Table of Contents

 

 

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, 2012

or

 

¨ 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.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨  (Do Not Check if a Smaller Reporting Company)    Smaller Reporting Company   ¨

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 October 26, 2012, there were 31,491,141 outstanding shares of the Registrant’s Common Stock.

 

 

 


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

 

PART 1 — FINANCIAL INFORMATION   
ITEM 1.    FINANCIAL STATEMENTS      1   
  

Consolidated Balance Sheets (Unaudited)

     1   
  

Consolidated Statements of Operations (Unaudited)

     2   
  

Consolidated Statements of Comprehensive Income (Unaudited)

     3   
  

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

     4   
  

Consolidated Statements of Cash Flows (Unaudited)

     5   
  

Notes to Consolidated Financial Statements (Unaudited)

     6   
ITEM 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     33   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     62   
ITEM 4.   

CONTROLS AND PROCEDURES

     62   
PART II — OTHER INFORMATION   
ITEM 1.   

LEGAL PROCEEDINGS

     63   
ITEM 1A.   

RISK FACTORS

     63   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     63   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     63   
ITEM 4.   

MINE SAFETY DISCLOSURES

     63   
ITEM 5.   

OTHER INFORMATION

     63   
ITEM 6.   

EXHIBITS

     63   
SIGNATURES      64   


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and Due From Banks

   $ 72,053      $ 80,582   

Interest-Bearing Deposits in Other Banks

     217,375        101,101   

Federal Funds Sold

     13,000        20,000   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     302,428        201,683   

Restricted Cash

     4,393        1,818   

Term Federal Funds Sold

     55,000        115,000   

Securities Available for Sale, at Fair Value (Amortized Cost of $402,978 as of September 30, 2012 and $377,747 as of December 31, 2011)

     410,210        381,862   

Securities Held to Maturity, at Amortized Cost (Fair Value of $59,363 as of December 31, 2011)

     —          59,742   

Loans Held for Sale, at the Lower of Cost or Fair Value

     10,736        22,587   

Loans Receivable, Net of Allowance for Loan Losses of $66,107 as of September 30, 2012 and $89,936 as of December 31, 2011

     1,892,813        1,849,020   

Accrued Interest Receivable

     7,467        7,829   

Premises and Equipment, Net

     15,412        16,603   

Other Real Estate Owned, Net

     364        180   

Customers’ Liability on Acceptances

     2,157        1,715   

Servicing Assets

     5,148        3,720   

Other Intangible Assets, Net

     1,376        1,533   

Investment in Federal Home Loan Bank Stock, at Cost

     19,621        22,854   

Investment in Federal Reserve Bank Stock, at Cost

     10,261        8,558   

Deferred Tax Assets

     48,826        —     

Current Tax Assets

     11,689        9,073   

Bank-Owned Life Insurance

     28,816        28,289   

Prepaid Expenses

     2,239        1,598   

Other Assets

     12,901        11,160   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,841,857      $ 2,744,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

Deposits:

    

Noninterest-Bearing

   $ 694,345      $ 634,466   

Interest-Bearing

     1,669,040        1,710,444   
  

 

 

   

 

 

 

Total Deposits

     2,363,385        2,344,910   

Accrued Interest Payable

     15,266        16,032   

Bank’s Liability on Acceptances

     2,157        1,715   

Federal Home Loan Bank Advances

     3,029        3,303   

Junior Subordinated Debentures

     82,406        82,406   

Accrued Expenses and Other Liabilities

     11,627        10,850   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,477,870        2,459,216   

STOCKHOLDERS’ EQUITY:

    

Common Stock, $0.001 Par Value; Authorized 62,500,000 Shares; Issued 32,067,095 Shares

    

(31,489,201 Shares Outstanding) as of September 30, 2012 and December 31, 2011

     257        257   

Additional Paid-In Capital

     549,814        549,744   

Unearned Compensation

     (92     (166

Accumulated Other Comprehensive Income—Unrealized Gain on Securities

    

Available for Sale and Loss on Interest-Only Strip, Net of Income Taxes of $1,882 as of September 30, 2012 and $602 as of December 31, 2011

     5,364        3,524   

Accumulated Deficit

     (121,498     (197,893

Less Treasury Stock, at Cost; 577,894 Shares as of September 30, 2012 and December 31, 2011

     (69,858     (69,858
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     363,987        285,608   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,841,857      $ 2,744,824   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

1


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

INTEREST AND DIVIDEND INCOME:

        

Interest and Fees on Loans

   $ 26,781      $ 29,355      $ 81,564      $ 89,509   

Taxable Interest on Investment Securities

     1,992        2,022        6,280        7,789   

Tax-Exempt Interest on Investment Securities

     98        39        299        116   

Interest on Term Federal Funds Sold

     191        49        684        94   

Interest on Federal Funds Sold

     20        5        53        22   

Interest on Interest-Bearing Deposits in Other Banks

     142        75        269        243   

Dividends on Federal Reserve Bank Stock

     154        112        430        336   

Dividends on Federal Home Loan Bank Stock

     24        17        82        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest and Dividend Income

     29,402        31,674        89,661        98,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE:

        

Interest on Deposits

     3,639        5,730        12,511        18,657   

Interest on Federal Home Loan Bank Advances

     40        46        126        618   

Interest on Junior Subordinated Debentures

     804        739        2,400        2,148   

Interest on Other Borrowings

     —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

     4,483        6,515        15,037        21,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES

     24,919        25,159        74,624        76,743   

Provision for Credit Losses

     —          8,100        6,000        8,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

     24,919        17,059        68,624        68,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME:

        

Service Charges on Deposit Accounts

     2,851        3,225        8,955        9,644   

Insurance Commissions

     1,092        940        3,622        3,403   

Remittance Fees

     476        469        1,417        1,430   

Trade Finance Fees

     274        341        858        966   

Other Service Charges and Fees

     361        389        1,105        1,090   

Bank-Owned Life Insurance Income

     235        237        872        700   

Gain on Sales of SBA Loans Guaranteed Portion

     1,772        1,612        7,245        1,612   

Net Loss on Sales of Other Loans

     (515     (3,057     (8,234     (3,472

Net Gain on Sales of Investment Securities

     10        1,704        1,392        1,634   

Impairment Loss on Investment Securities:

