Hanmi Financial Corporation (HAFC)

Executive Summary / Key Takeaways

• The USKC Initiative Creates a Defensible Moat: Hanmi's Corporate Korea strategy, launched with a Seoul office in late 2024, has grown to $910 million in loans and over $1 billion in deposits, representing 14% and 15% of respective portfolios. This unique corridor into the U.S. market for Korean companies provides a growth vector that regional competitors cannot easily replicate, driving C&I loan production up 296% in Q3 2025.

• Strategic Portfolio Transformation Drives Margin Inflection: Hanmi is actively reducing CRE concentration while scaling C&I, SBA, and residential lending, producing a 48% year-over-year increase in Q3 net income to $22.1 million. This shift, combined with disciplined deposit cost management, expanded net interest margin 15 basis points to 3.22%—a level that supports sustained profitability even if loan growth moderates.

• Proactive Credit Management Creates "Very Clean" Asset Quality: Management's aggressive approach to portfolio management—including a $8.6 million charge-off on a syndicated CRE office loan and strategic payoff of undesirable credits—reduced criticized loans by $122.8 million year-to-date. This positions Hanmi to weather potential CRE headwinds while peers may face latent credit issues.

• Valuation Offers Asymmetric Risk/Reward: Trading at $29.01 with a P/E of 12.1x and price-to-book of 1.11x, Hanmi trades at a discount to larger regional peers like East West Bancorp (EWBC) despite superior near-term earnings momentum. The 3.72% dividend yield and 5.21x price-to-free-cash-flow multiple provide downside support while the USKC initiative offers underappreciated upside.

Setting the Scene: A Niche Bank at an Inflection Point

Hanmi Financial Corporation, founded in 1982 and headquartered in Los Angeles, California, operates as a traditional bank holding company with a twist. While its $7.86 billion asset base and core banking activities—accepting deposits and lending—appear conventional, the company has carved out a defensible niche serving Korean-American communities and, more recently, Korean companies expanding into the United States. This positioning distinguishes Hanmi from the dozens of regional banks competing for share in California and Texas.

The company's recent history reveals a deliberate strategic pivot. In late 2024, Hanmi opened a representative office in Seoul, South Korea, launching its USKC (U.S. Korea Corridor) initiative to formalize relationships with Korean subsidiaries entering the U.S. market. This move complements existing Korea desks across several American cities and represents more than geographic expansion—it creates a captive pipeline of cross-border commercial clients who require specialized banking services, from trade finance to commercial real estate acquisition. The strategy gained traction in March 2025 with the opening of a branch in Duluth, Georgia, a rapidly growing area with the third-largest Korean community in the United States and a hub for Korean manufacturing investment in automobiles and clean energy.

Hanmi operates in a competitive landscape dominated by larger Asian-American focused banks. East West Bancorp leverages its $70 billion asset base and U.S.-China trade finance expertise, while Cathay General Bancorp (CATY) targets Chinese-American communities with its $23 billion balance sheet. Hope Bancorp (HOPE), at $18 billion, competes directly for Korean-American market share. All three dwarf Hanmi's scale, yet none have replicated Hanmi's integrated Seoul-to-U.S. corridor. This structural difference matters because it provides Hanmi with a unique source of low-cost deposits and high-quality C&I loans that are less rate-sensitive than typical commercial relationships.

Technology, Products, and Strategic Differentiation

Hanmi's competitive advantage rests on three pillars: the USKC initiative, SBA lending expertise, and a relationship banking model that prioritizes cultural fluency over transaction volume. The USKC strategy functions as a complete ecosystem rather than a product line. Korean companies entering the U.S. market face unique challenges—regulatory compliance, real estate acquisition, supply chain financing—that generic regional banks cannot efficiently address. Hanmi's Seoul office provides direct access to decision-makers in Korea, while its U.S. network offers localized execution. This two-way bridge creates switching costs that are difficult for competitors to overcome, as evidenced by USKC deposits exceeding $1 billion for the first time in Q3 2025, representing 17% of total demand deposits.

The company's SBA Preferred Lender status represents another underappreciated moat. Hanmi consistently produces $45-55 million in quarterly SBA loans, selling the guaranteed portions into the secondary market for gains of $1.9-2.2 million per quarter. SBA lending provides non-interest income, which diversifies revenue away from spread-based earnings, while the government guarantee mitigates credit risk. During economic uncertainty, this program offers a stable earnings stream that many peers lack.

