UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
   
þ
x
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2009
or
For the Fiscal Year Ended December 31, 2010
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period FromTo
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     (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)
Securities Registered Pursuant to Section 12(b) of the Act:
   
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value
 NASDAQ “Global Select Market”
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
None
(Title of Class)
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yeso     Noþx
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yeso     Noþx
 
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.  Yesþx     Noo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yeso     Noo
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.o
 
Indicate by check mark whether the Registrantregistrant 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 Rule12b-2 of the Exchange Act. (Check one):
       
Large Accelerated Fileroaccelerated filer Accelerated FilerþNon-Accelerated FileroSmaller Reporting Companyo
   Accelerated filerx
Non-accelerated filer
o(Do Not Checknot check if a Smaller Reporting Company)smaller reporting company) Smaller reporting companyo
 
Indicate by check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Act).  Yeso     Noþx
 
As of June 30, 2009,2010, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $80,729,000.$59,235,000. For purposes of the foregoing calculation only, in addition to affiliated companies, all directors and officers of the Registrant have been deemed affiliates.
 
Number of shares of common stock of the Registrant outstanding as of March 1, 20102011 was 51,182,390151,258,390 shares.
 
Documents Incorporated By Reference Herein:Registrant’s Definitive Proxy Statement for its 2011 Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 2009,2010, is incorporated by reference into Part III of this report.report (or information will be provided by amendment to thisForm 10-K).
 

 

HANMI FINANCIAL CORPORATION
ANNUAL REPORT ONFORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 20092010
TABLE OF CONTENTS
       
    
Page
Cautionary Note Regarding Forward-Looking Statements
  1 
 
PART I
      
Item 1.
 Business  23 
Item 1A.
 Risk Factors  3132 
Item 1B.
 Unresolved Staff Comments  4145 
Item 2.
 Properties  4146 
Item 3.
 Legal Proceedings  4247 
Item 4.
 Submission of Matters to a Vote of Security HoldersRemoved and Reserved  4247 
 
PART II
     
PART II  
 
Item 5.
 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  4247 
Item 6.
 Selected Financial Data  4450 
Item 7.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations  4753 
Item 7A.
 Quantitative and Qualitative Disclosures About Market Risk  7687 
Item 8.
 Financial Statements and Supplementary Data  7687 
Item 9.
 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  7687 
Item 9A.
 Controls and Procedures  7687 
Item 9B.
 Other Information  8191 
 
PART III
     
PART III  
 
Item 10.
 Directors, Executive Officers and Corporate Governance  8191 
Item 11.
 Executive Compensation  8191 
Item 12.
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  8191 
Item 13.
 Certain Relationships and Related Transactions, and Director Independence  8292 
Item 14.
 Principal AccountingAccountant Fees and Services  8292 
 
PART IV
     
PART IV  
 
Item 15.
 Exhibits, Financial Statement Schedules  8293 
  Index to Consolidated Financial Statements  8394 
  Report of Independent Registered Public Accounting Firm  8495 
  Consolidated Balance Sheets as of December 31, 20092010 and 20082009  8596 
  
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 2008 and 20072008
  8697 
  
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2010, 2009 2008 and 20072008
  8798 
  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 2008 and 20072008
  88
Notes to Consolidated Financial Statements8999 
      
SignaturesNotes to Consolidated Financial Statements  143100
Signatures
163 
    
Exhibit Index
  144164 
EX-4
EX-10.29
EX-10.30
EX-10.35
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements under“Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”and elsewhere in thisForm 10-K constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, youAll statements in thisForm 10-K other than statements of historical fact are “forward – looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, our allowance for credit losses and conditions of our loan portfolio, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our securities purchase agreement with Woori, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. You can generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statement, because of:
failure to continue as a going concern;
failure to maintain adequate levels of capital and liquidity to support our operations;
a significant number of our customers failing to perform under their loans and other terms of credit agreements;
the effect of regulatory orders we have entered into and potential future supervisory action against us or Hanmi Bank;
fluctuations in interest rates and a decline in the level of our interest rate spread;
failure to attract or retain deposits;
sources of liquidity available to us and to Hanmi Bank becomingincluding, but not limited or our potential inability to access sufficient sources of liquidity when needed or the requirement that we obtain government waivers to do so;
adverse changes in domestic or global financial markets, economic conditions or business conditions;
regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;
significant reliance on loans secured by real estate and the associated vulnerability to downturns in the local real estate market, natural disasters and other variables impacting the value of real estate;
failure to attract or retain our key employees;
failure to maintain our status as a financial holding company;
adequacy of our allowance for loan losses;
credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
volatility and disruption in financial, credit and securities markets, and the price of our common stock;
deterioration in the financial markets that may result in other-than-temporary impairment charges relating to our securities portfolio;
competition in our primary market areas;
demographic changes in our primary market areas; and
significant government regulations, legislation and potential changes thereto.
to:
 
•    our ability to continue as going concern;
•    closure of Hanmi Bank and appointment of the Federal Deposit Insurance Corporation as receiver;
•    failure to complete the transaction contemplated by the securities purchase agreement with Woori Finance Holdings Co., Ltd.;
•    failure to raise enough capital to support our operations or meet our regulatory requirements;
•    failure to maintain adequate levels of capital to support our operations;
•    a significant number of customers failing to perform under their loans and other terms of credit agreements;
•    our compliance with and the effect of regulatory orders we have entered into and potential future supervisory or governmental actions against us or Hanmi Bank;
•    fluctuations in interest rates and a decline in the level of our interest rate spread;
•    failure to attract or retain deposits and restrictions on taking brokered deposits;
•    sources of liquidity available to us and to Hanmi Bank becoming limited or our potential inability to access sufficient sources of liquidity when needed or the requirement that we obtain government waivers to do so;
•    adverse changes in domestic or global financial markets, economic conditions or business conditions;
•    regulatory restrictions on Hanmi Bank’s ability to pay dividends to us and on our ability to make payments on our obligations;
•    significant reliance on loans secured by real estate and the associated vulnerability to downturns in the local real estate market, natural disasters and other variables impacting the value of real estate;
•    failure to attract or retain our key employees;


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•    adequacy of our allowance for loan losses;
•    credit quality and the effect of credit quality on our provision for credit losses and allowance for loan losses;
•    volatility and disruption in financial, credit and securities markets, and the price of our common stock;
•    deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
•    competition in our primary market areas;.
•    demographic changes in our primary market areas;
•    global hostilities, acts of war or terrorism, including but not limited to, conflict between North and South Korea;
•    the effects of climate change and attendant regulation on our customers and borrowers;
•    the effects of litigation against us;
•    significant government regulations, legislation and potential changes thereto; and
•    other risks described herein and in the other reports and statements we file with the SEC.
For additional information concerning risks we face, see“Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —– Interest Rate Risk Management”and"“— Capital Resources and Liquidity.”We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

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PART I
ITEM 1.  BUSINESS
General
Hanmi Financial Corporation (“Hanmi Financial,” “we,” “us” or “our”) is a Delaware corporation incorporated on March 14, 2000 to be the holding company for the Bank and is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”). Hanmi Financial also elected financial holding company status under the BHCA in 2000. Our principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010, and our telephone number is(213) 382-2200.
The Bank, our primary subsidiary, is a state chartered bank incorporated under the laws of the State of California on August 24, 1981, and licensed pursuant to the California Financial Code (“Financial Code”) on December 15, 1982. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act (“FDI Act”) up to applicable limits thereof, and the Bank is a member of the Federal Reserve System. The Bank’s headquarters is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010.
The Bank is a community bank conducting general business banking, with its primary market encompassing theKorean-American community as well as other communities in the multi-ethnic populations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San Francisco Bay area, and the Silicon Valley area in Santa Clara County. The Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. The Bank’s client base reflects the multi-ethnic composition of these communities. At December 31, 2010, the Bank maintained a branch network of 27 full-service branch offices in California and one loan production office (“LPO”) in Washington.
Our other subsidiaries are Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All World”), which were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance agencies that offer a complete line of insurance products, including life, commercial, automobile, health, and property and casualty.
The Bank’s revenues are derived primarily from interest and fees on our loans, interest and dividends on our securities portfolio, and service charges on deposit accounts. A summary of revenues for the periods indicated follows:
                         
  Year Ended December 31, 
  2010  2009  2008 
  (Dollars in Thousands) 
 
Interest and Fees on Loans $137,328   80.8% $173,318   80.1% $223,942   82.6%
Interest and Dividends on Investments  6,631   3.9%  8,634   4.0%  14,022   5.2%
Other Interest Income  553   0.3%  2,195   1.0%  219   0.1%
Service Charges on Deposit Accounts  14,049   8.3%  17,054   7.9%  18,463   6.8%
Other Non-Interest Income  11,357   6.7%  15,056   7.0%  14,391   5.3%
                         
                         
Total Revenues
 $ 169,918    100.0% $ 216,257    100.0% $ 271,037    100.0%
                         
Going Concern
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In order to comply with the Final Order (as defined below), the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent.


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PART I
ITEM 1.BUSINESS
In addition, the Bank was also required to maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.5 percent at December 31, 2010 and until the Final Order is terminated. As a result of the successful completion of the registered rights and best efforts offering in July 2010, the capital contribution requirement set forth in the Final Order was satisfied. However, the tangible capital ratio requirement set for in the Final Order has not been satisfied at December 31, 2010. Further, should our asset quality continue to erode and require significant additional provision for credit losses, resulting in added future net operating losses at the Bank, or should we otherwise fail to be profitable, our capital levels will additionally decline requiring the raising of more capital than the amount currently required to satisfy our agreements with our regulators. An inability to raise additional capital when needed or comply with the terms of the Final Order or Written Agreement and Final Order(as defined below), raises substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm in their audit report for fiscal year 2010 has expressed substantial doubt about our ability to continue as a going concern. Continued operations may depend on our ability to comply with the regulatory orders we are subject to, as discussed in greater detail below.
Regulatory Enforcement Action
 
On November 2, 2009, the members of the Board of Directors of Hanmithe Bank (the “Bank”) consented to the issuance of a Final Order (the “Order”“Final Order”) from the California Department of Financial Institutions (the “DFI”).DFI. On the same date, Hanmi Financial and the Bank entered into a Written Agreement (the “Agreement”“Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”).FRB. The Final Order and the Written Agreement contain substantially similar provisions.
The Final Order and the Written Agreement require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, with respect to the Written Agreement, of Hanmi; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Final Order and the Written Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Final Order and the Written Agreement also require the Bank to review and revise its allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and the Bank and Hanmi must obtain prior approval from the FRB prior to declaring and paying dividends.
     Under The Board and management intend to continue their efforts in cooperation with the Order,FRB and the Bank is also requiredDFI to increase its capital and maintain certain regulatory capital ratios prior to certain dates specifiedcomply with all provisions in the Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. The Bank will be required to maintain a ratio of tangible shareholder’s equity to total tangible assets as follows:
Ratio of Tangible Shareholder’s
DateEquity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010Not Less Than 9.0 Percent
From December 31, 2010 and Until theFinal Order is TerminatedNot Less Than 9.5 Percent
     If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholder’s equity to total tangible assets ratio of 7.13 percent. As of December 31, 2008, the Bank had a Tier 1 leverage ratio of 8.85 percent and tangible stockholder’s equity to total tangible assets ratio of 8.68 percent. See“Note 15 — Regulatory Matters”for further details regarding the Order andWritten Agreement.
Going Concern
     As previously mentioned, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. As part ofUnder the recently issued DFI Final Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will bewas required to increase its contributed equity capital by not less than an additional $100 million.
     We have also committed The Bank was required to the FRB to adopt a consolidated capital plan to augment and maintain a sufficient capital position. Our existing capital resources may not satisfy our capital requirements for the foreseeable future and may not be sufficientratio of tangible shareholder’s equity to offset any problem assets. Further, should our asset quality erode and require significant additional provision for credit losses, resulting in consistent net operating losses at the Bank, our capital levels will decline and we will need to raise capital to satisfy our agreements with the Regulators.total tangible assets as follows:
 Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are
Ratio of Tangible Shareholder’s
DateEquity to Total Tangible Assets
By July 31, 2010Not Less Than 9.0 Percent
From December 31, 2010 and Until the Final Order is TerminatedNot Less Than 9.5 Percent

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4

outside our control,If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and on our financial performance.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 to be submitted to the FRB. On July 27, 2010, we completed a registered rights and best efforts offering by which we raised $116.8 million in net proceeds. As a result, we satisfied the $100 million capital contribution requirement set forth in the Final Order. However, the Bank had tangible stockholder’s equity to total tangible assets ratio of 8.59 percent as of December 31, 2010, below the requirement set forth in the Final Order. Accordingly, we cannot be certainnotified the DFI and the FRB of our ability to raise additional capital on terms acceptable to us.this lower ratio. Our inability to raise additional capital or comply with the terms ofcapital ratios identified in the Final Order and the Agreement raises substantial doubt about our ability to continue as a going concern.
GeneralAgreement with Woori
 Hanmi Financial Corporation
On May 25, 2010, we entered into a definitive securities purchase agreement with Woori Finance Holdings Co., Ltd. (“Hanmi Financial,” “we,” “us” or “our”Woori”) is. The agreement with Woori, as amended, provides that upon satisfaction of all conditions to closing, we will issue 175 million shares of common stock to Woori at a Delaware corporation incorporated on March 14, 2000purchase price per share of $1.20, for aggregate gross consideration of $210 million. The agreement with Woori currently permits us to be the holding company for the Bank. Hanmi Financial became the holding company for the Bank in June 2000raise capital from other sources and is terminable at will by either party. The transaction with Woori remains subject to the Bank Holding Company Act of 1956, as amended (“BHCA”). Hanmi Financial also elected financial holding company status under the BHCA in 2000. Our principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010, and our telephone number is (213) 382-2200.
     The Bank, our primary subsidiary, is a state chartered bank incorporated under the laws of the State of California on August 24, 1981, and licensed by the DFI on December 15, 1982. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act (“FDI Act”) up to applicable limits thereof, and the Bank is a member of the Federal Reserve System. The Bank’s headquarters is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010.
     The Bank is a community bank conducting general business banking, with its primary market encompassing the Korean-American community as well as other communities in the multi-ethnic populations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San Francisco Bay area, and the Silicon Valley area in Santa Clara County. The Bank’s full-service offices are located in business areas where many of the businesses are run by immigrantsregulatory approval and other minority groups. The Bank’s client base reflectsconditions to closing. We cannot provide any assurance whether regulatory approvals will be obtained or whether we will close the multi-ethnic composition of these communities. At December 31, 2009, the Bank maintained a branch network of 27 full-service branch offices in California and two loan production offices (“LPOs”) in Virginia and Washington.transaction with Woori at all.
 Our other subsidiaries are Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All World”), which were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance agencies that offer a complete line of insurance products, including life, commercial, automobile, health, and property and casualty.
     The Bank’s revenues are derived primarily from interest and fees on our loans, interest and dividends on our securities portfolio, and service charges on deposit accounts. A summary of revenues for the periods indicated follows:
                         
  Year Ended December 31, 
  2009  2008  2007 
          (Dollars in Thousands)         
Interest and Fees on Loans $173,318   80.1% $223,942   82.6% $261,992   81.6%
Interest and Dividends on Investments  8,634   4.0%  14,022   5.2%  17,867   5.6%
Other Interest Income  2,195   1.0%  219   0.1%  1,037   0.3%
Service Charges on Deposit Accounts  17,054   7.9%  18,463   6.8%  18,061   5.6%
Other Non-Interest Income  15,056   7.0%  14,391   5.3%  21,945   6.9%
                   
                         
Total Revenues
 $216,257   100.0% $271,037   100.0% $320,902   100.0%
                   
Market Area
 
The Bank historically has provided its banking services through its branch network to a wide variety of small- to medium-sized businesses. Throughout the Bank’s service areas, competition is intense for both loans and deposits. While the market for banking services is dominated by a few nationwide banks with many offices operating over a wide geographic areas, the Bank’s primary competitors are relatively smaller community banks that focus their marketing efforts onKorean-American businesses in the Bank’s service areas. Substantially all of our assets are located in, and substantially all of our revenues are derived from clients located within California.

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Lending Activities
 
The Bank originates loans for its own portfolio and for sale in the secondary market. Lending activities include real estate loans (commercial property, construction and residential property), commercial and industrial loans (commercial term loans, commercial lines of credit, SBA loans and international trade finance), and consumer loans.
 
Real Estate Loans
 
Real estate lending involves risks associated with the potential decline in the value of the underlying real estate collateral and the cash flow from income-producing properties. Declines in real estate values and cash flows can be caused by a number of factors, including adversity in general economic conditions, rising interest rates, changes in tax and other laws and regulations affecting the holding of real estate, environmental conditions, governmental and other use restrictions, development of competitive properties and increasing vacancy rates. When real estate values decline, the Bank’s real estate dependence increases the risk of loss both in the Bank’s loan portfolio and any holdings of other real estate owned (“OREO”) because of foreclosures on loans.


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Commercial Property
 
The Bank offers commercial real estate loans. These loans are generally collateralized by first deeds of trust. For these commercial real estate loans, the Bank generally obtains formal appraisals in accordance with applicable regulations to support the value of the real estate collateral. All appraisal reports on commercial mortgage loans are reviewed by an Appraisal Review Officer. The review generally covers an examination of the appraiser’s assumptions and methods that were used to derive a value for the property, as well as compliance with the Uniform Standards of Professional Appraisal Practice (the “USPAP”). The Bank first looks to cash flow from the borrower to repay the loan and then to cash flow from other sources. The majority of the properties securing these loans are located in Los Angeles County and Orange County.
 
The Bank’s commercial real estate loans are principally secured by investor-owned commercial buildings and owner-occupied commercial and industrial buildings. Generally, these types of loans are made for a period of up to seven years based on a longer amortization period. These loans usually have aloan-to-value ratio at time of origination of 65 percent or less, using an adjustable rate indexed to the prime rate appearing in the West Coast edition ofThe Wall Street Journal(“WSJ Prime Rate”) or the Bank’s prime rate (“Bank Prime Rate”), as adjusted from time to time. The Bank also offers fixed-rate commercial real estate loans, including hybrid-fixed rate loans that are fixed for one to five years and convert to adjustable rate loans for the remaining term. Amortization schedules for commercial real estate loans generally do not exceed 25 years.
 
Payments on loans secured by investor-owned and owner-occupied properties are often dependent upon successful operation or management of the properties. Repayment of such loans may be subject to a greater extent to the risk of adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks in a variety of ways, including limiting the size of such loans in relation to the market value of the property and strictly scrutinizing the property securing the loan. The Bank manages these risks in a variety of ways, including vacancy and interest rate hike sensitivity analysis at the time of loan origination and quarterly risk assessment of the total commercial real estate secured loan portfolio that includes most recent industry trends. When possible, the Bank also obtains corporate or individual guarantees from financially capable parties. Representatives of the Bank visit all of the properties securing the Bank’s real estate loans before the loans are approved. The Bank requires title insurance insuring the status of its lien on all of the real estate secured loans when a trust deed on the real estate is taken as collateral. The Bank also requires the borrower to maintain fire insurance, extended coverage casualty insurance and, if the property is in a flood zone, flood insurance, in an amount equal to the outstanding loan balance, subject to applicable laws that may limit the amount of hazard insurance a lender can require to replace such improvements. We cannot assure that these procedures will protect against losses on loans secured by real property.

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Construction
 
The Bank finances the construction of multifamily, low-income housing, commercial and industrial properties within its market area. The future condition of the local economy could negatively affect the collateral values of such loans. The Bank’s construction loans typically have the following characteristics:
•    maturities of two years or less;
•    a floating rate of interest based on the Bank Prime Rate or the WSJ Prime Rate;
•    minimum cash equity of 35 percent of project cost;
•    reserve of anticipated interest costs during construction or advance of fees;


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maturities of two years or less;
•    first lien position on the underlying real estate;
•    loan-to-value ratios at time of origination generally not exceeding 65 percent; and
•    recourse against the borrower or a guarantor in the event of default.
a floating rate of interest based on the Bank Prime Rate or the WSJ Prime Rate;
minimum cash equity of 35 percent of project cost;
reserve of anticipated interest costs during construction or advance of fees;
first lien position on the underlying real estate;
loan-to-value ratios at time of origination generally not exceeding 65 percent; and
recourse against the borrower or a guarantor in the event of default.
The Bank does, on acase-by-case basis, commit to making permanent loans on the property with loan conditions that command strong project stability and debt service coverage. Construction loans involve additional risks compared to loans secured by existing improved real property. These include the following:
•    the uncertain value of the project prior to completion;
•    the inherent uncertainty in estimating construction costs, which are often beyond the borrower’s control;
•    construction delays and cost overruns;
•    possible difficulties encountered in connection with municipal or other governmental regulations during construction; and
•    the difficulty in accurately evaluating the market value of the completed project.
the uncertain value of the project prior to completion;
the inherent uncertainty in estimating construction costs, which are often beyond the borrower’s control;
construction delays and cost overruns;
possible difficulties encountered in connection with municipal or other governmental regulations during construction; and
the difficulty in accurately evaluating the market value of the completed project.
Because of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, or accrued interest on, the loans as well as the related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period. The Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risk in construction lending. Among other things, qualified and bonded third parties are engaged to provide progress reports and recommendations for construction disbursements. No assurance can be given that these procedures will prevent losses arising from the risks described above.
 
Residential Property
 
The Bank originates fixed-rate and variable-rate mortgage loans secured by one- to four-family properties with amortization schedules of 15 to 30 years and maturities of up to 30 years. The loan fees charged, interest rates and other provisions of the Bank’s residential loans are determined by an analysis of the Bank’s cost of funds, cost of origination, cost of servicing, risk factors and portfolio needs. The Bank may sell some of the mortgage loans that it originates to secondary market participants. The typical turn-around time from origination to sale is between 30 and 90 days. The interest rate and the price of the loan are typically agreed to prior to the loan origination.
 
Commercial and Industrial Loans
 
The Bank offers commercial loans for intermediate and short-term credit. Commercial loans may be unsecured, partially secured or fully secured. The majority of the origination of commercial loans is in Los Angeles County and Orange County, and loan maturities are normally 12 to 60 months. The Bank requires a credit underwriting before considering any extension of credit. The Bank finances primarily small and middle market businesses in a wide spectrum of industries. Commercial and industrial loans consist of credit lines for operating needs, loans for equipment purchases and working capital, and various other business purposes.

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As compared to consumer lending, commercial lending entails significant additional risks. These loans typically involve larger loan balances, are generally dependent on the cash flow of the business and may be subject to adverse conditions in the general economy or in a specific industry. Short-term business loans generally are intended to finance current operations and typically provide for principal payment at maturity, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
 
In general, it is the intent of the Bank to take collateral whenever possible, regardless of the loan purpose(s). Collateral may include liens on inventory, accounts receivable, fixtures and equipment, leasehold improvements and real estate. When real estate is the primary collateral, the Bank obtains formal appraisals in accordance with applicable regulations to support the value of the real estate collateral. Typically, the Bank requires all principals of a business to be co-obligors on all loan instruments and all significant stockholders of corporations to execute a specific debt guaranty. All borrowers must demonstrate the ability to service and repay not only their obligations to the Bank debt, but also all outstanding business debt, without liquidating the collateral, based on historical earnings or reliable projections.
 
Commercial Term Loans
 
The Bank finances small and middle-market businesses in a wide spectrum of industries throughout California. The Bank offers term loans for a variety of needs, including loans for working capital, purchases of equipment, machinery or inventory, business acquisitions, renovation of facilities, and refinancing of existing business-related debts. These loans have repayment terms of up to seven years.
 
Commercial Lines of Credit
 
The Bank offers lines of credit for a variety of short-term needs, including lines of credit for working capital, account receivable and inventory financing, and other purposes related to business operations. Commercial lines of credit usually have a term of 12 months or less.
 
SBA Loans
 
The Bank originates loans qualifying for guarantees issued by the U.S. SBA, an independent agency of the Federal Government. The SBA guarantees on such loans currently range from 75 percent to 90 percent of the principal. The Bank typically requires that SBA loans be secured by business assets and by a first or second deed of trust on any available real property. When the loan is secured by a first deed of trust on real property, the Bank generally obtains appraisals in accordance with applicable regulations. SBA loans have terms ranging from 5 to 20 years depending on the use of the proceeds. To qualify for a SBA loan, a borrower must demonstrate the capacity to service and repay the loan, without liquidating the collateral, based on historical earnings or reliable projections.
 
The Bank normally sells to unrelated third parties a substantial amount of the guaranteed portion of the SBA loans that it originates. When the Bank sells a SBA loan, it has a right to repurchase the loan if the loan defaults. If the Bank repurchases a loan, the Bank will make a demand for guarantee purchase to the SBA. The Bank retains the right to service the SBA loans, for which it receives servicing fees. The unsold portions of the SBA loans that remain owned by the Bank are included in loans receivable on the Consolidated Balance Sheets. As of December 31, 2009,2010, the Bank had $139.5$123.8 million of SBA loans in its portfolio, and was servicing $233.1$191.3 million of SBA loans sold to investors.


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International Trade Finance
 
The Bank offers a variety of international finance and trade services and products, including letters of credit, import financing (trust receipt financing and bankers’ acceptances) and export financing. Although most of our trade finance activities are related to trade with Asian countries, all of our loans are made to companies domiciled in the United States.States (“U.S.”). A substantial portion of this business involves California-based customers engaged in import activities.

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Consumer Loans
 
Consumer loans are extended for a variety of purposes, including automobile loans, secured and unsecured personal loans, home improvement loans, home equity lines of credit, overdraft protection loans, unsecured lines of credit and credit cards. Management assesses the borrower’s creditworthiness and ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review ofdebt-to-income ratios and other measures of repayment ability. Although creditworthiness of the applicant is of primary importance, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Most of the Bank’s loans to individuals are repayable on an installment basis.
 
Any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance, because the collateral is more likely to suffer damage or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, the collection of loans to individuals is dependent on the borrower’s continuing financial stability, and thus is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, various federal and state laws, including bankruptcy and insolvency laws, often limit the amount that the lender can recover on loans to individuals. Loans to individuals may also give rise to claims and defenses by a consumer borrower against the lender on these loans, and a borrower may be able to assert against any assignee of the note these claims and defenses that the borrower has against the seller of the underlying collateral.
Off-Balance Sheet Commitments
 
As part of its service to its small- to medium-sized business customers, the Bank from time to time issues formal commitments and lines of credit. These commitments can be either secured or unsecured. They may be in the form of revolving lines of credit for seasonal working capital needs or may take the form of commercial letters of credit or standby letters of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
Lending Procedures and Loan Limits
 
Loan applications may be approved by the Board of Directors’ Loan Committee, or by the Bank’s management or lending officers to the extent of their lending authority. Individual lending authority is granted to the Chief Credit Officer and certain additional officers, including District Leaders. Loans for which direct and indirect borrower liability exceeds an individual’s lending authority are referred to the Bank’s Management Credit Committee and, for those in excess of the Management Credit Committee’s approval limits, to the Board of Directors’ Loan Committee.


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Legal lending limits are calculated in conformance with the California Financial Code, which prohibits a bank from lending to any one individual or entity or its related interests on an unsecured basis any amount that exceeds 15 percent of the sum of stockholders’ equity plus the allowance for loan losses, capital notes and any debentures, plus an additional 10 percent on a secured basis. At December 31, 2009,2010, the Bank’s authorized legal lending limits for loans to one borrower were $55.9$60.1 million for unsecured loans plus an additional $37.3$40.1 million for specific secured loans. However, the Bank has established internal loan limits that are lower than the legal lending limits.
 
The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to certain underwriting practices. The review of each loan application includes analysis of the applicant’s experience, prior credit history, income level, cash flow, financial condition, tax returns, cash flow projections, and the value of any collateral to secure the loan, based upon reports of independent appraisersand/or audits of accounts receivable or inventory pledged as security. In the case of real estate loans over a specified amount, the review of collateral value includes an appraisal report prepared by an independent Bank-approved appraiser. All appraisal reports on commercial real property secured loans are reviewed by an Appraisal Review Officer. The review generally covers an examination of the appraiser’s assumptions and methods that were used to derive a value for the property, as well as compliance with the USPAP.

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Allowance for Loan Losses, Allowance for Off-Balance Sheet Items and Provision for Credit Losses
 
The Bank maintains an allowance for loan losses at a level considered by management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing economic conditions. In addition, the Bank maintains an allowance for off-balance sheet items associated with unfunded commitments and letters of credit, which is included in other liabilities on the Consolidated Balance Sheets.
 
The Bank follows the“Interagency Policy Statement on the Allowance for Loan and Lease Losses” and analyzes theits allowance for loan losses on a quarterly basis. In addition, as an integral part of the quarterly credit review process of the Bank, the allowance for loan losses and allowance for off-balance sheet items are reviewed for adequacy. The DFI California Department of Financial Institutions (the “DFI”)and/or the Board of Governors of the Federal Reserve System (the “FRB”) may require the Bank to recognize additions to the allowance for loan losses through a provision for credit losses based upon their assessment of the information available to them at the time of their examinations.
Deposits
 
The Bank raises funds primarily through its network of branches and broker deposits. The Bank attracts deposits by offering a wide variety of transaction and term accounts and personalized customer service. Accounts offered include business and personal checking accounts, savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts and certificates of deposit.
Website
 
We maintain an Internet website atwww.hanmi.com. We make available free of charge on the website our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and any amendments thereto, as soon as reasonably practicable after we file such reports with the Securities and Exchange Commission (“SEC”). None of the information on or hyperlinked from our website is incorporated into this Annual Report onForm 10-K (“Report”). These reports and other information on file can be inspected and copied at the public reference facilities of the SEC at 100 F Street, N.E., Washington D.C., 20549. The public


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may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains a website that contains the reports, proxy and information statements and other information we file with them. The address of the site iswww.sec.gov.
Employees
 
As of December 31, 2009,2010, the Bank had 454431 full-time employees and 1928 part-time employees, and Chun-Ha and All World had 3639 full-time employees.employees and one part-time employee. Our employees are not represented by a union or covered by a collective bargaining agreement. We believe that our employee relations are satisfactory.
Insurance
 
We maintain financial institution bond and commercial insurance at levels deemed adequate by management to protect Hanmi Financial from certain litigation and other losses.
Competition
 
The banking and financial services industry in California generally, and in the Bank’s market areas specifically, are highly competitive. The increasingly competitive environment faced by banks is primarily the result of changes in laws and regulation, changes in technology and product delivery systems, new competitors in the market, and the accelerating pace of consolidation among financial service providers. We compete for loans, deposits and customers with other commercial banks, savings institutions, securities and brokerage companies, mortgage companies, real estate investment trusts, insurance companies, finance companies, money market funds, credit unions and other non-bank financial service providers. Some of these competitors are larger in total assets and capitalization, have greater access to capital markets, including foreign-ownership,and/or offer a broader range of financial services.

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Among the advantages that the major banks have over the Bank is their ability to finance extensive advertising campaigns and to allocate their investment assets to the regions with the highest yield and demand. Many of the major commercial banks operating in the Bank’s service areas offer specific services (for instance, trust services) that are not offered directly by the Bank. By virtue of their greater total capitalization, these banks also have substantially higher lending limits.
 The recent trend has been for other
Other institutions, including brokerage firms, credit card companies and retail establishments, to offer banking services to consumers in competition with the Bank, including money market funds with check access and cash advances on credit card accounts. In addition, other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity securities compete with banks for the acquisition of deposits.
 
The Bank’s major competitors are relatively smaller community banks that focus their marketing efforts onKorean-American businesses in the Bank’s service areas. These banks compete for loans primarily through the interest rates and fees they charge and the convenience and quality of service they provide to borrowers. The competition for deposits is primarily based on the interest rate paid and the convenience and quality of service.
 
In order to compete with other financial institutions in its service area, the Bank relies principally upon local promotional activity, including advertising in the local media, personal contacts, direct mail and specialized


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services. The Bank’s promotional activities emphasize the advantages of dealing with a locally owned and headquartered institution attuned to the particular needs of the community.
Economic Developments, LegislationLegislative and Regulatory InitiativesDevelopments
 
Future profitability, like that of most financial institutions, is primarily dependent on interest rate differentials and credit quality. In general, the difference between the interest rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans extended to our customers and securities held in our investment portfolio, will comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on us cannot be predicted.
 
Our business is also influenced by the monetary and fiscal policies of the Federal Government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities, by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and affect interest earned on interest-earning assets and interest paid on interest-bearing liabilities. The nature and impact on us of any future changes in monetary and fiscal policies cannot be predicted.
 
From time to time, federal and state legislation is enacted that may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers, such as recent federal legislation permitting affiliations among commercial banks, insurance companies and securities firms. We cannot predict whether or when any potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. In addition, the outcome of any investigations initiated by state authorities or litigation raising issues may result in necessary changes in our operations, additional regulation and increased compliance costs.
From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have improved, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are still in serious difficulty due to reduced consumer spending and continued liquidity challenges in the credit markets. In response to this economic downturn an financial industry instability, legislative and regulatory initiatives were, and are expected to continue to be, introduced and implemented, which substantially intensify the regulation of the financial services industry.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The landmark Dodd-Frank Wall Street Reform and Consumer Protection Act financial reform legislation (“Dodd-Frank”), which became law on July 21, 2010, significantly revised and expanded the rulemaking, supervisory and enforcement authority of federal bank regulators. Dodd-Frank followed other legislative and regulatory initiatives in 2008 and 2009 in response to the economic downturn and financial industry instability. Dodd-Frank impacts many aspects of the financial industry and, in many cases, will impact larger and smaller

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financial institutions and community banks differently over time. Dodd-Frank includes, among other things, the following:
(i) the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation;
(ii) expanded FDIC resolution authority to conduct the orderly liquidation of certain systemically significant non-bank financial companies in addition to depository institutions;
(iii) the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment;
(iv) the requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;
(v) enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks;
(vi) the termination of investments by the U.S. Treasury under TARP;
(vi) the elimination and phase out of trust preferred securities (TRUPS) from Tier 1 capital with certain exceptions;
(vii) a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 and an extension of federal deposit coverage until January 1, 2013 for the full net amount held by depositors in non-interesting bearing transaction accounts;
(ix) authorization for financial institutions to pay interest on business checking accounts;
(x) changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be the institution’s deposit base, but instead, will be its average consolidated total assets less its average tangible equity and an increase in the minimum insurance ratio for the Deposit Insurance Fund (“DIF”) from 1.15% to 1.35%;
(xi) the elimination of remaining barriers to de novo interstate branching by banks;
(xii) expanded restrictions on transactions with affiliates and insiders under Section 23A and 23B of the Federal Reserve Act and lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions;
(xiii) the transfer of oversight of federally chartered thrift institutions to the Office of the Comptroller of the Currency and state chartered savings banks to the FDIC, and the elimination of the Office of Thrift Supervision;
(xiv) provisions that affect corporate governance and executive compensation at most United States publicly traded companies, including financial institutions, including (1) stockholder advisory votes on executive compensation, (2) executive compensation “clawback” requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings, revenues, gains or other criteria, (3) enhanced independence requirements for compensation committee members, and (4) authority for the SEC to adopt proxy access rules which would permit stockholders of publicly traded companies to nominate candidates for election as director and have those nominees included in a company’s proxy statement; and


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 Negative developments beginning
(xv) the creation of a Consumer Financial Protection Bureau, which is authorized to promulgate consumer protection regulations relating to bank and non-bank financial products and examine and enforce these regulations on banks with more than $10 billion in assets.
We cannot predict the extent to which the interpretations and implementation of this wide-ranging federal legislation by regulations and in supervisory policies and practices may affect us. Many of the latter halfrequirements of 2007 in the sub-prime mortgage marketDodd-Frank will be implemented over time and the securitization marketsmost will be subject to regulations to be implemented or which will not become fully effective for such loans and other factors have resulted in uncertainty in the financial markets in general and a related general economic downturn, which continued through 2008 and are anticipated to continue throughout 2010. Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and residential construction loans and resulted in significant write-downs of assets by many financial institutions. In addition, the values ofseveral years. There can be no assurance that these or future reforms (such as possible new standards for commercial real estate collateral supporting many commerciallending (“CRE”) or new stress testing guidance for all banks) arising out of these regulations and studies and reports required by Dodd-Frank will not significantly increase our compliance or other operating costs and earnings or otherwise have a significant impact on our business, financial condition and results of operations. Dodd-Frank will likely result in more stringent capital, liquidity and leverage requirements on us and may otherwise adversely affect our business. For example, the provisions that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as residential loans have declinedplace limitations on certain revenues those deposits may generate. Provisions that revoke the Tier 1 capital treatment of trust preferred securities and may continue to decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly. Bank and bank holding company stock prices have been significantly negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. The bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance of formal and informal enforcement orders and other supervisory actions requiring that institutions take action to address credit quality, liquidity and risk management, and capital adequacy, as well as other safety and soundness concerns.
     On November 2, 2009, the members of the Board of Directors of the Bank consentedotherwise require revisions to the issuancecapital requirements of the Order from the DFI. On the same date, Hanmi Financial and the Bank entered into the Agreement with the FRB. The Ordercould require Hanmi Financial and the Agreement contain substantially similar provisions. The Order and the Agreement require the Board of Directors of the Bank to prepare and submit written plans toseek other sources of capital in the DFI and the FRB that address the following items: (i) strengthening board oversightfuture. As a result of the managementchanges required by Dodd-Frank, the profitability of our business activities may be impacted and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, with respect to the Agreement, of Hanmi; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Order and the Agreement also require the Bank to review and revise its allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and the Bank and Hanmi must obtain prior approval from the FRB prior to declaring and paying dividends.
     Under the Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank willwe may be required to increase its contributed equity capitalmake changes to certain of our business practices. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.
Some of the regulations required by not less than an additional $100 million. The Bank will be required to maintain a ratiovarious sections of tangible shareholder’s equity to total tangible assets as follows:Dodd-Frank have been proposed and some adopted in final, including the following notices of proposed rulemakings (“NPRs”)and/or interim or final rules for the following sections of Dodd-Frank:
 - Risk Based Capital Guidelines – Market Risk (Section 171) – Final Rule
 
 - Ratio of Tangible Shareholder’sOrderly Liquidation (Section 209) – Initial Final Rule
Date
 Equity- Implement Changes to Total Tangible AssetsDIF Assessment Base (Section 331) – NPR
By December 31, 2009
 Not Less Than 7.0 Percent- Designated Reserve Ratio and Restoration Plan for the Deposit Insurance Fund (Sections 332 and 334) – Final Rule
By July 31, 2010
 Not Less Than 9.0 Percent- $250,000 Deposit Insurance Coverage Limit (Section 335) – Final Rule
From December 31, 2010 and Until the Order is Terminated
 Not Less Than 9.5 Percent- Unlimited coverage for Non-Interest Bearing Deposits (Section 343) – Final Rule
- Incentive-based Compensation (Section 956) – FDIC NPR.
EESA and ARRA
 If
Through its authority under the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. Our inability to comply with the capital ratios identified in the Order raises substantial doubt about our ability to continueEmergency Economic Stabilization Act of 2008 (“EESA”), as a going concern.
     On February 17, 2009,amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed, the U.S. Treasury (“Treasury”) implemented the TARP Capital Purchase Program (the “TARP CPP”), a program designed to temporarily inject capital into law by President Obama.financial institutions. In order to participate in the TARP CPP, financial institutions were required to adopt certain standards for executive compensation and corporate governance. The ARRA includesincluded a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposesneeds and imposed certain new, more stringent executive compensation and corporate expenditure


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limits on all current and future TARP recipients until the institution has repaid theU.S. Treasury which is now permitted under the ARRA without penalty and without the need to

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raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
repaid. The executive compensation standards are more stringent than those currently in effect under the TARP CPP or those previously proposed by the Treasury. The new standardsARRA include, (butbut are not limited to):to, (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employee’s total annual compensation;compensation, (ii) prohibitions on golden parachute payments for departure from a company;company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria;criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings;earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the U.S. Treasury to be inconsistent with the purposes of the TARP or otherwise contrary to the public interest;interest, (vi) required establishment of a company-wide policy regarding “excessive or luxury expenditures;expenditures,” and (vii) inclusion in a participant’s proxy statements for annual shareholderstockholder meetings of a non-binding “Say on Pay” shareholderstockholder vote on the compensation of executives.
     On February 25, 2009, Hanmi Financial and the first day the CAP program was initiated, the Treasury released the actual terms of the program, stating that the purpose of the CAP is to restore confidence throughout the financial system that the nation’s largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to severe economic environment, and to support lending to creditworthy borrowers. Under the CAP terms, eligible U.S. banking institutions with assets in excess of $100 billion on a consolidated basis are required to participate in coordinated supervisory assessments, which are forward-looking “stress test” assessments to evaluate the capital needs of the institution under a more challenging economic environment. Should this assessment indicate the need for the bank to establish an additional capital buffer to withstand more stressful conditions, these larger institutions may access the CAP immediately as a means to establish any necessary additional buffer or they may delay the CAP funding for six months to raise the capital privately. Eligible U.S. banking institutions with assets below $100 billion may also obtain capital from the CAP. The CAP program doesBank elected not replace the TARP CPP, but is an additional program to the TARP CPP, and is open to eligible institutions regardless of whether they participated in the TARP CPP. The deadline to apply to the CAP is May 25, 2009. Recipients of capital under the CAP will be subject to the same executive compensation requirements as if they had received the TARP CPP.
     We applied to participate in the TARP CPP forCPP.
Federal Banking Agency Compensation Guidelines
Guidelines adopted by the federal banking agencies pursuant to the FDI Act prohibit excessive compensation as an investmentunsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In June 2010, the federal bank regulatory agencies jointly issued additional comprehensive guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of upbanking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to $105 million frommaterially affect the Federal Governmentrisk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in December 2008, but we withdrew our application in June 2009.compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
 The EESA also increased
On February 7, 2011, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on most accounts from $100,000(FDIC) approved a joint proposed rulemaking to $250,000 throughimplement Section 956 of the end of 2013. In addition, the FDIC has implemented two temporary liquidity programs to: (i) provide deposit insuranceDodd-Frank for the full amount of most noninterest-bearing transaction accounts (the “Transaction Account Guarantee”) through the end of 2013; and (ii) guarantee certain unsecured debt ofbanks with $1 billion or more in assets. Section 956 prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and their holding companies through June 2012 underare deemed to be excessive, or that may lead to material losses. The proposed rule would move the U.S. closer to aspects of international compensation standards by 1) requiring deferral of a temporary liquidity guarantee programsubstantial portion of incentive compensation for executive officers of particularly large institutions described above; 2) prohibiting incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excessive compensation; 3) prohibiting incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss; 4) requiring policies and procedures for incentive-based compensation arrangements that are commensurate with the size and


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complexity of the institution; and 5) requiring annual reports on incentive compensation structures to the institution’s appropriate Federal regulator. A joint rule making proposal will be published for comment by all of the banking agencies and the Securities and Exchange Commission (the “Debt Guarantee Program”“SEC”), among other agencies.
The scope, content and togetherapplication of the “TLGP”).
U.S. banking regulators’ policies on incentive compensation continue to evolve in the aftermath of the economic downturn. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of Hanmi Financial and the Bank didto hire, retain and motivate key employees.
The Small Business Jobs Act of 2010
The Small Business Jobs Act of 2010 makes available up to $30 billion of funds for preferred stock capital investments by the U.S. Treasury in banks with less than $10 billion assets as of December 31, 2009 through the Small Business Lending Fund (“SBLF”). Banks with up to $1 billion assets may apply for up to 5% and banks with more than $1 billion in assets, but less than $10 billion, may apply for up to 3% of their risk-weighted assets. In some cases, preferred stock issued under the SBLF may be exchanged for preferred stock issued to the U.S. Treasury for TARP CPP funds. Banks on or recently removed from the FDIC problem bank list may not electapply and banks with other supervisory problems or enforcement actions may be required to opt outraise matching capital or may have their application denied. The new law provides that the term of the Debt Guarantee Program.preferred stock is a maximum of 10 years and that the capital is to receive Tier 1 treatment. The FDIC charges “systemic risk special assessments”interest rate on the preferred starts at 5% and may later range between 1% and 9%, depending on, among other things, the amount of qualifying small business loans which the recipient bank makes. The Bank has not yet determined whether or not it will apply to depository institutions that participate in the TLGP. SBLF.
International Capital and Liquidity Initiatives
The FDIC has recentlyinternational Basel Committee on Banking Supervision (the “Basel Committee”) is a committee of central banks and bank supervisors and regulators from the major industrialized countries. The Basel Committee develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In December 2009, the Basel Committee released two consultative documents proposing significant changes to bank capital, leverage and liquidity requirements in response to the economic downturn to enhance the Basel II framework which had not yet been fully implemented internationally and even less so in the United States. The Group of Twenty Finance Ministers and Central Bank Governors (commonly referred to as the G-20), including the United States, endorsed the reform package, referred to as Basel III, and proposed phase in timelines in November, 2010. Basel III provides for increases in the minimum Tier 1 common equity ratio and the minimum requirement for the Tier 1 capital ratio. Basel III additionally includes a “capital conservation buffer” on top of the minimum requirement designed to absorb losses in periods of financial and economic distress; and an additional required countercyclical buffer percentage to be implemented according to a particular nation’s circumstances. These capital requirements are further supplemented under Basel III by a non-risk-based leverage ratio. Basel III also reaffirms the Basel Committee’s intention to introduce higher capital requirements on securitization and trading activities at the end of 2011.
The Basel III liquidity proposals have three main elements: (i) a “liquidity coverage ratio” designed to meet the bank’s liquidity needs over a30-day time horizon under an acute liquidity stress scenario, (ii) a “net stable funding ratio” designed to promote more medium and long-term funding over a one-year time horizon, and (iii) a set of monitoring tools that Congress give the FDIC expanded authorityBasel Committee indicates should be considered as the minimum types of information that banks should report to charge feessupervisors.


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Implementation of Basel III in the United States will require regulations and guidelines by United States banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee. It is unclear how United States banking regulators will define “well-capitalized” in their implementation of Basel III and to thosewhat extent and when smaller banking organizations in the United States will be subject to these regulations and guidelines. Basel III standards, if adopted, would lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. United States banking regulators must also implement Basel III in conjunction with the provisions of Dodd-Frank related to increased capital and liquidity requirements. Further, Dodd-Frank required minimum leverage and risk-based capital requirements on a consolidated basis for all depository institution holding companies that benefit directly and indirectly frominsured depository institutions which may not be less than the FDIC guarantees.strictest requirements in effect for depository institutions as of the date of enactment, July 21, 2010.
Supervision and Regulation
 
General
 
We are extensively regulated under both federal and certain state laws. Regulation and supervision by the federal and state banking agencies is intended primarily for the protection of depositors and the Deposit Insurance Fund (“DIF”)DIF administered by the FDIC, and not for the benefit of stockholders. Set forth below is a summary description of the keyprincipal laws and regulations that relate to our operations. These descriptions are qualified in their entirety by reference to the applicable laws and regulations.

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 From time to time, federal and state legislation is enacted that may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Several proposals for legislation that could substantially intensify the regulation of the financial services industry (including a possible comprehensive overhaul of the financial institutions regulatory system) are expected to be introduced and possibly enacted in the new Congress in response to the current economic downturn and financial industry instability. Other legislative and regulatory initiatives that could affect us and the Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced, before the Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject us and the Bank to increased regulation, disclosure and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules, regulations and policies to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations or changes in policies may be enacted or the extent to which the business of the Bank would be affected thereby.
Hanmi Financial
 
As a bank and financial holding company, we are subject to regulationsupervision and examination by the FRB under the BHCA. Accordingly, we are subject to the FRB’s authority to:
require periodic reports and such additional information as the FRB may require.
 •require periodic reports and such additional information as the FRB may require.
 •    require usbank holding companies to maintain certain levels of capital. See“Capital Standards.”
•    require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to support each subsidiary bank.
•    restrict the ability of bank holding companies to obtain dividends or other distributions from their subsidiary banks.
•    terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary.
•    take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for non-compliance under certain circumstances.
•    require the prior approval of senior executive officers or director changes and golden parachute payments, including change in control agreements or new employment agreements with payment terms which are contingent upon termination.
•    regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem our securities in certain situations.


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•    limit or prohibit and require FRB prior approval of the payment of dividends.
•    require financial holding companies to divest non-banking activities or subsidiary banks if they fail to meet certain financial holding company standards.
•    approve acquisitions of more than 5% of the voting shares of another bank and mergers with other banks or savings institutions and consider certain competitive, management, financial and other factors in granting these approvals. Similar California and other state banking agency approvals may also be required.
require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to support each subsidiary bank. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations, or both.
terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary.
take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for non-compliance under certain circumstances.
regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem our securities in certain situations.
limit or prohibit and require FRB prior approval of the payment of dividends.
require financial holding companies to divest non-banking activities or subsidiary banks if they fail to meet certain financial holding company standards.
approve acquisitions and mergers with other banks or savings institutions and consider certain competitive, management, financial and other factors in granting these approvals. Similar California and other state banking agency approvals may also be required.
A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its non-banking subsidiaries. It is also subject to supervision and examination by the FRB. Examinations are designed to inform the FRB of the financial condition and nature of the operations of the bank holding company and its subsidiaries and to monitor compliance with the BHCA and other laws affecting the operations of bank holding companies. To determine whether potential weaknesses in the condition or operations of bank holding companies might pose a risk to the safety and soundness of their subsidiary banks, examinations focus on whether a bank holding company has adequate systems and internal controls in place to manage the risks inherent in its business, including credit risk, interest rate risk, market risk (for example, from changes in value of portfolio instruments and foreign currency), liquidity risk, operational risk, legal risk and reputation risk.

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Bank holding companies may be subject to potential enforcement actions by the FRB for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the FRB. Enforcement actions may include the issuance of cease and desist orders, the imposition of civil money penalties, the requirement to meet and maintain specific capital levels for any capital measure, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against officers or directors and other “institution-affiliated” parties.
 
Regulatory Restrictions on Dividends; Source of Strength
 
Hanmi Financial is regarded as a legal entity separate and distinct from its other subsidiaries. The principal source of our revenue is dividends received from the Bank. Various federal and state statutory provisions limit the amount of dividends the Bank can pay to Hanmi Financial without regulatory approval. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
 Under
The Federal Reserve Board policy,Reserve’s view is that in serving as a source of strength to its subsidiary banks, a bank holding company is expectedshould stand ready to act as a sourceuse available resources to provide adequate capital funds to its subsidiary banks during periods of financial strengthstress or adversity and should maintain financial flexibility and capital-raising capacity to eachobtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet itssource-of-strength obligations may constitute an unsafe and unsound practice or a violation of its banking subsidiaries and commit resourcesthe Federal Reserve Board’s regulations, or both. Thesource-of-strength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to their support. Such support maymaintain adequate capital levels. In such a situation, the subsidiary bank will be required at times when, absent this Federal Reserve Board policy,by the bank’s federal regulator to take “prompt corrective action” including obtaining a guarantee by the bank holding company may not be inclined to provide it. As discussed below,of a capital plan for


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and under capitalized bank subsidiaries. See “Prompt Corrective Action Regulations” below. Additionally, if a bank holding company has more than one bank subsidiary, the FDI Act provides that each subsidiary bank may have “cross-guaranty” liability for any loss incurred by the FDIC in certain circumstances, couldconnection with the failure of another commonly-controlled bank.
Because Hanmi Financial is a legal entity separate and distinct from the Bank, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be requiredsubject to guarantee the capital planprior claims of an undercapitalized banking subsidiary.
the subsidiary’s creditors. In the event of a liquidation or other resolution of the Bank, the claims of depositors and other general or subordinated creditors of the Bank would be entitled to a priority of payment over the claims of holders of any obligation of the Bank to its shareholders, including any depository institution holding company (such as Hanmi Financial) or any shareholder or creditor of such holding company. In the event of a bank holding company’s bankruptcy under Chapter 11 of the United States Bankruptcy Code, the trustee will be deemed to have assumed, and is required to cure immediately, any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.
 
Regulatory Restrictions on Activities “Closely Related” to Banking
 The Bank Holding Company Act prohibits a
Subject to prior notice or FRB approval, bank holding company, with certain limited exceptions, from acquiring directcompanies may generally engage in, or indirect ownership or control of any votingacquire shares of any company which is not a bank or from engagingcompanies engaged in, any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows the acquisition of interests in companies whose activities are founddetermined by the Federal Reserve Board, by order or regulation,FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. These activities include, among other things, numerous services and functions performed in connection with lending, investing, and financial counseling and tax planning. In approving acquisitions by bankBank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors,which elect and weighs the expected benefitsretain “financial holding company” status pursuant to the public (such as greater convenience and increased competition or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). The Federal Reserve Board is also empowered to differentiate between activities commencedde novo and activities commenced through acquisition of a going concern.

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Gramm-Leach Bliley Act; Financial Holding Companies
     The Gramm-Leach-Bliley Financial Modernization Act of 1999 revised and expanded the provisions of the Bank Holding Company Act by including a new section that permits a bank holding company to elect to become a financial holding company to(“GLBA”) may engage in a full range ofthese nonbanking activities and broader securities, insurance, merchant banking and other activities that are “financial in nature.” The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company require that all of the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company must be and remain at all times “well-capitalized” and “well managed.” Hanmi Financial has previously elected to be a financial holding company.
     The Gramm-Leach-Bliley Act further requires that, in the event that the bank holding company elects to become a financial holding company, the election must be made by filing a written declaration with the appropriate Federal Reserve Bank that:
states that the bank holding company elects to become a financial holding company;
provides the name and head office address of the bank holding company and each depository institution controlled by the bank holding company;
certifies that each depository institution controlled by the bank holding company is “well-capitalized” as of the date the bank holding company submits its declaration;
provides the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company; and
certifies that each depository institution controlled by the bank holding company is “well managed” as of the date the bank holding company submits its declaration.
     The bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the institution’s most recent examination.
     Financial holding companies may engage, directly or indirectly, in any activity that is determined to be:
financial in nature;
•incidental to such financial activity; or
•complementary to a financial activity provided it “does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”
     The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: lending, trust and other banking activities; insurance activities; or are incidental or complementary to activities that are financial or economic advisory services; securitization of assets; securities underwriting and dealing; existing bank holding company domestic activities; existing bank holding company foreign activities and merchant banking activities. In addition, the Gramm-Leach-Bliley Act specifically gives thein nature without prior Federal Reserve Board the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the United States Treasury Department, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”
approval. Pursuant to the Gramm-Leach-Bliley Act, Chun-HaGLBA and All World qualify as financial subsidiaries. Under the Gramm-Leach-Bliley Act,Dodd-Frank, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized, and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the Community Reinvestment Act (“CRA”)., which requires banks to help meet the credit needs of the communities in which they operate. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. Pursuant to the termsHanmi Financial elected financial holding company status and Chun-Ha and All World are considered financial subsidiaries of the AgreementHanmi Financial. Hanmi Financial has agreed with the FRB we have agreed to take certain corrective action pursuant to these Gramm-Leach-Bliley ActGLBA requirements.

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Hanmi Financial is also a bank holding company within the meaning of Section 3700 of the California Financial Code. Therefore, Hanmi Financial and any of its subsidiaries are subject to examination by, and may be required to file reports with, the DFI.
Privacy Policies
 
Under the Gramm-Leach-Bliley Act,GLBA, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties and establish procedures and practices to protect customer data from unauthorized access. Hanmi Financial and its subsidiariesthe Bank have established policies and procedures to assure our compliance with all privacy provisions of the Gramm-Leach-Bliley Act.GLBA.


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Safe and Sound Banking PracticesCapital Adequacy Requirements
 
At December 31, 2010, Hanmi Financial and the Bank’s capital ratios exceed the minimum percentage requirements to be deemed “well capitalized” for regulatory purposes.See “Notes to Consolidated Financial Statements, Note 1 – Regulatory Matters and Going Concern Consideration.” The regulatory capital guidelines and the actual capital ratios for Hanmi Financial and the Bank as of December 31, 2010, were as follows:
                 
  Regulatory Capital Guidelines Actual
  Adequately
 Well
 Hanmi
 Hanmi
  Capitalized Capitalized Bank Financial
 
Total Risk-Based Capital Ratio  8.00%  10.00%  12.22%  12.32%
Tier 1 Risk-Based Capital Ratio  4.00%  6.00%  10.91%  10.09%
Tier 1 Leverage Ratio  4.00%  5.00%  8.55%  7.90%
Bank holding companies and banks are not permittedsubject to engage in unsafevarious regulatory capital requirements administered by state and unsoundfederal banking agencies. Increased capital requirements are expected as a result of Dodd-Frank and the Basel III international supervisory developments. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding companyCapital amounts and classifications are also subject to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.qualitative judgments by regulators about components, risk weighting, and other factors.
 
The Federal Reserve Board has broad authority to prohibit activities ofcurrent risk-based capital guidelines for bank holding companies and their nonbanking subsidiaries which represent unsafebanks adopted by the federal banking agencies are expected to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and unsound banking practices or which constitute violationsthose recorded as off-balance sheet items, such as commitments, letters of laws or regulations,credit and can assess civil money penaltiesrecourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for certain activities conducted on a knowingthose categories perceived as representing greater risks and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each daydividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Under the activity continues.
Annual Reporting; Examinations
     We are required to file annual reports with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the company for the cost of such the examination.
Capital Adequacy Requirements
     The Federal Reserve Board has adopted a system using risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for assets with low credit risk, such as certain U.S. Treasury securities, to evaluate100 percent for assets with relatively high credit risk, such as business loans.
The risk-based capital requirements also take into account concentrations of credit (i.e., relatively large proportions of loans involving one borrower, industry, location, collateral or loan type) and the risks of “non-traditional” activities (those that have not customarily been part of the banking business). The risk-based capital adequacyregulations also include exposure to interest rate risk as a factor that the regulators will consider in evaluating a bank’s capital adequacy. Interest rate risk is the exposure of certain largea bank’s current and future earnings and equity capital arising from adverse movements in interest rates. While interest rate risk is inherent in a bank’s role as financial intermediary, it introduces volatility to bank holding companies. Priorearnings and to March 30, 2006, these capital guidelines were applicable to all bankthe economic value of the institution. Bank holding companies having $150 million or moreand banks engaged in assets on a consolidated basis. However, effective March 30, 2006, the Federal Reserve Board amended the asset size threshold to $500 million for purposes of determining whether a bank holding company issignificant trading activity may also be subject to the market risk capital adequacy guidelines.guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. Neither Hanmi Financial currently has consolidated assets in excess of $500 million andnor the Bank is thereforecurrently subject to the Federal Reserve Board’smarket risk capital adequacy guidelines.rules.
 
Qualifying capital is classified depending on the type of capital:
•    “Tier I capital” currently includes common equity and trust preferred securities, subject to certain criteria and quantitative limits. The capital received from trust preferred offerings also qualifies as Tier I capital, subject to the new provisions of Dodd-Frank. Under Dodd-Frank, depository institution holding companies with more than $15 billion in total consolidated assets as of December 31, 2009,


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will no longer be able to include trust preferred securities as Tier 1 regulatory capital after of the end of a3-year phase-out period beginning 2013, and would need to replace any outstanding trust preferred securities issued prior to May 19, 2010 with qualifying Tier 1 regulatory capital during the phase-out period. For institutions with less than $15 billion in total consolidated assets, existing trust preferred capital will still qualify as Tier 1. New issues by small bank holding companies with less than $500 million assets could still qualify as Tier 1, however the market for any new trust preferred capital raises is uncertain.
•    “Tier II capital” includes hybrid capital instruments, other qualifying debt instruments, a limited amount of the allowance for loan and lease losses, and a limited amount of unrealized holding gains on equity securities. Following the phase-out period under Dodd-Frank, trust preferred securities will be treated as Tier II capital. The maximum amount of supplemental capital elements that qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital.
•    “Tier III capital” consists of qualifying unsecured debt. The sum of Tier II and Tier III capital may not exceed the amount of Tier I capital.
Under the current capital guidelines, specific categories of assetsthere are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determinethree fundamental capital ratios: a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio, of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. To be considered “well-capitalized,” a bank holding company must maintain, on a consolidated basis, (i) a Tier 1 risk-based capital ratio of at least 6.0%, and (ii)a Tier 1 leverage ratio. To be deemed “well capitalized” a bank must have a total risk-based capital ratio, of 10.0% or greater. As of December 31, 2009, oura Tier 1 risk-based capital ratio was 6.76% and our total risk-based capital ratio was 9.12%. Accordingly, we and the Bank both qualified as “adequately capitalized” as of December 31, 2009.
     In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of at least 4.0%. As of10%, 6% and 5%, respectively. At December 31, 2009, our leverage ratio was 5.82%.2010, the respective capital ratios of Hanmi Financial and the Bank exceeded the minimum percentage requirements to be deemed “well-capitalized” for regulatory purposes.

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 The
In addition to the requirements of Dodd-Frank and Basel III, the federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. The federal bank regulatory agencies may setchange existing capital requirements for a particular banking organization thatguidelines or adopt new capital guidelines in the future. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are higher thanexposed, including the minimum ratios when circumstances warrant. Federal Reserve Boardvolume and severity of problem loans. FRB guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets. Federal banking regulators may set higher capital requirements when a bank’s particular circumstances warrant and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized. In such cases, the institutions may no longer be deemed well capitalized and may therefore additionally be subject to restrictions on taking brokered deposits. Hanmi Financial and the Bank are subject to such requirements and restrictions pursuant to the Written Agreement with the FRB.
 