        

Total Other-Than-Temporary Impairment Loss on Investment Securities

     (176     —          (292     —     

Less: Portion of Loss Recognized in Other Comprehensive Income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Impairment Loss Recognized in Earnings

     (176     —          (292     —     

Other Operating Income

     140        118        402        496   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

     6,520        5,978        17,342        17,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSE:

        

Salaries and Employee Benefits

     9,148        8,146        27,707        26,032   

Occupancy and Equipment

     2,623        2,605        7,839        7,820   

Deposit Insurance Premiums and Regulatory Assessments

     283        1,552        3,182        4,999   

Data Processing

     1,211        1,383        3,762        4,269   

Other Real Estate Owned Expense

     352        (86     377        1,549   

Professional Fees

     1,112        1,147        2,950        3,074   

Directors and Officers Liability Insurance

     296        737        888        2,204   

Supplies and Communications

     669        712        1,803        1,786   

Advertising and Promotion

     1,023        631        2,633        2,105   

Loan-Related Expense

     164        222        452        631   

Amortization of Other Intangible Assets

     41        161        157        569   

Expense related to Unconsummated Capital

    Offerings

     —          —          —          2,220   

Other Operating Expenses

     1,882        1,642        5,563        5,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

     18,804        18,852        57,313        62,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES

     12,635        4,185        28,653        23,347   

(Benefit) Provision for Income Taxes

     (644     (18     (47,742     706   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 13,279      $ 4,203      $ 76,395      $ 22,641   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE:

        

Basic

   $ 0.42      $ 0.22      $ 2.43      $ 1.20   

Diluted

   $ 0.42      $ 0.22      $ 2.42      $ 1.20   

WEIGHTED-AVERAGE SHARES OUTSTANDING:

        

Basic

     31,475,976        18,888,474        31,474,042        18,886,415   

Diluted

     31,545,111        18,907,299        31,506,767        18,905,843   

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

2


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

NET INCOME

   $ 13,279      $ 4,203      $ 76,395      $ 22,641   

OTHER COMPREHENSIVE INCOME, NET OF TAX

        

Unrealized Gain on Securities

        

Unrealized Holding Gain Arising During Period

     1,655        2,289        2,248        8,505   

Unrealized Holding Gain Arising from the reclassification of held-to-maturity securities to available-for-sale securities

     1,968        —          1,968        —     

Less: Reclassification Adjustment for Loss (Gain) Included in Net Income

     166        (1,704     (1,100     (1,634

Unrealized Gain on Interest Rate Swap

     —          1        9        3   

Unrealized Gain (Loss) on Interest-Only Strip of Servicing Assets

     2        (9     (4     (8

Income Tax Related to Items of Other Comprehensive Income

     (1,581     —          (1,281     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

     2,210        577        1,840        6,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $        15,489      $        4,780      $        78,235      $        29,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

3


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Number of Shares)

 

    Common Stock – Number of
Shares
    Stockholders’ Equity  
    Gross
Shares
Issued and
Outstanding
    Treasury
Shares
    Net
Shares
Issued and
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 AT JANUARY 1, 2011

    19,478,862        (579,063     18,899,799      $ 156      $ 472,335      $ (219   $ (2,964   $ (226,040   $ (70,012   $ 173,256   

Share-Based Compensation Expense

    —          —          —          —          335        105        —          —          —          440   

Restricted Stock Awards

    7,500        —          7,500        —          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 AT SEPTEMBER 30, 2011

    19,486,362        (579,063     18,907,299      $ 156      $ 472,748      $ (192   $ 3,902      $ (203,399   $ (70,012   $ 203,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,744      $ (166   $ 3,524      $ (197,893   $ (69,858   $ 285,608   

Share-Based Compensation Expense

          —          95        49        —          —          —          144   

Restricted Stock Awards

    —          —          —          —          (25     25        —          —          —          —     

Comprehensive Income:

                  —         

Net Income

    —          —          —          —          —          —          —          76,395        —          76,395   

Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes

    —          —          —          —          —          —          1,840        —          —          1,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

                      78,235   
                   

 

 

 

BALANCE AT SEPTEMBER 30, 2012

    32,067,095        (577,894     31,489,201      $ 257      $ 549,814      $ (92   $ 5,364      $ (121,498   $ (69,858   $ 363,987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

4


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Nine Months Ended
September 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 76,395      $ 22,641   

Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:

    

Depreciation and Amortization of Premises and Equipment

     1,606        1,605   

Amortization of Premiums and Accretion of Discounts on Investment Securities, Net

     2,743        2,052   

Amortization of Other Intangible Assets

     157        569   

Amortization of Servicing Assets

     720        487   

Share-Based Compensation Expense

     144        440   

Provision for Credit Losses

     6,000        8,100   

Net Gain on Sales of Investment Securities

     (1,392     (1,634

Other-Than-Temporary Loss on Investment Securities

     292        —     

Deferred Tax Benefit

     (50,098     —     

Net Gain on Sales of Loans

     (1,311     (1,044

Loss on Sales of Other Real Estate Owned

     92        599   

Valuation Impairment on Other Real Estate Owned

     301        470   

Lower of Cost or Fair Value Adjustment for Loans Held for Sale

     2,300        2,903   

Gain on Bank-Owned Life Insurance Settlement

     (163     —     

Increase in Cash Surrender Value of Bank-Owned Life Insurance

     (709     (701

Origination of Loans Held for Sale

     (86,311     (28,656

Proceeds from Sales of SBA Loans Guaranteed Portion

     95,856        20,011   

Changes in Fair Value of Stock Warrants

     177        —     

Loss on Sale of Premises and Equipment

     5        —     

Loss on Investment in Affordable Housing Partnership

     660        660   

Decrease in Accrued Interest Receivable

     362        823   

Increase in Servicing Assets

     (2,148     (481

Increase in Restricted Cash

     (2,575     —     

Increase in Prepaid Expenses

     (641     (1,253

(Increase) Decrease in Other Assets

     (2,843     852   

Increase in Current Tax Assets

     (2,616     —     

Decrease in Accrued Interest Payable

     (766     (2,476

Increase (Decrease) in Other Liabilities

     1,923        (510
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     38,160        25,457   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock

     3,233        3,320   

Proceeds from Matured or Called Securities Available for Sale

     108,701        171,490   

Proceeds from Sales of Securities Available for sale

     96,538        152,468   

Proceeds from Matured or Called Securities Held to Maturity

     6,704        35   

Proceeds from Sales of Other Real Estate Owned

     1,850        5,598   

Proceeds from Sales of Loans Held for Sale

     87,979        73,126   

Proceeds from Matured Term Federal Funds

     215,000        —     

Proceeds from Insurance Settlement on Bank-Owned Life Insurance

     345        —     

Net (Increase) Decrease in Loans Receivable

     (56,878     114,269   

Purchase of Federal Reserve Bank Stock

     (1,703     (40

Purchases of Loans Receivable

     (82,885     —     

Purchases of Term Federal Fund

     (155,000     —     

Purchases of Securities Available for Sale

     (179,080     (267,432

Purchases of Securities Held to Maturity

     —          (51,844

Purchases of Premises and Equipment

     (420     (633
  

 

 

   

 

 

 

Net Cash Provided By Investing Activities

     44,384        200,357   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (Decrease) in Deposits

     18,475        (113,552

Repayment of Long-Term Federal Home Loan Bank Advances

     (274     (259

Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings

     —          (132,861
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     18,201        (246,672
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     100,745        (20,858

Cash and Cash Equivalents at Beginning of Year

     201,683        249,720   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 302,428      $ 228,862   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash Paid During the Period for:

    

Interest Paid

   $ 15,803      $ 23,900   

Income Taxes Paid

   $ 4,912      $ 3   

Non-Cash Activities:

    

Transfer of Loans Receivable to Other Real Estate Owned

   $ 2,558      $ 3,938   

Transfer of Loans Receivable to Loans Held for Sale

   $ 89,792      $ 66,287   

Transfer of Loans Held for Sale to Loans Receivable

   $ 1,779      $ —     

Loans Provided in the Sale of Loans Held for Sale

   $ —        $ 5,750   

Loans Provided in the Sale of Other Real Estate Owned

   $ —        $ 510   

Reclassification of held-to-maturity securities to available-for-sale securities at amortized cost

   $ 52,674      $ —     

See Accompanying Notes to Consolidated Financial Statements. (Unaudited)

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

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, 2012, 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 interim information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 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.

Descriptions of our significant accounting policies are included in “Note 2 Summary of Significant Accounting Policies” in our 2011 Annual Report on Form 10-K.

The number of shares of Hanmi Financial’s common stock and the computation of basic and diluted earnings per share were adjusted retroactively for all periods presented to reflect the 1-for-8 reverse stock split of Hanmi Financial’s common stock, which became effective on December 19, 2011.

NOTE 2 — REGULATORY MATTERS

On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order (“Final Order”) with the California Department of Financial Institutions (the “DFI”). The Final Order contained a list of requirements ranging from a capital directive to developing a contingency funding plan. Following a target joint examination of the Bank by the DFI and Federal Reserve Bank of San Francisco (the “FRB”), which commenced in February 2012, and based on the improved condition of the Bank noted at the examination, the Bank entered into a Memorandum of Understanding (“MOU”) with the DFI on May 1, 2012. Concurrently with the entry into the MOU, the DFI issued an order terminating the Final Order. On October 29, 2012, the DFI informed the Bank that the Bank’s overall condition has improved and that the MOU has been terminated. Accordingly, the Bank is no longer subject to any of the requirements imposed by the MOU.

On November 2, 2009, Hanmi Financial and the Bank entered into a Written Agreement (the “Written Agreement”) with the FRB. The Written Agreement contains a list of strict requirements ranging from a capital directive to developing a contingency funding plan.

While Hanmi Financial has taken such actions as necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Written Agreement, there can be no assurance that compliance with the Written Agreement will not have material and adverse effects on the operations and financial condition of Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Written Agreement could result in further enforcement actions by the FRB, or the placing of the Bank into conservatorship or receivership.

Written Agreement

Pursuant to the Written Agreement, the Board of Directors of the Bank prepared and submitted written plans to the FRB that addressed 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 of Hanmi Financial; (vii) improving the Bank’s earnings through a strategic plan and a budget; and

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

(viii) improving the Bank’s liquidity position, funds management practices, and contingency funding plan. In addition, the Written Agreement places restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank. The Written Agreement also requires the Bank to charge off or collect certain problem loans and review and revise its methodology for calculating allowance for loan and lease losses consistent with relevant supervisory guidance. Hanmi Financial and the Bank are also prohibited from paying dividends without prior approval from the FRB.

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.

Based on submissions to and consultations with the FRB, we believe that the Bank has taken the required corrective action and has complied with substantially all of the requirements of the Written Agreement.

Risk-Based Capital

Federal bank regulatory agencies require bank holding companies such as Hanmi Financial to maintain 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 bank holding companies to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. In order to be considered “well capitalized,” federal bank regulatory agencies require depository institutions such as the Bank to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, the federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 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.

