash Equivalents Used In Investing Activities
    (166,267 )     (5,407 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
(Decrease) Increase in Deposits
    (7,248 )     16,091  
Proceeds from Exercises of Stock Options and Stock Warrants
    1,522       1,311  
Tax Benefit from Exercises of Stock Options
    329        
Cash Dividends Paid
    (3,058 )     (2,481 )
Increase (Decrease) in Other Borrowed Funds
    85,202       (2,182 )
 
           
Net Cash and Cash Equivalents Provided By Financing Activities
    76,747       12,739  
 
           
 
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (65,697 )     31,677  
Cash and Cash Equivalents — Beginning of Period
    163,477       127,164  
 
           
 
               
CASH AND CASH EQUIVALENTS END OF PERIOD
  $ 97,780     $ 158,841  
 
           
 
               
Supplemental Disclosures of Cash Flow Information:
               
Interest Paid
  $ 10,221     $ 10,885  
Income Taxes Paid
  $ 1,900     $ 500  
 
               
Supplemental Schedule of Non-Cash Investing and Financing Activities:
               
Transfer of Loans to Other Real Estate Owned
  $ 545     $  
Accrued Dividends
  $ 3,001     $ 2,481  
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, 2006 AND 2005
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Presentation
     Hanmi Financial Corporation (“Hanmi Financial”, “we” or “us”) 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. The Bank is a community bank conducting general business banking with its primary market encompassing the multi-ethnic populations of Los Angeles, Orange, San Diego, San Francisco and Santa Clara counties of the State of California. 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. As of March 31, 2006, the Bank maintained a branch network of 22 locations, serving individuals and small- to medium-sized businesses in its primary market. The Bank also has five loan production offices in California, Georgia, Illinois, Virginia and Washington.
     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, 2006, 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 (“GAAP”). The interim information should be read in conjunction with our 2005 Annual Report on Form 10-K.
     Descriptions of our significant accounting policies are included in “Note 1 Summary of Significant Accounting Policies” in our 2005 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.
     Stock-Based Compensation
     We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), on January 1, 2006 using the “modified prospective” method. Under this method, awards that are granted, modified or settled after December 31, 2005 are measured and accounted for in accordance with SFAS No. 123(R). Also under this method, expense is recognized for services attributed to the current period for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Prior to the adoption of SFAS No. 123(R), we accounted for stock compensation under the intrinsic value method permitted by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations. Accordingly, we previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
     The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 in 2005.
         
    Three Months Ended  
    March 31, 2005  
    (Dollars in Thousands,  
    Except Per Share Data)  
Net Income — As Reported
  $ 13,332  
 
       
Add — Share-Based Employee Compensation Expense Included in Reported Net Income, Net of Related Tax Effects
    242  
 
       
Deduct — Total Share-Based Employee Compensation Expense Associated with Stock Options Determined Under Fair Value Method for All Option Awards, Net of Related Tax Effects
    (527 )
 
     
 
       
Net Income — Pro Forma
  $ 13,047  
 
     
 
       
Earnings Per Share — As Reported:
       
Basic
  $ 0.27  
Diluted
  $ 0.27  
 
       
Earnings Per Share — Pro Forma:
       
Basic
  $ 0.26  
Diluted
  $ 0.26  
     SFAS No. 123(R) requires that cash flows resulting from the realization of tax deductions in excess of the compensation cost recognized (excess tax benefits) are to be classified as financing cash flows. Before the adoption of SFAS No. 123(R), we presented all tax benefits realized from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. For the three months ended March 31, 2006 and 2005, excess tax benefits of $329,000 and $333,000, respectively, are shown as financing cash inflows and operating cash inflows, respectively, in the Consolidated Statements of Cash Flows.
     In November 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of the Share-Based Payment Awards.” We have adopted the alternative transition method prescribed by Staff Position No. FAS 123R-3.
     In addition, SFAS No. 123(R) requires that any unearned compensation related to awards granted prior to the adoption of SFAS No. 123(R) must be eliminated against the appropriate equity accounts. As a result, the presentation of Shareholders’ Equity was revised to reflect the transfer of the balance previously reported in Unearned Compensation to Additional Paid-In Capital.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 2 — EMPLOYEE STOCK-BASED COMPENSATION
     At March 31, 2006, we had two stock incentive plans, the Year 2000 Stock Option Plan and the 2004 CEO Stock Option Plan (collectively, the “Plans”), which provide for the granting of non-qualified and incentive stock options and restricted stock awards to employees (including officers and directors).
     Year 2000 Stock Option Plan
     Under the Year 2000 Stock Option Plan, we may grant options for up to 5,430,742 shares of common stock. As of March 31, 2006, 3,071,027 shares were still available for issuance.
     All stock options granted under the Year 2000 Stock Option Plan have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted under the Year 2000 Stock Option Plan generally vest based on five years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). New shares of common stock may be issued or treasury shares may be utilized upon the exercise of stock options.
     For the three months ended March 31, 2006 and 2005, the estimated weighted-average fair value of options granted under the Year 2000 Stock Option Plan was $5.54 per share and $5.49 per share, respectively. The weighted-average fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 1.35 percent and 1.07 percent in 2006 and 2005, respectively; expected volatility of 31.9 percent and 33.0 percent in 2006 and 2005, respectively; expected term of 4.9 years and 4.1 years in 2006 and 2005, respectively; and risk-free interest rates of 4.61 percent and 4.11 percent in 2006 and 2005, respectively.
     Expected volatility is determined based on the historical daily volatility of our stock price over a period equal to the expected term of the options granted. The expected term of the options represents the period of time that options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
     The grant date fair value of options granted under the Year 2000 Stock Option Plan during the three months ended March 31, 2006 and 2005 was $50,000 and $250,000, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $1.5 million and $3.4 million, respectively. Cash received from options exercised totaled $426,000 and $1.3 million for the three months ended March 31, 2006 and 2005, respectively. The actual tax benefit realized from tax deductions on options exercised during the three months ended March 31, 2006 and 2005 was $329,000 and $333,000, respectively.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 2 — EMPLOYEE STOCK-BASED COMPENSATION (Continued)
     The following is a summary of the transactions under the Year 2000 Stock Option Plan for the three months ended March 31, 2006:
                 
            Weighted-  
            Average  
            Exercise  
    Number     Price Per  
    of Shares     Share  
Options Outstanding — January 1, 2006
    1,173,712     $ 10.55  
Options Granted
    9,000     $ 17.74  
Options Cancelled/Expired
    (32,470 )   $ 13.65  
Options Exercised
    (82,026 )   $ 5.19  
 
             
 
               
Options Outstanding — March 31, 2006
    1,068,216     $ 10.93  
 
             
 
               
Options Exercisable — March 31, 2006
    539,887     $ 8.58  
 
             
     The following is a summary of the transactions for non-vested stock options under the Year 2000 Stock Option Plan for the three months ended March 31, 2006:
                 
