Form 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

¨	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 x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of November 1, 2011, there were 151,278,390 outstanding shares of the Registrant’s Common Stock.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets (Unaudited)		1
	Consolidated Statements of Operations (Unaudited)		2
	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited)		3
	Consolidated Statements of Cash Flows (Unaudited)		4
	Notes to Consolidated Financial Statements (Unaudited)		5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		43

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		76

ITEM 4.	CONTROLS AND PROCEDURES		76

PART II — OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		77

ITEM 1A.	RISK FACTORS		77

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		79

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		79

ITEM 4.	REMOVED AND RESERVED		79

ITEM 5.	OTHER INFORMATION		79

ITEM 6.	EXHIBITS		80

SIGNATURES			81

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)


	September 30, 2011			December 31, 2010
ASSETS
Cash and Due From Banks	$	72,591		$	60,983
Interest-Bearing Deposits in Other Banks		156,271			158,737
Federal Funds Sold		—			30,000

Cash and Cash Equivalents		228,862			249,720
Securities Held to Maturity, at Amortized Cost (Fair Value of $52,560 as of September 30, 2011 and $847 as of December 31, 2010)		52,638			845
Investment Securities Available for Sale, at Fair Value (Amortized Cost of $358,562 as of September 30, 2011 and $415,491 as of December 31, 2010)		363,060			413,118
Loans Receivable, Net of Allowance for Loan Losses of $100,792 as of September 30, 2011 and $146,059 as of December 31, 2010		1,891,533			2,084,447
Loans Held for Sale, at the Lower of Cost or Fair Value		37,202			36,620
Accrued Interest Receivable		7,225			8,048
Premises and Equipment, Net		16,627			17,599
Other Real Estate Owned, Net		289			4,089
Customers’ Liability on Acceptances		599			711
Servicing Assets		2,884			2,890
Other Intangible Assets, Net		1,664			2,233
Investment in Federal Home Loan Bank Stock, at Cost		23,962			27,282
Investment in Federal Reserve Bank Stock, at Cost		7,489			7,449
Income Taxes Receivable		9,188			9,188
Bank-Owned Life Insurance		28,051			27,350
Other Assets		15,297			15,559

TOTAL ASSETS	$	2,686,570		$	2,907,148

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-Bearing	$	621,195		$	546,815
Interest-Bearing		1,731,974			1,919,906

Total Deposits		2,353,169			2,466,721
Accrued Interest Payable		13,490			15,966
Bank’s Liability on Acceptances		599			711
Federal Home Loan Bank Advances		3,392			153,650
Other Borrowings		18,708			1,570
Junior Subordinated Debentures		82,406			82,406
Accrued Expenses and Other Liabilities		11,603			12,868

Total Liabilities		2,483,367			2,733,892

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common Stock, $0.001 Par Value; Authorized 500,000,000 Shares; Issued 155,890,890 Shares (151,258,390 Shares Outstanding) and 155,830,890 Shares (151,198,390 Shares Outstanding) as of September 30, 2011 and December 31, 2010, respectively		156			156
Additional Paid-In Capital		472,748			472,335
Unearned Compensation		(192	)		(219	)
Accumulated Other Comprehensive Income (Loss) – Unrealized Gain (Loss) on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $602 as of September 30, 2011 and December 31, 2010		3,902			(2,964	)
Accumulated Deficit		(203,399	)		(226,040	)
Less Treasury Stock, at Cost: 4,632,500 Shares as of September 30, 2011 and December 31, 2010		(70,012	)		(70,012	)

Total Stockholders’ Equity		203,203			173,256

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,686,570		$	2,907,148

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in Thousands, Except Per Share Data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans	$	29,355		$	33,681		$	89,509		$	104,862
Taxable Interest on Investment Securities		2,022			1,592			7,789			4,035
Tax-Exempt Interest on Investment Securities		39			62			116			216
Dividends on Federal Reserve Bank Stock		112			102			336			323
Dividends on Federal Home Loan Bank Stock		17			33			58			74
Interest on Interest-Bearing Deposits in Other Banks		75			165			243			319
Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements		5			8			22			41
Interest on Term Federal Funds Sold		49			32			94			29

Total Interest and Dividend Income		31,674			35,675			98,167			109,899

INTEREST EXPENSE:
Interest on Deposits		5,730			8,299			18,657			26,816
Interest on Federal Home Loan Bank Advances		46			342			618			1,027
Interest on Other Borrowings		—			22			1			53
Interest on Junior Subordinated Debentures		739			739			2,148			2,100

Total Interest Expense		6,515			9,402			21,424			29,996

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES		25,159			26,273			76,743			79,903
Provision for Credit Losses		8,100			22,000			8,100			117,496

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES		17,059			4,273			68,643			(37,593	)

NON-INTEREST INCOME:
Service Charges on Deposit Accounts		3,225			3,442			9,644			10,770
Insurance Commissions		940			1,089			3,403			3,573
Remittance Fees		469			484			1,430			1,469
Trade Finance Fees		341			381			966			1,144
Other Service Charges and Fees		389			409			1,090			1,193
Bank-Owned Life Insurance Income		237			237			700			703
Net Gain on Sales of Investment Securities		1,704			4			1,634			117
Net Gain (Loss) on Sales of Loans		(1,445	)		229			(1,860	)		443
Impairment Loss on Investment Securities:
Total Other-than-temporary Impairment Loss on Investment Securities		—			(790	)		—			(790	)
Less: Portion of Loss Recognized in Other Comprehensive Income		—			—			—			—

Net Impairment Loss Recognized in Earnings		—			(790	)		—			(790	)
Other Operating Income		118			186			496			731

Total Non-Interest Income		5,978			5,671			17,503			19,353

NON-INTEREST EXPENSE:
Salaries and Employee Benefits		8,146			9,552			26,032			27,349
Deposit Insurance Premiums and Regulatory Assessments		1,552			2,253			4,999			8,552
Occupancy and Equipment		2,605			2,702			7,820			8,101
Other Real Estate Owned Expense		(86	)		2,580			1,549			9,998
Data Processing		1,383			1,446			4,269			4,432
Professional Fees		1,147			753			3,074			2,841
Directors and Officers Liability Insurance		737			716			2,204			2,149
Supplies and Communication		712			683			1,786			1,774
Advertising and Promotion		631			567			2,105			1,605
Loan-Related Expense		222			322			631			939
Amortization of Other Intangible Assets		161			273			569			902
Expenses Related to Unconsummated Capital Offerings		—			—			2,220			—
Other Operating Expenses		1,642			2,232			5,541			6,428