The capital ratios of Hanmi Financial and the Bank were as follows as of September 30, 2012 and December 31, 2011:

 

     Actual     Minimum
Regulatory
Requirement
    Minimum to Be
Categorized as
“Well Capitalized”
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In Thousands)  

September 30, 2012

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 438,822         20.79   $ 168,853         8.00     N/A         N/A   

Hanmi Bank

   $ 419,546         19.91   $ 168,584         8.00   $ 210,730         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 411,921         19.52   $ 84,426         4.00     N/A         N/A   

Hanmi Bank

   $ 392,687         18.63   $ 84,292         4.00   $ 126,438         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 411,921         14.71   $ 111,982         4.00     N/A         N/A   

Hanmi Bank

   $ 392,687         14.05   $ 111,790         4.00   $ 139,738         5.00

December 31, 2011

               

Total Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 387,328         18.66   $ 166,082         8.00     N/A         N/A   

Hanmi Bank

   $ 364,041         17.57   $ 165,795         8.00   $ 207,243         10.00

Tier 1 Capital (to Risk-Weighted Assets):

               

Hanmi Financial

   $ 360,500         17.36   $ 83,041         4.00     N/A         N/A   

Hanmi Bank

   $ 337,309         16.28   $ 82,897         4.00   $ 124,346         6.00

Tier 1 Capital (to Average Assets):

               

Hanmi Financial

   $ 360,500         13.34   $ 108,106         4.00     N/A         N/A   

Hanmi Bank

   $ 337,309         12.50   $ 107,924         4.00   $ 134,905         5.00

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 2 — REGULATORY MATTERS (Continued)

 

Reserve Requirement

The Bank is required to maintain a certain percentage of its deposits as reserves at the FRB. The daily average reserve balance required to be maintained with the FRB was $0 and $1.5 million, and the Bank was in compliance with such requirement as of September 30, 2012 and December 31, 2011, respectively.

Federal Reserve Notices of Proposed Rulemaking

On June 7, 2012, the Board of Governors of the Federal Reserve System approved for publication in the Federal Register three related notices of proposed rulemaking (collectively, the “Notices”) relating to the implementation of revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the Basel III international capital standards. Among other things, if adopted as proposed, the Notices would establish a new capital standard consisting of common equity Tier 1 capital; increase the capital ratios required for certain existing capital categories and add a requirement for a capital conservation buffer (failure to meet these standards would result in limitations on capital distributions as well as executive bonuses); and add more conservative standards for including securities in regulatory capital, which would phase-out trust preferred securities as a component of Tier 1 capital effective January 1, 2013. In addition, the Notices contemplate the deduction of certain assets from regulatory capital and revisions to the methodologies for determining risk weighted assets, including applying a more risk-sensitive treatment to residential mortgage exposures and to past due or nonaccrual loans. The Notices provide for various phase-in periods over the next several years. Hanmi Financial and the Bank will be subject to many provisions in the Notices, but until final regulations are issued pursuant to the Notices, Hanmi Financial cannot predict the actual effect of the Notices.

NOTE 3 — FAIR VALUE MEASUREMENTS

Fair Value Option and Fair Value Measurements

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Topic 820),” 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. FASB ASU 2011-04 became effective for interim and annual reporting periods beginning after December 15, 2011, and early application was not permitted. The changes to U.S. GAAP as result of ASU 2011-04 are as follows: (i) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or liabilities); (ii) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets (ASU 2011-04 extends that prohibition to all fair value measurements); (iii) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks (this exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position); (iv) Aligns the fair value measurement of instruments classified within an entity’s stockholders’ equity with the guidance for liabilities; (v) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. Our adoption of FASB ASU 2011-04 did not have a significant impact on our financial condition or result of operations.

FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. 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.

FASB ASC 825, “Financial Instruments,” provides additional guidance for estimating fair value in accordance with FASB ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 825 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. FASB ASC 825 also requires additional disclosures relating to fair value measurement inputs and valuation techniques, as well as disclosures of all debt and equity investment securities by major security types rather than by major security categories that should be based on the nature and risks of the securities during both interim and annual periods. FASB ASC 825 became effective for interim and annual reporting periods ending after June 15, 2009 and did not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB ASC 825 requires comparative disclosures only for periods ending after initial adoption. We adopted FASB ASC 825 in the second quarter of 2009. 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 FASB ASC 825 “Financial Instruments.” The adoption of FASB ASC 825 resulted in additional disclosures that are presented in “Note 4 – Investment Securities.”

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

We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, 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.

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. If quoted prices are not available, fair values are measured using 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, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve,

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

prepayment speeds, and default rates. 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-dealers. We review the market prices provided by the broker-dealers for our securities for reasonableness based on our understanding of the marketplace, and 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 as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. 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. As of September 30, 2012, we had a zero coupon tax credit municipal bond of $788,000. The zero coupon tax credit municipal bond is recorded at estimated fair value using a discounted cash flow method. We measured the zero coupon tax credit municipal bond on a recurring basis with Level 3 inputs.

SBA Loans Held for Sale – Small Business Administration (“SBA”) loans held for sale are carried at the lower of cost or fair value. As of September 30, 2012 and December 31, 2011, we had $4.8 and $5.1 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, 2012 and December 31, 2011, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Non-performing Loans Held for Sale – We reclassify certain non-performing loans as held-for-sale 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 which approximate their fair value. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of September 30, 2012 and December 31, 2011, we had $4.4 million and $15.0 million of non-performing loans held for sale, respectively. We measure non-performing loans held for sale at fair value on a nonrecurring basis with Level 3 inputs.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the nine months ended September 30, 2012. As of September 30, 2012 and December 31, 2011, 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  
     (In Thousands)  

September 30, 2012

           

ASSETS:

           

Debt Securities Available for Sale:

           

Mortgage-Backed Securities

   $ —         $ 142,168       $ —         $ 142,168   

Collateralized Mortgage Obligations

     —           101,390         —           101,390   

U.S. Government Agency Securities

     79,164         —           —           79,164   

Municipal Bonds-Tax Exempt

     —           11,950         788         12,738   

Municipal Bonds-Taxable

     —           46,234         —           46,234   

Corporate Bonds

     —           19,897         —           19,897   

Other Securities

     —           8,328         —           8,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

     79,164         329,967         788         409,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

     291         —           —           291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

     291         —           —           291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 79,455       $ 329,967       $ 788       $ 410,210   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 1,060       $ 1,060   