Hanmi Financial and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. As of December 31, 2010, the Bank’s leverage capital ratio was 8.55 percent, and Hanmi Financial’s leverage capital ratio was 7.90 percent, both ratios exceeding regulatory minimums.
As described previously, the Bank is alsowas required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. The Bank will be required to maintain a ratio of tangible shareholder’s equity to total tangible assets as follows:See“Item 1. Business – Regulatory Enforcement Action.”for further details.


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Ratio of Tangible Shareholder’s
DateEquity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010Not Less Than 9.0 Percent
From December 31, 2010 and Until the Order is TerminatedNot Less Than 9.5 Percent
     If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. Our inability to comply with the capital ratios identified in the Order raises substantial doubt about our ability to continue as a going concern. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholder’s equity to total tangible assets ratio of 7.13 percent.
Imposition of Liability for Undercapitalized Subsidiaries
 
Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
 
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
 
Acquisitions by Bank Holding Companies
 
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all, or substantially all, of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.
 
Control Acquisitions
 
The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control.

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In addition, any company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of the company, or otherwise obtaining control or a “controlling influence” over the company.
 
Cross-guarantees
 
Under the Federal Deposit Insurance Act, or FDIA, a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance.


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In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions. The Bank is currently the only FDIC-insured depository institution subsidiary of Hanmi Financial.
 
Because Hanmi Financial is a legal entity separate and distinct from the Bank, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of the Bank, the claims of depositors and other general or subordinated creditors of the Bank would be entitled to a priority of payment over the claims of holders of any obligation of the Bank to its shareholders, including any depository institution holding company (such as Hanmi Financial) or any shareholder or creditor of such holding company.
 
Anti-Terrorism LegislationSarbanes-Oxley Act
 In the wake of the tragic events of September 11th, on October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also known as the “Patriot Act,” the law enhances the powers of the federal government and law enforcement organizations to combat terrorism, organized crime, and money laundering.
The Patriot Act significantly amends and expands the application of the Bank Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity reporting rules, and enhanced anti-money laundering programs.
     Under the Patriot Act, financial institutions areCompany is subject to prohibitions against specified financial transactionsthe accounting oversight and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:
to conduct enhanced scrutinycorporate governance requirements of account relationships to guard against money laundering and report any suspicious transaction;
to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;
•to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and
•to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

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     Under the Patriot Act, financial institutions must also establish anti-money laundering programs. The Patriot Act sets forth minimum standards for these programs, including: (i) the development of internal policies, procedures and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test the adequacy of such programs.
     In addition, the Patriot Act requires bank regulatory agencies to consider the record of a bank in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions. Regulations proposed by the U.S. Department of the Treasury to effect certain provisions of the Patriot Act provide that all transaction or other correspondent accounts held by a U.S. financial institution on behalf of any foreign bank must be closed within 90 days after the final regulations are issued, unless the foreign bank has provided the U.S. financial institution with a means of verification that the institution is not a “shell bank.” Proposed regulations interpreting other provisions of the Patriot Act continue to be issued.
     Under the authority of the Patriot Act, the Secretary of the Treasury adopted rules on September 26, 2002 increasing the cooperation and information sharing among financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under those rules, a financial institution is required to:
expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in a request submitted by the Financial Crimes Enforcement Network (“FinCEN”);
notify FinCEN if an account or transaction is identified;
•designate a contact person to receive information requests;
•limit use of information provided by FinCEN to (i) reporting to FinCEN, (ii) determining whether to establish or maintain an account or engage in a transaction, and (iii) assisting the financial institution in complying with the Bank Secrecy Act; and
•maintain adequate procedures to protect the security and confidentiality of FinCEN requests.
     Under the new rules, a financial institution may also share information regarding individuals, entities, organizations, and countries for purposes of identifying and, as appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering. Such information-sharing is protected under a safe harbor if the financial institution: (i) notifies FinCEN of its intention to share information, even when sharing with an affiliated financial institution; (ii) takes reasonable steps to verify that, prior to sharing, the financial institution or association of financial institutions with which it intends to share information has submitted a notice to FinCEN; (iii) limits the use of shared information to identifying and reporting on money laundering or terrorist activities, determining whether to establish or maintain an account or engage in a transaction, or assisting it in complying with the Bank Security Act; and (iv) maintains adequate procedures to protect the security and confidentiality of the information. Any financial institution complying with these rules will not be deemed to have violated the privacy requirements discussed above.
     The Secretary of the Treasury also adopted a rule on September 26, 2002 intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Under the rule, financial institutions: (i) are prohibited from providing correspondent accounts to foreign shell banks; (ii) are required to obtain a certification from foreign banks for which they maintain a correspondent account stating the foreign bank is not a shell bank and that it will not permit a foreign shell bank to have access to the U.S. account; (iii) must maintain records identifying the owner of the foreign bank for which they may maintain a correspondent account and its agent in the United States designated to accept services of legal process; and (iv) must terminate correspondent accounts of foreign banks that fail to comply with or fail to contest a lawful request of the Secretary of the Treasury or the Attorney General of the United States, after being notified by the Secretary or Attorney General.

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Sarbanes-Oxley Act of 2002
     In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act contains reformsincluding, among other things, required executive certification of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented pursuant to regulations issued by the SEC. The following is a summary of certain key provisions of the Sarbanes-Oxley Act.
     In addition to the establishment of a new accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all registered public accounting firms and publicly traded companies, the Sarbanes-Oxley Act places restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client requires pre-approval by the client’s audit committee. Also, the Sarbanes-Oxley Act makes certain changes to thefinancial presentations, requirements for partner rotation after a period of time. The Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. Furthermore, counsel is required to report evidence of a material violation of securities laws or a breach of fiduciary duties to the company’s chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
     Under this law, longer prison terms apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules or regulations) are restricted. In addition, the legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers required to report changes in ownership in a company’s securities must now report any such change within two business days of the change.
     The Sarbanes-Oxley Act increases responsibilities and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s registered public accounting firm. Audit committeetheir members, must be independent and are barred from accepting consulting, advisory or other compensatory fees from the company. In addition, companies are requireddisclosure to disclose whether at least one membershareholders of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not. A company’s registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if the company’s chief executive officer, chief financial officer, controller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Sarbanes-Oxley Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading. Furthermore, the Sarbanes-Oxley Act increases the protection for employees of publicly traded companies who provide evidence of fraud, by increasing relief for compensatory damages in civil cases and penalties in criminal cases.

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     The Sarbanes-Oxley Act also has provisions relating to inclusion of certain internal control reports and assessments by management in the annual report to stockholders. Hanmi Financial is required to include an internal control report containing management’s assertions regarding the effectiveness of its internal control structure and procedures over financial reporting. The internal control report must include statements regarding management’s responsibility for establishing
Securities Registration
Hanmi Financial’s common stock is publicly held and maintaining adequate internal control over financial reporting; management’s assessment as to the effectiveness of the company’s internal control over financial reporting, based on management’s evaluation of it as of year-end; and of the framework used as criteria for evaluating the effectiveness of the company’s internal control over financial reporting. The law also requires the company’s registered public accounting firm that issues the audit report to attest to, and reportlisted on the company’s internal controls over financial reporting in accordance with standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board.
Securities Registration
     Our securities are registered with the SEC under the Exchange Act. As such,NASDAQ Stock Market (“NASDAQ”), and we are subject to the periodic reporting, information, proxy solicitation, insider trading, corporate governance and other requirements and restrictions of the Securities Exchange Act.Act of 1934 and the regulations of the SEC promulgated thereunder as well as listing requirements of NASDAQ. Dodd-Frank includes the following provisions that affect corporate governance and executive compensation at most United States publicly traded companies, including Hanmi Financial: (1) stockholder advisory votes on executive compensation, (2) executive compensation “clawback” requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings, revenues, gains or other criteria similar to the requirements of the ARRA for TARP CPP recipients (3) enhanced independence requirements for compensation committee members, and (4) SEC authority to adopt proxy access rules which would permit stockholders of publicly traded companies to nominate candidates for election as director and have those nominees included in a company’s proxy statement.
 
The Bank
 
As a California commercial bank whose deposits are insured by the FDIC, the Bank is subject to regulation, supervision and regular examination by the DFI and by the FRB. As a member bank,FRB, as the Bank is a stockholderBank’s primary Federal regulator, and must additionally comply with certain applicable regulations of the FRBof San Francisco.Federal Reserve. Specific federal and state laws and regulations thatwhich are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, their activities relating to dividends, investments, loans, the nature and amount of and collateral for certain loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions. Supervision, examinationCalifornia banks are also subject to statutes and enforcement actionsfederal banking regulations including Regulation O and Federal Reserve Act Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to


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“insiders”, including officers directors and principal shareholders, and loans or extension of credit by these agencies are generally intendedbanks to protect depositors, creditors, borrowersaffiliates or purchases of assets from affiliates, including parent bank holding companies, except pursuant to certain exceptions and terms and conditions at least as favorable to those prevailing for comparable transactions with unaffiliated parties. Dodd-Frank expanded definitions and restrictions on transactions with affiliates and insiders under Section 23A and 23B and also lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions.
Pursuant to the FDI Act and the DIFFinancial Code, California state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries or by non-bank subsidiaries of bank holding companies. Further, pursuant to GLBA, California banks may conduct certain “financial” activities in a subsidiary to the same extent as may a national bank, provided the bank is and generally is not intended forremains “well-capitalized,” “well-managed” and in satisfactory compliance with the protection of stockholders.CRA. The Bank currently has no financial subsidiaries.
 
If, as a result of an examination, the DFI or the FRB should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DFI and the FRB, and separately the FDIC as insurer of the Bank’s deposits, have residual authority to:
•    require affirmative action to correct any conditions resulting from any violation or practice;
•    direct an increase in capital or establish specific minimum capital ratios;
•    restrict the Bank’s growth geographically, by products and services or by mergers and acquisitions;
•    enter into informal non-public or formal public memoranda of understanding or written agreements; enjoin unsafe and unsound practices and issue cease and desist orders to take corrective action;
•    remove officers and directors and assess civil monetary penalties;
•    terminate the Bank’s deposit insurance, which would also result in the revocation of the Bank’s license by the DFI; and
•    take possession and close and liquidate the Bank.
require affirmative action to correct any conditions resulting from any violation or practice;
direct an increase in capital or establish specific minimum capital ratios;
restrict the Bank’s growth geographically, by products and services or by mergers and acquisitions;
enter into informal non-public or formal public memoranda of understanding or written agreements; enjoin unsafe and unsound practices and issue cease and desist orders to take corrective action;
remove officers and directors and assess civil monetary penalties; and
take possession and close and liquidate the Bank.
As discussed above, on October 8, 2008, the Bank entered into a MOU with the Regulators to address certain issues raised in the Bank’s most recent regulatory examination by the DFI on March 10, 2008. The MOU has been superseded by theFinal Order issued by the DFI, and the Written Agreement with the FRB, each of which were issued effective as of November 2, 2009.

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Permissible Activities and SubsidiariesBrokered deposits
 
Under the California Financial Code, California banks have all the powers of a California corporation, subject to the general limitation of state bank powers under the FDI Act, to those permissible for national banks. California banks may engage in the “commercial banking business,” which generally encompasses lending, deposit-taking and all other kinds of banking business in which banks, including national banks, customarily engage in the United States. Further, California banks may form subsidiaries to engage in the many so-called “closely related to banking” or “non-banking” activities commonly conducted by national banks in operating subsidiaries. Federal law prohibits the Bank and its subsidiaries from engaging in any banking activities in which a national bank cannot engage, unless the activity is found by the FDIC not to pose a significant risk to the DIF. This prohibition does not extend to those activities in which the Bank (or a subsidiary of the Bank) is authorized under state law to engage as agent, advisor, custodian, administrator or trustee for its customer.
     In addition, under the GLBA, the Bank may engage in expanded financial activities through specially qualified “financial subsidiaries” to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be and remain well-capitalized and well-managed and in satisfactory compliance with the CRA, and would be subject to the same capital deduction, risk management and affiliate transaction rules that apply to financial subsidiaries of national banks. Generally, a financial subsidiary is permitted to engage in activities, as may a financial holding company, that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank to conduct directly within the bank. However, a bank financial subsidiary may not engage as principal in underwriting insurance (other than credit life insurance), issue annuities, or engage in real estate development or investment or merchant banking. Presently, the Bank has no financial subsidiaries.
     In September 2007, the SEC and the FRB finalized joint rules required by the Financial Services Regulatory Relief Act of 2006 to implement exceptions provided in the GLBA for securities activities that banks may conduct without registering with the SEC as a securities broker or moving such activities to a broker-dealer affiliate. The FRB’s final Regulation R provides exceptions for networking arrangements with third party broker-dealers and authorizes compensation for bank employees who refer and assist retail and high net worth bank customers with their securities, including sweep accounts to money market funds, and with related trust, fiduciary, custodial and safekeeping needs. The final rules, which became effective in 2009, are not expected to have a material effect on the current securities activities that the Bank currently conducts for customers.
Brokered deposits
     Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well-capitalized” banks are permitted to accept brokered deposits, but all banks that are not well-capitalized could be restricted to accept such deposits. The FDIC may, on acase-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. Deposits obtained from financial intermediaries, so-called “brokered deposits,” represented approximately 7.40 percent of the Bank’s total deposits as of December 31, 2009. As previously mentioned, the Bank is not currently well-capitalized and therefore is restricted from accepting brokered deposits. As of December 31, 2009,2010, in compliance with the FRB Written Agreement, the Bank had no brokered deposits were $203.5 million. All brokered deposits are currently scheduled to mature on or prior to June 30, 2010.deposits.

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Community Reinvestment Act
 
Under the Community Reinvestment Act, or CRA, as implemented by the Congress in 1977, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate


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income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. Hanmi Financial has a Compliance Committee, which oversees the planning of products, and services offered to the community, especially those aimed to serve low and moderate income communities. The Federal Reserve rated the Bank as “outstanding”“satisfactory” in meeting community credit needs under the CRA at its most recent examination for CRA performance.
 
Interstate Banking and Branching
 
Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, as amended by Dodd-Frank, bank holding companies and banks generally have the ability to acquire or merge with banks in other states, and subject to certain state restrictions, banks may also acquire or establish new branches outside their home states. Interstate branches are subject to certain laws of the states in which they are located. The Bank presently has no interstate branches.
 
Federal Home Loan Bank System
 
The Bank is a member and stockholder of the capital stock of the Federal Home Loan Bank of San Francisco. Among other benefits, each Federal Home Loan Bank (“FHLB”) serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock requirement with an initial cap of $25 million (100 percent of “membership asset value” as defined), or (ii) an activity based stock requirement (based on percentage of outstanding advances). At December 31, 2009,2010, the Bank was in compliance with the FHLB’s stock ownership requirement and our investment in FHLB capital stock totaled $30.7$27.3 million. The total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity as of December 31, 20092010 were $571.2$444.2 million and $415.9$395.1 million, respectively.
 
Federal Reserve System
 
The FRB requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily checking and non-personal time deposits). At December 31, 2009,2010, the Bank was in compliance with these requirements.
Prompt Corrective Action Regulations
The FDI Act requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator under the prompt corrective action rules generally depend upon an institution’s classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio. However, the federal banking

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Capital Standards
     At December 31, 2009, Hanmi Financial and the Bank’s capital ratios exceed the minimum percentage requirements to be deemed “adequately capitalized” institutions. See“Notes to Consolidated Financial Statements, Note 15 — Regulatory Matters.”
     Hanmi Financial and the Bank are subject to capital adequacy guidelines that incorporate both risk-based and leverage capital requirements. These capital adequacy guidelines define capital in terms of “core capital elements,” or Tier 1 capital, and “supplemental capital elements,” or Tier 2 capital. Tier 1 capital is generally defined as the sum of the core capital elements less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on available-for-sale investment securities carried at fair value. The following items are included as core capital elements: (i) common shareholders’ equity; (ii) qualifying non-cumulative perpetual preferred stock and related surplus, including trust preferred securities (but not in excess of 25 percent of Tier 1 capital); and (iii) minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital elements include: (i) allowance for loan and lease losses (but not more than 1.25 percent of an institution’s risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and (iv) term subordinated debt and intermediate-term preferred stock and related surplus. The maximum amount of supplemental capital elements that qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital.
     The minimum required ratio of qualifying total capital to total risk-weighted assets, or the total risk-based capital ratio, is 8.0 percent, at least one-half of which must be in the form of Tier 1 capital, and the minimum required ratio of Tier 1 capital to total risk-weighted assets, or the Tier 1 risk-based capital ratio, is 4.0 percent. Risk-based capital ratios are calculated to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under the risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for assets with low credit risk, such as certain U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such as business loans.
     The risk-based capital requirements also take into account concentrations of credit (i.e., relatively large proportions of loans involving one borrower, industry, location, collateral or loan type) and the risks of “non-traditional” activities (those that have not customarily been part of the banking business). The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards and authorize the regulators to review an institution’s management of such risks in assessing an institution’s capital adequacy. The risk-based capital regulations also include exposure to interest rate risk as a factor that the regulators will consider in evaluating a bank’s capital adequacy. Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from adverse movements in interest rates. While interest rate risk is inherent in a bank’s role as financial intermediary, it introduces volatility to bank earnings and to the economic value of the institution. Bank holding companies and banks engaged in significant trading activity (trading assets constituting 10 percent or more of total assets, or $1 billion or more) may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. Neither Hanmi Financial nor the Bank is currently subject to the market risk capital rules.
     Hanmi Financial and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted average total assets of at least 3.0 percent. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3.0 percent minimum, for a minimum of 4.0 percent to 5.0 percent. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. Federal regulators may, however, set higher capital requirements when a bank’s particular circumstances warrant. As of December 31, 2009, the Bank’s leverage capital ratio was 6.69 percent, and Hanmi Financial’s leverage capital ratio was 5.82 percent, both ratios exceeding regulatory minimums.

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     As of December 31, 2009, the regulatory capital guidelines and the actual capital ratios for Hanmi Financial and the Bank were as follows:
                 
  Regulatory Capital Guidelines  Actual 
  Adequately  Well  Hanmi  Hanmi 
  Capitalized  Capitalized  Bank  Financial 
Total Risk-Based Capital Ratio  8.00%  10.00%  9.07%  9.12%
Tier 1 Risk-Based Capital Ratio  4.00%  6.00%  7.77%  6.76%
Tier 1 Leverage Ratio  4.00%  5.00%  6.69%  5.82%
     The current risk-based capital guidelines that apply to Hanmi Financial and the Bank are based upon the 1988 capital accord of the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. A new international accord, referred to as Basel II, which emphasizes internal assessment of credit, market and operational risk, supervisory assessment and market discipline in determining minimum capital requirements, became mandatory for large or “core” international banks outside the United States in 2008 (total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more); is optional for others, and if adopted, must first be complied with in a “parallel run” for two years along with the existing Basel I standards. In January 2009, the Basel Committee proposed to reconsider regulatory capital standards, supervisory and risk-management requirements and additional disclosures in the final new accord in response to recent worldwide developments.
     As previously mentioned, by July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. See“Notes to Consolidated Financial Statements, Note 15 — Regulatory Matters”for further details.
Prompt Corrective Action Regulations
     Federal law requires each federal banking agency to take prompt corrective action when a bank falls below one or more prescribed minimum capital ratios. The federal banking agencies have, by regulation, defined the following five capital categories:
•“Well Capitalized”– Total risk-based capital ratio of 10.0 percent, Tier 1 risk-based capital ratio of 6.0 percent, and leverage capital ratio of 5.0 percent, and not subject to any order or written directive by any regulatory authority to meet and maintain a specific capital level for any capital measure;
•“Adequately Capitalized”– Total risk-based capital ratio of 8.0 percent, Tier 1 risk-based capital ratio of 4.0 percent, and leverage capital ratio of 4.0 percent (or 3.0 percent if the institution receives the highest rating from its primary regulator);
•“Undercapitalized”– Total risk-based capital ratio of less than 8.0 percent, Tier 1 risk-based capital ratio of less than 4.0 percent, or leverage capital ratio of less than 4.0 percent (or 3.0 percent if the institution receives the highest rating from its primary regulator);
•“Significantly Undercapitalized”– Total risk-based capital ratio of less than 6.0 percent, Tier 1 risk-based capital ratio of less than 3.0 percent, or leverage capital ratio of less than 3.0 percent; and
•“Critically Undercapitalized”– Tangible equity to total assets of less than 2.0 percent.
     A bank may be treated as though it were in the next lower capital category if, after notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as “critically undercapitalized” unless its actual capital ratio warrants such treatment.
     Undercapitalized banks are required to submit capital restoration plans and, during any period of capital inadequacy, may not pay dividends or make other capital distributions, are subject to asset growth and expansion restrictions and may not be able to accept brokered deposits. At each successively lower capital category, banks are subject to increased restrictions on operations.

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     The federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forthThese include operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.
A depository institution’s capital tier under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the other factors established by the regulations. A bank will be: (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In general,addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards are designedapplicable with respect to assistsuch institution as of the federal banking agencies in identifying and addressing problems at insuredtime it fails to comply with the plan. If a depository institutions before capital becomes impaired. If an institution fails to meet safetysubmit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and soundness standards,restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency may requiredetermines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to submit a compliance plan and institute enforcement proceedingsbe engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if an acceptable compliance plan is not submitted or the deficiency is not corrected.
     Under the Order, the Bank is required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specifiedinstitution were in the Order. By July 31, 2010,next


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lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. See “Note 15 — Regulatory Matters”for further details.levels of the institution.
 
FDIC Deposit Insurance
 
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIFDeposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to the EESA,Dodd-Frank, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000 and all non-interest-bearing transaction accounts are insured through the end of 2013.December 31, 2012. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. PursuantDue to the Federal Deposit Insurance Reform Actgreatly increased number of 2005,bank failures and losses incurred by DIF, as well as the recent extraordinary programs in which the FDIC is authorizedhas been involved to setsupport the reserve ratio forbanking industry generally, the FDIC’s DIF annually at between 1.15 percentwas substantially depleted and 1.50 percent of estimated insured deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. In an effort to restore capitalization levels and to ensure the DIF will adequately cover projected losses from future bank failures, the FDIC in October 2008, proposed a rule to alter the way in which it differentiates for risk in the risk-based assessment system and to revise deposit insurance assessment rates, including base assessment rates.
     On February 27,has incurred substantially increased operating costs. In November, 2009, the FDIC adopted a final rule modifyingrequirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the risk-based assessment systemfourth quarter of 2009 and setting initialfor all of 2010, 2011, and 2012. The Bank prepaid its assessments based on the calculations of the projected assessments at that time.
Dodd-Frank changed the base assessment rates beginning April 1, 2009, at 12for FDIC insurance assessments to 45 basis pointsa bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base alone, and duerequires the FDIC to extraordinary circumstances, extendedincrease the time within which the reserve ratio mustDIF’s reserves against future losses. This will necessitate increased deposit insurance premiums that are expected to be borne primarily by returnedinstitutions with assets of greater than $10 billion and with significant balance sheet debt obligations in addition to 1.15 percent from five to seven years.deposits liabilities.
 On May 22, 2009,
As required by Dodd-Frank, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan: (1) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35 percent (from the former minimum of 1.15 percent) and removes the upper limit on the designated reserve ratio (which was formerly capped at 1.5 percent) and consequently on the size of the fund; (2) requires that the fund reserve ratio reach 1.35 percent by September 30, 2010 (rather than 1.15 percent by the end of 2016, as formerly required); (3) requires that, in setting assessments, the FDIC offset the effect of requiring that the reserve ratio reach 1.35 percent by September 30, 2020, rather than 1.15 percent by the end of 2016 on insured depository institutions with total consolidated assets of less than $10 million; (4) eliminates the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35 percent and 1.5 percent; and (5) continues the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5 percent, but grants the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends. The FDI Act continues to require that the FDIC’s Board of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio, engage innotice-and-comment rulemaking before the beginning of the calendar year. The FDIC has set a long-term goal of getting its reserve ratio up to 2% of insured deposits by 2027.
On February 7, 2011, the FDIC approved a final rule, imposingas mandated by Dodd-Frank, changing the deposit insurance assessment system from one that is based on total domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the final rule creates a 5scorecard-based assessment system for larger banks (those with more than $10 billion in assets) and suspends dividend payments if the Deposit Insurance Fund reserve ratio exceeds 1.5 percent, but provides for decreasing


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assessment rates when the Deposit Insurance Fund reserve ratio reaches certain thresholds. Larger insured depository institutions will likely pay higher assessments to the Deposit Insurance Fund than under the old system. Additionally, the final rule includes a new adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis point special assessmentpoints on eachevery dollar of long-term, unsecured debt held as an asset that was issued by another insured depository institution (excluding debt guaranteed under the FDIC’s Temporary Liquidity Guarantee Program) to the extent that all such debt exceeds 3 percent of the other insured depository institution’s assets minus Tier 1 capital as of June 30, 2009.capital. The amount of the special assessment for any institution was limitednew rule is expected to 10 basis points times the institution’s assessment basetake effect for the second quarter 2009. The special assessment was collected on September 30, 2009.beginning April 1, 2011.
 Additionally, by participating in the transaction account guarantee program under the TLGP, banks temporarily become subject
Our FDIC insurance expense totaled $10.5 million for 2010. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to an additional assessment on deposits in excess of $250,000 in certain transaction accounts and additionally for assessments from 50 basis points to 100 basis points per annum depending on the initial maturity of the debt. Further, all FDIC-insured institutions are required to pay assessments to the FDICoutstanding FICO bonds to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal Government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined quarterly, averaged 0.0113 percent of insured deposits in fiscal 2008. These assessments will continue until the FICO bonds mature in 2017.
The FDIC may terminate a depository institution’s deposit insurance upon a finding thatFICO assessment rates, which are determined quarterly, was 0.01060% of insured deposits for the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interestfirst quarter of fiscal 2010 and 0.01040% of insured deposits for each of the bank’s depositors.last three quarters of fiscal 2010. The terminationtotal FICO assessments in 2010 was $280,000.
We are generally unable to control the amount of depositpremiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, a bank would also result in the revocation of the bank’s charter by the DFI.our common stock.

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Loans-to-One-Borrower
 
With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25 percent (and unsecured loans may not exceed 15 percent) of the bank’s stockholders’ equity, allowance for loan losses, and any capital notes and debentures of the bank.
 
Extensions of Credit to Insiders and Transactions with Affiliates
 
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to:
•    a bank or bank holding company’s executive officers, directors and principal stockholders (i.e., in most cases, those persons who own, control or have power to vote more than 10 percent of any class of voting securities);
•    any company controlled by any such executive officer, director or stockholder; or
•    any political or campaign committee controlled by such executive officer, director or principal stockholder.
a bank or bank holding company’s executive officers, directors and principal stockholders (i.e., in most cases, those persons who own, control or have power to vote more than 10 percent of any class of voting securities);
any company controlled by any such executive officer, director or stockholder; or
any political or campaign committee controlled by such executive officer, director or principal stockholder.
Such loans and leases:
•    must comply withloan-to-one-borrower limits;
•    require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
•    must be made on substantially the same terms (including interest rates and collateral) and follow


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must comply with loan-to-one-borrower limits;
credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;
•    must not involve more than the normal risk of repayment or present other unfavorable features; and
•    in the aggregate limit not exceed the bank’s unimpaired capital and unimpaired surplus.
require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;
must not involve more than the normal risk of repayment or present other unfavorable features; and
in the aggregate limit not exceed the bank’s unimpaired capital and unimpaired surplus.
California has laws and the DFI has regulations that adopt and apply Regulation O to the Bank.
 
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B, as amended by Dodd-Frank, and FRB Regulation W on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of any affiliates. Affiliates include parent holding companies, sister banks, sponsored and advised companies, financial subsidiaries and investment companies where the Bank’s affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally:
•    prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts;
•    limit such loans and investments to or in any affiliate individually to 10 percent of the Bank’s capital and surplus;
•    limit such loans and investments to all affiliates in the aggregate to 20 percent of the Bank’s capital and surplus; and
•    require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the Bank as those prevailing for comparable transactions with non-affiliated parties.
prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts;
limit such loans and investments to or in any affiliate individually to 10 percent of the Bank’s capital and surplus;
limit such loans and investments to all affiliates in the aggregate to 20 percent of the Bank’s capital and surplus; and
require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the Bank as those prevailing for comparable transactions with non-affiliated parties.
Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDI Act’s prompt corrective action regulations and the supervisory authority of the federal and state banking agencies discussed above.

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Dividends
 
Holders of Hanmi Financial common stock and preferred stock are entitled to receive dividends as and when declared by the Board of Directors out of funds legally available therefore under the laws of the State of Delaware. Delaware corporations such as Hanmi Financial may make distributions to their stockholders out of their surplus, or out of their net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. However, dividends may not be paid out of a corporation’s net profits if, after the payment of the dividend, the corporation’s capital would be less than the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.
 
The FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends. In a February 2009 guidance letter, the FRB directed that a bank holding company should inform the FRB if it is planning to pay a dividend that exceeds earnings for a given quarter or that


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could affect the bank’s capital position in an adverse way. Further, the FRB’s position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company’s ability to pay dividends. Hanmi Financial has agreed with the FRB that it will not declare or pay any dividends or make any payments on its trust preferred securities or any other capital distributions without the prior written consent of the FRB.
 
The Bank is a legal entity that is separate and distinct from its holding company. Hanmi Financial receives income through dividends paid by the Bank. Subject to the regulatory restrictions described below, future cash dividends by the Bank will depend upon management’s assessment of future capital requirements, contractual restrictions and other factors.
 
The powers of the Board of Directors of the Bank to declare a cash dividend to its holding company is subject to California law as set forth in the Financial Code, which restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the DFI, in an amount not exceeding the greatest of: 1) retained earnings of the bank; 2) the net income of the bank for its last fiscal year; or 3) the net income of the bank for its current fiscal year. Due to the Bank’s retained deficit of $53.5 million as of December 31, 2008 and a net loss for years ended 20082009 and 2009,2010, the Bank is restricted under California lawthe Financial Code from making dividends to Hanmi Financial without the prior approval of the DFI. See“Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities —– Dividends”for a further discussion of restrictions on the Bank’s ability to pay dividends to Hanmi Financial.
 
Under the terms of itsthe FRB Written Agreement and the DFI Final Order, the Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the FRB and DFI, and the Bank and Hanmi must obtain prior approval from the FRB and DFI prior to declaring and paying dividends.
 
Bank regulators also have authority to prohibit a bank from engaging in business practices considered to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors, that regulators could assert that the payment of dividends or other payments might, under certain circumstances, be an unsafe or unsound practice, even if technically permissible.

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Bank Secrecy Act and USA PATRIOT Act
 
The Bank Secrecy Act (“BSA”) is a disclosure law that forms the basis of the Federal Government’s framework to prevent and detect money laundering and to deter other criminal enterprises. Under the BSA, financial institutions such as the Bank are required to maintain certain records and file certain reports regarding domestic currency transactions and cross-border transportations of currency. Among other requirements, the BSA requires financial institutions to report imports and exports of currency in the amount of $10,000 or more and, in general, all cash transactions of $10,000 or more. The Bank has established a BSA compliance policy under which, among other precautions, the Bank keeps currency transaction reports to document cash transactions in excess of $10,000 or in multiples totaling more than $10,000 during one business day, monitors certain potentially suspicious transactions such as the exchange of a large number of small denomination bills for large denomination bills, and scrutinizes electronic funds transfers for BSA compliance. The BSA also requires that financial institutions report to relevant law enforcement agencies any suspicious transactions potentially involving violations of law.


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The USA PATRIOT Act and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws in response to the terrorist attacks in September 2001. The Bank has adopted additional comprehensive policies and procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have serious reputation consequences for us and the Bank.

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Consumer Laws
 
The Bank and Hanmi Financial are subject to many federal and statemust comply with numerous consumer protection lawsstatutes and implementing regulations, prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition, including:
The Home Ownership and Equity Protection Act of 1994 requires extra disclosures and consumer protections to borrowers from certain lending practices, such as practices deemed to be “predatory lending.”
Privacy policies are required by federal and state banking laws and regulations that limitincluding the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. The federal bank regulatory agencies have adopted customer information security guidelines for safeguarding confidential, personal customer information. The guidelines require each financial institution, underCRA, the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access or use of such information that could result in substantial harm or inconvenience to any customer.
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and gives consumers more control of their credit data.
Thethe Equal Credit Opportunity Act, generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act, requires that credit terms be disclosed in a meaningful and consistent way so that consumers may compare credit terms more readily and knowledgeably.
Thethe Fair Housing Act, regulates many lending practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.
The CRA requires insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities; directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices and further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. In its most recently released public reports, from September 2008, the Bank received an “outstanding” rating.
The Home Mortgage Disclosure Act, includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
The Real Estate Settlement Procedures Act, requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks.
The National Flood Insurance Act, requires homes in flood-prone areas with mortgages from a federally regulated lender to have flood insurance.
Thethe Americans with Disabilities Act and various federal and state privacy protection laws. Effective July 1, 2010, a new federal banking rule under the Electronic Fund Transfer Act prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines and one-time debit card transactions, submit to certain exceptions, unless a consumer consents, or opts in, conjunctionto the overdraft service for those type of transactions. Noncompliance with similar California legislation, requires employers with 15these laws could subject the Bank to lawsuits and could also result in administrative penalties, including, fines and reimbursements. The Bank and Hanmi Financial are also subject to federal and state laws prohibiting unfair or more employeesfraudulent business practices, untrue or misleading advertising and all businesses operating “commercial facilities” or “public accommodations” to accommodate disabled employees and customers.

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unfair competition.
 
These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.
 
Dodd-Frank provides for the creation of the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve. This bureau is a new regulatory agency for United States banks. It will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, and contains provisions on mortgage-related matters such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. The bureau’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining banks consumer transactions, and enforcing rules related to consumer financial products and services. It is anticipated that the bureau will begin regulating activities in 2011. Banks with less than $10 billion in assets, such as the Bank, will continue to be examined for compliance by their primary federal banking agency.
Regulation of Subsidiaries
 
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. Chun-Ha and All World are subject to the licensing and supervisory authority of the California Commissioner of Insurance.

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ITEM 1A. RISK FACTORSGoing Concern
 
As previously mentioned, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In order to comply with the Final Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank was required to increase its contributed equity capital by not less than an additional $100 million and maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent. In addition, the Bank was also required to maintain a ratio of tangible stockholders’ equity to total tangible assets of at least 9.5 percent at December 31, 2010 and until the Final Order is terminated. As a result of the successful completion of the registered rights and best efforts offering in July 2010, the capital contribution requirement set forth in the Final Order was satisfied. However, the tangible capital ratio requirement set for in the Final Order has not been satisfied at December 31, 2010. Further, should our asset quality continue to erode and require significant additional provision for credit losses, resulting in added future net operating losses at the Bank, or should we otherwise fail to be profitable, our capital levels will additionally decline requiring the raising of more capital than the amount currently required to satisfy our agreements with our regulators. An inability to raise additional capital when needed or comply with the terms of the Final Order or Written Agreement, raises substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.
As set forth above, on May 25, 2010, we entered into a definitive securities purchase agreement with Woori and are currently awaiting final regulatory approval for the applications filed by Woori in connection with the transactions contemplated by the securities purchase agreement. We intend to inject a substantial portion of the net proceeds from the Woori transaction as new capital into Hanmi Bank. However, we cannot provide assurance that we will be successful in consummating the transaction with Woori.
ITEM 1A.  RISK FACTORS
Together with the other information on the risks we face and our management of risk contained in this Report or in our other SEC filings, the following presents significant risks that may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also adversely impact our financial condition, business operations and results of operations.
 
Risks Relating to our Business and Ownership of Our Common Stock
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.Our independent registered public accounting firm in their audit report for fiscal year 20092010 has expressed substantial doubt about our ability to continue as a going concern. Continued operations may depend on our ability to comply with the terms of the Final Order and Written Agreement and the financing or other capital required to do so may not be available or may not be available on acceptable terms. Our audited financial statements were prepared under the assumption that we will continue our


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operations on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a going concern, our shareholdersstockholders will lose some or all of their investment in Hanmi Financial.us.
 We, and our independent registered public accounting firm, have identified a material weakness in our internal control over financial reporting.Management and our independent registered public accountants have identified a material weakness in our internal control over financial reporting related to the allowance for loan losses. The identified deficiency that was considered a material weakness related to management’s policies and procedures for the monitoring and timely evaluation of and revision to management’s approach for assessing credit risk inherent in the Company’s loan portfolio to reflect changes in the economic environment.
     While we are taking steps to address the identified material weakness and prevent additional material weaknesses from occurring, there is no guarantee that these steps will be sufficient to remediate the identified material weakness or prevent additional material weaknesses from occurring. If we fail to remediate the material weakness, or if additional material weaknesses are discovered in the future, we may fail to meet our future reporting obligations and our financial statements may contain material misstatements. Any such failure could also adversely affect the results of the periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting.
Our operations and regulatory capital needs require us to enhance our capital position in the near term and may also require us to raise additional capital in the future, but that capital may not be available or may not be on terms acceptable to us when it is needed.future.We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. As part of the recently issued DFI Final Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. The Bank will beis required to maintain a ratio of tangible shareholder’sstockholder’s equity to total tangible assets as follows:
   
  Ratio of Tangible Shareholder’s
Date Equity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010 Not Less Than 9.0 Percent
From December 31, 2010 and Until the Final Order is Terminated Not Less Than 9.5 Percent
At December 31, 2010, the Bank had a tangible stockholders’ equity to total tangible assets ratio of 8.59%. Accordingly, we are not in compliance with the Final Order. Pursuant to the Written Agreement, we are also required to increase and maintain sufficient capital at the Company and at Hanmi Bank that is satisfactory to the Federal Reserve Bank. We have also committed to the FRBFederal Reserve Bank to adopt a consolidated capital plan to augment and maintain a sufficient capital position. Our existing capital resources may not satisfy our capital requirements for the foreseeable future and may not be sufficient to offset any problem assets. Even if we are successful in completing the transaction with Woori, we may still need to raise additional capital in the future to support our operations. If the transaction with Woori is not consummated, we will need to find alternative sources of capital. Further, should our asset quality erode and require significant additional provision for credit losses, resulting in consistent net operating losses at theHanmi Bank, our capital levels will decline and we will need to raise capital to satisfy our agreements with the Regulators.regulators and any future regulatory orders or agreements we may be subject to.

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Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital on terms acceptable to us. Inability to raise additional capital when needed, raises substantial doubt about our ability to continue as a going concern.
     On June 12, 2009, and subsequently amended on July 31, 2009 and September 28, 2009, we entered into a Securities Purchase Agreement with Leading Investment & Securities Co., Ltd., a Korean securities broker-dealer (“LIS”), providing for the sale of 8,079,612 unregistered shares of Hanmi Financial common stock to LIS at a purchase price of $1.37 per share, resulting in gross proceeds of $11.1 million. The initial phase of this transaction was completed on September 4, 2009, resulting in an initial investment by LIS of $6.8 million. It is not expected that the remainder of this transaction will be completed. Inability to raise additional capital through other sources when needed, raises substantial doubt about our ability to continue as a going concern. In addition, if we were to raise additional capital through the issuance of additional shares, our stock price could be adversely affected, depending on the terms of any shares we were to issue.
 We are restricted from accepting brokered deposits and offering interest rates on deposits that are substantially higher than the prevailing rates in our market. Due to the Bank’s total risk-based capital ratio that was 9.07 percent as of December 31, 2009 coupled with the regulatory enforcement action with specific capital provisions, the Bank is considered to be “adequately capitalized” under the regulatory framework for prompt corrective action. Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. Accordingly, we are restricted from accepting brokered deposits and offering interest rates on deposits that are significantly higher than the prevailing rates in our market. Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature.
The Bank is subject to additional regulatory oversight as a result of a formal regulatory enforcement action issued by the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions.The Bank was subject to an informal supervisory agreement (a MOU) with the FRB of San Francisco and the California Department of Financial Institutions to address certain issues raised in the Bank’s regulatory examination by the DFI on March 10, 2008. The material terms of the MOU are discussed in“Notes to Consolidated Financial Statements, Note 15 - - Regulatory Matters.”As a result of the Bank’s recently completed examination by the FRB and DFI, onOn November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order from the DFI.California Department Financial Institutions. On the same date, Hanmi Financialwe and the Bank entered into the Written Agreement with the FRB. The Order and the Agreement contain substantially similar provisions which are described in greater detail in this“Notes to Consolidated Financial Statements, Note 15 — Regulatory Matters.”Federal Reserve Bank. Under the terms of the Final Order and the Written Agreement, which were issued and became effective on November 2, 2009, theHanmi Bank is required to implement certain corrective and remedial measures under strict time frames and we can offer no assurance that theHanmi Bank will be able to meet the deadlines imposed by the regulatory orders. The Order and Agreement will remain in effect until modified, terminated, suspendedorders or set aside by the FRB and DFI, as applicable.any extensions of those deadlines.
 
These regulatory actions will remain in effect until modified, terminated, suspended or set aside by the FRBFederal Reserve Bank or the DFI,California Department of Financial Institutions, as applicable. Failure to comply with the terms of these regulatory actions within the applicable time frames provided or any extended


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deadlines could result in additional orders or penalties from the FRBFederal Reserve Bank and the DFI,California Department of Financial Institutions, which could include further restrictions on our business, assessment of civil money penalties on us and the Bank, as well as our respective directors, officers and other affiliated parties, termination of deposit insurance, removal of one or more officersand/or directors, the liquidation or other closure of the Bank and our ability to continue as a going concern. Generally, these enforcement actions will be lifted only after subsequent examinations substantiate complete correction of the underlying issues. Therefore they are not expected to be lifted if and when the Woori transaction is consummated.
 
We may become subject to additional regulatory restrictions in the event that our regulatory capital levels continuewere to decline.Although we and the Bank both qualified as “adequately capitalized” under the We cannot provide any assurance that our total risk-based capital ratio or other regulatory framework for prompt corrective action as of December 31, 2009, the additional regulatory restrictions resulting from thecapital ratios will not decline in our capital category, or any further decline, could have a material adverse effect on our business, financial condition, results of operations, cash flows and/orthe future prospects and our abilitysuch that Hanmi Bank may be considered to continue as a going concern.

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be “undercapitalized” for regulatory purposes. If a state member bank, like Hanmi Bank, is classified as undercapitalized, the bank is required to submit a capital restoration plan to the Federal Reserve.Reserve Bank. Pursuant to FDICIA,Federal Deposit Insurance Corporation Improvement Act, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the Federal Reserve Bank of a capital restoration plan for the bank. Furthermore, if a state non-member bank is classified as undercapitalized, the FDIC may take certain actionsPursuant to correct the capital positionSection 38 of the bank; ifFederal Deposit Insurance Act and Federal Reserve Board Regulation H, Hanmi Bank was previously required to submit a capital restoration plan to the Federal Reserve Bank that must be guaranteed by the Company as a result of the previous decline in the Bank’s capital position. Hanmi Bank is also subject to other restrictions pursuant to Section 38 and Federal Reserve Board Regulation H, including restrictions on dividends, asset growth and expansion through acquisitions, branching or new lines of business and is prohibited from paying certain management fees until its improving capital ratios are deemed satisfactory by its regulators. The Federal Reserve Bank also has the discretion to impose certain other corrective actions pursuant to Section 38 and Regulation H.
If a bank is classified as significantly undercapitalized, or critically undercapitalized, the Federal Reserve Bank would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers. These actions may also be taken by the Federal Reserve Bank at any time on an undercapitalized bank if it determines those restrictions are necessary. If a bank is classified as critically undercapitalized, FDICIAin addition to the foregoing restrictions, the Federal Deposit Insurance Corporation Improvement Act prohibits payment on any subordinated debt and requires the bank to be placed into conservatorship or receivership within 90 days, unless the Federal Reserve Bank determines that other action would better achieve the purposes of FDICIAthe Federal Deposit Insurance Corporation Improvement Act regarding prompt corrective action with respect to undercapitalized banks.
 Under FDICIA, banks may be restricted in their ability to accept broker deposits, depending on their capital classification. “Well-capitalized” banks are permitted to accept broker deposits, but all banks that are not well-capitalized could be restricted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized, such as the Bank, to accept broker deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. These restrictions could materially and adversely affect our ability to access lower costs funds and thereby decrease our future earnings capacity.
     Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Our inability to obtain regulatory consent to accept or renew brokered deposits could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects and our ability to continue as a going concern.
Finally, the capital classification of a bank affects the frequency of examinations of the bank, the deposit insurance premiums paid by such bank, and the ability of the bank to engage in certain activities, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flowsand/or future prospects and our ability to continue as a going concern. Under FDICIA, the FDIC
The Bank is requiredcurrently restricted from paying dividends to conduct a full-scope, on-site examinationus and we are restricted from paying dividends to stockholders and from making any payments on our trust preferred securities. The primary source of every bank at least once every twelve months. An exceptionour income from which we pay our obligations and distribute dividends to this ruleour stockholders is made, however, that provides that banks (i) with assets of less than $100.0 million, (ii) are categorized as “well-capitalized,” (iii) were found to be well managed and its composite rating was outstanding and (iv) has not been subject to a change in control during the last twelve months, need only be examined by the FDIC once every 18 months.
We may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed.We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from the turmoilreceipt of dividends from Hanmi Bank. The availability of dividends from Hanmi Bank is limited by various statutes and regulations. Hanmi Bank currently has a retained earnings deficit and has suffered net losses in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors, which may diminish our ability to raise additional capital.

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     Our ability2010, 2009 and 2008, largely caused by provision for credit losses and goodwill impairments. As a result, the California Financial Code does not provide authority for Hanmi Bank to raise additional capital, if needed,declare a dividend to us, with or without Commissioner approval. In addition, Hanmi Bank is prohibited from paying dividends to us unless it receives prior regulatory approval. Furthermore, we agreed that we will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, andnot pay any dividends or make any payments on our financial performance. Accordingly,outstanding $82.4 million of trust preferred securities or any other capital distributions without the prior written consent of the Federal Reserve Bank. We began to defer interest payment on our trust preferred securities commencing with the interest payment that was due on January 15, 2009. If we cannot be assureddefer interest payments for more than 20 consecutive quarters under any of our abilityoutstanding trust preferred instruments, then we would be in default under such trust preferred arrangements and the amounts due under the agreements pursuant to raise additional capital if needed or on terms acceptable to us. Inability to raise additional capital when needed, raises substantial doubt aboutwhich we issued our ability to continue as a going concern.trust preferred securities would be immediately due and payable.
 
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.Liquidity is essential to our business. An inability to raise funds through deposits, including brokered deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us.
For example, the Federal Reserve Bank’s lending to Hanmi Bank is limited as provided for in Regulation A (12 C.F.R. 201). Currently, the Federal Reserve Bank will not lend to Hanmi Bank for more than 60 days in any 120 day period and Hanmi Bank must maintain a minimum of $20.7 million to offset the risk from Hanmi Bank’s non-Fedwire activity. In addition, due to continued deterioration in credit and capital, Hanmi Bank’s maximum borrowing capacity from the Federal Home Loan Bank has been reduced from 20% of total assets to 15% of total assets and the maximum term has been reduced from 84 to 12 months.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as a result of the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.markets.
 
We may be required to make additional provisions for credit losses and charge off additional loans in the future, which could adversely affect our results of operations and capital levels. During the year ended December 31, 2010, we recorded a $122.5 million provision for credit losses and gross charge-offs of $131.8 million in loans, offset by recoveries of $9.9 million. For the year ended December 31, 2010, we recognized net losses of $88.0 million. There has been a general slowdown in the economy and in particular, in the housing market in areas of Southern California where a majority of our loan customers are based, along with high unemployment. This slowdown reflects declining prices and excess inventories of homes to be sold, which has contributed to a financial strain on homebuilders and suppliers, as well as an overall decrease in the collateral value of real estate securing loans. As of December 31, 2010, we had $856.5 million in commercial real estate, construction and residential property loans. Continuing deterioration in the real estate market generally and in the residential property and construction segment in particular, along with high levels of unemployment, could result in additional loan charge-offs and provisions for credit losses in the future, which could have an adverse effect on our net income and capital levels.
Our allowance for loan losses may not be adequate to cover actual losses. A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors and related parties may


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fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. We maintain an allowance for loan losses to provide for loan defaults and non-performance. The allowance is also increased for new loan growth. While we believe that our allowance for loan losses is adequate to cover inherent losses, we cannot assure you that we will not increase the allowance for loan losses further or that our regulators will not require us to increase this allowance.
Our Southern California business focus and economic conditions in Southern California could adversely affect our operations. Hanmi Bank’s operations are located primarily in Los Angeles and Orange counties. Because of this geographic concentration, our results depend largely upon economic conditions in these areas. The continued deterioration in economic conditions in Hanmi Bank’s market areas, continued high unemployment or a significant natural or man-made disaster in these market areas, could have a material adverse effect on the quality of Hanmi Bank’s loan portfolio, the demand for its products and services and on its overall financial condition and results of operations.
Our concentration in commercial real estate loans located primarily in Southern California could have adverse effects on credit quality. As of December 31, 2010, Hanmi Bank’s loan portfolio included commercial real estate and construction loans, primarily in Southern California, totaling $793.9 million, or 35.0 percent of total gross loans. Because of this concentration, a continued deterioration of the Southern California commercial real estate market could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans. Among the factors that could contribute to such a continued decline are general economic conditions in Southern California, interest rates and local market construction and sales activity.
Our concentration in commercial and industrial loans could have adverse effects on credit quality. As of December 31, 2010, Hanmi Bank’s loan portfolio included commercial and industrial loans, primarily in Southern California, totaling $1.36 billion, or 60.0 percent of total gross loans. Because of this concentration, a continued deterioration of the Southern California economy could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans, which could have adverse consequences for Hanmi Bank.
Our concentrations of loans in certain industries could have adverse effects on credit quality. As of December 31, 2010, Hanmi Bank’s loan portfolio included loans to: 1) lessors of non-residential buildings totaling $379.0 million, or 16.7% of total gross loans; 2) borrowers in the accommodation industry totaling $321.7 million, or 14.2 percent of total gross loans; and 3) gas stations totaling $287.6 million, or 12.7 percent of total gross loans. Most of these loans are in Southern California. Because of these concentrations of loans in specific industries, a continued deterioration of the Southern California economy overall, and specifically within these industries, could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans, which could have material and adverse consequences for Hanmi Bank.
The Woori investment is subject to conditions to closing and may not close at all. The transactions contemplated by the securities purchase agreement with Woori is subject to numerous closing conditions, many of which are outside of our control and might not be fulfilled. The transaction with Woori must be approved by certain governmental agencies, including the Federal Reserve Board, the California Department of Financial Institutions (which has approved Woori’s application) and the Korean Financial Services Commission, which could delay or prevent the closing. We cannot assure you that the investment by Woori in us will close


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in the near term or at all. If we fail to consummate the transactions contemplated by the securities purchase agreement and we otherwise fail to raise sufficient capital to satisfy the terms of the Final Order and the Written Agreement, further regulatory action could be taken against us and Hanmi Bank and we may not be able to continue as a going concern. Failure to comply with the terms of the regulatory orders within the applicable time frames provided could result in additional orders or penalties from the Federal Reserve Bank, the Federal Deposit Insurance Corporation and the California Department of Financial Institutions, which could include further restrictions on our business, assessment of civil money penalties on us and Hanmi Bank, as well as our respective directors, officers and other affiliated parties, termination of deposit insurance, removal of one or more officersand/or directors and the liquidation or other closure of Hanmi Bank.
Even if we were to consummate the transactions contemplated by the securities purchase agreement with Woori, we may still need to raise additional capital in the future and there can be no assurance that we would be able to do so in the amounts required and in a timely manner, or at all. Failure to raise sufficient capital could have a material adverse effect on our business, financial conditions and results of operations and subject us to further regulatory restrictions or penalties.
Existing stockholders will experience substantial dilution from the Woori investment or other capital raising transactions. The Woori investment will involve the issuance of a substantial number of shares of our common stock. If the Woori investment is completed, current stockholders may have less than a majority interest in us. If we raise capital from other sources, we may also issue a substantial number of shares of our common stock or securities convertible into common stock. As a result of the sale of such a large number of shares of our common stock, the market price of our common stock could decline and we could experience dilution to earnings and book value.
In the future we may decide or be required to raise additional funds, which would cause then existing stockholders to experience dilution. Even if we complete the Woori investment, we may decide to raise additional funds through public or private debt or equity financings for a number of reasons, including in response to regulatory or other requirements to meet our liquidity and capital needs, to finance our operations and business strategy or for other reasons. If we raise funds by issuing equity securities or instruments that are convertible into equity securities, the percentage ownership of our existing stockholders will further be reduced, the new equity securities may have rights, preferences and privileges superior to those of our common stock, and the market of our common stock could decline.
Even after the Woori investment or any other capital raising transactions, we may still be subject to continued regulatory scrutiny. Even if we complete the Woori investment (or other alternative capital raising transactions), we cannot assure you whether or when the regulatory agreements and orders we have entered into will be lifted or terminated. Even if they are lifted or terminated in whole or in part, we may still be subject to supervisory enforcement actions that restrict our activities.
If the Woori investment is completed, we may have a controlling stockholder who would be able to control certain corporate matters. If the transactions with Woori are consummated, Woori may become a controlling shareholder of ours. As a result, and subject to compliance with applicable law and our charter documents (subject to the limitations contained in our securities purchase agreement with Woori), Woori may have voting control of us, and, with control, would be able to (i) elect all of the members of our Board of Directors; (ii) adopt amendments to our charter documents; and (iii) subject to the limitations set forth in the securities purchase agreement regarding a cash-out merger, control the vote on any merger, sale of assets or other fundamental corporate transaction of the Company or Hanmi Bank or the issuance of additional equity securities or incurrence of debt, in each case without the approval of our other stockholders. It will also be


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impossible for a third party, other than Woori, to obtain control of us through purchases of our common stock not beneficially owned or controlled by Woori, which could have a negative impact on our stock price. Furthermore, in pursuing its economic interests, Woori may make decisions with respect to fundamental corporate transactions that may be different than the decisions of other stockholders. In addition, under the rules applicable to NASDAQ, if another company owns more than 50% of the voting power of a listed company, that company is considered a “controlled company” and exempt from rules relating to independence of the Board of Directors and the compensation and nominating committees. If the Woori investment is completed, we may be a controlled company. Accordingly, we would be exempt from certain corporate governance requirements and our stockholders may not have all the protections that these rules are intended to provide.
If the Woori investment is completed, the views of Woori’s ownership stake may adversely affect us. Woori is also subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Korean banking authorities and U.S. regulatory authorities as a result of its 100% indirect controlling interest in Woori America Bank headquartered in New York. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action in the U.S. and in Korea against Woori and its affiliates. The views of Woori regarding possible new businesses, strategies, acquisitions, divestitures or other initiatives, including compliance and risk management processes, may differ from ours. Additionally, Woori America Bank has branches in California and competes with Hanmi Bank for customers. Woori may take actions with respect to Woori America Bank’s business in California or elsewhere that could be disadvantageous to Hanmi Bank and to stockholders of Hanmi Financial other than Woori. If the transaction with Woori are consummated, this may delay or hinder us from pursuing initiatives or cause us to incur additional costs and subject us to additional oversight. Also, to the extent any directors, officers or employees serve us and Woori at the same time that could create or create the appearance of, conflicts of interest.
Difficult economic and market conditions have adversely affected our industry.Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
 •    We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
 
 •    The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions


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might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process.
 •    We may be required to pay significantly higher FDICFederal Deposit Insurance Corporation premiums because market developments have significantly depleted the deposit insurance fund of the FDICFederal Deposit Insurance Corporation and reduced the ratio of reserves to insured deposits.
 
 •    Our liquidity could be negatively impacted by an inability to access the capital markets, unforeseen or extraordinary demands on cash, or regulatory restrictions, which could, among other things, materially and adversely affect our business, results of operations and financial condition and our ability to continue as a going concern.

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If current levels of marketInstability in domestic and international financial markets could adversely affect us. Global capital markets and economic conditions are still unstable and the resulting disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business,has been particularly acute in the financial condition and results of operations and prospects as a going concern.sector. Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system. On October 3, 2008, President Bush signed into law the EESA and on February 17, 2009, President Obama signed the ARRA in response to the current crisis in the financial sector. The Treasury and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system. There can be no assurance however, as to the actual impact that the EESA and the ARRAregulatory initiatives will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA and the ARRAregulatory initiatives to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to capital, liquidity, the financial condition of our borrowers and credit or the value of our securities.
 
U.S. and international financial markets and economic conditions could adversely affect our liquidity, results of operations and financial condition.Global capital markets and economic conditions continue to be adversely affected and the resulting disruption has been particularly acute in the financial sector. Our capital ratios have been adversely affected and the cost and availability of funds may be adversely affected by illiquid credit markets and the demand for our products and services may decline as our borrowers and customers realize the impact of an economic slowdown and recession. In addition, the severity and duration of these adverse conditions is unknown and may exacerbate our exposure to credit risk and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Accordingly, continued turbulence in the U.S. and international markets and economy may adversely affect our liquidity, financial condition, results of operations and profitability.
We have recently experienced an unexpected loss insuccess depends on our key management.Our Chief Credit Officer passed away in October 2009. Our success depends in large part on our ability to attract key people who are qualified and have knowledge and experience in the banking industry in our markets and to retain those people to successfully implement our business objectives. The unexpected loss of services of one or more of our key personnel or the inability to maintain consistent personnel in management could have a material adverse impact on our business and results of operations.
 
WeOur interest expense may be required to make additional provisions for credit losses and charge off additional loans inincrease following the future, which could adversely affect our resultsrepeal of operations and capital levels.the Federal prohibition on payment of interest on demand deposits. DuringThe federal prohibition on the year ended December 31, 2009, we recordedability of financial institutions to pay interest on demand deposit accounts was repealed as part of the Dodd-Frank Act. As a $196.4 million provisionresult, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for credit lossesclients. We do not yet know what interest rates other institutions may offer. Our interest expense will increase and charged off $125.4 million in loans, net of $2.8 million in recoveries. There has been a general slowdown in the economy and in particular, in the housing market in areas of Southern California where a majority of our loan customers are based. This slowdown reflects declining prices and excess inventories of homes to be sold, which has contributed to a financial strain on homebuilders and suppliers, as well as an overall decrease in the collateral value of real estate securing loans. As of December 31, 2009, we had $1.0 billion in commercial real estate, construction and residential property loans. Continuing deterioration in the real estate market generally and in the residential property and construction segment in particular could result in additional loan charge-offs and provisions for credit losses in the future, which could have an adverse effect on our net income and capital levels.
Our allowance for loan losses may not be adequateinterest margin will decrease if the Bank begins offering interest on demand deposits to cover actual losses.A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses thatattract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition, net income and results of operations and cash flows. We maintain an allowance for loan losses to provide for loan defaults and non-performance. The allowance is also appropriately increased for new loan growth. While we believe that our allowance for loan losses is adequate to cover inherent losses, we cannot assure you that we will not increase the allowance for loan losses further or that our regulators will not require us to increase this allowance.operations.

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Changes in economic conditions could materially hurt our business.Our business is directly affected by changes in economic conditions, including finance, legislative and regulatory changes and changes in government monetary and fiscal policies and inflation, all of which are beyond our control. In 2009, theThe economic conditions in the markets in which many of our borrowers operate have deteriorated and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels.
If economic conditions continue to deteriorate, it may exacerbate the following consequences:
 •    problem assets and foreclosures may increase;
 
 •    demand for our products and services may decline;
 
 •    low cost or non-interest bearing deposits may decrease; and


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 •    collateral for loans made by us, especially real estate, may decline in value.
Our Southern California business focus and economic conditions in Southern California could adversely affect our operations.The Bank’s operations are located primarily in Los Angeles and Orange counties. Because of this geographic concentration, our results depend largely upon economic conditions in these areas. The continued deterioration in economic conditions in the Bank’s market areas, or a significant natural or man-made disaster in these market areas, could have a material adverse effect on the quality of the Bank’s loan portfolio, the demand for its products and services and on its overall financial condition and results of operations.
Our concentration in commercial real estate loans located primarily in Southern California could have adverse effects on credit quality.As of December 31, 2009, the Bank’s loan portfolio included commercial real estate and construction loans, primarily in Southern California, totaling $965.9 million, or 34.2 percent of total gross loans. Because of this concentration, a continued deterioration of the Southern California commercial real estate market could exacerbate adverse consequences for the Bank. Among the factors that could contribute to such a continued decline are general economic conditions in Southern California, interest rates and local market construction and sales activity.
Our concentration in commercial and industrial loans could have adverse effects on credit quality.As of December 31, 2009, the Bank’s loan portfolio included commercial and industrial loans, primarily in Southern California, totaling $1.71 billion, or 60.8 percent of total gross loans. Because of this concentration, a continued deterioration of the Southern California economy could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans, which could have adverse consequences for the Bank.
Our concentrations of loans in certain industries could have adverse effects on credit quality.As of December 31, 2009, the Bank’s loan portfolio included loans to: 1) lessors of non-residential buildings totaling $417.3 million, or 14.8 percent of total gross loans; 2) borrowers in the accommodation industry totaling $413.4 million, or 14.7 percent of total gross loans; and 3) gas stations totaling $343.1 million, or 12.2 percent of total gross loans. Most of these loans are in Southern California. Because of these concentrations of loans in specific industries, a continued deterioration of the Southern California economy overall, and specifically within these industries, could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans, which could have adverse consequences for the Bank.
If a significant number of borrowers, guarantors or related parties fail to perform as required by the terms of their loans, we could sustain losseslosses..A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors or related parties may fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that management believes are appropriate to limit this risk by assessing the likelihood of non-performance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on our financial condition and results of operations. As described herein, theThe Bank substantially increased its provision for credit losses in the years ended December 31 2010, 2009 2008 and 2007,2008, as compared to previous years, as a result of increases in historical loss factors, increased charge-offs and migration of more loans into more adverse risk categories.