Total Non-Interest Expense		18,852			24,079			62,799			75,070

INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		4,185			(14,135	)		23,347			(93,310	)
Provision (Benefit) for Income Taxes		(18	)		442			706			11

NET INCOME (LOSS)	$	4,203		$	(14,577	)	$	22,641		$	(93,321	)

EARNINGS (LOSS) PER SHARE:
Basic	$	0.03		$	(0.12	)	$	0.15		$	(1.24	)
Diluted	$	0.03		$	(0.12	)	$	0.15		$	(1.24	)
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		151,107,790			122,789,120			151,091,317			75,204,528
Diluted		151,258,390			122,789,120			151,246,741			75,204,528
DIVIDENDS DECLARED PER SHARE	$	—		$	—		$	—		$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands; Except Share Data)


	Common Stock – Number of Shares							Stockholders’ Equity
	Issued		Treasury Stock			Outstanding		Common Stock		Additional Paid-In Capital		Unearned Compensation			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Treasury Stock, at Cost			Total Stockholders’ Equity
BALANCE AS OF JANUARY 1, 2010		55,814,890		(4,632,500	)		51,182,390	$	56	$	357,174	$	(302	)	$	859		$	(138,031	)	$	(70,012	)	$	149,744
Shares Issued, Net of Offering and Underwriting Costs		100,000,000		—			100,000,000		100		114,209		—			—			—			—			114,309
Exercises of Stock Options		16,000		—			16,000		—		22		—			—			—			—			22
Share-Based Compensation Expense		—		—			—		—		686		62			—			—			—			748

Comprehensive Loss:
Net Loss		—		—			—		—		—		—			—			(93,321	)		—			(93,321	)
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—		—		—			1,130			—			—			1,130

Total Comprehensive Loss																									(92,191	)

BALANCE AS OF SEPTEMBER 30, 2010		155,830,890		(4,632,500	)		151,198,390	$	156	$	472,091	$	(240	)	$	1,989		$	(231,352	)	$	(70,012	)	$	172,632

BALANCE AS OF JANUARY 1, 2011		155,830,890		(4,632,500	)		151,198,390	$	156	$	472,335	$	(219	)	$	(2,964	)	$	(226,040	)	$	(70,012	)	$	173,256

Share-Based Compensation Expense		—		—			—		—		335		105			—			—			—			440
Restricted Stock Awards		60,000		—			60,000		—		78		(78	)		—			—			—			—

Comprehensive Income:
Net Income		—		—			—		—		—		—			—			22,641			—			22,641
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes		—		—			—		—		—		—			6,866			—			—			6,866

Total Comprehensive Income																									29,507

BALANCE AS OF SEPTEMBER 30, 2011		155,890,890		(4,632,500	)		151,258,390	$	156	$	472,748	$	(192	)	$	3,902		$	(203,399	)	$	(70,012	)	$	203,203

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)	$	22,641		$	(93,321	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Premises and Equipment		1,605			1,729
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net		2,052			476
Amortization of Other Intangible Assets		569			902
Amortization of Servicing Assets		487			705
Share-Based Compensation Expense		440			748
Provision for Credit Losses		8,100			117,496
Net Gain on Sales of Investment Securities		(1,634	)		(117	)
Net Gain on Sales of Loans		(1,044	)		(443	)
Loss on Sales of Other Real Estate Owned		599			81
Provision for Valuation Allowance on Other Real Estate Owned		470			8,444
Impairment Loss on Investment Securities		—			790
Lower of Cost or Fair Value Adjustment for Loans Held for Sale		2,903			—
Deferred Tax Benefit		—			3,608
Origination of Loans Held for Sale		(28,656	)		(21,050	)
Net Proceeds from Sales of Loans Held for Sale		20,011			119,560
Loss on Investment in Affordable Housing Partnership		660			660
Decrease in Accrued Interest Receivable		823			1,050
Increase in Servicing Asset		(481	)		(60	)
Increase in Cash Surrender Value of Bank-Owned Life Insurance		(701	)		(703	)
Increase in Other Assets		(401	)		(4,547	)
Decrease in Income Tax Receivable		—			47,366
(Decrease) Increase in Accrued Interest Payable		(2,476	)		1,121
(Decrease) Increase in Other Liabilities		(510	)		223

Net Cash Provided By Operating Activities		25,457			184,718

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock		3,320			3,374
Proceeds from Matured or Called Investment Securities Available for Sale		171,490			100,006
Proceeds from Matured or Called Investment Securities Held to Maturity		35			19
Proceeds from Sales of Investment Securities Available for Sale		152,468			3,264
Net Proceeds from Sales of Loans Held for Sale		73,126			—
Proceeds from Sales of Other Real Estate Owned		5,598			7,732
Net Decrease in Loans Receivable		114,269			229,531
Purchases of Federal Reserve Bank Stock		(40	)		—
Purchases of Investment Securities Available for Sale		(267,432	)		(294,669	)
Purchases of Investment Securities Held to Maturity		(51,844	)		—
Purchases of Premises and Equipment		(633	)		(711	)

Net Cash Provided By Investing Activities		200,357			48,546

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Deposits		(113,552	)		(221,941	)
Proceeds from Exercise of Stock Options		—			22
Net Proceeds from Issuance of Common Stock in Private Offering		—			116,276
Repayment of Long-Term Federal Home Loan Bank Advances		(259	)		(244	)
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings		(132,861	)		811

Net Cash Used In Financing Activities		(246,672	)		(105,076	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(20,858	)		128,188
Cash and Cash Equivalents at Beginning of Period		249,720			154,110

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	228,862		$	282,298

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Paid	$	23,900		$	28,875
Income Taxes Paid, Net of Refunds	$	3		$	(49,971	)
Non-Cash Activities:
Loans Provided in the Sale of Loans Held for Sale	$	5,750		$	—
Transfer of Loans to Other Real Estate Owned	$	3,938		$	11,745
Transfer of Loans to Loans Held for Sale	$	66,287		$	103,717
Loans Provided in the Sale of Other Real Estate Owned	$	510		$	1,217
Issuance of Stock Warrants in Connection with Common Stock Offering	$	—		$	1,967

See Accompanying Notes to Consolidated Financial Statements (Unaudited).