Digital investments, while modest compared to money-center banks, target specific operational bottlenecks. Hanmi deployed a new loan origination system and online account opening platform in 2024, aiming to improve efficiency rather than compete on consumer-facing technology. The strategy reflects management's recognition that Hanmi's target customers—small and medium-sized Korean businesses—value relationship-based service over app-based convenience. This focus on operational efficiency contributed to the efficiency ratio declining to a two-year low of 52.65% in Q3 2025, demonstrating that technology investments can enhance profitability without requiring massive R&D budgets.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

Hanmi's Q3 2025 results provide clear evidence that its strategic initiatives are translating into financial outperformance. Net income of $22.1 million ($0.73 per diluted share) increased 48% from $14.9 million ($0.49) in the prior year, with an $11 million increase in net interest income and a $1.4 million increase in non-interest income contributing to this growth. The net interest margin expanded 15 basis points to 3.22%, a critical inflection point that validates management's deposit cost management strategy. This expansion occurred because average loan yields increased 10 basis points while average rates paid on interest-bearing deposits decreased 8 basis points, a spread improvement that directly boosts profitability.

The loan portfolio reflects the strategic shift away from CRE concentration. Total loans grew 4.4% year-to-date to $6.46 billion, with C&I production surging 296% in Q3 to $211 million. This increase was not a one-time event but rather the culmination of investments in commercial banking teams and USKC momentum. For the nine months ended September 30, 2025, C&I production reached $316 million, already exceeding the full-year 2024 total of $275 million. Meanwhile, CRE production grew a more modest 58% quarter-over-quarter to $177 million, and management explicitly stated the goal of reducing CRE as a percentage of the total portfolio. This mix shift matters because C&I loans typically carry higher yields and lower loss rates than CRE, particularly office properties, which have faced structural headwinds.

Deposit dynamics reveal disciplined pricing strategy. Total deposits increased 5.1% year-to-date to $6.77 billion, with non-interest-bearing deposits maintaining a stable 30.8% of the total. The average cost of interest-bearing deposits fell 71 basis points year-over-year to 3.56%, and management noted that October month-to-date rates had already declined an additional 23 basis points on savings and money market accounts. This cost reduction is not accidental—Hanmi has been strategically repricing maturing CDs, retaining 88% of $680 million in retail CDs that rolled off at 4.69% while repricing them at 3.93%, a 76 basis point improvement. As the Fed continues cutting rates, this tailwind should persist, supporting margin expansion into 2026.

Credit quality metrics validate management's "very clean asset quality" claim. Nonperforming assets represent just 0.27% of total assets, and the allowance for credit losses stands at 1.07% of loans. The $8.6 million charge-off on a $20 million syndicated CRE office loan in Q2 2025, while painful, demonstrates proactive risk management rather than systemic weakness. This demonstrates Hanmi's willingness to absorb short-term earnings volatility to maintain long-term asset quality, a discipline that many peers lack. Special mention loans decreased $122.8 million year-to-date through upgrades, paydowns, and amortization, while classified loans increased only $2.9 million despite the CRE charge-off.

Outlook, Management Guidance, and Execution Risk

Management's guidance for the remainder of 2025 reflects confidence in the strategic trajectory while acknowledging execution risks. Hanmi now targets mid-single-digit loan growth for the full year, up from the previous forecast of low-to-mid-single-digit growth. This increase is supported by a loan pipeline similar to Q3's robust production, though management candidly admits that payoff activity remains unpredictable. The guidance signals that the C&I and USKC investments are delivering tangible results, not just temporary volume spikes.

The company plans to continue scaling its C&I, residential mortgage, and SBA portfolios while broadening its core deposit base. Residential mortgage production increased 23% quarter-over-quarter to $103 million in Q3, with sales into the secondary market generating $1.2 million in gains. SBA production remained within the $45-50 million quarterly target range, providing consistent non-interest income. These segments offer diversification away from CRE and typically exhibit lower credit volatility during economic downturns.

Execution risks center on three areas. First, the USKC initiative faces headwinds from tariff uncertainty, with some customers adopting a "wait-and-see" approach. However, management notes that roughly one-third of USKC customers are Tier 1 and Tier 2 automotive suppliers producing domestically in the Georgia-Alabama corridor, making them less vulnerable to trade disruptions. This selective customer base provides resilience that generic commercial lenders lack. Second, competition for deposits remains fierce, with management acknowledging that CD pricing is "still very competitive" despite Fed rate cuts. Hanmi's relationship banking model helps retain customers without being the rate leader, but margin pressure could emerge if larger competitors aggressively price deposits. Third, the digital transformation requires ongoing investment, and any missteps could impair the efficiency gains that drove the ratio to 52.65%.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to Hanmi's investment thesis is a deterioration in credit quality beyond the proactive management that has defined recent quarters. While the CRE office loan charge-off appears isolated, the company still holds a $550 million office portfolio with approximately $200 million maturing in 2025. Management has reviewed these maturing loans and sees "no potential issue at this time," but commercial real estate valuations remain under pressure from elevated interest rates and changing work patterns. If a broader CRE downturn emerges, Hanmi's smaller scale and higher concentration relative to $70 billion EWBC could amplify losses. The asymmetry here is that while Hanmi's proactive approach has kept nonperforming assets at just 0.27% of total assets, a systemic CRE shock would hit the bank's capital harder than more diversified peers.