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Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of risk from a downturn in our real estate markets.A downturn in ourthe real estate markets could hurt our business because many of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and national disasters particular to California. Substantially all of our real estate collateral is located in California. If real estate values continue to further decline, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer material losses on defaulted loans.
 
We are exposed to risk of environmental liabilities with respect to properties to which we take title.In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation andclean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate orclean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be materially and adversely affected.
 
Our earnings are affected by changing interest ratesrates..Changes in interest rates affect the level of loans, deposits and investments, the credit profile of existing loans, the rates received on loans and securities and the rates paid on deposits and borrowings. Significant fluctuations in interest rates may have a material adverse effect on our financial condition and results of operations. The current historically low interest rate environment resultedcaused by the response to the financial market crisis and the global economic recession in 2008 may affect our operating earnings negatively.
 We must manage our funding resources to enable us to meet our ongoing operations costs and our deposit and borrowing obligations as they come due.Liquidity is essential to our business and any inability to raise funds could have a substantial negative effect on our liquidity. Sources of funds to meet our operating needs and obligations include deposits; interest and fee income on loans and other products and services; earnings on our investment securities portfolio; revenue from the sale or securitization of loans; new capital infusions and borrowings, such as from the FHLB. Adverse regulatory developments or a decline in our financial condition or a decline in financial market conditions generally, such as the recent turmoil faced by depository financial institutions in the domestic and worldwide credit markets, or a decline in the financial condition of the FHLB, could have a significant impact on our ability to meet our liquidity needs, including our ability to attract deposits in an increasingly competitive environment. We cannot forecast if or when market liquidity conditions will improve from current stresses, although it is our expectation that the existing turmoil in the financial and credit markets may continue to affect its performance at least throughout 2010.
The short-term and long-term impact of the new Basel II capital standards and the forthcoming new capital rules to be proposed for non-Basel II U.S. banks is uncertain.As a result of the recent deterioration in the global credit markets and the potential impact of increased liquidity risk and interest rate risk, it is unclear what the short-term impact of the implementation of Basel II may be or what impact a pending alternative standardized approach to the Basel II option for non-Basel II U.S. banks may have on the cost and availability of different types of credit and the potential compliance costs of implementing the new capital standards.
We are subject to government regulations that could limit or restrict our activities, which in turn could adversely affect our operationsoperations..The financial services industry is subject to extensive federal and state supervision and regulation. Significant new laws, including the recent enactment of Dodd-Frank Act, changes in existing laws, or repeals of existing laws may cause our results to differ materially.materially from historical and


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projected performance. Further, federal monetary policy, particularly as implemented through the Federal Reserve System,Board, significantly affects credit conditions and a material change in these conditions could have a material adverse affectimpact on our financial condition and results of operations.
Additional requirements imposed by the Dodd-Frank Act and other regulations could adversely affect us. Recent government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory requirements, including expansive financial services regulatory reform legislation. Dodd-Frank, adopted in July 2010, sets out sweeping regulatory changes. Changes imposed by the Dodd-Frank include, among others: (i) new requirements on banking, derivative and investment activities, including modified capital requirements, the repeal of the prohibition on the payment of interest on business demand accounts,anddebit card interchange fee requirements; (ii) corporate governance and executive compensation requirements; (iii) enhanced financial institution safety and soundness regulations, including increases in assessment fees and deposit insurance coverage; and (iv) the establishment of new regulatory bodies, such as the Bureau of Consumer Financial Protection. Certain provisions are effective immediately; however, much of the Financial Reform Act is subject to further rulemakingand/or studies. As such, while we are subject to the legislation, we cannot fully assess the impact of the Dodd-Frank until final rules are implemented, which depending on the rule, could be within six to 24 months from the enactment of the Dodd-Frank, or later.
Current and future legal and regulatory requirements, restrictions and regulations, including those imposed under Dodd-Frank, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, and results of operations, may require us to invest significant management attention and resources to evaluate and make any changes required by the legislation and accompanying rules and may make it more difficult for us to attract and retain qualified executive officers and employees.
The FDIC’s restoration plan and the related increased assessment rate could adversely affect our earnings. As a result of a series of financial institution failures and other market developments, the DIF has been significantly depleted and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of Dodd-Frank, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required which we may be required to pay. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.
The impact of the new Basel III capital standards will likely impose enhanced capital adequacy standards on us. On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III, which were approved in November 2010 by the G20 leadership. Basel III increases the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7%. Basel III increases the minimum Tier 1 capital ratio to 8.5% inclusive of the capital conservation buffer, increases the minimum total capital ratio to 10.5% inclusive of the capital buffer and introduces a countercyclical capital buffer of up to 2.5% of common equity or other fully loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and

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new liquidity standards. The Basel III capital and liquidity standards will be phased in over a multi-year period. The Federal Reserve will likely implement changes to the capital adequacy standards applicable to us and the Bank which will increase our capital requirements and compliance costs.
Competition may adversely affect our performanceperformance..The banking and financial services businesses in our market areas are highly competitive. We face competition in attracting deposits, making loans, and attracting and retaining employees.employees, particularly in theKorean-American community. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, new competitors in the market, and the pace of consolidation among financial services providers. Our results in the future may differbe materially and adversely impacted depending upon the nature and level of competition.
 The Bank is currently restricted from paying dividends to Hanmi Financial and Hanmi Financial is restricted from paying dividends to stockholders and from making any payments on its trust preferred securities.The primary source of Hanmi Financial’s income from which we pay Hanmi Financial obligations and distribute dividends to our stockholders is from the receipt of dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. The Bank currently has deficit retained earnings and has suffered net losses in 2009 and 2008, largely caused by provision for credit losses and goodwill impairments. As a result, the California Financial Code does not provide authority for the Bank to declare a dividend to Hanmi Financial, with or without Commissioner approval. In addition, the Bank is prohibited from paying dividends to Hanmi Financial unless it receives prior regulatory approval. See“Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. Capital Resources and Liquidity.”Furthermore, Hanmi Financial has agreed that it will not pay any dividends or make any payments on our outstanding $82.4 million of trust preferred securities or any other capital distributions without the prior written consent of the FRB. We began to defer interest payment on our trust preferred securities commencing with the interest payment that was due on January 15, 2009. If we defer interest payments for more than 20 consecutive quarters under any of our outstanding trust preferred instruments, then we would be in default under such trust preferred arrangements and the amounts due under the agreements pursuant to which we issued our trust preferred securities would be immediately due and payable. See“Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for a further discussion of restrictions on the Bank’s ability to pay dividends to Hanmi Financial.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
 
We rely on communications, information, operating and financial control systems technology from third-partythird party service providers, and we may suffer an interruption in those systems.We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including our internet banking services and data processing systems. Any failure or interruption of these services or systems or breaches in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicingand/or loan origination systems. The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all.
 
Negative publicity could damage our reputation.Reputation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or perceived conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. In addition, legislation and regulations which impose restrictions on executive compensation may make it more difficult for us to retain and recruit key personnel. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan

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origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. Failure to attract or retain such employees could have a material adverse effect on our financial condition and results of operations.
The price of our common stock may be volatile or may decline.The trading price of our common stock may fluctuate widely because of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
 •developments relating to the Woori investment;
•    actual or anticipated quarterly fluctuations in our operating results and financial condition;
 
 •    changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
 
 •    failure to meet analysts’ revenue or earnings estimates;
 
 •    speculation in the press or investment community;
 
 •    strategic actions by us or our competitors, such as acquisitions or restructurings;
 
 •    actions by institutional stockholders;
 
 •    fluctuations in the stock price and operating results of our competitors;
 
 •    general market conditions and, in particular, developments related to market conditions for the financial services industry;
 
 •    proposed or adopted legislative or regulatory changes or developments;
 
 •    anticipated or pending investigations, proceedings or litigation that involve or affect us; or
 
 •    domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility recently. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity-related securities, and other factors identified above in“Cautionary Note Regarding Forward-Looking “Forward Looking Statements.”Current levels of market volatility are unprecedented. The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation and potential delisting from Thethe NASDAQ Stock Market, Inc. (“Nasdaq”).
 
Your share ownership may be diluted by the issuance of additional shares of our common stock in the future. YourIn addition to the substantial dilution you will experience upon the completion of the Woori transaction, your share ownership may be diluted by the issuance of additional shares of our common stock in the future. First, we have adopted a stock option plan that provides for the granting of stock options to our directors, executive


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officers and other employees. As of December 31, 2009, 743,9582010, 3,066,891 shares of our common stock were issuable under options granted in connection with our stock option plans.plans and stock warrants issued in connection with the registered rights and best efforts offerings. In addition, 3,000,0002,446,333 shares of our common stock are reserved for future issuance to directors, officers and employees under our stock option plan.plans. It is probable that the stock options will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.
In addition, our amendedAmended and restated certificateRestated Certificate of incorporationIncorporation authorizes the issuance of up to 200,000,000500,000,000 shares of common stock, butstock. Our Amended and Restated Certificate of Incorporation does not provide for preemptive rights to the holders of our common stock. Any authorized but unissued shares are available for issuance by our Board of Directors. As a result, if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you may be unable to maintain your pro rata ownership in Hanmi Financial.the Company.

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Future sales of common stock by existing stockholders may have an adverse impact on the market price of our common stock.Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, including by Woori following completion of the transaction with Woori could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. As of December 31, 2009, there were 51,182,390 shares of our common stock outstanding, which are freely tradable without restriction or further registration under the federal securities laws unless purchased or sold by our “affiliates” within the meaning of Rule 144 under the Securities Act.
 
Holders of our junior subordinated debentures have rights that are senior to those of our stockholders. As of December 31, 2009,2010, we had outstanding $82.4 million of trust preferred securities issued by our subsidiary trusts. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. The junior subordinated debentures underlying the trust preferred securities are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock. We commenced deferring distributions on the junior subordinated debentures (and the related trust preferred securities) with the payment that was due on January 15, 2009.
 
Anti-takeover provisions and state and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline.Various provisions of our certificateAmended and Restated Certificate of incorporationIncorporation and by-lawsBy-laws could delay or prevent a third-party from acquiring us, even if doing so might be beneficial to our stockholders. These provisions provide for, among other things, a classified board of directors, supermajority voting approval for certain actions, limitation on large stockholders taking certain actions and the authorization to issue “blank check” preferred stock by action of the Board of Directors acting alone, thus without obtaining stockholder approval. The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, either FRBFederal Reserve Bank approval must be obtained or notice must be furnished to the FRBFederal Reserve Bank and not disapproved prior to any person or entity acquiring “control” of a state member bank, such as the Bank. These provisions may prevent a merger or acquisition that would be attractive to stockholders and could limit the price investors would be willing to pay in the future for our common stock.
 We may face
Subject to the limitations set forth in the securities purchase agreement with Woori regarding a cash-out merger, following the completion of the transaction with Woori, Woori would control the vote on any merger, sale of assets or other risks.From time to time, we detailfundamental corporate transaction of the Company or Hanmi Bank or the issuance of additional equity securities or incurrence of debt, in each case without the approval of our other risks with respect to our business and/or financial results in our filings with the SEC.stockholders.

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It will also be impossible for a third party, other than Woori, to obtain control of us through purchases of our common stock not beneficially owned or controlled by Woori, which could have a negative impact on our stock price. If Woori were to sell or transfer shares of our common stock as a block, another person or entity could become our controlling stockholder, subject to any required regulatory approvals.
ITEM 1B. UNRESOLVED STAFF COMMENTSOur ability to use some or all of our net operating loss carryforwards may be impaired. There is a significant likelihood that the Woori investment will cause a reduction in the value of our net operating loss carryforwards (“NOLs”) realizable for income tax purposes. 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. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-change NOLs and other losses we can use to reduce our taxable income generally equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the applicable federal long-term tax-exempt interest rate for the month of the “ownership change.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.


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ITEM 2.  PROPERTIES
 
Hanmi Financial’s principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California. The office is leased pursuant to a five-year term, which expires on November 30, 2013.
 
The following table sets forth information about our offices as of December 31, 2009:2010:
       
      Owned/
Office Address City/State Leased
Corporate Headquarters(1)
 3660 Wilshire Boulevard, Penthouse Suite A Los Angeles, CA Leased
Branches:
      
Beverly Hills Branch 9300 Wilshire Boulevard, Suite 101 Beverly Hills, CA Leased
Cerritos – Artesia Branch 11754 East Artesia Boulevard Artesia, CA Leased
Cerritos – South Branch 11900 South Street, Suite 109 Cerritos, CA Leased
Downtown – Los Angeles Branch 950 South Los Angeles Street Los Angeles, CALeased
Diamond Bar Branch1101 Brea Canyon Road, Suite A-1Diamond Bar, CA Leased
Fashion District Branch 726 East 12th Street, Suite 211 Los Angeles, CA Leased
Fullerton – Beach Branch 5245 Beach Boulevard Buena Park, CA Leased
Garden Grove – Brookhurst Branch 9820 Garden Grove Boulevard Garden Grove, CA Owned
Garden Grove – Magnolia Branch 9122 Garden Grove Boulevard Garden Grove, CA Owned
Gardena Branch 2001 West Redondo Beach Boulevard Gardena, CA Leased
Irvine Branch 14474 Culver Drive, Suite D Irvine, CA Leased
Koreatown Galleria Branch 3250 West Olympic Boulevard, Suite 200 Los Angeles, CA Leased
Koreatown Plaza Branch 928 South Western Avenue, Suite 260 Los Angeles, CA Leased
Northridge Branch 10180 Reseda Boulevard Northridge, CA Leased
Olympic Branch(2)
 3737 West Olympic Boulevard Los Angeles, CA Owned
Olympic – Kingsley Branch 3099 West Olympic Boulevard Los Angeles, CA Owned
Rancho Cucamonga Branch 9759 Baseline Road Rancho Cucamonga, CA Leased
Rowland Heights Branch 18720 East Colima Road Rowland Heights, CA Leased
San Diego Branch 4637 Convoy Street, Suite 101 San Diego, CA Leased
San Francisco Branch 1469 Webster Street San Francisco, CA Leased
Silicon Valley Branch 2765 El Camino Real Santa Clara, CA Leased
Torrance – Crenshaw Branch 2370 Crenshaw Boulevard, Suite H Torrance, CA Leased
Torrance – Del Amo Mall Branch 21838 Hawthorne Boulevard Torrance, CA Leased
Van Nuys Branch 14427 Sherman Way Van Nuys, CA Leased
Vermont Branch(3)
 933 South Vermont Avenue Los Angeles, CA Owned
Western Branch 120 South Western Avenue Los Angeles, CA Leased
Wilshire – Hobart Branch 3660 Wilshire Boulevard, Suite 103 Los Angeles, CA Leased
Departments:
      
Commercial Loan Department(1)
 3660 Wilshire Boulevard, Suite 1050 Los Angeles, CA Leased
Consumer Loan Center(1)
 3660 Wilshire Boulevard, Suite 424 Los Angeles, CA Leased
Insurance & Wealth ManagementPrivate Banking Department(1)
 3660 Wilshire3737 West Olympic Boulevard Suite 424 Los Angeles, CA Leased
International Finance Department(1)
 933 South Vermont Avenue, 2nd Floor Los Angeles, CA Leased
SBA Loan Center(1)
 3660 Wilshire Boulevard, Suite 116 Los Angeles, CA Leased
LPOs and Subsidiaries:
      
Northwest Region LPO(1)
 33110 Pacific Hwy South, Suite 4 Federal Way, WA Leased
Virginia LPO(1)
7535 Little River Turnpike, Suite 200BAnnandale, VALeased
Chun-Ha/All World(1)
 12912 Brookhurst Street, Suite 480 Garden Grove, CA Leased
Chun-Ha(1)
 3225 Wilshire Boulevard, Suite 1806 Los Angeles, CA Leased
 
(1)Deposits are not accepted at this facility.
 
(2)Training Facility is also located at this facility.
 
(3)Administrative offices are also located at this facility.
 
As of December 31, 2009,2010, our consolidated investment in premises and equipment, net of accumulated depreciation and amortization, totaled $18.7$17.6 million. Our total occupancy expense, exclusive of furniture and


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equipment expense, was $5.6$5.7 million for the year ended December 31, 2009.2010. Hanmi Financial and its subsidiaries consider their present facilities to be sufficient for their current operations.

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ITEM 3.  LEGAL PROCEEDINGS
 
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management and in consultation with external legal counsel, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSREMOVED AND RESERVED
PART II
 During the fourth quarter of 2009, no matters were submitted to stockholders for a vote.
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
 
The following table sets forth, for the periods indicated, the high and low trading prices of Hanmi Financial’s common stock for the last two years as reported on the Nasdaq Global Select Market under the symbol “HAFC”:
                        
 High Low Cash Dividend  High Low Cash Dividend
2010:
         
Fourth Quarter $1.28  $0.86   — 
Third Quarter $1.70  $1.17   — 
Second Quarter $4.26  $1.26   — 
First Quarter $2.83  $1.02   — 
2009:
          
Fourth Quarter $1.86 $1.10 —  $1.86  $1.10   — 
Third Quarter $1.92 $1.22 —  $1.92  $1.22   — 
Second Quarter $2.65 $1.21 —  $2.65  $1.21   — 
First Quarter $3.00 $0.75 —  $3.00  $0.75   — 
 
2008:
 
Fourth Quarter $5.19 $1.65 — 
Third Quarter $6.77 $4.65 — 
Second Quarter $7.79 $5.20 $0.03 Per Share
First Quarter $9.82 $6.80 $0.06 Per Share
Holders
 
Hanmi Financial had 324619 registered stockholders of record as of February 1, 2010.2011.
Dividends
 
Hanmi Financial has agreed with the FRB that it will not pay any cash dividends to its stockholders without the prior consent of the FRB. The Bank is also required to seek prior approval from the Regulatorsits regulators to pay cash dividends to Hanmi Financial. The ability of Hanmi Financial to pay dividends to its stockholders is also directly dependent on the ability of the Bank to pay dividends to us. Section 642 of the California Financial Code provides that neither a California state-chartered bank nor a majority-owned subsidiary of a bank can pay dividends to its stockholders in an amount which exceeds the lesser of (a) the retained earnings


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of the bank or (b) the net income of the bank for its last three fiscal years, in each case less the amount of any previous distributions made during such period.
 
As a result of the net loss incurred by the Bank in recent years, the Bank is currently not able to pay dividends to Hanmi Financial under Section 642. However, Financial Code Section 643 provides, alternatively, that, notwithstanding the foregoing restriction set forth in Section 642, dividends in an amount not exceeding the greatest of (a) the retained earnings of the bank; (b) the net income of the bank for its last fiscal year or (c) the net income of the bank for its current fiscal year may be declared with the prior approval of the California Commissioner of Financial Institutions. The Bank had a retained deficit of $171.7$254.2 million as of December 31, 2009.2010 and is not able to pay dividends under Section 643.

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 Due to the net losses for 2009 and 2008, FRB approval is required for payment of bank dividends to Hanmi Financial in 2009.
FRB Regulation H Section 208.5 provides that the Bank must obtain FRB approval to declare and pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years. On August 29, 2008, we announced the suspension of our quarterly cash dividend. As a result of our existing regulatory agreements, we are required to obtain regulatory approval prior to the Bank or Hanmi Financial declaring any dividends to its respective shareholders.stockholders.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
The junior subordinated debentures underlying our trust preferred securities are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We began to defer distributions on our $82.4 million of outstanding junior subordinated debentures (and related trust preferred securities) commencing with the interest payment that was due on January 15, 2009.
We currently do not have any present intention of paying cash dividends to Hanmi Financial stockholders.


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Performance Graph
 
The following graph shows a comparison of stockholder return on Hanmi Financial’s common stock with the cumulative total returns for: 1) the Nasdaq Composite® (U.S.) Index; 2) the Standard and Poor’s (“S&P”) 500 Financials Index; and 3) the SNL Bank $1B-$5B Index, which was compiled by SNL Financial LC of Charlottesville, Virginia. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance. The performance graph shall not be deemed incorporated by reference to any general statement incorporating by reference this Report into any filing under the Securities Act of 1933 or under the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.
                           
    December 31, 
Index Symbol 2004  2005  2006  2007  2008  2009 
Hanmi Financial HAFC $100.00  $100.50  $128.13  $50.39  $12.57  $7.32 
Nasdaq Composite ^IXIC $100.00  $101.37  $111.02  $121.91  $72.49  $104.30 
S&P 500 Financials S5FINL $100.00  $106.30  $126.41  $103.47  $47.36  $55.27 
SNL Bank $1B-$5B — $100.00  $98.29  $113.74  $82.85  $68.77  $49.26 
TOTAL RETURN PERFORMANCE
                           
    December 31,
Index Symbol 2005 2006 2007 2008 2009 2010
 
Hanmi Financial HAFC $100.00  $127.49  $49.80  $12.42  $7.24  $8.87 
Nasdaq Composite IXIC $100.00  $109.52  $120.27  $71.51  $102.89  $120.29 
S&P 500 Financials S5FINL $100.00  $118.92  $97.34  $44.56  $51.99  $58.27 
SNL Bank $1B-$5B — $100.00  $115.72  $84.36  $67.88  $49.93  $57.38 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
During the fourth quarter of 2009,2010, there were no purchases of Hanmi Financial’s equity securities by Hanmi Financial or its affiliates. As of December 31, 2009,2010, there was no current plan authorizing purchases of Hanmi Financial’s equity securities by Hanmi Financial or its affiliates.

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ITEM 6.  SELECTED FINANCIAL DATA
 
The following table presents selected historical financial information, including per share information as adjusted for the stock dividends and stock splits declared by us. This selected historical financial data should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Report and the information contained in“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”The selected historical financial data as of and for each of the years in the five years ended December 31, 20092010 is derived from our audited financial statements. In the opinion of management, the information presented reflects all adjustments, including normal and recurring accruals, considered necessary for a fair presentation of the results of such periods.
                    
                     As of and for the Year Ended December 31, 
 As of and for the Year Ended December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005  (Dollars in Thousands, Except for Per Share Data) 
 (Dollars in Thousands, Except for Per Share Data) 
SUMMARY STATEMENTS OF OPERATIONS:
                     
Interest and Dividend Income $184,147 $238,183 $280,896 $260,189 $200,941  $144,512  $184,147  $238,183  $280,896  $260,189 
Interest Expense 82,918 103,782 129,110 106,946 62,850   38,638   82,918   103,782   129,110   106,946 
                      
Net Interest Income Before Provision for Credit Losses 101,229 134,401 151,786 153,243 138,091   105,874   101,229   134,401   151,786   153,243 
Provision for Credit Losses 196,387 75,676 38,323 7,173 5,395   122,496   196,387   75,676   38,323   7,173 
Non-Interest Income 32,110 32,854 40,006 36,963 31,450   25,406   32,110   32,854   40,006   36,963 
Non-Interest Expense 90,354 195,027 189,929 77,313 70,201   96,805   90,354   195,027   189,929   77,313 
                      
Income (Loss) Before Provision (Benefit) for Income Taxes  (153,402)  (103,448)  (36,460) 105,720 93,945   (88,021)  (153,402)  (103,448)  (36,460)  105,720 
Provision (Benefit) for Income Taxes  (31,125)  (1,355) 24,302 40,370 36,144   (12)  (31,125)  (1,355)  24,302   40,370 
                      
NET INCOME (LOSS)
 $(122,277) $(102,093) $(60,762) $65,350 $57,801  $(88,009) $(122,277) $(102,093) $(60,762) $65,350 
           
            
SUMMARY BALANCE SHEETS:
                     
Cash and Cash Equivalents $154,110 $215,947 $122,398 $138,501 $163,477  $249,720  $154,110  $215,947  $122,398  $138,501 
Total Investment Securities 133,289 197,117 350,457 391,579 443,912   413,963   133,289   197,117   350,457   391,579 
Net Loans(1)
 2,674,064 3,291,125 3,241,097 2,837,390 2,469,080   2,121,067   2,674,064   3,291,125   3,241,097   2,837,390 
Total Assets 3,162,706 3,875,816 3,983,657 3,725,243 3,414,252   2,907,148   3,162,706   3,875,816   3,983,657   3,725,243 
Total Deposits 2,749,327 3,070,080 3,001,699 2,944,715 2,826,114   2,466,721   2,749,327   3,070,080   3,001,699   2,944,715 
Total Liabilities 3,012,962 3,611,901 3,613,101 3,238,873 2,987,923   2,733,892   3,012,962   3,611,901   3,613,101   3,238,873 
Total Stockholders’ Equity 149,744 263,915 370,556 486,370 426,329   173,256   149,744   263,915   370,556   486,370 
Tangible Equity 146,362 258,965 256,548 272,412 208,580   171,023   146,362   258,965   256,548   272,412 
Average Net Loans(1)
 3,044,395 3,276,142 3,049,775 2,721,229 2,359,439   2,368,369   3,044,395   3,276,142   3,049,775   2,721,229 
Average Investment Securities 188,325 271,802 368,144 414,672 418,750   215,280   188,325   271,802   368,144   414,672 
Average Interest-Earning Assets 3,611,009 3,653,720 3,494,758 3,214,761 2,871,564   2,981,878   3,611,009   3,653,720   3,494,758   3,214,761 
Average Total Assets 3,717,179 3,866,856 3,882,891 3,602,181 3,249,190   2,998,507   3,717,179   3,866,856   3,882,891   3,602,181 
Average Deposits 3,109,322 2,913,171 2,989,806 2,881,448 2,632,254   2,587,686   3,109,322   2,913,171   2,989,806   2,881,448 
Average Borrowings 341,514 591,930 355,819 221,347 165,482   243,690   341,514   591,930   355,819   221,347 
Average Interest-Bearing Liabilities 2,909,014 2,874,470 2,643,296 2,367,389 2,046,227   2,268,954   2,909,014   2,874,470   2,643,296   2,367,389 
Average Stockholders’ Equity 225,708 323,462 492,637 458,227 417,813   137,968   225,708   323,462   492,637   458,227 
Average Tangible Equity 221,537 264,490 275,036 242,362 198,527   135,171   221,537   264,490   275,036   242,362 
 
PER SHARE DATA:
                     
Earnings (Loss) Per Share – Basic $(2.57) $(2.23) $(1.27) $1.34 $1.18  $(0.93) $(2.57) $(2.23) $(1.27) $1.34 
Earnings (Loss) Per Share – Diluted $(2.57) $(2.23) $(1.27) $1.32 $1.16  $(0.93) $(2.57) $(2.23) $(1.27) $1.32 
Book Value Per Share(2)
 $2.93 $5.75 $8.08 $9.91 $8.76  $1.15  $2.93  $5.75  $8.08  $9.91 
Tangible Book Value Per Share(3)
 $2.86 $5.64 $5.59 $5.55 $4.29  $1.13  $2.86  $5.64  $5.59  $5.55 
Cash Dividends Per Share — $0.09 $0.24 $0.24 $0.20   —   —  $0.09  $0.24  $0.24 
Common Shares Outstanding(4)
 51,182,390 45,905,549 45,860,941 49,076,613 48,658,798 
Common Shares Outstanding  151,198,390   51,182,390   45,905,549   45,860,941   49,076,613 
 
(1)Loans receivable, net of allowance for loan losses and deferred loan fees.
 
(2)Total stockholders’ equity divided by common shares outstanding.
 
(3)Tangible equity divided by common shares outstanding.
(4)On January 20, 2005, our Board of Director declared a two-for-one stock split and new shares were distributed on February 15, 2005.

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  As of and for the Year Ended December 31,
  2010 2009 2008 2007 2006
 
SELECTED PERFORMANCE RATIOS:
                    
Return on Average Assets(4)
  (2.94)%  (3.29)%  (2.64)%  (1.56)%  1.81%
Return on Average Stockholders’ Equity(5)
  (63.79)%  (54.17)%  (31.56)%  (12.33)%  14.26%
Return on Average Tangible Equity(6)
  (65.11)%  (55.19)%  (38.60)%  (22.09)%  26.96%
Net Interest Spread(7)
  3.15%  2.28%  2.95%  3.20%  3.65%
Net Interest Margin(8)
  3.55%  2.84%  3.72%  4.39%  4.83%
Efficiency Ratio(9)
  73.74%  67.76%  116.60%  99.03%  40.65%
Dividend Payout Ratio(10)
  —   —   (4.05)%  (18.11)%  18.02%
Average Stockholders’ Equity to Average Total Assets  4.60%  6.07%  8.36%  12.69%  12.72%
SELECTED CAPITAL RATIOS:
                    
Total Capital to Total Risk-Weighted Assets:                    
Hanmi Financial  12.32%  9.12%  10.79%  10.65%  12.55%
Hanmi Bank  12.22%  9.07%  10.70%  10.59%  12.28%
Tier 1 Capital to Total Risk-Weighted Assets:                    
Hanmi Financial  10.09%  6.76%  9.52%  9.40%  11.58%
Hanmi Bank  10.91%  7.77%  9.44%  9.34%  11.31%
Tier 1 Capital to Average Total Assets:                    
Hanmi Financial  7.90%  5.82%  8.93%  8.52%  10.08%
Hanmi Bank  8.55%  6.69%  8.85%  8.47%  9.85%
SELECTED ASSET QUALITY RATIOS:
                    
Non-Performing Loans to Total Gross Loans(11)
  7.45%  7.77%  3.62%  1.66%  0.50%
Non-Performing Assets to Total Assets(12)
  5.95%  7.76%  3.17%  1.37%  0.38%
Net Loan Charge-Offs to Average Total Gross Loans  4.79%  3.88%  1.38%  0.73%  0.17%
Allowance for Loan Losses to Total Gross Loans  6.44%  5.14%  2.11%  1.33%  0.96%
Allowance for Loan Losses to Non-Performing Loans  86.41%  66.19%  58.23%  80.05%  193.86%
                     
  As of and for the Year Ended December 31, 
  2009  2008  2007  2006  2005 
SELECTED PERFORMANCE RATIOS:
                    
Return on Average Assets(4)
  (3.29%)  (2.64%)  (1.56%)  1.81%  1.78%
Return on Average Stockholders’ Equity(5)
  (54.17%)  (31.56%)  (12.33%)  14.26%  13.83%
Return on Average Tangible Equity(6)
  (55.19%)  (38.60%)  (22.09%)  26.96%  29.11%
Net Interest Spread(7)
  2.28%  2.95%  3.20%  3.65%  4.02%
Net Interest Margin(8)
  2.84%  3.72%  4.39%  4.83%  4.89%
Efficiency Ratio(9)
  67.76%  116.60%  99.03%  40.65%  41.41%
Dividend Payout Ratio(10)
  —   (4.05%)  (18.11%)  18.02%  16.84%
Average Stockholders’ Equity to Average Total Assets  6.07%  8.36%  12.69%  12.72%  12.86%
                     
SELECTED CAPITAL RATIOS:
                    
Total Capital to Total Risk-Weighted Assets:                    
Hanmi Financial  9.12%  10.79%  10.65%  12.55%  12.04%
Hanmi Bank  9.07%  10.70%  10.59%  12.28%  11.98%
Tier 1 Capital to Total Risk-Weighted Assets:                    
Hanmi Financial  6.76%  9.52%  9.40%  11.58%  11.03%
Hanmi Bank  7.77%  9.44%  9.34%  11.31%  10.96%
Tier 1 Capital to Average Total Assets:                    
Hanmi Financial  5.82%  8.93%  8.52%  10.08%  9.11%
Hanmi Bank  6.69%  8.85%  8.47%  9.85%  9.06%
                     
SELECTED ASSET QUALITY RATIOS:
                    
Non-Performing Loans to Total Gross Loans(11)
  7.77%  3.62%  1.66%  0.50%  0.41%
Non-Performing Assets to Total Assets(12)
  7.76%  3.17%  1.37%  0.38%  0.30%
Net Loan Charge-Offs to Average Total Gross Loans  3.88%  1.38%  0.73%  0.17%  0.12%
Allowance for Loan Losses to Total Gross Loans  5.14%  2.11%  1.33%  0.96%  1.00%
Allowance for Loan Losses to Non-Performing Loans  66.19%  58.23%  80.05%  193.86%  246.40%
 
(4)Net income (loss) divided by average total assets.
 
(5)Net income (loss) divided by average stockholders’ equity.
 
(6)Net income (loss) divided by average tangible equity.
 
(7)Average yield earned on interest-earning assets less average rate paid on interest-bearing liabilities. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent
 
(8)Net interest income before provision for credit losses divided by average interest-earning assets. Computed on a tax-equivalent basis using an effective marginal rate of 35 percent
 
(9)Total non-interest expense divided by the sum of net interest income before provision for credit losses and total non-interest income.
 
(10)Dividends declared per share divided by basic earnings (loss) per share.
 
(11)Non-performing loans, including loans held for sale, consist of non-accrual loan and loans past due 90 days or more still accruing interest.
 
(12)Non-performing assets consist of non-performing loans and other real estate owned.
Non-GAAP Financial Measures
 
Return on Average Tangible Equity
 
Return on average tangible equity is supplemental financial information determined by a method other than in accordance with U.S. generally accepted accounting principles (“GAAP”). This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Average tangible equity is calculated by subtracting average goodwill and average other intangible assets from average stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
                    
                     Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005    (Dollars in Thousands)   
 (Dollars in Thousands) 
Average Stockholders’ Equity $225,708 $323,462 $492,637 $458,227 $417,813  $137,968  $225,708  $323,462  $492,637  $458,227 
Less Average Goodwill and Average Other Intangible Assets  (4,171)  (58,972)  (217,601)  (215,865)  (219,286)  (2,797)   (4,171)   (58,972)   (217,601)   (215,865) 
                      
 
Average Tangible Equity
 $221,537 $264,490 $275,036 $242,362 $198,527  $135,171  $221,537  $264,490  $275,036  $242,362 
           
            
Return on Average Stockholders’ Equity  (54.17%)  (31.56%)  (12.33%)  14.26%  13.83%  (63.79)%   (54.17)%   (31.56)%   (12.33)%   14.26% 
Effect of Average Goodwill and Average Other Intangible Assets  (1.02%)  (7.04%)  (9.76%)  12.70%  15.28%  (1.32)%   (1.02)%   (7.04)%   (9.76)%   12.70% 
                      
 
Return on Average Tangible Equity
  (55.19%)  (38.60%)  (22.09%)  26.96%  29.11%  (65.11%)   (55.19%)   (38.60%)   (22.09%)   26.96% 
                      
 
Tangible Book Value Per Share
 
Tangible book value per share is supplemental financial information determined by a method other than in accordance with GAAP. This non-GAAP measure is used by management in the analysis of Hanmi Financial’s performance. Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total stockholders’ equity and dividing the difference by the number of shares of common stock outstanding. Management believes the presentation of this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results of Hanmi Financial, as it provides a method to assess management’s success in utilizing tangible capital. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
 
The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:
                    
                     December 31, 
 December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005  (Dollars in Thousands, Except Per Share Amounts) 
 (Dollars in Thousands, Except Per Share Amounts) 
Total Stockholders’ Equity $149,744 $263,915 $370,556 $486,370 $426,329  $173,256  $149,744  $263,915  $370,556  $486,370 
Less Goodwill and Other Intangible Assets  (3,382)  (4,950)  (114,008)  (213,958)  (217,749)  (2,233)   (3,382)   (4,950)   (114,008)   (213,958) 
                      
 
Tangible Equity
 $146,362 $258,965 $256,548 $272,412 $208,580  $171,023  $146,362  $258,965  $256,548  $272,412 
           
            
Book Value Per Share $2.93 $5.75 $8.08 $9.91 $8.76  $1.15  $2.93  $5.75  $8.08  $9.91 
Effect of Goodwill and Other Intangible Assets  (0.07)  (0.11)  (2.49)  (4.36)  (4.47)  (0.02)   (0.07)   (0.11)   (2.49)   (4.36) 
                      
 
Tangible Book Value Per Share
 $2.86 $5.64 $5.59 $5.55 $4.29  $1.13  $2.86  $5.64  $5.59  $5.55 
                      

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion presents management’s analysis of the financial condition and results of operations as of and for the years ended December 31, 2010, 2009 2008 and 2007.2008. This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes related thereto presented elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements because of certain factors discussed elsewhere in this Report. See“Item 1A. Risk Factors. also “Cautionary Note Regarding Forward-Looking Statements.”
CRITICAL ACCOUNTING POLICIES
 
We have established various accounting policies that govern the application of GAAP in the preparation of our consolidated financial statements. Our significant accounting policies are described in the“Notes to Consolidated Financial Statements, Note 2 —– Summary of Significant Accounting Policies.”Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of Hanmi Financial’s Board of Directors.
 
Allowance for Loan Losses
 
We believe the allowance for loan losses and allowance for off-balance sheet items are critical accounting policies that require significant estimates and assumptions that are particularly susceptible to significant change in the preparation of our financial statements. Our allowance for loan loss methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experiences on 913 segmented loan pools by type and risk rating, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Qualitative factors include the general economic environment in our markets, delinquency and charge-off trends, and the change in non-performing loans. Concentration of credit, change of lending management and staff, quality of loan review system, and change in interest rate are other qualitative factors that are considered in our methodologies. See“Financial Condition —– Allowance for Loan Losses and Allowance for Off-Balance Sheet Items,” “Results of Operations —– Provision for Credit Losses”and“Notes to Consolidated Financial Statements, Note 2 —– Summary of Significant Accounting Policies”for additional information on methodologies used to determine the allowance for loan losses and allowance for off-balance sheet items.
 
Loan Sales
 
We normally sell SBA and residential mortgage loans to secondary market investors. When SBA guaranteed loans are sold, we generally retain the right to service these loans. We record a loan servicing asset when the benefits of servicing are expected to be more than adequate compensation to a servicer, which is determined by discounting all of the future net cash flows associated with the contractual rights and obligations of the servicing agreement. The expected future net cash flows are discounted at a rate equal to the return that would adequately compensate a substitute servicer for performing the servicing. In addition to the anticipated rate of loan prepayments and discount rates, other assumptions (such as the cost to service


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the underlying loans, foreclosure costs, ancillary income and float rates) are also used in determining the value of the loan servicing assets. Loan servicing assets are discussed in more detail in“Notes to Consolidated Financial Statements, Note2 —Note 2 – Summary of Significant Accounting Policies”and“Note 5 —– Loans” presented elsewhere herein.

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Investment Securities
 
The classification and accounting for investment securities are discussed in more detail in“Notes to Consolidated Financial Statements, Note 2 —– Summary of Significant Accounting Policies” presented elsewhere herein. Under FASB ASC 320,“Investment,”investment securities generally must be classified asheld-to-maturity,available-for-sale or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during the periods in which they arise. Investment securities that are classified asheld-to-maturity are recorded at amortized cost. Unrealized gains and losses onavailable-for-sale securities are recorded as a separate component of stockholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized or are deemed to beother-than-temporarily impaired.
 
The fair values of investment securities are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.
 
We are obligated to assess, at each reporting date, whether there is another-than-temporary impairment (“OTTI”) to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income. The determination ofother-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. We examine all individual securities that are in an unrealized loss position at each reporting date forother-than-temporary impairment. Specific investment-related factors we examine to assess impairment include the nature of the investment, severity and duration of the loss, the probability that we will be unable to collect all amounts due, an analysis of the issuers of the securities and whether there has been any cause for default on the securities and any change in the rating of the securities by the various rating agencies. Additionally, we evaluate whether the creditworthiness of the issuer calls the realization of contractual cash flows into question. Our impairment assessment also takes into consideration factor that we do not intend to sell the security and it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis of the security. If the decline in fair value is judged to be other than temporary, the security is written down to fair value which becomes the new cost basis and an impairment loss is recognized.
 
For debt securities, the classification ofother-than-temporary impairment depends on whether we intend to sell the security or it more likely than not will be required to sell the security before recovery of its costs basis, and on the nature of the impairment. If we intend to sell a security or it is more likely than not it will be required to sell a security prior to recovery of its cost basis, the entire amount of impairment is recognized in earnings. If we do not intend to sell the security or it is more likely than not it will be required to sell the


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security prior to recovery of its cost basis, the credit loss component of impairment is recognized in earnings and impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security’s effective interest rate at the date of acquisition. The cost basis of another-than-temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value. Management does not believe that there are any investment securities, other than those identified in the current and previous periods, that are deemedother-than-temporarily impaired as of December 31, 20092010 and 2008.2009. Investment securities are discussed in more detail in“Notes to Consolidated Financial Statements, Note 4 —– Investment Securities”presented elsewhere herein.
 
Income Taxes
 
We provide for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2010, we established an additional valuation allowance of $47.5 million, totaling $92.7 million against our existing net deferred tax assets of $92.7 million and recorded a net deferred tax assets balance of zero. As of December 31, 2009, the Companywe established a $45.2 million of valuation allowance of $45.2 million against its existing net deferred tax assets of $48.8 million and recorded a net deferred tax assets balance of $3.6 million. As ofAt December 31, 2008, we had net deferred tax assets of $29.5 million and 2007, no valuation allowance was required. Income taxes are discussed in more detail in“Notes to Consolidated Financial Statements, Note 2 —– Summary of Significant Accounting Policies”and“Note 12 —11 – Income Taxes”presented elsewhere herein.

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EXECUTIVE OVERVIEW
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, we recognized net losses of $88.0 million, $122.3 million $102.1 million and $60.8$102.1 million, respectively. The decline in net losses infor the year ended December 31, 2010 as compared to the year ended December 31, 2009 werewas primarily due tothe result of lower levels of provision for credit losses of $122.5 million compared to $196.4 million. Themillion in 2009. Our losses in 2008 and 2007 were mainly caused by a goodwill impairment charges of $107.4 million and $102.9 million, respectively, coupled with provisionsa provision for credit losses of $75.7 million and $38.3 million, respectively.million. For the years ended December 31, 2010, 2009 2008 and 2007,2008, our diluted loss per share was ($2.57)0.93), ($2.23)2.57) and ($1.27)2.23), respectively.
 In 2009, the economic conditions in the markets in which our borrowers operate continued
On July 27, 2010, we successfully completed a $120 million registered rights and best efforts offering to deteriorate and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels. Given the challenging credit environment, our priorities have been to manage the credit risk exposure through accelerating the resolution of problem loans and enhancing various credit quality management programs. Our proactive resolution of problem loans resulted in elevated charge-off levels especially during the second half of 2009. To proactively identify problem loans at their earliest stage and to effectively manage them until resolution, the notable changes we recently made to the credit department, among others, were to split review and monitoring functions with sufficient resources to handle problem loans in time effective fashion. Building on the changes that we implemented, we initiated additional programs, such as increased extent and frequency of independent loan review and collateral reappraisals, to further strengthen our loan grading systems and allowance for loan loss methodology. See“Financial Condition — Allowance for Loan Losses and Allowance for Off-Balance Sheet Items”for additional information on methodologies used to determine the allowance for loan losses. The combined impact of our proactive credit risk management actions resulted in a substantial increase in the loan loss provision in 2009.
          To prudently manage and maintain our capital levels, we deleveraged our balance sheet during the most part of 2009 as demonstrated by an 18.4 percent or $713.1 million decrease in total assets at December 31, 2009 relative to December 31, 2008. Our balance-sheet deleveraging strategy was primarily focused on a careful reduction of loans and rate-sensitive deposits without creating a liquidity risk.position. As a result, of this strategy, total gross loans decreased by $542.8we satisfied the $100 million or 16.1% to $2.82 billion atcapital contribution requirement set forth in the Final Order and the Bank has met the threshold for being considered “well-capitalized” for regulatory purposes since September 30, 2010. However, the tangible capital ratio requirement set forth in the Final Order has not been satisfied as of December 31, 2009 from $3.36 billion at December 31, 2008 mainly through natural amortization2010. Accordingly, we notified the DFI and payoffs. With sufficient liquidity generated from the reduction in loansFRB of such event. Based on submissions to and securities coupledconsultations with a strong surplus cash balance accumulated inour regulators, we believe that the first half of 2009, we were able to reduce our rate-sensitive time deposits, which were mostly high-cost promotional time deposits that matured byBank has taken the third quarter of 2009, brokered depositsrequired corrective action and FHLB borrowings.
          In an effort to improve our net interest margin and core deposit base, we launched a series of core deposit campaigns throughout 2009, specifically enabling us to replace high-cost promotional time depositshas complied with low-cost deposit products. As a result, our core deposits (defined as demand, money market and savings deposits) increased by $364.1 million, or 36.8% to $1.35 billion at December 31, 2009 from $989.2 million at December 31, 2008, while total deposits decreased by $320.8 million, or 10.4 percent, to $2.75 billion at December 31, 2009, compared to $3.07 billion at December 31, 2008. This decrease in deposits primarily resulted from a $670.7 million decrease in brokered deposits, partially offset by a $364.1 million increase in core deposits. Thanks to the successful deposit campaigns, our quarterly net interest margin notably improved from 2.50 percent in the first quarter of 2009 to 3.46 percent in the fourth quarter of 2009, exceeding the 3.38% quarterly net interest margin posted in the fourth quarter of 2008. Despite the ongoing economic challenges, we ended 2009 with a significant reduction in our reliance on wholesale funding and adequate levels of liquidity and quarterly net interest margin.
Outlook for 2010
          The economic recession continued to deepen into the first half of 2009, but has shown some signs of improvement over the second half of 2009. Although the depth, breadth and durationsubstantially all of the economic recovery remain unclear into 2010, we are cautiously optimistic about further improvement in the economy and the real estate market during the second half of 2010.
     Our overall objective is to reclaim our place as the leading community bank in the Korean-American banking industry. We intend to continue to meet all regulatory orders imposed on us. Although this continues to be a difficult period for us, we intend to restore the financial soundness and safetyrequirements of the Bank. To that end, we have identified the three strategic focus areas for 2010, which include raising capital, sustaining liquidity and improving credit quality.Final Order

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     In regards toand the capital order mandated by our regulators, the minimum capital requirement to raise $100 million by July 31, 2010 is intended to bringWritten Agreement. For a further discussion of the Bank’s tangible capital ratiocondition and capital resources, see “Capital Resources and Liquidity.”
We have made continuous efforts to over 9%. Withimprove our solid franchise value driven by loyal customersasset quality through proactive loan monitoring, accelerated problem loan resolutions, and dedicated employees,sales of non-performing assets. In accordance with our liquidity preservation strategy, funds raised from the secondary stock offerings and sales of loans were placed into highly liquid assets. As a result, we believe wemaintained a strong liquidity position with $663.7 million in cash and marketable securities as of December 31, 2010.
Significant financial highlights include (as of and for the year ended December 31, 2010):
•  The Bank’s total risk-based capital ratio improved to 12.22% as of December 31, 2010 compared to 9.07% as of December 31, 2009. The Bank’s tangible common equity to tangible assets also improved to 8.59% as of December 31, 2010 compared to 7.13% as of December 31, 2009.
•  Non-performing loans decreased to $169.0 million, or 7.45% of total gross loans, as of December 31, 2010 compared to $219.1 million, or 7.77% as of December 31, 2009. The coverage ratio of the allowance to non-performing loans increased to 86.41% as of December 31, 2010 compared to 66.19% as of December 31, 2009.
•  The cost of funds decreased through changes in the composition of our deposit portfolio. The average funding cost decreased by 104 basis points to 1.36% for the year ended December 31, 2010 compared to 2.40% for the year ended December 31, 2009.
•  Net interest margin improved 71 basis points to 3.55% for the year ended December 31, 2010 compared to 2.84% for the year ended December 31 2009.
Outlook for fiscal 2011
For 2011, our priorities will be able to raise a sufficient level ofenhance our capital within the required timeframe. However, there can be no assurance that we will be successful in our efforts. While continuously making utmost efforts to raise capital from investors, we will shift our focus from capital ratio management to liquidity preservation.
     With this change, we will continue to deleverage our long-term assets until the capital is raised, while preserving our deposit base to maintain an adequate level of liquidity. Responding to the interest rate restriction recently amended by the FDIC, we have launched new deposit products with flexible and innovative features. We will also continue to deploy more products tailored to meet the ever-changing needs of customers. In addition to our innovative retail product orientation, we willposition, continue to improve our customer service quality through various programs including “mystery shoppers” and customer surveys. With the new products coupled with enhanced customer service quality, we believe we will be able to preserve our deposit base and attract new customers without compromising our net interest margin.
     We expect our credit quality and to remain a challenge for 2010comply fully with elevated levelsall of problem assets, reservesthe requirements of the Final Order and charges-offs. A numberthe Written Agreement.
We believe that our proactive initiatives to manage credit risk exposure have resulted in improvement of initiatives have been implemented in an effort to minimize our continuously deteriorating credit quality.asset quality over the past several quarters. We will continueare committed to refine our credit risk management systemsystems to meet the challenges of our changing externaleconomic environment.
Based on our current liquidity position, we have begun to consider strategic changes. We are currently planning to develop innovative new products and internal environments.services as well as generate quality new loans to expand our existing customer base with the goal of improving our profitability.
We continue to evaluate available options to enhance our capital position. Responding to the rapidly changing economy, the additional capital from the Woori transaction or alternative sources may be necessary to provide us with adequate capital resources to support our business, our level of problem assets and our operations and to comply with the regulatory orders we are subject to.
RESULTS OF OPERATIONS
Net Interest Income, Net Interest Spread and Net Interest Margin
 
Our earnings depend largely upon “net interest income,” which is the difference between the interest income received from our loan portfolio and other interest-earning assets and the interest paid on deposits and borrowings. The difference is “net interest income.” The difference between the yield earned on interest-earning assets and the cost of interest-bearing liabilities is “net


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interest spread.” Net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the “net interest margin.”
 
Net interest income is affected by the change in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” Our net interest income also is affected by changes in the yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate changes.” Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are affected by general economic conditions and other factors beyond our control, such as federalFederal economic policies, the general supply of money in the economy, income tax policies, governmental budgetary matters and the actions of the FRB.

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The following table shows the average balances of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets


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and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated.
                                    
                             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007    Interest
 Average
   Interest
 Average
   Interest
 Average
 
 Interest Average Interest Average Interest Average  Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 
 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/  Balance Expense Rate Balance Expense Rate Balance Expense Rate 
 Balance Expense Rate Balance Expense Rate Balance Expense Rate  (Dollars in Thousands) 
 (Dollars in Thousands) 
ASSETS
                                     
Interest-Earning Assets:                                     
Gross Loans, Net(1)
 $3,157,133 $173,318  5.49% $3,332,133 $223,942  6.72% $3,080,544 $261,992  8.50% $2,544,472  $137,328   5.40% $  3,157,133  $173,318   5.49% $3,332,133  $223,942   6.72%
Municipal Securities(2)
 54,448 3,543  6.51% 63,918 4,180  6.54% 71,937 4,700  6.53%
Municipal Securities:                                    
Taxable  3,746   189   5.05%  —   —   —   —   —   — 
Tax – Exempt(2)
  6,909   346   5.01%  54,448   3,543   6.51%  63,918   4,180   6.54%
Obligations of Other U.S. Government Agencies 24,417 1,108  4.54% 65,440 2,813  4.30% 116,701 4,963  4.25%  69,112   1,952   2.82%  24,417   1,108   4.54%  65,440   2,813   4.30%
Other Debt Securities 109,460 4,568  4.17% 142,444 6,574  4.62% 179,506 8,436  4.70%  135,513   3,733   2.75%  109,460   4,568   4.17%  142,444   6,574   4.62%
Equity Securities 41,399 656  1.58% 38,516 1,918  4.98% 26,228 1,413  5.39%  37,437   532   1.42%  41,399   656   1.58%  38,516   1,918   4.98%
Federal Funds Sold 84,363 326  0.39% 8,934 166  1.86% 19,746 1,032  5.23%  10,346   52   0.50%  84,363   326   0.39%  8,934   166   1.86%
Term Federal Funds Sold 95,822 1,718  1.79% 1,913 43  2.25% 96 5  5.21%  8,342   33   0.40%  95,822   1,718   1.79%  1,913   43   2.25%
Interest-Earning Deposits 43,967 151  0.34% 422 10  2.37% — — —   166,001   468   0.28%  43,967   151   0.34%  422   10   2.37%
                          
Total Interest-Earning Assets 3,611,009 185,388  5.13% 3,653,720 239,646  6.56% 3,494,758 282,541  8.08%  2,981,878   144,633   4.85%  3,611,009   185,388   5.13%  3,653,720   239,646   6.56%
                          
 
Noninterest-Earning Assets:                                     
Cash and Cash Equivalents 71,448 88,679 92,148   67,492           71,448           88,679         
Allowance for Loan Losses  (112,738)  (55,991)  (30,769)   (176,103)          (112,738)          (55,991)        
Other Assets 147,460 180,448 326,754   125,240           147,460           180,448         
              
 
Total Noninterest-Earning Assets 106,170 213,136 388,133   16,629           106,170           213,136         
              
 
TOTAL ASSETS
 $3,717,179 $3,866,856 $3,882,891  $2,998,507          $3,717,179          $3,866,856         
       
        
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                     
Interest-Bearing Liabilities:                                     
Deposits:                                     
Savings $91,089 2,328  2.56% $89,866 2,093  2.33% $97,173 2,004  2.06% $119,754   3,439   2.87% $91,089   2,328   2.56% $89,866   2,093   2.33%
Money Market Checking and NOW Accounts 507,619 9,786  1.93% 618,779 19,909  3.22% 452,825 15,446  3.41%  464,864   4,936   1.06%  507,619   9,786   1.93%  618,779   19,909   3.22%
Time Deposits of $100,000 or More 1,051,994 34,807  3.31% 1,045,968 43,598  4.17% 1,430,603 75,516  5.28%  1,069,600   19,529   1.83%  1,051,994   34,807   3.31%  1,045,968   43,598   4.17%
Other Time Deposits 916,798 29,325  3.20% 527,927 18,753  3.55% 306,876 15,551  5.07%  371,046   6,504   1.75%  916,798   29,325   3.20%  527,927   18,753   3.55%
Federal Home Loan Bank Advances 257,529 3,399  1.32% 498,875 14,027  2.81% 237,733 12,156  5.11%  158,531   1,366   0.86%  257,529   3,399   1.32%  498,875   14,027   2.81%
Other Borrowings 1,579 2  0.13% 10,649 346  3.25% 35,680 1,793  5.03%  2,753   53   1.93%  1,579   2   0.13%  10,649   346   3.25%
Junior Subordinated Debentures 82,406 3,271  3.97% 82,406 5,056  6.14% 82,406 6,644  8.06%  82,406   2,811   3.41%  82,406   3,271   3.97%  82,406   5,056   6.14%
                            
 
Total Interest-Bearing Liabilities 2,909,014 82,918  2.85% 2,874,470 103,782  3.61% 2,643,296 129,110  4.88%  2,268,954   38,638   1.70%  2,909,014   82,918   2.85%  2,874,470   103,782   3.61%
             
        
Noninterest-Bearing Liabilities:                                     
Demand Deposits 541,822 630,631 702,329   562,422           541,822           630,631         
Other Liabilities 40,635 38,293 44,629   29,163           40,635           38,293         
              
 
Total Noninterest-Bearing Liabilities 582,457 668,924 746,958   591,585           582,457           668,924         
       
        
Total Liabilities 3,491,471 3,543,394 3,390,254   2,860,539           3,491,471           3,543,394         
Stockholders’ Equity 225,708 323,462 492,637   137,968           225,708           323,462         
       
        
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $3,717,179 $3,866,856 $3,882,891  $2,998,507          $3,717,179          $3,866,856         
              
Net Interest Income
 $102,470 $135,864 $153,431      $105,995          $102,470          $135,864     
              
Net Interest Spread(3)
  2.28%  2.95%  3.20%          3.15%          2.28%          2.95%
             
Net Interest Margin(4)
  2.84%  3.72%  4.39%          3.55%          2.84%          3.72%
             
 
(1)Average balances for loans include non-accrual loans and net of deferred fees and related direct costs. Loan fees have been included in the calculation of interest income. Loan fees were $1.8 million, $2.3 million $2.4 million and $2.7$2.4 million for the years ended December 31, 2010, 2009 and 2008, and 2007, respectively.
 
(2)Computed on a tax-equivalent basis using an effective marginal rate of 35 percent.
 
(3)Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(4)Represents net interest income as a percentage of average interest-earning assets.

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The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to changes in average daily balances (volume) or changes in average daily interest rates (rate). The variances attributable to both the volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the changes in each.
                        
                         Year Ended December 31, 
 Year Ended December 31,  2010 vs. 2009 2009 vs. 2008 
 2009 vs. 2008 2008 vs. 2007  Increase (Decrease)
 Increase (Decrease)
 
 Increase (Decrease) Increase (Decrease)  Due to Change in Due to Change in 
 Due to Change in Due to Change in  Volume Rate Total Volume Rate Total 
 Volume Rate Total Volume Rate Total  (In Thousands) 
 (In Thousands) 
Interest and Dividend Income:                         
Gross Loans, Net $(11,281) $(39,343) $(50,624) $20,139 $(58,189) $(38,050) $(33,111) $(2,879) $(35,990) $(11,281) $(39,343) $(50,624)
Municipal Securities  (616)  (21)  (637)  (524) 4  (520)
Municipal Securities:                        
Taxable  189   —   189   —   —   — 
Tax – Exempt  (2,530)  (667)  (3,197)  (616)  (21)  (637)
Obligations of Other U.S. Government Agencies  (1,854) 149  (1,705)  (2,202) 52  (2,150)  1,393   (549)  844   (1,854)  149   (1,705)
Other Debt Securities  (1,419)  (587)  (2,006)  (1,713)  (149)  (1,862)  935   (1,770)  (835)  (1,419)  (587)  (2,006)
Equity Securities 134  (1396)  (1,262) 619  (114) 505   (60)  (64)  (124)  134   (1,396)  (1,262)
Federal Funds Sold 386  (226) 160  (398)  (468)  (866)  (350)  76   (274)  386   (226)  160 
Term Federal Funds Sold 1,686  (11) 1,675 43  (5) 38   (909)  (776)  (1,685)  1,686   (11)  1,675 
Interest-Earning Deposits 158  (17) 141 10 — 10   349   (32)  317   158   (17)  141 
                          
 
Total Interest and Dividend Income  (12,806)  (41,452)  (54,258) 15,974  (58,869)  (42,895)  (34,094)  (6,661)  (40,755)  (12,806)  (41,452)  (54,258)
             
              
Interest Expense:                         
Savings 28 207 235  (158) 247 89   798   313   1,111   28   207   235 
Money Market Checking and NOW Accounts  (3,133)  (6,990)  (10,123) 5,382  (919) 4,463   (766)  (4,084)  (4,850)  (3,133)  (6,990)  (10,123)
Time Deposits of $100,000 or More 250  (9,041)  (8,791)  (17,907)  (14,011)  (31,918)  574   (15,852)  (15,278)  250   (9,041)  (8,791)
Other Time Deposits 12,603  (2,031) 10,572 8,835  (5,633) 3,202   (12,972)  (9,849)  (22,821)  12,603   (2,031)  10,572 
Federal Home Loan Bank Advances and Other Borrowings  (5,231)  (5,741)  (10,972) 8,497  (8,073) 424 
Federal Home Loan Bank Advances  (1,068)  (965)  (2,033)  (5,069)  (5,559)  (10,628)
Other Borrowings  2   49   51   (162)  (182)  (344)
Junior Subordinated Debentures —  (1,785)  (1,785) —  (1,588)  (1,588)  —   (460)  (460)  —   (1,785)  (1,785)
             
              
Total Interest Expense 4,517  (25,381)  (20,864) 4,649  (29,977)  (25,328)  (13,432)  (30,848)  (44,280)  4,517   (25,381)  (20,864)
                          
 
Change in Net Interest Income
 $(17,323) $(16,071) $(33,394) $11,325 $(28,892) $(17,567) $(20,662) $24,187  $3,525  $(17,323) $(16,071) $(33,394)
                          
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, net interest income before provision for credit losses on a tax-equivalent basis was $106.0 million, $102.5 million $135.9 million and $153.4$135.9 million, respectively. The net interest spread and net interest margin for the year ended December 31, 20092010 were 3.15 percent and 3.55 percent, respectively, compared to 2.28 percent and 2.84 percent, respectively, compared tofor the year ended December 31, 2009 and 2.95 percent and 3.72 percent, respectively, for the year ended December 31, 2008 and 3.20 percent and 4.39 percent, respectively, for2008. The increase in net interest income in 2010 as compared to 2009 was primarily due to lower deposit costs resulting from the year ended December 31, 2007.replacement of high-cost promotional time deposits with low-cost deposit products through the changes in the composition of our deposit portfolio. The decrease in net interest income in 2009 as compared to 2008 was primarily due to the steep decrease of 400 basis points in the federal funds target rate since December 2007 and the impact of a higher level of nonaccrual loans, partially offset by lower deposit costs.
 
