Executive Summary / Key Takeaways

• Hanmi Financial (NASDAQ: HAFC) is executing a relationship-driven banking strategy focused on diversifying its loan portfolio towards Commercial & Industrial (C&I) and expanding its deposit base, particularly within the growing U.S.-Korea Connection (USKC) market.
• Recent financial performance shows resilience, with Q1 2025 net income increasing 17% year-over-year, driven by net interest margin expansion (up 11 bps to 3.02%) fueled by lower funding costs and disciplined expense management (efficiency ratio improved to 55.69%).
• Asset quality remains a key focus, though nonperforming assets increased in Q1 2025 primarily due to a single syndicated CRE office loan ($20M), for which a specific reserve ($6.2M) has been provided; management expresses confidence in the overall portfolio quality and mitigation strategies.
• Strategic initiatives like the new Seoul representative office and the Duluth, Georgia branch opening are designed to deepen USKC relationships and capture growth in key markets, contributing to deposit and C&I loan expansion.
• Management guides for low to mid-single-digit loan growth in 2025, balancing production pipelines with expected payoffs, while continuing to leverage loan sales (SBA, residential mortgage) for fee income and balance sheet management.

A Foundation of Relationships: Hanmi's Strategic Blueprint

Hanmi Financial, through its primary subsidiary Hanmi Bank, operates as a traditional regional bank, deeply rooted in the acceptance of deposits and the lending and investing of money. For over 40 years, the bank has served its communities, building a business model centered on personalized, relationship-driven banking. This approach is not merely operational; it is the foundational strength that guides Hanmi's strategic responses to the dynamic market environment and differentiates it within the competitive landscape.

Hanmi operates within the U.S. regional banking sector, competing directly with institutions like East West Bancorp (EWBC), Cathay General Bancorp (CATY), and Pacific Premier Bancorp (PPBI), as well as indirectly with fintech firms encroaching on traditional banking services. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Hanmi holds an estimated 0.2-0.3% aggregate market share. Its strategic positioning leverages a strong community-focused brand, particularly within ethnic markets, and regulatory licenses for specialized lending like SBA loans. These factors contribute to customer loyalty and enable faster loan approvals in targeted segments compared to some rivals.

However, Hanmi faces competitive pressures. Larger peers like EWBC possess greater scale and have invested heavily in digital transformation, potentially offering faster processing speeds and lower operating costs per unit. CATY, while similar in niche focus, has demonstrated streamlined back-office operations leading to cost advantages. PPBI's aggressive M&A strategy allows for faster market expansion. Indirect competitors, such as fintech firms, challenge traditional banking with potentially cheaper and faster digital alternatives, particularly impacting small business services.

In response to these dynamics, Hanmi's strategy is multifaceted: diversify the loan portfolio away from a heavy concentration in Commercial Real Estate (CRE) towards Commercial & Industrial (C&I) lending, expand the core deposit base, target deposit-rich business verticals, and optimize its geographic footprint through strategic branch actions. This strategy is informed by a history of targeted acquisitions, such as the equipment financing portfolio in 2016 and the assumption of subordinated debentures in 2014, which contributed to asset diversification.

Integral to this strategy are investments in technology. Hanmi has implemented a new loan origination system and an online account opening system. The stated goals of these investments are to drive operational efficiencies, improve the efficiency of underwriting and closing commercial loans, and enhance the customer experience. Specific quantifiable performance metrics for these new systems are not detailed. This is particularly important in a competitive environment where rivals are leveraging digital tools for efficiency gains. Hanmi's ongoing efforts in this area are crucial to narrowing potential gaps in operational cost and processing speed relative to more digitally advanced competitors.

Performance Reflecting Strategic Execution

Hanmi's recent financial performance provides insight into the early impacts of its strategic focus amidst prevailing economic conditions. For the first quarter of 2025, the company reported net income of $17.7 million, or $0.58 per diluted share. This represents a notable 17% increase in net income compared to the same period in 2024, driven primarily by a $4.4 million increase in net interest income and a $1.5 million decrease in noninterest expense.

Net interest income reached $55.1 million in Q1 2025, contributing to a third consecutive quarter of net interest margin expansion. The net interest margin, on a taxable equivalent basis, increased by 11 basis points to 3.02% from 2.91% in Q4 2024. This expansion was predominantly fueled by a decrease in interest expense, particularly on deposits. Deposit interest expense declined by 6.6% quarter-over-quarter, with the average rate paid on interest-bearing deposits falling 27 basis points to 3.69% in Q1 2025. This demonstrates Hanmi's ability to lower funding costs as higher-rate deposits mature and are repriced in the current market environment, a trend management expects to continue, albeit at a slower pace.