            Weighted-  
            Average  
            Grant Date  
    Number     Fair Value  
    of Shares     Per Share  
Non-Vested Stock Options Outstanding — January 1, 2006
    652,710     $ 4.07  
Non-Vested Options Granted
    9,000     $ 5.54  
Non-Vested Options Cancelled/Expired
    (32,470 )   $ 4.06  
Non-Vested Options Vested
    (100,911 )   $ 3.73  
 
             
 
               
Non-Vested Options Outstanding — March 31, 2006
    528,329     $ 4.16  
 
             
     As of March 31, 2006, the total compensation cost not yet recognized under the Year 2000 Stock Option Plan was $1.3 million with a weighted-average recognition period of 2.8 years.
     As of March 31, 2006, stock options outstanding under the Year 2000 Stock Option Plan were as follows:
                                                                 
    Options Outstanding     Options Exercisable  
                    Weighted-     Weighted-                     Weighted-     Weighted-  
                    Average     Average                     Average     Average  
                    Exercise     Remaining                     Exercise     Remaining  
   Exercise   Number     Intrinsic     Price Per     Contractual     Number     Intrinsic     Price Per     Contractual  
Price Range   Outstanding     Value     Share     Life     Outstanding     Value     Share     Life  
(Dollars in Thousands, Except Per Share Data)  
$  3.27 to $  3.99
    156,666     $ 592     $ 3.78     4.5 years     156,666     $ 592     $ 3.78     4.5 years
$  4.00 to $  7.99
    260,572       1,840     $ 7.06     5.1 years     182,419       1,290     $ 7.07     4.9 years
$  8.00 to $11.99
    2,624       27     $ 10.44     0.1 years     2,624       27     $ 10.44     0.1 years
$12.00 to $15.99
    558,800       7,641     $ 13.67     8.0 years     189,067       2,555     $ 13.51     7.9 years
$16.00 to $19.10
    89,554       1,578     $ 17.62     9.1 years     9,111       170     $ 18.66     8.9 years
 
                                                       
 
    1,068,216     $ 11,678     $ 10.93     6.9 years     539,887     $ 4,634     $ 8.58     5.9 years
 
                                                       

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 2 — EMPLOYEE STOCK-BASED COMPENSATION (Continued)
     2004 CEO Stock Option Plan
     Under the 2004 CEO Stock Option Plan, a total of 350,000 stock options were granted to our Chief Executive Officer. As of March 31, 2006, there were no additional shares available for issuance.
     All stock options granted under the 2004 CEO Stock Option Plan have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted under the 2004 CEO Stock Option Plan vest based on six years of continuous service and expire ten years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). New shares of common stock may be issued or treasury shares may be utilized upon the exercise of stock options.
     There were no stock options granted under the 2004 CEO Stock Option Plan during the three months ended March 31, 2006 and 2005.
     The following is a summary of the transactions under the 2004 CEO Stock Option Plan for the three months ended March 31, 2006:
                 
            Exercise  
    Number     Price Per  
    of Shares     Share  
Options Outstanding — January 1, 2006
    350,000     $ 17.17  
 
             
 
               
Options Outstanding — March 31, 2006
    350,000     $ 17.17  
 
             
 
               
Options Exercisable — March 31, 2006
    58,333     $ 17.17  
 
             
     The following is a summary of the transactions for non-vested stock options under the 2004 CEO Stock Option Plan for the three months ended March 31, 2006:
                 
            Grant Date  
    Number     Fair Value  
    of Shares     Per Share  
Non-Vested Stock Options Outstanding — January 1, 2006
    350,000     $ 4.82  
Non-Vested Options Vested
    (58,333 )   $ 4.82  
 
             
 
               
Non-Vested Options Outstanding — March 31, 2006
    291,667     $ 4.82  
 
             
     As of March 31, 2006, the total compensation cost not yet recognized under the 2004 CEO Stock Option Plan was $1.1 million with a recognition period of 3.8 years.
     As of March 31, 2006, stock options outstanding under the 2004 CEO Stock Option Plan were as follows:
                                                         
Options Outstanding     Options Exercisable  
            Exercise     Remaining                     Exercise     Remaining  
Number   Intrinsic     Price Per     Contractual     Number     Intrinsic     Price Per     Contractual  
Outstanding   Value     Share     Life     Outstanding     Value     Share     Life  
(Dollars in Thousands, Except Per Share Data)  
350,000
  $ 6,008     $ 17.17     8.6 years     58,333     $ 1,001     $ 17.17     8.6 years

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 3 — 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.
     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  
    (Dollars in Thousands, Except Per Share Data)  
Three Months Ended March 31, 2006:
                       
Basic EPS — Income Available to Common Shareholders
  $ 14,802       48,714,435     $ 0.30  
Effect of Dilutive Securities — Options and Warrants
          603,962        
 
                 
 
                       
Diluted EPS — Income Available to Common Shareholders
  $ 14,802       49,318,397     $ 0.30  
 
                 
 
                       
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  
 
                 
     As of March 31, 2006 and 2005, there were 49,554 and 125,554 options, respectively, 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.
NOTE 4 — OFF-BALANCE SHEET COMMITMENTS
     As part of the service to our small- 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,  
    2006     2005  
    (In Thousands)  
Commitments to Extend Credit
  $ 584,685     $ 555,736  
Commercial Letters of Credit
    61,715       58,036  
Standby Letters of Credit
    30,825       42,768  
Unused Credit Card Lines
    16,241       14,892  
 
           
 
               
Total Undisbursed Loan Commitments
  $ 693,466     $ 671,432  
 
           

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HANMI FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)
NOTE 5 — RECENTLY ISSUED ACCOUNTING STANDARDS
     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and SFAS No. 140” (“SFAS No. 155”). This Statement:
    permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
 
    clarifies which interest-only strips and principal-only strips are not subject to SFAS No. 133;
 
    establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation;
 
    clarifies that concentrations of credit risks in the form of subordinations are not embedded derivatives; and
 
    amends SFAS No. 140 to eliminate the prohibition on a Qualified Special Purpose Entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
     SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Early adoption of this statement is allowed. We have not determined the financial impact of the adoption of SFAS No. 155 or whether we will adopt SFAS No. 155 in 2006.
     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which amends the guidance in SFAS No. 140. SFAS No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations. Such servicing assets or servicing liabilities are required to be measured initially at fair value, if practicable. SFAS No. 156 also allows an entity to measure its servicing assets and servicing liabilities subsequently using either the amortization method, which existed under SFAS No. 140, or the fair value measurement method. SFAS No. 156 will be effective in the fiscal year beginning January 1, 2007. We do not expect the adoption of SFAS No. 156 to have a material impact on our financial condition or results of operations.

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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 financial condition and results of operations for the three months ended March 31, 2006. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005 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 the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2005. 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.
     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. See “Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items” and “Results of Operations — Provision for Credit Losses” for a description of the methodology used to determine the allowance for loan losses and allowance for off-balance sheet items.
SELECTED FINANCIAL DATA
     The following table sets forth certain selected financial data for the periods indicated.
                 