Average loans were $2.54 billion in 2010, as compared with $3.16 billion in 2009 as compared withand $3.33 billion in 2008, representing a decrease of 19.4 percent and $3.08 billion in 2007, representinga decrease of 5.3 percent in 2010 and increase of 8.2 percent in 2009, and 2008, respectively. Average interest-earning assets were $2.98 billion in 2010, as compared with $3.61 billion in 2009 as compared withand $3.65 billion in 2008, representing a decrease of 17.4 percent and $3.49 billion in 2007, representing decrease of 1.2 percent in 2010 and increase of 4.5 percent in 2009, and 2008, respectively. The $42.7$629.1 million decrease in average interest earning assets in 20092010 was attributable primarily toa direct result of our preplanned deleveraging strategy. Consistent with this strategy the combined total of average interest-bearing liabilities and demand deposits decreased by $54.3implemented since early 2009. Average investment securities were $215.3 million in 2009. In 2008, the majority of interest-earning assets growth was funded by a $236.12010, as compared with $188.3 million increase in FHLB advances and other borrowings. Total average interest-bearing liabilities grew by $34.5 million and $231.2 million, respectively, in 2009 and 2008.$271.8 million in 2008, representing an increase of 14.3 percent

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and a decrease of 30.7 percent in 2010 and 2009, respectively. Despite significant pressure on yields on interest-earning assets, the increase in investment securities in 2010 was due to the increased investment in short-term instruments to maintain a strong level of liquidity. The decrease in average investment securities in 2009 as compared to 2008 was a direct result of our balance sheet deleveraging strategy. Consistent with the balance sheet deleveraging strategy implemented in early 2009, the average interest-bearing liabilities decreased by $640.1 million in 2010 as compared to 2009. Average FHLB advances were $158.5 million in 2010, as compared with $257.5 million in 2009 and $498.9 million in 2008, representing a decrease of 38.4 percent and a decrease of 48.4 percent in 2010 and 2009, respectively.
The average yield on interest-earning assets decreased by 14328 basis points to 5.134.85 percent in 2009,2010, after 152a 143 basis point decrease in 20082009 to 5.13 percent from 6.56 percent from 8.08 percent in 2007,2008, primarily due to a decrease in loan portfolio yields.yields and lower yields on investment securities in the current low interest rate environment. The average loan yield decreased by 1239 basis points to 5.495.40 percent in 2009,2010, after 178a 123 basis point decrease in 20082009 to 5.49 percent from 6.72 percent from 8.50 percent in 2007,2008, reflecting the impact of a decrease in federal funds target rate and an increase in our overall level of nonaccrual loans. Our interest income forgone on nonaccrual loans increased by $1.5 million, or 18.7 percent from $7.9 million in 2009 to $9.4 million in 2010. In 2008, the interest income forgone on nonaccrual loans was $1.9 million. The average yield on investment securities decreased by 201 basis points to 2.89 percent in 2010, compared to 4.90 percent in 2009 and decreased by 9 basis points in 2009, compared to 4.99 percent in 2008. The average cost on interest-bearing liabilities alsosignificantly decreased by 115 basis points to 1.70 percent in 2010, compared to a decrease of 76 basis points to 2.85 percent in 2009 compared to a decrease of 127 basis points tofrom 3.61 percent in 2008 from 4.88 percent in 2007. The2008. This decrease in 2009 was primarily due to the FRB’s lowering of rates and a continued shift in funding sources toward lower—cost funds. Total average corelower-cost funds through disciplined deposit pricing while reducing wholesale funds and rate sensitive deposits. During the first six months of 2010, total brokered deposits a low-cost source of funding, increased 10.18 percent to $2.06 billion in 2009 from $1.87 billion in 2008.$203.5 million matured. We had no brokered deposits at December 31, 2010. As a result, interest income decreased 22.0 percent to $144.6 million for 2010 from $185.4 million in 2009 and interest expense decreased 53.4 percent to $38.6 million for 2010 from $82.9 million in 2009. In 2009, interest income decreased by 22.6 percent to $185.4 million for 2009 from $239.6 million in 2008 and interest expense decreased 20.1 percent to $82.9 million for 2009 from $103.8 million in 2008.
In 2008,2010, net interest income decreasedon a tax-equivalent basis increased by 15.73.44 percent to $239.6$106.0 million, from $282.5compared to $102.5 million in 20072009, due to decreases in interest-bearing liabilities and interest expense decreased 19.6 percent to $103.8 million from $129.1 millionpaid , partially offset by decreases in 2007.
average interest-earning assets and interest earned. In 2009, net interest income on a tax-equivalent basis decreased by 24.6 percent to $102.5 million compared tofrom $135.9 million in 2008, due to decreases in average interest-earning assets and interest earned, partially offset by a reduction in interest paid for interest-bearing liabilities. In 2008, net interest income decreased by 11.4 percent to $135.9 million from $153.4 million in 2007, due mainly to decreases in interest earned and paid for interest-earning assets and interest-bearing liabilities.
Provision for Credit Losses
 
For the year ended December 31, 2010, the provision for credit losses was $122.5 million, compared to $196.4 million for the year ended December 31, 2009. The decrease in the provision for credit losses is attributable to decreases in net charge-offs and problem loans, reflecting the improvement in asset quality through aggressive management of our problem asset. Net charge-offs decreased $0.7 million, or 0.6 percent, from $122.6 million for the year ended December 31, 2009 to $121.9 million for the year ended December 31, 2010. Non-performing loans decreased from $219.1 million, or 7.77 percent of total gross loans, as of December 31, 2009 to $169.0 million, or 7.45 percent of total gross loans, as of December 31, 2010. See“Non-Performing Assets”and“Allowance for Loan Losses and Allowance for Off-Balance Sheet Items”for further details.
For the year ended December 31, 2009, the provision for credit losses was $196.4 million, compared to $75.7 million for the year ended December 31, 2008. The increase in the provision for credit losses is


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attributable to deterioration in credit quality including increases in net charge-offs non-performing loans and criticized and classified loans, reflecting a continued severe economic downturn.problem loans. Net charge-offs increased $76.6 million, or 166.7 percent, from $46.0 million for the year ended December 31, 2008 to $122.6 million for the year ended December 31, 2009. Non-performing loans increased from $121.9 million, or 3.62 percent of total gross loans, as of December 31, 2008 to $219.1 million, or 7.77 percent of total gross loans, as of December 31, 2009. See“Non-Performing Assets”and“Allowance for Loan Losses and Allowance for Off-Balance Sheet Items”for further details.
 For the year ended December 31, 2008, the provision for credit losses was $75.7 million, compared to $38.3 million for the year ended December 31, 2007. The increase in the provision for credit losses is attributable to increases in the loan portfolio, net charge-offs, non-performing loans and criticized and classified loans. The gross loan portfolio increased $76.3 million, or 2.3 percent, from $3.29 billion at December 31, 2007 to $3.36 billion at December 31, 2008. Net charge-offs increased $23.3 million, or 103.1 percent, from $22.6 million for the year ended December 31, 2007 to $46.0 million for the year ended December 31, 2008. Non-performing loans increased from $54.5 million, or 1.66 percent of total gross loans, as of December 31, 2007 to $121.9 million, or 3.62 percent of total gross loans, as of December 31, 2008. See“Non-Performing Assets”and“Allowance for Loan Losses and Allowance for Off-Balance Sheet Items”for further details.

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Non-Interest Income
 
We earn non-interest income from five major sources: service charges on deposit accounts, insurance commissions, remittance fees, fees generated from international trade finance and other service changes. In addition, we sell certain assets primarily for risk and liquidity management purposes.
The following table sets forth the various components of non-interest income for the years indicated:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  (In Thousands) 
 (In Thousands) 
Service Charges on Deposit Accounts $17,054 $18,463 $18,061  $14,049  $17,054  $18,463 
Insurance Commissions 4,492 5,067 4,954   4,695   4,492   5,067 
Remittance Fees 2,109 2,194 2,049   1,968   2,109   2,194 
Trade Finance Fees 1,956 3,088 4,493   1,523   1,956   3,088 
Other Service Charges and Fees 1,810 2,365 2,527   1,516   1,810   2,365 
Bank-Owned Life Insurance Income  942   932   952 
Net Gain on Sales of Loans 1,220 765 5,452   514   1,220   765 
Bank-Owned Life Insurance Income 932 952 933 
Net Gain on Sales of Investment Securities 1,833 77 —   122   1,833   77 
Other-Than-Temporary Impairment Loss on Securities —  (2,410)  (1,074)  (790)  —   (2,410)
Other Operating Income 704 2,293 2,611   867   704   2,293 
              
Total Non-Interest Income
 $32,110 $32,854 $40,006  $25,406  $32,110  $32,854 
              
 We earn
For the year ended December 31, 2010, non-interest income was $25.4 million, a decrease of 20.9 percent from four major sources:$32.1 million for the year ended December 31, 2009. The decrease in non-interest income for 2010 is primarily attributable to decreases in service charges on deposit accounts, insurance commissions, fees generated from international trade finance anda net gain on sales of loans. loans and investment securities, and impairment loss on investment securities. The service charges on deposit accounts decreased $3.0 million, or 17.6 percent, to $14.0 million in 2010 compared to $17.1 million in 2009 due to the shrinkage in the deposit portfolio under our deleveraging strategy in the slowed economy. Impairment loss on investment securities of $790,000 resulted from a write-down of equity securities, acquired prior to 2004 for Community Reinvestment Act purposes, upon recapitalization of the issuer of such equity securities. The net gain on sale of loans decreased by $706,000 in 2010 compared to 2009 as a result of lower sales volume. In 2009, we sold accumulated inventory of SBA loans upon the recovery of the SBA secondary market. The net gain on sales of investment securities also decreased by $1.7 million in 2010 compared to 2009. The aforementioned higher level of sales transaction of loans and investment securities in 2009 was a direct result of our balance-sheet deleveraging strategy. The additional liquidity from such sale of assets allowed us to reduce wholesale funds.
For the year ended December 31, 2009, non-interest income was $32.1 million, a decrease of 2.3 percent from $32.9 million for the year ended December 31, 2008. The slight decrease in non-interest income for 2009 iswas primarily attributable to decreases in various service charges on deposit accounts, trade finance fee, andthat resulted from our deleveraging strategy in the slowed economy. In addition, other operating income partially offset by a net gain on sales of investment securities and the absence of OTTI loss on securities recognized in 2008. For the year ended December 31, 2008, non-interest income was $32.9 million, a decrease of 17.8 percent from $40.0 million for the year ended December 31, 2007. The overall decrease in non-interest income for 2008 is primarily due to lower gain on sales of loans, and increase in OTTI loss on securities and lower trade finance fee income.
     Service charges on deposit accounts decreased $1.4 million, or 7.6 percent, in 2009 decreased substantially to $704,000, as compared to 2008 and increased $402,000, or 2.2 percent, in 2008 compared to 2007. The decrease was primarily due to a decrease in account analysis fees, reflecting a decrease in the number of accounts subject to account analysis fees, partially offset by an increase in account analysis fees started from March 2009. Service charge income on deposit accounts increased in 2008 primarily due to an increase of $1.2 million in NSF charges, partially offset by a decrease of $644,000 in account analysis fee income.
     Insurance commissions decreased $575,000, or 11.3 percent, in 2009 compared to 2008 and increased $113,000, or 2.3 percent, in 2008 compared to 2007. The decrease in 2009 was primarily attributable to a decreased demand for insurance products due to a sluggish economy.
     Remittance fees slightly decreased $85,000, or 3.9 percent, in 2009 compared to 2008 and increased $145,000, or 7.1 percent, in 2008 compared to 2007 due primarily to a decline in transaction volumes.
     Fees generated from international trade finance decreased by 36.7 percent from $3.1 million in 2008 to $2.0 million in 2009 and decreased by 31.3 percent from $4.5 million in 2007 to $3.1 million in 2008. The decreases in 2009 and 2008 were primarily attributable to a decline in export letter of credit volume due to the continuation of stressed conditions in the international trade market.
     Other service charges and fees decreased $555,000, or 23.5 percent, in 2009 compared to 2008 and decreased $162,000, or 6.4 percent, in 2008 compared to 2007. The decrease was primarily due to a decrease in loan servicing income.
     Gain on sales of loans was $1.2 million in 2009, compared to $765,000 in 2008 and $5.5 million in 2007, representing an increase of 59.5 percent in 2009 and a decrease of 86.0 percent in 2008. In 2009, the increase in gain on sales of loans resulted from increased sales activity in SBA loans, reflecting a recovery in the SBA secondary market. In 2008, the lower gain on sales of loans was primarily due to a depressed secondary market for SBA loans and lower premiums, which decreased to 3.3 percent in 2008 compared to 4.3 percent in 2007. During 2009, there were $37.3 million of SBA loans sold, compared to $23.3 million in 2008 and $116.6 million in 2007.

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     Net gain on sales of investment securities increased $1.8 million in 2009 compared to 2008 and increased $77,000 in 2008 compared to 2007. There was no sale of investment securities in 2007. In 2009, we realized a $1.8 million net gain on sale of investment securities as part of our balance-sheet deleveraging plan as well as a repositioning of the investment portfolio to substantially reduce municipal bonds in response to our inability to realize tax benefits offered by the bonds in the near future. Proceeds from the sale of investment securities provided additional liquidity to reduce wholesale funds.
     We have periodically evaluated our investments for OTTI. We recorded no OTTI charge in 2009. However, in 2008, we recorded an OTTI charge of $2.4 million related to an impairment loss on a Lehman Brothers corporate bond. During 2007, we recorded an OTTI charge of $1.1 million to write down the value of an investment in CRA preferred securities to their estimated fair value.
     Other operating income decreased by $1.6 million, or 69.3 percent, from $2.3 million in 2008, to $704,000 in 2009. The decrease was attributable primarily to the absence ofwhich included a $1.0 million income for the refund of a previously paid legal and consulting fee to outside vendors and a decrease of $230,000 in income vendors. Such decreases were partially offset by the aforementioned gain


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on sales of mutual fund.assets in 2009. In 2007, other operating income included change2009, we did not have any OTTI charge as opposed to 2008 in fair value of derivatives of $683,000 and gainwhich we recorded a $2.4 million impairment loss on sale of other real estate owned of $226,000.a Lehman Brothers corporate bond.
Non-Interest Expense
 
The following table sets forth the breakdown of non-interest expense for the years indicated:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007    (In Thousands)   
 (In Thousands) 
Salaries and Employee Benefits $33,101 $42,209 $47,036  $36,730  $33,101  $42,209 
Occupancy and Equipment 11,239 11,158 10,494   10,773   11,239   11,158 
Deposit Insurance Premiums and Regulatory Assessments 10,418 3,713 587   10,756   10,418   3,713 
Other Real Estate Owned Expense  10,679   5,890   390 
Data Processing 6,297 5,799 6,390   5,931   6,297   5,799 
Other Real Estate Owned Expense 5,890 390 8 
Professional Fees 4,099 3,539 2,468   3,521   4,099   3,539 
Directors and Officers Liability Insurance  2,865   1,175   397 
Advertising and Promotion 2,402 3,518 3,630   2,394   2,402   3,518 
Supplies and Communications 2,352 2,518 2,592   2,302   2,352   2,518 
Loan-Related Expense 1,947 790 674   1,147   1,947   790 
Amortization of Other Intangible Assets 1,568 1,958 2,324   1,149   1,568   1,958 
Other Operating Expenses 11,041 12,042 10,835   8,558   9,866   11,645 
Impairment Loss on Goodwill — 107,393 102,891   —   —   107,393 
              
Total Non-Interest Expense
 $90,354 $195,027 $189,929  $96,805  $90,354  $195,027 
              
 
For the year ended December 31, 2010, non-interest expense was $96.8 million, anincrease of $6.5 million, or 7.1 percent, from $90.4 million for the year ended December 31, 2009. The increase in 2010 was primarily due to the increases in OREO expense, salaries, and employee benefits. OREO expense increased by $4.8 million to $10.7 million in 2010 as compared with $5.9 million in 2009, due primarily to a $5.6 million additional provision for our OREO valuation allowance. Salaries and employee benefits expense for 2010 also increased by $3.6 million, or 11.0 percent, to $36.7 million for 2010 from $33.1 million for 2009 due primarily to a $1.2 million compensation expense for the payments associated with an employee retention plan. Furthermore, the 2009 expense was lower than usual due to the $2.5 million reversal of post-retirement death benefit liabilities upon amendments of our bank-owned life insurance policies. We also had a substantial increase in directors and officers liability insurance premiums due to the change in risk categories of the Bank. Such increases were partially offset by decreases in loan-related expense and other operating expense.
For the year ended December 31, 2009, non-interest expense was $90.4 million, a decrease of $104.7 million, or 53.7 percent, from $195.0 million for the year ended December 31, 2008. The decrease in 2009 was primarily due to the absence of $107.4 million in impairment loss on goodwill recognized in 20082008. Excluding the goodwill impairment loss, non-interest expense was $87.6 million, which marked only a $2.7 million increase in 2009. Such increase was due primarily to the increases in FDIC insurance assessments due to the higher assessment rates for FDIC insurance on deposits and a decrease of$1.8 million special assessment charged in 2009. OREO expense also increased by $5.5 million from $390,000 in 2008 to $5.9 million in 2009, due primarily to a $3.1 million provision for OREO valuation allowance. Such increases more than offset a $9.1 million decrease in salaries and employee benefits partially offset by an increase of $6.7 million in FDIC insurance assessments2009 and an increase of $5.5 million in other real estate owned expense. For the year ended December 31, 2008, non-interest expense was $195.0 million, an increase of $5.1 million, or 2.7 percent, from $189.9 million for the year ended December 31, 2007. The increase in 2008 was primarily the result of an impairment loss on goodwill of $107.4 million, compared to $102.9 million in 2007. At December 31, 2009, we had no remaining goodwill recorded on our balance sheet.
cost savings efforts. Salaries and employee benefits expense for 2009 decreased by $9.1 million, or 21.6 percent, to $33.1 million from $42.2 million for 2008, as the direct results of an employee reduction in August 2008 of approximately ten percent, lower incentive compensation, and the aforementioned reversal of a $2.5 million previously accrued liability onassociated with a post-retirement death benefit through an amendment to the bank-owned life insurance policy in 2009. At December 31, 2009, the Company had a total of 509 employees, compared with 563 employees at December 31, 2008.benefit.

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     Deposit insurance premiums and regulatory assessments increased $6.7 million, or 180.6 percent, from $3.7 million in 2008 to $10.4 million in 2009. The increase was due to higher assessment rates for FDIC insurance on deposits beginning in the second quarter of 2009 and an increase in the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per depositor and fully insured on all noninterest-bearing deposit accounts until December 31, 2013. In addition, there was a special one-time assessment of $1.8 million during the second quarter of 2009. The FDIC imposed a 5 basis point special assessment on each insured institution’s assets minus Tier 1 capital as of June 30, 2009 to maintain public confidence in the federal deposit insurance system.
     Other real estate owned expense increased $5.5 million from $390,000 in 2008 to $5.9 million in 2009. The increase was due primarily to $1.7 million expenses incurred for two foreclosed California properties (a condominium project in Oakland and a private golf course in Fallbrook), a $3.1 million provision for valuation allowance, and a $211,000 loss on the sale of other real estate owned.
     Loan-related expense increased $1.2 million, or 146.5 percent, from $790,000 in 2008 to $1.9 million in 2009. The increase was primarily due to an $850,000 expense related to a legal settlement on a loan and an increase of $190,000 in appraisal expense.
Income Taxes
 
For the year ended December 31, 2009,2010, a tax benefit of $12,000 was recognized on pre-tax losses of $88.0 million, representing an effective tax benefit rate of 0.01percent, compared to a tax benefit of $31.1 million was recognized on pre-tax losses of $153.4 million, representing an effective tax benefit rate of 20.3 percent, compared tofor 2009 and a tax benefit of $1.4 million recognized on pre-tax losses of $103.4 million, representing an effective tax benefit rate of 1.3 percent, for 2008, and income taxes of $24.3 million recognized on a pre-tax loss of $36.5 million, representing an2008. The effective tax rate of 66.7 percent, for 2007. The effective tax rates for 2008 and 2007 includeincludes impairment losses on goodwill of $107.4 million, and $102.9 million, respectively, which are not deductible for tax purposes.
 
During 2009,2010, we made investments in various tax credit funds totaling $6.2$6.5 million and recognized $1.1 million of income tax credits earned from qualified low-income housing investments. We recognized an income tax credit of $908,000$1.1 million for the tax year 2008of 2009 from $6.1$6.2 million in such investments and recognized an income tax credit of $775,000$908,000 for the tax year 20072008 from $5.8$6.1 million in such investments. We intend to continue to make such investments as part of an effort to lower the effective tax rate and to meet our community reinvestment obligations under the CRA.
 
As indicated in“Notes to Consolidated Financial Statements, Note 12 —11 – Income Taxes,”income taxes are the sum of two components: current tax expense and deferred tax expense (benefit). Current tax expense is the result of applying the current tax rate to taxable income. The deferred portion is intended to account for the fact that income on which taxes are paid differs from financial statement pretax income because certain items of income and expense are recognized in different years for income tax purposes than in the financial statements. These differences in the years that income and expenses are recognized cause “temporary differences.”
 
Most of our temporary differences involve recognizing more expenses in our financial statements than we have been allowed to deduct for taxes, and therefore we normally havehad a net deferred tax asset. AsA valuation allowance is provided when it is more likely than not that some portion or all of December 2009,the deferred tax assets will not be realized. During 2010, we established aan additional valuation allowance of $45.2$47.5 million , totaling $92.7 million against its existing net deferred tax assets of $48.8 million. The remaining$92.7 million and recorded a net deferred tax assetassets balance of zero at December 31, 2010. As of December 31, 2009, we established a $45.2 million valuation allowance against its existing net deferred tax assets of $48.8 million and recorded a net deferred tax assets balance of $3.6 million represents the amount of benefit we will receive in the future based on the carryback of future taxable losses against 2008 taxable income.million. At December 31, 2008, and 2007, we had net deferred tax assets of $29.5 million and $18.5 million, respectively.no valuation allowance was required.

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FINANCIAL CONDITION
Investment Portfolio
Investment securities are classified as held to maturity or available for sale in accordance with GAAP. Those securities that we have the ability and the intent to hold to maturity are classified as “held to maturity.” All other securities are classified as “available for sale.” There were no trading securities as of December 31, 2010, 2009, and 2008. Securities classified as hold to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available for sale securities are stated at fair value. The composition of our investment portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. The investment portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.


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As of December 31, 2009,2010, the investment portfolio was composed primarily of mortgage-backed securities,collateralized mortgage obligations, U.S. Government agency securities, collateralized mortgage obligations, asset-backedmortgage-backed securities, municipal bonds and municipalcorporate bonds. Investment securities available for sale were 99.8 percent, 99.3 percent 99.5 percent and 99.799.5 percent of the total investment portfolio as of December 31, 2010, 2009 2008 and 2007,2008, respectively. Most of the securities held carried fixed interest rates. Other than holdings of U.S. Government agency securities, there were no investments in securities of any one issuer exceeding 10 percent of stockholders’ equity as of December 31, 2010, 2009 2008 or 2007.2008.
 
As of December 31, 2009,2010, securities available for sale were $413.1 million, or 14.2 percent of total assets, compared to $132.4 million, or 4.2 percent of total assets, compared to $196.2 million, or 5.1 percent of total assets, as of December 31, 2008.2009. Securities available for sale decreasedincreased in 2009 as part of our balance-sheet deleveraging plan as well as a repositioning of the investment portfolio to substantially reduce municipal bonds in response2010, due mainly to our inability to realize tax benefits offered by the bonds in the near future. Proceedsliquidity-preservation and earnings-enhancement strategies that we put additional funds from the salecapital raise and sales of investment securities provided additional liquidity to reduce wholesale funds.loans into marketable securities. In 2010, 2009 2008 and 2007,2008, we purchased $448.4 million, $89.4 million $25.4 million and $45.0$25.4 million, respectively, of U.S. Government agency securities, corporate bonds and mortgage-backedvarious types of marketable securities to replenish the portfolio for principal repayments in the form of calls, prepayments and scheduled amortization and to maintain an assetinvestment portfolio mix and size consistent with our strategic direction.capital market expectations and asset-liability management strategies.
 
The following table summarizes the amortized cost, fair value and distribution of investment securities as of the dates indicated:
                        
                         Investment Portfolio as of December 31, 
 Investment Portfolio as of December 31,  2010 2009 2008 
 2009 2008 2007  Amortized
 Fair
 Amortized
 Fair
 Amortized
 Fair
 
 Amortized Fair Amortized Fair Amortized Fair  Cost Value Cost Value Cost Value 
 Cost Value Cost Value Cost Value  (In Thousands) 
 (In Thousands) 
Securities Held to Maturity:                         
Municipal Bonds $696 $696 $695 $695 $694 $694  $696  $696  $696  $696  $695  $695 
Mortgage-Backed Securities(1)
 173 175 215 215 246 247   149   151   173   175   215   215 
                          
Total Securities Held to Maturity
 $869 $871 $910 $910 $940 $941  $845  $847  $869  $871  $910  $910 
                          
 
Securities Available for Sale:                         
Collateralized Mortgage Obligations $139,053  $137,193  $12,520  $12,789  $36,204  $36,162 
U.S. Government Agency Securities  114,066   113,334   33,325   32,763   17,580   17,700 
Mortgage-Backed Securities(1)
 $65,218 $66,332 $77,515 $78,860 $99,332 $99,198   108,436   109,842   65,218   66,332   77,515   78,860 
U.S. Government Agency Securities 33,325 32,763 17,580 17,700 104,893 105,089 
Collateralized Mortgage Obligations(2)
 12,520 12,789 36,204 36,162 51,881 51,418 
Municipal Bonds  22,420   21,028   7,369   7,359   58,987   58,313 
Corporate Bonds(2)
  20,449   20,205   —   —   355   169 
Asset-Backed Securities 8,127 8,188 — — — —   7,115   7,384   8,127   8,188   —   — 
Municipal Bonds 7,369 7,359 58,987 58,313 69,907 71,751 
Other Securities 3,925 4,195 4,684 4,958 3,925 3,835   3,305   3,259   3,925   4,195   4,684   4,958 
Equity Securities 511 794 511 804 — — 
Corporate Bonds(3)
 — — 355 169 18,295 18,226 
             
Equity Securities(3)
  647   873   511   794   511   804 
              
Total Securities Available for Sale
 $130,995 $132,420 $195,836 $196,966 $348,233 $349,517  $  415,491  $  413,118  $  130,995  $  132,420  $  195,836  $  196,966 
                          
 
(1)Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
 
(2)Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities, except for two private-label securities held as of December 31, 2008 with an unrealized loss totaling $42,000. The two private-label securities were sold during the year ended December 31, 2009.
(3)Balances presented for amortized cost, representing one corporate bond, were net of an OTTI charge of $2.4 million, which was related to a credit loss, as of December 31, 2008. Therefore, the adoption of a new accounting standard did not require a reclassification for the non-credit portion of previously recognized OTTI from the opening balance of retained earnings to other comprehensive income as of March 31, 2009. The corporate bond was sold during the year ended December 31, 2009.
(3)Balances presented for amortized cost, representing two corporate bonds, were net of an OTTI charge of $790,000, which was related to a credit loss, as of December 31, 2010. We recorded an OTTI charge of $790,000 to write down the value of one investment security to its fair value during the year ended December 31, 2010.

58
64

The following table summarizes the contractual maturity schedule for investment securities, at amortized cost, and their weighted-average yield as of December 31, 2009:
                                 
          After One Year But  After Five Years But    
  Within One Year  Within Five Years  Within Ten Years  After Ten Years 
  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
  (Dollars in Thousands) 
Mortgage-Backed Securities $2,287   4.29% $6,506   4.24% $5,355   4.45% $51,243   4.35%
U.S. Government Agency Securities  —   —   —   —   9,999   4.10%  23,326   5.57%
Collateralized Mortgage Obligations  3,386   4.00%  3,811   4.09%  5,323   3.95%  —   — 
Asset-Backed Securities  —   —   —   —   5,440   4.43%  2,687   4.51%
Municipal Bonds(1)
  —   —   695   7.06%  2,869   6.13%  4,501   6.65%
Other Securities  3,925   3.37%  —   —   —   —   —   — 
Equity Securities  —   —   —   —   —   —   511   — 
Corporate Bonds  —   —   —   —   —   —   —   — 
                             
  $9,598   3.81% $11,012   4.37% $28,986   4.40% $82,268   4.80%
                             
The following table summarizes the contractual maturity schedule for investment securities, at amortized cost, and their weighted-average yield as of December 31, 2010:
 
                                 
     After One Year But
  After Five Years But
    
  Within One Year  Within Five Years  Within Ten Years  After Ten Years 
  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
  (Dollars in Thousands) 
 
Collateralized Mortgage Obligations $1,450   4.49% $90,396   2.45% $36,830   2.78% $10,377   2.79%
U.S. Government Agency Securities  —   —   96,999   1.72%  17,067   2.81%  —   — 
Mortgage-Backed Securities  1,973   4.34%  84,113   2.50%  22,499   4.30%  —   — 
Municipal Bonds(1)
  —   —   696   7.06%  2,877   5.57%  19,543   4.13%
Corporate Bonds  —   —   17,449   2.22%  3,000   4.00%  —   — 
Asset-Backed Securities  —   —   —   —   4,824   4.55%  2,290   4.78%
Other Securities  3,305   3.31%  —   —   —   —   —   — 
Equity Securities  —   —   —   —   —   —   648   — 
                                 
  $6,728   3.87% $289,653   2.20% $87,097   3.39% $32,858   3.74%
                                 
(1)The yield on municipal bonds has been computed on a tax-equivalent basis, using an effective marginal rate of 35 percent.
 
The amortized cost of mortgage-backed securities and collateralized mortgage obligations are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties.
In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” amended currentother-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the twelve months ended December 31, 2010, we recorded $790,000 in OTTI in earnings on anavailable-for-sale security.
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 December 31, 20092010 and 2008:
                                     
  Holding Period 
  Less than 12 Months  12 Months or More  Total 
  Gross  Estimated  Number  Gross  Estimated  Number  Gross  Estimated  Number 
Investment Securities Unrealized  Fair  of  Unrealized  Fair  of  Unrealized  Fair  of 
Available for Sale Losses  Value  Securities  Losses  Value  Securities  Losses  Value  Securities 
  (In Thousands) 
December 31, 2009:
                                    
Mortgage-Backed Securities $144  $14,584   3  $—  $—   —  $144  $14,584   3 
Municipal Bonds  12   303   1   80   793   1   92   1,096   2 
U.S. Government Agency Securities  562   32,764   6   —   —   —   562   32,764   6 
Other Securities  24   1,976   2   39   961   1   63   2,937   3 
                            
  $742  $49,627   12  $119  $1,754   2  $861  $51,381   14 
                            
December 31, 2008:
                                    
Mortgage-Backed Securities $158  $10,631   42  $33  $5,277   4  $191  $15,908   46 
Municipal Bonds  968   35,614   66   119   1,749   4   1,087   37,363   70 
Collateralized Mortgage Obligations  36   4,569   4   143   5,903   4   179   10,472   8 
Other Securities  72   929   1   40   1,960   2   112   2,889   3 
Corporate Bonds  186   169   1   —   —   —   186   169   1 
                            
  $1,420  $51,912   114  $335  $14,889   14  $1,755  $66,801   128 
                            
2009:
 All individual
                                     
  Holding Period 
  Less than 12 Months  12 Months or More  Total 
  Gross
  Estimated
  Number
  Gross
  Estimated
  Number
  Gross
  Estimated
  Number
 
Investment Securities
 Unrealized
  Fair
  of
  Unrealized
  Fair
  of
  Unrealized
  Fair
  of
 
Available for Sale Losses  Value  Securities  Losses  Value  Securities  Losses  Value  Securities 
  (In Thousands) 
 
December 31, 2010:
                                    
Collateralized Mortgage Obligations $  2,330  $99,993     20  $—  $—   —  $  2,330  $90,993     20 
U.S. Government Agency Securities  830   69,266   14   —   —   —   830   69,266   14 
Mortgage-Backed Securities $731  $62,738   16  $—  $—   —  $731  $62,738   16 
Municipal Bonds  1,440   16,907   11   —   —   —   1,440   16,907   11 
Corporate Bonds  257   17,210   5   —   —   —   257   17,210   5 
Other Securities  3   1,997   2   43   957   1   46   2,954   3 
                                     
  $5,591  $268,111   68  $43  $957   1  $5,634  $269,068   69 
                                     
December 31, 2009:
                                    
U.S. Government Agency Securities  562   32,764   6   —   —   —   562   32,764   6 
Mortgage-Backed Securities $144  $14,584   3  $—  $—   —  $144  $14,584   3 
Municipal Bonds  12   303   1   80   793   1   92   1,096   2 
Other Securities  24   1,976   2   39   961   1   63   2,937   3 
                                     
  $742  $49,627   12  $119  $1,754     2  $861  $  51,381   14 
                                     
The unrealized losses on investments in U.S. agencies securities that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2009 and 2008 had investment grade ratings upon purchase. The issuerswere caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities haveat a price less than par. Because the Bank does 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 December 31, 2009. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
     We are required to assess whether the entity has the intentintend to sell the debt security or moresecurities in


65

this class and it is not likely than notthat the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the debt security before its anticipated recovery. We dounrealized losses on these investments are not consideredother-than-temporarily impaired.
The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of December 31, 2010. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell thesethe securities in this class and it is not more likely than not that wethe Bank will be required to sell the investmentsthese securities before the recovery of itstheir amortized cost bases. Therefore,basis, which may include holding each security until maturity, the unrealized losses on these investments are not consideredother-than-temporarily impaired.
Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in management’san unrealized loss position at December 31, 2010, all of them are issued and guaranteed by governmental sponsored entities. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and no concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not consideredother-than-temporarily impaired.
In the opinion of management, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of December 31, 20092010 and 20082009 are notother-than-temporarily impaired, and therefore, no impairment charges as of December 31, 20092010 and 20082009 are warranted.

59

Investment securities available for sale with carrying values of $118.0 million and $91.6 million as of December 31, 2010 and 2009, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
Loan Portfolio
 
Total gross loans decreased by $552.9 million, or 19.6 percent, in 2010 and decreased by $542.8 million, or 16.1 percent, in 2009 and increased by $76.3 million, or 2.3 percent, in 2008.2009. Total gross loans represented 89.278.0 percent of total assets at December 31, 2009,2010, compared with 86.889.2 percent and 82.586.8 percent at December 31, 20082009 and 2007,2008, respectively. The overall decrease in total gross loans is attributable to management’s balance sheet deleveraging strategy, by carefully evaluatingwhich includes a careful evaluation of credits that are subject to renewal and accepting only thoseacceptance of credits that management believes are of the highesthigh quality, as well as loan charge-offs and transfers to other real estate owned.
 
Real estate loans were $856.5 million and $1.04 billion at December 31, 2010 and 2009, respectively, representing 37.8 percent and 37.0 percent, respectively, of total gross loans. Real estate loans are extended to finance the purchaseand/or improvement of commercial real estate and residential property. The properties generally are investor-owned, but may be for user-owned purposes. Underwriting guidelines include, among other things, an appraisal in conformity with the USPAP, limitations onloan-to-value ratios, and minimum cash


66

flow requirements to service debt. The majority of the properties taken as collateral are located in Southern California.
Commercial and industrial loans were $1.71$1.36 billion and $2.10$1.71 billion at December 31, 20092010 and 2008,2009, respectively, representing 60.860.0 percent and 62.460.8 percent, respectively, of total gross loans. Commercial loans include term loans and revolving lines of credit. Term loans typically have a maturity of three to seven years and are extended to finance the purchase of business entities, owner-occupied commercial property, business equipment, leasehold improvements or for permanent working capital. SBA guaranteed loans usually have a longer maturity (5 to 20 years). Lines of credit, in general, are extended on an annual basis to businesses that need temporary working capitaland/or import/export financing. These borrowers are well diversified as to industry, location and their current and target markets.
 Real estate loans were $1.04 billion and $1.18 billion at December 31, 2009 and 2008, respectively, representing 37.0 percent and 35.1 percent, respectively, of total gross loans. Real estate loans are extended to finance the purchase and/or improvement of commercial real estate and residential property. The properties generally are investor-owned, but may be for user-owned purposes. Underwriting guidelines include, among other things, an appraisal in conformity with the USPAP, limitations on loan-to-value ratios, and minimum cash flow requirements to service debt. The majority of the properties taken as collateral are located in Southern California.

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The following table sets forth the amount of total loans outstanding in each category as of the dates indicated:
                    
                     Amount of Loans Outstanding as of December 31, 
 Amount of Loans Outstanding as of December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005  (In Thousands) 
 (In Thousands) 
Real Estate Loans:                     
Commercial Property $839,598 $908,970 $795,675 $757,428 $733,650  $731,482  $839,598  $908,970  $795,675  $757,428 
Construction 126,350 178,783 215,857 202,207 152,080   62,400   126,350   178,783   215,857   202,207 
Residential Property(1)
 77,149 92,361 90,375 81,758 88,442   62,645   77,149   92,361   90,375   81,758 
                      
 
Total Real Estate Loans 1,043,097 1,180,114 1,101,907 1,041,393 974,172   856,527   1,043,097   1,180,114   1,101,907   1,041,393 
           
            
Commercial and Industrial Loans:                     
Commercial Term Loans 1,420,034 1,611,449 1,599,853 1,202,612 945,210   1,133,892   1,420,034   1,611,449   1,599,853   1,202,612 
Commercial Lines of Credit 101,159 214,699 256,978 225,630 224,271   59,056   101,159   214,699   256,978   225,630 
SBA Loans(2)
 139,531 178,399 118,528 171,631 155,491   123,750   139,531   178,399   118,528   171,631 
International Loans 53,488 95,185 119,360 126,561 106,520   44,167   53,488   95,185   119,360   126,561 
                      
 
Total Commercial and Industrial Loans 1,714,212 2,099,732 2,094,719 1,726,434 1,431,492   1,360,865   1,714,212   2,099,732   2,094,719   1,726,434 
           
            
Consumer Loans(3)
 63,303 83,525 90,449 100,121 92,154   50,300   63,303   83,525   90,449   100,121 
                      
 
Total Gross Loans
 $2,820,612 $3,363,371 $3,287,075 $2,867,948 $2,497,818  $  2,267,692  $  2,820,612  $  3,363,371  $  3,287,075  $  2,867,948 
                      
 
(1)As of December 31, 2009, 2008, 2007 2006 and 2005,2006, residential mortgage loans held for sale totaling $0, $0, $310,000 and $630,000, respectively, were included at the lower of cost or fair value.
(2)As of December 31, 2010, 2009, 2008, 2007 and $1.12006, SBA loans held for sale totaling $18.1 million, $5.0 million, $37.4 million, $6.0 million and $23.2 million, respectively, were included at the lower of cost or fair value.
 
(2)(3)As of December 31, 2009, 2008, 2007, 2006 and 2005, SBA loans held for sale totaling $5.0 million, $37.4 million, $6.0 million, $23.2 million and $0, respectively, were included at the lower of cost or fair value.
(3)Consumer loans include home equity lines of credit.
 
As of December 31, 2010 and December 31, 2009, loans receivable (including loans held for sale), net of deferred loan fees and allowance for loan losses, totaled $2.12 billion and $2.67 billion, respectively, a decrease of $553.0 million, or 20.7 percent. Total gross loans decreased by $552.9 million, or 19.6 percent, from $2.82 billion as of December 31, 2009 to $2.27 billion as of December 31, 2010, reflecting the continued implementation of our deleveraging strategy.
During 2010, total new loan production and advances amounted to $287.6 million. For the same period, we experienced decreases in loans totaling $840.5 million, comprised of $554.6 million in principal amortization and payoffs, $131.8 million in charge-offs, $135.8 million in problem loan sales, $5.3 million in SBA loan sales and $13.0 million that were transferred to OREO. The $286.1 million decrease in commercial term loans was attributable to $90.1 million in problem loan sales, $218.3 million in principal amortization and payoffs, $70.3 million in charge-offs, and $5.6 million that were transferred to OREO, partially offset by $98.2 million of new loan production, for the year ended December 31, 2010.
Real estate loans, composed of commercial property, construction loans and residential property, decreased $186.6 million, or 17.9 percent, to $856.5 million as of December 31, 2010 from $1.04 billion as of December 31,


67

2009, representing 37.8 percent of total gross loans as of December 31, 2010 and 37.0 percent of total gross loans as of December 31, 2009, respectively. Commercial and industrial loans, composed of owner-occupied commercial property, trade finance, SBA and commercial lines of credit, decreased $353.3 million, or 20.6 percent, to $1.36 billion as of December 31, 2010 from $1.71 billion as of December 31, 2009, representing 60.0 percent of total gross loans as of December 31, 2010 and 60.8 percent of total gross loans as of December 31, 2009. Consumer loans decreased $13.0 million, or 20.5 percent, to $50.3 million as of December 31, 2010 from $63.3 million as of December 31, 2009.
The following table sets forth the percentage distribution of loans in each category as of the dates indicated:
                    
                     Percentage Distribution of Loans as of December 31, 
 Percentage Distribution of Loans as of December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005 
Real Estate Loans:                     
Commercial Property  29.8%  27.0%  24.2%  26.4%  29.4%  32.3%  29.8%  27.0%  24.2%  26.4%
Construction  4.5%  5.3%  6.6%  7.1%  6.1%  2.8%  4.5%  5.3%  6.6%  7.1%
Residential Property  2.7%  2.8%  2.7%  2.8%  3.5%  2.7%  2.7%  2.8%  2.7%  2.8%
                      
 
Total Real Estate Loans  37.0%  35.1%  33.5%  36.3%  39.0%  37.8%  37.0%  35.1%  33.5%  36.3%
           
            
Commercial and Industrial Loans:                     
Commercial Term Loans  50.3%  47.9%  48.7%  41.9%  37.8%  50.0%  50.3%  47.9%  48.7%  41.9%
Commercial Lines of Credit  3.6%  6.4%  7.8%  7.9%�� 9.0%  2.6%  3.6%  6.4%  7.8%  7.9%
SBA Loans  4.9%  5.3%  3.6%  6.0%  6.2%  5.5%  4.9%  5.3%  3.6%  6.0%
International Loans  2.0%  2.8%  3.6%  4.4%  4.3%  1.9%  2.0%  2.8%  3.6%  4.4%
                      
 
Total Commercial and Industrial Loans  60.8%  62.4%  63.7%  60.2%  57.3%  60.0%  60.8%  62.4%  63.7%  60.2%
           
            
Consumer Loans  2.2%  2.5%  2.8%  3.5%  3.7%  2.2%  2.2%  2.5%  2.8%  3.5%
                      
 
Total Gross Loans
  100.0%  100.0%  100.0%  100.0%  100.0%    100.0%    100.0%    100.0%    100.0%    100.0%
                      
 
The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In Thousands) 
 (In Thousands) 
Commitments to Extend Credit $262,821 $386,785  $178,424  $262,821 
Standby Letters of Credit 17,225 47,289   15,226   17,225 
Commercial Letters of Credit 13,544 29,177   11,899   13,544 
Unused Credit Card Lines 23,408 16,912   24,649   23,408 
          
 
Total Undisbursed Loan Commitments
 $316,998 $480,163  $  230,198  $  316,998 
          

61
68

The table below shows the maturity distribution and repricing intervals of outstanding loans as of December 31, 2009.2010. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates. The table includes non-accrual loans of $219.0$169.0 million.
                
                   After One
     
  After One    Year But
     
  Year But  Within
 Within
 After
   
 Within Within After  One Year Five Years Five Years Total 
 One Year Five Years Five Years Total  (In Thousands) 
 (In Thousands) 
Real Estate Loans:                 
Commercial Property $703,955 $135,643 $— $839,598  $616,434  $114,374  $674  $731,482 
Construction 126,350 — — 126,350   62,400   —   —   62,400 
Residential Property 19,463 52,401 5,285 77,149   38,123   17,327   7,195   62,645 
                  
 
Total Real Estate Loans 849,768 188,044 5,285 1,043,097   716,957   131,701   7,869   856,527 
         
          
Commercial and Industrial Loans:                 
Commercial Term Loans 1,075,332 344,702 — 1,420,034   968,645   164,273   974   1,133,892 
Commercial Lines of Credit 101,159 — — 101,159   59,047   9   —   59,056 
SBA Loans 136,269 3,262 — 139,531   109,770   13,980   —   123,750 
International Loans 53,488 — — 53,488   44,167   —   —   44,167 
                  
 
Total Commercial and Industrial Loans 1,366,248 347,964 — 1,714,212   1,181,629   178,262   974   1,360,865 
         
          
Consumer Loans 61,954 1,349 — 63,303   48,605   1,695   —   50,300 
                  
 
Total Gross Loans
 $2,277,970 $537,357 $5,285 $2,820,612  $1,947,191  $311,658  $8,843  $2,267,692 
         
          
Loans With Predetermined Interest Rates $412,984 $512,365 $5,285 $930,634  $427,959  $280,205  $7,869  $716,033 
Loans With Variable Interest Rates $1,864,986 $24,992 $— $1,889,978  $1,519,232  $31,453  $974  $1,551,659 
         
 
As of December 31, 2009,2010, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of total gross loans outstanding:
                
 Balance as of Percentage of Total  Balance as of
 Percentage of Total
Industry December 31, 2009 Gross Loans Outstanding  December 31, 2010 Gross Loans Outstanding
 (In Thousands)  (In Thousands)  
Lessors of Non-Residential Buildings $417,266  14.8% $     379,043   16.7%
Accommodation/Hospitality $413,380  14.7% $321,735   14.2%
Gasoline Stations $343,100  12.2% $287,560   12.7%
 
There was no other concentration of loans to any one type of industry exceeding 10 percent of total gross loans outstanding.
Non-Performing Assets
 
Non-performing loans consist of loans on non-accrual status and loans 90 days or more past due and still accruing interest. Non-performing assets consist of non-performing loans and OREO. Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.


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Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at this point, we stop recognizing income from the interest on the loan and reverse any uncollected interest that had been accrued but unpaid. These loans may or may not be collateralized, but collection efforts are continuously pursued.

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Except for non-performing loans set forth below, our management is not aware of any loans as of December 31, 2009 and 20082010 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. Our management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.
 
The following table provides information with respect to the components of non-performing assets as of December 31 for the years indicated:
                    
                     December 31, 
 December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005    (Dollars in Thousands)   
 (Dollars in Thousands) 
Non-Performing Loans:                     
Non-Accrual Loans:                     
Real Estate Loans:                     
Commercial Property $58,927 $8,160 $2,684 $246 $—  $47,937  $58,927  $8,160  $2,684  $246 
Construction 15,185 38,163 24,118 — —   19,097   15,185   38,163   24,118   — 
Residential Property 3,335 1,350 1,490 — 474   1,925   3,335   1,350   1,490   — 
Commercial and Industrial Loans 140,931 73,007 25,729 13,862 9,574   99,022   140,931   73,007   25,729   13,862 
Consumer Loans 622 143 231 105 74   1,047   622   143   231   105 
                      
 
Total Non-Accrual Loans 219,000 120,823 54,252 14,213 10,122   169,028   219,000   120,823   54,252   14,213 
           
            
Loans 90 Days or More Past Due and Still Accruing (as to Principal or Interest):                     
Commercial and Industrial Loans — 989 150 — —   —   —   989   150   — 
Consumer Loans 67 86 77 2 9   —   67   86   77   2 
                      
 
Total Loans 90 Days or More Past Due and Still Accruing (as to Principal or Interest) 67 1,075 227 2 9   —   67   1,075   227   2 
                      
 
Total Non-Performing Loans 219,067 121,898 54,479 14,215 10,131 
 
Total Non-Performing Loans(1) (2)
  169,028   219,067   121,898   54,479   14,215 
Other Real Estate Owned 26,306 823 287 — —   4,089   26,306   823   287   — 
           
            
Total Non-Performing Assets
 $245,373 $122,721 $54,766 $14,215 $10,131  $ 173,117  $  245,373  $  122,721  $  54,766  $  14,215 
                      
Troubled Debt Restructured Performing Loans $47,395  $—  $—  $—  $— 
��            
Non-Performing Loans as a Percentage of Total Gross Loans  7.77%  3.62%  1.66%  0.50%  0.41%  7.45%  7.77%  3.62%  1.66%  0.50%
Non-Performing Assets as a Percentage of Total Assets  7.76%  3.17%  1.37%  0.38%  0.30%  5.95%  7.76%  3.17%  1.37%  0.38%
 
(1)Include troubled debt restructured non-performing loans of $27.0 million, $36.7 million, $24.2 million as of December 31, 2010, December 31, 2009 and December 31, 2008, respectively.
(2)Include loans held for sale.
Non-accrual loans totaled $169.0 million as of December 31, 2010, compared to $219.0 million as of December 31, 2009, compared to $120.8 million as of December 31, 2008, representing a 81.322.8 percent increase.decrease. Delinquent loans (defined as 30 days or more past due) were $147.5 million as of December 31, 2010, compared to $186.3 million as of December 31, 2009, comparedrepresenting a 20.8 percent decrease. Non-performing loans decreased by $50.0 million, or 22.8 percent, to $128.5$169.0 million as of December 31, 2008, representing a 45.0 percent increase. We believe that the increases in non-performing loans and delinquent loans are attributable primarily to a current economic recession that is affecting some of our borrowers’ ability to honor their commitments.
     Non-performing loans increased by $97.2 million, or 79.7 percent,2010, compared to $219.1 million as of December 31, 2009, compared2009. For the year ended December 31, 2010, loans totaling $222.2 million were placed on nonaccrual status. The additions to $121.9nonaccrual loans of $222.2 million were offset by $131.5 million in charge-offs, $107.8 million in sales of problem loans, $6.1 million in principal paydowns and payoffs, $14.7 million that were placed back to accrual status, and $12.1 million that were transferred to OREO. The $107.8 million in sales of problem loans were


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primarily comprised of commercial property loans of $47.1 million with related charge-offs of $9.1 million, and commercial term loans of $60.3 million with related charge-offs of $12.2 million. There was no gain or loss recognized as any deficiency between net proceeds and outstanding loan balances were charged off prior to the sales of the loans. The $50.0 million decrease in non-performing loans is attributable primarily to the $39.7 million decrease in non-performing commercial term loans, which make up $63.0 million or 37.3 percent of the total non-performing loans and $11.0 million decrease in non-performing commercial property loans, which make up $47.9 million or 28.4 percent of the total non-performing loans as of December 31, 2008. 2010.
The ratio of non-performing loans to total gross loans also increaseddecreased to 7.45 percent at December 31, 2010 from 7.77 percent at December 31, 2009 from 3.62 percent at December 31, 2008.due primarily to the decrease in total gross loans. During the same period, the allowance for loan losses increased by $74.0$1.1 million, or 104.30.7 percent, to $145.0$146.1 million from $71.0$145.0 million. The $97.2 million increase in non-performing loans resulted primarily from increases of $50.7 million in commercial real estate loans, $37.5 million in real estate secured commercial term loans, and $19.7 million in SBA loans, partially offset by the $25.6 million decrease in construction loans. Of the $219.1$169.0 million non-performing loans, approximately $200.7$149.5 million were impaired based on the definition contained in FASB ASC 310,ASC310, “Receivables,” which resulted in aggregate impairment reserve of $23.1$15.3 million as of December 31, 2009. This impairment reserve total is in addition to the charge-offs of $49.4 million from impaired loans. The2010. We calculate our allowance for the collateral-dependent loans is calculated byas the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

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As of December 31, 2009,2010, $138.1 million, or 81.7 percent, of the $169.0 million of non-performing loans were secured by real estate, compared to $176.0 million, or 80.3 percent, of the $219.1 million of non-performing loans were secured by real estate. Asas of December 31, 2008, $96.3 million, or 79.0 percent, of the $121.9 million of non-performing loans were secured by real estate.2009. In light of declining property values in the current economic downturnrecession affecting the real estate markets, the Bank continued to obtain current appraisals and factor in adequate market discounts on the collateral to compensate for non-current appraisals.
As of December 31, 2010, other real estate owned consisted of eight properties, primarily located in California, with a combined net carrying value of $4.1 million. For the year ended December 31, 2010, fourteen properties, with a carrying value of $13.0 million, were transferred from loans receivable to other real estate owned and eighteen properties, with a carrying value of $26.1 million, were sold and a net loss of $196,000 was recognized. As of December 31, 2009, 2008 and 2007, we had OREOother real estate owned consisted of twelve properties with a combined net carrying value of $26.3 million.
We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.


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The following table provides information on impaired loans, disaggregated by class of loan, as of the dates indicated:
                         
        With No
          
     Unpaid
  Related
  With an
     Average
 
  Recorded
  Principal
  Allowance
  Allowance
  Related
  Recorded
 
  Investment  Balance  Recorded  Recorded  Allowance  Investment 
        (In thousands)       
 
December 31, 2010:
                        
Real Estate Loans:                        
Commercial Property                        
Retail $17,606  $18,050  $6,336  $11,270  $1,543  $21,190 
Land  35,207   35,295   5,482   29,725   1,485   40,858 
Other  11,357   11,476   10,210   1,147   33   15,342 
Construction  17,691   17,831   13,992   3,699   280   12,311 
Residential Property  1,926   1,990   1,926   —   —   2,383 
Commercial and Industrial Loans:                        
Commercial Term Loans                        
Unsecured  17,847   18,799   6,465   11,382   10,313   18,460 
Secured by Real Estate  80,213   81,395   35,154   45,059   11,831   101,617 
Commercial Lines of Credit  4,067   4,116   1,422   2,645   1,321   4,988 
SBA Loans  17,715   18,544   7,112   10,603   2,122   23,213 
International Loans  127   141   —   127   127   397 
Consumer Loans  934   951   393   541   393   639 
                         
Total $204,690  $208,588  $88,492  $116,198  $29,448  $241,398 
                         
December 31, 2009:
                        
Real Estate Loans:                        
Commercial Property                        
Retail $19,233  $19,430  $17,170  $2,063  $120  $15,834 
Land  22,960   22,978   19,889   3,071   461   10,801 
Other  16,640   16,924   14,747   1,893   176   17,283 
Construction  15,185   15,204   9,823   5,362   444   23,677 
Residential Property  3,335   3,459   1,989   1,346   395   2,512 
Commercial and Industrial Loans:                        
Commercial Term Loans                        
Unsecured  19,094   19,373   2,680   16,414   14,806   17,777 
Secured by Real Estate  83,875   84,528   48,806   35,069   4,075   98,898 
Commercial Lines of Credit  1,906   1,951   1,345   561   343   2,235 
SBA Loans  20,040   20,567   10,126   9,914   1,805   17,033 
International Loans  739   742   739   —   —   1,717 
Consumer Loans  524   531   —   524   524   890 
                         
Total $203,531  $205,687  $127,314  $76,217  $23,149  $208,657 
                         
For the year ended December 31, 2010 and 2009, we recognized interest income on one impaired commercial term loan secured by real estate of $402,000 and $1.0 million, $823,000respectively. Except for such loan, no interest income was recognized on impaired loans subsequent to classification as impaired in 2010 and $287,000, respectively.2009. No interest income recognized on impaired loans subsequent to classification as impaired in 2008.
The following is a summary of interest foregone on impaired loans for the periods indicated:
             
  Year Ended December 31, 
  2010  2009  2008 
  (In Thousands) 
 
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance with Their Original Terms $20,848  $17,471  $7,327 
Less: Interest Income Recognized on Impaired Loans(1)
  (11,473)  (9,569)  (5,422)
             
Interest Foregone on Impaired Loans
 $9,375  $7,902  $1,905 
             
(1)  Includes interest income recognized on an accrual basis prior to classification as impaired.


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There were no commitments to lend additional funds to borrowers whose loans are included above.
For the year ended December 31, 2010, we restructured monthly payments on 272 loans, with a net carrying value of $228.4 million as of December 31, 2010, through temporary payment structure modification from principal and interest due monthly to interest only due monthly for six months or less. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. For the year ended December 31, 2009, we restructured monthly payments on 351 loans, with a net carrying value of $281.0 million as of December 31, 2009. As of December 31, 2010, troubled debt restructurings on accrual status totaled $47.4 million, all of which were temporary interest rate and payment reductions, and a $6.4 million reserve relating to these loans is included in the allowance for loan losses. Troubled debt restructurings on accrual status are comprised of loans that are contractually current and have sustained repayment ability and performance or well secured and in process of collection. As of December 31, 2009, there were no troubled debt restructured loans on accrual status.
Allowance for Loan Losses and Allowance for Off-Balance Sheet Items
 
The Bank will charge off a loan and declare a loss when its collectability is sufficiently questionable that the Bank can no longer justify showing the loan as an asset on its balance sheet. To determine if a loan should be charged off, all possible sources of repayment are analyzed, including the potential for future cash flow from income or liquidation of other assets, the value of any collateral, and the strength of co-makers or guarantors. When these sources do not provide a reasonable probability that principal can be collected in full, the Bank will fully or partially charge off the loan.
Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.
 
To determine general reserve requirements, existing loans are divided into 10 general loan pools of risk-rated loans (commercial real estate, construction, commercial term — unsecured, commercial term —(Commercial Real Estate, Construction, Commercial Term – Unsecured, Commercial Term – T/D secured, commercial lineSecured, Commercial Line of credit,Credit, SBA, international, consumer installment, consumer lineInternational, Consumer Installment, Consumer Line of credit,Credit, and miscellaneousMiscellaneous loans) as well as 3 homogenous loan pools (residential mortgage, auto loans,(Residential Mortgage, Auto Loans, and credit card)Credit Card). For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade (pass, special mention, substandard, and doubtful) to determine risk factors for potential loss inherent in the current outstanding loan portfolio.
 In
During the first quarter of 2008, we enhanced our migration analysis2010, to enhance reserve calculations to better reflect the Bank’s current loss profile. Our prior migration analysis utilized 28 quartersprofile, the two loan pools of evenly-weightedcommercial real estate and commercial term – T/D secured were subdivided according to the 21 collateral codes used by the Bank to identify commercial property types (Apartment, Auto, Car Wash, Casino, Church, Condominium, Gas Station, Golf Course, Industrial, Land, Manufacturing, Medical, Mixed Used, Motel, Office, Retail, School, Supermarket, Warehouse, Wholesale, and Others). This further segregation allows the Bank to more specifically allocate reserves within the commercial real estate portfolio according to risks defined by historic losses. Our revised migration analysis utilizes loss as well as current loan concentrations of the different collateral types.
Risk factor calculations were previously based on12-quarters of historic lossesloss analysis with 1.5 to 1 weighting given to the most recent six quarters. In the first quarter of 2010, the historic loss window was


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reduced to eight quarters with 1.5 to 1 weighting given to the most recent four quarters. The enhanced window places greater emphasis on losses taken by the Bank within the past year, as recent loss history is more relevant to the Bank’s risks given the rapid changes to asset quality within the current economic conditions.
 
As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis; however, as with risk-rated loans, risk factor calculations are based on 12-quarter8-quarters of historic loss analysis with 1.5 to 1 weighting given to the most recent sixfour quarters.
 
The Bank will charge off a loan and declare a loss when its collectability is sufficiently questionable that the Bank can no longer justify showing the loan as an asset on its balance sheet. To determine if a loan should be charged off, all possible sources of repayment are analyzed, including the potential for future cash flow from income or liquidation of other assets, the value of any collateral, and the strength of co-makers or guarantors. When these sources do not provide a reasonable probability that principal can be collected in full, the Bank will fully or partially charge off the loan.
For purposes of determining the allowance for credit losses, the loan portfolio is subdivided into three portfolio segments: Real Estate, Commercial and Industrial, and Consumer. The portfolio segment of Real Estate contains the allowance loan pools of Commercial Real Estate, Construction, and Residential Mortgage. The portfolio segment of Commercial and Industrial contains the loan pools of Commercial Term — Unsecured, Commercial Term — T/D Secured, Commercial Line of Credit, SBA, International, and Miscellaneous. Lastly, the portfolio segment of Consumer contains the loan pools of Consumer Installment, Consumer Line of Credit, Auto, and Credit Card.
Real Estate loans, which are mostly dependent on rental income from non-owner occupied or investor properties, have been subject to increased losses. Prior to 2009, no historic losses were recorded for loans secured by commercial real estate. However, given the decrease in sales and increase in vacancies due to the current slowed economy, losses in loans secured by office and retail properties have been significant. Loans secured by vacant land have also had significant losses as valuations have decreased and further development has been limited. Similarly, Construction loans have been subject to losses due to unforeseen difficulties in completion of projects. As such, allocations to general reserves for those loan pools have been higher than that of loan pools with lower risk. Residential Mortgage loans constitute a limited concentration within the Bank’s entire loan portfolio, and losses as well as supplementary reserves have been minimal.
Commercial and Industrial loans, which are largely subject to changes in business cash flow, have had the most historic losses within the Bank’s entire loan portfolio. The largest loan pool within the C & I sector is Commercial Term — T/D Secured, which are mostly loans secured by owner-occupied business properties. Loans secured by car washes, gas stations, golf courses, and motels have had the most significant losses, as the hospitality and recreation industries have been negatively affected by the current economy. As such, allocations to general reserve for those loan pools have been increased. Also, Commercial Term — Unsecured and SBA loans have had considerable losses and additional general reserves as decreased business cash flow due to the economic recession has jeopardized borrowers’ repayment abilities.
Consumer loans constitute a limited concentration within the Bank’s loan portfolio and are mostly evaluated in bulk for general reserve requirements due to the relatively small volume per loan.
Specific reserves are allocated for loans deemed “impaired.” FASB ASC 310, “Receivables,” provides the definition of impairment:indicates that a loan is impaired“impaired” when based on current information and events, it is probable that a bank iscreditor will be unable to collect all amounts due, under the loanincluding principal and interest, according to the contractual terms and schedules of the loan documents.agreement. Loans that


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represent significant concentrations of credit, material non-performing loans, insider loans and other material credit exposures are subject to FASB ASC 310 impairment analysis.
 
Loans that are determined to be impaired under FASB ASC 310, are individually analyzed to estimate the Bank’s exposure to loss based on the borrower’s character, the current financial condition of the borrower and the guarantor, the borrower’s resources, the borrower’s payment history, repayment ability, debt servicing ability, action plan, the prevailing value of the underlying collateral, the Bank’s lien position, general economic conditions, specific industry conditions, outlook for the future, etc.
 
