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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number 000-30421

HANMI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        As of September 30, 2002, there were 13,760,841 outstanding shares of the issuer's Common Stock, with a par value of $0.001 per share.

FORM 10-Q

INDEX

HANMI FINANCIAL CORPORATION

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HANMI FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See accompanying notes to consolidated financial statements.

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HANMI FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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HANMI FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Hanmi Financial Corporation

        Hanmi Financial Corporation ("Hanmi Financial" or the "Company") is a Delaware corporation incorporated on March 14, 2000 pursuant to a Plan of Reorganization and Agreement of Merger to be the holding company for Hanmi Bank (the "Hanmi Bank"). The Company became the holding company for Hanmi Bank in June 2000, and is subject to the Bank Holding Company Act of 1956, as amended.

        Hanmi Bank, the subsidiary of the Company, was incorporated under the laws of the State of California on August 24, 1981, and was licensed by the California Department of Financial Institutions on December 15, 1982. Hanmi Bank's deposit accounts are insured under the Federal Deposit Insurance Act up to the applicable limits thereof, and Hanmi Bank is a member of the Federal Reserve System. Hanmi Bank's headquarters office is located at 3660 Wilshire Boulevard, Penthouse Suite "A", Los Angeles, California 90010.

        Hanmi Bank is a community bank conducting general business banking with its primary market encompassing the multi-ethnic population of the Los Angeles, Orange and San Diego counties. Hanmi Bank's full-service offices are located in business areas where many of the businesses are run by immigrants and other minority groups. Hanmi Bank's client base reflects the multi-ethnic composition of these communities. Hanmi Bank currently has twelve full-service branch offices located in Los Angeles, Orange and San Diego counties. Of the twelve offices, Hanmi Bank opened nine as de novo branches and acquired the other three through acquisition.

Note 2. Basis of Presentation

        In the opinion of management, the consolidated financial statements of Hanmi Financial reflect all the material adjustments necessary for a fair presentation of the results for the interim periods ended September 30, 2002 and 2001 but are not necessarily indicative of the results which will be reported for the entire year. In the opinion of management, the aforementioned consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America.

        Certain reclassifications were made to the prior period presentation to conform to the current period's presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.

Note 3. Critical Accounting Policies

        The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require management to make estimates and judgements that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

        Accounting for the allowance for loan losses involves significant judgements and assumptions made by management, which has a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgements and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading "Allowance for Loan Losses."

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Note 4. Accounting Matters

        On July 30, 2002, FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under Statement No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event leaves the company little or no discretion to avoid transferring or using the assets in the future. Previous accounting guidance was provided by the Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company expects that adoption of SFAS No. 146 will not have a material impact on the Company's results of operations or financial condition.

        In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds SFAS No. 4 that required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Henceforth, those gains and losses from extinguishment of debt are to be classified in accordance with the criteria in APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 64 which amended SFAS No. 4 is no longer necessary with the rescission of SFAS No 4. SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is effective for financial statements for period beginning after May 15, 2002, and earlier adoption is recommended. Upon adoption, the Company is required to reclassify prior period items that do not meet the extraordinary classification criteria in APB 30. The Company adopted SFAS No. 145 effective May 15, 2002. Adoption of SFAS No. 145 did not have any impact on the results of operations or financial condition of the Company.

        The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities", as amended by SFAS Nos. 137 and 138, as of January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company entered into an interest rate swap during the quarter ended June 30, 2002. For the nine months ended September 30, 2002, the changes in fair value of this derivative recognized $1.4 million through earnings. The swap was terminated during the second quarter of 2002, and there were no separate derivatives existing as of September 30, 2002.

        The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") as of January 1, 2002. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 141 requires, upon adoption of Statement 142, that the Company evaluate its existing goodwill that was acquired in a prior purchase business combination, and make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill.

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        SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of January 1, 2002, the date of adoption, the Company had unamortized goodwill in the amount of $1.8 million and unamortized identifiable intangible assets in the amount of $341,000. There was no goodwill amortization taken and no impairment of goodwill and intangible assets as of September 30, 2002.

        In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. The statement is effective for fiscal years beginning after December 15, 2001 and must be adopted as of the beginning of this fiscal year. The Company adopted SFAS No. 144 as of January 1, 2002, and there was no material impact on the Company's consolidated financial statements.

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143"), which requires that the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred or reasonable estimate of fair value can be made. The associated asset retirement cost would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is recorded at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. Management has determined that the impact of the adoption of SFAS 143 is immaterial.