December 31, 2011:

           

ASSETS:

           

Debt Securities Available for Sale:

           

Mortgage-Backed Securities

   $ —         $ 113,005       $ —         $ 113,005   

Collateralized Mortgage Obligations

     —           162,837         —           162,837   

U.S. Government Agency Securities

     72,548         —           —           72,548   

Municipal Bonds-Tax Exempt

     —           3,482         —           3,482   

Municipal Bonds-Taxable

     —           6,138         —           6,138   

Corporate Bonds

     —           19,836         —           19,836   

Other Securities

     —           3,335         —           3,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities Available for Sale

     72,548         308,633         —           381,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities Available for Sale:

           

Financial Services Industry

     681         —           —           681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities Available for Sale

     681         —           —           681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 73,229       $ 308,633       $ —         $ 381,862   

LIABILITIES:

           

Stock Warrants

   $ —         $ —         $ 883       $ 883   

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 nine months ended September 30, 2012:

 

     Beginning
Balance as of
January 1,
2012
     Purchase,
Issuances, Sales and
Settlement
     Realized
Gains or Losses
In Earnings
     Unrealized
Gains or Losses
In Other
Comprehensive
Income
     Ending
Balance as of
September 30,
2012
 
     (In Thousands)  

ASSETS:

              

Municipal Bonds-Tax Exempt (1)

   $ —         $ 698       $ —         $ 90       $ 788   

LIABILITIES:

              

Stock Warrants (2)

   $ 883       $ —         $ 177       $ —         $ 1,060   

 

(1) 

Reflects a zero coupon tax credit municipal bond that was previously classified as a held-to-maturity security, which was reclassified as an available-for-sale security during the three months ended September 30, 2012. As the Company was not able to obtain a price from independent external pricing service providers, the discounted cash flow method was used to determine its fair value. The bond carried a par value of $700,000 and an amortized value of $698,000 with a remaining life of 2.5 years at September 30, 2012.

(2) 

Reflects warrants for our common stock issued 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 $9.60 per share of our common stock and expire on October 14, 2015. See “Note 8 – Stockholders’ Equity” for more details.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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

For the nine months ended September 30, 2012 and 2011, 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
     Loss During The
Three Months
Ended September 30,
2012 and 2011
     Loss During The
Nine Months
Ended September 30,
2012 and 2011
 
     (In Thousands)  

September 30, 2012

              

ASSETS:

              

Non-Performing Loans Held for Sale (1)

   $ —         $ —         $ 4,421       $ 519       $ 2,300   

Impaired Loans (2)

   $ —         $ 19,919       $ 10,594       $ 2,259       $ 4,303   

Other Real Estate Owned (3)

   $ —         $ —         $ 364       $ 244       $ 301   

September 30, 2011

              

ASSETS:

              

Non-Performing Loans Held for Sale (4)

   $ —         $ —         $ 4,246       $ —         $ 2,488   

Impaired Loans (5)

   $ —         $ —         $ 103,410       $ 16,328       $ 29,264   

Other Real Estate Owned (6)

   $ —         $ —         $ 248       $ —         $ 194   

 

(1) Includes commercial term loans of $3.2 million and SBA loans of $1.2 million
(2) Includes real estate loans of $4.6 million, commercial and industrial loans of $25.3 million, and consumer loans of $574,000
(3) Includes properties from the foreclosure of a commercial property loan of $103,000 and a SBA loan of $261,000
(4) Includes commercial term loans of $3.8 million and SBA loans of $434,000
(5) Includes real estate loans of $35.6 million, commercial and industrial loans of $66.9 million, and consumer loans of $875,000
(6) Includes a property from the foreclosure of a SBA loan

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 in order 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, 2012      December 31, 2011  
     Carrying or
Contract
Amount
     Estimated
Fair Value
     Carrying or
Contract
Amount
     Estimated
Fair Value
 
     (In Thousands)  

Financial Assets:

           

Cash and Cash Equivalents

   $ 302,428       $ 302,428       $ 201,683       $ 201,683   

Restricted Cash

     4,393         4,393         1,818         1,818   

Term Federal Funds

     55,000         55,015         115,000         115,173   

Investment Securities Available for Sale

     410,210         410,210         381,862         381,862   

Investment Securities Held to Maturity

     —           —           59,742         59,363   

Loans Receivable, Net of Allowance for Loan Losses

     1,892,813         1,833,112         1,849,020         1,802,511   

Loans Held for Sale

     10,736         10,736         22,587         22,587   

Accrued Interest Receivable

     7,467         7,467         7,829         7,829   

Investment in Federal Home Loan Bank Stock

     19,621         19,621         22,854         22,854   

Investment in Federal Reserve Bank

     10,261         10,261         8,558         8,558   

Financial Liabilities:

           

Noninterest-Bearing Deposits

     694,345         694,345         634,466         634,466   

Interest-Bearing Deposits

     1,669,040         1,675,056         1,710,444         1,710,878   

Borrowings

     85,435         85,517         85,709         83,853   

Accrued Interest Payable

     15,266         15,266         16,032         16,032   

Off-Balance Sheet Items:

           

Commitments to Extend Credit

     205,833         175         158,748         194   

Standby Letters of Credit

     10,544         26         12,742         26   

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)

 

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 – The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these instruments (Level 1).

Restricted Cash – The carrying amount of restricted cash approximates its fair value (Level 1).

Term Federal Funds – The fair value of term federal funds with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates (Level 2).

Investment Securities – The fair value of investment securities, consisting of investment securities available for sale, is generally obtained from market bids for similar, identical securities or obtained from independent securities brokers or dealers, or other model-based valuation techniques described above (Level 1, 2 and 3).

Loans Receivable, Net of Allowance for Loan Losses – The fair value for loans receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering 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 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 (Level 3).

Loans Held for Sale – Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2 input). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustment is typically significant and result in Level 3 classification of the inputs for determining fair value.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts of investment in Federal Home Loan Bank (“FHLB”) and FRB stock approximate fair value as such stock may be resold to the issuer at carrying value (Level 1).