The loans identified as impaired are measured using one of the three methods of valuations: (1) the present value of expected future cash flow orflows discounted cash flow,at the loan’s effective interest rate, (2) the fair market value of the collateral if the loan is collateral dependent, or (3) the loan’s observable market price.

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When determining the appropriate level for allowance for loan losses, the management considers qualitative adjustments for any factors that are likely to cause estimated credit losses associated with the Bank’s current portfolio to differ from historical loss experience, including but not limited to:
 •    changes in lending policies and procedures, including underwriting standards and collection, charge-offs, and recovery practice;
 
 •    changes in national and local economic and business conditions and developments, including the condition of various market segments;
 
 •    changes in the nature and volume of the portfolio;
 
 •changes in the experience, ability, and depth of lending management and staff;
•    changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings, charge-offs and other loan modifications;
 
 •    changes in the quality of the Bank’s loan review system and the degree of oversight by the Board of Directors;
 
 •    the existence and effect of any concentrations of credit, and changes in the level of such concentrations;
 
 •    transfer risk on cross-border lending activities;
 
 •    the effect of external factors such as competition and legal and regulatory requirements as well as declining collateral values on the level of estimated credit losses in the Bank’s current portfolio.
In order to systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix is utilized. The above factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the asset portfolio along with corresponding basis points for qualitative adjustments.


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The following table reflects our allocation of allowance for loan and lease losses by loan category as well as the loans receivable for each loan type:
                                                                                
 December 31,  December 31, 
 2009 2008 2007 2006 2005  2010 2009 2008 2007 2006 
Allowance for Loan Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans  Allowance
 Loans
 Allowance
 Loans
 Allowance
 Loans
 Allowance
 Loans
 Allowance
 Loans
 
Losses Applicable To Amount Receivable Amount Receivable Amount Receivable Amount Receivable Amount Receivable  Amount Receivable Amount Receivable Amount Receivable Amount Receivable Amount Receivable 
 (Dollars in Thousands)   
 (Dollars in Thousands) 
Real Estate Loans:                                         
Commercial Property $19,149 $839,598 $5,587 $908,970 $2,269 $795,675 $2,101 $757,428 $2,043 $733,650  $26,248  $729,222  $19,149  $839,598  $5,587  $908,970  $2,269  $795,675  $2,101  $757,428 
Construction 9,043 126,350 4,102 178,783 3,478 215,857 586 202,207 475 152,080   5,606   60,995   9,043   126,350   4,102   178,783   3,478   215,857   586   202,207 
Residential Property(1)
 997 77,149 449 92,361 32 90,065 19 81,128 19 87,377   911   62,645   997   77,149   449   92,361   32   90,065   19   81,128 
                                          
 
Total Real Estate Loans 29,189 1,043,097 10,138 1,180,114 5,779 1,101,597 2,706 1,040,763 2,537 973,107   32,765   852,862   29,189   1,043,097   10,138   1,180,114   5,779   1,101,597   2,706   1,040,763 
 
Commercial and Industrial Loans(1)
 110,678 1,709,202 58,866 2,062,322 36,011 2,088,694 23,099 1,703,194 21,035 1,431,492   108,986   1,327,910   110,678   1,709,202   58,866   2,062,322   36,011   2,088,694   23,099   1,703,194 
Consumer Loans 2,690 63,303 1,586 83,525 1,821 90,449 1,752 100,121 1,391 92,154   2,077   50,300   2,690   63,303   1,586   83,525   1,821   90,449   1,752   100,121 
Unallocated 2,439 — 396 — — — — — — —   2,231   —   2,439   —   396   —   —   —   —   — 
                                          
 
Total
 $144,996 $2,815,602 $70,986 $3,325,961 $43,611 $3,280,740 $27,557 $2,844,078 $24,963 $2,496,753  $146,059  $2,231,072  $144,996  $2,815,602  $70,986  $3,325,961  $43,611  $3,280,740  $27,557  $2,844,078 
                                          
 
(1)Loans held for sale excluded.

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The following table sets forth certain information regarding our allowance for loan losses and allowance for off-balance sheet items for the periods presented. Allowance for off-balance sheet items is determined by applying reserve factors according to loan pool and grade as well as actual current commitment usage figures by loan type to existing contingent liabilities.
                    
                     As of and for the Year Ended December 31, 
 As of and for the Year Ended December 31,  2010 2009 2008 2007 2006 
 2009 2008 2007 2006 2005  (Dollars in Thousands) 
 (Dollars in Thousands) 
Allowance for Loan Losses:
                     
Balance at Beginning of Year $70,986 $43,611 $27,557 $24,963 $22,702  $144,996  $70,986  $43,611  $27,557  $24,963 
                      
Charge-Offs:                     
Real Estate Loans 27,262 15,005 199 — —   33,216   27,262   15,005   199   — 
Commercial and Industrial Loans 95,768 31,916 22,255 5,333 4,371   97,340   95,768   31,916   22,255   5,333 
Consumer Loans 2,350 1,231 876 796 827   1,267   2,350   1,231   876   796 
                      
Total Charge-Offs 125,380 48,152 23,330 6,129 5,198   131,823   125,380   48,152   23,330   6,129 
                      
Recoveries on Loans Previously Charged Off:                     
Real Estate Loans 5 — — 406 —   3,131   5   —   —   406 
Commercial and Industrial Loans 2,650 1,979 494 957 2,193   6,623   2,650   1,979   494   957 
Consumer Loans 128 203 202 187 201   177   128   203   202   187 
                      
Total Recoveries on Loans Previously Charged Off 2,783 2,182 696 1,550 2,394   9,931   2,783   2,182   696   1,550 
                      
Net Loan Charge-Offs 122,597 45,970�� 22,634 4,579 2,804   121,892   122,597   45,970   22,634   4,579 
                      
Provision Charged to Operating Expense 196,607 73,345 38,688 7,173 5,065   122,955   196,607   73,345   38,688   7,173 
                      
Balance at End of Year
 $144,996 $70,986 $43,611 $27,557 $24,963  $146,059  $144,996  $70,986  $43,611  $27,557 
                      
 
Allowance for Off-Balance Sheet Items:
                     
Balance at Beginning of Year $4,096 $1,765 $2,130 $2,130 $1,800  $3,876  $4,096  $1,765  $2,130  $2,130 
Provision Charged to Operating Expense  (220) 2,331  (365) — 330   (459)  (220)  2,331   (365)  — 
                      
Balance at End of Year
 $3,876 $4,096 $1,765 $2,130 $2,130  $3,417  $3,876  $4,096  $1,765  $2,130 
           
            
Ratios:
                     
Net Loan Charge-Offs to Average Total Gross Loans  3.88%  1.38%  0.73%  0.17%  0.12%  4.79%  3.88%  1.38%  0.73%  0.17%
Net Loan Charge-Offs to Total Gross Loans at End of Period  4.35%  1.37%  0.69%  0.16%  0.11%  5.38%  4.35%  1.37%  0.69%  0.16%
Allowance for Loan Losses to Average Total Gross Loans  4.59%  2.13%  1.41%  1.00%  1.05%  5.74%  4.59%  2.13%  1.41%  1.00%
Allowance for Loan Losses to Total Gross Loans at End of Period  5.14%  2.11%  1.33%  0.96%  1.00%  6.44%  5.14%  2.11%  1.33%  0.96%
Net Loan Charge-Offs to Allowance for Loan Losses  84.55%  64.76%  51.90%  16.62%  11.23%  83.45%  84.55%  64.76%  51.90%  16.62%
Net Loan Charge-Offs to Provision Charged to Operating Expense  62.36%  62.68%  58.50%  63.84%  55.36%  99.14%  62.36%  62.68%  58.50%  63.84%
Allowance for Loan Losses to Non-Performing Loans  66.19%  58.23%  80.05%  193.86%  246.40%  86.41%  66.19%  58.23%  80.05%  193.86%
 
Balances:
                     
Average Total Gross Loans Outstanding During Period $3,158,624 $3,334,008 $3,082,671 $2,751,565 $2,386,575  $2,545,408  $3,158,624  $3,334,008  $3,082,671  $2,751,565 
Total Gross Loans Outstanding at End of Period $2,820,612 $3,363,371 $3,287,075 $2,867,948 $2,497,818  $2,267,692  $2,820,612  $3,363,371  $3,287,075  $2,867,948 
Non-Performing Loans at End of Period $219,067 $121,898 $54,479 $14,215 $10,131  $169,028  $219,067  $121,898  $54,479  $14,215 
           
 
The allowance for loan losses increased by $1.1 million, or 0.7 percent, to $146.1 million at December 31, 2010 as compared to $145.0 million at December 31, 2009 and increased by $74.0 million, or 104.3 percent, to $145.0 million at December 31, 2009 as compared to $71.0 million at December 31, 2008 and increased by $27.4 million, or 62.8 percent, to $71.0 million at December 31, 2008 as compared to $43.6 million at December 31, 2007.2008. The allowance for loan losses as a percentage of total gross loans increased to 6.44 percent as of December 31, 2010 from 5.14 percent as of December 31, 2009, fromcompared to 2.11 percent as of December 31, 2008, compared to 1.33 percent as of December 31, 2007. Concurrently, the2008. The provision for credit losses decreased by $73.9 million, or 37.6 percent, to $122.5 million at December 31, 2010 as compared to $196.4 million at December 31, 2009 and increased by $123.3 million, or 168.1 percent, to $196.6 million at December 31, 2009 as compared to $73.3 million at December 31, 2008 and increased by $34.72008.
General reserves decreased $1.3 million, or 89.61.5 percent, to $73.3$88.7 million at December 31, 20082010 as compared to $38.7 million at December 31, 2007.
     The increase in the allowance for loan losses in 2009 was due primarily to subsequent increases in historical loss rates as a result of elevated levels of charge-offs as well as migration of loans into more adverse risk rating categories. Due to this increase in reserve factors derived from historic loss rates and migration of loans into adverse risk rating categories, general reserves increased $54.5 million, or 153.1 percent, to $90.1 million at December 31, 20092009. The overall gross loan balance decreased by $552.9 million, or 19.6 percent, to $2.27 billion at December 31, 2010, as compared to $35.6$2.82 billion at December 31, 2009. There were no changes to qualitative adjustments during 2010. However, qualitative reserves decreased by $6.1 million, or 19.2 percent, to $25.5 million at December 31, 2008. In addition, qualitative adjustments were increased between 5 to 85 basis points for an average of 40 basis points across all loan types. Accordingly, qualitative reserves increased $15.4 million, or 95.1 percent,2010 as compared to $31.6 million at December 31, 2009 as compared2009. On the other hand, impairment reserves increased by $6.3 million, or 27.2 percent, to $16.2


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$29.4 million at December 31, 2008. As a result, despite the decrease in overall loan balance of $542.82010 as compared to $23.1 million or 16.1at December 31, 2009. Allowance coverage for impaired loans also increased to 13.2 percent at December 31, 2010 as compared to $2.82 billion11.5 percent at December 31, 2009, as comparedmanagement has adhered to $3.36 billionprudent conservative assessments in light of decreased collateral values. In addition, management applied an additional $2.2 million in unallocated reserves at December 31, 2008, higher factors2010 to ensure sufficient allowance coverage.
As total allowance remained stable from December 31, 2009 to December 31, 2010, yearly provisioning expense was consistent with net charge-offs in 2010. For the year ended December 31, 2010, total charge-offs were $131.8 million, compared to $125.4 million for both general reservesthe year ended December 31, 2009, and qualitative adjustments significantly increased allowance requirements.

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     The total impaired$48.2 million for the year ended December 31, 2008. Charge-offs in Commercial Real Estate loans increased $79.3$11.3 million or 65.3 percent, to $200.7$26.8 million at December 31, 2010 as compared to $15.5 million at December 31, 2009. Commercial Term Loans (Secured by Real Estate) also had an increase of $23.5 million to $48.7 million at December 31, 2010 as compared to $25.3 million at December 31, 2009. These increases in real estate secured loan charge-off were a direct result of aggressive efforts to sell problem assets at competitive discount rates as well as prudent write-down of loans with collateral shortfalls. Charge-offs in SBA loans also increased $3.9 million to $12.7 million at December 31, 2010 as compared to $8.8 million at December 31, 2009, as comparedsmall businesses continue to $121.4struggle in the current economy. However, other loan pools, such as Commercial Term (Unsecured) and International, had decreased charge-offs in 2010. Charge-offs in Commercial Term (Unsecured) loans decreased $8.4 million to $30.7 million at December 31, 2008. However, specific reserve allocations associated with impaired loans only increased $4.9 million, or 26.9 percent,2010 as compared to $23.1$39.1 million at December 31, 20092009. Charge-offs in International loans decreased $17.1 million to $603,000 at December 31, 2010 as compared to $18.2$17.7 million at December 31, 2008. The comparatively low increase in impairment reserve was mainly due to timely charge-off of collateral dependant loans that are 90 or more days past due. As the impairment reserve is mostly derived from shortfalls in collateral dependant loans, the amount of required impairment reserve has been limited due to charge-offs recorded.2009.
 For the year ending December 31, 2009, total charge-offs were $125.4 million, compared to $48.2 million for the year ending December 31, 2008 and $23.3 million for the year ending December 31, 2007. Charge-offs in the loan pool of commercial term (T/D secured and unsecured) increased $40.8 million to $64.4 million at December 31, 2009 as compared to $23.6 million at December 31, 2008. Charge-offs in commercial real estate loans increased $15.7 million to $16.0 million at December 31, 2009 as compared to $300,000 at December 31, 2008. As property values have continued to decrease, real estate secured loans, which had in prior years remained stable due to low initial loan to values, lost equity and had to be charged-off. As a result, the Bank experienced significant losses in secured loan pools that previously had minimal charge-offs. In addition to Commercial Term and Real Estate loans, charge-offs in international loans increased $16.0 million to $16.5 million at December 31, 2009 as compared to $500,000 at December 31, 2008. The increased charge-offs within international loans was mainly due to losses, totaling $15.7 million, from three specific borrowers.
The Bank also recorded in other liabilities an allowance for off-balance sheet exposure, primarily unfunded loan commitments, of $3.9$3.4 million and $4.1$3.9 million at December 31, 20092010 and 2008,2009, respectively. The Bank closely monitors the borrower’s repayment capabilities while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these reserves are adequate for losses inherent in the loan portfolio and off-balance sheet exposure as of December 31, 20092010 and 2008.2009.
Deposits
 
Total deposits at December 31, 2010, 2009 and 2008 and 2007 were $2.47 billion, $2.75 billion $3.07 billion and $3.00$3.07 billion, respectively, representing a decrease of $282.6 million, or 10.3 percent, in 2010 and a decrease of $320.8 million, or 10.4 percent, in 2009. The decreases in total deposits were the direct results of strategic plans aiming to reduce the reliance on volatile wholesale funds. As of December 31, 2010, we had no brokered deposits, compared to $203.5 million as of December 31, 2009 and an increase$874.2 million as of $68.4 million, or 2.3 percent, in 2008.December 31, 2008, respectively. At December 31, 2010, 2009 2008 and 2007,2008, total time deposits outstanding were $1.40 billion, $2.08$1.40 billion and $1.78$2.08 billion, respectively, representing 56.9 percent, 50.8 percent 67.8 percent and 59.467.8 percent, respectively, of total deposits. During 2009,2010, under the FDIC’s interest rate restriction on deposits, we successfully recapturedshifted a substantial portion of the maturednon-maturity money market deposits to one and two-year maturity time deposits through Advantage and raised new retail depositsDiamond Freedom CD products with low-cost core-deposit products. This deposit-portfolio rebalancing implemented underinnovative and flexible features such as call options, penalty-free withdrawals, and additional deposits. The Bank is not subject to the Bank’s de-leveraging strategy allowed some run-offFDIC’s interest rate restriction as of rate-sensitive deposits.December 31, 2010.


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The table below summarizes the deposit balances by major category for the periods indicated:
                        
                         Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  Balance Percent Balance Percent Balance Percent 
 Balance Percent Balance Percent Balance Percent      (Dollars in Thousands)     
 (Dollars in Thousands) 
Demand, Noninterest-Bearing $556,306  20.2% $536,944  17.5% $680,282  22.7% $546,815   22.2% $556,306   20.2% $536,944   17.5%
Savings 111,172  4.0% 81,869  2.7% 93,099  3.1%  113,968   4.6%  111,172   4.0%  81,869   2.7%
Money Market Checking and NOW Accounts 685,858  24.9% 370,401  12.1% 445,806  14.9%  402,481   16.3%  685,858   24.9%  370,401   12.1%
Time Deposits of $100,000 or More 815,190  29.8% 849,800  27.6% 1,441,683  47.9%  1,118,621   45.3%  815,190   29.8%  849,800   27.6%
Other Time Deposits 580,801  21.1% 1,231,066  40.1% 340,829  11.4%  284,836   11.6%  580,801   21.1%  1,231,066   40.1%
                    
 
Total Deposits
 $2,749,327  100.0% $3,070,080  100.0% $3,001,699  100.0% $2,466,721   100.0% $2,749,327   100.0% $3,070,080   100.0%
                    
 
Demand deposits and money market accounts decreased by $292.9 million, or 23.6 percent, in 2010 and increased by $334.8 million, or 36.9 percent, in 2009 and decreased by $218.7 million, or 19.4 percent, in 2008.2009. Core deposits (defined as demand, money market and savings deposits) increaseddecreased by $364.1$290.1 million, or 36.821.4 percent, to $1.06 billion as of December 31, 2010 from $1.35 billion as of December 31, 2009 from $989.2 million as of December 31, 2008.2009. At December 31, 2009,2010, noninterest-bearing demand deposits represented 20.222.2 percent of total deposits compared to 17.520.2 percent at December 31, 2008. Despite the increased competitive pressures to build core deposits in light of the current recessionary economic condition, we attribute the ability to maintain our core deposit base to our strong brand awareness and marketing efforts in our service markets.2009.

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Brokered deposits decreased by $670.7 million from $874.2 million as of December 31, 2008 to $203.5 million as of December 31, 2009.in 2010. All of our brokered deposits had matured and the Bank had no brokered deposits as of December 31, 2009 will mature in less than one year and the2010. The Bank is currently restricted from accepting brokered deposits due to our capital classification. Brokered deposits are not a guaranteed source of funds, which may affect our ability to raise necessary liquidity. We plan to continue to reduce the Bank’s reliance on wholesale funding including FHLB advances and brokered deposits, and build our deposit base with long-term relationships. For additional discussion regarding our brokered deposits and payment of interest rates on our deposits, see“Interest Rate Risk Management – Liquidity – Hanmi Bank.”
 
Average deposits for the years ended December 31, 2010, 2009 and 2008 and 2007 were $2.59 billion, $3.11 billion $2.91 billion and $2.99$2.91 billion, respectively. Average deposits decreased by 16.8 percent in 2010 and increased by 6.7 percent in 2009 and decreased by 2.6 percent in 2008.On2009. On October 3, 2008, the FDIC deposit insurance limit on most accounts was increased from $100,000 to $250,000. This increase is in effect through December 31, 2013. As of December 31, 2009,2010, time deposits of more than $250,000 were $261.0$392.3 million.
 
The table below summarizes the distribution of average deposits and the average rates paid for the periods indicated:
                        
                         Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  Average
 Average
 Average
 Average
 Average
 Average
 
 Average Average Average Average Average Average  Balance Rate Balance Rate Balance Rate 
 Balance Rate Balance Rate Balance Rate  (Dollars in Thousands) 
 (Dollars in Thousands) 
Demand, Noninterest-Bearing $541,822 — $630,631 — $702,329 —  $562,422   —  $541,822   —  $630,631   — 
Savings 91,089  2.56% 89,866  2.33% 97,173  2.06%  119,754   2.87%  91,089   2.56%  89,866   2.33%
Money Market Checking and NOW Accounts 507,619  1.93% 618,779  3.22% 452,825  3.41%  464,864   1.06%  507,619   1.93%  618,779   3.22%
Time Deposits of $100,000 or More 1,051,994  3.31% 1,045,968  4.17% 1,430,603  5.28%  1,069,600   1.83%  1,051,994   3.31%  1,045,968   4.17%
Other Time Deposits 916,798  3.20% 527,927  3.55% 306,876  5.07%  371,046   1.75%  916,798   3.20%  527,927   3.55%
              
 
Total Deposits
 $3,109,322  2.45% $2,913,171  2.90% $2,989,806  3.63% $2,587,686   1.33% $3,109,322   2.45% $2,913,171   2.90%
              


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The table below summarizes the maturity of time deposits of $100,000 or more at December 31 for the years indicated:
            
             December 31, 
 December 31,  2010 2009 2008 
 2009 2008 2007  (In Thousands) 
 (In Thousands) 
Three Months or Less $344,901 $238,695 $958,917  $343,946  $344,901  $238,695 
Over Three Months Through Six Months 246,116 246,087 289,293   135,620   246,116   246,087 
Over Six Months Through Twelve Months 219,739 338,233 188,890   118,428   219,739   338,233 
Over Twelve Months 4,434 26,785 4,583   520,627   4,434   26,785 
              
 
Total Time Deposits of $100,000 or More
 $815,190 $849,800 $1,441,683  $1,118,621  $815,190  $849,800 
              
Federal Home Loan Bank Advances
 
FHLB advances and other borrowings mostly take the form of advances from the FHLB of San Francisco and overnight federal funds. At December 31, 2009,2010, advances from the FHLB were $154.0$153.7 million, a decrease of $268.2 million,$328,000, or 63.50.2 percent, from the December 31, 20082009 balance of $422.2 million as we have been successfully executing a strategy replacing the usage of wholesale funds with more stable customer deposits in 2009. As of$154.0 million. FHLB advances at December 31, 2009, there were no FHLB advances2010 with a remaining maturity of less than one year.year were $150.0 million, and the weighted-average interest rate thereon was 0.74 percent. See“Note 109 – FHLB Advances and Other Borrowings”for more details.

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Junior Subordinated Debentures
 
During the first half of 2004, we issued two junior subordinated notes bearing interest at the three-month London InterBank Offered Rate (“LIBOR”) plus 2.90 percent totaling $61.8 million and one junior subordinated note bearing interest at the three-month LIBOR plus 2.63 percent totaling $20.6 million. The outstanding subordinated debentures related to these offerings, the proceeds of which were used to finance the purchase of PUB,Pacific Union Bank, totaled $82.4 million at December 31, 20092010 and 2008.2009. In October 2008, we committed to the FRB that no interest payments on the junior subordinated debentures would be made without the prior written consent of the FRB. Therefore, in order to preserve its capital position, Hanmi Financial’s Board of Directors has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. In addition, we are prohibited from making interest payments on our outstanding junior subordinated debentures under the terms of our recently issued regulatory enforcement actions without the prior written consent of the FRB and DFI. Accrued interest payable on junior subordinated debentures amounted to $4.1$6.9 million and $780,000$4.1 million at December 31, 20092010 and December 31, 2008,2009, respectively. See “Note 11 —10 – Junior Subordinated Debentures”for further details.
INTEREST RATE RISK MANAGEMENT
 
Interest rate risk indicates our exposure to market interest rate fluctuations. The movement of interest rates directly and inversely affects the economic value of fixed-income assets, which is the present value of future cash flow discounted by the current interest rate; under the same conditions, the higher the current interest rate, the higher the denominator of discounting. Interest rate risk management is intended to decrease or increase the level of our exposure to market interest rates. The level of interest rate risk can be managed through such means as the changing of gap positions and the volume of fixed-income assets. For successful management of interest rate risk, we use various methods to measure existing and future interest rate risk exposures, giving effect to historical attrition rates of core deposits. In addition to regular reports used in business operations, repricing gap analysis, stress testing and simulation modeling are the main measurement techniques used to quantify interest rate risk exposure.

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80

The following table shows the status of our gap position as of December 31, 2009:
                         
      After  After One          
  Less  Three  Year But          
  Than  Months  Within  After  Non-    
  Three  But Within  Five  Five  Interest-    
  Months  One Year  Years  Years  Sensitive  Total 
          (Dollars in Thousands)         
ASSETS
                        
Cash and Due from Banks $—  $—  $—  $—  $55,263  $55,263 
Interest—Bearing Deposits in Other Banks  95,559   3,288   —   —   —   98,847 
Investment Securities:                        
Fixed Rate  4,624   11,980   32,367   71,877   —   120,848 
Floating Rate  68   306   7,180   4,887   —   12,441 
Loans:                        
Fixed Rate  151,971   297,291   475,805   5,285   —   930,352 
Floating Rate  1,627,047   14,921   29,292   —   —   1,671,260 
Non—Accrual  —   —   —   —   219,000   219,000 
Deferred Loan Fees and Allowance for Loan Losses  —   —   —   —   (146,548)  (146,548)
Federal Home Loan Bank and Federal Reserve Bank Stock  —   —   —   38,575   —   38,575 
Other Assets  —   26,408   —   6,785   129,475   162,668 
                   
                         
TOTAL ASSETS
 $1,879,269  $354,194  $544,644  $127,409  $257,190  $3,162,706 
                   
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:                        
Deposits:                        
Demand – Noninterest—Bearing $—  $—  $—  $—  $556,306  $556,306 
Savings  11,017   26,416   53,823   19,916   —   111,172 
Money Market Checking and NOW Accounts  95,881   198,843   278,109   113,025   —   685,858 
Time Deposits:                        
Fixed Rate  648,555   741,664   5,767   5   —   1,395,991 
Floating Rate  —   —   —   —   —   — 
Federal Home Loan Bank Advances  150,197   606   3,175   —   —   153,978 
Other Borrowings  1,747   —   —   —   —   1,747 
Junior Subordinated Debentures  82,406   —   —   —   —   82,406 
Other Liabilities  —   —   —   —   25,504   25,504 
Stockholders’ Equity  —   —   —   —   149,744   149,744 
                   
                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $989,803  $967,529  $340,874  $132,946  $731,554  $3,162,706 
                   
                         
Repricing Gap $889,466  $(613,335) $203,770  $(5,537) $(474,364) $— 
Cumulative Repricing Gap $889,466  $276,131  $479,901  $474,364  $—  $— 
Cumulative Repricing Gap as a Percentage of Total Assets  28.12%  8.73%  15.17%  15.00%  —     
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets  30.97%  9.61%  16.71%  16.51%  —     
2010:
 
                         
     After
  After One
          
  Less
  Three
  Year But
          
  Than
  Months
  Within
  After
  Non-
    
  Three
  But Within
  Five
  Five
  Interest-
    
  Months  One Year  Years  Years  Sensitive  Total 
  (Dollars in Thousands) 
 
ASSETS
                        
Cash and Due from Banks $—  $—  $—  $—  $60,983  $60,983 
Interest-Bearing Deposits in Other Banks  184,366   4,371   —   —   —   188,737 
Investment Securities:                        
Fixed Rate  14,141   49,803   159,751   112,916   4,467   341,078 
Floating Rate  17,394   27,264   26,297   2,322   (392)  72,885 
Loans:                        
Fixed Rate  163,611   264,348   280,206   7,869   —   716,034 
Floating Rate  1,245,392   107,691   31,453   973   —   1,385,509 
Non-Accrual  —   —   —   —   169,028   169,028 
Deferred Loan Fees, Discounts, and Allowance for Loan Losses  —   —   —   —   (149,504)  (149,504)
Federal Home Loan Bank and Federal Reserve Bank Stock  —   —   —   34,731   —   34,731 
Other Assets  —   27,350   —   6,599   53,718   87,667 
                         
TOTAL ASSETS
 $1,624,904  $480,827  $497,707  $165,410  $138,300  $2,907,148 
                         
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Liabilities:                        
Deposits:                        
Demand – Noninterest-Bearing $—  $—  $—  $—  $546,815  $546,815 
Savings  11,283   27,079   55,217   20,389   —   113,968 
Money Market Checking and NOW Accounts  29,154   138,564   178,923   55,840   —   402,481 
Time Deposits:                        
Fixed Rate  428,404   381,047   593,892   —   —   1,403,343 
Floating Rate  58   —   56   —   —   114 
Federal Home Loan Bank Advances  150,087   267   3,296   —   —   153,650 
Other Borrowings  1,570   —   —   —   —   1,570 
Junior Subordinated Debentures  82,406   —   —   —   —   82,406 
Other Liabilities  —   —   —   —   29,545   29,545 
Stockholders’ Equity  —   —   —   —   173,256   173,256 
                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $702,962  $546,957  $831,384  $76,229  $749,616  $2,907,148 
                         
Repricing Gap $921,942  $(66,130) $(333,677) $89,181  $(611,316) $— 
Cumulative Repricing Gap $921,942  $855,812  $522,135  $611,316  $—  $— 
Cumulative Repricing Gap as a Percentage of Total Assets  31.71%  29.44%  17.96%  21.03%  —     
Cumulative Repricing Gap as a Percentage of Interest-Earning Assets  33.67%  31.25%  19.07%  22.32%  —     
The repricing gap analysis measures the static timing of repricing risk of assets and liabilities (i.e., apoint-in-time analysis measuring the difference between assets maturing or repricing in a period and liabilities maturing or repricing within the same period). Assets are assigned to maturity and repricing categories based on their expected repayment or repricing dates, and liabilities are assigned based on their repricing or maturity dates. Core deposits that have no maturity dates (demand deposits, savings, money market checking and NOW accounts) are assigned to categories based on expected decay rates.

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As of December 31, 2009,2010, the cumulative repricing gap for the three-month period wasreflected an asset-sensitive position and 30.97of 33.67 percent of interest-earning assets, which decreasedincreased from the30.97 percent at December 31, 2008 figure of 31.21 percent.2009. The decreaseincrease was caused primarily by an $88.9 million increase in interest bearing cash, a $26.8 million increase in investment securities, a $69.2 million decrease of $351.0 million in fixed and floating rate loans with maturities or expected to reprice within three monthsmoney market accounts, and a $220.1 million decrease of $130.0 million in overnight federal funds sold,time deposits, partially offset by a $370.0 million decrease of $210.8 million in FHLB advances with maturities or expected to reprice within three months. loans.


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The cumulative repricing gap for the twelve-month period wasreflected an asset-sensitive position and 9.61of 31.25 percent of interest-earning assets, which increased from the9.61 percent at December 31, 2008 figure that was liability-sensitive and 4.04 percent.2009. The increase was caused primarily by a $64.8 increase in investment securities, a $59.8 million increase in loans, a $67.6 million decrease of $534.3in money market accounts, and a $360.6 million decrease in fixed and floating rate time deposits withwithin the maturities or expected toand reprice within twelve months and a decrease of $260.5 million in FHLB advances with maturities or expected to reprice within twelve months, partially offset by a decrease of $299.6 million in fixed and floating rate loans with maturities or expected to reprice within twelve months and a decrease of $130.0 million in overnight federal funds sold.terms.
 
The following table summarizes the status of the cumulative gap position as of the dates indicated.
                
                 Less Than Three Months Less Than Twelve Months 
 Less Than Three Months Less Than Twelve Months December 31, December 31, 
 December 31, December 31, 2010 2009 2010 2009 
 2009 2008 2009 2008 (Dollars in Thousands) 
 (Dollars in Thousands) 
Cumulative Repricing Gap $889,466 $1,127,888 $276,131 $(145,945) $921,942  $889,466  $855,812  $276,131 
Percentage of Total Assets  28.12%  29.10%  8.73%  (3.77%)  31.71%  28.12%  29.44%  8.73%
Percentage of Interest-Earning Assets  30.97%  31.21%  9.61%  (4.04%)  33.67%  30.97%  31.25%  9.61%
 
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings rather than maximizing yield. In order to achieve stable earnings, we attempt to prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
 
To supplement traditional gap analysis, we perform simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the market value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated). This sensitivity analysis is compared to policy limits, which specify the maximum tolerance level for net interest income exposure over a one-year horizon, given the basis point adjustment in interest rates reflected below.
                                  
Rate Shock Table
 Percentage Changes Change in Amount  Percentage Changes Change in Amount
Change in Net Economic Net EconomicChange in
 Net
 Economic
 Net
 Economic
Interest Interest Value of Interest Value ofInterest
 Interest
 Value of
 Interest
 Value of
Rate Income Equity Income EquityRate Income Equity Income Equity
 (Dollars in Thousands)   (Dollars in Thousands)
200%  11.08%  7.78% $15,414 $23,345 
100%  5.44%  4.49% $7,575 $13,468 
(100%)  (1)  (1)  (1)  (1)
(200%)  (1)  (1)  (1)  (1)
200%  9.28%  −11.16% $9,531  $(27,126)
100%  4.03%  −5.71% $4,136  $(13,873)
(100)%  (1)  (1)  (1)  (1)
(200)%  (1)  (1)  (1)  (1)
 
(1)The table above only reflects the impact of upward shocks due to the fact that a downward parallel shock of 100 basis points or more is not possible given that some short-term rates are currently less than one percent.
 
The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

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CAPITAL RESOURCES AND LIQUIDITY
 
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, the Board continually assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs. Total stockholders’ equity was $149.7 million at December 31, 2009, which represented a decrease of $114.2 million, or 43.3 percent, compared to $263.9 million at December 31, 2008. The decrease was primarily due to provision for credit losses of $196.4 million during 2009.
 Hanmi Financial and
Under the Bank are deemed to be “adequately capitalized” as of December 31, 2009. Although there can be no assurance that we will be successful, the Board and management will make their utmost efforts to raise a sufficient capital within the required timeframe.
     Under theFinal Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order.Final Oder. By July 31, 2010, the Bank will bewas required to increase its contributed equity capital by not less than an additional $100 million, which it was able to do following the successful completion of a registered rights and best efforts offering by which we raised net proceeds of approximately $116.8 million. TheAs of December 31, 2010, the Bank will be requiredwas “well capitalized” according to the regulatory PCA guidelines.
However, the Final Order requires the Bank to maintain a ratio of tangible shareholder’s equity to total tangible assets as follows:
   
  Ratio of Tangible Shareholder’s
Date 
Equity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010Not Less Than 9.0 Percent
From December 31, 2010 and Until the Order is Terminated Not Less Than 9.5 Percent
 
If the Bank is not able to maintain the capital ratios identified in the Final Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. Inability to comply with the capital ratios identified in the Order raises substantial doubt about our ability to continue as a going concern. As of December 31, 2009,2010, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholder’sstockholders’ equity to total tangible assets ratio of 7.138.59 percent. Accordingly, we notified the DFI and the FRB of such event.
 
To comply with the provisions of the Final Order and the Written Agreement, we entered into the agreement with Woori on May 25, 2010 which provides that upon satisfaction of all conditions to closing, we will issue 175 million shares of common stock to Woori at a purchase price per share of $1.20, for aggregate gross consideration of $210 million. Subsequent to May 25, 2010, we amended the agreement with Woori to, among other things, extend the termination date to December 31, 2010, to release us from exclusivity with Woori, to eliminate our obligation to pay a termination fee upon the occurrence of certain events and to allow us, if needed, to pursue further fundraising effortsand/or alternative proposals to acquire control of Hanmi Financial.
We believe that we will need the additional capital from the transaction with Woori or alternative sources to provide us with adequate capital resources to support our business, our level of problem assets and our operations and to comply with the regulatory orders we are subject to. Even if we are successful in completing the transaction with Woori or raising capital from alternative sources, we may still need to raise additional capital in the future to support our operations. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance.
Liquidity – Hanmi Financial
 Hanmi Financial is a company separate and apart from the Bank that must provide for its own liquidity. Substantially all of Hanmi Financial’s revenues are obtained from dividends declared and paid by the Bank. Under applicable California law, the Bank cannot make any distribution (including a cash dividend) to its shareholder (Hanmi Financial) in an amount which exceeds the lesser of: (i) the retained earnings of the Bank or (ii) the net income of the Bank for its last three fiscal years, less the amount of any distributions made by the Bank to its shareholder during such period. Notwithstanding the foregoing, with the prior approval of the California Commissioner of Financial Institutions, the Bank may make a distribution (including a cash dividend) to Hanmi Financial in an amount not exceeding the greatest of: (i) the retained earnings of the Bank; (ii) the net income of the Bank for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year. The Bank currently has deficit retained earnings and has suffered net losses in 2007, 2008 and 2009. See“Dividends”for further information. As a result, the California Financial Code does not provide authority for the Bank to declare a dividend to Hanmi Financial, with or without Commissioner approval. In addition, the Bank has been prohibited by the MOU described in“Notes to Consolidated Financial Statements, Note 15 — Regulatory Matters,”and continues to be prohibited by the FRB Written Agreement and DFI Final Order, from paying dividends to Hanmi Financial unless it receives prior regulatory approval.

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Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through December 31, 2010.2011. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated


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debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of December 31, 2009,2010, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $3.5$7.7 million, up from $2.2$3.5 million as of December 31, 2008.2009.
Liquidity – Hanmi Bank
 
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originated through its branch platform. In 2009,an effort to preserve liquidity, the Bank deployed two deposit campaigns to increase new depositsinnovative products, such as Advantage and reduce its reliance on wholesale funding to an optimum level.
     ThroughDiamond Freedom CDs, during the first depositnine months of 2010, and utilized Internet rate service providers in the first half of 2010. Through this campaign promoted from December 2008 and early partthe use of March 2009,Internet rate service providers, the Bank achieved the objectives of maintaining adequate liquidity and significantly reducing its reliance on wholesale funds. The second deposit campaign promoted during the third and fourth quarters of 2009 successfully recaptured a substantial portion of time deposits raised from the first deposit campaign with low-cost core-deposit products . This deposit-portfolio rebalancing implemented under the Bank’s de-leveraging strategy allowed some run-off of rate-sensitivebrokered deposits. As a result, totalTotal deposits decreased by $320.8$282.6 million, or 10.410.3 percent, from $3.07 billion as of December 31, 2008 to $2.75 billion as of December 31, 2009. This decrease resulted2009 to $2.47 billion as of December 31, 2010, primarily fromdue to a $340.1$203.5 million decrease in interest-bearing deposits, partially offset by a $19.4 million increase of noninterest-bearingbrokered deposits. The Bank’s wholesale funds consistinghistorically consisted of Federal Home Loan Bank (“FHLB”)FHLB advances and brokered deposits, significantly decreased by $938.9 million to $357.5 million atdeposits. As of December 31, 2009 from $1.30 billion at December 31, 2008.
     Due to the Bank’s total risk-based capital ratio that was below 10% as of September 30, 2009 coupled with the regulatory enforcement action with a specific capital provision, the Bank is considered to be “adequately capitalized” under the regulatory framework for prompt corrective action. Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. On December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well capitalized to request a determination from the FDIC whether they are operating in an area where rates paid on deposits are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010.
     The Bank has been in compliance with its regulatory restrictions, the rate restriction for non-local customers since JanuaryBank had no brokered deposits, and had FHLB advances of only $153.7 million that slightly decreased $328,000 in 2010. Since then, there has been no noticeable change in non-local deposits. The Bank is also required to be in compliance with the national rate caps for local customers starting in March 2010. Our ability to compete for local deposits in the Korean-American community may be limited due to the interest rate restriction. However, we believe that we will be able to compete effectively against our competition with innovative products and quality customer service rather than deposit rates.
 
The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 2015 percent of its total assets. As of December 31, 2009,2010, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $571.2$444.2 million and $415.9$290.5 million, respectively. The Bank’s FHLB borrowings as of December 31, 20092010 totaled $154.0$153.7 million, representing 4.95.3 percent of total assets. As of March 12, 2010,9, 2011, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $355.0$435.1 million and $447.3$281.5 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans

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and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
 
As a means of augmenting its liquidity, the Bank had $295.0 million unpledged marketable securities that are available for sale at December 31, 2010. Also, the Bank had an available borrowing source of $143.7$146.3 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $400.4$376.6 million, and had no borrowings as of December 31, 2009.2010. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2009,2010, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million. This line of credit will continue for a term of one year, and, unless amended or terminated, will automatically renew for successive one-year terms.
 On July 10, 2009, due to a deterioration in the Bank’s risk profile, the Borrower in Custody Program of the Fed Discount Window in which the Bank has participated changed from the primary credit program to the secondary credit program, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate. As of March 12, 2010, the Bank had $239.4 million available for use through the Fed Discount Window, as the Bank pledged loans with a carrying value of $557.0 million, and there were no borrowings. As the Bank has pledgeable loans, it will pledge additional loans to maintain an adequate level of borrowing line with the Fed Discount Window.
Current market conditions have limited the Bank’s liquidity sources principally to interest-bearing deposits, unpledged marketable securities, and secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or Federal Reserve Bank would not reduce the Bank’s borrowing capacity or that the Bank would be able to continue to replace deposits at competitive rates. The Bank is currently restricted from accepting brokered deposits as a funding source. As of December 31, 2009,2010, in compliance with its regulatory restrictions, the Bank does not have any brokered deposits and would consult in advance with its regulators if it were $203.5 million, or 7.4 percent of total deposits. Allto consider accepting brokered deposits in the future.


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The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are currently scheduledsufficient to mature onmeet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or prior to June 30, 2010. In 2009,in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the Bank successfully replaced $670.7 millionresponsibilities of brokered. key departments in the event of a liquidity contraction.
The Bank believes that it will be able to replenish the maturing brokered deposits with retail deposits, as it demonstrated its ability to generate retail deposits for the past twelve months. If the Bank is unable to replace these maturing deposits with new deposits, the Bank believes that itnonetheless has adequate liquidity resources to fund its obligations with its interest-bearing deposits, unpledged marketable securities, and secured funding outletscredit lines with the FHLB and Fed Discount Window.
OFF-BALANCE SHEET ARRANGEMENTS
 
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the Consolidated Balance Sheets. The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty.
 
Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
         
  December 31, 
  2009  2008 
  (In Thousands) 
Commitments to Extend Credit $262,821  $386,785 
Standby Letters of Credit  17,225   47,289 
Commercial Letters of Credit  13,544   29,177 
Unused Credit Card Lines  23,408   16,912 
       
         
Total Undisbursed Loan Commitments
 $316,998  $480,163 
       

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  December 31, 
  2010  2009 
  (In Thousands) 
 
Commitments to Extend Credit $178,424  $262,821 
Standby Letters of Credit  15,226   17,225 
Commercial Letters of Credit  11,899   13,544 
Unused Credit Card Lines  24,649   23,408 
         
Total Undisbursed Loan Commitments
 $230,198  $316,998 
         

CONTRACTUAL OBLIGATIONS
 
Our contractual obligations as of December 31, 20092010 are as follows:
                                        
 More Than More Than        More Than
 More Than
     
 One Year Three Years        One Year
 Three Years
     
 and Less and Less More      and Less
 and Less
 More
   
 Less Than Than Three Than Five Than Five    Less Than
 Than Three
 Than Five
 Than Five
   
Contractual Obligations One Year Years Years Years Total  One Year Years Years Years Total 
 (In Thousands) 
 (In Thousands) 
Time Deposits $1,389,983 $5,974 $29 $5 $1,395,991  $809,509  $593,760  $188  $—  $1,403,457 
Federal Home Loan Bank Advances and Other Borrowings 1,747 150,000 3,978 — 155,725   151,570   —   3,650   —   155,220 
Commitments to Extend Credit 262,821 — — — 262,821   178,424   —   —   —   178,424 
Junior Subordinated Debentures — — — 82,406 82,406   —   —   —   82,406   82,406 
Standby Letters of Credit 17,184 41 — — 17,225   15,195   31   —   —   15,226 
Operating Lease Obligations 5,401 8,532 5,390 7,344 26,667   4,470   7,716   3,927   5,645   21,758 
                      
 
Total Contractual Obligations
 $1,677,136 $164,547 $9,397 $89,755 $1,940,835  $1,159,168  $601,507  $7,765  $88,051  $1,856,491 
                      


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Operating lease obligations represent the total minimum lease payments under non-cancelable operating leases with remaining terms of up to 10 years.
RECENTLY ISSUED ACCOUNTING STANDARDS
 
FASB ASC 105, “Generally Accepted Accounting Principles”ASU2011-01, “Receivable (Topic 310), Deferral of the Effective Date of Disclosure about Troubled Debt Restructurings in UpdateNo. 2010-20”– ASU2011-01 temporarily delays the effective date of the disclosure about troubled debt restructurings (“TDRs”) in ASU2010-20 for public entities. The delay is intended to allow the FASB ASCto complete its deliberations on what constitutes a TDR. The effective date of the new disclosure about TDRs for public entities and the guidance for determining what constitute a TDR will then be coordinated. This guidance is the exclusive authoritative reference for non-governmental U.S. GAAP for use in financial statements issuedanticipated to be effective for interim andan annual periods ending after SeptemberJune 15, 2009, except for SEC rules and interpretive releases, which2011. We are also authoritative GAAP for SEC registrants. The contentsevaluating the impact of the Codification will carry the same leveladoption of authority, eliminating the four-level GAAP hierarchy previously set forth. The FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not includedASU2011-01 on its disclosures in the consolidated financial statements.
FASB ASCASU2010-20, “Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”– ASU2010-20 requires new and enhanced disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The new and amended disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. The guidance is non-authoritative. FASB ASC 105effective for an entity’s first annual period that ends on or after December 15, 2010. Adoption of ASU2010-20 did not have a material the effectsignificant impact on our financial condition or results of operations.
 FASB ASC 810, “Consolidations”– FASB ASC 810 amends the guidance related to the consolidation of variable interest entities (“VIE’s”). It requires reporting entities to evaluate former qualifying special-purpose entities (“QSPE’s”) for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. FASB ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FASB ASC 810-10-50. FASB ASC 810 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPE’s and entities currently subject to the guidance related to the consolidation of VIE’s will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. We are currently evaluating the effect that the provisions of FASB ASC 810 may have on our financial condition and results of operations.
FASB ASC 860, “Transfers and Servicing”– FASB ASC 860 amends the guidance related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. FASB ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FASBASC 810-10-50. FASB ASC 860 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. FASB ASC 860’s disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. We are currently evaluating the effect that the provisions of FASB ASC 860 may have on our financial condition and results of operations.

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FASB ASC 855, “Subsequent Events”– FASB ASC 855 addresses accounting and disclosure requirements related to subsequent events. FASB ASC 855 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. FASB ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. The adoption of FASB ASC 855 did not have a material effect on our financial condition or results of operations.
 
FASB ASU 2010-01, “Equity (Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash”– ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and is required to be applied on a retrospective basis. Adoption of ASU 2010-01 did not have a significant impact on the Company’s consolidated financial statements.
FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)”– ASU2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Adoption of ASU2010-06 is did not expected to have a significant impact on the Company’sour consolidated financial statements.


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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in the Bank’s portfolio, see“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —– Interest Rate Risk Management”and“—– Capital Resources and Liquidity .”
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed as a part of this Report are set forth on pages 8395 through 142162
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.  CONTROLS AND PROCEDURES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Hanmi Financial Corporation (“Hanmi Financial”) files or submits under the Securities Exchange Act
As of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that Hanmi Financial files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
December 31, 2010, Hanmi Financial carried out an evaluation, under the supervision and with the participation of Hanmi Financial’s management,

76

including theHanmi Financial’s Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the company’sHanmi Financial’s disclosure controls and procedures and internal controls over financial reporting pursuant to Securities and Exchange Commission (“SEC”) rules. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that:
• Hanmi Financial’s disclosure controls and procedures were effective as of the end of the period covered by this report
Disclosure controls and procedures are defined in SEC rules as controls and other procedures designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2009 pursuant to Exchange Act Rule 13a-15b. Based on that evaluation and the identification of the material weakness2010, there have been no changes in Hanmi Financial’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting”, the Chief Executive Officer and Chief Financial Officer have concluded that has materially affected, or is reasonably likely to materially affect, Hanmi Financial’s disclosure controls and procedures were not effective as of December 31, 2009.internal control over financial reporting.


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Management’s Report on Internal Control Over Financial Reporting
 
Management of Hanmi Financial Corporation (“Hanmi Financial”) is responsible for establishing and maintaining adequate internal control over financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission. Hanmi Financial’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those written policies and procedures that:
 •    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
 •    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles;
 
 •    provide reasonable assurance that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
 •    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
     Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives becauseBecause of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting form human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of Hanmi Financial’s financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
     As of December 31, 2009, Hanmi Financial carried out an evaluation, under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of internal control over financial reporting pursuantmay not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to Rule 13a-15(c), as adopted byfuture periods are subject to the SEC underrisk that controls may become inadequate because of changes in conditions, or that the Exchange Act. In evaluatingdegree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of theHanmi Financial’s internal control over financial reporting management used the framework establishedas of December 31, 2010. Management based this assessment on criteria for effective internal control over financial reporting described inInternal Control – IntegratedControl-Integrated Frameworkissued by the CommittedCommittee of Sponsoring Organizations of the Treadway Commission (COSO).
     A material weakness is a control deficiency, or combinationCommission. Management’s assessment included an evaluation of control deficiencies, inthe design of Hanmi Financial’s internal control over financial reporting such that there is a reasonable possibility that a material misstatement of Hanmi Financial’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following a material weakness as of December 31, 2009 related to management’s policies and procedures for the monitoring and timely evaluation of and revision to management’s approach for assessing credit risk inherent in the Company’s loan portfolio to reflect changes in the economic environment. Specifically, neither the internal loan review grading process control nor the information and communication control that are designed to prompt senior management’s review over the adequacytesting of the loan loss reserve factors were operating effectively.operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
 
Based on ourthis assessment, and the criteria discussed above, Hanmi Financial has concludedmanagement determined that, as of December 31, 2009,2010, Hanmi Financial maintained effective internal control over financial reporting was not effective as a result of the aforementioned material weakness.reporting.
 
KPMG LLP, the independent registered public accounting firm that audited and reported on the consolidated

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financial statements of Hanmi Financial and subsidiaries, has issued an adverse opiniona report on the effectiveness of the Hanmi Financial’s internal control over financial reporting as of December 31, 2009.
Changes in Internal Control over Financial Reporting
     During2010. The report expresses an unqualified opinion on the fourth quartereffectiveness of 2009, we implemented the following changes in ourHanmi Financial’s internal control over financial reporting to address a previously reported material weakness:
We designed and implemented several key initiatives to significantly strengthen our internal loan review function. These included:
•intensive review by the loan monitoring department to validate the appropriateness of loan grades;
•expanded additional review of all loan grading changes by management and senior loan officers;
•independent third party review to ensure the assessment of our internal loan grades.
We implemented several key changes to ensure the adequacy of allowance for loan losses. These included:
•increasing qualitative adjustments based on current and potential loss scenarios to sufficiently reflect deterioration in the asset portfolio as well as economic decline;
•implementing more stringent assessment of restructured loans by down-grading all such loans to Substandard;
•closely monitoring collateral dependent loans by continually obtaining up to date valuations;
•adhering to more stringent requirements for charge-offs regards to impaired loans.
     Our changes described above implemented during the fourth quarter of 2009 due to the previously identified material weakness have materially affected such internal control over financial reporting.
Remediation of Material Weakness
     Hanmi Financial determined the following additional steps necessary to address the aforementioned material weaknesses, including:
•increasing management oversight of the loan portfolio by establishing two new departments to primarily focus on performing quality control review and monitoring;
•providing intensive onsite review and training to loan officers and other branch staffs by management;
•outsourcing to independent third parties for credit review to validate the appropriateness of internal loan grading.
     We began to execute the remediation plans identified above in the fourth quarter of 2009, and we believe our controls and procedures will continue to improve as a result of the further implementation of these actions. However, there can be no assurances that our efforts will be successful or that additional efforts will not be necessary by the Company to remediate this material weakness.December 31, 2010.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
 
We have audited Hanmi Financial Corporation’s (the Company) internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Hanmi Financial Corporation’sThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 A
In our opinion, Hanmi Financial Corporation maintained, in all material weakness is a deficiency, or a combination of deficiencies, inrespects, effective internal control over financial reporting such that there is a reasonable possibility that a material misstatementas of the Company’s annual or interim financial will not be prevented or detectedDecember 31, 2010, based on a timely basis. Management identified and includedcriteria established in its assessment a material weakness related to the allowance for loan losses that related to management’s policies and procedures for the monitoring and timely evaluation of and revision to management’s approach for assessing credit risk inherent in the Company’s loan portfolio to reflect changes in the economic environment.Internal Control-Integrated Frameworkissued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hanmi Financial Corporation and subsidiaries as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended


89

December 31, 2009,2010, and our report dated March 15, 201016, 2011 expressed an unqualified opinion on those consolidated financial statements. Our report contains an explanatory paragraph that states the Company is operating under a formal supervisory agreement with the Federal Reserve Bank of San Francisco and the
/s/ KPMG LLP
Los Angeles, California Department of Financial Institutions. The agreement restricts certain operations and requires the Company to, among other things, increase the contributed equity capital at Hanmi Bank by $100 million by July 31, 2010 and achieve specific regulatory capital ratios by July 31, 2010 and December 31, 2010. The ability of the Company to comply with the terms of this agreement and its requirements raises substantial doubt about its ability to continue as a going concern. This
March 16, 2011

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material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements, and this report does not affect our report thereon.
ITEM 9B.  OTHER INFORMATION
     In our opinion, because of the affect of the aforementioned material weakness on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over the financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission.None.
/s/ KPMG LLP

Los Angeles, California
March 15, 2010

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ITEM 9B. OTHER INFORMATIONPART III
 None.
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as hereinafter noted, the information concerning directors and officers of Hanmi Financial is incorporated by reference from the sections entitled“The Board of Directors and Executive Officers”and“Section 16(a) Beneficial Ownership Reporting Compliance”of Hanmi Financial’s 2011 Definitive Proxy Statement for the Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year.year (or information will be provided in an amendment to thisForm 10-K).
Code of Ethics
 
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial and accounting officer, controller and other persons performing similar functions. It will be provided to any stockholder without charge, upon the written request of that stockholder. Such requests should be addressed to Judith Kim, Associate General Counsel, Hanmi Financial Corporation, 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010. It is also available on our website atwww.hanmi.com..
ITEM 11. EXECUTIVE COMPENSATION
 
ITEM 11.  EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the section entitled“Executive Compensation”of Hanmi Financial’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSyear (or information will be provided in an amendment to thisForm 10-K).
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management and related stockholder matters will appear under the caption“Beneficial Ownership of Principal Stockholders and Management”in Hanmi Financial’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders and is incorporated herein by reference.reference (or information will be provided by amendment to thisForm 10-K).


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Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table summarizes information as of December 31, 20092010 relating to equity compensation plans of Hanmi Financial pursuant to which grants of options, restricted stock awards or other rights to acquire shares may be granted from time to time.
             
          Number of Securities 
          Remaining Available for 
          Future Issuance Under 
  Number of Securities to be  Weighted-Average  Equity Compensation 
  Issued Upon Exercise of  Exercise Price of  Plans (Excluding 
  Outstanding Options,  Outstanding Options,  Securities 
  Warrants and Rights  Warrants and Rights  Reflected in Column(a)) 
   (a)   (b)     
Equity Compensation Plans Approved By Security Holders  1,180,358  $11.78   3,000,000 
Equity Compensation Plans Not Approved By Security Holders  —  $—   — 
           
Total Equity Compensation Plans
  1,180,358  $11.78   3,000,000 
           

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        Number of Securities
 
        Remaining Available for
 
        Future Issuance Under
 
  Number of Securities to be
  Weighted-Average
  Equity Compensation
 
  Issued Upon Exercise of
  Exercise Price of
  Plans (Excluding
 
  Outstanding Options,
  Outstanding Options,
  Securities
 
  Warrants and Rights  Warrants and Rights  Reflected in Column (a)) 
  (a)  (b)    
 
Equity Compensation Plans Approved By Security Holders  1,066,891  $11.93   2,446,333 
Equity Compensation Plans Not Approved By Security Holders  2,000,000 (1) $1.20   2,000,000 
             
Total Equity Compensation Plans
  3,066,891  $4.93   4,446,333 
             

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
(1)  Reflects warrants issued to Cappello Capital Corp. in connection with services it provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at a purchase price of $1.20 per share of our common stock and expire on October 14, 2015. The warrants may be exercised for cash or by “cashless exercise”. The exercise price and number of shares subject to the warrants are subject to adjustment for, among other events, stock splits and stock dividends.
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence is incorporated by reference from the sections entitled“Certain Relationships and Related Transactions”and“Director Independence”of Hanmi Financial’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESyear (or information will be provided by amendment to thisForm 10-K).
 
ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning Hanmi Financial’s principal accountants’ fees and services is incorporated by reference from the section entitled“Independent Accountants”of Hanmi Financial’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the close of Hanmi Financial’s fiscal year.year (or information will be provided by amendment to thisForm 10-K).


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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.  Financial Statements and SchedulesEXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
 (1)  The Financial Statements required to be filed hereunder are listed in the Index to Consolidated Financial Statements on page 83 of this Report.
 
 (2)  All Financial Statement Schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
 
 (3)  The Exhibits required to be filed with this Report are listed in the Exhibit Index included herein at pages 144164 and 145.167.