    Three Months Ended  
    March 31,  
    2006     2005  
    (Dollars in Thousands, Except Per Share Data)  
AVERAGE BALANCES:
               
Average Gross Loans, Net of Deferred Loan Fees
  $ 2,547,421     $ 2,239,174  
Average Securities
  $ 437,676     $ 420,774  
Average Interest-Earning Assets
  $ 3,036,300     $ 2,736,771  
Average Total Assets
  $ 3,423,419     $ 3,103,486  
Average Deposits
  $ 2,810,313     $ 2,519,229  
Average Interest-Bearing Liabilities
  $ 2,215,781     $ 1,926,399  
Average Shareholders’ Equity
  $ 434,220     $ 406,067  
Average Tangible Equity (1)
  $ 216,723     $ 185,222  
Common Shares Outstanding
    48,856,216       49,621,677  
 
               
PER SHARE DATA:
               
Earnings Per Share — Basic
  $ 0.30     $ 0.27  
Earnings Per Share — Diluted
  $ 0.30     $ 0.27  
Book Value Per Share (2)
  $ 8.99     $ 8.23  
Tangible Book Value Per Share (3)
  $ 4.55     $ 3.79  
Cash Dividends Per Share
  $ 0.06     $ 0.05  
 
(1)   Average tangible equity is calculated by subtracting average goodwill and average core deposit intangible assets from average shareholders’ equity.
 
(2)   Shareholders’ equity divided by common shares outstanding.
 
(3)   Tangible equity divided by common shares outstanding.

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    Three Months Ended  
    March 31,  
    2006     2005  
SELECTED PERFORMANCE RATIOS:
               
Return on Average Assets (4) (5)
    1.75 %     1.74 %
Return on Average Shareholders’ Equity (4) (6)
    13.83 %     13.32 %
Return on Average Tangible Equity (4) (7)
    27.70 %     29.19 %
Net Interest Spread (8)
    3.78 %     4.01 %
Net Interest Margin (9)
    4.85 %     4.72 %
Efficiency Ratio (10)
    39.10 %     44.38 %
Dividend Payout Ratio (11)
    20.27 %     18.61 %
Average Shareholders’ Equity to Average Total Assets
    12.68 %     13.08 %
 
               
SELECTED CAPITAL RATIOS: (12)
               
Total Risk-Based Capital Ratio:
               
Hanmi Financial
    11.97 %     12.34 %
Hanmi Bank
    11.87 %     12.16 %
Tier 1 Risk-Based Capital Ratio:
               
Hanmi Financial
    10.94 %     11.32 %
Hanmi Bank
    10.84 %     11.13 %
Tier 1 Leverage Ratio:
               
Hanmi Financial
    9.57 %     9.41 %
Hanmi Bank
    9.49 %     9.25 %
 
               
SELECTED ASSET QUALITY RATIOS:
               
Non-Performing Loans to Total Gross Loans (13)
    0.38 %     0.31 %
Non-Performing Assets to Total Assets (14)
    0.31 %     0.22 %
Net Loan Charge-Offs to Average Total Gross Loans (15)
    0.19 %     0.01 %
Allowance for Loan Losses to Total Gross Loans
    1.00 %     1.00 %
Allowance for Loan Losses to Non-Performing Loans
    259.5 %     327.9 %
 
(4)   Calculation based upon annualized net income.
 
(5)   Net income divided by average total assets.
 
(6)   Net income divided by average shareholders’ equity.
 
(7)   Net income divided by average tangible equity.
 
(8)   Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities.
 
(9)   Net interest income before provision for credit losses divided by average interest-earning assets.
 
(10)   Total non-interest expenses divided by the sum of net interest income before provision for credit losses and total non-interest income.
 
(11)   Dividends declared divided by net income.
 
(12)   The required ratios for a “well-capitalized” institution, as defined by regulations of the Board of Governors of the Federal Reserve System, are 10 percent for Total Risk-Based Capital Ratio (total capital divided by risk-weighted assets); 6 percent for Tier 1 Risk-Based Capital Ratio (Tier 1 capital divided by risk-weighted assets); and 5 percent for Tier 1 Leverage Ratio (Tier 1 capital divided by average assets).
 
(13)   Non-performing loans consist of non-accrual loans, loans past due 90 days or more and restructured loans.
 
(14)   Non-performing assets consist of non-performing loans (see footnote (13) above) and other real estate owned.
 
(15)   Calculation based upon annualized net loan charge-offs.

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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 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 core deposit intangible assets from average shareholders’ equity. Banking and financial institution regulators also exclude goodwill and intangibles from shareholders’ 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.
     The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
                 
    Three Months Ended  
    March 31,  
    2006     2005  
    (Dollars in Thousands)  
Average Shareholders’ Equity
  $ 434,220     $ 406,067  
Less Average Goodwill and Core Deposit Intangible Assets
    (217,497 )     (220,845 )
 
           
 
               
Average Tangible Equity
  $ 216,723     $ 185,222  
 
           
 
               
Return on Average Shareholders’ Equity
    13.83 %     13.32 %
Effect of Average Goodwill and Core Deposit Intangible Assets
    13.87 %     15.87 %
 
           
 
               
Return on Average Tangible Equity
    27.70 %     29.19 %
 
           
     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 core deposit intangible assets from total shareholders’ 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:
                 
    Three Months Ended  
    March 31,  
    2006     2005  
    (Dollars in Thousands, Except Per Share Data)  
Total Shareholders’ Equity
  $ 439,204     $ 408,450  
Less Goodwill and Core Deposit Intangible Assets
    (217,124 )     (220,446 )
 
           
 
               
Tangible Equity
  $ 222,080     $ 188,004  
 
           
 
               
Book Value Per Share
  $ 8.99     $ 8.23  
Effect of Goodwill and Core Deposit Intangible Assets
    (4.44 )     (4.44 )
 
           
 
               
Tangible Book Value Per Share
  $ 4.55     $ 3.79  
 
           

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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, 2006 under “Risk Factors,” “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, 2006, net income was $14.8 million, or $0.30 per diluted share, compared to $13.3 million, or $0.27 per diluted share, for the three months ended March 31, 2005. The 11.0 percent increase in net income for 2006 as compared to 2005 was attributable to increases in net interest margin and average interest-earning assets. Net interest income before provision for credit losses increased $4.5 million, or 14.1 percent, due to ongoing growth in the loan portfolio. The net interest margin was 4.85 percent for the three months ended March 31, 2006, compared to 4.72 percent for the same period of 2005.
     Our results of operations are significantly affected by the provision for credit losses. The provision for credit losses was $3.0 million and $136,000 for the three months ended March 31, 2006 and 2005, respectively, reflecting changes in the classification of certain credits as well as growth in the loan portfolio in the respective quarters.
     Non-interest income increased by $897,000, or 12.2 percent, mainly due to an increase in service charges on deposit accounts and higher gain on sales of loans. Non-interest expenses increased by $34,000, or 0.2 percent, due to effective expense control and a comparatively lower decrease in fair value of embedded options. The efficiency ratio (non-interest expenses divided by the sum of net interest income before provision for credit losses and non-interest income) for the first quarter of 2006 was 39.10 percent, compared to 44.38 percent for the same quarter in 2005.
     The annualized return on average assets was 1.75 percent for the three months ended March 31, 2006, compared to 1.74 percent for the same period of 2005. The annualized return on average shareholders’ equity was 13.83 percent for the three months ended March 31, 2006, and return on average tangible equity was 27.70 percent, compared to 13.32 percent and 29.19 percent, respectively, for the same period in 2005.