While funding costs decreased, the average yield on the loan portfolio saw a slight decline of 2 basis points to 5.95% in Q1 2025, despite average loan balances increasing by 0.8%. Management notes that new loan production yields remain above the portfolio average, suggesting a slight upward bias on loan yields going forward, though the impact on the overall book yield is gradual given the size of the portfolio.

Noninterest income remained relatively stable year-over-year at $7.7 million in Q1 2025 but increased 5% sequentially. This was largely influenced by gains on loan sales. The company sold $32.2 million of SBA loans, recognizing a gain of $2.0 million, and $10.0 million of residential loans, with a net gain of $0.2 million. These sales are a deliberate part of the strategy to supplement fee income and manage the balance sheet.

Disciplined expense management also contributed significantly to the improved bottom line. Noninterest expense decreased by 4.0% year-over-year to $35.0 million in Q1 2025. This reduction was attributed to lower salaries and employee benefits (partially due to increased capitalized loan origination costs), decreased professional fees (following the completion of a loan system implementation), and reduced advertising/promotion expenses. The effectiveness of this cost control is reflected in the improved efficiency ratio, which reached 55.69% in Q1 2025, marking the best quarterly performance since Q4 2023.

Loan balances saw modest growth, increasing by $30.4 million (0.5%) to $6.28 billion at March 31, 2025, driven by solid production across categories ($345.9 million) offset by payoffs and sales. Deposit growth was stronger, increasing by $183.7 million (2.9%) to $6.62 billion, primarily in money market/savings and time deposits. Noninterest-bearing demand deposits, a key focus, remained a solid 31.2% of total deposits. This deposit growth outpaced loan growth in the quarter, leading to a decrease in the loan-to-deposit ratio to 94.9% from 97.1% at year-end 2024, enhancing liquidity. Uninsured deposits stood at $2.67 billion, representing a significant portion of the deposit base, which is a factor to monitor in the current environment.

Asset Quality, Risks, and Mitigation

Maintaining strong asset quality is a core tenet of Hanmi's strategy, underpinned by disciplined underwriting and credit administration. However, the first quarter of 2025 saw an increase in nonperforming assets (NPAs), which rose significantly to $35.7 million (0.46% of total assets) from $14.4 million (0.19% of total assets) at December 31, 2024. This increase was largely attributable to a single $20.0 million commercial real estate office loan being designated as nonaccrual. This loan is part of a $200 million syndicated credit where Hanmi holds a 10% interest. While the loan was current, it was downgraded due to the inability of the lender and sponsor to agree on renewal or extension terms upon maturity. Hanmi has provided a specific reserve of $6.2 million against this loan and is continuously monitoring the situation.

Beyond this specific credit, criticized loans (Special Mention and Classified) remained relatively stable in aggregate, with a decrease in Special Mention loans (due to upgrades and paydowns) offset by an increase in Classified loans (due to downgrades, including the aforementioned CRE office loan and some equipment financing). Management emphasizes that loans moved to special mention or classified status are proactively identified and monitored, and for loans modified for borrowers experiencing financial difficulty (including term extensions and interest-only/principal deferments), there were no payment defaults within the preceding 12 months as of Q1 2025.

The allowance for credit losses (ACL) stood at $70.6 million at March 31, 2025, representing 1.12% of total loans, consistent with year-end 2024. Effective January 1, 2025, Hanmi changed its methodology for estimating expected credit losses, moving from a PD/LGD model to a historical loss rate approach adjusted for current and forecasted conditions. The quantitative analysis incorporates a midpoint approach using multiple economic scenarios from Moody's. A sensitivity analysis using a more adverse scenario (Moody's S2, projecting a mild recession in 2025) indicated a potential need for an additional $2.4 million in ACL, highlighting the sensitivity of the allowance to economic forecasts.

Net charge-offs increased slightly to $1.9 million (0.13% annualized) in Q1 2025, primarily driven by higher gross charge-offs in equipment financing agreements, partially offset by recoveries.

Key risks acknowledged by management include general economic and business conditions, volatility in credit and equity markets, changes in consumer behavior, competition, inflation, interest rate fluctuations, and changes in real estate values. The increase in NPAs and the sensitivity of the ACL to economic conditions underscore the importance of vigilant credit monitoring and management in the current uncertain macroeconomic environment.