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93

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     
  Page
 
Report of Independent Registered Public Accounting Firm
  84
95 
Consolidated Balance Sheets as of December 31, 20092010 and 20082009
  85
96 
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 2008 and 20072008
  86
97 
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2010, 2009 2008 and 20072008
  87
98 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 2008 and 20072008
  88
99 
Notes to Consolidated Financial Statements
  89100 

83
94

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hanmi Financial Corporation:
 
We have audited the accompanying consolidated balance sheets of Hanmi Financial Corporation and subsidiaries (the Company) as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009.2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanmi Financial Corporation and subsidiaries as of December 31, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009,2010, in conformity with U.S. generally accepted accounting principles.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As further described in note 1 to the consolidated financial statements, at December 31, 2009,2010, the Company and its wholly-ownedwholly owned subsidiary, Hanmi Bank, are currently operating under a formal supervisory agreement (“the Agreement”)agreements (the Agreements) with the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions. The Agreement restrictsAgreements restrict certain operations and requires the Company to, among other things, increase the contributed equity capital at Hanmi Bank by $100 million by July 31, 2010 and achieve specified regulatory capital ratios by July 31, 2010 and December 31, 2010. Failure to achieve all of the agreement’s requirements may lead to additional regulatory actions including being placed into receivership or conservatorship. The ability of the Company to comply with terms of this agreement raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in note 1 to the consolidated financial statements.1. The 20092010 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hanmi Financial Corporation’s internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated March 15, 201016, 2011 expressed an adverseunqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/  KPMG LLP
Los Angeles, California
March 15, 201016, 2011

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95

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
        
         December 31, 
 December 31,  2010 2009 
 2009 2008 
ASSETS
 
ASSETS
Cash and Due From Banks $55,263 $83,933  $60,983  $55,263 
Interest-Bearing Deposits in Other Banks 98,847 2,014   158,737   98,847 
Federal Funds Sold — 130,000   30,000   — 
          
 
Cash and Cash Equivalents 154,110 215,947   249,720   154,110 
 
Securities Held to Maturity, at Amortized Cost (Fair Value: 2009 — $871; 2008 — $910) 869 910 
Securities Held to Maturity, at Amortized Cost (Fair Value: 2010 — $847; 2009 — $871)  845   869 
Securities Available for Sale, at Fair Value 132,420 196,207   413,118   132,420 
Loans Receivable, Net of Allowance for Loan Losses of $144,996 and $70,986 at December 31, 2009 and 2008, Respectively 2,669,054 3,253,715 
Loans Receivable, Net of Allowance for Loan Losses of $146,059 and $144,996 at December 31, 2010 and 2009, Respectively  2,084,447   2,669,054 
Loans Held for Sale, at the Lower of Cost or Fair Value 5,010 37,410   36,620   5,010 
Customers’ Liability on Acceptances 994 4,295   711   994 
Premises and Equipment, Net 18,657 20,279   17,599   18,657 
Accrued Interest Receivable 9,492 12,347   8,048   9,492 
Other Real Estate Owned 26,306 823 
Deferred Income Taxes 3,608 29,456 
Other Real Estate Owned, Net  4,089   26,306 
Deferred Tax Assets  —   3,608 
Servicing Assets 3,842 3,791   2,890   3,842 
Other Intangible Assets 3,382 4,950 
Other Intangible Assets, Net  2,233   3,382 
Federal Home Loan Bank Stock, at Cost 30,697 30,697   27,282   30,697 
Federal Reserve Bank Stock, at Cost 7,878 10,228   7,449   7,878 
Income Taxes Receivable 56,554 11,712   9,188   56,554 
Bank-Owned Life Insurance 26,408 25,476   27,350   26,408 
Other Assets 13,425 17,573   15,559   13,425 
     
      
TOTAL ASSETS
 $3,162,706 $3,875,816  $2,907,148  $3,162,706 
          
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:         
Deposits:         
Noninterest-Bearing $556,306 $536,944  $546,815  $556,306 
Interest-Bearing: 2,193,021 2,533,136   1,919,906   2,193,021 
          
 
Total Deposits 2,749,327 3,070,080   2,466,721   2,749,327 
 
Accrued Interest Payable 12,606 18,539   15,966   12,606 
Acceptances Outstanding 994 4,295   711   994 
Federal Home Loan Bank Advances 153,978 422,196   153,650   153,978 
Other Borrowings 1,747 787   1,570   1,747 
Junior Subordinated Debentures 82,406 82,406   82,406   82,406 
Other Liabilities 11,904 13,598   12,868   11,904 
          
 
Total Liabilities
 3,012,962 3,611,901   2,733,892   3,012,962 
          
 
COMMITMENTS AND CONTINGENCIES         
 
STOCKHOLDERS’ EQUITY:         
Common Stock, $0.001 Par Value; Authorized 200,000,000 Shares; Issued 55,814,890 Shares (51,182,390 Shares Outstanding) and 50,538,049 Shares (45,905,549 Shares Outstanding) at December 31, 2009 and 2008, Respectively 56 51 
Common Stock, $0.001 Par Value; Authorized 500,000,000 Shares; Issued 155,830,890 Shares (151,198,390 Shares Outstanding) as of December 31, 2010 and Authorized 200,000,000 shares; Issued 55,814,890 Shares (51,182,390 Shares Outstanding) at December 31, 2009, Respectively  156   56 
Additional Paid-In Capital 357,174 349,304   472,335   357,174 
Unearned Compensation  (302)  (218)  (219)  (302)
Accumulated Other Comprehensive Income — Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes of $602 and $473 at December 31, 2009 and 2008, Respectively 859 544 
Accumulated Other Comprehensive Income (Loss) — Unrealized Gain (Loss) on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes of $602 at December 31, 2010 and 2009  (2,964)  859 
Accumulated Deficit  (138,031)  (15,754)  (226,040)  (138,031)
Treasury Stock, at Cost (4,632,500 Shares at December 31, 2009 and 2008)  (70,012)  (70,012)
     
Treasury Stock, at Cost (4,632,500 Shares at December 31, 2010 and 2009)  (70,012)  (70,012)
      
Total Stockholders’ Equity
 149,744 263,915   173,256   149,744 
          
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $3,162,706 $3,875,816  $2,907,148  $3,162,706 
          
See Accompanying Notes to Consolidated Financial Statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007 
INTEREST AND DIVIDEND INCOME:             
Interest and Fees on Loans $173,318 $223,942 $261,992  $137,328  $173,318  $223,942 
Taxable Interest on Investment Securities 5,675 9,387 13,399   5,874   5,675   9,387 
Tax-Exempt Interest on Investment Securities 2,303 2,717 3,055   225   2,303   2,717 
Interest on Term Federal Funds Sold 1,718 43 5   33   1,718   43 
Dividends on Federal Reserve Bank Stock 592 692 704   430   592   692 
Interest on Federal Funds Sold and Securities Purchased Under Resale Agreements 326 166 1,032   52   326   166 
Interest on Interest-Bearing Deposits in Other Banks 151 10 —   468   151   10 
Dividends on Federal Home Loan Bank Stock 64 1,226 709   102   64   1,226 
              
 
Total Interest and Dividend Income 184,147 238,183 280,896   144,512   184,147   238,183 
       
        
INTEREST EXPENSE:             
Interest on Deposits 76,246 84,353 108,517   34,408   76,246   84,353 
Interest on Federal Home Loan Bank Advances 3,399 14,027 12,156   1,366   3,399   14,027 
Interest on Junior Subordinated Debentures 3,271 5,056 6,644   2,811   3,271   5,056 
Interest on Other Borrowings 2 346 1,793   53   2   346 
              
 
Total Interest Expense 82,918 103,782 129,110   38,638   82,918   103,782 
              
 
NET INTEREST INCOME (LOSS) BEFORE PROVISION FOR CREDIT LOSSES 101,229 134,401 151,786 
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES  105,874   101,229   134,401 
Provision for Credit Losses 196,387 75,676 38,323   122,496   196,387   75,676 
              
 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES  (95,158) 58,725 113,463 
       
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES  (16,622)  (95,158)  58,725 
        
NON-INTEREST INCOME:             
Service Charges on Deposit Accounts 17,054 18,463 18,061   14,049   17,054   18,463 
Insurance Commissions 4,492 5,067 4,954   4,695   4,492   5,067 
Remittance Fees 2,109 2,194 2,049   1,968   2,109   2,194 
Trade Finance Fees 1,956 3,088 4,493   1,523   1,956   3,088 
Other Service Charges and Fees 1,810 2,365 2,527   1,516   1,810   2,365 
Bank-Owned Life Insurance Income  942   932   952 
Net Gain on Sales of Loans 1,220 765 5,452   514   1,220   765 
Bank-Owned Life Insurance Income 932 952 933 
Net Gain on Sales of Investment Securities 1,833 77 —   122   1,833   77 
Other-Than-Temporary Impairment Loss on Securities —  (2,410)  (1,074)
Impairment Loss on Investment Securities:            
TotalOther-than-temporary Impairment Loss on Investment Securities
  (790)  —   (2,410)
Less: Portion of Loss Recognized in Other Comprehensive Income  —   —   — 
Net Impairment Loss Recognized in Earnings  (790)  —   (2,410)
Other Operating Income 704 2,293 2,611   867   704   2,293 
              
 
Total Non-Interest Income 32,110 32,854 40,006   25,406   32,110   32,854 
       
        
NON-INTEREST EXPENSE:             
Salaries and Employee Benefits 33,101 42,209 47,036   36,730   33,101   42,209 
Occupancy and Equipment 11,239 11,158 10,494   10,773   11,239   11,158 
Deposit Insurance premiums and Regulatory Assessments 10,418 3,713 587   10,756   10,418   3,713 
Data Processing 6,297 5,799 6,390   5,931   6,297   5,799 
Other Real Estate Owned Expense 5,890 390 8   10,679   5,890   390 
Professional Fees 4,099 3,539 2,468   3,521   4,099   3,539 
Advertising and Promotion 2,402 3,518 3,630   2,394   2,402   3,518 
Supplies and Communications 2,352 2,518 2,592   2,302   2,352   2,518 
Loan-Related Expense 1,947 790 674   1,147   1,947   790 
Amortization of Other Intangible Assets 1,568 1,958 2,324   1,149   1,568   1,958 
Directors and Officers Liability Insurance  2,865   1,175   397 
Other Operating Expenses 11,041 12,042 10,835   8,558   9,866   11,645 
Impairment Loss on Goodwill — 107,393 102,891   —   —   107,393 
              
 
Total Non-Interest Expense 90,354 195,027 189,929   96,805   90,354   195,027 
              
 
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES  (153,402)  (103,448)  (36,460)
Provision (Benefit) for Income Taxes  (31,125)  (1,355) 24,302 
       
LOSS BEFORE BENEFIT FOR INCOME TAXES  (88,021)  (153,402)  (103,448)
Benefit for Income Taxes  (12)  (31,125)  (1,355)
        
NET LOSS
 $(122,277) $(102,093) $(60,762) $(88,009) $(122,277) $(102,093)
              
 
EARNINGS (LOSS) PER SHARE: 
LOSS PER SHARE:            
Basic $(2.57) $(2.23) $(1.27) $(0.93) $(2.57) $(2.23)
Diluted $(2.57) $(2.23) $(1.27) $(0.93) $(2.57) $(2.23)
 
WEIGHTED-AVERAGE SHARES OUTSTANDING:             
Basic 47,570,361 45,872,541 47,787,213   94,322,222   47,570,361   45,872,541 
Diluted 47,570,361 45,872,541 47,787,213   94,322,222   47,570,361   45,872,541 
 
DIVIDENDS DECLARED PER SHARE $— $0.09 $0.24  $—  $—  $0.09 
See Accompanying Notes to Consolidated Financial Statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
                                         
  Common Stock — Number of Shares Stockholders’ Equity 
  Gross      Net              Accumulated          
  Shares      Shares      Additional      Other  Retained  Treasury  Total 
  Issued and  Treasury  Issued and  Common  Paid-in  Unearned  Comprehensive  Earnings  Stock,  Stockholders’ 
  Outstanding  Shares  Outstanding  Stock  Capital  Compensation  Income (Loss)  (Deficit)  at Cost  Equity 
BALANCE AT JANUARY 1, 2007
  50,239,613   (1,163,000)  49,076,613   50   344,810   —   (3,200)  164,751   (20,041)  486,370 
                                         
Shares Issued for Business Acquisitions  102,181   —   102,181   —   2,198   —   —   —   —   2,198 
Exercises of Stock Options and Stock Warrants  132,647   —   132,647   —   1,164   —   —   —   —   1,164 
Share-Based Compensation Expense  —   —   —   —   1,880   11   —   —   —   1,891 
Restricted Stock Awards  19,000   —   19,000   —   256   (256)  —   —   —   — 
Tax Benefit from Exercise of Stock Options  —   —   —   —   317   —   —   —   —   317 
Cash Dividends  —   —   —   —   —   —   —   (11,574)  —   (11,574)
Repurchase of Common Stock  —   (3,469,500)  (3,469,500)  —   —   —   —   —   (49,971)  (49,971)
Repurchase of Stock Warrants  —   —   —   —   (2,552)  —   —   —   —   (2,552)
                                         
Comprehensive Income:                                        
Net Loss  —   —   —   —   —   —   —   (60,762)  —   (60,762)
Change in Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes  —   —   —   —   —   —   3,475   —   —   3,475 
                               
                                         
Total Comprehensive Loss                                      (57,287)
                                        
                                         
BALANCE AT DECEMBER 31, 2007
  50,493,441   (4,632,500)  45,860,941   50   348,073   (245)  275   92,415   (70,012)  370,556 
                                         
Cumulative-Effect Adjustment — Adoption of EITF Issue No. 06-4  —   —   —   —   —   —   —   (2,223)  —   (2,223)
Shares Issued for Business Acquisitions  39,608   —   39,608   1   292   —   —   —   —   293 
Repurchase of Stock Options  —   —   —   —   (70)  —   —   —   —   (70)
Share-Based Compensation Expense  —   —   —   —   983   53   —   —   —   1,036 
Restricted Stock Awards  10,000   —   10,000   —   67   (67)  —   —   —   — 
Cancellation of Restricted Stock Award  (5,000)  —   (5,000)  —   (41)  41   —   —   —   — 
Cash Dividends  —   —   —   —   —   —   —   (3,853)  —   (3,853)
                                         
Comprehensive Loss:                                        
Net Loss  —   —   —   —   —   —   —   (102,093)  —   (102,093)
Change in Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes  —   —   —   —   —   —   269   —   —   269 
                               
                                         
Total Comprehensive Loss                                      (101,824)
                                        
                                         
BALANCE AT DECEMBER 31, 2008
  50,538,049   (4,632,500)  45,905,549  $51  $349,304  $(218) $544  $(15,754) $(70,012) $263,915 
                               
                                         
Shares Issued for Business Acquisitions  39,418   —   39,418   —   46   —   —   —   —   46 
Issuance of Stock in Private Offering  5,070,423   —   5,070,423   5   6,834   —   —   —   —   6,839 
Share-Based Compensation Expense  —   —   —   —   836   70   —   —   —   906 
Restricted Stock Awards  205,000   —   205,000   —   284   (284)  —   —   —   — 
Cancellation of Restricted Stock Award  (38,000)  —   (38,000)  —   (130)  130   —   —   —   — 
                                         
Comprehensive Loss:                                        
Net Loss  —   —   —   —   —   —   —   (122,277)  —   (122,277)
Change in Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Net of Income Taxes  —   —   —   —   —   —   315   —   —   315 
                               
                                         
Total Comprehensive Loss                                      (121,962)
                                        
                                         
BALANCE AT DECEMBER 31, 2009
  55,814,890   (4,632,500)  51,182,390  $56  $357,174  $(302) $859  $(138,031) $(70,012) $149,744 
                               
                                         
  Common Stock — Number of Shares  Stockholders’ Equity 
  Gross
     Net
           Accumulated
          
  Shares
     Shares
     Additional
     Other
  Retained
  Treasury
  Total
 
  Issued and
  Treasury
  Issued and
  Common
  Paid-in
  Unearned
  Comprehensive
  Earnings
  Stock,
  Stockholders’
 
  Outstanding  Shares  Outstanding  Stock  Capital  Compensation  Income (Loss)  (Deficit)  at Cost  Equity 
 
BALANCE AT JANUARY 1, 2008
  50,493,441   (4,632,500)  45,860,941   50   348,073   (245)  275   92,415   (70,012)  370,556 
Cumulative-Effect Adjustment — Adoption of EITF IssueNo. 06-4
  —   —   —   —   —   —   —   (2,223)  —   (2,223)
Shares Issued for Business Acquisitions  39,608   —   39,608   1   292   —   —   —   —   293 
Repurchase of Stock Options  —   —   —   —   (70)  —   —   —   —   (70)
Share-Based Compensation Expense  —   —   —   —   983   53   —   —   —   1,036 
Restricted Stock Awards  10,000   —   10,000   —   67   (67)  —   —   —   — 
Cancellation of Restricted Stock Award  (5,000)  —   (5,000)  —   (41)  41   —   —   —   — 
Cash Dividends  —   —   —   —   —   —   —   (3,853)  —   (3,853)
Comprehensive Loss:                                        
Net Loss  —   —   —   —   —   —   —   (102,093)  —   (102,093)
Change in Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps, Net of Income Taxes  —   —   —   —   —   —   269   —   —   269 
                                         
Total Comprehensive Loss                                      (101,824)
                                         
BALANCE AT DECEMBER 31, 2008
  50,538,049   (4,632,500)  45,905,549  $51  $349,304  $(218) $544  $(15,754) $(70,012) $263,915 
                                         
Shares Issued for Business Acquisitions  39,418   —   39,418   —   46   —   —   —   —   46 
Issuance of Stock in Private Offering  5,070,423   —   5,070,423   5   6,834   —   —   —   —   6,839 
Share-Based Compensation Expense  —   —   —   —   836   70   —   —   —   906 
Restricted Stock Awards  205,000   —   205,000   —   284   (284)  —   —   —   — 
Cancellation of Restricted Stock Award  (38,000)  —   (38,000)  —   (130)  130   —   —   —   — 
Comprehensive Loss:                                        
Net Loss  —   —   —   —   —   —   —   (122,277)  —   (122,277)
Change in Unrealized Gain on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes  —   —   —   —   —   —   315   —   —   315 
                                         
Total Comprehensive Loss                                      (121,962)
                                         
BALANCE AT DECEMBER 31, 2009
  55,814,890   (4,632,500)  51,182,390  $56  $357,174  $(302) $859  $(138,031) $(70,012) $149,744 
                                         
Shares Issued, Net of Offering and Underwriting Costs  100,000,000   —   100,000,000   100   114,209   —   —   —   —   114,309 
Exercises of Stock Options  16,000   —   16,000   —   22   —   —   —   —   22 
Share-Based Compensation Expense  —   —   —   —   930   83   —   —   —   1,013 
Comprehensive Loss:                                        
Net Loss  —   —   —   —   —   —   —   (88,009)  —   (88,009)
Change in Unrealized Loss on Securities Available for Sale and Interest-Only Strips, Net of Income Taxes  —   —   —   —   —   —   (3,823)  —   —   (3,823)
                                         
Total Comprehensive Loss                                      (91,832)
                                         
BALANCE AT DECEMBER 31, 2010
  155,830,890   (4,632,500)  151,198,390  $156  $472,335  $(219) $(2,964) $(226,040) $(70,012) $173,256 
                                         
See Accompanying Notes to Consolidated Financial Statements.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net Loss $(122,277) $(102,093) $(60,762) $(88,009) $(122,277) $(102,093)
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities:             
Depreciation and Amortization of Premises and Equipment 2,610 2,900 2,953   2,286   2,610   2,900 
Amortization of Premiums and Accretion of Discounts on Investment Securities, Net  (516) 164 218   1,329   (516)  164 
Amortization of Other Intangible Assets 1,568 1,958 2,324   1,149   1,568   1,958 
Amortization of Servicing Assets 823 1,295 2,046   1,033   823   1,295 
Share-Based Compensation Expense 906 1,036 1,891   1,013   906   1,036 
Provision for Credit Losses 196,387 75,676 38,323 �� 122,496   196,387   75,676 
Federal Home Loan Bank and Federal Reserve Bank Stock Dividends —  (1,259)  (708)  —   —   (1,259)
Net Gain on Sales of Investment Securities  (1,833)  (77) —   (122)  (1,833)  (77)
Other-Than-Temporary Impairment Loss on Investment Securities — 2,410 1,074   790   —   2,410 
Net Gain on Sales of Loans  (1,220)  (765)  (5,452)  (514)  (1,220)  (765)
(Gain) Loss on Sales of Other Real Estate Owned 211 324  (226)
Loss on Sales of Other Real Estate Owned  196   211   324 
Valuation Impairment on Other Real Estate Owned 3,115 — —   8,683   3,115   — 
Impairment Loss on Goodwill — 107,393 102,891   —   —   107,393 
Excess Tax Benefit from Exercises of Stock Options — —  (193)
Cash Surrender Value of Bank-Owned Life Insurance  (942)  (932)  (951)
Deferred Tax Expense (Benefit) 26,016  (11,254)  (14,618)  3,561   26,016   (11,254)
Origination of Loans Held for Sale  (1,711)  (54,347)  (108,639)  (20,228)  (1,711)  (54,347)
Net Proceeds from Sales of Loans Held for Sale 35,331 24,037 131,626   144,308   35,331   24,037 
Decrease (Increase) in Accrued Interest Receivable 2,855 5,064  (492)
Changes in Fair Value of Stock Warrants  (362)  —   — 
Loss on Investment in Affordable Housing Partnership  880   895   760 
Decrease in Accrued Interest Receivable  1,444   2,855   5,064 
Increase in Servicing Assets, Net  (874)  (750)  (1,803)  (81)  (874)  (750)
Increase in Cash Surrender Value of Bank-Owned Life Insurance  (932)  (951)  (933)
(Increase) Decrease in Other Assets 4,000 7,937 2,875   (3,014)  3,105   7,177 
Increase in Income Taxes Receivable  (44,842)  (6,081) — 
(Increase) Decrease in Income Taxes Receivable  47,366   (44,842)  (6,081)
Increase (Decrease) in Accrued Interest Payable  (5,933)  (3,289)  (754)  3,360   (5,933)  (3,289)
Increase (Decrease) in Other Liabilities  (1,428)  (5,573) 3,158 
       
Decrease in Other Liabilities  (177)  (1,428)  (5,573)
        
Net Cash Provided By Operating Activities
 92,256 43,755 94,821   226,445   92,256   43,755 
              
 
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Proceeds from Matured Term Federal Funds Sold — — 5,000 
Proceeds from Redemption of Federal Home Loan Bank and Federal Reserve Bank Stock 2,350 4,074 —   4,510   2,350   4,074 
Proceeds from Matured or Called Securities Available for Sale 62,144 147,320 89,958   130,125   62,144   147,320 
Proceeds from Sales of Investment Securities Available for Sale 93,685 28,501 —   31,832   93,685   28,501 
Repayments and Redemption of Investment Securities Held to Maturity  24   —   — 
Proceeds from Sales of Other Real Estate Owned 4,917 2,128 1,306   25,113   4,917   2,128 
Net Decrease (Increase) in Loans Receivable 354,328  (95,286)  (461,297)  294,701   354,328   (95,286)
Purchases of Federal Home Loan Bank and Federal Reserve Bank Stock —  (10,261)  (7,849)  (666)  —   (10,261)
Purchases of Investment Securities Available for Sale  (89,357)  (24,580)  (44,980)  (448,428)  (89,357)  (24,580)
Purchases of Premises and Equipment  (988)  (2,379)  (3,682)  (1,228)  (988)  (2,379)
Business Acquisitions, Net of Cash Acquired — —  (1,727)
              
 
Net Cash Provided By (Used In) Investing Activities
 427,079 49,517  (423,271)
       
Net Cash Provided By Investing Activities
  35,983   427,079   49,517 
        
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Increase (Decrease) in Deposits  (320,753) 68,381 56,984   (282,606)  (320,753)  68,381 
Net Proceeds from Issuance of Common Stock in Private Offering 6,839 — — 
Proceeds from Exercises of Stock Options and Stock Warrants — — 1,164 
Excess Tax Benefit from Exercises of Stock Options — — 193 
Cash Paid to Acquire Treasury Stock — —  (49,971)
Net Proceeds from Issuance of Common Stock in Offering  116,271   6,839   — 
Proceeds from Exercises of Stock Options  22   —   — 
Cash Paid to Repurchase Stock Options and Stock Warrants —  (70)  (2,552)  —   —   (70)
Cash Dividends Paid —  (3,853)  (11,574)  —   —   (3,853)
Proceeds from Long-Term Federal Home Loan Bank Advances and Other Borrowings — 250,000 —   —   —   250,000 
Repayment of Long-Term Federal Home Loan Bank Advances and Other Borrowings  (107,218)  (468)  (443)  (328)  (107,218)  (468)
Net Change in Short-Term Federal Home Loan Bank Advances and Other Borrowings  (160,040)  (313,713) 318,546   (177)  (160,040)  (313,713)
              
 
Net Cash (Used In) Provided By Financing Activities
  (581,172) 277 312,347   (166,818)  (581,172)  277 
       
        
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  (61,837) 93,549  (16,103)  95,610   (61,837)  93,549 
Cash and Cash Equivalents at Beginning of Year 215,947 122,398 138,501   154,110   215,947   122,398 
              
 
CASH AND CASH EQUIVALENTS AT END OF YEAR
 $154,110 $215,947 $122,398  $249,720  $154,110  $215,947 
       
        
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
             
Cash Paid During the Period for:
             
Interest Paid $88,851 $107,071 $129,864  $35,278  $88,851  $107,071 
Income Taxes Paid $— $13,873 $38,232 
Income Taxes (Refunds) Paid $(49,971) $—  $13,873 
Non-Cash Activities:
             
Stock Issued for Business Acquisition $46 $293 $2,198  $—  $46  $293 
Transfer of Loans to Other Real Estate Owned $38,726 $2,988 $1,367  $12,992  $38,726  $2,988 
Loan Provided in the Sale of Other Real Estate Owned $5,000 $— $— 
Transfer of Loans to Loans Held for Sale $155,176  $—  $— 
Loans Provided in the Sale of Other Real Estate Owned $1,217  $5,000  $— 
Issuance of Stock Warrants in Connection with Common Stock Offering $1,962  $—  $— 
Transfer of Equity Securities from Other Assets to Securities Available for Sale $— $511 $—  $—  $—  $511 
See Accompanying Notes to Consolidated Financial Statements.

88
99

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008
NOTE 1 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION
 
On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Final Order (“Order”) with the California Department of Financial Institutions (the “DFI”). On the same date, Hanmi Financial and the Bank entered into a Written Agreement (the “Agreement”“Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). The Order and the Written Agreement contain a list of strict requirements ranging from a capital directive to developing a contingency funding plan.
 
While Hanmi Financial intends to take such actions as may be necessary to enable Hanmi Financial and the Bank to comply with the requirements of the Regulatory Agreement and Order, there can be no assurance that Hanmi Financial or the Bank will be able to comply fully with the provisions of the Written Agreement and the Order, or that compliance with the Written Agreement and the Order will not have material and adverse effects on the operations and financial condition of the Hanmi Financial and the Bank. Any material failure to comply with the provisions of the Written Agreement and the Order could result in further enforcement actions by both DFI and FRB, or the placing of the Bank into conservatorship or receivership.
 
Written Agreement and Final Order
 
The Order and the Written Agreement contain substantially similar provisions. The Order and the Written Agreement require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, with respect to the Written Agreement, of Hanmi; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Order and the Written Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Order and the Written Agreement also require the Bank to review and revise its allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and the Bank and Hanmi must obtain prior approval from the FRB prior to declaring and paying dividends.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 1 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION(Continued)
Under the Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will bewas required to increase its contributed equity capital by not less than an additional $100 million. The Bank will bewas required to maintain a ratio of tangible shareholders’ equity to total tangible assets as follows:
   
  Ratio of Tangible Shareholder’s
Date 
Equity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010Not Less Than 9.0 Percent

From December 31, 2010 and Until the Order is Terminated		 Not Less Than 9.0 Percent
Not Less Than 9.5 Percent


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 1 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION(Continued)
If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi Financial and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be approved by the FRB. On July 27, 2010, we completed a registered rights and best efforts offering by which we raised $116.8 million in net proceeds. As a result, we satisfied the $100 million capital contribution requirement set forth in the Final Order. The Bank had tangible stockholders’ equity to total tangible assets ratio of 8.59 percent at December 31, 2010. Accordingly, we notified the DFI and FRB of such event. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholder’s equity to total tangible assets ratio of 7.13 percent. As of December 31, 2008, the Bank had a Tier 1 leverage ratio of 8.85 percent and tangible stockholder’s equity
In addition to total tangible assets ratio of 8.68 percent.
     To complycomplying with the provisions of the AgreementOrder and the Order, additional actions taken includeWritten Agreement, we entered into a definitive securities purchase agreement with Woori Finance Holdings Co. Ltd. (“Woori”) on May 25, 2010 which provides that upon satisfactions of all conditions to closing , we will issue 175 million shares of common stock to Woori at a purchase price per share of $1.20, for aggregate gross consideration of $210 million.
Risk-Based Capital
The regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the following:
•The Board Committees have been reorganized after a board assessment was conducted to leverage the experience and skill base of our directors and improve board oversight of the Bank’s operations.
•Tools such as master calendar of scheduled events and policy exception trigger tables have been created to assist the Board’s ability to monitor the Bank’s operations more effectively.
•Jung Hak Son, a 24 year member of the Bank has been appointed to the Chief Credit Officer position and is currently awaiting approval from the regulatory agencies.
•Loan policies and procedures continue to be adjusted and enhanced to keep current with the rapidly changing credit and economic environment.
•Allowance for loan loss quantitative and qualitative factors have been changed to reflect the higher risk in the loan portfolio due to the recessionary economy.
•The credit department has also been reorganized and reinforced with additional personnel to increase the level of management loan review and loan monitoring.
•Written plans have been developed for each problem loan greater than $3 Million and the plans implemented and monitored to improve loan work out and loan collection.
•Bank’s strategic plan has been reviewed and revised, then approved by the Board of Directors.
•Bank’s liquidity management plan and contingency funding plan have been significantly revised to reflect the additional restrictions and challenges of the market.
•The capital plan has been revised and significant effort is being made to raise the required capital within the time frame mandated by the Order.
•A Compliance Committee has been organized to monitor the progress toward full compliance with all the provisions of the Agreement and the Order and approves the reports prior to submission according to the schedule established.
risk-based guidelines, regulators require banking organizations to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio is 3.0 percent. In addition to these uniform risk-based capital guidelines that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 1 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION(Continued)
 Policies
The capital ratios of Hanmi Financial and procedures have been developed, plans have been formulated, documented, approvedthe Bank were as follows as of December 31, 2010 and submitted and administrative requirements such as submission of quarterly progress reports are also being met. However, the results of these actions are still subject to review by our regulators.2009:
                         
     Minimum
  Minimum to Be
 
        Regulatory
  Categorized as
 
  Actual  Requirement  “Well Capitalized” 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in Thousands) 
 
December 31, 2010
                        
Total Capital (to Risk-Weighted Assets):                        
Hanmi Financial $284,345   12.32% $184,570   8.00%  N/A   N/A 
Hanmi Bank $281,380   12.22% $184,187   8.00% $230,234   10.00%
Tier 1 Capital (to Risk-Weighted Assets):                        
Hanmi Financial $232,676   10.09% $92,285   4.00%  N/A   N/A 
Hanmi Bank $251,111   10.91% $92,094   4.00% $138,141   6.00%
Tier 1 Capital (to Average Assets):                        
Hanmi Financial $232,676   7.90% $117,774   4.00%  N/A   N/A 
Hanmi Bank $251,111   8.55% $117,494   4.00% $146,868   5.00%
                         
December 31, 2009
                        
Total Capital (to Risk-Weighted Assets):                        
Hanmi Financial $262,796   9.12% $230,614   8.00%  N/A   N/A 
Hanmi Bank $261,194   9.07% $230,261   8.00% $287,826   10.00%
Tier 1 Capital (to Risk-Weighted Assets):                        
Hanmi Financial $194,749   6.76% $115,307   4.00%  N/A   N/A 
Hanmi Bank $223,700   7.77% $115,131   4.00% $172,696   6.00%
Tier 1 Capital (to Average Assets):                        
Hanmi Financial $194,749   5.82% $133,945   4.00%  N/A   N/A 
Hanmi Bank $223,700   6.69% $133,770   4.00% $167,212   5.00%
 
Going ConcernReserve Requirement
 
The Bank is required to maintain a percentage of its deposits as reserves at the FRB. The daily average reserve balance required to be maintained with the FRB was $1.5 million as of December 31, 2010 and 2009, respectively.
Going Concern
As previously mentioned, we are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. As part of the recently issued DFI Final Order issued on November 2, 2009, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Final Order. By July 31, 2010, the Bank will bewas required to increase its contributed equity capital by not less than an additional $100 million.
     We have also committed to the FRB to adopt a consolidated capital plan to augmentmillion and maintain a sufficientratio of tangible stockholders’ equity to total tangible assets of at least 9.0 percent. As a result of the successful completion of the registered rights and best efforts offering in July 2010, the capital position. Our existingcontribution requirement set forth in the Final Order has been satisfied. However, the tangible capital resources mayratio requirement set forth in the Final Order has not satisfy our capital requirements for the foreseeable future and may not be sufficient to offset any problem assets.been satisfied at December 31, 2010. Further, should our asset quality continue to erode and require significant additional provision for credit losses,


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 1 — REGULATORY MATTERS AND GOING CONCERN CONSIDERATION(Continued)
resulting in consistentadded future net operating losses at the Bank, our capital levels will additionally decline and we will need to raiserequiring the raising of more capital than the amount currently required to satisfy our agreements with the Regulators.
     Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital if needed or on terms acceptable to us. Inabilityregulators. An inability to raise additional capital when needed or comply with the terms of the Final Order or Agreement, raises substantial doubt about our ability to continue as a going concern.
 
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.

91

As set forth above, on May 25, 2010, we entered into a definitive securities purchase agreement with Woori and are currently awaiting final regulatory approval for the applications filed by Woori in connection with the transactions contemplated by the securities purchase agreement. We will inject a substantial portion of the net proceeds from the Woori transaction as new capital into Hanmi Bank. However, we cannot provide assurance that we will be successful in consummating the transaction with Woori.
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Summary of Operations
 
Hanmi Financial Corporation (“Hanmi Financial,” “we,” “us” or “our”) was formed as a holding company of Hanmi Bank (the “Bank”) and registered with the Securities and Exchange Commission under the Securities Act of 1933 on March 17, 2001. Subsequent to its formation, each of the Bank’s shares was exchanged for one share of Hanmi Financial with an equal value. Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through operation of the Bank.
 
The Bank is a community bank conducting general business banking, with its primary market encompassing theKorean-American community as well as other communities in the multi-ethnic populations of Los Angeles County, Orange County, San Bernardino County, San Diego County, the San Francisco Bay area, and the Silicon Valley area in Santa Clara County. The Bank’s full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. The Bank’s client base reflects the multi-ethnic composition of these communities. The Bank is a California state-chartered financial institution insured by the FDIC. As of December 31, 2009,2010, the Bank maintained a branch network of 27 full-service branch offices in California and twoone loan production officesoffice in Virginia and Washington.
 
Our other subsidiaries, Chun-Ha Insurance Services, Inc. (“Chun-Ha”) and All World Insurance Services, Inc. (“All World”), were acquired in January 2007. Founded in 1989, Chun-Ha and All World are insurance agencies


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
that offer a complete line of insurance products, including life, commercial, automobile, health, and property and casualty.
 
Basis of Presentation
 
The accounting and reporting policies of Hanmi Financial and subsidiaries conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.
 
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification™Codificationtm (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Hanmi Financial and our wholly owned subsidiaries, the Bank, Chun-Ha and All World. All intercompany transactions and balances have been eliminated in consolidation.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Significant areas where estimates are made consist of the allowance for loan losses,other-than-temporary impairment, investment securities valuations and income taxes. Actual results could differ from those estimates.
 
Reclassifications
 
Certain reclassifications were made to the prior year’s presentation to conform to the current year’s presentation.


104

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity RiskRisks and Uncertainties
 
FASB ASC 275,“Risks and Uncertainties,”requires reporting entities to disclose information about the nature of their operations and vulnerabilities due to certain concentrations. Based on our industry and current capital situation, our primary risks and uncertainties consist of capital, credit and liquidity risk.
Our operations and regulatory capital needs require us to enhance our capital in the near term and may require us to raise additional capital in the future. Our ability to raise additional capital will depend on conditions in the capital markets at the time, which are outside of our control and our financial performance. For further disclosure on our capital position, see“Note 1 — Regulatory Matters and Going Concern Consideration.”
A significant source of credit risk arises from the possibility that we could sustain losses to borrowers, guarantors, and related parties due to the failure of our customers to perform in accordance with the terms of their loans. Such failure could have an adverse impact on our financial performance as it could lead to additional provisions in our allowance for loan losses. For further disclosure on our credit risk and credit quality indicators, see“Note 5 — Loans.” Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.
For further disclosure on our liquidity position and our available sources of liquidity, see“Note 2220 — Liquidity.”
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash, due from banks and overnight federal funds sold, all of which have original or purchased maturities of less than 90 days.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Securities
 
Securities are classified into three categories and accounted for as follows:
 1.     Securities that we have the positive intent and ability to hold to maturity are classified as “held-to-maturity”“held-to-maturity” and reported at amortized cost;
 
 2.     Securities that are bought and held principally for the purpose of selling them in the near future are classified as “trading securities” and reported at fair value. Unrealized gains and losses are recognized in earnings; and
 
 3.     Securities not classified asheld-to-maturity or trading securities are classified as “available for sale” and reported at fair value. Unrealized gains and losses are reported as a separate component of stockholders’ equity as accumulated other comprehensive income, net of income taxes.


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accreted discounts and amortized premiums on investment securities are included in interest income using the effective interest method over the remaining period to the call date or contractual maturity and, in the case of mortgage-backed securities and securities with call features, adjusted for anticipated prepayments. Unrealized and realized gains or losses related to holding or selling of securities are calculated using the specific-identification method.
 
We are obligated to assess, at each reporting date, whether there is another-than-temporary impairment to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income. The determination ofother-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. We examine all individual securities that are in an unrealized loss position at each reporting date forother-than-temporary impairment. Specific investment-related factors we examine to assess impairment include the nature of the investment, severity and duration of the loss, the probability that we will be unable to collect all amounts due, an analysis of the issuers of the securities and whether there has been any cause for default on the securities and any change in the rating of the securities by the various rating agencies. Additionally, we evaluate whether the creditworthiness of the issuer calls the realization of contractual cash flows into question. Our impairment assessment also takes into consideration factor that we do not intend to sell the security and it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis of the security. If the decline in fair value is judged to be other than temporary, the security is written down to fair value which becomes the new cost basis and an impairment loss is recognized.
 
For debt securities, the classification ofother-than-temporary impairment depends on whether we intend to sell the security or if it is more likely than not we will be required to sell the security before recovery of its costs basis, and on the nature of the impairment. If we intend to sell a security or if it is more likely than not itwe will be required to sell athe security prior tobefore recovery, of its cost basis, the entire amount of impairmentan OTTI write-down is recognized in earnings.earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell the security or it is not more likely than not itthat we will be required to sell the security prior tobefore recovery, of its cost basis, the OTTI write-down is separated into an amount representing credit loss, component of impairmentwhich is recognized in earnings, and impairment associated with non-creditthe amount related to all other factors, such as market liquidity,which is recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security’s effective interest rate at the date of acquisition. The cost basis of another-than-temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value. Management does not believe that there are any investment securities, other than those identified in the current and previous periods, that are deemedother-than-temporarily impaired as of December 31, 2009.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)2010.
 
We also have a minority investment of less than five percent in a publicly traded company, Pacific International Bancorp (“PIB”). As of December 31, 2009,2010, the investment was carried at fair value and included in securities available for sale on the Consolidated Balance Sheets. As of December 31, 2010 and 2009, andits


106

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 its (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
carrying value was $794,000$774,000 and $804,000,$794,000, respectively. We monitor the investment for impairment and make appropriate reductions in carrying value when necessary.
 
Loans Receivable
 
We originate loans for investment, with such designation made at the time of origination. Loans receivable that we have the intent and ability to hold for the foreseeable future, or until maturity, are stated at their outstanding principal, reduced by an allowance for loan losses and net of deferred loan fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Non-refundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income as an adjustment to yield over the loan term using the effective interest method. Discounts or premiums on purchased loans are accreted or amortized to interest income using the effective interest method over the remaining period to contractual maturity adjusted for anticipated prepayments.
 
Interest on loans is credited to income as earned and is accrued only if deemed collectible. Direct loan origination costs are offset by loan origination fees with the net amount deferred and recognized over the contractual lives of the loans in interest income as a yield adjustment using the effective interest method. Discounts or premiums associated with purchased loans are accreted or amortized to interest income using the interest method over the contractual lives of the loans, adjusted for prepayments. Accretion of discounts and deferred loan fees is discontinued when loans are placed on non-accrual status.
 
Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual assets may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual.
 
Loans Held for Sale
 
Loans originated and intended for sale in the secondary market, primarily Small Business Administration (“SBA”) loans, are carried at the lower of aggregate cost or market value. Origination fees on loans held for sale, net of certain costs of processing and closing the loans, are deferred until the time of sale and are included in the computation of the gain or loss from the sale of the related loans. A valuation allowance is


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
established if the market value of such loans is lower than their cost and net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Allowance for Loan Losses
 
Management believes the allowance for loan losses is adequate to provide for probable losses inherent in the loan portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management��sManagement’s estimates are based on previous loan loss experience; volume, growth and composition of the loan portfolio; the value of collateral; and current economic conditions. Our lending is concentrated in commercial, consumer, construction and real estate loans in the greater Los Angeles/Orange County area. Although management believes the level of the allowance is adequate to absorb probable losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably be predicted at this date.
 
Provisions to the allowance for loan losses are made quarterly to recognize probable loan losses. The quarterly provision is based on the allowance need, which is determined through analysis involving quantitative calculations based on historic loss rates for general reserves and individual impairment calculations for specific allocations to impaired loans as well as qualitative adjustments.
To determine general reserve requirements, existing loans are divided into 10 general loan pools of risk-rated loans (Commercial Real Estate, Construction, Commercial Term — Unsecured, Commercial Term — T/D Secured, Commercial Line of Credit, SBA, International, Consumer Installment, Consumer Line of Credit, and Miscellaneous loans) as well as 3 homogenous loan pools (Residential Mortgage, Auto, and Credit Card). For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade (pass, special mention, substandard, and doubtful) to determine risk factors for potential loss inherent in the current outstanding loan portfolio.
During the first quarter of 2010, to enhance reserve calculations to better reflect the Bank’s current loss profile, the two loan pools of commercial real estate and commercial term — T/D secured were subdivided according to the 21 collateral codes used by the Bank to identify commercial property types (Apartment, Auto, Car Wash, Casino, Church, Condominium, Gas Station, Golf Course, Industrial, Land, Manufacturing, Medical, Mixed Used, Motel, Office, Retail, School, Supermarket, Warehouse, Wholesale, and Others). This further segregation allows the Bank to more specifically allocate reserves within the commercial real estate portfolio according to risks defined by historic loss as well as current loan concentrations of the different collateral types.
For purposes of determining the allowance for credit losses, the loan portfolio is subdivided into three portfolio segments: Real Estate, Commercial and Industrial, and Consumer. The portfolio segment of Real Estate contains the allowance loan pools of Commercial Real Estate, Construction, and Residential Mortgage. The portfolio segment of Commercial and Industrial contains the loan pools of Commercial Term — Unsecured,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Commercial Term — T/D Secured, Commercial Line of Credit, SBA, International, and Miscellaneous. Lastly, the portfolio segment of Consumer contains the loan pools of Consumer Installment, Consumer Line of Credit, Auto, and Credit Card.
Real Estate loans, which are mostly dependent on rental income from non-owner occupied or investor properties, have been subject to increased losses. Prior to 2009, no historic losses were recorded for loans secured by commercial real estate. However, given the decrease in sales and increase in vacancies due to the current slowed economy, losses in loans secured by office and retail properties have been significant. Loans secured by vacant land have also had significant losses as valuations have decreased and further development has been limited. Similarly, Construction loans have been subject to losses due to unforeseen difficulties in completion of projects. As such, allocations to general reserves for those loan pools have been higher than that of loan pools with lower risk. Residential Mortgage loans constitute a limited concentration within the Bank’s entire loan portfolio, and losses as well as supplementary reserves have been minimal.
Commercial and Industrial loans, which are largely subject to changes in business cash flow, have had the most historic losses within the Bank’s entire loan portfolio. The largest loan pool within the C & I sector is Commercial Term — T/D Secured, which are mostly loans secured by owner-occupied business properties. Loans secured by car washes, gas stations, golf courses, and motels have had the most significant losses, as the hospitality and recreation industries have been negatively affected by the current economy. As such, allocations to general reserve for those loan pools have been increased. Also, Commercial Term — Unsecured and SBA loans have had considerable losses and additional general reserves as decreased business cash flow due to the economic recession has jeopardized borrowers’ repayment abilities.
Consumer loans constitute a limited concentration within the Bank’s loan portfolio and are mostly evaluated in bulk for general reserve requirements due to the relatively small volume per loan.
Non-performing assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO”). Loans are generally placed on non-accrual status when they become 90 days past due unless management believes the loan is adequately collateralized and in the process of collection. Additionally, the Bank may place loans that are not 90 days past due on non-accrual status, if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question.
 
When loans are placed on non-accrual status, accrued but unpaid interest is reversed against the current year’s income, and interest income on non-accrual loans is recorded on a cash basis. The Bank may treat payments as interest income or return of principal depending upon management’s opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan losses are charged, and recoveries are credited, to the allowance account. Additions to the allowance account are charged to the provision for credit losses. The allowance for loan losses is maintained at a level considered adequate by management to absorb probable losses in the loan portfolio. The adequacy of the allowance is determined by management based upon an evaluation and review of the loan portfolio, consideration of historical loan loss experience, current economic conditions, changes in the composition of the loan portfolio, analysis of collateral values and other pertinent factors.
 
Loans are measured for impairment when it is probable that not all amounts, including principal and interest, will be collected in accordance with the contractual terms of the loan agreement. The amount of impairment and any subsequent changes are recorded through the provision for credit losses as an adjustment to the allowance for loan losses. Accounting standards require that an impaired loan be measured based on:
 1.     the present value of the expected future cash flows, discounted at the loan’s effective interest rate; or
 
 2.     the loan’s observable fair value; or
 
 3.     the fair value of the collateral, if the loan is collateral-dependent.
The Bank follows the“Interagency Policy Statement on the Allowance for Loan and Lease Losses” and analyzes the allowance for loan losses on a quarterly basis. In addition, as an integral part of the quarterly credit review process of the Bank, the allowance for loan losses and allowance for off-balance sheet items are reviewed for adequacy. The DFIand/or the Board of Governors of the Federal Reserve System require the Bank to recognize additions to the allowance for loan losses based upon their assessment of the information available to them at the time of their examinations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Premises and Equipment
 
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the various classes of assets. The ranges of useful lives for the principal classes of assets are as follows:
   
Buildings and Improvements 10 to 30 years
Furniture and Equipment 3 to 7 Years
Leasehold Improvements Term of Lease or Useful Life, Whichever is Shorter
Software 3 Years
 
Impairment of Long-Lived Assets
 
We account for long-lived assets in accordance with the provisions of FASB ASC 360,“Property, Plant and Equipment.”This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
 
Other Real Estate Owned
 
Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation impairment is recorded through expense. Operating costs after acquisition are expensed.
 
Servicing Assets
 
Servicing assets are recorded at the lower of amortized cost or fair value in accordance with the provisions of FASB ASC 860, “Transfers and Servicing.” The fair values of servicing assets represent either the price paid if purchased, or the allocated carrying amounts based on relative values when retained in a sale. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing income. The fair value of servicing assets is determined based on the present value of estimated net future cash flows related to contractually specified servicing fees.
 
Upon sales of such loans, we receive a fee for servicing the loans. The servicing asset is recorded based on the present value of the contractually specified servicing fee, net of adequate compensation, for the estimated life of the loan, using a discount rate and a constant prepayment rate. The servicing asset is amortized in proportion to and over the period of estimated servicing income. Management periodically evaluates the servicing asset for impairment. Impairment, if it occurs, is recognized in a valuation allowance in the period of impairment.
 
Interest-only strips are recorded based on the present value of the excess of total servicing fee over the contractually specified servicing fee for the estimated life of the loan, calculated using the same assumptions as noted above. Such interest-only strips are accounted for at their estimated fair value, with unrealized gains or losses recorded as adjustments to accumulated other comprehensive income (loss).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Goodwill
 
Goodwill represents the excess of purchase price over the fair value of net assets acquired. In accordance with FASB ASC 350,“Intangibles-Goodwill and Other,”goodwill must be recorded at the reporting unit level. Reporting units are defined as an operating segment. We have identified one reporting unit — our banking operations. FASB ASC 350 prohibits the amortization of goodwill, but requires that it be tested for impairment at least annually (at any time during the year, but at the same time each year), or more frequently if events or


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
circumstances change, such as adverse changes in the business climate, that would more likely than not reduce the reporting unit’s fair value below its carrying amount.
 
The impairment test is performed in two phases. The first step involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit was derived based on a weighted distribution of values derived from three different approaches: market approach, market capitalization approach, and income approach. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed.
 
Other Intangible Assets
 
Other intangible assets consists of a core deposit intangible (“CDI”) and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. CDI represents the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions. We amortize the CDI balance using an accelerated method over eight years. The acquired intangible assets were initially measured at fair value and then are amortized on the straight-line method over their estimated useful lives.
 
As required by FASB ASC 350, we evaluated the useful lives assigned to other intangible assets and determined that no change was necessary and amortization expense was not adjusted for the year ended December 31, 2009.2010. As required by FASB ASC 350, other intangible assets are assessed for impairment or recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The other intangible assets recoverability analysis is consistent with our policy for assessing impairment of long-lived assets.
 
Federal Home Loan Bank Stock
 
The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and is required to own common stock in the FHLB based upon the Bank’s balance of residential mortgage loans and outstanding FHLB advances. FHLB stock is carried at cost and may be sold back to the FHLB at its carrying value. FHLB stock is


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends received are reported as dividend income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Federal Reserve Bank Stock
 
The Bank is a member of the Federal Reserve Bank of San Francisco (“FRB”) and is required to maintain stock in the FRB based on a specified ratio relative to the Bank’s capital. FRB stock is carried at cost and may be sold back to the FRB at its carrying value. FRB stock is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends received are reported as dividend income.
 
Derivative Instruments
 
We account for derivatives in accordance with the provisions of FASB ASC 815, “Derivatives and Hedging — Overall.”Under FASB ASC 815, all derivatives are recognized on the balance sheet at their fair values. On the date the derivative contract is entered into, we designate the derivative as a fair value hedge or a cash flow hedge. Fair value hedges include hedges of the fair value of a recognized asset, liability or a firm commitment. Cash flow hedges include hedges of the variability of cash flows to be received or paid related to a recognized asset, liability or a forecasted transaction. Changes in the fair value of derivatives designated as fair value hedges, along with the change in fair value on the hedged asset, liability or firm commitment that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of derivatives designated as cash flow hedges, to the extent effective as a hedge, are recorded in accumulated other comprehensive income (loss) and reclassified into earnings in the period during which the hedged item affects earnings.
 
We formally document all relationships between hedging instruments and hedged items. This documentation includes our risk management objective and strategy for undertaking various hedge transactions, as well as how hedge effectiveness and ineffectiveness will be measured. This process includes linking derivatives to specific assets and liabilities on the balance sheet. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.
 
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the balance sheet at its fair value, with changes in its fair value recognized in current period earnings. For fair value hedges, the formerly hedged asset or liability will no longer be adjusted for changes in fair value and any previously recorded adjustments to the carrying value of the hedged asset or liability will be amortized in the same manner that the hedged item affects income. For cash flow hedges, amounts previously recorded in accumulated other comprehensive


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
income (loss) will be reclassified into income as earnings are impacted by the variability in the cash flows of the hedged item.
 
If the hedging instrument is terminated early, the derivative is removed from the balance sheet. Accounting for the adjustments to the hedged asset or liability or adjustments to accumulated other comprehensive income (loss) are the same as described above when a derivative no longer qualifies as an effective hedge.
 
If the hedged asset or liability is sold or extinguished, the derivative will continue to be carried on the balance sheet at its fair value, with changes in its fair value recognized in current period earnings. The hedged item, including previously recordedmark-to-market adjustments, is derecognized immediately as a component of the gain or loss upon disposition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Bank-Owned Life Insurance
 
We have purchased single premium life insurance policies (“bank-owned life insurance”) on certain officers. The Bank is the beneficiary under the policy. In the event of the death of a covered officer, we will receive the specified insurance benefit from the insurance carrier. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due, if any, that are probable at settlement.
 
Affordable Housing Investments
 
The Bank has invested in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout California. The partnership interests are accounted for utilizing the equity method of accounting. The costs of the investments are being amortized on a straight-line method over the life of related tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture with interest. Such investments are recorded in other assets in the accompanying Consolidated Balance Sheets.
 
Junior Subordinated Debentures
 
We have established three statutory business trusts that are wholly owned subsidiaries of Hanmi Financial: Hanmi Capital Trust I, Hanmi Capital Trust II and Hanmi Capital Trust III (collectively, “the Trusts”). In three separate private placement transactions, the Trusts issued variable rate capital securities representing undivided preferred beneficial interests in the assets of the Trusts. Hanmi Financial is the owner of all the beneficial interests represented by the common securities of the Trusts.
 
FASB ASC 810,“Consolidation of Variable Interest Entities (Revised December 2003) — an Interpretation of ARB No. 51,”requires that variable interest entities be consolidated by a company if that company is subject to


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a majority of expected losses from the variable interest entity’s activities, or is entitled to receive a majority of the entity’s expected residual returns, or both. The Trusts are not consolidated and junior subordinated debt represents liabilities of Hanmi Financial to the Trusts.
 
Income Taxes
 
We provide for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Share-Based Compensation
 
We adopted FASB ASC 718,“Compensation-Stock Compensation,”on January 1, 2006 using the “modified prospective” method. Under this method, awards that are granted, modified or settled after December 31, 2005 are measured and accounted for in accordance with FASB ASC 718. Also under this method, expense is recognized for services attributed to the current period for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123, “Accounting for Stock-Based Compensation.”Prior to the adoption of FASB ASC 718, we accounted for stock compensation under the intrinsic value method permitted by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. Accordingly, we previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.
 In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123R-3,“Transition Election Related to Accounting for the Tax Effects of the Share-Based Payment Awards.”We have adopted the alternative transition method prescribed by FSP No. FAS 123R-3 and concluded that we have no pool of tax benefits as of the adoption date of FASB ASC 718.
FASB ASC 718 requires that cash flows resulting from the realization of excess tax benefits recognized on awards that were fully vested at the time of adoption of FASB ASC 718 be classified as a financing cash inflow and an operating cash outflow on the Consolidated Statements of Cash Flows. Before the adoption of FASB ASC 718, we presented all tax benefits realized from the exercise of stock options as an operating cash inflow.
 
In addition, FASB ASC 718 requires that any unearned compensation related to awards granted prior to the adoption of FASB ASC 718 be eliminated against the appropriate equity accounts. As a result, the presentation of stockholders’ equity was revised to reflect the transfer of the balance previously reported in unearned compensation to additional paid-in capital.
 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Treasury Stock
 
We use the cost method of accounting for treasury stock. The cost method requires us to record the reacquisition cost of treasury stock as a deduction from stockholders’ equity on the Consolidated Balance Sheets.
 
Recently Issued Accounting Standards
 
FASB ASC 105, “Generally Accepted Accounting Principles”ASU2011-01, “Receivable (Topic 310), Deferral of the Effective Date of Disclosure about Troubled Debt Restructurings in UpdateNo. 2010-20”— ASU2011-01 temporarily delays the effective date of the disclosure about troubled debt restructurings (“TDRs”) in ASU2010-20 for public entities. The delay is intended to allow the FASB ASCto complete its deliberations on what constitutes a TDR. The effective date of the new disclosure about TDRs for public entities and the guidance for determining what constitute a TDR will then be coordinated. This guidance is the exclusive authoritative reference for non-governmental U.S. GAAP for use in financial statements issuedanticipated to be effective for interim andan annual periods ending after SeptemberJune 15, 2009, except2011.
FASB ASU2010-20, “Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for SEC rulesCredit Losses”— ASU2010-20 requires new and interpretive releases, which are also authoritative GAAPenhanced disclosures about the credit quality of an entity’s financing receivables and its allowance for SEC registrants.credit losses. The contentsnew and amended disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. The guidance is effective for an entity’s first annual period that ends on or after December 15, 2010. Adoption of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth. The FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the FASB ASC is non-authoritative. FASB ASC 105ASU2010-20 did not have a material the effectsignificant impact on our financial condition or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
FASB ASC 810, “Consolidations”— FASB ASC 810 amends the guidance related to the consolidation of variable interest entities (“VIE’s”). It requires reporting entities to evaluate former qualifying special-purpose entities (“QSPE’s”) for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. FASB ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FASB ASC 810-10-50. FASB ASC 810 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPE’s and entities currently subject to the guidance related to the consolidation of VIE’s will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. We are currently evaluating the effect that the provisions of FASB ASC 810 may have on our financial condition and results of operations.
FASB ASC 860, “Transfers and Servicing”— FASB ASC 860 amends the guidance related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. FASB ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FASBASC 810-10-50. FASB ASC 860 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. FASB ASC 860’s disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. We are currently evaluating the effect that the provisions of FASB ASC 860 may have on our financial condition and results of operations.
FASB ASC 855, “Subsequent Events”— FASB ASC 855 addresses accounting and disclosure requirements related to subsequent events. FASB ASC 855 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies are required to disclose the date through which subsequent events have been evaluated. FASB ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. The adoption of FASB ASC 855 did not have a material effect on our financial condition or results of operations.
 
FASB ASU 2010-01, “Equity (Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash”— ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and is required to be applied on a retrospective basis. Adoption of ASU 2010-01 did not have a significant impact on the Company’s consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)”—– ASU2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Adoption of ASU2010-06 is did not expected to have a significant impact on the Company’sour consolidated financial statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
 
Fair Value Option and Fair Value Measurements
 
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 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 providing disclosures for 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 security during both interim and annual periods. FASB ASC is effective for interim and annual reporting periods ending after June 15, 2009 and does 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. The adoption of FASB ASC 825 resulted in additional disclosures that are presented in“Note 4 — Investment Securities.”
 
FASB ASU2010-06, “Fair Value Measurements and Disclosures (Topic 820)” — ASU2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, entities will be required to provide fair value measurement disclosures for each class of assets and liabilities, and about inputs and valuation techniques used to measure fair value. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU2010-06 resulted in additional disclosures that are presented in“Note 3 — Fair Value Measurements.”


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
We used the following methods and significant assumptions to estimate fair value:
 
Investment Securities Available for Sale— The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.
Level 1 investment securities include thoseU.S. government and agency debentures and equity securities that are traded on an active exchange such as the New York Stock Exchange, as well as other U.S. government and agency debentures that are tradedor by dealers or brokers in activeover-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange orover-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities’ categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and corporate debt securities. we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.
Securities classified as Level 3 investment securities are preferred stocks that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into the Company’s proprietary valuation model. The fair value of the securities is determined by discounting contractual cash flows at a discount rate derived from a synthetic bond-rating method. This method relies on significant unobservable assumptions such as default spread and expected cash flows, and therefore, the Company has determined that classification of the instrument as Level 3 is appropriate.
 
SBA Loans Held for Sale— Loans held for sale are carried at the lower of cost or fair value. The fair valueAs of December 31, 2010 and 2009, we had $10.0 million and $5.0 million of loans held for sale, is basedrespectively. Management obtains quotes, bids or pricing indication sheets on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classifyall or part of these loans as Level 2 and subjectdirectly from the purchasing financial institutions. Premiums received or to non-recurring fair value adjustments.be received on the quotes, bids or pricing indication

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS(Continued)
 
sheets are indicative of the fact that cost is lower than fair value. At December 31, 2010 and 2009, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.
Nonperforming loans held for sale — We reclassify certain nonperforming loans when the decision to sell those loans is made. The fair value of nonperforming loans held for sale is generally based upon the quotes, bids or sales contract price which approximate the fair value. Nonperforming loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of December 31, 2010, we had $26.6 million of nonperforming loans held for sale. We measure nonperforming loans held for sale at fair value on a nonrecurring basis with Level 3 inputs
Impaired Loans— FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310,“Receivables,”including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These loans are classified as Level 23 and subject to non-recurring fair value adjustments.
 
Other Real Estate Owned— Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned as Level 23 and subject to non-recurring fair value adjustments.
 
Servicing Assets and Servicing Liabilities— The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. We are able to compare the valuation model inputs and results to widely available published industry data for reasonableness. Fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs. As such, we classify them as Level 3.
 
Other Intangible Assets— Other intangible assets consists of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Fair value measurements of other intangible assets use significant unobservable inputs. As such, we classify them as Level 3 and subject to non-recurring fair value adjustments.
 
Stock Warrants — The fair value of stock warrants was determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
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. As such, we classify them as Level 3 and subject to recurring fair value adjustments.
FASB ASC 320,“Investments — Debt and Equity Securities,”amended currentother-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-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. FASB ASC 320 did not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. FASB ASC 320 also extended disclosure requirements about debt and equity securities to interim reporting periods. FASB ASC 320 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FASB ASC 320 requires comparative disclosures only for periods ending after initial adoption. We adopted FASB ASC 320 in the second quarter of 2009 and it had no impact on our financial condition or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS(Continued)
Fair Value Measurement
 
FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a three-level fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
 
•Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•
 •Level 2 Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
•
 •Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes in accordance with ASC 825, Financial Instruments.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
We record investment securities available for sale at fair value on a recurring basis. Certain other assets such as loans held for sale, mortgage servicing assets, impaired loans, other real estate owned, 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.
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 year ended December 31, 2010. There was a transfer of assets into Level 1 out of Level 3 of the fair value hierarchy for the year ended December 31, 2010. The transfer was due to a conversion of preferred shares of the issuer to common shares that were traded on the OTC Bulletin Board. The preferred shares were converted into common shares upon the approval of the company’s shareholders which occurred on October 6, 2010. We recognize transfers of assets between levels at the end of each respective quarterly reporting period.
As of December 31, 2009,2010, assets and liabilities measured at fair value on a recurring basis are as follows:
                
                 Level 1 Level 2 Level 3   
 Level 1 Level 2 Level 3      Significant
     
 Significant        Observable
     
  Observable        Inputs With
     
 Inputs With      Quoted Prices in
 No Active
     
 Quoted Prices in No Active      Active Markets
 Market With
 Significant
 Balance as of
 
 Active Markets Market With Significant Balance as of  for Identical
 Identical
 Unobservable
 December 31,
 
 for Identical Identical Unobservable December 31,  Assets Characteristics Inputs 2010 
 Assets Characteristics Inputs 2009  (In Thousands) 
 (In Thousands) 
ASSETS:
                 
Securities Available for Sale: 
Mortgage-Backed Securities $— $66,332 $— $66,332 
Debt Securities Available for Sale:                
Residential Mortgage-Backed Securities $—  $109,842  $—  $109,842 
U.S. Government Agency Securities 32,763 — — 32,763   113,334   —   —   113,334 
Collateralized Mortgage Obligations — 12,789 — 12,789   —   137,193   —   137,193 
Municipal Bonds  —   21,028   —   21,028 
Asset-Backed Securities — 8,188 — 8,188   —   7,384   —   7,384 
Corporate Bonds  —   20,205   —   20,205 
Other Securities — 2,937 1,258 4,195   —   3,259   —   3,259 
Municipal Bonds — 7,359 — 7,359 
Equity Securities 794 — — 794 
                  
Total Debt Securities Available for Sale $113.334  $298,911  $—  $412,245 
         
Equity Securities Available for Sale:                
Financial Services Industry $873   —   —  $873 
         
Total Equity Securities Available for Sale $873  $—  $—  $873 
          
Total Securities Available for Sale $33,557 $97,605 $1,258 $132,420  $114,207  $298,911  $—  $413,118 
                  
 
Servicing Assets $— $— $3,842 $3,842 
 
LIABILITIES:
                 
Servicing Liabilities $— $— $216 $216 
Stock Warrants $—  $—  $1,600  $1,600 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS(Continued)
 
The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009:
                         
   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
              Realized and      
              Unrealized      
  Beginning     Realized and Gains or Losses     Ending
  Balance as of Purchases, Unrealized in Other Transfers Balance as of
  January 1, Issuances and Gains or Losses Comprehensive In and/or Out December 31,
  2009 Settlements in Earnings Income of Level 3 2009
          (In Thousands)        
ASSETS:
                        
Investment Securities Available for Sale:                        
Other Securities $ 1,311  $—  $—  $ (53) $ —  $ 1,258 
Servicing Assets $3,791  $ 874  $ (823) $—  $—  $3,842 
                         
LIABILITIES:
                        
Servicing Liabilities $(238) $—  $22  $—  $—  $216 
2010:
 
                         
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
        Realized and
    
        Unrealized
    
  Beginning
   Realized and
 Gains or Losses
   Ending
  Balance as of
 Purchases,
 Unrealized
 in Other
 Transfers
 Balance as of
  January 1,
 Issuances and
 Gains or Losses
 Comprehensive
 In and/or Out
 December 31,
  2010 Settlements in Earnings Income of Level 3 2010
  (In Thousands)
LIABILITIES:
                        
Stock Warrants $—  $(1,962)  $362  $—  $—  $(1,600) 
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
 
As of December 31, 2009,2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:
                
                 Level 1 Level 2 Level 3  
 Level 1 Level 2 Level 3     Significant
    
 Significant       Observable
    
 Observable       Inputs With
    
 Inputs With     Quoted Prices in
 No Active
    
 Quoted Prices in No Active     Active Markets
 Market With
 Significant
 Losses During the
 Active Markets Market With Significant Balance as of for Identical
 Identical
 Unobservable
 Year Ended
 for Identical Identical Unobservable December 31, Assets Characteristics Inputs December 31, 2010
 Assets Characteristics Inputs 2009 (In Thousands)
 (In Thousands) 
ASSETS:
             
Loans Held for Sale $ — $5,010 $— $5,010 
Nonperforming Loans Held for Sale $  —  $     —  $  26,591(1) $  24,397 
Impaired Loans $— $ 163,529 $ 16,519 $ 180,048  $—  $—  $162,593(2) $45,243 
Other Real Estate Owned $— $26,306 $— $26,306  $—  $—  $4,089(3) $4,484 
Other Intangible Assets $— $3,382 $— $3,382 
 
(1)Includes commercial property loans of $2.3 million, construction loans of $1.4 million, commercial term loan of $14.9 million, and SBA loans of $8.0 million.
(2)Includes real estate loans of $64.6 million, commercial and industrial loans of $97.3 million, and consumer loans of $704,000 .
(3)Includes properties from the foreclosure of real estate loans of $1.1 million and commercial and industrial loans of $3.0 million.
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 assumptionsand/or estimation methodologies may have a material effect on the estimated fair value amounts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS(Continued)
 
The estimated fair values of financial instruments were as follows:
                                
 December 31, 2009 December 31, 2008  December 31, 2010 December 31, 2009 
 Carrying Estimated Carrying Estimated  Carrying
 Estimated
 Carrying
 Estimated
 
 or Contract Fair or Contract Fair  or Contract
 Fair
 or Contract
 Fair
 
 Amount Value Amount Value  Amount Value Amount Value 
 (In Thousands)  (In Thousands) 
Financial Assets:
 
FINANCIAL ASSETS:
                
Cash and Cash Equivalents $154,110 $154,110 $215,947 $215,947  $  249,720  $  249,720  $  154,110  $154,110 
Investment Securities Held to Maturity 869 871 910 910   845   847   869   871 
Investment Securities Available for Sale 132,420 132,420 196,207 196,207   413,118   413,118   132,420   132,420 
Loans Receivable, Net of Allowance for Loan Losses 2,674,064 2,573,080 3,251,311 3,246,955   2,121,067   2,061,988   2,674,064   2,573,080 
Accrued Interest Receivable 9,492 9,492 12,347 12,347   8,048   8,048   9,492   9,492 
Investment in Federal Home Loan Bank Stock 30,697 30,697 30,697 30,697   27,282   27,282   30,697   30,697 
Investment in Federal Reserve Bank Stock 7,878 7,878 10,228 10,228   7,449   7,449   7,878   7,878 
 
Financial Liabilities:
 
FINANCIAL LIABILITIES:
                
Noninterest-Bearing Deposits 556,306 556,306 536,944 536,944   546,815   546,815   556,306   556,306 
Interest-Bearing Deposits 2,193,022 2,197,866 2,533,136 2,538,394   1,919,906   1,927,314   2,193,022   2,197,866 
Borrowings 236,453 237,354 505,389 506,429   237,626   233,077   236,453   237,354 
Accrued Interest Payable 12,606 12,606 18,539 18,539   15,966   15,966   12,606   12,606 
 
Off-Balance Sheet Items:
 
OFF-BALANCE SHEET ITEMS:
                
Commitments to Extend Credit 262,821 177 386,785 384   178,424   130   262,821   177 
Standby Letters of Credit 17,225 37 47,289 194   15,226   50   17,225   37 
 
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 approximate fair value due to the short-term nature of these instruments.
 