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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.
     For the three months ended March 31, 2006 and 2005, net interest income before provision for credit losses was $36.3 million and $31.9 million, respectively. The net interest spread and net interest margin for the three months ended March 31, 2006 were 3.78 percent and 4.85 percent, respectively, compared to 4.01 percent and 4.72 percent, respectively, for the three months ended March 31, 2005.
     Average interest-earning assets increased 10.9 percent to $3,036.3 million for the three months ended March 31, 2006 from $2,736.8 million for the same period in 2005. Average gross loans increased 13.8 percent to $2,547.4 million for the three months ended March 31, 2006 from $2,239.2 million for the same period in 2005, and average investment securities increased 4.0 percent to $437.7 million for the three months ended March 31, 2006 from $420.8 million for the same period in 2005. Total loan interest income increased by 37.7 percent for the three months ended March 31, 2006 due to the increase in average gross loans outstanding and the increase in the average yield on loans from 6.92 percent for the three months ended March 31, 2005 to 8.38 percent for the same period in 2006. The average interest rate charged on loans increased 146 basis points, reflecting the increase in the average Wall Street Journal Prime Rate of 199 basis points from 5.44 percent for the three months ended March 31, 2005 to 7.43 percent for the same period in 2006. The yield on average interest-earning assets increased by 135 basis points from 6.40 percent for the three months ended March 31, 2005 to 7.75 percent for the three months ended March 31, 2006, reflecting a shift in the mix of interest-earning assets from 81.8 percent loans, 15.4 percent securities and 2.8 percent other interest-earning assets for the three months ended March 31, 2005 to 83.9 percent loans, 14.4 percent securities and 1.7 percent other interest-earning assets for the same period in 2006.
     The majority of interest-earning assets growth was funded by a $291.1 million, or 11.6 percent, increase in average total deposits. Total average interest-bearing liabilities grew by 15.0 percent to $2,215.8 million for the three months ended March 31, 2006 compared to $1,926.4 million for the same period in 2005. The average interest rate paid for interest-bearing liabilities increased by 158 basis points from 2.39 percent for the three months ended March 31, 2005 to 3.97 percent for the three months ended March 31, 2006. In the second half of 2005, due to competitive pricing, the Bank increased its rates on certificates of deposit to maintain relationships with valued customers and to fund loan growth.

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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, 2006     March 31, 2005  
            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 (1)
  $ 2,547,421     $ 52,637       8.38 %   $ 2,239,174     $ 38,226       6.92 %
Municipal Securities (2)
    73,770       778       6.49 %     74,050       776       6.54 %
Obligations of Other U.S. Government Agencies
    126,498       1,303       4.12 %     96,217       934       3.94 %
Other Debt Securities
    237,308       2,692       4.54 %     250,507       2,665       4.31 %
Equity Securities
    24,610       325       5.28 %     21,961       273       5.04 %
Federal Funds Sold
    26,593       289       4.35 %     54,862       335       2.48 %
Interest-Earning Deposits
    100       1       4.15 %                  
 
                                       
Total Interest-Earning Assets
    3,036,300       58,025       7.75 %     2,736,771       43,209       6.40 %
 
                                       
 
                                               
Noninterest-Earning Assets:
                                               
Cash and Cash Equivalents
    94,501                       84,659                  
Allowance for Loan Losses
    (25,011 )                     (22,730 )                
Other Assets
    317,629                       304,786                  
 
                                           
Total Noninterest-Earning Assets
    387,119                       366,715                  
 
                                           
 
                                               
Total Assets
  $ 3,423,419                     $ 3,103,486                  
 
                                           
 
                                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                 
Interest-Bearing Liabilities:
                                               
Deposits:
                                               
Money Market Checking
  $ 519,628       3,714       2.90 %   $ 592,211       3,008       2.06 %
Savings
    117,761       482       1.66 %     150,261       556       1.50 %
Time Deposits of $100,000 or More
    1,167,270       12,784       4.44 %     797,141       5,002       2.54 %
Other Time Deposits
    272,760       2,611       3.88 %     234,662       1,245       2.15 %
Other Borrowed Funds
    138,362       2,089       6.12 %     152,124       1,536       4.09 %
 
                                       
Total Interest-Bearing Liabilities
    2,215,781       21,680       3.97 %     1,926,399       11,347       2.39 %
 
                                       
 
                                               
Noninterest-Bearing Liabilities:
                                               
Demand Deposits
    732,894                       744,954                  
Other Liabilities
    40,524                       26,066                  
 
                                           
Total Noninterest-Bearing Liabilities
    773,418                       771,020                  
 
                                           
Total Liabilities
    2,989,199                       2,697,419                  
Shareholders’ Equity
    434,220                       406,067                  
 
                                           
 
                                               
Total Liabilities and Shareholders’ Equity
  $ 3,423,419                     $ 3,103,486                  
 
                                           
 
                                               
Net Interest Income
          $ 36,345                     $ 31,862          
 
                                           
 
                                               
Net Interest Spread (3)
                    3.78 %                     4.01 %
 
                                           
 
                                               
Net Interest Margin (4)
                    4.85 %                     4.72 %
 
                                           
 
(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 $1.5 million for the three months ended March 31, 2006 and 2005, respectively.
 
(2)   Yields on tax-exempt income have been computed on a tax-equivalent basis, using an effective marginal rate of 35 percent.
 
(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, 2006 vs. 2005    
    Increases (Decreases)    
    Due to Change in  
    Volume     Rate     Total  
      (In Thousands)  
Interest Income:
                       
Gross Loans, Net
  $ 5,700     $ 8,711     $ 14,411  
Municipal Securities
    (2 )     4       2  
Obligations of Other U.S. Government Agencies
    301       68       369  
Other Debt Securities
    (142 )     169       27  
Equity Securities
    33       19       52  
Federal Funds Sold
    (227 )     181       (46 )
Interest-Earning Deposits
    1             1  
 
                 
Total Interest Income
    5,664       9,152       14,816  
 
                 
 
                       
Interest Expense:
                       
Money Market Checking
    (404 )     1,110       706  
Savings
    (129 )     55       (74 )
Time Deposits of $100,000 or More
    2,988       4,794       7,782  
Other Time Deposits
    229       1,137       1,366  
Other Borrowed Funds
    (150 )     703       553  
 
                 
Total Interest Expense
    2,534       7,799       10,333  
 
                 
 
                       
Change in Net Interest Income
  $ 3,130     $ 1,353     $ 4,483  
 
                 
Provision for Credit Losses
     For the three months ended March 31, 2006, the provision for credit losses was $3.0 million, compared to $136,000 for the three months ended March 31, 2005. The allowance for loan losses remained at 1.00 percent of total gross loans at March 31, 2006 and 2005, with the increase in the dollar amount allowed for credit losses due to changes in the classification of certain credits as well as growth in the loan portfolio, including growth in loan types that historically have experienced charge-offs. Non-performing assets increased from $10.1 million, or 0.30 percent of total assets, as of December 31, 2005 to $10.8 million, or 0.31% of total assets, as of March 31, 2006. The $175.6 million, or 7.0 percent, increase in the loan portfolio and the $705,000, or 7.0 percent, increase in non-performing assets required the provision to increase to $3.0 million for the three months ended March 31, 2006 to maintain the necessary allowance level.

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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)  
    2006     2005     Amount     Percentage  
            (Dollars in Thousands)          
Service Charges on Deposit Accounts
  $ 4,231     $ 3,730     $ 501       13.4 %
Trade Finance Fees
    1,071       945       126       13.3 %
Remittance Fees
    488       468       20       4.3 %
Other Service Charges and Fees
    534       579       (45 )     (7.8 %)
Bank-Owned Life Insurance Income
    218       205       13       6.3 %
Increase in Fair Value of Derivatives
    225       419       (194 )     (46.3 %)
Other Income
    643       621       22       3.5 %
Gain on Sales of Loans
    839       308       531       172.4 %
Gain on Sales of Securities Available for Sale
    5       82       (77 )     (93.9 %)
 
                       
 
                               
Total Non-Interest Income
  $ 8,254     $ 7,357     $ 897       12.2 %
 
                       
     Non-interest income is earned from three major sources: service charges on deposit accounts, fees generated from international trade finance and gain on sales of loans. For the three months ended March 31, 2006, non-interest income was $8.3 million, an increase of 12.2 percent from $7.4 million for the three months ended March 31, 2005. The overall increase in non-interest income is primarily due to expansion in the Bank’s loan and deposit portfolios.
     Service charges on deposit accounts increased by $501,000, or 13.4 percent, from $3.7 million for the three months ended March 31, 2005 to $4.2 million for three months ended March 31, 2006. Service charge income on deposit accounts increased due to higher deposit volume and number of accounts. Average deposits increased by 11.6 percent from $2,519.2 million for three months ended March 31, 2006 to $2,810.3 million for the three months ended March 31, 2006. Service charges are regularly reviewed to maximize service charge income while still maintaining a competitive position.
     Fees generated from international trade finance increased by $126,000, or 13.3 percent, from $945,000 for the three months ended March 31, 2005 to $1.1 million for the three months ended March 31, 2006 due to higher volume. Trade finance fees related primarily to import and export letters of credit.
     The changes in the fair value of derivatives are caused by movements in the indexes to which interest rates on certain certificates of deposit are tied. In 2005 and 2004, the Bank offered certificates of deposit tied to either the Standard & Poor’s 500 Index or a basket of Asian currencies. The Bank entered into swap transactions to hedge the market risk associated with such certificates of deposit. The swaps and the related derivatives embedded in the certificates of deposit are accounted for at fair value. The increase in the fair value of the swaps of $225,000 and $419,000 recorded in non-interest income for the three months ended March 31, 2006 and 2005, respectively, are partially offset by changes in the fair value of the embedded derivatives recorded in non-interest expenses.
     Gain on sales of loans increased by $531,000, or 172.4 percent, from $308,000 for the three months ended March 31, 2005 to $839,000 for the three months ended March 31, 2006. The increase in gain on sales of loans resulted primarily from an increase of $10.9 million, or 186.6 percent, in sales activity for SBA loans. The guaranteed portion of a substantial percentage of SBA loans is sold in the secondary markets, and servicing rights are retained.

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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)  
    2006     2005     Amount     Percentage  
            (Dollars in Thousands)          
Salaries and Employee Benefits
  $ 9,161     $ 9,167     $ (6 )     (0.1 %)
Occupancy and Equipment
    2,318       2,231       87       3.9 %
Data Processing
    1,215       1,165       50       4.3 %
Professional Fees
    668       479       189       39.5 %
Advertising and Promotion
    646       694       (48 )     (6.9 %)
Supplies and Communications
    636       579       57       9.8 %
Amortization of Core Deposit Intangible
    625       732       (107 )     (14.6 %)
Decrease in Fair Value of Embedded Options
    102       573       (471 )     (82.2 %)
Other Operating Expenses
    2,068       1,785       283       15.9 %
 
                       
 
                               
Total Non-Interest Expenses
  $ 17,439     $ 17,405     $ 34       0.2 %
 
                       
     For the three months ended March 31, 2006 and 2005, non-interest expenses were $17.4 million. The efficiency ratio (non-interest expenses divided by the sum of net interest income before provision for credit losses and non-interest income) for the first quarter of 2006 was 39.10 percent, compared to 44.38 percent for the same quarter in 2005. The improvement in the efficiency ratio was due to effective expense control and a comparatively lower decrease in fair value of embedded options.
     Salaries and employee benefits were $9.2 million for the three months ended March 31, 2006 and 2005. Salaries, incentive compensation and employee benefits increased $464,000, net of a decrease in share-based compensation of $292,000, which increase was offset by a $474,000 increase in salaries and employee benefits capitalized as direct loan originating costs.
     Professional fees were $668,000 for the three months ended March 31, 2006, representing an increase of $189,000, or 39.5 percent, compared to $479,000 for the three months ended March 31, 2005. The increase was caused primarily by increased regulatory compliance consulting fees.
     Core deposit premium amortization decreased to $625,000 for the three months ended March 31, 2006, representing a decrease of $107,000, or 14.6 percent, compared to $732,000 for the three months ended March 31, 2005. The decrease is due to the core deposit premium being amortized using the level yield amortization method.
     Other operating expenses for the three months ended March 31, 2006 increased $283,000, or 15.9 percent, to $2.1 million from $1.8 million for the three months ended March 31, 2005. The increase is primarily attributable to amortization expense of $243,000 related to the termination in the fourth quarter of 2005 of interest rate swaps that had unrealized losses.
Income Taxes
     For the three months ended March 31, 2006, income taxes of $9.4 million were recognized on pre-tax income of $24.2 million, representing an effective tax rate of 38.8 percent, compared to income taxes of $8.3 million recognized on pre-tax income of $21.7 million, representing an effective tax rate of 38.5 percent, for the three months ended March 31, 2005.