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Item 2. Management's Discussion and Analysis of Recent Developments

        The following is management's discussion and analysis of the major factors that influenced the Company's results of operations and financial condition for the three and nine months ended September 30, 2002. This analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and with the unaudited financial statements and notes as set forth in this report.

        The following table sets forth-certain selected financial data concerning the Company for the periods indicated:

(1)

Calculations are based on annualized net income, sum of trailing 12 months.

(2)

Represents the ratio of non-interest expense to the sum of net interest income before provision for loan losses and total non-interest income excluding gains and losses recognized from securities.

(3)

Net interest margin is calculated by dividing annualized net interest income by total average interest-earning assets.

(4)

The required ratios for a "well-capitalized" institution are 5% leveraged capital, 6% tier 1 risk-based capital and 10% total risk-based capital.

(5)

Nonperforming assets consist of nonperforming loans, which include nonaccrual loans, loans past due 90 days or more and still accruing interest, restructured loans, and other real estate owned.

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Forward-Looking Information

        Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the Company involves inherent risks and uncertainties. Risks and uncertainties include possible future deteriorating economic conditions in the Company's areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available for sale securities declining significantly in value as interest rates rise; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. For additional information concerning these factors, see "Interest Rate Risk Management", and "Liquidity and Capital Resources" contained in the Company's annual 10-K.

Dividends

        On February 21, 2002, the Company declared a 9% stock dividend payable on April 5, 2002 to shareholders of record at the close of business on March 7, 2002. The shares and share data have been retroactively restated to reflect this 9% stock dividend. On February 28, 2001, the Company declared a 12% stock dividend payable on April 5, 2001 to shareholders of record at the close of business on March 14, 2001. The shares and per share data have been retroactively restated to reflect the 12% year 2001 stock dividend.

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Results of Operations

        The Company's net income for the quarter ended September 30, 2002 was $5.1 million or $0.37 per diluted share compared to $4.4 million or $0.32 per diluted share for the quarter ended September 30, 2001. The increase in net income for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001 was primarily due to the increase in net interest income of $1.2 million which resulted from an increase in loan volume and reduced interest expense.

        For the nine months ended September 30, 2002, net income decreased by $343,000 or 2.73% to $12.2 million from $12.6 million for the same period in 2001. The decrease was due to an impairment charge of $4.4 million on a Worldcom, Inc. bond during the second and third quarter of 2002, which was partially off-set by gain on sale of securities of $1.8 million and income recognized from increase in fair value of an interest swap of $1.4 million. As a result, the annualized return on average assets was 1.29% for the third quarter of 2002 compared to a return on average assets of 1.55% for the same period in 2001, a decrease of 26 basis points. The annualized return on average equity was 14.96% for the third quarter of 2002, compared to a return on average equity of 17.97% for the same period in 2001, a decrease of 301 basis points.

Net Interest Income

        The principal component of the Company's earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. The net interest spread is the yield on average interest-earning assets less the average cost of interest-bearing deposits and borrowed funds.

        For the quarter ended September 30, 2002, the Company's net interest income before provision for loan losses was $12.8 million. This represented an increase of $1.2 million or 10.3% over net interest income of $11.6 million for the same quarter in 2001. For the nine months ended September 30, 2002, net interest income before provision for loan losses was $35.8 million. This represented an increase of $3.1 million or 9.5% over net interest income before provision of loan losses of $32.7 million for the nine months ended September 30, 2001.

        The interest rate spread increased to 3.32% for the nine months ended September 30, 2002, from 3.10% for the same period in 2001. The change was due to a greater reduction on interest paid on deposits as term deposits repriced. However, the net interest margin decreased to 4.07% for the nine months ended September 30, 2002, from 4.39% for the same period in 2001 due to an increase in the volume of interest earning assets with lower interest rates.

        Total interest income decreased $0.8 million or 4.1% to $18.6 million for the three months ended September 30, 2002 from $19.4 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, total interest income decreased by $7.8 million or 13.1% to $51.6 million from $59.4 million for the same period in 2001. The decrease was primarily the result of a decrease in interest rates, which was off set by a positive impact of an increase in volume of interest earning assets. The yield on average interest-earning assets decreased to 5.86% for the nine months ended September 30, 2002, from a yield of 7.97% for the nine months ended September 30, 2001. This decrease was primarily due to a decrease of the prime interest rate throughout the rest of the year 2001. Average interest earning assets were $1.2 billion for the nine months ended September 30, 2002, which represented an increase of $179.8 million or 18.1% from average of $994.6 million average interest earning assets for the same period of 2001.