Investment Securities– — The fair value of securities was generally obtained from market bids for similar or identical securities or obtained from independent securities brokers or dealers.
 
Loans Receivable, Net of Allowance for Loan Losses– — Fair values were estimated for loans 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS (Continued)
Accrued Interest Receivable– — The carrying amount of accrued interest receivable approximates its fair value.
 
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock– — The carrying amounts approximate fair value as the stock may be resold to the issuer at carrying value.
 
Noninterest-Bearing Deposits– — The fair value of non-maturity deposits was the amount payable on demand at the reporting date. Non-maturity deposits include noninterest-bearing demand deposits, savings accounts and money market checking.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 3 — FAIR VALUE MEASUREMENTS(Continued)
Interest-Bearing Deposits– — The fair value of interest-bearing deposits, such as certificates of deposit, was estimated based on discounted cash flows. The discount rate used was based on interest rates currently being offered by the Bank on comparable deposits as to amount and term.
 
Borrowings– — Borrowings consist of FHLB advances, junior subordinated debentures and other borrowings. Discounted cash flows have been used to value borrowings.
 
Accrued Interest Payable– — The carrying amount of accrued interest payable approximates its fair value.
 
Stock Warrants — The fair value of stock warrants was determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected term of the warrants. The expected life assumption is 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.
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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 4 — INVESTMENT SECURITIES
 
The following is a summary of investment securities held to maturity:
                                
   Gross Gross Estimated    Gross
 Gross
 Estimated
 
 Amortized
 Unrealized
 Unrealized
 Fair
 
 Cost Gain Loss Value 
 (In Thousands) 
December 31, 2010:
                
Municipal Bonds $696  $—  $—  $696 
Mortgage-Backed Securities(1)
  149   2   —   151 
 Amortized Unrealized Unrealized Fair          
 Cost Gain Loss Value  $845  $2  $—  $847 
 (In Thousands)          
December 31, 2009:
                 
Municipal Bonds $696 $— $— $696  $696  $—  $—  $696 
Mortgage-Backed Securities(1)
 173 2 — 175   173   2   —   175 
                  
  $869  $2  $—  $871 
 $869 $2 $— $871          
         
 
December 31, 2008:
 
Municipal Bonds $695 $— $— $695 
Mortgage-Backed Securities(1)
 215 — — 215 
         
 
 $910 $— $— $910 
         
 
(1)Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 4 — INVESTMENT SECURITIES(Continued)
The following is a summary of investment securities available for sale:
                                
   Gross Gross Estimated    Gross
 Gross
 Estimated
 
 Amortized
 Unrealized
 Unrealized
 Fair
 
 Cost Gain Loss Value 
 (In Thousands) 
December 31, 2010:
                
Mortgage-Backed Securities(1)
 $108,436  $2,137  $731  $109,842 
Collateralized Mortgage Obligations(1)
  139,053   470   2,330   137,193 
U.S. Government Agency Securities  114,066   98   830   113,334 
Municipal Bonds  22,420   48   1,440   21,028 
Corporate Bonds  20,449   13   257   20,205 
Asset-Backed Securities  7,115   269   —   7,384 
Other Securities  3,305   —   46   3,259 
Equity Securities  647   226   —   873 
 Amortized Unrealized Unrealized Fair          
 Cost Gain Loss Value  $415,491  $3,261  $5,634  $413,118 
 (In Thousands)          
December 31, 2009:
                 
Mortgage-Backed Securities(1)
 $65,218 $1,258 $144 $66,332  $65,218  $1,258  $144  $66,332 
U.S. Government Agency Securities 33,325 562 32,763   33,325   —   562   32,763 
Collateralized Mortgage Obligations(2)
 12,520 269 — 12,789 
Collateralized Mortgage Obligations(1)
  12,520   269   —   12,789 
Asset-Backed Securities 8,127 61 — 8,188   8,127   61   —   8,188 
Municipal Bonds 7,369 82 92 7,359   7,369   82   92   7,359 
Other Securities 3,925 332 62 4,195   3,925   332   62   4,195 
Equity Securities 511 283 — 794   511   283   —   794 
                  
  $130,995  $2,285  $860  $132,420 
 $130,995 $2,285 $860 $132,420          
         
 
December 31, 2008:
 
Mortgage-Backed Securities(1)
 $77,515 $1,536 $191 $78,860 
U.S. Government Agency Securities 17,580 120 — 17,700 
Collateralized Mortgage Obligations(2)
 36,204 137 179 36,162 
Municipal Bonds 58,987 413 1,087 58,313 
Other Securities 3,925 386 112 4,199 
Equity Securities 511 293 — 804 
Corporate Bonds(3)
 355 — 186 169 
         
 
 $195,077 $2,885 $1,755 $196,207 
         
 
(1)Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.
(2)Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities, except for two private-label securities held as of December 31, 2008 with an unrealized loss totaling $42,000. The two private-label securities were sold during the year ended December 31, 2009.
(3)Balances presented for amortized cost, representing one corporate bond, were net of an OTTI charge of $2.4 million, which was related to a credit loss, as of December 31, 2008. Therefore, the adoption of FASB ASC 320 did not require a reclassification for the non-credit portion of previously recognized OTTI from the opening balance of retained earnings to other comprehensive income as of March 31, 2009. The corporate bond was sold in the fourth quarter of 2009 for a realized gain of $83,000.


125

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair value of investment securities at December 31, 2009,2010, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2039, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
  Available for Sale  Held to Maturity 
  Amortized  Estimated  Amortized  Estimated 
  Cost  Fair Value  Cost  Fair Value 
      (In Thousands)     
Within One Year $3,925  $4,195  $—  $— 
Over One Year Through Five Years  —   —   —   — 
Over Five Years Through Ten Years  18,308   18,096   696   696 
Over Ten Years  30,513   30,214   —   — 
Mortgage-Backed Securities  65,218   66,332   173   175 
Collateralized Mortgage Obligations  12,520   12,789   —   — 
Equity Securities  511   794   —   — 
             
                 
  $130,995  $132,420  $869  $871 
             

109

                 
  Available for Sale  Held to Maturity 
  Amortized
  Estimated
  Amortized
  Estimated
 
  Cost  Fair Value  Cost  Fair Value 
  (In Thousands) 
 
Within One Year $—  $—  $—  $— 
Over One Year Through Five Years  114,447   113,525   696   696 
Over Five Years Through Ten Years  31,074   31,025   —   — 
Over Ten Years  21,834   20,660   —   — 
Mortgage-Backed Securities  108,436   109,842   149   151 
Collateralized Mortgage Obligations  139,053   137,193   —   — 
Equity Securities  647   873   —   — 
                 
  $415,491  $413,118  $845  $847 
                 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERIn accordance with FASB ASC 320,“Investments — Debt and Equity Securities,”amended currentother-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. As of December 31, 2009, 2008 AND 2007(Continued)
NOTE 4 — INVESTMENT SECURITIES(Continued)2010, we recorded $790,000 in OTTI charges in earnings on oneavailable-for-sale security.
 
In 2010, we had an investment securities in mutual funds (“Special Series A Shares”) with an aggregate carrying value of $925,000. During 2010, the issuer of such securities completed a comprehensive restructuring which resulted in the exchange of our Special Series A shares into common shares of the issuer. Based on the closing price of the share at September 30, 2010, we recorded an OTTI charge of $790,000 to write down the value of the investment securities to its fair value.
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


126

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
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 December 31, 20092010 and 2008:2009:
                                                                        
  Holding Period  Holding Period 
  Less than 12 Months   12 Months or More   Total     Less than 12 Months 12 Months or More Total 
 Gross Estimated Number Gross Estimated Number Gross Estimated Number  Gross
 Estimated
 Number
 Gross
 Estimated
 Number
 Gross
 Estimated
 Number
 
Investment Securities Unrealized Fair of Unrealized Fair of Unrealized Fair of  Unrealized
 Fair
 of
 Unrealized
 Fair
 of
 Unrealized
 Fair
 of
 
Available for Sale Losses Value Securities Losses Value Securities Losses Value Securities  Losses Value Securities Losses Value Securities Losses Value Securities 
 (In Thousands) 
December 31, 2010:
                                    
Mortgage-Backed Securities $731  $62,738   16  $—  $—   —  $731  $62,738   16 
Collateralized Mortgage Obligations  2,330   99,993   20   —   —   —   2,330   99,993   20 
Municipal Bonds  1,440   16,907   11   —   —   —   1,440   16,907   11 
U.S. Government Agency Securities  830   69,266   14   —   —   —   830   69,266   14 
Other Securities  3   1,997   2   43   957   1   46   2,954   3 
Corporate Bonds  257   17,210   5   —   —   —   257   17,210   5 
                   
 $5,591  $268,111   68  $43  $957   1  $5,634  $269,068   69 
 (In Thousands)                    
December 31, 2009:
                                     
Mortgage-Backed Securities $144 $14,584 3 $— $— — $144 $14,584 3  $144  $14,584   3  $—  $—   —  $144  $14,584   3 
Municipal Bonds 12 303 1 80 793 1 92 1,096 2   12   303   1   80   793   1   92   1,096   2 
U.S. Government Agency Securities 562 32,764 6 — — — 562 32,764 6   562   32,764   6   —   —   —   562   32,764   6 
Other Securities 24 1,976 2 39 961 1 63 2,937 3   24   1,976   2   38   961   1   62   2,937   3 
                                      
  $742  $49,627   12  $118  $1,754   2  $860  $51,381   14 
 $742 $49,627 12 $119 $1,754 2 $861 $51,381 14                    
                   
 
December 31, 2008:
 
Mortgage-Backed Securities $158 $10,631 42 $33 $5,277 4 $191 $15,908 46 
Municipal Bonds 968 35,614 66 119 1,749 4 1,087 37,363 70 
Collateralized Mortgage Obligations 36 4,569 4 143 5,903 4 179 10,472 8 
Other Securities 72 929 1 40 1,960 2 112 2,889 3 
Corporate Bonds 186 169 1 — — — 186 169 1 
                   
 
 $1,420 $51,912 114 $335 $14,889 14 $1,755 $66,801 128 
                   
The impairment losses described previously are not included in the table above as the impairment losses were recorded. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 20092010 and 20082009 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 December 31, 2009.2010. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
 
The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of December 31, 2010. Because the decline in fair value is attributable to changes in interest rates or widening


127

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not consideredother-than-temporarily impaired.
Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at December 31, 2010, all of them are issued and guaranteed by U.S. government sponsored entities. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and no concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not consideredother-than-temporarily impaired
FASB ASC 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of December 31, 20092010 and 20082009 are notother-than-temporarily impaired, and therefore, no impairment charges as of December 31, 20092010 and 20082009 are warranted.

110

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERInvestment securities available for sale with carrying values of $118.0 million and $91.6 million as of December 31, 2010 and 2009, 2008 AND 2007(Continued)
NOTE 4 — INVESTMENT SECURITIES(Continued)respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
 
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:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  (In Thousands) 
 (In Thousands) 
Gross Realized Gains on Sales of Investment Securities $2,327 $618 $—  $     228  $     2,327  $     618 
Gross Realized Losses on Sales of Investment Securities  (494)  (541) —   (106)  (494)  (541)
              
 
Net Realized Gains on Sales of Investment Securities
 $1,833 $77 $—  $122  $1,833  $77 
       
        
Proceeds from Sales of Investment Securities $93,685 $28,501 $—  $31,832  $93,685  $28,501 
Tax Expense on Sales of Investment Securities $771 $32 $—  $52  $771  $32 


128

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 4 — INVESTMENT SECURITIES (Continued)
There were $122,000, $1.8 million $77,000 and $0$77,000 in net realized gains on sales of securities available for sale during the years ended December 31, 2010, 2009 and 2008, respectively. In 2010, $3.6 million ($2.1 million, net of income taxes) of net unrealized losses arose during the year and 2007, respectively.was included in comprehensive income and $205,000 ($119,000, net of income taxes) of previously net unrealized gains were realized in earnings. In 2009, $515,000 ($298,000, net of income taxes) of net unrealized gains arose during the year and was included in comprehensive income and $220,000 ($127,000, net of income taxes) of previously net unrealized gains were realized in earnings. In 2008, $281,000 ($163,000, net of income taxes) of net unrealized gains arose during the year and was included in comprehensive income and $435,000 ($252,000, net of income taxes) of previously net unrealized gains were realized in earnings. In 2007, $2.7 million ($2.0 million, net
NOTE 5 — LOANS
The Board of income taxes)Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure change, strategic planning revisions, concentrations of net unrealized gains arose duringcredit, planning revisions, loan delinquencies and no-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, refinance on real estate properties. Commercial and industrial loans are consisted of commercial term loans, commercial lines of credit, and SBA loans. Consumer loans are consisted 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 yearBank’s loan portfolio consists of commercial real estate loans and was includedcommercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loan portfolio by portfolio diversification based on property types, tightening underwriting standards, and portfolio liquidity and management and has not exceeded certain specified limits set forth in comprehensive income.
     Investment securities available for sale with carrying valuesthe Bank’s loan policy. Most of $98.8 million and $123.6 million as of December 31, 2009 and 2008, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.the Bank’s lending activity occurs within the Southern California.

111
129

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 5 — LOANS(Continued)
 
Loans Receivable
 
Loans receivable consisted of the following:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In Thousands) 
 (In Thousands) 
Real Estate Loans:         
Commercial Property $839,598 $908,970  $     729,222  $     839,598 
Construction 126,350 178,783   60,995   126,350 
Residential Property 77,149 92,361   62,645   77,149 
          
 
Total Real Estate Loans 1,043,097 1,180,114   852,862   1,043,097 
          
 
Commercial and Industrial Loans: 
Commercial and Industrial Loans:(1)
        
Commercial Term Loans 1,420,034 1,611,449   1,118,999   1,420,034 
Commercial Lines of Credit 101,159 214,699   59,056   101,159 
SBA Loans 134,521 140,989   105,688   134,521 
International Loans 53,488 95,185   44,167   53,488 
          
 
Total Commercial and Industrial Loans 1,709,202 2,062,322   1,327,910   1,709,202 
     
      
Consumer Loans 63,303 83,525   50,300   63,303 
          
 
Total Gross Loans
 2,815,602 3,325,961   2,231,072   2,815,602 
 
Allowance for Loans Losses  (144,996)  (70,986)  (146,059)  (144,996)
Deferred Loan Fees  (1,552)  (1,260)  (566)  (1,552)
          
 
Loans Receivable, Net
 $2,669,054 $3,253,715  $2,084,447  $2,669,054 
          
 
(1) Commercial and industrial loans include owner-occupied property loans of $894.8 million and $1.12 billion as of December 31, 2010 and December 31, 2009, respectively.
Accrued interest on loans receivable amounted to $9.3$6.5 million and $11.8$9.3 million at December 31, 20092010 and 2008,2009, respectively. At December 31, 20092010 and 2008,2009, loans receivable totaling $1,378.1 million$1.03 billion and $2,841.5 million,$1.38 billion, respectively, were pledged to secure FHLB advances and the FRB’s federal discount window.


130

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
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:
                        
                         As of and for the Year Ended December 31, 
 As of and for the Year Ended December 31,  2010 2009 2008 
 2009 2008 2007    Allowance
   Allowance
   Allowance
 
 Allowance Allowance Allowance    for Off-
   for Off-
   for Off-
 
 for Off- for Off- for Off-  Allowance
 Balance
 Allowance
 Balance
 Allowance
 Balance
 
 Allowance Balance Allowance Balance Allowance Balance  for Loan
 Sheet
 for Loan
 Sheet
 for Loan
 Sheet
 
 for Loan Sheet for Loan Sheet for Loan Sheet  Losses Items Losses Items Losses Items 
 Losses Items Losses Items Losses Items  (In Thousands) 
 (In Thousands) 
Balance at Beginning of Year $70,986 $4,096 $43,611 $1,765 $27,557 $2,130  $  144,996  $  3,876  $  70,986  $  4,096  $  43,611  $  1,765 
Provision Charged to Operating Expense 196,607  (220) 73,345 2,331 38,688  (365)  122,955   (459)  196,607   (220)  73,345   2,331 
Loans Charged Off  (125,380) —  (48,152) —  (23,330) —   (131,823)  —   (125,380)  —   (48,152)  — 
Recoveries 2,783 — 2,182 — 696 —   9,931   —   2,783   —   2,182   — 
                          
 
Balance at End of Year
 $144,996 $3,876 $70,986 $4,096 $43,611 $1,765  $146,059  $3,417  $144,996  $3,876  $70,986  $4,096 
                          

112
131

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 5 — LOANS(Continued)
 Impaired Loans
     The following table provides information on impaired loans for the periods indicated:
             
  As of and for the 
  Year Ended December 31, 
  2009  2008  2007 
      (In Thousands)     
Recorded Investment With Related Allowance $91,371  $71,448  $38,930 
Recorded Investment With No Related Allowance  109,363   49,945   15,202 
Allowance on Impaired Loans  (23,148)  (18,157)  (11,829)
          
             
Net Recorded Investment in Impaired Loans
 $177,586  $103,236  $42,303 
          
             
Average Total Recorded Investment in Impaired Loans $281,980  $149,680  $61,249 
          
     The following is a summary of interest foregone on impaired loans for the periods indicated:
             
  Year Ended December 31, 
  2009  2008  2007 
      (In Thousands)     
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance With Their Original Terms $17,471  $7,327  $4,672 
Less: Interest Income Recognized on Impaired Loans on a Cash Basis  (9,569)  (5,422)  (3,705)
          
             
Interest Foregone on Impaired Loans
 $7,902  $1,905  $967 
          
     There were no commitments to lend additional funds to borrowers whose loans are included above.
Non-Performing Assets
The following table details non-performing assetsthe information on the allowance for credit losses by portfolio segment for the periods indicated:
         
  December 31, 
  2009  2008 
  (In Thousands) 
Non-Accrual Loans $219,000  $120,823 
Loans 90 Days or More Past Due and Still Accruing  67   1,075 
       
         
Total Non-Performing Loans  219,067   121,898 
         
Other Real Estate Owned  26,306   823 
       
         
Total Non-Performing Assets
 $245,373  $122,721 
       
     Loans on non-accrual status totaled $219.0 million as ofyear ended December 31, 2009, compared to $120.8 million as2010 and 2009.
                     
     Commercial
          
  Real Estate  and Industrial  Consumer  Unallocated  Total 
  (Dollars in Thousands) 
 
2010
                    
Allowance for Loan Losses:
                    
Beginning Balance $30,081  $112,225  $2,690  $—  $144,996 
Charge-Offs  31,514   99,037   1,272   —   131,823 
Recoveries on Loans Previously Charged Off  3,131   6,623   177   —   9,931 
Provision  31,068   89,175   484   2,228   122,955 
                     
Ending Balance $32,766  $108,986  $2,079  $2,228  $146,059 
                     
Ending Balance: Individually Evaluated for Impairment $3,342  $25,714  $393  $—  $29,449 
                     
Ending Balance: Collectively Evaluated for Impairment $29,423  $83,272  $1,686  $2,228  $116,611 
                     
Loans Receivable:
                    
Ending Balance $852,861  $1,327,911  $50,300  $—  $2,231,072 
                     
Ending Balance: Individually Evaluated for Impairment $83,788  $112,101  $934  $—  $196,823 
                     
Ending Balance: Collectively Evaluated for Impairment $769,073  $1,215,810  $49,366  $—  $2,034,249 
                     
2009
                    
Allowance for Loan Losses:
                    
Beginning Balance $10,136  $58,866  $1,584  $400  $70,986 
Charge-Offs  27,262   95,768   2,350   —   125,380 
Recoveries on Loans Previously Charged Off  5   2,650   128   —   2,783 
Provision  47,202   146,477   3,328   (400)  196,607 
                     
Ending Balance $30,081  $112,225  $2,690  $—  $144,996 
                     
Ending Balance: Individually Evaluated for Impairment $1,596  $21,029  $523  $—  $23,148 
                     
Ending Balance: Collectively Evaluated for Impairment $28,484  $91,196  $2,167  $—  $121,847 
                     
Loans Receivable:
                    
Ending Balance $1,043,097  $1,709,202  $63,303  $—  $2,815,602 
                     
Ending Balance: Individually Evaluated for Impairment $77,353  $121,788  $524  $—  $199,665 
                     
Ending Balance: Collectively Evaluated for Impairment $965,744  $1,587,414  $62,779  $—  $2,615,937 
                     
Credit Quality Indicators
As part of December 31, 2008, representing a 81.3 percent increase. Delinquent loans (defined as 30 days or more past due) were $186.3 million asthe on-going monitoring of December 31, 2009, compared to $128.5 million as of December 31, 2008, representing a 45.0 percent increase. We believe that the increases in non-performing loans and delinquent loans are attributable primarily to a current economic recession that is affecting somecredit quality of our borrowers’ abilityloan portfolio, we utilize an internal loan grading system to honor their commitments.identify credit risk and assign appropriate grade for each and every loan in our loan

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132

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 5 — LOANS(Continued)
 Non-performing
portfolio on a grade of 0 to 8. Pass-grade (0 to 4) loans increasedare reviewed for reclassification on an annual basis, while criticized (5) and classified (6 and 7) loans are reviewed semi-annually. Additional adjustments may be made daily as needed. The loan grade definitions are as follows:
Pass: pass loans are loans conforming in all respects to Bank policy and regulatory requirements, that do not exhibit any potential or defined weaknesses as defined under Special Mention, Substandard or Doubtful. This is the lowest 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 Pass grade:
Pass 0: loans secured in full by $97.2 million,cash or 79.7 percent,cash equivalents.
Pass 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 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 3: loans or commitments to $219.1 millionborrowers 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 grater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans which are designated this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity
Pass 4: loans or commitments to borrowers exhibiting either somewhat weaker balance sheet proportions or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result of this the Bank may have secured its exposure in an effort to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.
Special Mention or 5: 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
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 Loss are considered uncollectible and of such little value that their continuance as bank-able 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 basically worthless asset even though partial recovery may be affected in the future. Loans classified Loss will be charged off in a timely manner.


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
                 
  Pass
  Criticized
  Classified
    
  
(Grade 0-4)
  
(Grade 5)
  
(Grade 6-7)
  
Total Loans
 
  (In Thousands) 
 
December 31, 2010:
                
Real Estate Loans:                
Commercial Property                
Retail $302,696  $18,507  $38,568  $359,771 
Land  3,845   —   37,353   41,198 
Other  265,957   20,804   41,493   328,254 
Construction  12,958   25,897   22,139   60,994 
Residential Property  59,329   —   3,315   62,644 
Commercial and Industrial Loans:                
Commercial Term Loans                
Unsecured  134,709   24,620   63,739   223,068 
Secured by Real Estate  617,200   107,645   171,086   895,931 
Commercial Lines of Credit  40,195   8,019   10,841   59,055 
SBA Loans  68,994   731   35,965   105,690 
International Loans  38,447   4,693   1,027   44,167 
Consumer Loans  48,027   347   1,926   50,300 
                 
Total $1,592,357  $211,263  $427,452  $2,231,072 
                 
December 31, 2009:
                
Real Estate Loans:                
Commercial Property                
Retail $352,021  $6,105  $56,914  $415,040 
Land  3,357   2,638   59,654   65,649 
Other  306,881   10,484   41,545   358,910 
Construction  90,348   16,696   19,305   126,349 
Residential Property  72,646   —   4,503   77,149 
Commercial and Industrial Loans:                
Commercial Term Loans                
Unsecured  207,544   15,240   64,261   287,045 
Secured by Real Estate  846,023   67,593   219,373   1,132,989 
Commercial Lines of Credit  74,821   14,593   11,744   101,158 
SBA Loans  98,986   1,845   33,691   134,522 
International Loans  41,680   7,404   4,404   53,488 
Consumer Loans  62,830   —   473   63,303 
                 
Total $2,157,137  $142,598  $515,867  $2,815,602 
                 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
The following is an aging analysis of past due loans, disaggregated by class of loan, as of December 31, 2010 and 2009:
                             
                    Accruing
 
        90 Days or
           90 Days or
 
  30-59 Days
  60-89 Days
  More Past
  Total Past
        More Past
 
  Past Due  Past Due  Due  Due  Current  Total Loans  Due 
  (In Thousands) 
 
December 31, 2010:
                            
Real Estate Loans:                            
Commercial Property                            
Retail $—  $—  $7,857  $7,857  $351,913  $359,770  $— 
Land  —   —   25,725   25,725   15,471   41,196   — 
Other  —   —   7,212   7,212   321,043   328,255   — 
Construction  10,409   —   8,477   18,886   42,108   60,994   — 
Residential Property  522   —   1,240   1,762   60,883   62,645   — 
Commercial and Industrial Loans:                            
Commercial Term Loans                            
Unsecured  2,208   2,781   6,842   11,831   211,237   223,068   — 
Secured by Real Estate  5,111   3,720   10,530   19,361   876,570   895,931   — 
Commercial Lines of Credit  454   —   1,745   2,199   56,857   59,056   — 
SBA Loans  2,287   8,205   13,957   24,449   81,241   105,690   — 
International Loans  —   —   —   —   44,167   44,167   — 
Consumer Loans  596   202   865   1,663   48,637   50,300   — 
                             
Total $21,587  $14,908  $84,450  $120,945  $2,110,127  $2,231,072  $— 
                             
December 31, 2009:
                            
Real Estate Loans:                            
Commercial Property                            
Retail $—  $846  $16,622  $17,468  $397,572  $415,040  $— 
Land  —   —   8,997   8,997   56,651   65,648   — 
Other  1,310   2,340   14,171   17,821   341,089   358,910   — 
Construction  —   —   15,185   15,185   111,165   126,350   — 
Residential Property  603   751   2,111   3,465   73,684   77,149   — 
Commercial and Industrial Loans:                            
Commercial Term Loans                            
Unsecured  5,231   8,599   9,768   23,598   263,447   287,045   — 
Secured by Real Estate  15,924   2,283   34,836   53,043   1,079,946   1,132,989   — 
Commercial Lines of Credit  1,790   53   1,671   3,514   97,645   101,159   — 
SBA Loans  5,066   11,611   24,396   41,073   93,448   134,521   — 
International Loans  —   594   —   594   52,894   53,488   — 
Consumer Loans  637   245   373   1,255   62,048   63,303   67 
                             
Total $30,561  $27,322  $128,130  $186,013  $2,629,589  $2,815,602  $67 
                             


136

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 comparedAND 2008 (Continued)
NOTE 5 — LOANS (Continued)
Impaired Loans
Loans are considered impaired specifically when, non-accrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or Troubled Debt Restructuring (TDR) loans to $121.9 million as of December 31, 2008. During the same period, the allowance for loan losses increased by $74.0 million, or 104.3 percent, to $145.0 million from $71.0 million. The allowance for the collateral-dependent loans is calculatedoffer terms not typically granted by the difference betweenBank or when current information or events make it unlikely to collect in full according to the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coveragecontractual terms of the loan atagreements; or Substandard loans in the timeamount over 5% of designationthe Bank’s Tier 1 Capital; or a deterioration in the borrower’s financial condition raises uncertainty as non-performing. We continue to monitortimely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.original contractual terms.
 As of December 31, 2009, other real estate owned consisted of 13 properties, located in California, with a combined net carrying value of $26.3 million. During 2009, 20 properties, with a carrying value of $35.8 million, were transferred from loans receivable to other real estate owned and 7 properties, with a carrying value of $10.1 million, were sold and a loss of $211,000 was recognized. As of December 31, 2008, other real estate owned consisted of three properties with a combined net carrying value of $823,000.
We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as ana practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.
 
The allowance for the collateral-dependent loans is calculated by the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.


137

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
The following table provides information on impaired loans, disaggregated by class of loan, as of the dates indicated:
                         
     Unpaid
  With No Related
  With an
     Average
 
  Recorded
  Principal
  Allowance
  Allowance
  Related
  Recorded
 
  
Investment
  
Balance
  
Recorded
  
Recorded
  
Allowance
  
Investment
 
  (In thousands) 
 
December 31, 2010:
                        
Real Estate Loans:                        
Commercial Property                        
Retail $17,606  $18,050  $6,336  $11,270  $1,543  $21,190 
Land  35,207   35,295   5,482   29,725   1,485   40,858 
Other  11,357   11,476   10,210   1,147   33   15,342 
Construction  17,691   17,831   13,992   3,699   280   12,311 
Residential Property  1,926   1,990   1,926   —   —   2,383 
Commercial and Industrial Loans:                        
Commercial Term Loans                        
Unsecured  17,847   18,799   6,465   11,382   10,313   18,460 
Secured by Real Estate  80,213   81,395   35,154   45,059   11,831   101,617 
Commercial Lines of Credit  4,067   4,116   1,422   2,645   1,321   4,988 
SBA Loans  17,715   18,544   7,112   10,603   2,122   23,213 
International Loans  127   141   —   127   127   397 
Consumer Loans  934   951   393   541   393   639 
                         
Total $ 204,690  $ 208,588   $88,492  $ 116,198  $ 29,448  $ 241,398 
                         
December 31, 2009:
                        
Real Estate Loans:                        
Commercial Property                        
Retail $19,233  $19,430  $17,170  $2,063  $120  $15,834 
Land  22,960   22,978   19,889   3,071   461   10,801 
Other  16,640   16,924   14,747   1,893   176   17,283 
Construction  15,185   15,204   9,823   5,362   444   23,677 
Residential Property  3,335   3,459   1,989   1,346   395   2,512 
Commercial and Industrial Loans:                        
Commercial Term Loans                        
Unsecured  19,094   19,373   2,680   16,414   14,806   17,777 
Secured by Real Estate  83,875   84,528   48,806   35,069   4,075   98,898 
Commercial Lines of Credit  1,906   1,951   1,345   561   343   2,235 
SBA Loans  20,040   20,567   10,126   9,914   1,805   17,033 
International Loans  739   742   739   —   —   1,717 
Consumer Loans  524   531   —   524   524   890 
                         
Total $203,531  $205,687  $127,314  $76,217  $23,149  $208,657 
                         
For the year ended December 31, 2010 and 2009, we recognized interest income on one impaired commercial term loan secured by real estate of $402,000 and $1.0 million, respectively. Except for such loan,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
no interest income was recognized on impaired loans subsequent to classification as impaired in 2010 and 2009. No interest income was recognized on impaired loans subsequent to classification as impaired in 2008.
The following is a summary of interest foregone on impaired loans for the periods indicated:
             
  Year Ended December 31, 
  2010  2009  2008 
  (In Thousands) 
 
Interest Income That Would Have Been Recognized Had Impaired Loans Performed in Accordance with Their Original Terms $20,848  $17,471  $7,327 
Less: Interest Income Recognized on Impaired Loans(1)
  (11,473)  (9,569)  (5,422)
             
Interest Foregone on Impaired Loans
 $  9,375  $  7,902  $  1,905 
             
(1)     Includes interest income recognized on an accrual basis prior to classification as impaired.
There were no commitments to lend additional funds to borrowers whose loans are included above.
Non-Accrual loans
Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectibility of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest become current and full repayment is expected.


139

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
The following table details non-accrual loans, disaggregated by class of loan, for the periods indicated:
         
  December 31, 
  2010  2009 
  (In Thousands) 
 
Real Estate Loans:        
Commercial Property        
Retail $10,998  $19,234 
Land  25,725   22,960 
Other  8,953   16,734 
Construction  17,691   15,185 
Residential Property  1,926   3,335 
         
Commercial and Industrial Loans:        
Commercial Term Loans        
Unsecured  17,065   24,003 
Secured by Real Estate  31,053   78,673 
Commercial Lines of Credit  2,798   1,906 
SBA Loans  25,054   34,540 
International Loans  127   739 
         
Consumer Loans  1,047   622 
         
Total $  142,437  $  217,931 
         
The following table details non-performing assets for the periods indicated:
         
  December 31, 
  2010  2009 
  (In Thousands) 
 
Non-Accrual Loans $142,437  $217,931 
Loans 90 Days or More Past Due and Still Accruing  —   67 
         
Total Non-Performing Loans  142,437   217,998 
Other Real Estate Owned  4,089   26,306 
         
Total Non-Performing Assets
 $  146,526  $  244,304 
         
Loans on non-accrual status, excluding loans held for sale, totaled $142.4 million as of December 31, 2010, compared to $217.9 million as of December 31, 2009, representing a 34.6 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $120.9 million as of December 31, 2010, compared to $186.3 million as of December 31, 2009, representing a 35.1 percent decrease.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 5 — LOANS (Continued)
As of December 31, 2010, other real estate owned consisted of eight properties, primarily located in California, with a combined net carrying value of $4.1 million. For the year ended December 31, 2010, fourteen properties, with a carrying value of $13.0 million, were transferred from loans receivable to other real estate owned and eighteen properties, with a carrying value of $26.1 million, were sold and a net loss of $196,000 was recognized. As of December 31, 2009, other real estate owned consisted of twelve properties with a combined net carrying value of $26.3 million.
Troubled Debt Restructured Loans
 
There were no commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings. As of December 31, 2010, troubled debt restructured loans, excluding loans held for sale, totaled $72.2 million and the related allowance was $10.2 million. As of December 31, 2009, troubled debt restructured loans, excluding loans held for sale, totaled $36.7 million and the related allowance was $581,000. As of December 31, 2008, troubled debt restructured loans totaled $24.2 million and the related allowance was $714,000. There were no restructured loans at December 31, 2007. Excluding the troubled debt restructured (“TDR”) loans, the Bank also restructured $165.8 million of loans in 2009 that did not qualify as TDR loans.
 
Servicing Assets
 
The changes in servicing assets were as follows for the periods indicated:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In Thousands) 
 (In Thousands) 
Balance at Beginning of Year $3,791 $4,336  $3,842  $3,791 
Additions 874 405   81   874 
Changes in Valuation Allowance — 345   —   — 
Amortization  (823)  (1,295)  (1,033)  (823)
          
 
Balance at End of Year
 $3,842 $3,791  $  2,890  $  3,842 
          
 
At December 31, 20092010 and 2008,2009, we serviced loans sold to unaffiliated parties in the amounts of $233.1$191.1 million and $228.6$233.1 million, respectively. These represent loans that have either been sold or securitized for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.

114
141

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 6 — PREMISES AND EQUIPMENT
 
The following is a summary of the major components of premises and equipment:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In Thousands) 
 (In Thousands) 
Land $6,120 $6,120  $6,120  $6,120 
Buildings and Improvements 9,035 8,790   9,115   9,035 
Furniture and Equipment 14,468 14,528   15,377   14,468 
Leasehold Improvements 11,240 10,956   11,238   11,240 
Software 862 862   862   862 
          
   42,712   41,725 
 41,725 41,256 
Accumulated Depreciation and Amortization  (23,068)  (20,977)  (25,113)  (23,068)
     
      
Total Premises and Equipment, Net
 $18,657 $20,279  $  17,599  $  18,657 
          
 
Depreciation and amortization expense totaled $2.3 million, $2.6 million $2.9 million and $3.0$2.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
NOTE 7 — GOODWILL
     As of December 31,2010, 2009 and 2008, goodwill totaled $0. The change in goodwill during the year is as follows:
       
  As of and for the
  Year Ended
  December 31,
  2009 2008 
  (In Thousands)
Balance at Beginning of Year $—$107,100 
Acquired Goodwill — 293 
Impairment Loss on Goodwill — (107,393)
       
       
Balance at End of Year
 $—$— 
       
respectively.
 Impairment Loss on Goodwill
     During our assessments of goodwill during the second quarter of 2008 and the fourth quarter of 2007, we concluded that we had an impairment of goodwill based on the decline in the market value of our common stock, which we believe reflects, in part, recent turmoil in the financial markets that has adversely affected the market value of the common stock of many banks. The fair value was determined based on a weighted distribution of values derived from three different approaches: market approach, market capitalization approach, and income approach. Based on these assessments, we concluded that the related goodwill was impaired and $107.4 million and $102.9 million was required to be expensed as a non-cash charge to continuing operations during the second quarter of 2008 and the fourth quarter of 2007, respectively. At December 31, 2009, we had no remaining goodwill recorded on our balance sheet.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 87 — OTHER INTANGIBLE ASSETS
 
Other intangible assets were as follows:
                            
                               December 31, 2010 December 31, 2009 
 December 31, 2009 December 31, 2008    Gross
   Net
 Gross
   Net
 
 Gross Net Gross Net  Amortization
 Carrying
 Accumulated
 Carrying
 Carrying
 Accumulated
 Carrying
 
 Amortization Carrying Accumulated Carrying Carrying Accumulated Carrying  Period Amount Amortization Amount Amount Amortization Amount 
 Period Amount Amortization Amount Amount Amortization Amount  (In Thousands) 
 (In Thousands) 
Other Intangible Assets:                             
Core Deposit Intangible 8 years $13,137 $(11,822) $1,315 $13,137 $(10,538) $2,599   8 years  $13,137  $(12,687) $450  $13,137  $(11,822) $1,315 
Trade Names 20 years 970  (146) 824 970  (97) 873   20 years   970   (194)  776   970   (146)  824 
Client/Insured Relationships 10 years 770  (231) 539 770  (154) 616   10 years   770   (308)  462   770   (231)  539 
Non-Compete Agreements 5 years 600  (360) 240 600  (240) 360   5 years   600   (480)  120   600   (360)  240 
Carrier Relationships 15 years 580  (116) 464 580  (78) 502   15 years   580   (155)  425   580   (116)  464 
                            
 
Total Other Intangible Assets
 $16,057 $(12,675) $3,382 $16,057 $(11,107) $4,950      $ 16,057  $ (13,824) $ 2,233  $ 16,057  $ (12,675) $ 3,382 
                          
 
The weighted-average amortization period for other intangible assets is 9.0 years. The total amortization expense for other intangible assets was $1.1 million, $1.6 million $2.0 million and $2.3$2.0 million during the years ended December 31, 2010, 2009 and 2008, and 2007, respectively.


142

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 7 — OTHER INTANGIBLE ASSETS (Continued)
Estimated future amortization expense related to other intangible assets for each of the next five years is as follows:
        
Year Ending      
December 31, Amount  Amount 
 (In Thousands)  (In Thousands) 
2010 $1,149 
2011 $700  $700 
2012 $198  $198 
2013 $165  $165 
2014 $164  $164 
2015 $164 
 
As of December 31, 20092010 and 2008,2009, management is not aware of any circumstances that would indicate impairment of other intangible assets. There were no impairment charges related to other intangible asset recorded through earnings in 20092010 or 2008.2009.
NOTE 98 — DEPOSITS
 
At December 31, 2009,2010, the scheduled maturities of time deposits are as follows:
             
  Time       
  Deposits  Other    
Year Ending of $100,000  Time    
December 31, or More  Deposits  Total 
  (In Thousands)     
2010 $812,085  $577,898  $1,389,983 
2011  4,434   1,420   5,854 
2012  —   120   120 
2013  —   —   — 
2014  —   29   29 
Thereafter  —   5   5 
          
             
Total
 $816,519  $579,472  $1,395,991 
          

116

             
  Time
       
  Deposits
  Other
    
Year Ending
 of $100,000
  Time
    
December 31,
 or More  Deposits  Total 
  (In Thousands) 
 
2011 $597,993  $211,516  $809,509 
2012  516,747   71,711   588,458 
2013  3,881   1,421   5,302 
2014  —   60   60 
2015  —   128   128 
Thereafter  —   —   — 
             
Total
 $ 1,118,621  $ 284,836  $ 1,403,457 
             

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 9 — DEPOSITS(Continued)
 
A summary of interest expense on deposits was as follows for the periods indicated:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  (In Thousands) 
 (In Thousands) 
Savings $2,328 $2,093 $2,004  $3,439  $2,328  $2,093 
Money Market Checking and NOW Accounts 9,786 19,909 15,446   4,936   9,786   19,909 
Time Deposits of $100,000 or More 34,807 43,598 75,516   19,529   34,807   43,598 
Other Time Deposits 29,325 18,753 15,551   6,504   29,325   18,753 
              
 
Total Interest Expense on Deposits
 $76,246 $84,353 $108,517  $ 34,408  $ 76,246  $ 84,353 
              
 
Accrued interest payable on deposits totaled $8.5$9.1 million and $16.7$8.5 million at December 31, 2010 and


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 andAND 2008(Continued)
NOTE 8 — DEPOSITS (Continued)
2009, respectively. Total deposits reclassified to loans due to overdrafts at December 31, 2010 and 2009 and 2008 were $2.9$2.6 million and $3.1$2.9 million, respectively.
 
On October 3, 2008, FDIC deposit insurance on most accounts was increased from $100,000 to $250,000. This increase is in place until the end of 2013. As of December 31, 2009,2010, time deposits of more than $250,000 were $261.0$392.4 million.
NOTE 109 — FHLB ADVANCES AND OTHER BORROWINGS
 
FHLB advances and other borrowings consisted of the following:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In Thousands) 
 (In Thousands) 
FHLB Advances $153,978 $422,196  $153,650  $153,978 
Note Issued to U.S. Treasury 1,747 787   1,570   1,747 
          
 
Total FHLB Advances and Other Borrowings
 $155,725 $422,983  $ 155,220  $ 155,725 
          
 
FHLB advances represent collateralized obligations with the FHLB. The following is a summary of contractual maturities pertaining to FHLB advances:
                 
  December 31, 2009  December 31, 2008 
      Weighted-      Weighted- 
      Average      Average 
Year of     Interest      Interest 
Maturity Amount  Rate  Amount  Rate 
      (Dollars in Thousands)     
2009 $—   —  $161,000   1.71%
2010  —   —   6,908   4.44%
2011  150,000   0.76%  150,000   0.76%
2012  —   —   —   — 
2013  —   —   100,000   0.67%
2014  3,978   5.27%  4,288   5.27%
               
                 
  $153,978   0.88% $422,196   1.21%
               

117

         
  December 31, 2010
    Weighted-
    Average
    Interest
Year of Maturity
 Amount Rate
  (Dollars in Thousands)
 
2011 $150,000   0.76%
2012  —   — 
2013  —   — 
2014  3,650   5.27%
         
  $  153,650   0.87%
         

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 10 — FHLB ADVANCES AND OTHER BORROWINGS(Continued)
 
The following is financial data pertaining to FHLB advances:
            
             Year Ended December 31,
 Year Ended December 31, 2010 2009 2008
 2009 2008 2007 (Dollars in Thousands)
 (Dollars in Thousands)
Weighted-Average Interest Rate at End of Year  0.88%  1.21%  4.73%  0.87%   0.88%   1.21% 
Weighted-Average Interest Rate During the Year  1.32%  2.81%  5.11%  0.88%   1.32%   2.81% 
Average Balance of FHLB Advances $257,529 $498,875 $237,733  $158,531  $257,529  $498,875 
Maximum Amount Outstanding at Any Month-End $411,156 $597,472 $432,664  $ 153,951  $ 411,156  $ 597,472 
 
We have pledged investment securities available for sale and loans receivable with carrying values of $98.8$111.3 million and $977.7$657.8 million, respectively, as collateral with the FHLB for this borrowing facility. The total borrowing capacity available from the collateral that has been pledged is $571.2$444.2 million, of which $415.9


144

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 9 — FHLB ADVANCES AND OTHER BORROWINGS (Continued)
$290.5 million remained available as of December 31, 2009.2010. At December 31, 2009,2010, we had $143.7$146.3 million available for use through the Fed Discount Window, as we pledged loans with a carrying value of $400.4$376.6 million, and there were no borrowings.
 
At December 31, 2009,2010, advances from the FHLB were $154.0$153.7 million, a decrease of $268.2 million,$328,000, or 63.5%,0.2 percent, from the December 31, 20082009 balance of $422.2$154.0 million. FHLB advances at December 31, 2010 with a remaining maturity of less than one year were $150.0 million, as we have been successfully executing a strategy replacingand the usage of wholesale funds with more stable customer deposits in 2009.weighted-average interest rate thereon was 0.76 percent.
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, interest expense on FHLB advances and other borrowings totaled $1.4 million, $3.4 million $14.4 million and $13.9$14.4 million, respectively, and the weighted-average interest rates were 0.88 percent, 1.31 percent and 2.82 percent, and 5.10 percent, respectively.

118

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 1110 — JUNIOR SUBORDINATED DEBENTURES
 
During the first half of 2004, we issued three junior subordinated notes to finance the purchase of Pacific Union Bank. The outstanding subordinated debentures related to these offerings totaled $82.4 million at December 31, 20092010 and 20082009 as follows:
                             
      Trust  Interest         Junior    
      Preferred  Rate as of         Subordinated  Final 
      Securities  December 31, Fixed/  Interest Rate  Debt Owed  Maturity 
Description Issuance(1)  Outstanding  2009 Adjustable  Basis  to Trusts(2)  Date 
Hanmi Capital Trust I  1/8/2004  $30,000   3.15% Adjustable quarterly 3 month LIBOR + 2.90% $30,928   1/15/2034 
Hanmi Capital Trust II  3/15/2004  $30,000   3.15% Adjustable quarterly 3 month LIBOR + 2.90% $30,928   3/15/2034 
Hanmi Capital Trust III  4/28/2004  $20,000   2.91% Adjustable quarterly 3 month LIBOR + 2.63% $20,619   4/30/2034 
                       
    Trust
  Interest
       Junior
   
    Preferred
  Rate as of
       Subordinated
  Final
    Securities
  December 31,
  Fixed/
  Interest Rate
 Debt Owed
  Maturity
Description Issuance(1) Outstanding  2009  Adjustable  Basis to Trusts(2)  Date
 
Hanmi Capital
Trust I		 1/8/2004 $30,000   3.15%  Adjustable quarterly  3 month
LIBOR + 2.90%		 $30,928  1/15/2034
Hanmi Capital
Trust II		 3/15/2004 $30,000   3.15%  Adjustable quarterly  3 month
LIBOR + 2.90%		 $30,928  3/15/2034
Hanmi Capital
Trust III		 4/28/2004 $20,000   2.91%  Adjustable quarterly  3 month
LIBOR + 2.63%		 $20,619  4/30/2034
 
 
(1)Each issue of junior subordinated debentures may be redeemed in whole or in part by us after five years from the first interest payment date.
 
(2)Junior subordinated debt includes the funding cost of $69,000
 
Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payments of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by us. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided that such trust has funds available for such obligations.


145

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 10 — JUNIOR SUBORDINATED DEBENTURES (Continued)
Under the provisions of each issue of the junior subordinated debentures, we have the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the junior subordinated debentures are deferred, the distributions on the applicable trust preferred securities will also be deferred. However, the interest due would continue to accrue during any such interest payment deferral period.
 
In October 2008, we committed to the FRB that no interest payments on the junior subordinated debentures would be made without the prior written consent of the FRB. Therefore, in order to preserve its capital position, Hanmi Financial’s Board of Directors has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. In addition, we are prohibited from making interest payments on our outstanding junior subordinated debentures under the terms of our recently issued regulatory enforcement actions without the prior written consent of the FRB and DFI. Accrued interest payable on junior subordinated debentures amounted to $4.1$6.9 million and $780,000$4.1 million at December 31, 20092010 and December 31, 2008,2009, respectively.

119

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 11 — JUNIOR SUBORDINATED DEBENTURES(Continued)
The trust preferred securities issued by the trusts are currently included in our Tier 1 capital for regulatory purposes. On March 1, 2005, the Federal Reserve adopted final rules that would continue to allow trust preferred securities to be included in Tier 1 capital,purposes, subject to stricter quantitative and qualitative limits. Currently, trust preferred securities and qualifying perpetual preferred stock are limited inUnder the aggregate to no more than 25% of a bank holding company’s core capital elements. The new rule amends the existing limitrules issued by providing thatFRB, restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill and associated deferred tax liability. The amount of such excess trust preferred securities are includable in Tier 2 capital. The new quantitative limits were fully effective on March 31, 2009.
 
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with a30-year maturity. The final rules provide that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital, subject (together with subordinated debt and certain other investments) to an aggregate limit of 50% of Tier 1 capital. In addition, under the regulations, the trust preferred securities during this five-year period would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the debentures.
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, interest expense on the junior subordinated debentures totaled $2.8 million, $3.3 million $5.1 million and $6.6$5.1 million, respectively, and the weighted-average interest rates were 3.41 percent, 3.97 percent 6.14 percent and 8.066.14 percent, respectively.
NOTE 1211 — 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 betakenbe 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


146

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 11 — INCOME TAXES (Continued)
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 have beenwere 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:
         
  December 31,  December 31, 
  2009  2008 
  (In Thousands) 
Unrecognized Tax Benefits at Beginning of Year $1,437  $1,032 
         
Gross Increases for Tax Positions of Prior Years  589   960 
Gross Decreases for Tax Positions of Prior Years  (167)  — 
Increases in Tax Positions for Current Year  80   131 
Settlements  —   — 
Lapse in Statute of Limitations  (120)  (686)
       
         
Unrecognized Tax Benefits at End of Year
 $1,819  $1,437 
       

120

         
  December 31,
  December 31,
 
  2010  2009 
  (In Thousands) 
 
Unrecognized Tax Benefits at Beginning of Year $1,819  $1,437 
Gross Increases for Tax Positions of Prior Years  198   589 
Gross Decreases for Tax Positions of Prior Years  —   (167)
Increases in Tax Positions for Current Year  —   80 
Decrease due to FTB Audit result  (526)  — 
Transfer to current state tax reserve  (336)  — 
Lapse in Statute of Limitations  (200)  (120)
         
Unrecognized Tax Benefits at End of Year
 $955  $1,819 
         

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 12 — INCOME TAXES(Continued)
 
The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $955,000, $1.8 million and $1.4 million $976,000 and $141,000 as of December 31, 2009,2010, December 31, 20082009 and January 1, 2008, respectively.
During 2010, we reversed accrued interest of $136,000 mainly due to the audit result from the Franchise Tax Board for the tax year 2005 to 2007. During 2009 and 2008, we accrued interest of $108,000 and $58,000, respectively, for uncertain tax benefits. As of December 31, 2010, 2009 and 2008, the total amount of accrued interest related to uncertain tax positions, net of federal tax benefit, was $88,000, $225,000 and $117,000, 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. 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 20092011 because of a lapse of the statute of limitations. We anticipate an insignificant net change in the unrecognized tax benefits related to prior business acquisition costs, which will increase due to additional unrecognized tax benefits and decrease due to the lapse of the statute of limitations during 2009.2011. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next 12 months.


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 We are currently open to audit under
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 11 — INCOME TAXES (Continued)
In April 2010, we received the statuteNotice of limitations byProposed Assessment from the Internal Revenue ServiceCalifornia Franchise Tax Board for the years ended December 31, 2006 through 2008.tax year 2005 to 2007 and adjusted the unrecognized tax benefit amount accordingly. Hanmi Financial Corporation and its subsidiaries’ state income tax returns are open to audit under the statute of limitations by various state tax authorities for the years ended December 31, 20042006 through 2008 and we2009. We are currently under audit from California Franchise Tax Boardthe Internal Revenue Service for the tax year 2005 to 2007.years ended December 31, 2007 through 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:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007  (In Thousands) 
 (In Thousands) 
Current Expense:             
Federal $(56,829) $7,020 $30,074  $(3,224) $(56,829) $7,020 
State  (312) 2,879 8,846   (349)  (312)  2,879 
              
   (3,573)  (57,141)  9,899 
  (57,141) 9,899 38,920        
       
 
Deferred Expense:             
Federal 18,343  (7,590)  (10,791)  3,561   18,343   (7,590)
State 7,673  (3,664)  (3,827)  —   7,673   (3,664)
         3,561   26,016   (11,254)
        
 26,016  (11,254)  (14,618)
       
 
Provision (Benefit) for Income Taxes
 $(31,125) $(1,355) $24,302  $(12) $(31,125) $(1,355)
              

121
148

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 1211 — INCOME TAXES(Continued)
 
Deferred tax assets and liabilities were as follows:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In thousands) 
 (In Thousands) 
Deferred Tax Assets:         
Credit Loss Provision $64,254 $35,792  $69,532  $64,254 
Depreciation 1,618 2,170   1,203   1,618 
NOL 17,758 — 
Net Operating Loss Carryforward  39,994   17,758 
Unrealized Loss on Securities Available for Sale, Interest-Only Strips  988   — 
Tax Credit 587 564   4,059   587 
State Taxes  90   — 
Other 3,844 398   4,259   3,844 
          
 
Total Deferred Tax Assets 88,061 38,924   120,125   88,061 
     
      
Deferred Tax Liabilities:         
Mark to Market  (32,287)  (1,374)  (21,696)  (32,287)
Purchase Accounting  (4,260)  (4,559)  (3,747)  (4,260)
Unrealized Gain on Securities Available for Sale, Interest-Only Strips and Interest Rate Swaps  (602)  (471)
Unrealized Gain on Securities Available for Sale, Interest-Only Strips  —   (602)
State Taxes  (53)  (2,337)  —   (53)
Other  (2,017)  (727)  (2,003)  (2,017)
          
 
Total Deferred Tax Liabilities  (39,219)  (9,468)  (27,446)  (39,219)
     
      
Valuation Allowance  (45,234) —   (92,679)  (45,234)
          
 
Net Deferred Tax Assets
 $3,608 $29,456  $—  $3,608 
          
 
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 an establishment ofestablishing a valuation allowance of $45.2$92.7 million and recording a net deferred tax assets balance of zero was prudentappropriate given our historical losses. The remaining net deferred tax asset of $3.6 million at December 31, 2009 representsrepresented the amount of benefit we willwould receive in the future based on the carryback of future taxable losses against 2008 taxable income.income and properly recognized in our income statement during 2010.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 11 — INCOME TAXES (Continued)
A reconciliation between the federal statutory income tax rate and the effective tax rate was as follows:
            
             Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007 
Federal Statutory Income Tax Rate  35.0%  35.0%  (35.0%)  35.0%  35.0%  35.0%
 
State Taxes, Net of Federal Tax Benefits  (3.4%)  0.5%  9.1%  (0.1)%  (3.4)%  0.5%
Tax-Exempt Municipal Securities  0.5%  0.9%  (3.0%)  0.1%  0.5%  0.9%
Tax Credit — Federal  1.5%  0.7%  0.9%
Other  1.0%  1.2%  (4.3%)  1.6%  0.3%  0.3%
Valuation Allowance  (12.8%) — —   (38.0)%  (12.8)%  — 
Impairment Loss on Goodwill —  (36.3%)  99.9%  —   —   (36.3)%
              
 
Effective Tax Rate
  20.3%  1.3%  66.7%  0.1%  20.3%  1.3%
              
 At
During 2010, we received a Federal tax refund of $50.0 million related to net operating loss carryback and at December 31, 2009 and 2008,2010, there was net current taxes receivable of $56.6$9.2 million and $11.7 million, respectively.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERwhich we can claim in the future. Net current taxes receivable at December 31, 2009 2008 AND 2007(Continued)was $56.6 million.
NOTE 1312 — SHARE-BASED COMPENSATION
 
At December 31, 2009,2010, we had onetwo incentive plan,plans, the Year 2000 Stock Option Plan (the “2000 Plan”) and, the 2007 Equity Compensation Plan (the “Plan”“2007 Plan” and with the 2000 Plan, the “Plans”), which replaced the Year 2000 Stock Option Plan. The 2004 CEO Stock Option Plan (the “CEO Plan”) was terminated on December 31, 2007. The2007 Plan provides for grants of non-qualified and incentive stock options, restricted stock, stock appreciation rights and performance shares to non-employee directors, officers, employees and consultants of Hanmi Financial and its subsidiaries. The CEO Plan had2000 plan provided for the grant of non-qualified and incentive stock options. Although no future stock options may be granted under the 2000 plan, certain employees, directors and restrictedofficers of Hanmi Financial and its subsidiaries still hold options to purchase Hanmi Financial common stock to our former Chief Executive Officer.under the 2000 Plan.
 
Under the 2007 Plan, we may grant equity incentive awards for up to 3,000,000 shares of common stock. As of December 31, 2009, 3,000,0002010, 2,446,333 shares were still available for issuance. The CEO Plan was terminated as of December 31,issuance under the 2007 and there were no additional shares available for issuance.Plan.
 
The table below shows the share-based compensation expense and related tax benefits for the periods indicated:
            
             Year Ended December 31, 
 Year Ended December 31, 2010 2009 2008 
 2009 2008 2007
Share-Based Compensation Expense $906 $1,036 $1,891  $1,012  $906  $1,036 
Related Tax Benefits $381 $436 $795  $426  $381  $436 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 12 — SHARE-BASED COMPENSATION (Continued)
As of December 31, 2009,2010, unrecognized share-based compensation expense was as follows:
        
         Unrecognized
 Average Expected
 
 Unrecognized Average Expected  Expense Recognition Period 
 Expense Recognition Period  (Dollars in Thousands) 
 (Dollars in Thousands) 
Stock Option Awards $1,025 1.8 years $407   1.2 years 
Restricted Stock Awards 302 4.0 years  219   2.8 years 
      
 
Total Unrecognized Share-Based Compensation Expense
 $1,327 2.3 years $626   1.8 years 
      
 
2007 Equity Compensation Plan and 2000 Stock Option Plan
 
Stock Options
 
All stock options granted under the 2007 Plan have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted under the 2007 Plan generally vest based on 5 years of continuous service and expire 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). New shares of common stock are issued or treasury shares are utilized upon the exercise of stock options.
 