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

NOTE 1 — BASIS OF PRESENTATION

Hanmi Financial Corporation (“Hanmi Financial,” “we” or “us”) is a Delaware corporation and is subject to the Bank Holding Company Act of 1956, as amended. Our primary subsidiary is Hanmi Bank (the “Bank”), a California state chartered bank. Our other subsidiaries are Chun-Ha Insurance Services, Inc., a California corporation (“Chun-Ha”) and All World Insurance Services, Inc., a California corporation (“All World”).

In the opinion of management, the accompanying unaudited consolidated financial statements of Hanmi Financial Corporation and Subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended September 30, 2011, but are not necessarily indicative of the results that will be reported for the entire year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the aforementioned unaudited consolidated financial statements are in conformity with GAAP. Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report on Form 10-K”).

The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We account for a troubled debt restructuring in accordance with the amendments in ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. Under ASU 2011-02, a restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession that it would not otherwise consider to the debtor for economic or legal reasons related to the debtor’s financial difficulties . Upon identifying loans as TDRs, such TDR loans are individually evaluated for specific impairment. The amount of impairment and any subsequent changes are recorded through the provision for credit losses as an adjustment to the allowance for loan losses. Accounting standards require that an impaired loan be measured based on: (i) the present value of the expected future cash flows, discounted at the loan’s effective interest rate; or (ii) the loan’s observable fair value; or (iii) the fair value of the collateral, if the loan is collateral-dependent.

Descriptions of other significant accounting policies are included in “Note 2 — Summary of Significant Accounting Policies” in our 2010 Annual Report on Form 10-K.

Certain reclassifications were made to the prior period’s presentation to conform to the current period’s presentation.

Recently Issued Accounting Standards

FASB ASU 2011-05, “Presentation of Comprehensive Income (Topic 220)” – ASU 2011-05 is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. These amendments apply to all entities that report items of other comprehensive income, in any period presented. Under the amendments to Topic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in ASU 2011-05 are effective fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of ASU 2011-05 is not expected to have a significant impact on our financial condition or result of operations.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 1 — BASIS OF PRESENTATION (Continued)

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820)” – ASU 2011-04 provides guidance on fair value measurement and disclosure requirements that the FASB deemed largely identical across U.S. GAAP and IFRS. The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or allowed. ASU 2011-04 supersedes most of the guidance in ASC topic 820, but many of the changes are clarifications of existing guidance or wording changes to reflect IFRS 13. Amendments in ASU 2011-04 change the wording used to describe U.S. GAAP requirements for fair value and disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. Adoption of ASU 2011-04 is not expected to have a significant impact on our financial condition or result of operations.

NOTE 2 — REGULATORY MATTERS

On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of a Final Order (“Final Order”) with the California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Final Order and the Agreement contain a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

While Hanmi Financial intends to take such actions as may be necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Final Order and the Agreement, there can be no assurance that Hanmi Financial or the Bank will be able to comply fully with the provisions of the Final Order and the Agreement, or that compliance with the Final Order and the Agreement will not have material or adverse effects on the operations and financial condition of Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Final Order and the Agreement could result in further enforcement actions by the DFI or the FRB or both, or the possible placement of the Bank into conservatorship or receivership.

Final Order and Written Agreement

The Final Order and the Agreement contain substantially similar provisions, and require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening Board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi)improving the capital position of the Bank and, with respect to the Agreement, of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; and (viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Final Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank, and require the Bank to charge off or collect certain problem loans and to review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and Hanmi Financial and the Bank must obtain prior approval from the FRB prior to declaring and paying dividends.

Under the Final Order, the Bank is required to increase its capital and maintain certain regulatory capital ratios prior to certain dates as follows: (1)by July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million, and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent; and (2) by December 31, 2010, and thereafter during the life of the Final Order, the Bank will be required to maintain a ratio of tangible stockholders’ equity to total tangible assets of not less than 9.5 percent.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 2 — REGULATORY MATTERS (Continued)

If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan approved by the FRB. On July 27, 2010, we completed a registered rights and best efforts offering in which we raised approximately $116.8 million in net proceeds. As a result, we satisfied the $100 million capital contribution requirement set forth in the Final Order. While the Bank’s tangible stockholders’ equity to total tangible assets ratio was 8.59% at December 31, 2010, the ratio increased to 10.63 percent at September 30, 2011. Therefore, the Bank is currently in compliance with the tangible capital ratio requirement.

Risk-Based Capital

Federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require banking organizations to maintain a minimum ratio of Tier 1 capital to average 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 federal bank regulatory agencies 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, federal bank regulatory agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

As of September 30, 2011, Hanmi Financial’s Tier 1 capital (stockholders’ equity plus qualified junior subordinated debentures less intangible assets) was $264.0 million. This represented an increase of $31.3 million, or 13.5 percent, over Tier 1 capital of $232.7 million as of December 31, 2010. The capital ratios of Hanmi Financial and the Bank were as follows as of September 30, 2011:


	Actual					Minimum Regulatory Requirement					To be Categorized as “Well Capitalized” under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
September 30, 2011
Total Capital (to Risk-Weighted Assets):
Hanmi Financial	$	304,692		14.58	%	$	167,201		8.00	%		N/A		N/A
Hanmi Bank	$	307,152		14.72	%	$	166,929		8.00	%	$	208,661		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Hanmi Financial	$	264,032		12.63	%	$	83,601		4.00	%		N/A		N/A
Hanmi Bank	$	280,107		13.42	%	$	83,465		4.00	%	$	125,197		6.00	%
Tier 1 Capital (to Average Assets):
Hanmi Financial	$	264,032		9.80	%	$	107,793		4.00	%		N/A		N/A
Hanmi Bank	$	280,107		10.41	%	$	107,626		4.00	%	$	134,532		5.00	%

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS

Fair Value Option and Fair Value Measurements

We determine the fair value of our assets and liabilities in accordance with ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value of an asset or liability is determined based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact for the asset or liability.

In determining fair value, we use various methods including market and income approaches. Based on these approaches, we utilize certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we classify and disclose assets and liabilities based on the fair value hierarchy presented below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-6, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. This requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlements in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarifies that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. In addition, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation were effective for the first reporting period beginning after December 31, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis was effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU 2010-06 did not have a material effect on our financial condition or result of operations.