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FINANCIAL CONDITION
Summary of Changes in Balance Sheets — March 31, 2006 Compared to December 31, 2005
     As of March 31, 2006, total assets were $3.51 billion, an increase of $100.7 million, or 3.0 percent, from the December 31, 2005 balance of $3.41 billion. The increase in assets was mainly funded by overnight Federal funds purchased and FHLB advances, which increased by $85.2 million, or 183.9 percent, to $131.5 million at March 31, 2006 from $46.3 million at December 31, 2005. As of March 31, 2006 and December 31, 2005, loans receivable, net of deferred loan fees and allowance for loan losses, and loans held for sale totaled $2.64 billion and $2.47 billion, respectively, an increase of $173.0 million, or 7.0 percent. Investment securities decreased $13.0 million, or 2.9 percent, to $430.9 million at March 31, 2006 from $443.9 million at December 31, 2005.
Investment Portfolio
     Securities are classified as held to maturity or available for sale in accordance with Statement of Financial Accounting Standards (“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, 2006 or December 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, 2006, held to maturity securities totaled $1.0 million and available for sale securities totaled $429.8 million, compared to $1.0 million and $442.9 million, respectively, at December 31, 2005.
                                                 
    March 31, 2006     December 31, 2005  
                    Unrealized                     Unrealized  
    Amortized     Fair     Gain     Amortized     Fair     Gain  
    Cost     Value     (Loss)     Cost     Value     (Loss)  
                    (In Thousands)                  
Held to Maturity:
                                               
Municipal Bonds
  $ 692     $ 692     $     $ 692     $ 692     $  
Mortgage-Backed Securities
    347       347             357       359       2  
 
                                   
 
                                               
Total Held to Maturity
  $ 1,039     $ 1,039     $     $ 1,049     $ 1,051     $ 2  
 
                                   
 
                                               
Available for Sale:
                                               
Mortgage-Backed Securities
  $ 143,163     $ 139,628     $ (3,535 )   $ 149,311     $ 147,268     $ (2,043 )
U.S. Government Agency Securities
    129,638       127,274       (2,364 )     129,589       127,813       (1,776 )
Collateralized Mortgage Obligations
    79,506       77,407       (2,099 )     83,068       81,456       (1,612 )
Municipal Bonds
    71,252       72,660       1,408       71,536       73,220       1,684  
Corporate Bonds
    8,199       7,922       (277 )     8,235       8,053       (182 )
Other Securities
    4,999       4,954       (45 )     4,999       5,053       54  
 
                                   
 
                                               
Total Available for Sale
  $ 436,757     $ 429,845     $ (6,912 )   $ 446,738     $ 442,863     $ (3,875 )
 
                                   

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     The amortized cost and estimated fair value of investment securities at March 31, 2006, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2036, 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
  $ 14,986     $ 14,882     $     $  
Over One Year Through Five Years
    129,546       126,951              
Over Five Years Through Ten Years
    8,050       8,153       692       692  
Over Ten Years
    61,506       62,824              
 
                       
 
    214,088       212,810       692       692  
 
                       
 
                               
Mortgage-Backed Securities
    143,163       139,628       347       347  
Collateralized Mortgage Obligations
    79,506       77,407              
 
                       
 
    222,669       217,035       347       347  
 
                       
 
                               
 
  $ 436,757     $ 429,845     $ 1,039     $ 1,039  
 
                       
Loan Portfolio
     All loans are carried at face amount, less principal repayments collected, net of deferred loan fees 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)  
    2006     2005     Amount     Percentage  
            (Dollars in Thousands)          
Real Estate Loans:
                               
Commercial Property
  $ 766,248     $ 733,650     $ 32,598       4.4 %
Construction
    169,422       152,080       17,342       11.4 %
Residential Property (1)
    85,356       88,442       (3,086 )     (3.5 %)
 
                       
Total Real Estate Loans
    1,021,026       974,172       46,854       4.8 %
 
                       
 
                               
Commercial and Industrial Loans:
                               
Commercial Term Loans
    994,089       945,210       48,879       5.2 %
Commercial Lines of Credit
    240,115       224,271       15,844       7.1 %
SBA Loans
    195,885       155,491       40,394       26.0 %
International Loans
    128,446       106,520       21,926       20.6 %
 
                       
Total Commercial and Industrial Loans
    1,558,535       1,431,492       127,043       8.9 %
 
                       
 
                               
Consumer Loans
    93,828       92,154       1,674       1.8 %
 
                       
 
                               
Total Loans — Gross
    2,673,389       2,497,818       175,571       7.0 %
 
                               
Deferred Loan Fees
    (4,604 )     (3,775 )     (829 )     22.0 %
Allowance for Loan Losses
    (26,703 )     (24,963 )     (1,740 )     7.0 %
 
                       
 
                               
Net Loans Receivable
  $ 2,642,082     $ 2,469,080     $ 173,002       7.0 %
 
                       
 
(1)   Amount includes loans held for sale, at the lower of cost or market, of $1.4 million and $1.1 million at March 31, 2006 and December 31, 2005, respectively.

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     At March 31, 2006 and December 31, 2005, loans, net of deferred loan fees, allowance for loan losses and loans held for sale, totaled $2.64 billion and $2.47 billion, respectively. Real estate loans, composed of commercial property, residential property and construction loans, increased $46.9 million, or 4.8 percent, to $1,021.0 million at March 31, 2006 from $974.2 million at December 31, 2005, representing 38.2 percent and 39.0 percent, respectively, of the total loan portfolio. Total commercial and industrial loans, composed of domestic commercial property and lines of credit, trade financing and SBA loans, increased $127.0 million, or 8.9 percent, to $1.56 billion at March 31, 2006 from $1.43 billion at December 31, 2005, representing 58.3 percent and 57.3 percent, respectively, of the total loan portfolio. Consumer loans increased $1.7 million, or 1.8 percent, to $93.8 million at March 31, 2006 from $92.2 million at December 31, 2005.
     As of March 31, 2006, there was $323.5 million of loans outstanding, or 12.10 percent of total gross loans outstanding, to borrowers who were involved in the accommodation/hospitality industry. There was no other concentration of loans to any one type of industry exceeding 10 percent of total gross loans.
Non-Performing Assets
     Non-performing assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO”). Loans are generally placed on non-accrual status when they become 90 days past due unless management believes the loan is adequately collateralized and in the process of collection. Loans may be restructured by management when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower eventually will overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.
     Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, 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.
     The table below shows the composition of non-performing assets as of the dates indicated.
                                 
    March 31,     December 31,     Increase  
    2006     2005     Amount     Percentage  
      (Dollars in Thousands)  
Non-Accrual Loans
  $ 10,282     $ 10,122     $ 160       1.6 %
Loans 90 Days or More Past Due and Still Accruing
    9       9              
 
                       
 
                               
Total Non-Performing Loans
    10,291       10,131       160       1.6 %
Other Real Estate Owned
    545             545        
 
                       
 
                               
Total Non-Performing Assets
  $ 10,836     $ 10,131     $ 705       7.0 %
 
                       
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
     Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is calculated using a formula designed to provide adequate allowances for anticipated losses. 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.

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     The allowance for loan losses and allowance for off-balance sheet items 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 allowance for off-balance sheet items. 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, 2006, the allowance for loan losses was $26.7 million, an increase of $1.7 million, or 7.0 percent, compared to $25.0 million at December 31, 2005. The increase in the allowance for loan losses reflects changes in the classification of certain credits as well as growth in the loan portfolio, including loan types that historically have experienced charge-offs. As of March 31, 2006 and December 31, 2005, the allowance for off-balance sheet items was $2.1 million.
     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 allowance for off-balance sheet items 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 allowance for off-balance sheet items are adequate as of March 31, 2006 and December 31, 2005.
                 