        The Company's interest expense on deposits for the quarter ended September 30, 2002 decreased by approximately $2 million or 25.6% to $5.8 million from $7.8 million for the quarter ended September 30, 2001. For the nine months ended September 30, 2002, the interest expenses decreased

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by $10.9 million or 40.8% to $15.8 million from $26.7 million for the same period in 2001. The decrease reflected a decrease in the interest rates paid to depositors. The cost of average interest-bearing liabilities decreased to 2.54% for the nine months ended September 30, 2002, compared to a cost of 4.87% for the same period in 2001. Overall interest on deposits decreased mainly due to repricing of interest rates on certificates of deposits when they were renewed at current low interest rates. Average interest-bearing liabilities were $831.7 million for the nine months ended September 30, 2002, which represented an increase of $100.5 million or 13.7% from average interest-bearing liabilities of $731.2 million for the nine months ended September 30, 2001.

        The table below represents the average yield on each category of interest-earning assets, average rate paid on each category of interest-bearing liabilities, and the resulting interest rate spread and net yield on interest-earning assets for periods indicated. All average balances are daily average balances.

(1)

Loan fees have been included in the calculation of interest income. Loan fees were approximately $2.2 million and $1.7 million for the nine months ended September 30, 2002 and 2001, respectively. Loans are net of the allowance for loan losses, deferred fees and related direct costs.

(2)

Yields on tax-exempt income have not been computed on a tax equivalent basis.

(3)

Represents the average rate earned on interest-bearing assets less the average rate paid to interest-bearing liabilities

(4)

Represents annualized net interest income as percentage of average interest-earning assets.

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        The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

Provision for loan losses

        For the quarter ended September 30, 2002, the Company made an additional provision for loan losses of $1.1 million, an increase of $350,000 or 50% compared to $700,000 for the same period in 2001. For the nine months ended September 30, 2002, the provision for loan losses amounted to $3.2 million, an increase of $2.2 million or 220% compared to $1 million for the same period in 2001. The increase was mainly due to an increase in loan volume. The Company's management believes that the allowance is adequate for the inherent losses at September 30, 2002. (See Allowance and Provision for Loan Losses)

Non-interest Income

        Non-interest income includes revenues earned from sources other than interest income. It is primarily comprised of service charges and fees on deposit accounts, fees charged on trade finance, and gain on sale of loans and investment securities. Non-interest income increased by $440,000 to $5.1 million for the quarter ended September 30, 2002 from $4.7 million for the same period in 2001. The service charges on deposits increased $146,000 or 6.6% to $2.4 million compared to $2.2 million for the same quarter in 2001 due to increase in number of accounts from expanded branch network. Gain on sale of loans increased by $217,000 or 59.3% to $583,000 compared to $366,000 for the same quarter in 2001. The increase was offset by the decrease in gain on sale of securities of $199,000. Trade finance fees increased by $116,000 or 22.8% to $626,000 from $510,000 for the same period in 2001. Income recognized from the bank owned life insurance was added by $141,000 for the quarter ended September 30, 2002.

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        For the nine months ended September 30, 2002, non-interest income increased by $2.7 million or 21.5% to $15.3 million from $12.6 million for the same period in 2001. The increase was primarily due to an income recognized from the change in fair value of interest rate swap of $1.4 million, an increase in gain on the sale of loans of $571,000, trade finance fees of $408,000 and income recognized from Bank owned life insurance of $411,000.

        For the nine months ended September 30, 2002, the gain on sale of loan increased by $571,000 or 63.8% to $1.5 million from $895,000 for the same period in 2001. The Company sells the guaranteed portion of the SBA loans in the government securities secondary markets, while the Company retains the servicing rights. During the year 2002, the secondary market for these loans provided a favorable premium compared to the prior period and, therefore, the Company sold SBA loans in its portfolio. The Company currently plans to keep selling a significant number of its SBA loans in coming quarters as long as the secondary market is favorable.

        For the nine months ended September 30, 2002, trade finance fees increased by $408,000 or 29.1% to $1.8 million from $1.4 million for the same period in 2001. The increase was primarily due to growing activity in international trade as countries in the Asian-Pacific region are recovering from the economic crisis.