Non-Interest-Bearing Deposits – The fair value of non-interest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

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 discounted 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 rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings – Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 3).

Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

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 based on the contract term. The dividend yield of zero is based on 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 time of the grant (Level 3).

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 (Level 3).

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (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)  

December 31, 2011

           

Municipal Bonds-Tax Exempt

   $ 9,815       $ 98       $ 46       $ 9,867   

Municipal Bonds-Taxable

     38,797         117         522         38,392   

Mortgage-Backed Securities (1)

     3,137         2         11         3,128   

U.S. Government Agency Securities

     7,993         2         19         7,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Held to Maturity

   $ 59,742       $ 219       $ 598       $ 59,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2012

           

Mortgage-Backed Securities (1)

   $ 138,173       $ 3,996       $ 1       $ 142,168   

Collateralized Mortgage Obligations (1)

     100,125         1,296         31         101,390   

U.S. Government Agency Securities

     79,027         185         48         79,164   

Municipal Bonds-Tax Exempt

     12,232         506         —           12,738   

Municipal Bonds-Taxable

     44,336         2,025         127         46,234   

Corporate Bonds

     20,467         62         632         19,897   

Other Securities

     8,264         99         35         8,328   

Equity Securities

     354         —           63         291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 402,978       $ 8,169       $ 937       $ 410,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Mortgage-Backed Securities (1)

   $ 110,433       $ 2,573       $ 1       $ 113,005   

Collateralized Mortgage Obligations (1)

     161,214         1,883         260         162,837   

U.S. Government Agency Securities

     72,385         168         5         72,548   

Municipal Bonds-Tax Exempt

     3,389         93         —           3,482   

Municipal Bonds-Taxable

     5,901         237         —           6,138   

Corporate Bonds

     20,460         —           624         19,836   

Other Securities

     3,318         58         41         3,335   

Equity Securities

     647         85         51         681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 377,747       $ 5,097       $ 982       $ 381,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

The amortized cost and estimated fair value of investment securities at September 30, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, 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  
     Amortized
Cost
     Estimated
Fair Value
 
     (In Thousands)  

Within One Year

   $ —         $ —     

Over One Year Through Five Years

     33,266         32,891   

Over Five Years Through Ten Years

     94,078         95,429   

Over Ten Years

     36,982         38,041   

Mortgage-Backed Securities

     138,173         142,168   

Collateralized Mortgage Obligations

     100,125         101,390   

Equity Securities

     354         291   
  

 

 

    

 

 

 

Total

   $ 402,978       $ 410,210   
  

 

 

    

 

 

 

During the three months ended September 30, 2012, all held-to-maturity securities were reclassified to available-for-sale securities. The reclassified securities carried a fair value of $52.6 million and an amortized cost of $50.6 million at September 30, 2012. As more than 95% of the reclassified securities were municipal bonds, the Company decided to reclassify all held-to-maturity securities to available-for-sale securities to be more proactive under the current municipal market with a rising risk of default.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and nine months ended September 30, 2012, we recorded $176,000 and $292,000, respectively, in OTTI charges in earnings on an available-for-sale security.

The Company had an equity security with a carrying value of $218,000 at September 30, 2012. During 2012, the issuer’s financial condition had deteriorated and it was determined that the value on the investment is other-than-temporarily impaired. Based on the closing price of the shares at September 30, 2012, we recorded an OTTI charge of $176,000 to write down the value of the investment security to its fair value. For the nine months ended September 30, 2012, the total OTTI charge on this equity security was $292,000.

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, 2012 and December 31, 2011:

 

     Holding Period  
     Less Than 12 Months      12 Months or More      Total  

Investment Securities

Available for Sale

   Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
     Gross
Unrealized
Loss
     Estimated
Fair
Value
     Number
of
Securities
 
     (In Thousands, Except Number of Securities)  

September 30, 2012

                          

Mortgage-Backed Securities

   $ 1       $ 5,988         1       $ —         $ —           —         $ 1       $ 5,988         1   

Collateralized Mortgage Obligations

     31         9,890         4         —           —           —           31         9,890         4   

U.S. Government Agency Securities

     48         19,448         6         —           —           —           48         19,448         6   

Municipal Bonds-Taxable

     108         2,544         2         19         1,962         3         127         4,506         5   

Corporate Bonds

     —           —           —           632         10,350         3         632         10,350         3   

Other Securities

     —           —           —           35         965         1         35         965         1   

Equity Securities

     63         73         1         —           —           —           63         73         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251       $ 37,943         14       $ 686       $ 13,277         7       $ 937       $ 51,220         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                          

Mortgage-Backed Securities

   $ 1       $ 3,076         1       $ —         $ —           —         $ 1       $ 3,076         1   

Collateralized Mortgage Obligations

     260         36,751         16         —           —           —           260         36,751         16   

U.S. Government Agency Securities

     5         6,061         2         —           —           —           5         6,061         2   

Corporate Bonds

     41         4,445         2         583         15,391         4         624         19,836         6   

Other Securities

     1         12         1         40         959         1         41         971         2   

Equity Securities

     51         85         1         —           —           —           51         85         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 359       $ 50,430         23       $ 623       $ 16,350         5       $ 982       $ 66,780         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The impairment losses described previously are not included in the table above. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2012 and December 31, 2011 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, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

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.

The Company does 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. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2012 and December 31, 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of September 30, 2012 and December 31, 2011 are warranted.