    Three Months Ended  
    March 31,     December 31,  
    2006     2005  
    (Dollars in Thousands)  
Allowance for Loan Losses:
               
Balance at Beginning of Period
  $ 24,963     $ 24,523  
 
           
 
               
Actual Charge-Offs
    (1,328 )     (1,356 )
Recoveries on Loans Previously Charged Off
    108       250  
 
           
Net Loan Charge-Offs
    (1,220 )     (1,106 )
 
           
 
               
Provision Charged to Operating Expenses
    2,960       1,546  
 
           
 
               
Balance at End of Period
  $ 26,703     $ 24,963  
 
           
 
               
Allowance for Off-Balance Sheet Items:
               
Balance at Beginning of Period
  $ 2,130     $ 2,024  
Provision Charged to Operating Expenses
          106  
 
           
 
               
Balance at End of Period
  $ 2,130     $ 2,130  
 
           
 
               
Ratios:
               
Net Loan Charge-Offs to Average Total Gross Loans (1)
    0.19 %     0.18 %
Net Loan Charge-Offs to Total Gross Loans at End of Period (1)
    0.19 %     0.18 %
Allowance for Loan Losses to Average Total Gross Loans
    1.05 %     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)
    18.53 %     17.58 %
Net Loan Charge-Offs to Provision Charged to Operating Expenses
    41.22 %     66.95 %
Allowance for Loan Losses to Non-Performing Loans
    259.5 %     246.4 %
 
               
Balances:
               
Average Total Gross Loans Outstanding During Period
  $ 2,551,228     $ 2,498,947  
Total Gross Loans Outstanding at End of Period
  $ 2,673,389     $ 2,497,818  
Non-Performing Loans at End of Period
  $ 10,291     $ 10,131  
 
(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.
     As indicated above, we formally assess the adequacy of the allowance on a quarterly basis by:
    reviewing the adversely graded, delinquent or otherwise questionable loans;
 
    generating an estimate of the loss potential in each such loan;
 
    adding a risk factor for industry, economic or other external factors; and
 
    evaluating the present status of each loan.

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     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.
Deposits
     The following table shows the composition of deposits by type as of the dates indicated.
                                 
    March 31,     December 31,     Increase (Decrease)  
    2006     2005     Amount     Percentage  
            (Dollars in Thousands)          
Deposits:
                               
Demand — Noninterest-Bearing
  $ 748,530     $ 738,618     $ 9,912       1.3 %
Interest-Bearing:
                               
Money Market Checking
    495,365       526,171       (30,806 )     (5.9 %)
Savings
    114,336       121,574       (7,238 )     (6.0 %)
Time Deposits of $100,000 or More
    1,188,982       1,161,950       27,032       2.3 %
Other Time Deposits
    271,653       277,801       (6,148 )     (2.2 %)
 
                       
 
                               
Total Deposits
  $ 2,818,866     $ 2,826,114     $ (7,248 )     (0.3 %)
 
                       
     Demand deposits increased $9.9 million, or 1.3 percent, to $748.5 million at March 31, 2006 from $738.6 million at December 31, 2005. This increase was due to continued efforts to increase the net interest margin by changing the deposit composition mix between interest-bearing and noninterest-bearing accounts. Money market checking, savings and other time deposits decreased $30.8 million, or 5.9 percent, $7.2 million, or 6.0 percent, and $6.1 million, or 2.2 percent, respectively, to $495.4 million, $114.3 million and $271.7 million, respectively, at March 31, 2006 from $526.2 million, $121.6 million and $277.8 million, respectively, at December 31, 2005. These accounts decreased because customers shifted their balances into higher yielding certificates of deposit. Time deposits of $100,000 or more increased $27.0 million, or 2.3 percent, to $1.19 billion at March 31, 2006 from $1.16 billion at December 31, 2005. This growth reflects the shift away from low-yielding accounts that normally occurs as interest rates rise and depositors take advantage of the greater interest rate differentials available in the market.
Other Borrowed Funds
     Other borrowed funds consist of advances from the Federal Home Loan Bank of San Francisco (“FHLB”) and overnight Federal funds. At March 31, 2006 and December 31, 2005, advances from the FHLB were $93.4 million and $43.5 million, respectively. Overnight Federal funds totaled $38.0 million at March 31, 2006. There were no overnight Federal funds as of December 31, 2005. Among the advances from the FHLB and overnight Federal funds, short-term borrowings with a remaining maturity of less than one year were $93.1 million, and the weighted-average interest rate thereon was 4.86 percent.
INTEREST RATE RISK MANAGEMENT
     Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate. Under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to 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.

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     The following table shows the status of the gap position as of March 31, 2006:
                                                 
            After Three     After One                      
    Within     Months     Year But             Non-        
    Three     But Within     Within Five     After Five     Interest-        
    Months     One Year     Years     Years     Sensitive     Total  
    (Dollars in Thousands)  
ASSETS
                                               
Cash
  $     $     $     $     $ 97,780     $ 97,780  
FRB and FHLB Stock
                      24,730             24,730  
Securities:
                                               
Fixed Rate
    10,584       25,983       225,655       120,739             382,961  
Floating Rate
    6,179             33,919       7,825             47,923  
Loans:
                                               
Fixed Rate
    35,926       36,335       271,471       202,451             546,183  
Floating Rate
    1,955,669       13,525       147,730                   2,116,924  
Non-Accrual
                            10,282       10,282  
Deferred Loan Fees and Allowance for Loan Losses
                            (31,307 )     (31,307 )
Other Assets
          22,932             7,461       289,115       319,508  
 
                                   
 
                                               
Total Assets
  $ 2,008,358     $ 98,775     $ 678,775     $ 363,206     $ 365,870     $ 3,514,984  
 
                                   
 
                                               
               LIABILITIES AND SHAREHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Demand Deposits
  $ 72,911     $ 195,178     $ 412,879     $ 67,562     $     $ 748,530  
Savings
    17,927       35,787       53,562       7,060             114,336  
Money Market Checking
    66,072       163,916       210,109       55,268             495,365  
Time Deposits:
                                               
Fixed Rate
    580,612       718,873       15,253       237             1,314,975  
Floating Rate
    145,660                               145,660  
Other Borrowed Funds
    88,108       5,000       33,372       5,053             131,533  
Junior Subordinated Debentures
    82,406                               82,406  
Other Liabilities
                            42,975       42,975  
Shareholders’ Equity
                            439,204       439,204  
 
                                   
 
                                               
Total Liabilities and Shareholders’ Equity
  $ 1,053,696     $ 1,118,754     $ 725,175     $ 135,180     $ 482,179     $ 3,514,984  
 
                                   
 
                                               
Repricing Gap
  $ 954,662     $ (1,019,979 )   $ (46,400 )   $ 228,026     $ (116,309 )        
Cumulative Repricing Gap
  $ 954,662     $ (65,317 )   $ (111,717 )   $ 116,309     $          
Cumulative Repricing Gap as a Percentage of Total Assets
    27.16 %     (1.86 %)     (3.18 %)     3.31 %              
Cumulative Repricing Gap as a Percentage of Interest- Earning Assets
    30.61 %     (2.09 %)     (3.58 %)     3.73 %              
     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.

