NOTE 11 — INCOME TAXES

In June 2006, the FASB issued FASB ASC 740, “Income Taxes.” FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to be taken on a tax return. Under FASB ASC 740, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

We adopted the provisions of FASB ASC 740 on January 1, 2007, and there was no material effect on the consolidated financial statements as of the date of the adoption. Because of the implementation, there was no cumulative effect related to adopting FASB ASC 740. However, certain amounts were reclassified on the Consolidated Balance Sheets in order to comply with the requirements of FASB ASC 740.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $1.5 million, $955,000 and $1.8 million as of December 31, 2011, December 31, 2010 and December 31, 2009, respectively.

For the year ended December 31, 2011, unrecognized tax benefits increased by $536,000 in connection with the tax position taken on expense related to non-qualified stock option and prior business acquisition costs. For the year ended December 31, 2010, unrecognized tax benefit decreased by $864,000 mainly due to the audit result from the Franchise Tax Board (“FTB”) and the recognition of state tax benefits for the year. In 2011, we accrued interest of $231,000 for uncertain tax benefits. In 2010, accrued interest of $136,000 was reversed due to the audit result from the FTB for the tax year 2005 to 2007. In 2009, we accrued interest of $108,000 for uncertain tax benefits. As of December 31, 2011, 2010 and 2009, the total amount of accrued interest related to uncertain tax positions, net of federal tax benefit, was $319,000, $88,000 and $225,000, respectively. We account for interest and penalties related to uncertain tax positions as part of our provision for federal and state income taxes. Accrued interest and penalties are included within the related tax liability line on the Consolidated Balance Sheets.

Unrecognized tax benefits primarily include state exposures from California Enterprise Zone interest deductions and income tax treatment for prior business acquisition costs, dividend income from Federal Reserve Bank stock and expense related to non-qualified stock options. We believe that it is reasonably possible that certain remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2014 because of a lapse of the statute of limitations. We anticipate an insignificant net change in the unrecognized tax benefits due to the additional interest accrual and the lapse of the statute of limitations during 2012. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next 12 months.

In April 2010, we received the Notice of Proposed Assessment from the California Franchise Tax Board for the tax year 2005 to 2007 and adjusted the unrecognized tax benefit amount accordingly. Hanmi Financial Corporation and its subsidiaries’ federal and state income tax returns are open to audit under the statute of limitations by various federal and state tax authorities for the years ended December 31, 2004 through 2010. We are currently under audit from the Internal Revenue Service for the year ended December 31, 2009. Management does not anticipate any material changes in our financial statements due to the result of this audit.

A summary of the provision (benefit) for income taxes was as follows:

Deferred tax assets and liabilities were as follows:

The tax benefit of deductible temporary differences and tax carry forwards are recorded as an asset to the extent that management assesses the utilization of such temporary differences and carry forwards to be “more likely than not.” As of any period end, the amount of the deferred tax asset that is considered realizable could be reduced if estimates of future taxable income are reduced. In conducting the analysis of the recoverability of our deferred tax assets, we determined that maintaining a valuation allowance of $82.3 million and recording a net deferred tax assets balance of zero was appropriate given our historical losses.

As of December 31, 2011, the Company had net operating loss carryforwards of $55.9 million and $283 million for federal and state income tax purposes, respectively, which are available to offset future taxable income, if any, through 2031.

Section 382 of the Internal Revenue Code imposes restrictions on the use of a corporation’s NOLs, as well as certain recognized built-in losses and other carryforwards, after an “ownership change” occurs. A Section 382 “ownership change” occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. We believe that such an ownership change may have occurred as a result of an underwritten public offering of common stock on November 18, 2011.

A reconciliation between the federal statutory income tax rate and the effective tax rate was as follows:

At December 31, 2011, there was net current taxes receivable of $9.1 million which we can claim in the future. During 2010, we received a Federal tax refund of $50.0 million related to net operating loss carryback.