        At December 31, 2001, the Company invested $10 million in bank owned life insurance ("BOLI"). BOLI involves the purchase of life insurance by the Company on a chosen group of employees. The Company is the owner and beneficiary of the policies. During 2002, the increase in cash surrender value on life insurance was recognized in the amount of $141,000 for the quarter and $411,000 for the nine months ended September 30, 2002.

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Non-interest Expenses

        Non-interest expenses for the third quarter of 2002 increased approximately $794,000 or 9.7% to $9 million from $8.2 million for the same period in 2001. For nine months ended September 30, 2002, non-interest expense increased by $6 million or 26% to $29.1 million from $23.1 million for the same period in 2001. The increase was primarily due to the impairment charge made on investment of $4.4 million, and expanding of branch network.

        Salaries and employee benefits expenses for the third quarter of 2002 increased approximately $459,000 or 11.2% to $4.6 million from $4.1 million for the same period in 2001. This increase was primarily due to addition of new employees at the new branch in Irvine and additional staffs to provide additional services offered to customers, such as non-deposit products and credit cards. For the nine months ended September 30, 2002, the expense increased by $1.2 million or 10.3% to $13.1 million from $11.9 million for the same period in 2001.

        The occupancy and equipment expenses for the third quarter of 2002 increased $124,000 or 13.1% to $1.1 million from $950,000 for the same period in 2001. This increase is also a result of the Company's recent expansion of a new branch as well as annual adjustment of existing leases for other branch premises. For the nine months ended September 30, 2002, the expense increased by $384,000 or 13.6% to $3.2 million from $2.8 million for the same period in 2001.

        Data processing expense for the third quarter of 2002 increased by $105,000 or 17.6% to $703,000 from $598,000 for the same period in 2001. The increase was primarily due to the expanded branch net work and increase in volume of transaction accounts. For the nine months ended September 30, 2002, the expense increased by $355,000 or 20.7% to $2.1 million from $1.7 million for the same period in 2001.

        Professional fees for the third quarter of 2002 decreased by $325,000 or 57.4% to $241,000 from $566,000 for the same period in 2001. The decrease was mainly due to the cost of due diligence work done for California Center Bank for potential acquisition in year 2001. For the nine months ended September 30, 2002, the expense decreased by $216,000 or 21.2% to $802,000 from $1.0 million for the same period in 2001.

        At September 30, 2002, an additional impairment charge of $456,250 was made to the Worldcom Inc. bond. The charge amount was calculated based on the market value at September 30, 2002. Management concluded that the charge should be made since the lower value had been sustained

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for an extended period of time. As of September 30, 2002, $4.4 million has been charged off from the original of $5 million leaving the bond at a $593,750 carrying value.

        The breakdown of non-interest expense by category is reflected below:

Income Taxes

        The effective tax rate was reduced to 35 percent for the third quarter and for the nine months ended September 30, 2002. This compares with 40.7 percent for the third quarter and 40.6 percent for the nine months ended September 30, 2001. The lower tax rates, compared with prior periods, are due primarily to the formation of a special purpose subsidiary, a real estate investment trust ("REIT"), which provides state income tax benefits and flexibility to raise additional capital in a tax efficient manner. Management currently anticipates its effective tax rate may approximate the 34 percent to 36 percent ranges for 2002.

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Financial Condition

Summary of Changes in Balance Sheets: September 30, 2002 compared to December 31, 2001

        At September 30, 2002, the Company's total assets increased by $266.4 million or 23% to $1,425.2 million from $1,158.8 million at December 31, 2001. Loans, net of unearned loan fees and the allowance for loan losses, totaled $955.3 million at September 30, 2002, which represents an increase of $134.2 million or 16.3% from $821.1 million at December 31, 2001. Total deposits also increased by $213.5 million or 20.5% to $1,255.9 million at September 30, 2002 from $1,042.4 million at December 31, 2001.

Investment Security Portfolio

        At September 30, 2002, the Company classified its securities as held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) 115. Those securities that the Company has the ability and intent to hold to maturity are classified as "held-to-maturity securities". All other securities are classified as "available-for-sale". The Company owned no trading securities at September 30, 2002. Securities classified as held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available-for-sale securities are stated at fair value. The securities currently held by the Company are U.S. agencies, corporate bonds, municipal bonds, mortgage-backed securities, collateralized mortgage obligations and asset-backed securities.

        As of September 30, 2002, held-to-maturity securities totaled $10.1 million and available-for-sale securities totaled $289.7 million, compared to $17.6 million and $195.4 million at December 31, 2001, respectively.