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     On March 31, 2006, the cumulative repricing gap as a percentage of interest-earning assets in the less-than-three month period was 30.61 percent. This was a slight decrease from the previous quarter’s figure of 32.25 percent. The decrease was caused by growth in the fixed rate loan portfolio, including an increase of $129.4 million in fixed rate loans maturing after three months, funded by a $60.0 million decrease in Federal funds sold and securities purchased under agreements to resell, and an $85.2 million increase in other borrowed funds, offset by a decrease of $119.8 million in fixed-rate certificates of deposit maturing in less than three months as we increased the duration of our certificates of deposit portfolio. The cumulative repricing gap as a percentage of interest-earning assets in the three to twelve-month period also decreased, reaching (2.09) percent, reflecting the decrease in short-term liquid assets and increase in other borrowed funds. 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 (8.22) percent. The floating gap position in the less-than-one year period was 4.04 percent.
     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,  
    2006     2005     2006     2005  
    (Dollars in Thousands)  
Cumulative Repricing Gap
  $ 954,662     $ 972,608     $ (65,317 )   $ 94,299  
Percentage of Total Assets
    27.16 %     28.49 %     (1.86 %)     2.76 %
Percentage of Interest-Earning Assets
    30.61 %     32.25 %     (2.09 %)     3.13 %
     The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
     From time to time, the Bank has offered certificate of deposit (“CD”) products that have offered customers CD rates that are tied to market indexes, including the Standard & Poor’s 500 Index and a basket of foreign currencies. In order to hedge the market risk associated with the embedded options inherent in them, the Bank has entered into equity and currency swap contracts that are accounted for at market value. Management believes these swaps effectively hedge the economic risk associated with these CD products, but the swaps do not qualify for hedge accounting treatment under GAAP. The currency swap and related CD’s matured during the three months ended March 31, 2006.
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 liquidity consists primarily of 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, plus borrowing capacities, which include Federal funds lines, repurchase agreements and FHLB advances. Therefore, maintenance of high quality loans and securities that can be used for collateral in repurchase agreements or other secured borrowings is an important feature of our liquidity management.
     Liquidity risk may increase 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. 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.

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     The maintenance of a proper level of liquid assets is critical for both the liquidity and the profitability of the Bank. Since the primary purpose of the investment portfolio is to ensure the Bank has adequate liquidity management maintains appropriate levels of liquid assets to avoid exposure to higher than necessary liquidity risk.
     At March 31, 2006, short-term investments totaled 1.22 percent of the Bank’s total assets, compared to 3.15 percent at December 31, 2005. Core deposits, expressed as a percentage of the Bank’s total assets, decreased to 34.00 percent at March 31, 2006 from 35.25 percent at December 31, 2005, while short-term non-core funding as a percentage of the Bank’s total assets increased to 43.77 percent at March 31, 2006 from 41.85 percent at December 31, 2005. The ratio of short-term investments to short-term non-core funding decreased to 13.06 percent at March 31, 2006 from 18.31 percent at December 31, 2005. Off-balance sheet items, primarily unused credit lines, as a percentage of the Bank’s total assets, increased to 19.75 percent at March 31, 2006 from 19.68 percent at December 31, 2005. During the three months ended March 31, 2006, the Bank continued to see strong demand for loans. Net loans as a percentage of the total assets increased to 75.2 percent at March 31, 2006 from 72.4 percent at December 31, 2005.
     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 $439.2 million at March 31, 2006, which represented an increase of $12.4 million, or 2.9 percent, over total shareholders’ equity of $426.8 million at December 31, 2005.
     The regulatory agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4.0 percent. 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 percent. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio is 3.0 percent. 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, 2006, Hanmi Financial’s Tier 1 capital (shareholders’ equity plus junior subordinated debentures less intangible assets) was $307.2 million. This represented an increase of $36.2 million, or 13.4 percent, over Tier 1 capital of $271.0 million at March 31, 2005. At March 31, 2006, Hanmi Financial had a ratio of total capital to total risk-weighted assets of 11.97 percent and a ratio of Tier 1 capital to total risk-weighted assets of 10.94 percent. The Tier 1 leverage ratio was 9.57 percent at March 31, 2006.
     The capital ratios of Hanmi Financial and Hanmi Bank were as follows as of March 31, 2006:
                                                 
                    Minimum     Minimum to Be  
                    Regulatory     Categorized as  
    Actual     Requirement     “Well Capitalized”  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in Thousands)  
Total Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 335,989       11.97 %   $ 224,639       8.00 %     N/A       N/A  
Hanmi Bank
  $ 333,024       11.87 %   $ 224,400       8.00 %   $ 280,500       10.00 %
 
                                               
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Hanmi Financial
  $ 307,157       10.94 %   $ 112,320       4.00 %     N/A       N/A  
Hanmi Bank
  $ 304,192       10.84 %   $ 112,200       4.00 %   $ 168,300       6.00 %
 
                                               
Tier 1 Capital (to Average Total Assets):
                                               
Hanmi Financial
  $ 307,157       9.57 %   $ 128,376       4.00 %     N/A       N/A  
Hanmi Bank
  $ 304,192       9.49 %   $ 128,257       4.00 %   $ 160,321       5.00 %

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Dividends
     On March 16, 2006, we declared a quarterly cash dividend of $0.06 per common share for the first quarter of 2006. The dividend was paid on April 14, 2006. Future dividend payments are subject to the future earnings and legal requirements and the discretion of the Board of Directors.
OFF-BALANCE SHEET ARRANGEMENTS
     For a discussion of off-balance sheet arrangements, see “Note 5 — Off-Balance Sheet Arrangements” of Notes to Consolidated Financial Statements, “Item 1. Business — Small Business Administration Guaranteed Loans” and “Item 1. Business — Off-Balance Sheet Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2005.
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, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management” and “— Liquidity and Capital Resources.”
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     As of March 31, 2006, Hanmi Financial carried out an evaluation, under the supervision and with the participation of Hanmi Financial’s management, including Hanmi Financial’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Hanmi Financial’s disclosure controls and procedures and internal controls over financial reporting pursuant to Securities and Exchange Commission (“SEC”) rules. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that:
    Hanmi Financial’s disclosure controls and procedures were effective as of the end of the period covered by this report in timely alerting them to material information relating to Hanmi Financial that is required to be included in Hanmi Financial’s periodic SEC filings; and
 
    Hanmi Financial’s internal controls over financial reporting provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
     During the quarter ended March 31, 2006, there have been no significant changes in Hanmi Financial’s internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the evaluation date.
     Disclosure controls and procedures are defined in SEC rules as controls and other procedures designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Hanmi Financial’s disclosure controls and procedures were designed to ensure that material information related to Hanmi Financial, including subsidiaries, is made known to management, including the Chief Executive Officer and Chief Financial Officer, in a timely manner.

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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 1A. RISK FACTORS
     There were no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005 that was filed on March 16, 2006.
     
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, 2006
  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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