Strategic Growth Initiatives and Outlook

Hanmi's strategic growth initiatives are central to its forward-looking plan, aiming to leverage its strengths and expand its market presence. A core pillar is the U.S.-Korea Connection (USKC) initiative, targeting U.S.-domiciled subsidiaries of Korean companies. This initiative has shown tangible results, with USKC deposits increasing significantly to 15% of total deposits (up from 13% at year-end 2024) and 17% of demand deposits in Q1 2025. The USKC loan portfolio remained stable at approximately 15% of total loans. The opening of a representative office in Seoul, South Korea, in late 2024 has been a key milestone, increasing activity levels and visibility and generating growing interest and opportunities, particularly among midsized companies looking to establish or expand their U.S. footprint. Management notes that their USKC customers appear better positioned to handle potential tariff impacts than some domestic companies, having prepared since the initial discussions and with a significant portion involved in domestic manufacturing (e.g., automotive industry in the Georgia/Alabama corridor).

Geographic expansion is another priority, executed through strategic branch optimization. While consolidating some branches for efficiency, Hanmi successfully opened a new branch in Duluth, Georgia, in the Atlanta metropolitan market in March 2025. This market is strategically important due to its large Korean community and status as a major center for Korean manufacturing investment. The new branch saw strong production in its first month, indicating positive early momentum.

Looking ahead to the balance of 2025, management is focused on executing its growth strategy. Top priorities include generating loan growth in the low to mid-single-digit range. This growth is expected to involve a continued focus on expanding the C&I portfolio while reducing the percentage of CRE loans. Management acknowledges that net loan growth will depend on balancing production pipelines, which are currently solid, with the level of loan payoffs. To support C&I growth and core deposit gathering, Hanmi plans to hire additional banking talent in target verticals.

The company will continue to pursue residential mortgage and SBA loan sales to supplement fee revenues and manage the balance sheet. While SBA production guidance stands at $42 million-$45 million per quarter (plus/minus $5 million), management noted a drop in premium from year-end 2024, which could impact expected premium income.

Net interest margin expansion is anticipated to continue, but at a slower pace than recently experienced, as the magnitude of the benefit from deposit repricing diminishes. Loan yields are expected to remain relatively stable with a slight upward bias.

Analyst expectations, as reflected in the Zacks Consensus Estimate, project 2025 EPS around $2.50-$2.55, representing significant year-over-year growth.

Capital deployment remains a focus, with the Board reviewing dividends and share repurchases quarterly based on performance and market conditions. Hanmi increased its quarterly cash dividend by 8% to $0.27 per share in Q1 2025, signaling confidence.

Share repurchases are expected to continue, potentially influenced by market valuation relative to tangible book value.

The Bank remains well-capitalized, exceeding minimum regulatory requirements even after the termination of the CECL capital transition relief period on January 1, 2025.

Conclusion

Hanmi Financial is telling a story of strategic evolution and resilience. Anchored by its relationship-based banking model, the company is actively diversifying its asset base, expanding its funding sources, and optimizing its operational footprint to navigate a challenging banking environment. The recent financial performance, marked by net interest margin expansion and disciplined expense control, demonstrates operational effectiveness. While the increase in nonperforming assets in Q1 2025 highlights ongoing credit risks, particularly within the CRE portfolio, management's proactive approach to identifying and reserving against potential issues, coupled with strong overall credit administration, provides a degree of confidence.

The investment thesis for HAFC hinges on its ability to successfully execute its targeted growth strategies, particularly the USKC initiative and expansion into new markets like Atlanta, to drive sustainable loan and deposit growth. The focus on expanding the C&I portfolio and attracting core deposits is key to improving the balance sheet mix and enhancing profitability. Continued efficiency gains from technology investments and branch optimization will be important contributors to the bottom line. Investors should monitor the pace of loan growth relative to payoffs, the trajectory of funding costs, the performance of the CRE portfolio (especially maturing office loans), and the impact of macroeconomic conditions on credit quality and loan demand. Hanmi's commitment to returning capital through dividends and share repurchases, supported by strong capital ratios, adds another layer to the investment appeal. In a landscape defined by intense competition and economic uncertainty, Hanmi's ability to leverage its core relationship strength and execute its strategic initiatives will be critical to realizing its growth potential and enhancing shareholder value.