The weighted-average estimated fair value per share of options granted under the PlanPlans was as follows:
             
  Year Ended December 31,
  2009 2008 2007
Weighted-Average Estimated Fair Value Per Share of Options Granted $0.64  $1.54  $4.49 

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  Year Ended December 31,
  2010 2009 2008
 
Weighted-Average Estimated Fair Value Per Share of Options Granted $—  $0.64  $1.54 

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 13 — SHARE-BASED COMPENSATION(Continued)
 
The weighted-average fair value per share of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
           
             Year Ended December 31,
 Year Ended December 31, 2010 2009 2008
 2009 2008 2007
Weighted-Average Assumptions:          
Dividend Yield  0.00%  1.78%  1.68%  —   0.00%   1.78% 
Expected Volatility  51.28%  35.89%  29.98%  —   51.28%   35.89% 
Expected Term 5.0 years 3.1 years 4.9 years  —   5.0 years   3.1 years 
Risk-Free Interest Rate  1.89%  3.04%  4.29%  —   1.89%   3.04% 
 
Expected volatility was determined based on the historical weekly volatility of our stock price over a period equal to the expected term of the options granted. The expected term of the options represents the period that options granted are expected to be outstanding based primarily on the historical exercise behavior associated with previous option grants. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 12 — SHARE-BASED COMPENSATION (Continued)
The following information under the PlanPlans is presented for the periods indicated:
            
             Year Ended December 31, 
 Year Ended December 31, 2010 2009 2008 
 2009 2008 2007 (In Thousands) 
 (In Thousands) 
Grant Date Fair Value of Options Granted $173 $216 $596  $—  $173  $216 
Fair Value of Options Vested $993 $1,249 $1,590  $538  $993  $1,249 
Total Intrinsic Value of Options Exercised(1)
 $— $— $1,197  $14  $—  $— 
Cash Received from Options Exercised $— $— $1,145  $22  $—  $— 
Actual Tax Benefit Realized from Tax Deductions on Options Exercised $— $— $317  $—  $—  $— 
 
(1)
 Intrinsic value represents the difference between the closing stock price on the exercise date and the exercise price, multiplied by the number of options.
The following is a summary of stock option transactions under the PlanPlans for the periods indicated:
                        
                         Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007    Weighted-
   Weighted-
   Weighted-
 
 Weighted- Weighted- Weighted-    Average
   Average
   Average
 
 Average Average Average  Number
 Exercise
 Number
 Exercise
 Number
 Exercise
 
 Number Exercise Number Exercise Number Exercise  of
 Price Per
 of
 Price Per
 of
 Price Per
 
 of Price Per of Price Per of Price Per  Shares Share Shares Share Shares Share 
 Shares Share Shares Share Shares Share 
Options Outstanding at Beginning of Year 1,323,467 $14.05 1,472,766 $15.33 1,755,813 $15.31   1,180,358  $11.78   1,323,467  $14.05   1,472,766  $15.33 
 
Options Granted 270,000 $1.39 140,000 $6.28 132,667 $15.05   —  $—   270,000  $1.39   140,000  $6.28 
Options Exercised — $— — $—  (130,647) $8.76   (16,000) $1.35   —  $—   —  $— 
Options Forfeited  (154,111) $11.93  (208,467) $17.36  (256,267) $18.22   (8,200) $17.12   (154,111) $11.93   (208,467) $17.36 
Options Expired  (258,998) $12.45  (80,832) $15.33  (28,800) $16.90   (89,267) $11.38   (258,998) $12.45   (80,832) $15.33 
              
 
Options OutstandingatEnd of Year
 1,180,358 $11.78 1,323,467 $14.05 1,472,766 $15.33   1,066,891  $11.93   1,180,358  $11.78   1,323,467  $14.05 
              
 
Options Exercisable at End of Year 743,958 $14.21 778,245 $13.51 617,634 $12.48   796,691  $13.94   743,958  $14.21   778,245  $13.51 

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 1312 — SHARE-BASED COMPENSATION(Continued)
 
The following is a summary of transactions for non-vested stock options under the PlanPlans for the periods indicated:
                        
                         Year Ended December 31, 
 Year Ended December 31,  2010 2009 2008 
 2009 2008 2007    Weighted-
   Weighted-
   Weighted-
 
 Weighted- Weighted- Weighted-    Average
   Average
   Average
 
 Average Average Average  Number
 Grant Date
 Number
 Grant Date
 Number
 Grant Date
 
 Number Grant Date Number Grant Date Number Grant Date  of
 Fair Value
 of
 Fair Value
 of
 Fair Value
 
 of Fair Value of Fair Value of Fair Value  Shares Per Share Shares Per Share Shares Per Share 
 Shares Per Share Shares Per Share Shares Per Share 
Non-Vested Options Outstanding at Beginning of Year 545,222 $4.79 855,132 $5.47 1,283,910 $5.53   436,400  $2.71   545,222  $4.79   855,132  $5.47 
 
Options Granted 270,000 $0.64 140,000 $1.54 132,667 $4.49   —  $—   270,000  $0.64   140,000  $1.54 
Options Vested  (224,711) $4.42  (241,443) $5.17  (305,178) $5.21   (158,000) $3.41   (224,711) $4.42   (241,443) $5.17 
Options Forfeited  (154,111) $3.96  (208,467) $4.92  (256,267) $5.57   (8,200) $5.50   (154,111) $3.96   (208,467) $4.92 
              
 
Non-Vested Options Outstanding at End of Year
 436,400 $2.71 545,222 $4.79 855,132 $5.47   270,200  $2.22   436,400  $2.71   545,222  $4.79 
              
 
As of December 31, 2009,2010, stock options outstanding under the PlanPlans were as follows:
                                                                
 Options Outstanding Options Exercisable  Options Outstanding Options Exercisable 
 Weighted- Weighted- Weighted- Weighted-      Weighted-
 Weighted-
     Weighted-
 Weighted-
 
 Average Average Average Average      Average
 Average
     Average
 Average
 
 Exercise Remaining Exercise Remaining      Exercise
 Remaining
     Exercise
 Remaining
 
Exercise Number Intrinsic Price Per Contractual Number Intrinsic Price Per Contractual  Number
 Intrinsic
 Price Per
 Contractual
 Number
 Intrinsic
 Price Per
 Contractual
 
Price Range of Shares Value(1) Share Life of Shares Value(1) Share Life  of Shares Value(1) Share Life of Shares Value(1) Share Life 
(Dollars in Thousands, Except Per Share Data) 
 (Dollars in Thousands, Except Per Share Data) 
$1.35 to $4.99 271,624 $— $1.71 8.1 years 36,624 $— $3.89 0.7 years  219,000  $—  $1.37   8.3 years   31,000  $—  $1.38   8.3 years 
$5.00 to $9.99 174,191 — $6.85 5.7 years 121,191 — $6.79 4.6 years  168,191   —  $6.91   4.6 years   156,191   —  $6.71   4.4 years 
$10.00 to $14.99 267,500 — $13.51 4.2 years 267,500 — $13.51 4.2 years  265,500   —  $13.51   3.2 years   265,500   —  $13.51   3.2 years 
$15.00 to $19.99 395,043 — $17.93 6.3 years 246,643 — $17.98 6.2 years  342,200   —  $17.90   5.4 years   272,000   —  $17.91   5.3 years 
$20.00 to $21.63 72,000 — $21.63 6.9 years 72,000 — $21.63 6.9 years  72,000   —  $21.63   5.9 years   72,000   —  $21.63   5.9 years 
                  
   1,066,891  $—  $11.93   5.4 years   796,691  $—  $13,94   4.6 years 
 1,180,358 $— $11.78 6.2 years 743,958 $— $14.21 5.0 years         
         
 
(1)Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $2.06$1.15 as of December 31, 2008,2010, and the exercise price, multiplied by the number of options.
 
Restricted Stock Awards
 
Restricted stock awards under the 2007 Plan become fully vested after three to five years of continued employment from the date of grant. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock are treated as cancelled shares.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 1312 — SHARE-BASED COMPENSATION(Continued)
 
The table below provides information for restricted stock awards under the 2007 Plan for the periods indicated:
                         
  Year Ended December 31,
  2010 2009 2008
    Weighted-
   Weighted-
   Weighted-
    Average
   Average
   Average
  Number
 Grant Date
 Number
 Grant Date
 Number
 Grant Date
  of
 Fair Value
 of
 Fair Value
 of
 Fair Value
  Shares Per Share Shares Per Share Shares Per Share
 
Restricted Stock at Beginning of Year  183,400  $1.87   20,200  $11.42   19,000  $13.48 
Restricted Stock Granted  —  $—   205,000  $1.41   10,000  $6.68 
Restricted Stock Forfeited  —  $—   (38,000) $3.44   (5,000) $8.21 
Restricted Stock Vested  (37,800) $2.19   (3,800) $10.59   (3,800) $10.59 
                         
Restricted Stock at End of Year
  145,600  $1.77   183,400  $1.87   20,200  $11.42 
                         
                         
  Year Ended December 31, 
  2009  2008  2007 
      Weighted-      Weighted-      Weighted- 
      Average      Average      Average 
  Number  Grant Date  Number  Grant Date  Number  Grant Date 
  of  Fair Value  of  Fair Value  of  Fair Value 
  Shares  Per Share  Shares  Per Share  Shares  Per Share 
Restricted Stock at Beginning of Year  20,200  $11.42   19,000  $13.48   —  $— 
                         
Restricted Stock Granted  205,000  $1.41   10,000  $6.68   19,000  $13.48 
Restricted Stock Forfeited  (38,000) $3.44   (5,000) $8.21   —  $— 
Restricted Stock Vested  (3,800) $10.59   (3,800) $10.59   —  $— 
                      
Restricted Stock at End of Year
  183,400  $1.87   20,200  $11.42   19,000  $13.48 
                      
NOTE 13 — STOCKHOLDERS’ EQUITY
2004 CEO Stock Option PlanWarrants
 
As part of the agreement with the placement agency company executed on July 27, 2010, we issued warrants to purchase two million shares of common stock for services performed. The warrants have an exercise price of $1.20 per share. According to the agreement, the warrants vested on October 14, 2010 and are exercisable until its expiration on October 14, 2015. The Company followed the guidance of FASB ASC Topic 815- 40, “Stock OptionsDerivatives and Hedging — Contracts in Entity’s Own Stock”(“ASC 815-40”), which establishes a framework for determining whether certain freestanding and embedded instruments are indexed to a company’s own stock for purposes of evaluation of the accounting for such instruments under existing accounting literature. Under GAAP, the issuer is required to measure the fair value of the equity instruments in the transaction as of earlier of i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or ii) the date at which the counterparty’s performance is complete. The fair value of the warrants at the date of issuance totaling $2.0 million was recorded as a liability and a cost of equity, which was determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected term of the warrants. We used a weighted average expected stock volatility of 111.46%. The expected life assumption is based on the contract term of five years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 2.07% used for the warrant is equal to the zero coupon rate in effect at the time of the grant.
 There were no
Upon re-measuring the fair value of the stock options granted underwarrants at December 31, 2010, the CEO Plan duringfair value decreased by $362,000, which we have included in other operating expenses for the yearsyear ended December 31, 2009, 20082010. We used a weighted average expected stock volatility of 91.93% and 2007. Uponan expected life assumption of five years based on the former Chief Executive Officer’s retirement on December 31, 2007, 116,666 vested stock options were repurchased for $70,000.
     The following iscontract terms. We also used a summarydividend yield of stock option transactions under the CEO Plan for the periods indicated:
                         
  Year Ended December 31, 
  2009  2008  2007 
  Number  Exercise  Number  Exercise  Number  Exercise 
  of  Price Per  of  Price Per  of  Price Per 
  Shares  Share  Shares  Share  Shares  Share 
Options Outstanding at Beginning of Year  —  $—   —  $—   350,000  $17.17 
Options Forfeited  —  $—   —  $—   (233,334) $17.17 
Options Repurchased  —  $—   —  $—   (116,666) $17.17 
                      
Options Outstanding at End of Year
  —  $—   —  $—   —  $— 
                      
Options Exercisable at End of Year  —  $—   —  $—   —  $— 
zero as we have no present intention to pay

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 13 — SHARE-BASED COMPENSATIONSTOCKHOLDERS’ EQUITY (Continued)
 
cash dividends. The following is a summaryrisk free rate of transactions for non-vested stock options under the CEO Plan2.10% used for the periods indicated:
                         
  Year Ended December 31, 
  2009  2008  2007 
  Number  Grant Date  Number  Grant Date  Number  Grant Date 
  of  Fair Value  of  Fair Value  of  Fair Value 
  Shares  Per Share  Shares  Per Share  Shares  Per Share 
Non-Vested Options Outstanding at Beginning of Year  —  $—   —  $—   291,667  $4.82 
 
Options Forfeited  —  $—   —  $—   (233,334) $4.82 
Options Vested  —  $—   —  $—   (58,333) $4.82 
                      
Non-Vested Options Outstanding at End of Year
  —  $—   —  $—   —  $— 
                      
Restricted Stock Awards
     In February 2005, 100,000 shares of restricted stock were grantedwarrant is equal to our former Chief Executive Officer. 20,000 of these shares vested immediately, and an additional 20,000 shares were to vest each year over the next four years onzero coupon rate in effect at the anniversary dateend of the grant. Upon the former Chief Executive Officer’s retirement on December 31, 2007, all unvested restricted stock became immediately vested.measurement period.
 The table below provides information for restricted stock awards under the CEO Plan for the periods indicated:
                         
  Year Ended December 31, 
  2009  2008  2007 
      Weighted-      Weighted-      Weighted- 
      Average      Average      Average 
  Number  Grant Date  Number  Grant Date  Number  Grant Date 
  of  Fair Value  of  Fair Value  of  Fair Value 
  Shares  Per Share  Shares  Per Share  Shares  Per Share 
Restricted Stock at Beginning of Year  —  $—   —  $—   60,000  $18.15 
Restricted Stock Vested  —  $—   —  $—   (60,000) $18.15 
                      
Restricted Stock at End of Year
  —  $—   —  $—   —  $— 
                      
NOTE 14 — STOCKHOLDERS’ EQUITY
Stock Warrants
     In 2004, we issued stock warrants to affiliates of Castle Creek Financial LLC for services rendered in connection with the placement of our equity securities. Under the terms of the warrants, the warrant holders can purchase 508,558 shares of common stock at an exercise price of $9.50 per share. The warrants were immediately exercisable and expire after five years. During the years ended December 31, 2009, 2008 and 2007, 0, 0 and 2,000 shares of common stock, respectively, were issued in connection with the exercise of stock warrants. In June 2007, we repurchased 324,502 stock warrants at an aggregate cash purchase price of $2.6 million and such stock warrants were then canceled. As of December 31, 2009, there were no outstanding stock warrants.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 14 — STOCKHOLDERS’ EQUITY(Continued)
Repurchase of Common Stock
     In April 2006, our Board of Directors authorized the repurchase of up to $50.0 million of our common stock as part of our ongoing capital management program. During the year ended December 31, 2007, 3,469,500 shares of our common stock were repurchased on the open market for an aggregate purchase price of $50.0 million. There were no common stock repurchases in 2009 or 2008. Repurchased shares are held in treasury pending use for general corporate purposes, including issuance under our stock option plans.
NOTE 15 — REGULATORY MATTERS
     Hanmi Financial and the Bank are subject to extensive federal and state supervision and regulation by certain regulatory agencies. In connection with such supervision and their recent examinations, the regulatory agencies will require that certain deficiencies in our policies, procedures or activities be corrected in the future. If such matters are not corrected in the future or significant progress is not made on such matters, then Hanmi Financial and/or the Bank may face additional regulatory action that may have an impact on the operations of Hanmi Financial and the Bank.
Risk-Based Capital
     The regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, regulators require banking organizations to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio is 3.0 percent. In addition to these uniform risk-based capital guidelines that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 15 — REGULATORY MATTERS(Continued)
     As of December 31, 2009, Hanmi Financial’s Tier 1 capital (stockholders’ equity plus junior subordinated debentures less intangible assets) was $194.7 million. This represented a decrease of $143.3 million, or 42.4 percent, over Tier 1 capital of $338.0 million as of December 31, 2008. The capital ratios of Hanmi Financial and the Bank were as follows as of December 31, 2009 and 2008:
                         
          Minimum  Minimum to Be 
          Regulatory  Categorized as 
  Actual  Requirement  “Well Capitalized” 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in Thousands) 
December 31, 2009
                        
Total Capital (to Risk-Weighted Assets):                        
Hanmi Financial $262,796   9.12% $230,614   8.00%  N/A   N/A 
Hanmi Bank $261,194   9.07% $230,261   8.00% $287,826   10.00%
Tier 1 Capital (to Risk-Weighted Assets):                        
Hanmi Financial $194,749   6.76% $115,307   4.00%  N/A   N/A 
Hanmi Bank $223,700   7.77% $115,131   4.00% $172,696   6.00%
Tier 1 Capital (to Average Assets):                        
Hanmi Financial $194,749   5.82% $133,945   4.00%  N/A   N/A 
Hanmi Bank $223,700   6.69% $133,770   4.00% $167,212   5.00%
 
December 31, 2008
                        
Total Capital (to Risk-Weighted Assets):                        
Hanmi Financial $383,043   10.79% $283,943   8.00%  N/A   N/A 
Hanmi Bank $379,438   10.70% $283,561   8.00% $354,451   10.00%
Tier 1 Capital (to Risk-Weighted Assets):                        
Hanmi Financial $338,042   9.52% $141,972   4.00%  N/A   N/A 
Hanmi Bank $334,628   9.44% $141,781   4.00% $212,671   6.00%
Tier 1 Capital (to Average Assets):                        
Hanmi Financial $338,042   8.93% $151,371   4.00%  N/A   N/A 
Hanmi Bank $334,628   8.85% $151,168   4.00% $188,959   5.00%
Reserve Requirement
The Bank is required to maintain a percentage of its deposits as reserves at the FRB. The daily average reserve balance required to be maintained with the FRB was $1.5 million as of December 31, 2009 and 2008, respectively.
Memorandum of Understanding
     On October 8, 2008, the members of the Board of Directors of the Bank entered into an informal supervisory agreement (a memorandum of understanding) with the Regulators to address certain issues raised in the Bank’s most recent regulatory examination by the DFI on March 10, 2008. The memorandum of understanding (the “MOU”) has been superseded by the Order issued by the DFI, and the Agreement with the FRB, each of which were issued effective as of November 2, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 15 — REGULATORY MATTERS(Continued)
     Certain of the issues to be addressed by management under the terms of the MOU relate to the following, among others: (i) Board and senior management maintenance and succession planning; (ii) Board oversight and education; (iii) Board assessment and enhancement; (iv) loan policies and procedures; (v) allowance for loan losses policies and procedures; (vi) liquidity and funds management policies; (vii) strategic planning; (viii) capital maintenance, including a requirement that the Bank maintain a minimum Tier 1 leverage ratio and tangible stockholder’s equity to total tangible assets ratio of not less than 8.0 percent; and (ix) restrictions on the payment of dividends without the Regulators’ prior approval.
     The Board and management are committed to addressing and resolving the issues raised in the memorandum of understanding on a timely basis. Since completion of the March 10, 2008 regulatory examination, actions have already been undertaken to address and resolve many of the issues raised by the memorandum of understanding.
     As noted above, some of the more significant changes have been in the area of methodology for estimation of the allowances for loan losses. With the changes in the economic climate, we have made various changes quarter to quarter, including:
•In the first quarter of 2008, the historical loss rate migration analysis was enhanced. Twelve previous quarters loss history, with the most recent six quarters weighted more heavily at 1.5 to 1.0 to factor in the increased loss rate to reflect the changing economic environment. Previously, the analysis was conducted using the previous 28 quarters all weighted evenly. The revision is more realistic and dynamic, which is particularly pertinent during these fast-changing times.
•The reserve factors for contingent liabilities have also been enhanced and now are based on the actual loan pool usage percentages and the risk rating reserve percentages, whereas before only the weighted historical loss rates for clean loans were used.
•Furthermore, collateral values are fluctuating more widely this past year than in previous years. Therefore, real estate secured loans are being monitored more frequently, and collateral is being reappraised more frequently so that impairment on these loans, whether they are classified loans or pass loans, may be calculated accurately for purposes of the allowance for loan losses.
•The impairment policy has also been revised to require charge-offs of fully impaired loans within 90 days of the impairment date. Exceptions to this policy are allowed only with the Chief Credit Officer’s approval.
•The MOU addresses enhancement of loan policies and procedures. The revisions to the loan policies and procedures were made more in response to changes in the business environment and increased credit risk, rather than to a specific mandate in the MOU.
     The rapidly changing economic conditions that have drastically affected our borrowers have necessitated several revisions to the qualitative factors used in the estimation of the allowance for loan losses. Some of the more significant qualitative factors adjusted are increases in delinquencies, classified assets, non-performing loans and charge-offs, changes in quality of loan review, credit concentrations, and external factors of real estate, construction, commercial term, line of credit and Small Business Administration (“SBA”) loans.
     As part of the Bank’s efforts to comply with the prior MOU, the liquidity contingency plan, earnings plan and updated strategic plan have been revised. As previously reported, certain directors have retired from the Board and other directors have joined the Board, bringing broader and more diverse skill sets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 15 — REGULATORY MATTERS(Continued)
     Separately, in accordance with its prior commitment to the FRB, Hanmi Financial has adopted a consolidated capital plan to augment and maintain a sufficient consolidated capital position. In addition, Hanmi Financial has agreed that it will not (i) declare or pay any dividends or make any payments on its junior subordinated debentures or any other capital distributions without the prior written consent of the FRB, and (ii) incur, increase or renew any existing debt or purchase, redeem or otherwise acquire any of its capital stock without the prior written consent of the FRB. In order to preserve its capital position, the Board of Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. Finally, Hanmi Financial has agreed to provide prior written notice and obtain the consent of the FRB prior to appointing any new directors or senior executive officers.
     Since entering into the MOU with the FRB and the DFI, the management of the Bank has made every effort to strengthen the bank’s control systems and comply with the provisions of the MOU. The actions taken toward this end include the following:
•The Board of Directors’ membership has been changed. Since October 2008, seven directors have retired or resigned. The Board has successfully recruited and elected three new directors, each of them with prior banking experience, professional designations and a wealth of knowledge and experience.
•The Corporate Governance Guidelines have also been revised and enhanced to more clearly outline director qualifications, nomination procedures and succession planning.
•The MOU also called for enhancements to the Capital Augmentation and Maintenance Plan, the Liquidity Contingency Plan, the Strategic Plan and the Earnings Plan. These have been completed and the plans are being followed with positive results.
•The MOU requires the Bank to submit reports quarterly on the progress made on all of the provisions. At this time, the Bank is in full or substantial compliance with a majority of the provisions, with the understanding that some of the provisions, like the Asset Quality Improvement Plan, the Capital Augmentation and Maintenance Plan, and the Earnings Plan, require the implementation of the plans and a passage of time to show the results of the plans.
•The regulators recommended that the Board of Directors increase its members by one additional director, and further enhancement to the management succession and retention programs. The Board of Directors is addressing these issues.
Written Agreement and Final Order
     On November 2, 2009, the members of the Board of Directors of the Bank consented to the issuance of the Order from the DFI. On the same date, Hanmi Financial and the Bank entered into the Agreement with the FRB. The Order and the Agreement contain substantially similar provisions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 15 — REGULATORY MATTERS(Continued)
     The Order and the Agreement require the Board of Directors of the Bank to prepare and submit written plans to the DFI and the FRB that address the following items: (i) strengthening board oversight of the management and operation of the Bank; (ii) strengthening credit risk management practices; (iii) improving credit administration policies and procedures; (iv) improving the Bank’s position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses; (vi) improving the capital position of the Bank and, with respect to the Agreement, of Hanmi; (vii) improving the Bank’s earnings through a strategic plan and a budget for 2010; (viii) improving the Bank’s liquidity position and funds management practices; and (ix) contingency funding. In addition, the Order and the Agreement place restrictions on the Bank’s lending to borrowers who have adversely classified loans with the Bank and requires the Bank to charge off or collect certain problem loans. The Order and the Agreement also require the Bank to review and revise its allowance for loan and lease losses consistent with relevant supervisory guidance. The Bank is also prohibited from paying dividends, incurring, increasing or guaranteeing any debt, or making certain changes to its business without prior approval from the DFI, and the Bank and Hanmi must obtain prior approval from the FRB prior to declaring and paying dividends.
     Under the Order, the Bank is also required to increase its capital and maintain certain regulatory capital ratios prior to certain dates specified in the Order. By July 31, 2010, the Bank will be required to increase its contributed equity capital by not less than an additional $100 million. The Bank will be required to maintain a ratio of tangible shareholder’s equity to total tangible assets as follows:
Ratio of Tangible Shareholder’s
DateEquity to Total Tangible Assets
By December 31, 2009Not Less Than 7.0 Percent
By July 31, 2010Not Less Than 9.0 Percent
From December 31, 2010 and Until the Order is TerminatedNot Less Than 9.5 Percent
     If the Bank is not able to maintain the capital ratios identified in the Order, it must notify the DFI, and Hanmi and the Bank are required to notify the FRB if their respective capital ratios fall below those set forth in the capital plan to be submitted to the FRB. As of December 31, 2009, the Bank had a Tier 1 leverage ratio of 6.69 percent and tangible stockholder’s equity to total tangible assets ratio of 7.13 percent. As of December 31, 2008, the Bank had a Tier 1 leverage ratio of 8.85 percent and tangible stockholder’s equity to total tangible assets ratio of 8.68 percent.
     On November 2, 2009, the MOU was superseded by the Agreement with the FRB and the Order with the DFI. The Agreement and the Order contain substantially the same requirements. To comply with the provisions of the Agreement and the Order, additional actions taken include the following:
•The Board Committees have been reorganized after a board assessment was conducted to leverage the experience and skill base of our directors and improve board oversight of the Bank’s operations.
•Tools such as master calendar of scheduled events and policy exception trigger tables have been created to assist the Board’s ability to monitor the bank’s operations more effectively.
•Jung Hak Son, a 24 year member of the Bank has been appointed to the Chief Credit Officer position and is currently awaiting approval from the regulatory agencies.
•Loan policies and procedures continue to be adjusted and enhanced to keep current with the rapidly changing credit and economic environment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 15 — REGULATORY MATTERS(Continued)
•Allowance for loan loss quantitative and qualitative factors have been changed to reflect the higher risk in the loan portfolio due to the recessionary economy.
•The credit department has also been reorganized and reinforced with additional personnel to increase the level of management loan review and loan monitoring.
•Written plans have been developed for each problem loan greater than $3 Million and the plans implemented and monitored to improve loan work out and loan collection.
•Bank’s strategic plan has been reviewed and revised, then approved by the Board of Directors.
•Bank’s liquidity management plan and contingency funding plan have been significantly revised to reflect the additional restrictions and challenges of the market.
•Capital plan has been revised and significant effort is being made to raise the required capital within the time frame mandated by the Order.
•A Compliance Committee has been organized to monitor the progress toward full compliance with all the provisions of the Agreement and the Order and approves the reports prior to submission according to the schedule established.
     Policies and procedures have been developed, plans have been formulated, documented, approved and submitted and administrative requirements such as submission of quarterly progress reports are also being met. However, the results of these actions are still subject to review by our regulators.
     In conjunction with regulatory requirement, during 2009, the Bank has enhanced loan policies and procedures. First, we enhanced existing policies and procedures regarding the monitoring of loans to be more stringent as well as limiting and making allowances for exceptions to our loan policy more difficult. Second, we centralized the loan underwriting and approval processes, including centralizing the credit underwriting function at two locations, creating a central monitoring mechanism to monitor all loans, and increasing resources in departments of the Bank engaged in addressing problem assets.
     In addition, we have incorporated both internal and external loan review functions to continuously reassess the quality of loans, especially those deemed as high risk. On a need basis for collateral dependant loans, re-appraisals have been conducted to proactively monitor for potential shortfalls as well as ensure adequacy of the Bank’s allowance for loan and lease loss.
Capital Plan
     Separately, Hanmi Financial has committed to the FRB that it will adopt a consolidated capital plan to augment and maintain a sufficient consolidated capital position. In addition, Hanmi Financial has agreed that it will not (i) declare or pay any dividends or make any payments on its trust preferred securities or any other capital distributions without the prior written consent of the FRB, and (ii) incur, increase or renew any existing debt or purchase, redeem or otherwise acquire any of its capital stock without the prior written consent of the FRB. In order to preserve its capital position, the Board of Hanmi Financial has elected to defer quarterly interest payments on its outstanding trust preferred securities until further notice, beginning with the interest payment that was due on January 15, 2009. Finally, Hanmi Financial has agreed to provide prior written notice and obtain the consent of the FRB prior to appointing any new directors or senior executive officers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 16 — EARNINGS (LOSS) PER SHARE
 
Earnings (loss) per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. Unvested restricted stock was excluded from the calculation of weighted-average common shares for basic EPS. For diluted EPS, weighted-average common shares include the impact of restricted stock under the treasury method.
 
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
             
    Weighted-
  
  Income
 Average
 Per
  (Loss)
 Shares
 Share
  (Numerator) (Denominator) Amount
  (Dollars in thousands, except per share amounts)
 
Year Ended December 31, 2010:
            
Basic EPS — Income Available to Common Stockholders $(88,009)  94,322,222  $(0.93)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
             
Diluted EPS — Income Available to Common Stockholders $(88,009)  94,322,222  $(0.93)
             
Year Ended December 31, 2009:
            
Basic EPS — Income Available to Common Stockholders $(122,277)  47,570,361  $(2.57)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
             
Diluted EPS — Income Available to Common Stockholders $(122,277)  45,570,361  $(2.57)
             
Year Ended December 31, 2008:
            
Basic EPS — Income Available to Common Stockholders $(102,093)  45,872,541  $(2.23)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
             
Diluted EPS — Income Available to Common Stockholders $(102,093)  45,872,541  $(2.23)
             
             
      Weighted-    
  Income  Average  Per 
  (Loss)  Shares  Share 
  (Numerator)  (Denominator)  Amount 
  (Dollars in Thousands, Except Per Share Amounts) 
Year Ended December 31, 2009:
            
Basic EPS — Income Available to Common Stockholders $(122,277)  47,570,361  $(2.57)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
          
             
Diluted EPS — Income Available to Common Stockholders $(122,277)  45,570,361  $(2.57)
          
             
Year Ended December 31, 2008:
            
Basic EPS — Income Available to Common Stockholders $(102,093)  45,872,541  $(2.23)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
          
             
Diluted EPS — Income Available to Common Stockholders $(102,093)  45,872,541  $(2.23)
          
             
Year Ended December 31, 2007:
            
Basic EPS — Income Available to Common Stockholders $(60,762)  47,787,213  $(1.27)
Effect of Dilutive Securities — Options and Warrants  —   —   — 
          
             
Diluted EPS — Income Available to Common Stockholders $(60,762)  47,787,213  $(1.27)
          
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, there were 3,212,491, 1,363,758 1,345,667 and 1,493,7661,345,667 options, warrants and unvested restricted stock outstanding, respectively, that were not included in the computation of diluted EPS because of a net loss or their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 1715 — EMPLOYEE BENEFITS
 
401(k)401(k) Plan
 
We have a Section 401(k) plan for the benefit of substantially all of our employees. We match 75 percent of participant contributions to the 401(k) plan up to 8 percent of each 401(k) plan participant’s annual compensation. For the years ended December 31, 2010, 2009 2008 and 2007,2008, contributions to the 401(k) plan were $992,000, $1.1 million $1.3 million and $1.2$1.3 million, respectively.
 
Bank-Owned Life Insurance
 
In 2001 and 2004, we purchased single premium life insurance policies called bank-owned life insurance covering certain officers. The Bank is the beneficiary under the policy. In the event of the death of a covered officer, we will receive the specified insurance benefit from the insurance carrier.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 17 — EMPLOYEE BENEFITS(Continued)
Deferred Compensation Plan
 
Effective November 1, 2006, the Board of Directors approved the Hanmi Financial Corporation Deferred Compensation Plan (“the DCP”). The DCP is a non-qualified deferred compensation program for directors and certain key employees whereby they may defer a portion of annual compensation for payment upon retirement of the amount deferred plus a guaranteed return. The DCP is unfunded. As of December 31, 20092010 and 2008,2009, the liability for the deferred compensation plan and interest thereon was $75,000$78,000 and $151,000,$75,000, respectively.
NOTE 1816 — COMMITMENTS AND CONTINGENCIES
 
Lease Commitments
 
We lease our premises under non-cancelable operating leases. At December 31, 2009,2010, future minimum annual rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, was as follows:
        
Year Ending      
December 31, Amount  Amount 
 (In Thousands)  (In Thousands) 
2010 $5,434 
2011 4,667  $4,470 
2012 3,865   4,180 
2013 3,338   3,536 
2014 2,051   2,154 
2015  1,773 
Thereafter 7,344   5,645 
   
    
Total
 $26,699  $21,758 
      
 
For the years ended December 31, 2010, 2009 2008 and 2007,2008, rental expenses recorded under such leases amounted to $5.7 million, $5.6 million and $5.2 million, and $4.8 million, respectively.


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 16 — COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
 
In the normal course of business, we are involved in various legal claims. Management has reviewed all legal claims against us with in-house or outside legal counsel and has taken into consideration the views of such counsel as to the outcome of the claims. In management’s opinion, the final disposition of all such claims will not have a material adverse effect on our financial position or results of operations.
NOTE 1917 — OFF-BALANCE SHEET COMMITMENTS
 
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the Consolidated Balance Sheets. The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 19 — OFF-BALANCE SHEET COMMITMENTS(Continued)
Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and income-producing or borrower-occupied properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
        
         December 31, 
 December 31,  2010 2009 
 2009 2008  (In thousands) 
 (In Thousands) 
Commitments to Extend Credit $262,821 $386,785  $178,424  $262,821 
Standby Letters of Credit 17,225 47,289   15,226   17,225 
Commercial Letters of Credit 13,544 29,177   11,899   13,544 
Unused Credit Card Lines 23,408 16,912   24,649   23,408 
          
 
Total Undisbursed Loan Commitments
 $316,998 $480,163  $230,198  $316,998 
          
NOTE 2018 — SEGMENT REPORTING
 
Through our branch network and lending units, we provide a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time and savings deposits; and commercial and industrial, real estate and consumer lending. While our chief decision makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one reportable operating segment.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 (Continued)
NOTE 2119 — CUMULATIVE-EFFECT ADJUSTMENT FROM THE ADOPTION OF EITF
         ISSUENO. 06-4
 
In September 2006, the FASB’s Emerging Issues Task Force (“EITF”) issued FASB ASC 715,“Compensation-Retirement Benefits,”which requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in FASB ASC 715,“Compensation-Retirement Benefits,”or Accounting Principles Board Opinion No. 12, as appropriate. For transition, an entity could apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented; or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. We adopted the provisions of FASB ASC 715 on January 1, 2008 and recorded a $2.2 million cumulative-effect adjustment to the beginning balance in retained earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2220 — LIQUIDITY
 FASB ASC 275,“Risks and Uncertainties,”requires reporting entities to disclose information about the nature of their operations and vulnerabilities due to certain concentrations. Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.
Hanmi Financial
 
Currently, management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its operating cash needs through December 31, 2010.2011. On August 29, 2008, we elected to suspend payment of quarterly dividends on our common stock in order to preserve our capital position. In addition, Hanmi Financial has elected to defer quarterly interest payments on its outstanding junior subordinated debentures until further notice, beginning with the interest payment that was due on January 15, 2009. As of December 31, 2009,2010, Hanmi Financial’s liquid assets, including amounts deposited with the Bank, totaled $3.5$7.7 million, up from $2.2$3.5 million as of December 31, 2008.2009.
 
Hanmi Bank
 
Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originated through its branch platform. In 2009,an effort to preserve liquidity, the Bank deployed two deposit campaigns to increase new depositsinnovative products, such as Advantage and reduce its reliance on wholesale funding to an optimum level.
     ThroughDiamond Freedom CDs, during the first depositnine months of 2010, and utilized Internet rate service providers in the first half of 2010. Through this campaign promoted from December 2008 and early partthe use of March 2009,Internet rate service providers, the Bank achieved the objectives of maintaining adequate liquidity and significantly reducing its reliance on wholesale funds. The second deposit campaign promoted during the third and fourth quarters of 2009 successfully recaptured a substantial portion of time deposits raised from the first deposit campaign with low-cost core-deposit products. This deposit-portfolio rebalancing implemented under the Bank’s deleveraging strategy allowed some run-off of rate-sensitivebrokered deposits. As a result, total deposits decreased by $320.8$282.6 million, or 10.410.3 percent, from $3.07 billion as of December 31, 2008 to $2.75 billion as of December 31, 2009. This decrease resulted2009 to $2.47 billion as of December 31, 2010, primarily fromdue to a $340.1$203.5 million decrease in interest-bearing deposits, partially offset by a $19.4 million increase of noninterest-bearingbrokered deposits. The Bank’s wholesale funds consistinghistorically consisted of Federal Home Loan Bank (“FHLB”)FHLB advances and brokered deposits, significantly decreased by $938.9 million to $357.5 million atdeposits. As of December 31, 2009 from $1.30 billion at December 31, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 22 — LIQUIDITY(Continued)
 Due to the Bank’s total risk-based capital ratio that was below 10% as of September 30, 2009 coupled
NOTE 20 — LIQUIDITY (Continued)
2010, in compliance with theits regulatory enforcement action with a specific capital provision,restrictions, the Bank is considered to be “adequately capitalized” under the regulatory framework for prompt corrective action. Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use ofhad no brokered deposits, by institutionsand had FHLB advances of only $153.7 million that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. On December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well capitalized to request a determination from the FDIC whether they are operatingslightly decreased $328,000 in an area where rates paid on deposits are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010.
 
The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 2015 percent of its total assets. As of December 31, 2009,2010, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $571.2$444.2 million and $415.9$290.5 million, respectively. The Bank’s FHLB borrowings as of December 31, 20092010 totaled $154.0$153.7 million, representing 4.95.3 percent of total assets. As of March 12, 2010,9, 2011, the Bank’s FHLB borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $355.0$435.1 million and $447.3$281.5 million, respectively. The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
 
As a means of augmenting its liquidity, the Bank had $295.0 million unpledged marketable securities that are available for sale at December 31, 2010. Also, the Bank had an available borrowing source of $143.7$146.3 million from the Federal Reserve Discount Window (the “Fed Discount Window”), to which the Bank pledged loans with a carrying value of $400.4$376.6 million, and had no borrowings as of December 31, 2009.2010. The Bank is currently in the secondary program of the Borrower in Custody Program of the Fed Discount Window, which allows the Bank to request very short-term credit (typically overnight) at a rate that is above the primary credit rate within a specified period. In August 2009,2010, South Street Securities LLC extended a line of credit to the Bank for reverse repurchase agreements up to a maximum of $100.0 million. This line of credit will continue for a term of one year,
The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and unless amended or terminated, will automatically renew for successive one-year terms.
     On July 10, 2009, due to a deteriorationcommitments, particularly in the Bank’s risk profile,event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the BorrowerCFPs provide a framework for management and other critical personnel to follow in Custody Programthe event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for activation and decision making, liquidity options and the Fed Discount Windowresponsibilities of key departments in which the Bank has participated changed from the primary credit program to the secondary credit program, which allows the Bank to request very short-term credit (typically overnight) atevent of a rate that is above the primary credit rate. As of March 12, 2010, the Bank had $239.4 million available for use through the Fed Discount Window, as the Bank pledged loans with a carrying value of $557.0 million, and there were no borrowings. As the Bank has pledgeable loans, it will pledge additional loans to maintain an adequate level of borrowing line with the Fed Discount Window.

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 22 — LIQUIDITY(Continued)liquidity contraction.
 
Current market conditions have limited the Bank’s liquidity sources principally to interest-bearing deposits, unpledged marketable securities, and secured funding outlets such as the FHLB and Fed Discount Window. There can be no assurance that actions by the FHLB or FRBFederal Reserve Bank would not reduce the Bank’s borrowing capacity or that the Bank would be able to continue to replace deposits at competitive rates. The Bank is currently restricted from accepting brokered deposits as a funding source. As of December 31, 2009,2010, in compliance with its regulatory restrictions, the Bank does not have any brokered deposits and would consult in advance with its regulators if it were $203.5 million, or 7.4 percent of total deposits. Allto consider accepting brokered deposits are currently scheduled to mature on or prior to June 30, 2010. Inin the future.


159

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 the Bank successfully replaced $670.7 million of brokered deposits. If the Bank is unable to replace these maturing deposits with new deposits, theAND 2008 (Continued)
NOTE 20 — LIQUIDITY (Continued)
The Bank believes that it nonetheless has adequate liquidity resources to fund its obligations with its interest-bearing deposits, unpledged marketable securities, and secured funding outletscredit lines with the FHLB and Fed Discount Window.
NOTE 21 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
         
  December 31, 
  2010  2009 
  (In Thousands) 
 
ASSETS
        
Cash $7,716  $3,486 
Securities Available for Sale  774   794 
Investment in Consolidated Subsidiaries  251,808   228,324 
Investment in Trust Preferred Securities  2,475   2,475 
Other Assets  1,654   1,538 
         
TOTAL ASSETS
 $264,427  $236,617 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Liabilities:        
Junior Subordinated Debentures $82,406  $82,406 
Other Liabilities  8,765   4,467 
Stockholders’ Equity  173,256   149,744 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $264,427  $236,617 
         
STATEMENTS OF OPERATIONS
             
  Year Ended December 31, 
  2010  2009  2008 
  (In Thousands) 
 
Equity in Earnings (Losses) of Subsidiaries $(82,705) $(118,340) $(97,040)
Other Expenses, Net  (5,339)  (6,057)  (8,610)
Income Tax Benefit  35   2,120   3,557 
             
NET INCOME (LOSS)
 $(88,009) $(122,277) $(102,093)
             

139
160

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 2321 — CONDENSED FINANCIAL INFORMATION OF PARENT
     COMPANY(Continued)
BALANCE SHEETS
         
  December 31, 
  2009  2008 
  (In Thousands) 
ASSETS
        
Cash $3,486  $2,167 
Securities Available for Sale  794   804 
Investment in Consolidated Subsidiaries  228,324   340,297 
Investment in Trust Preferred Securities  2,475   2,475 
Other Assets  1,538   1,738 
       
         
TOTAL ASSETS
 $236,617  $347,481 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Liabilities:        
Junior Subordinated Debentures $82,406  $82,406 
Other Liabilities  4,467   1,160 
Stockholders’ Equity  149,744   263,915 
       
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $236,617  $347,481 
       
STATEMENTS OF OPERATIONSCASH FLOWS
             
  Year Ended December 31, 
  2009  2008  2007 
  (In Thousands) 
Equity in Earnings (Losses) of Subsidiaries $(118,340) $(97,040) $(54,500)
Other Expenses, Net  (6,057)  (8,610)  (10,155)
Income Tax Benefit  2,120   3,557   3,893 
          
             
NET INCOME (LOSS)
 $(122,277) $(102,093) $(60,762)
          
             
  Year Ended December 31, 
  2010  2009  2008 
  (In Thousands) 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net Loss $(88,009) $(122,277) $(102,093)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used In Operating            
Activities:            
Losses of Subsidiaries  82,705   118,340   97,040 
Share-Based Compensation Expense  1,013   906   1,036 
Changes in Fair Value of Stock Warrants  (362)  —   — 
(Increase) Decrease in Other Assets  (116)  200   (706)
Increase (Decrease) in Other Liabilities  2,706   3,311   (2,983)
             
Net Cash Provided (Used) In Operating Activities
  (2,063)  480   (7,706)
             
CASH FLOWS FROM INVESTING ACTIVITIES:
            
Dividends Received from Hanmi Bank  —   —   8,500 
Payments from (to) Hanmi Bank  (110,000)  (6,000)  — 
             
Net Cash Provided (Used) By Investing Activities
  (110,000)  (6,000)  8,500 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
            
Proceeds from Exercise of Stock Options and Stock Warrants  22   —   — 
Net Proceeds from Issuance of Common Stock in Offering  116,271   6,839   — 
Cash Paid to Repurchase Stock Options and Stock Warrants  —   —   (70)
Cash Dividends Paid  —   —   (3,853)
             
Net Cash Provided (Used) In Financing Activities
  116,293   6,839   (3,923)
             
NET INCREASE (DECREASE) IN CASH
  4,230   1,319   (3,129)
Cash at Beginning of Year  3,486   2,167   5,296 
             
CASH AT END OF YEAR
 $7,716  $3,486  $2,167 
             

140
161

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008 AND 2007(Continued)
NOTE 23 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY(Continued)
             
STATEMENTS OF CASH FLOWS Year Ended December 31, 
  2009  2008  2007 
      (In Thousands)     
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net Income (Loss) $(122,277) $(102,093) $(60,762)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used In Operating Activities:            
Losses (Earnings) of Subsidiaries  118,340   97,040   54,500 
Share-Based Compensation Expense  906   1,036   1,891 
(Increase) Decrease in Other Assets  200   (706)  3,139 
Increase (Decrease) in Other Liabilities  3,311   (2,983)  (208)
Tax Benefit from Exercises of Stock Options  —   —   317 
          
             
Net Cash Provided (Used) In Operating Activities
  480   (7,706)  (1,123)
          
             
CASH FLOWS FROM INVESTING ACTIVITIES:
            
Dividends Received from Hanmi Bank  —   8,500   63,501 
Payments from (to) Hanmi Bank  (6,000)  —   — 
Business Acquisitions, Net of Cash Received  —   —   (1,727)
          
             
Net Cash Provided (Used) By Investing Activities
  (6,000)  8,500   61,774 
          
             
CASH FLOWS FROM FINANCING ACTIVITIES:
            
Proceeds from Exercise of Stock Options and Stock Warrants  —   —   1,164 
Net Proceeds from Issuance of Common Stock in Private Offering  6,839   —   — 
Cash Paid to Acquire Treasury Stock  —   —   (49,971)
Cash Paid to Repurchase Stock Options and Stock Warrants  —   (70)  (2,552)
Cash Dividends Paid  —   (3,853)  (11,574)
          
             
Net Cash Provided (Used) In Financing Activities
  6,839   (3,923)  (62,933)
          
             
NET INCREASE (DECREASE) IN CASH
  1,319   (3,129)  (2,282)
Cash at Beginning of Year  2,167   5,296   7,578 
          
             
CASH AT END OF YEAR
 $3,486  $2,167  $5,296 
          

141

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007(Continued)
NOTE 2422 — QUARTERLY FINANCIAL DATA (UNAUDITED)
 
Summarized quarterly financial data follows:
                                
 Quarter Ended  Quarter Ended 
 March 31 June 30 September 30 December 31  March 31 June 30 September 30 December 31 
 (Dollars in Thousands; Except Per Share Amounts)  (Dollars in thousands; except per share amounts) 
2010:
                
Interest and Dividend Income $38,053  $36,171  $35,675  $34,613 
Interest Expense  10,719   9,875   9,402   8,642 
         
Net Interest Income Before Provision for Credit Losses  27,334   26,296   26,273   25,971 
Provision for Credit Losses  57,996   37,500   22,000   5,000 
Non-Interest Income  7,005   6,677   5,671   6,053 
Non-Interest Expense  26,224   24,766   24,079   21,735 
         
Income (Loss) Before Provision (Benefit) for Income Taxes  (49,881)  (29,293)  (14,135)  5,289 
Provision (Benefit) for Income Taxes  (395)  (36)  442   (23)
         
NET INCOME (LOSS)
 $(49,486) $(29,257) $(14,577) $5,312 
         
EARNINGS (LOSS) PER SHARE:                
Basic $(0.97) $(0.57) $(0.12) $0.04 
Diluted $(0.97) $(0.57) $(0.12) $0.04 
2009:
                 
Interest and Dividend Income $48,015 $47,680 $45,495 $42,957  $48,015  $47,680  $45,495  $42,957 
Interest Expense 24,885 24,544 18,977 14,512   24,885   24,544   18,977   14,512 
                  
 
Net Interest Income Before Provision for Credit Losses 23,130 23,136 26,518 28,445   23,130   23,136   26,518   28,445 
 
Provision for Credit Losses 45,953 23,934 49,500 77,000   45,953   23,934   49,500   77,000 
Non-Interest Income 8,380 7,678 8,213 7,839   8,380   7,678   8,213   7,839 
Non-Interest Expense 18,252 25,703 23,689 22,710   18,252   25,703   23,689   22,710 
                  
 
Income (Loss) Before Provision (Benefit) for Income Taxes  (32,695)  (18,823)  (38,458)  (63,426)
Provision (Benefit) for Income Taxes  (15,499)  (9,288) 21,207  (27,545)
         
Income (Loss) Before Provision for Income Taxes  (32,695)  (18,823)  (38,458)  (63,426)
Provision for Income Taxes  (15,499)  (9,288)  21,207   (27,545)
          
NET INCOME (LOSS)
 $(17,196) $(9,535) $(59,665) $(35,881) $(17,196) $(9,535) $(59,665) $(35,881)
         
          
EARNINGS (LOSS) PER SHARE:                 
Basic $(0.37) $(0.21) $(1.26) $(0.70) $(0.37) $(0.21) $(1.26) $(0.70)
Diluted $(0.37) $(0.21) $(1.26) $(0.70) $(0.37) $(0.21) $(1.26) $(0.70)
 
2008:
 
Interest and Dividend Income $64,970 $59,663 $59,441 $54,109 
Interest Expense 30,773 25,595 23,844 23,570 
         
 
Net Interest Income Before Provision for Credit Losses 34,197 34,068 35,597 30,539 
 
Provision for Credit Losses 17,821 19,229 13,176 25,450 
Non-Interest Income 9,765 9,652 5,328 7,404 
Non-Interest Expense 21,588 129,443 22,235 21,056 
         
 
Income (Loss) Before Provision for Income Taxes 4,553  (104,952) 5,514  (8,563)
Provision for Income Taxes 1,632 595 1,166  (4,748)
         
 
NET INCOME (LOSS)
 $2,921 $(105,547) $4,348 $(3,815)
         
 
EARNINGS (LOSS) PER SHARE: 
Basic $0.06 $(2.30) $0.09 $(0.08)
Diluted $0.06 $(2.30) $0.09 $(0.08)
NOTE 2523 — SUBSEQUENT EVENTS
 
Management has evaluated subsequent events through March 15, 2010, the date of issuance of the financial data included herein. There have been no subsequent events that occurred during such period that would require disclosure in thisForm 10-K or would be required to be recognized in the Consolidated Financial Statements as of December 31, 2009.2010.

142
162

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
HANMI FINANCIAL CORPORATION
HANMI FINANCIAL CORPORATION
 By:         /s/ Jay S. Yoo
Jay S. Yoo 
President and Chief Executive Officer
Date:  March 15, 2010  
Jay S. Yoo
President and Chief Executive Officer
Date:         March 16, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 15, 2010.16, 2011.
   
/s/ Jay S. Yoo
Jay S. Yoo
President and Chief Executive Officer
(Principal Executive Officer)		 /s/ Brian E. Cho
Jay S. Yoo
Brian E. Cho
President and Chief Executive Officer

Executive Vice President and Chief Financial Officer
(Principal Executive Officer)

(Principal Financial and Accounting Officer)
   
/s/ Joseph K. Rho
Joseph K. Rho
Chairman of the Board		 /s/ I Joon Ahn
Joseph K. Rho
I Joon Ahn
Chairman of the Board

Director
   
/s/ John A. Hall
John A. Hall
Director		 /s/ William J. Stolte
John A. HallRichard B. C. Lee

Director
William J. Stolte
Director
   
/s/ Joon Hyung Lee
Joon Hyung Lee
Director		 /s/ Paul (Seon-Hong) Kim
Joon Hyung Lee
Paul (Seon-Hong) Kim
Director

Director

143
163

HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
         
Exhibit
    
Number Document  
 
 3.1 Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated April 19, 2000 (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q, filed with the SEC on November 9, 2010).    
 3.2 Certificate of Second Amendment of Certificate of Incorporation of Hanmi Financial Corporation, dated June, 23, 2004 (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q, filed with the SEC on November 9, 2010).    
 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated May 28, 2009 (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q, filed with the SEC on November 9, 2010).    
 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated July 28, 2010 (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q, filed with the SEC on November 9, 2010).    
 3.5 Amended and Restated Bylaws of Hanmi Financial Corporation, dated April 19, 2000 (Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement onForm S-3 filed with the SEC on February 4, 2010).    
 3.6 Certificate of Amendment to Bylaws of Hanmi Financial Corporation, dated November 21, 2007 (Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement onForm S-3 filed with the SEC on February 4, 2010).    
 4  Specimen stock certificate representing Hanmi Financial Corporation Common Stock    
 4.1 Hanmi Financial Corporation Warrant for the Purchase of Shares of Common Stock, issued to Cappello Capital Corp., dated October 14, 2010 (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on October 14, 2010).    
 10.1 Amended and Restated Trust Agreement of Hanmi Capital Trust I dated as of January 8, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.2 Hanmi Capital Trust I Junior Subordinated Indenture dated as of January 8, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as Exhibit D to Exhibit 10.1) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.3 Hanmi Capital Trust I Guarantee Agreement dated as of January 8, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.4 Hanmi Capital Trust I Form of Common Securities Certificate (included as Exhibit B to Exhibit 10.1) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.5 Hanmi Capital Trust I Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10.1) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.6 Amended and Restated Trust Agreement of Hanmi Capital Trust II dated as of March 15, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    


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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX(Continued)
Exhibit
NumberDocument
3.1
Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation(1)
3.2
Certificate of Second Amendment of Certificate of Incorporation of Hanmi Financial Corporation(1)
3.3
Certificate of Third Amendment of Certificate of Incorporation of Hanmi Financial Corporation(2)
3.4
Amended and Restated Bylaws of Hanmi Financial Corporation(1)
3.5
Certificate of Amendment to Bylaws of Hanmi Financial Corporation dated November 21, 2007(1)
3.6
Certificate of Amendment to Bylaws of Hanmi Financial Corporation dated October 14, 2009(3)
4
Specimen stock certificate representing Hanmi Financial Corporation Common Stock(4)
10.1
Amended and Restated Trust Agreement of Hanmi Capital Trust I dated as of January 8, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein(5)
10.2
Hanmi Capital Trust I Junior Subordinated Indenture dated as of January 8, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.1)(5)
10.3
Hanmi Capital Trust I Guarantee Agreement dated as of January 8, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee(5)
10.4
Hanmi Capital Trust I Form of Common Securities Certificate (included as exhibit B to Exhibit 10.1)(5)
10.5
Hanmi Capital Trust I Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.1)(5)
10.6
Amended and Restated Trust Agreement of Hanmi Capital Trust II dated as of March 15, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein(5)
10.7
Hanmi Capital Trust II Junior Subordinated Indenture dated as of March 15, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.6)(5)
10.8
Hanmi Capital Trust II Guarantee Agreement dated as of March 15, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee(5)
10.9
Hanmi Capital Trust II Form of Common Securities Certificate (included as exhibit B to Exhibit 10.6)(5)
10.10
Hanmi Capital Trust II Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.6)(5)
10.11
Amended and Restated Trust Agreement of Hanmi Capital Trust III dated as of April 28, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein(5)
10.12
Hanmi Capital Trust III Junior Subordinated Indenture dated as of April 28, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.11)(5)
10.13
Hanmi Capital Trust III Guarantee Agreement dated as of April 28, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee(5)
10.14
Hanmi Capital Trust III Form of Common Securities Certificate (included as exhibit B to Exhibit 10.11)(5)
10.15
Hanmi Capital Trust III Form of Preferred Securities Certificate (included as exhibit C to Exhibit 10.11)(5)
10.16
Employment Agreement Between Hanmi Financial Corporation and Hanmi Bank, on the One Hand, and Jay S. Yoo, on the Other Hand, dated as of June 19, 2008(6) †
10.17
Hanmi Financial Corporation 2007 Equity Compensation Plan(7) †
10.18
Hanmi Financial Corporation Year 2000 Stock Option Plan(8) †
10.19
Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan(1) †
10.20
Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan(1) †
10.21
Employment Offer Letter with Brian E. Cho, executed November 1, 2007(9) †
10.22
Securities Purchase Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd.(10)
10.23
Registration Rights Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd.(10)
10.24
First Amendment to the Securities Purchase Agreement, dated July 31, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd.(11)
         
Exhibit
    
Number Document  
 
 10.7 Hanmi Capital Trust II Junior Subordinated Indenture dated as of March 15, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as Exhibit D to Exhibit 10.6) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.8 Hanmi Capital Trust II Guarantee Agreement dated as of March 15, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.9 Hanmi Capital Trust II Form of Common Securities Certificate (included as Exhibit B to Exhibit 10.6) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.10 Hanmi Capital Trust II Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10.6) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.11 Amended and Restated Trust Agreement of Hanmi Capital Trust III dated as of April 28, 2004 among Hanmi Financial Corporation, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and the Administrative Trustees Named Therein, (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.12 Hanmi Capital Trust III Junior Subordinated Indenture dated as of April 28, 2004 entered into between Hanmi Financial Corporation and Deutsche Bank Trust Company Americas, as Trustee (included as exhibit D to Exhibit 10.11) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.13 Hanmi Capital Trust III Guarantee Agreement dated as of April 28, 2004 entered into between Hanmi Financial Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.14 Hanmi Capital Trust III Form of Common Securities Certificate (included as Exhibit B to Exhibit 10.11) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.15 Hanmi Capital Trust III Form of Preferred Securities Certificate (included as Exhibit C to Exhibit 10.11) (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004).    
 10.16 Employment Agreement Between Hanmi Financial Corporation and Hanmi Bank, on the One Hand, and Jay S. Yoo, on the Other Hand, dated as of June 19, 2008 (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2008 filed with the SEC on August 11, 2008).†    
 10.17 Hanmi Financial Corporation 2007 Equity Compensation Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on June 26, 2007).†    
 10.18 Hanmi Financial Corporation Year 2000 Stock Option Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement onForm S-8 filed with the SEC on August 18, 2000).†    
 10.19 Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report onForm 10-K/A for the year ended December 31, 2008 filed with the SEC on April 9, 2009).†    
 10.20 Hanmi Financial Corporation Amended and Restated 2007 Employee Stock Incentive Plan — Restricted Stock Agreement (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report onForm 10-K/A for the year ended December 31, 2008 filed with the SEC on April 9, 2009)†    

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HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX(Continued)
Exhibit
NumberDocument
10.25
Amended and Restated Term Sheet, dated September 14, 2009, by and among Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners LLC(12)
10.26
Second Amendment to the Securities Purchase Agreement, dated September 28, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd.(13)
10.27
First Amendment to the Amended and Restated Term Sheet, dated September 28, 2009, by and between Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners, LLC(13)
10.28
Final Order, dated November 2, 2009, issued to Hanmi Bank by the California Department of Financial Institutions(14)
10.29
Written Agreement, dated November 2, 2009, by and between Hanmi Financial Corporation and Hanmi Bank, on one hand, and the Federal Reserve Bank of San Francisco, on the other hand(14)
14
Code of Ethics(15)
21
Subsidiaries of the Registrant(9)
23Consent of KPMG LLP
31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         
Exhibit
    
Number Document  
 
 10.21 Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report onForm 10-K/A for the year ended December 31, 2008 filed with the SEC on April 9, 2009).†    
 10.22 Employment Offer Letter with Brian E. Cho, executed November 1, 2007 (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on December 3, 2007).†    
 10.23 Securities Purchase Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on June 15, 2009).    
 10.24 Registration Rights Agreement, dated June 12, 2009, by and between Hanmi Financial Corporation and Leading Investments & Securities Co., Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on June 15, 2009).    
 10.25 First Amendment to the Securities Purchase Agreement, dated July 31, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on August 3, 2009).    
 10.26 Amended and Restated Term Sheet, dated September 14, 2009, by and among Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners LLC (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on September 15, 2009).    
 10.27 Second Amendment to the Securities Purchase Agreement, dated September 28, 2009, by and between Hanmi Financial Corporation and Leading Investment & Securities Co., Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on October 2, 2009).    
 10.28 First Amendment to the Amended and Restated Term Sheet, dated September 28, 2009, by and between Hanmi Financial Corporation, Leading Investment & Securities Co., Ltd., and IWL Partners, LLC (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on October 2, 2009).    
 10.29 Final Order, dated November 2, 2009, issued to Hanmi Bank by the California Department of Financial Institutions    
 10.30 Written Agreement, dated November 2, 2009, by and between Hanmi Financial Corporation and Hanmi Bank, on one hand, and the Federal Reserve Bank of San Francisco, on the other hand    
 10.31 Summary of 2010 Executive Retention Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2010 filed with the SEC on August 9, 2010). †    
 10.32 Securities Purchase Agreement, dated as of May 25, 2010, by and between Hanmi Financial and Woori Finance Holdings Co. Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on May 28, 2010).    
 10.33 Amendment No. 1 to the Securities Purchase Agreement, dated as of September [ • ] 2010, by and between Hanmi Financial and Woori Finance Holdings Co. Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on October 1, 2010).    
 10.34 Amendment No. 2 to the Securities Purchase Agreement, dated as of November 30, 2010, by and between Hanmi Financial and Woori Finance Holdings Co. Ltd. (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report onForm 8-K filed with the SEC on November 30, 2010).    
 10.35 Form of Indemnification Agreement    
 14  Code of Ethics (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report onForm 10-K for the year ended December 31, 2004 filed with the SEC on March 16, 2005).    

166

 
HANMI FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (Continued)
         
Exhibit
    
Number Document  
 
 21  Subsidiaries of the Registrant (Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report onForm 10-K for the year ended December 31, 2007 filed with the SEC on February 29, 2008).    
 23  Consent of KPMG LLP    
 31.1 Certification of Chief Executive Officer pursuant toRule 13a-14(a) andRule 15d-14(a) of the Securities Exchange Act, as amended    
 31.2 Certification of Chief Financial Officer pursuant toRule 13a-14(a) andRule 15d-14(a) of the Securities Exchange Act, as amended    
 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
(1)†Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 13, 2009.
(2)Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed with the SEC on August 11, 2009, as amended November 18, 2009.
(3)Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-3 filed with the SEC on February 4, 2010.
(4)Previously filed and incorporated by reference herein from Hanmi Financial Corporation’s Registration Statement on Form S-4 filed with the SEC on March 20, 2000.
(5)Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 filed with the SEC on August 9, 2004.
(6)Previously filed and incorporated by reference herein from Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed with the SEC on August 11, 2008.
(7)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on June 26, 2007.
(8)Previously filed and incorporated by reference herein from Hanmi Financial’s Registration Statement on Form S-8 filed with the SEC on August 18, 2000.
(9)Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 29, 2008.
(10)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on June 15, 2009.
(11)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on August 3, 2009.
(12)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on September 14, 2009.
(13)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on October 2, 2009.
(14)Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K filed with the SEC on November 5, 2009.
(15)Previously filed and incorporated by reference herein from Hanmi Financial’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 16, 2005.
†Constitutes a management contract or compensatory plan or arrangement.

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