We used the following methods and significant assumptions to estimate fair value:

Investment Securities Available for Sale – The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealers for our securities for reasonableness based on our understanding of the marketplace. We also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Securities classified as Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into our proprietary valuation model. As of September 30, 2011 and December 31, 2010, we had no level 3 investment securities.

SBA Loans Held for Sale – All Small Business Administration (“SBA”) loans originate for sale. Loans held for sale are carried at the lower of cost or fair value. As of September 30, 2011 and December 31, 2010, we had $19.7 million and $10.0 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At September 30, 2011 and December 31, 2010, the entire balance of SBA loans held for sale was recorded at its cost.

Non-performing Loans Held for Sale – We reclassify certain non-performing loans when we make the decision to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices from buyers. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of September 30, 2011 and December 31, 2010, we had $17.5 million and $26.6 million of non-performing loans held for sale, respectively, and measured them on a nonrecurring basis with Level 3 inputs.

Impaired Loans – FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 3 and subject to non-recurring fair value adjustments.

Other Real Estate Owned – Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned, which is subject to non-recurring fair value adjustments, as Level 3.

Servicing Assets and Servicing Liabilities – The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. The valuation model inputs and results are compared to widely available published industry data for reasonableness. Since fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs, we classify them as Level 3.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Other Intangible Assets – Other intangible assets consist of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Since fair value measurements of other intangible assets use significant unobservable inputs, we classify them, which are subject to non-recurring fair value adjustments, as Level 3.

Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the measurement date. As such, we classify stock warrants, which are subject to non-recurring fair value adjustments, as Level 3.

Fair Value Measurement

FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a three-level fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:


—	Level 1	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
—	Level 2	Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
—	Level 3	Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes in accordance with ASC 825, Financial Instruments.

We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, mortgage servicing assets, impaired loans, other real estate owned, and other intangible assets, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We recognize transfers of assets between levels at the end of each respective quarterly reporting period. However, there were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three and nine months ended September 30, 2011.

As of September 30, 2011 and December 31, 2010, assets and liabilities measured at fair value on a recurring basis are as follows:


	*Level 1*		*Level 2*		*Level 3*
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs With No Active Market With Identical Characteristics		Significant Unobservable Inputs		Balance as of September 30, 2011 and December 31, 2010
	(In Thousands)
September 30, 2011
ASSETS:
Debt Securities Available for Sale:
Collateralized Mortgage Obligations	$	—	$	143,046	$	—	$	143,046
U.S. Government Agency Securities		93,597		—		—		93,597
Residential Mortgage-Backed Securities		—		92,855		—		92,855
Corporate Bonds		—		19,961		—		19,961
Municipal Bonds		—		9,586		—		9,586
Asset-Backed Securities		—		—		—		—
Other Securities		—		3,337		—		3,337

Total Debt Securities Available for Sale	$	93,597	$	268,785	$	—	$	362,382

Equity Securities Available for Sale:
Financial Services Industry	$	678		—		—	$	678

Total Equity Securities Available for Sale	$	678	$	—	$	—	$	678

Total Securities Available for Sale	$	94,275	$	268,785	$	—	$	363,060

LIABILITIES:
Stock Warrants	$	—	$	—	$	746	$	746

December 31, 2010
ASSETS:
Debt Securities Available for Sale:
Collateralized Mortgage Obligations	$	—	$	137,193	$	—	$	137,193
U.S. Government Agency Securities		113,334		—		—		113,334
Residential Mortgage-Backed Securities		—		109,842		—		109,842
Municipal Bonds		—		21,028		—		21,028
Corporate Bonds		—		20,205		—		20,205
Asset-Backed Securities		—		7,384		—		7,384
Other Securities		—		3,259		—		3,259

Total Debt Securities Available for Sale	$	113,334	$	298,911	$	—	$	412,245

Equity Securities Available for Sale:
Financial Services Industry	$	873		—		—	$	873

Total Equity Securities Available for Sale	$	873	$	—	$	—	$	873

Total Securities Available for Sale	$	114,207	$	298,911	$	—	$	413,118

LIABILITIES:
Stock Warrants	$	—	$	—	$	1,600	$	1,600

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Beginning Balance as of July 1, 2011		Purchases, Issuances and Settlements		Realized and Unrealized Gains or Losses in Earnings		Realized and Unrealized Gains or Losses in Other Comprehensive Income		Transfers In and/or Out of Level 3		Ending Balance as of September 30, 2011
	(In Thousands)
LIABILITIES:
Stock Warrants ⁽¹⁾	$	1,289	$	—	$	543	$	—	$	—	$	746


	Beginning Balance as of January 1, 2011		Purchases, Issuances and Settlements		Realized and Unrealized Gains or Losses in Earnings		Realized and Unrealized Gains or Losses in Other Comprehensive Income		Transfers In and/or Out of Level 3		Ending Balance as of September 30, 2011
	(In Thousands)
LIABILITIES:
Stock Warrants ⁽¹⁾	$	1,600	$	—	$	854	$	—	$	—	$	746

⁽¹⁾

Reflects warrants for our common stock issued to Cappello Capital Corp. in connection with services it provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise price of $1.20 per share and expire on October 14, 2015. See “Note 8 – Stockholders’ Equity” for more details.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

For the three and nine months ended September 30, 2011 and 2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:


	*Level 1*		*Level 2*		*Level 3*
	Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs With No Active Market With Identical Characteristics		Significant Unobservable Inputs			Losses During The Three Months Ended September 30, 2011 and 2010		Losses During The Nine Months Ended September 30, 2011 and 2010
September 30, 2011
ASSETS:
Non-Performing Loans Held for Sale	$	—	$	—	$	4,246	⁽¹⁾	$	—	$	2,488
Impaired Loans	$	—	$	—	$	103,410	⁽²⁾	$	16,328	$	29,264
Other Real Estate Owned	$	—	$	—	$	248	⁽³⁾	$	—	$	194
September 30, 2010
ASSETS:
Non-Performing Loans Held for Sale	$	—	$	—	$	4,007	⁽⁴⁾	$	290	$	1,111
Impaired Loans	$	—	$	—	$	158,254	⁽⁵⁾	$	17,515	$	55,162
Other Real Estate Owned	$	—	$	—	$	18,738	⁽⁶⁾	$	1,941	$	7,853

⁽¹⁾

Includes commercial term loans of $3.8 million and SBA loans of $434,000.