USKC execution risk represents a second critical factor. The initiative's success depends on continued Korean foreign direct investment into the U.S., which could slow if geopolitical tensions escalate or if the Korean economy weakens. Management's September 2025 trip to Korea and participation in economic forums demonstrates commitment, but the 8.2% quarter-over-quarter growth in USKC loans could decelerate if Korean companies delay expansion plans. The positive asymmetry is that Hanmi has already built the infrastructure—Seoul office, U.S. banking teams, and correspondent relationships—creating a first-mover advantage that would be difficult for competitors to replicate quickly.

Deposit cost management, while currently a tailwind, could reverse if the Fed pauses rate cuts or if inflation resurges. Hanmi's average cost of interest-bearing deposits at 3.56% remains above its 3.22% net interest margin, indicating continued pressure on funding costs relative to earning asset yields. Larger competitors like EWBC and CATY with more diversified funding sources might better weather such a scenario, putting Hanmi at a relative disadvantage.

Finally, the competitive landscape poses ongoing threats. East West Bancorp's scale and trade finance expertise, Cathay General's deposit base, and Hope Bancorp's similar Korean-American focus all pressure Hanmi's market share. Management's comment that "deposit competition has been always fierce" acknowledges this reality. However, Hanmi's niche focus and USKC differentiation provide some protection against commoditization. The risk is that larger competitors could replicate elements of the Korean corridor strategy, though the cultural and operational barriers to building a Seoul office and cross-border expertise are significant.

Valuation Context: Positioning Relative to Fundamentals

At $29.01 per share, Hanmi trades at 12.1 times trailing earnings and 1.11 times book value, metrics that appear modest relative to both historical banking multiples and peer valuations. East West Bancorp commands 12.5 times earnings and 1.82 times book, while Cathay General trades at 11.6 times earnings and 1.18 times book. Hope Bancorp, despite weaker profitability, trades at 0.65 times book but a much higher 29.5 times earnings due to depressed net income. Hanmi's price-to-free-cash-flow ratio of 5.21x stands out as particularly attractive, especially when compared to EWBC's 12.15x and CATY's 8.75x, suggesting the market may be undervaluing Hanmi's cash generation capacity.

The 3.72% dividend yield provides income support while investors wait for the USKC strategy to fully mature. With a payout ratio of 44.17%, the dividend appears sustainable and could grow if earnings continue expanding.

Return on equity of 10.69% trails EWBC's 15.53% and CATY's 10.63%, reflecting Hanmi's smaller scale and lower leverage, but the trend is positive with ROE improving from 7.55% in Q3 2024 to 10.69% in Q3 2025.

Enterprise value to revenue of 3.42x positions Hanmi at a discount to EWBC's 4.91x but premium to HOPE's 2.59x, appropriately reflecting its growth trajectory and asset quality. The bank's capital ratios exceed well-capitalized requirements, providing capacity for continued loan growth and potential share repurchases. In Q3 2025 alone, Hanmi repurchased 199,698 shares at $23.45, signaling management's confidence that the stock remains undervalued relative to intrinsic worth.

Conclusion: A Niche Player at a Strategic Inflection Point

Hanmi Financial has engineered a rare combination in regional banking: a defensible strategic moat through its USKC initiative, improving margins via disciplined deposit cost management, and proactive credit quality that positions it ahead of potential CRE headwinds. The 48% year-over-year increase in Q3 net income, driven by a 15 basis point NIM expansion and 296% surge in C&I production, demonstrates that the strategy is translating into financial results. While the bank's $7.86 billion asset base remains modest compared to competitors like East West Bancorp, this smaller scale allows for more agile execution and targeted relationship building that larger institutions cannot replicate efficiently.

The investment thesis hinges on two variables: continued momentum in the USKC corridor and maintenance of the bank's "very clean" asset quality as the portfolio mix shifts. If Hanmi can sustain mid-single-digit loan growth while reducing CRE concentration, the valuation gap relative to peers should narrow, particularly as return on equity approaches the low-teens range. The 3.72% dividend yield and active share repurchase program provide downside mitigation, while the unique Korean corridor offers upside that is not priced into the current 12.1x earnings multiple. For investors seeking exposure to a regional bank with a differentiated growth strategy and improving profitability, Hanmi Financial presents an asymmetric risk/reward profile at current levels.