 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 4 — INVESTMENT SECURITIES (Continued)

 

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 September 30,      Nine Months Ended September 30,  
     2012      2011      2012     2011  
     (In Thousands)  

Gross Realized Gains on Sales of Investment Securities

   $ 10       $ 1,704       $ 1,442      $ 2,673   

Gross Realized Losses on Sales of Investment Securities

     —           —           (50     (1,039
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Realized Gains on Sales of Investment Securities

   $ 10       $ 1,704       $ 1,392      $ 1,634   
  

 

 

    

 

 

    

 

 

   

 

 

 

Proceeds from Sales of Investment Securities

   $ 8,000       $ 38,691       $ 96,538      $ 152,468   

Tax Expense on Sales of Investment Securities

   $ 4       $ 716       $ 585      $ 687   

For the three months ended September 30, 2012, $3.8 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $10,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $4,000 in comprehensive income. Among the $3.8 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the three months ended September 30, 2011, $584,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $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 nine months ended September 30, 2012, $3.1 million of net unrealized gains arose during the period and were included in comprehensive income, and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.7 million in comprehensive income. Among the $3.1 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the nine months ended September 30, 2011, $6.9 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1.6 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $249,000 million in comprehensive income.

Investment securities available for sale with carrying values of $19.4 million and $45.8 million as of September 30, 2012 and December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.

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 changes, 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, 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.

 

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Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

Loans Receivable

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

 

     September 30,
2012
    December 31,
2011
 
     (In Thousands)  

Real Estate Loans:

    

Commercial Property

   $ 728,419      $ 663,023   

Construction

     7,868        33,976   

Residential Property

     103,774        52,921   
  

 

 

   

 

 

 

Total Real Estate Loans

     840,061        749,920   

Commercial and Industrial Loans:

    

Commercial Term (1)

     861,906        944,836   

Commercial Lines of Credit (2)

     54,266        55,770   

SBA Loans (3)

     134,264        116,192   

International Loans

     29,378        28,676   
  

 

 

   

 

 

 

Total Commercial and Industrial Loans

     1,079,814        1,145,474   

Consumer Loans

     38,415        43,346   
  

 

 

   

 

 

 

Total Gross Loans

     1,958,290        1,938,740   

Allowance for Loans Losses

     (66,107     (89,936

Deferred Loan Fees

     630        216   
  

 

 

   

 

 

 

Loan Receivables, Net

   $ 1,892,813      $ 1,849,020   
  

 

 

   

 

 

 

 

(1)

Includes owner-occupied property loans of $743.1 million and $776.3 million as of September 30, 2012 and December 31, 2011, respectively.

(2)

Includes owner-occupied property loans of $1.3 million and $936,000 as of September 30, 2012 and December 31, 2011, respectively.

(3)

Includes owner-occupied property loans of $115.3 million and $93.6 million as of September 30, 2012 and December 31, 2011, respectively.

Accrued interest on loans receivable amounted to $5.5 million and $5.7 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, loans receivable totaling $517.0 million and $797.1 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Discount Window.

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

September 30, 2012

         

Balance at Beginning of Period

   $ 1,289      $ 3,849      $ —         $ 5,138   

Origination of Loans Held For Sale

     —          25,722        —           25,722   

Reclassification from Loan Receivables to Loans Held for Sale

     8,917        16,404        —           25,321   

Sales of Loans Held for Sale

     (8,828     (36,050     —           (44,878

Principal Payoffs and Amortization

     (21     (27     —           (48

Valuation Adjustments

     —          (519     —           (519
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2011

         

Balance at Beginning of Period

   $ 974      $ 43,131      $ —         $ 44,105   

Origination of Loans Held For Sale

     —          13,560        —           13,560   

Reclassification from Loan Receivables 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

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

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

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2012, loans receivable of $25.3 million were reclassified as loans held for sale, and loans held for sale of $44.9 million were sold. 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. There were no purchases of loans receivable for the three months ended September 30, 2012 and 2011.

 

16


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and
Industrial
    Consumer      Total  
     (In Thousands)  

September 30, 2012

         

Balance at Beginning of Period

   $ 11,068      $ 11,519      $ —         $ 22,587   

Origination of Loans Held For Sale

     —          86,311        —           86,311   

Reclassification from Loan Receivables to Loans Held for Sale

     41,141        48,651        —           89,792   

Reclassification from Loans Held for Sale to Other Real Estate Owned

     (360     —          —           (360

Reclassification from Loans Held for Sale to Loan Receivables

     (1,647     (132     —           (1,779

Sales of Loans Held for Sale

     (47,531     (135,505     —           (183,036

Principal Payoffs and Amortization

     (190     (289     —           (479

Valuation Adjustments

     (1,124     (1,176     —           (2,300
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

   $ 1,357      $ 9,379      $ —         $ 10,736   
  

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2011

         

Balance at Beginning of Period

   $ 3,666      $ 32,954      $ —         $ 36,620   

Origination of Loans Held For Sale

     —          28,656        —           28,656   

Reclassification from Loan Receivables 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
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at End of Period

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

 

 

   

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2012, loans receivable of $89.8 million were reclassified as loans held for sale, and loans held for sale of $183.0 million were sold. For the nine months ended September 30, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential mortgage loans were purchased. 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. There were no purchases of loans receivable for the nine months ended September 30, 2011.

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

Activity in the allowance for loan losses and allowance for 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,
2012
    June 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 
     (In Thousands)  

Allowance for Loan Losses:

          

Beginning Balance

   $ 71,893      $ 81,052      $ 109,029      $ 89,936      $ 146,059   

Actual Charge-Offs

     (7,223     (14,716     (16,551     (34,260     (62,384

Recoveries on Loans Previously Charged Off

     1,320        1,324        1,045        3,681        8,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Charge-Offs

     (5,903     (13,392     (15,506     (30,579     (53,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision Charged to Operating Expense

     117        4,233        7,269        6,750        8,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 66,107      $ 71,893      $ 100,792      $ 66,107      $ 100,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Off-Balance Sheet Items:

          

Beginning Balance

   $ 2,348      $ 2,581      $ 2,391      $ 2,981      $ 3,417   

Provision Charged to (Reversal of Charged to) Operating Expense

     (117     (233     831        (750     (195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,231      $ 2,348      $ 3,222      $ 2,231      $ 3,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following table details the information on the allowance for credit losses by portfolio segment for the three months ended September 30, 2012 and 2011:

 