⁽²⁾

Includes real estate loans of $35.6 million, commercial and industrial loans of $66.9 million, and consumer loans of $875,000 .

⁽³⁾

Represents a property from the foreclosure of a SBA loan.

⁽⁴⁾

Includes commercial term loans of $1.8 million and commercial property loans of $2.2 million.

⁽⁵⁾

Includes real estate loans of $31.2 million, commercial and industrial loans of $126.7 million, and consumer loans of $308,000.

⁽⁶⁾

Includes properties from the foreclosure of real estate loans of $17.8 million and commercial and industrial loans of $935,000.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

FASB ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The estimated fair values of financial instruments were as follows:


	September 30, 2011				December 31, 2010
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In Thousands)
Financial Assets:
Cash and Cash Equivalents	$	228,862	$	228,862	$	249,720	$	249,720
Investment Securities Held to Maturity		52,638		52,560		845		847
Investment Securities Available for Sale		363,060		363,060		413,118		413,118
Loans Receivable, Net of Allowance for Loan Losses		1,891,533		1,867,546		2,084,447		2,025,368
Loans Held for Sale		37,202		37,202		36,620		36,620
Accrued Interest Receivable		7,225		7,225		8,048		8,048
Investment in Federal Home Loan Bank Stock		23,962		23,962		27,282		27,282
Investment in Federal Reserve Bank Stock		7,489		7,489		7,449		7,449
Financial Liabilities:
Noninterest-Bearing Deposits		621,195		621,195		546,815		546,815
Interest-Bearing Deposits		1,731,974		1,736,270		1,919,906		1,927,314
Borrowings		104,506		104,191		237,626		233,077
Accrued Interest Payable		13,490		13,490		15,966		15,966
Stock Warrants		746		746		1,289		1,289
Off-Balance Sheet Items:
Commitments to Extend Credit		150,634		94		178,424		130
Standby Letters of Credit		14,902		33		15,226		50

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:

Cash and Cash Equivalents – For short-term instruments, including cash and due from banks, and interest bearing deposits in other banks, the carrying amount is a reasonable estimate of their fair value.

Investment Securities – Fair values for investment securities are based on quoted market prices when available, or estimated through the use of market prices obtained from independent securities brokers or dealers when market quotes are not readily accessible or available.

Loans Receivable, Net of Allowance for Loan Losses – Fair values for loans receivable are estimated based on the discounted cash flow approach. The discount rate is derived from the associated yield curve plus spreads, and reflects the current rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for loan losses relating to performing and nonperforming

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

loans results in a fair valuation of such loans. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans, and may differ materially from the values that we may ultimately realize.

Loans Held for Sale – For loans held for sale, the carrying value approximates their fair value.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value.

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – For investment in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, the carrying amounts approximate their fair value as the stock may be resold to the issuer at their carrying value.

Noninterest-Bearing Deposits – The fair value of noninterest-bearing deposits is equal to the amount payable on demand at the reporting date.

Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on the discounted value of contractual cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rates used for fair valuation are based on interest rates currently being offered by the Bank on comparable deposits as to amount and term.

Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows are used to value borrowings.

Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value.

Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the measurement date.

Commitments to Extend Credit and Standby Letters of Credit – The fair values of commitments to extend credit and standby letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES

The following is a summary of investment securities held to maturity:


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(In Thousands)
September 30, 2011:
Municipal Bonds	$	41,397	$	100	$	178	$	41,319
U.S. Government Agency Securities		7,994		—		—		7,994
Mortgage-Backed Securities ⁽¹⁾		3,247		2		2		3,247

	$	52,638	$	102	$	180	$	52,560

December 31, 2010:
Municipal Bonds	$	696	$	—	$	—	$	696
Mortgage-Backed Securities ⁽¹⁾		149		2		—		151

	$	845	$	2	$	—	$	847

⁽¹⁾

Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

The following is a summary of investment securities available for sale:


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(In Thousands)
September 30, 2011:
Collateralized Mortgage Obligations ⁽¹⁾	$	141,305	$	1,967	$	226	$	143,046
U.S. Government Agency Securities		93,362		236		1		93,597
Mortgage-Backed Securities ⁽¹⁾		90,193		2,662		—		92,855
Municipal Bonds		9,293		293		—		9,586
Corporate Bonds		20,457		—		496		19,961
Other Securities		3,305		69		37		3,337
Equity Securities ⁽³⁾		647		64		33		678

	$	358,562	$	5,291	$	793	$	363,060

December 31, 2010:
Collateralized Mortgage Obligations ⁽¹⁾	$	139,053	$	470	$	2,330	$	137,193
U.S. Government Agency Securities		114,066		98		830		113,334
Mortgage-Backed Securities ⁽¹⁾		108,436		2,137		731		109,842
Municipal Bonds		22,420		48		1,440		21,028
Corporate Bonds		20,449		13		257		20,205
Asset-Backed Securities ⁽²⁾		7,115		269		—		7,384
Other Securities		3,305		—		46		3,259
Equity Securities ⁽³⁾		647		226		—		873

	$	415,491	$	3,261	$	5,634	$	413,118

⁽¹⁾

Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

⁽²⁾

Collateralized debentures of small business investment companies and state and local development companies, and guaranteed by SBA.

⁽³⁾

Balances presented for amortized cost, representing two equity securities, were net of an OTTI charge of $790,000, which was related to a credit loss, as of December 31, 2010. We recorded an OTTI charge of $790,000 to write down the value of one equity investment to its fair value during the year ended December 31, 2010.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

The amortized cost and estimated fair value of investment securities at September 30, 2011, by contractual maturity, are shown below. Although collateralized mortgage obligations, mortgage-backed securities and asset-backed securities have contractual maturities through 2041, 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 Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands)
Within One Year	$	—	$	—	$	—	$	—
Over One Year Through Five Years		93,487		93,164		697		697
Over Five Years Through Ten Years		29,764		30,077		19,542		19,538
Over Ten Years		3,166		3,240		29,152		29,078
Collateralized Mortgage Obligations		141,305		143,046		—		—
Mortgage-Backed Securities		90,193		92,855		3,247		3,247
Equity Securities		647		678		—		—

	$	358,562	$	363,060	$	52,638	$	52,560

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and nine months ended September 30, 2011, there were no OTTI charges recorded in earnings. For the three and nine months ended September 30, 2010, we recorded $790,000 in OTTI charges in earnings on available for sale securities. As of September 30, 2010, we had investment securities in mutual funds (“Special Series A Shares”) with an aggregate carrying value of $925,000. During the first quarter of 2010, the issuer of such securities completed a comprehensive restructuring which resulted in the exchange of our Special Series A shares into common shares of the issuer. Based on the closing price of the shares at September 30, 2010, we recorded an OTTI charge of $790,000 to write down the value of the investment securities to their fair value.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

We perform periodic reviews for impairment in accordance with FASB ASC 320. Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the number of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of September 30, 2011 and December 31, 2010:


	Holding Period
	Less than 12 Months						12 Months or More						Total
Investment Securities Available for Sale	Gross Unrealized Losses		Estimated Fair Value		Number of Securities		Gross Unrealized Losses		Estimated Fair Value		Number of Securities		Gross Unrealized Losses		Estimated Fair Value		Number of Securities
	(In Thousands)
September 30, 2011:
Mortgage-Backed Securities	$	—	$	—		—	$	—	$	—		—	$	—	$	—		—
Collateralized Mortgage Obligations		226		22,965		9		—		—		—		226		22,965		9
Municipal Bonds		—		—		—		—		—		—		—		—		—
U.S. Government Agency Securities		1		3,001		1		—		—		—		1		3,001		1
Equity Securities		33		103		1		—		—		—		33		103		1
Other Securities		—		—		—		37		962		1		37		962		1
Corporate Bonds		31		4,454		2		465		15,507		4		496		19,961		6

	$	291	$	30,523		13	$	502	$	16,469		5	$	793	$	46,992		18

December 31, 2010:
Mortgage-Backed Securities	$	731	$	62,738		16	$	—	$	—		—	$	731	$	62,738		16
Collateralized Mortgage Obligations		2,330		99,993		20		—		—		—		2,330		99,993		20
Municipal Bonds		1,440		16,907		11		—		—		—		1,440		16,907		11
U.S. Government Agency Securities		830		69,266		14		—		—		—		830		69,266		14
Other Securities		3		1,997		2		43		957		1		46		2,954		3
Corporate Bonds		257		17,210		5		—		—		—		257		17,210		5

	$	5,591	$	268,111		68	$	43	$	957		1	$	5,634	$	269,068		69

The impairment losses described previously are not included in the table above as the impairment losses were recorded. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2011 and December 31, 2010 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of September 30, 2011. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 4 — INVESTMENT SECURITIES (Continued)

FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2011 and December 31, 2010 are not other-than-temporarily impaired, and therefore, no impairment charges as of September 30, 2011 and December 31, 2010 are warranted.

Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense on sales of investment securities were as follows for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011			2010
	(In Thousands)
Gross Realized Gains on Sales of Investment Securities	$	1,704	$	4	$	2,673		$	222
Gross Realized Losses on Sales of Investment Securities		—		—		(1,039	)		(105	)

Net Realized Gains on Sales of Investment Securities	$	1,704	$	4	$	1,634		$	117

Proceeds from Sales of Investment Securities	$	38,691	$	15,000	$	152,468		$	18,825
Tax Expense on Sales of Investment Securities	$	716	$	2	$	687		$	50

For the three months ended September 30, 2011, $584,000 ($339,000, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized an $1.7 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.6 million in comprehensive income. For the three months ended September 30, 2010, $865,000 ($501,000, net of income taxes) of net unrealized losses arose during the period and was included in comprehensive income, and we recognized a $4,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $88,000 ($51,000, net of income taxes) in comprehensive income. For the nine months ended September 30, 2011, $6.9 million ($4.0 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized an $1.6 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $249,000 ($105,000, net of income tax) in comprehensive income. For the nine months ended September 30, 2010, $2.1 million ($1.2 million, net of income taxes) of net unrealized gains arose during the period and was included in comprehensive income, and we recognized an $117,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $199,000 ($115,000, net of income taxes) in comprehensive income.

Investment securities available for sale with carrying values of $48.5 million and $118.0 million as of September 30, 2011 and December 31, 2010, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS

The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure change, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.

Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, international loans, and SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

Concentrations of credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy. Most of the Bank’s lending activity occurs within Southern California.

Loans Receivable

Loans receivable consisted of the following as of the dates indicated:


	September 30, 2011			December 31, 2010
	(In Thousands)
Real Estate Loans:
Commercial Property	$	658,550		$	729,222
Construction		39,284			60,995
Residential Property		56,638			62,645

Total Real Estate Loans		754,472			852,862

Commercial and Industrial Loans: ⁽¹⁾
Commercial Term		995,773			1,118,999
SBA		118,380			105,688
Commercial Lines of Credit		52,514			59,056
International		26,073			44,167

Total Commercial and Industrial Loans		1,192,740			1,327,910

Consumer Loans		44,819			50,300

Total Gross Loans		1,992,031			2,231,072
Allowance for Loans Losses		(100,792	)		(146,059	)
Deferred Loan Costs (Fees)		294			(566	)

Loans Receivable, Net	$	1,891,533		$	2,084,447

⁽¹⁾

Commercial and industrial loans include owner-occupied property loans of $811.0 million and $894.8 million as of September 30, 2011 and December 31, 2010, respectively.

Accrued interest on loans receivable amounted to $5.6 million and $6.5 million at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, loans receivable totaling $840.6 million and $1.03 billion, respectively, were pledged to secure borrowings from the FHLB and the Federal Reserve Discount Window.

The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the three months ended September 30, 2011 and 2010.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)


	Real Estate			Commercial and Industrial			Consumer		Total
	(Dollars in Thousands)
September 30, 2011
Loans Held for Sale:
Beginning Balance	$	974		$	43,131		$	—	$	44,105
Origination of Loans Held for Sale		—			13,560			—		13,560
Reclassification from Loans Receivable to Loans Held for sale		14,236			17,117			—		31,353
Sales of Loans Held for sale		(5,506	)		(46,238	)		—		(51,744	)
Principal Payoffs and Amortization		(7	)		(65	)		—		(72	)
Valuation Adjustments		—			—			—		—

Ending Balance	$	9,697		$	27,505		$	—	$	37,202

September 30, 2010
Loans Held for Sale:
Beginning Balance	$	14,853		$	15,691		$	—	$	30,544
Origination of Loans Held for Sale		—			1,894			—		1,894
Reclassification from Loans Receivable to Loans Held for sale		1,201			4,227			—		5,428
Sales of Loans Held for sale		(13,889	)		(13,169	)		—		(27,058	)
Principal Payoffs and Amortization		—			(148	)		—		(148	)
Valuation Adjustments		—			—			—		—

Ending Balance	$	2,165		$	8,495		$	—	$	10,660

For the three months ended September 30, 2011, loans receivable of $31.4 million were reclassified as loans held for sale, and loans held for sale of $51.7 million were sold. For the same period ended September 30, 2010, loans receivable of $5.4 million were reclassified as loans held for sale, and loans held for sale of $27.1 million were sold. The net proceeds from the sale of non-performing loans were $27.5 million and $24.7 million for the three months ended September 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the three months ended September 30, 2011 and 2010.

The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the nine months ended September 30, 2011 and 2010.


	Real Estate			Commercial and Industrial			Consumer		Total
	(Dollars in Thousands)
September 30, 2011
Loans Held for Sale:
Beginning Balance	$	3,666		$	32,954		$	—	$	36,620
Origination of Loans Held for Sale		—			28,656			—		28,656
Reclassification from Loans Receivable to Loans Held for sale		33,514			38,523			—		72,037
Sales of Loans Held for sale		(27,329	)		(68,682	)		—		(96,011	)
Principal Payoffs and Amortization		(21	)		(1,177	)		—		(1,198	)
Valuation Adjustments		(133	)		(2,769	)		—		(2,902	)

Ending Balance	$	9,697		$	27,505		$	—	$	37,202

September 30, 2010
Loans Held for Sale:
Beginning Balance	$	—		$	5,010		$	—	$	5,010
Origination of Loans Held for Sale		—			21,050			—		21,050
Reclassification from Loans Receivable to Loans Held for sale		30,041			73,676			—		103,717
Sales of Loans Held for sale		(27,876	)		(90,900	)		—		(118,776	)
Principal Payoffs and Amortization		—			(341	)		—		(341	)
Valuation Adjustments		—			—			—		—

Ending Balance	$	2,165		$	8,495		$	—	$	10,660

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

For the nine months ended September 30, 2011, loans receivable of $72.0 million were reclassified as loans held for sale, and loans held for sale of $96.0 million were sold. For the same period ended September 30, 2010, loans receivable of $103.7 million were reclassified as loans held for sale ,and loans held for sale of $118.8 million were sold. The net proceeds from the sale of non-performing loans were $73.1 million and $114.6 million for the nine months ended September 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the nine months ended September 30, 2011 and 2010.

Allowance for Loan Losses and Allowance for Off-Balance Sheet Items

Activity in the allowance for loan losses and off-balance sheet items was as follows for the periods indicated:


	As of and for the Three Months Ended									As of and for the Nine Months Ended
	September 30, 2011			June 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
	(In Thousands)
Allowance for Loan Losses:
Balance at Beginning of Period	$	109,029		$	125,780		$	176,667		$	146,059		$	144,996

Actual Charge-Offs		(16,551	)		(20,652	)		(23,204	)		(62,384	)		(94,036	)
Recoveries on Loans Previously Charged Off		1,045			4,151			1,900			8,822			7,393

Net Loan Charge-Offs		(15,506	)		(16,501	)		(21,304	)		(53,562	)		(86,643	)

Provision Charged to Operating Expenses		7,269			(250	)		20,700			8,295			117,710

Balance at End of Period	$	100,792		$	109,029		$	176,063		$	100,792		$	176,063

Allowance for Off-Balance Sheet Items:
Balance at Beginning of Period	$	2,391		$	2,141		$	2,362		$	3,417		$	3,876
Provision Charged to Operating Expenses		831			250			1,300			(195	)		(214	)

Balance at End of Period	$	3,222		$	2,391		$	3,662		$	3,222		$	3,662

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended September 30, 2011 and 2010.


	Real Estate			Commercial and Industrial		Consumer		Unallocated			Total
	(Dollars in Thousands)
September 30, 2011
Allowance for Loan Losses:
Beginning Balance	$	24,115		$	82,845	$	1,587	$	482		$	109,029
Charge-Offs		2,142			14,023		386		—			16,551
Recoveries on Loans Previously Charged Off		—			1,014		31		—			1,045
Provision		(165	)		4,961		992		1,481			7,269

Ending Balance	$	21,808		$	74,797	$	2,224	$	1,963		$	100,792

Ending Balance: Individually Evaluated for Impairment	$	3,630		$	25,915	$	285	$	—		$	29,830

Ending Balance: Collectively Evaluated for Impairment	$	18,178		$	48,882	$	1,939	$	1,963		$	70,962

Loans Receivable:
Ending Balance	$	754,472		$	1,192,740	$	44,819	$	—		$	1,992,031

Ending Balance: Individually Evaluated for Impairment	$	47,172		$	95,959	$	1,158	$	—		$	144,289

Ending Balance: Collectively Evaluated for Impairment	$	707,300		$	1,096,781	$	43,661	$	—		$	1,847,742

September 30, 2010
Allowance for Loan Losses:
Beginning Balance	$	32,045		$	140,504	$	2,198	$	1,920		$	176,667
Charge-Offs		2,864			20,131		209		—			23,204
Recoveries on Loans Previously Charged Off		1,168			688		44		—			1,900
Provision		9,394			11,122		625		(441	)		20,700

Ending Balance	$	39,743		$	132,183	$	2,658	$	1,479		$	176,063

Ending Balance: Individually Evaluated for Impairment	$	1,457		$	25,182	$	174	$	—		$	26,813

Ending Balance: Collectively Evaluated for Impairment	$	38,286		$	107,001	$	2,484	$	1,479		$	149,250

Loans Receivable:
Ending Balance	$	883,568		$	1,447,669	$	53,237	$	—		$	2,384,474

Ending Balance: Individually Evaluated for Impairment	$	80,461		$	155,083	$	538	$	—		$	236,082

Ending Balance: Collectively Evaluated for Impairment	$	803,107		$	1,292,586	$	52,699	$	—		$	2,148,392

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The following table details the information on the allowance for loan losses by portfolio segment for the nine months ended September 30, 2011 and 2010.


	Real Estate		Commercial and Industrial		Consumer		Unallocated			Total
	(Dollars in Thousands)
September 30, 2011
Allowance for Loan Losses:
Beginning Balance	$	32,766	$	108,986	$	2,079	$	2,228		$	146,059
Charge-Offs		14,786		46,715		883		—			62,384
Recoveries on Loans Previously Charged Off		2,744		6,025		53		—			8,822
Provision		1,084		6,501		975		(265	)		8,295

Ending Balance	$	21,808	$	74,797	$	2,224	$	1,963		$	100,792

Ending Balance: Individually Evaluated for Impairment	$	3,630	$	25,915	$	285	$	—		$	29,830

Ending Balance: Collectively Evaluated for Impairment	$	18,178	$	48,882	$	1,939	$	1,963		$	70,962

Loans Receivable:
Ending Balance	$	754,472	$	1,192,740	$	44,819	$	—		$	1,992,031

Ending Balance: Individually Evaluated for Impairment	$	47,172	$	95,959	$	1,158	$	—		$	144,289

Ending Balance: Collectively Evaluated for Impairment	$	707,300	$	1,096,781	$	43,661	$	—		$	1,847,742

September 30, 2010
Allowance for Loan Losses:
Beginning Balance	$	30,081	$	112,225	$	2,690	$	—		$	144,996
Charge-Offs		20,681		72,168		1,187		—			94,036
Recoveries on Loans Previously Charged Off		3,033		4,195		165		—			7,393
Provision		27,310		87,931		990		1,479			117,710

Ending Balance	$	39,743	$	132,183	$	2,658	$	1,479		$	176,063

Ending Balance: Individually Evaluated for Impairment	$	1,457	$	25,182	$	174	$	—		$	26,813

Ending Balance: Collectively Evaluated for Impairment	$	38,286	$	107,001	$	2,484	$	1,479		$	149,250

Loans Receivable:
Ending Balance	$	883,568	$	1,447,669	$	53,237	$	—		$	2,384,474

Ending Balance: Individually Evaluated for Impairment	$	80,461	$	155,083	$	538	$	—		$	236,082

Ending Balance: Collectively Evaluated for Impairment	$	803,107	$	1,292,586	$	52,699	$	—		$	2,148,392

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each and every loan in our loan portfolio.

Pass-grade (0 to 4) loans are reviewed for reclassification on an annual basis, while criticized (5) and classified (6 and 7) loans are reviewed semi-annually. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass: These loans, risk rated 0 to 4, are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential for defined weaknesses as defined under “Special Mention” (5), “Substandard” (6) or “Doubtful” (7). This is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass grade:

Pass 0: Secured in full by cash or cash equivalents.

Pass 1: A very strong, well-structured credit relationship with an established borrower.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirements, excellent liquidity, and very strong capital.

Pass 2: These loans require a well-structured credit that may not be as seasoned or as high quality as grade 1. Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This category includes individuals with substantial net worth supported by liquid assets and strong income.

Pass 3: Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheet proportions and significant cash flow coverage, although they may be somewhat more leveraged and exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans which are designated this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity

Pass 4: Loans or commitments to borrowers exhibiting either somewhat weaker balance sheet proportions or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result of this, the Bank may have secured its exposure in an effort to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.

Special Mention or 5: A Special Mention credit has potential weaknesses that deserve management’s close attention, as the borrower is exhibiting deteriorating trends that, if not corrected, could jeopardize repayment of the debt and result in a “Substandard” (6) grade. Credits which have significant actual, not potential, weaknesses are assigned lower grades than this grade.

Substandard or 6: A Substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

Doubtful or 7: A Doubtful credit is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events that may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss or 8: Loans classified Loss are considered uncollectible and of such little value that their continuance as active Bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)


	Pass (Grade 0-4)		Criticized (Grade 5)		Classified (Grade 6-7)		Total Loans
	(In Thousands)
September 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	277,240	$	8,810	$	26,103	$	312,153
Land		4,382		—		3,786		8,168
Other		281,879		16,445		39,905		338,229
Construction		8,391		14,080		16,813		39,284
Residential Property		53,878		—		2,760		56,638
Commercial and Industrial Loans:
Commercial Term
Unsecured		107,581		14,423		45,969		167,973
Secured by Real Estate		644,301		45,992		137,507		827,800
Commercial Lines of Credit		40,544		9,059		2,911		52,514
SBA		91,184		746		26,450		118,380
International		23,876		—		2,197		26,073
Consumer Loans		41,803		696		2,320		44,819

Total	$	1,575,059	$	110,251	$	306,721	$	1,992,031

December 31, 2010:
Real Estate Loans:
Commercial Property
Retail	$	302,696	$	18,507	$	38,568	$	359,771
Land		3,845		—		37,353		41,198
Other		265,957		20,804		41,493		328,254
Construction		12,958		25,897		22,139		60,994
Residential Property		59,329		—		3,315		62,644
Commercial and Industrial Loans:
Commercial Term
Unsecured		134,709		24,620		63,739		223,068
Secured by Real Estate		617,200		107,645		171,086		895,931
Commercial Lines of Credit		40,195		8,019		10,841		59,055
SBA		68,994		731		35,965		105,690
International		38,447		4,693		1,027		44,167
Consumer Loans		48,027		347		1,926		50,300

Total	$	1,592,357	$	211,263	$	427,452	$	2,231,072

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (Continued)

NOTE 5 — LOANS (Continued)

The following is an aging analysis of past due loans, disaggregated by loan class, as of September 30, 2011 and December 31, 2010:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Accruing 90 Days or More Past Due
	(In Thousands)
September 30, 2011:
Real Estate Loans:
Commercial Property
Retail	$	219	$	3,756	$	—	$	3,975	$	308,178	$	312,153	$	—
Land		—		—		360		360		7,808		8,168		—
Other		765		—		1,092		1,857		336,372		338,229		—
Construction		—		—		6,142		6,142		33,142		39,284		—
Residential Property		1,763		463		218		2,444		54,194		56,638		—
Commercial and Industrial Loans:
Commercial Term
Unsecured		846		921		1,270		3,037		164,936		167,973		—
Secured by Real Estate		2,134		5,214		2,782		10,130		817,670		827,800		—
Commercial Lines of Credit		—		300		754		1,054		51,460		52,514		—
SBA		5,213		6,976		8,625		20,814		97,566		118,380		—
International		—		—		—		—		26,073		26,073		—
Consumer Loans		361		382		536		1,279		43,540		44,819		—

Total	$	11,301	$	18,012	$	21,779	$	51,092	$	1,940,939	$	1,992,031

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