     Real Estate     Commercial
and Industrial
     Consumer      Unallocated     Total  
     (In Thousands)  

September 30, 2012

            

Allowance for Loan Losses:

            

Beginning Balance

   $ 21,406      $ 46,810       $ 1,757       $ 1,920      $ 71,893   

Charge-Offs

     1,321        5,571         331         —          7,223   

Recoveries on Loans Previously Charged Off

     58        1,251         11         —          1,320   

Provision

     1,080        174         783         (1,920     117   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,223      $ 42,664       $ 2,220       $ —        $ 66,107   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 768      $ 5,148       $ 398       $ —        $ 6,314   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,455      $ 37,516       $ 1,822       $ —        $ 59,793   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Loans Receivables:

            

Ending Balance

   $ 840,061      $ 1,079,814       $ 38,415       $ —        $ 1,958,290   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,315      $ 41,084       $ 1,238       $ —        $ 58,637   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,746      $ 1,038,730       $ 37,177       $ —        $ 1,899,653   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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 Receivables:

            
            

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   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The following table details the information on the allowance for credit losses by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

     Real Estate      Commercial
and Industrial
    Consumer      Unallocated     Total  
     (In Thousands)  

September 30, 2012

            

Allowance for Loan Losses:

            

Beginning Balance

   $ 19,637       $ 66,005      $ 2,243       $ 2,051      $ 89,936   

Charge-Offs

     9,406         24,079        775         —          34,260   

Recoveries on Loans Previously Charged Off

     575         3,053        53         —          3,681   

Provision

     10,419         (2,317     699         (2,051     6,750   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,223       $ 42,664      $ 2,220       $ —        $ 66,107   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 768       $ 5,148      $ 398       $ —        $ 6,314   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 20,455       $ 37,516      $ 1,822       $ —        $ 59,793   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Loans Receivables:

            

Ending Balance

   $ 840,061       $ 1,079,814      $ 38,415       $ —        $ 1,958,290   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ 16,315       $ 41,084      $ 1,238       $ —        $ 58,637   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 823,746       $ 1,038,730      $ 37,177       $ —        $ 1,899,653   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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 Receivables:

            

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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

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. All loans are reviewed semi-annually. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass: pass loans, grade (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or 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, or (0) to (4):

 

Pass or (0):

  loans secured in full by cash or cash equivalents.

Pass or (1):

  requires a very strong, well-structured credit relationship with an established borrower. The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirement, excellent liquidity, and very strong capital.

Pass or (2):

  requires 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 centered in liquid assets and strong income.

Pass or (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 or (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): Special Mention credits are potentially weak, as the borrower is exhibiting deteriorating trends which, if not corrected, could jeopardize repayment of the debt and result in a substandard classification. Credits which have significant actual, not potential, weaknesses are considered more severely classified.

Substandard or (6): A Substandard credit has a well-defined weakness that jeopardizes 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 which 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 as 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 it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

 

19


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

     Pass
(Grade 0-4)
     Criticized
(Grade 5)
     Classified
(Grade 6-7)
     Total Loans  
     (In Thousands)  

September 30, 2012

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 362,174       $ 3,073       $ 5,121       $ 370,368   

Land

     4,703         —           12,259         16,962   

Other

     318,598         20,988         1,503         341,089   

Construction

     —           —           7,868         7,868   

Residential Property

     99,815         —           3,959         103,774   

Commercial and Industrial Loans:

           

Commercial Term

           

Unsecured

     89,958         1,729         26,453         118,140   

Secured By Real Estate

     683,550         5,618         54,598         743,766   

Commercial Lines of Credit

     51,397         876         1,993         54,266   

SBA Loans

     121,260         1,442         11,562         134,264   

International Loans

     29,378         —           —           29,378   

Consumer Loans

     35,312         207         2,896         38,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,796,145       $ 33,933       $ 128,212       $ 1,958,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Real Estate Loans:

           

Commercial Property

           

Retail

   $ 292,914       $ 8,858       $ 10,685       $ 312,457   

Land

     4,351         —           3,418         7,769   

Other

     297,734         8,428         36,635         342,797   

Construction

     —           14,080         19,896         33,976   

Residential Property

     48,592         —           4,329         52,921   

Commercial and Industrial Loans:

              —     

Commercial Term

              —     

Unsecured

     100,804         8,680         41,796         151,280   

Secured By Real Estate

     634,822         36,290         122,444         793,556   

Commercial Lines of Credit

     44,985         7,676         3,109         55,770   

SBA Loans

     96,983         1,496         17,713         116,192   

International Loans

     26,566         —           2,110         28,676   

Consumer Loans

     40,454         676         2,216         43,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,588,205       $ 86,184       $ 264,351       $ 1,938,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Continued)

 

NOTE 5 — LOANS (Continued)

 

The following is an aging analysis of past due loans, disaggregated by class of loan, as of September 30, 2012 and December 31, 2011:

 

<
     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, 2012

                    

Real Estate Loans:

                    

Commercial Property

                    

Retail

   $ —         $ —         $ —         $ —         $ 370,368       $ 370,368       $ —     

Land

     —           —           —           —           16,962         16,962         —     

Other

     —           —           —           —           341,089         341,089         —     

Construction

     —           —           7,868         7,868         —           7,868         —     

Residential Property

     512         241         319         1,072         102,702         103,774         —     

Commercial and Industrial Loans:

                    

Commercial Term

                    

Unsecured

     1,125         731         613         2,469         115,671         118,140         —     

Secured By Real Estate

     —           —           1,921         1,921         741,845         743,766         —     

Commercial Lines of Credit

     —           —           416         416         53,850         54,266         —     

SBA Loans

     2,267         592         3,212         6,071         128,193         134,264         —     

International Loans

     —           —           —           —           29,378         29,378         —     

Consumer Loans

     271         15         136         422         37,993         38,415         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,175       $ 1,579       $ 14,485       $ 20,239       $ 1,938,051       $ 1,958,290       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                    

Real Estate Loans: