Hanmi Financial Corp Q1 FY2026 Earnings Call

Ladies and gentlemen, welcome to Hanmi Financial Corporation's First Quarter 2026 Conference Call. As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Ben Brodkowitz, Investor Relations for the company. Please go ahead.

Thank you, operator, and thank you all for joining us today to discuss Hanmi's First Quarter 2026 results. This afternoon, Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today's call. Both documents are available on the IR section of the company's website at hanmi.com. I'm here today with Bonnie Lee, President and Chief Executive Officer of Hanmi Financial Corporation; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Bonnie will begin today's call with an overview. Anthony will discuss loan and deposit activities. Ron will provide details on our financial performance, and then Bonnie will provide closing comments before we open the call up for your questions. Before we begin, I would like to remind you that today's comments may include forward-looking statements under the federal securities laws. Forward-looking statements are based on current plans, expectations, events and financial industry trends that may affect the company's future operating results and financial position. Our actual results may differ materially from those contemplated by our forward-looking statements, which involve risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from these forward-looking statements can be found in our SEC filings, including our reports on Forms 10-K and 10-Q. In particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation and our Form 10-Q. With that, I would now like to turn the call over to Bonnie Lee. Bonnie? Please go ahead.

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2026 results. Hanmi delivered strong financial results as key metrics in the first quarter as we consistently advanced our core initiatives and executed against our growth strategy. In the first quarter, a seasonally slower period for loan production, we delivered solid results, supported by strong C&I originations and ongoing expansion of new full-service commercial banking relationships. At the same time, we maintained disciplined underwriting and pricing standards. We also executed effectively on our deposit gathering initiatives, generating strong growth in total deposits while continuing to reduce our overall cost of funds. Combined with the favorable spreads on new loan production relative to payoffs, we generated net interest margin expansion for the seventh consecutive quarter. This strong execution, combined with our disciplined expense management, led to robust growth in net income compared to the year-ago period. Our performance highlights the success of our relationship-based banking model and the execution of our growth strategy. Now turning to some highlights for the first quarter. Net income for the first quarter was $22.6 million or $0.75 per diluted share, with continued growth on both a sequential and year-over-year basis. Net interest income increased from the prior quarter and net interest margin expanded by 10 basis points to 3.38%, reflecting a lower cost of funds. Return on average assets and return on average equity during the quarter were 1.18% and 10.8%, respectively. Deposits grew 7% on an annualized basis and noninterest-bearing deposits remained healthy at approximately 30% of total deposits. New loan originations were solid, with the C&I loan production increasing by 64%. However, this was offset by higher-than-normal payoffs, which led to a slight decline in total loans. We continue to maintain excellent asset quality driven by our focus on high-quality loans, disciplined underwriting standards and sound credit administration. Nonperforming assets decreased by 38%, representing 0.6% of total assets. Our disciplined focus and risk management continue to produce positive outcomes. During the quarter, we successfully collected a sizable payment for nonaccrual loans and sold two OREO properties for net gain. Turning to our Corporate Korea initiative. The relationships our dedicated bankers have established have driven deposit growth from these customers, resulting in an increase of 10% this quarter. Due to ongoing uncertainty about the impact of tariffs, loan activity remained muted. Our focus on disciplined expense management continues. Noninterest expense decreased by 2% for the quarter, primarily driven by the gain on the sale of real estate and lower salaries and benefits and advertising and promotion expenses. Importantly, our efficiency ratio further improved by 150 basis points to 53.5% from 55%. Our strong financial performance drove improvement in all capital ratios while we returned significant capital to shareholders in the form of dividends and share repurchases totaling $13.4 million this quarter. We remain well positioned to advance our growth strategy and deliver attractive shareholder returns. Clearly, geopolitical conflicts may have economic implications for the global economy. However, at this point, we have not seen any impact on our business nor our clients' businesses. We have had a strong start to 2026 and believe we are well positioned to build on this momentum in the months ahead. The strength and consistency of our operational performance underscore the effectiveness of our relationship-based banking model and reinforce our confidence in the strategy we are executing. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss our first-quarter loan production and deposit data.

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. First-quarter loan production was $378 million, up $3 million or $0.08 from the prior quarter with a weighted average interest rate of 6.54% compared to 6.90% last quarter. The increase in loan production was primarily due to an increase in C&I and CRE while residential equipment finance and SBA declined from fourth quarter levels. Our disciplined underwriting approach ensures we only engage in opportunities that align with our conservative underwriting standards. C&I production was $135 million, an increase of $53 million or 64% from the prior quarter. The increase was primarily driven by the investment we made in our C&I teams and our strategic efforts to further expand the portfolio. CRE production was $131 million, an increase of $6 million or 4%. CRE is now 61% of total loans, which is the lowest it has been in at least a decade. We remain pleased with the quality of our CRE portfolio. It has a weighted average loan-to-value ratio of approximately 47% and a weighted average debt service coverage ratio of 2.2x. SBA loan production declined $3 million from the prior quarter to $41 million, in line with historical ranges. The steady production reflects the strength of our key hires and the momentum we are building with the small business clients across our markets. During the quarter, we sold approximately $33 million of SBA loans. Total commitments for our commercial lines of credit were over $1.3 billion in the first quarter, up 3% or 14% on an annualized basis. Outstanding balances increased by 10%, resulting in a utilization rate of 43%, up from 40% in the prior quarter. Residential mortgage loan production was $29 million for the first quarter, down 59% or $41 million from the previous quarter. Residential mortgage loans represent approximately 15% of our total loan portfolio, down from 16% in the previous quarter. We sold $32 million in residential mortgages during the first quarter, resulting in a gain on sale of $0.5 million. We'll continue to evaluate additional sales contingent on market conditions. Corporate Korea accounted for $28 million of total loan production. US KC loan balances were $88 million, down $44 million or 5% from the prior quarter and represent approximately 12.5% of our total loan portfolio. Turning to deposits. In the first quarter, deposits increased 2% from the prior quarter, driven primarily by growth in interest-bearing deposits and a modest increase in noninterest-bearing demand deposits. Deposit balances for US KC customers increased by $107 million or 11%, surpassing $1.1 billion. At quarter end, Corporate Korea deposits represented 17% of our total deposits and 16% of our demand deposits. A little over a year ago, we opened a representative office in Seoul, South Korea, marking a key milestone in Hanmi's USKC strategy. Through this office, we're deepening relationships and supporting these customers as they expand into the U.S. market. The composition of our deposit base remained stable, reflecting the strength of our relationship banking model. At the end of the first quarter, noninterest-bearing deposits remained healthy at roughly 30% of total bank deposits. Turning to asset quality, which remains strong. Delinquencies declined 25% to 0.20% of total loans from 0.27% in the prior quarter. Nonperforming loans declined 31% to 0.19% of total loans from 0.28% in the prior quarter, primarily driven by a $9.7 million payment received and $10.2 million in nonaccrual loans. The performing assets declined 38% to 0.16% of total assets from 0.26% in the prior quarter, reflecting the aforementioned payment and the sale of two properties that entered OREO status during the third quarter of 2025. These properties were sold for a net gain of $0.8 million in the first quarter. During the quarter, $21.2 million was downgraded to special mention and a $5 million loan was downgraded to Class 5. These boundaries were borrower specific and not indicative of broader portfolio trends. Both loans remain current and are paying as agreed. Importantly, these actions reflect Hanmi's disciplined approach to early risk identification focused on achieving timely and optimal outcomes. And now I'll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on our first-quarter financial results. Ron?

Thank you, Anthony, and good afternoon. Pre-provision net revenue for the first quarter increased to $33.4 million or 4.1% from the fourth quarter, with all three components of PPNR contributing nicely to the growth. First, interest revenue increased 0.5% and net interest margin expanded by 10 basis points to 3.38%. Next, noninterest income was up 2.9% and noninterest expense declined by 1.9%. Looking closely at net interest revenue for the first quarter, there was a $1.6 million net benefit from lower interest rates, offset by a $700,000 effect from a lower level of interest-earning assets and an $800,000 effect from two less days in the period. Turning to net interest margin, it increased by 10 basis points, primarily reflecting a 16 basis point decline in the average cost of interest-bearing deposits. For the second quarter, we do not expect a similar decrease in the average cost of interest-bearing deposits. The April month-to-date average cost of money market and savings deposits is about the same as it was for the first quarter. The April month-to-date average cost of time deposits, however, is 10 basis points lower, bringing the average cost of all interest-bearing deposits to only about 5 basis points lower than that for the first quarter. Noninterest income increased 2.9% to $8.5 million, primarily from higher SBA loan sale gains with a higher volume of loans sold and higher trade premiums. Noninterest expense declined 1.9% to $38.4 million, principally due to the gain from the sales of two OREO properties where we had OREO expenses in the prior period. As expected, advertising and promotion expense declined from their fourth quarter seasonal high while professional fees and data processing charges increased due to higher activity in the quarter. Salaries and benefits declined as adjustments to performance and equity-based compensation plans more than offset the seasonal increase in employer taxes and benefits. The decrease in noninterest expense and the increase in revenues resulted in an efficiency ratio of 53.48% for the first quarter. Hanmi's effective tax rate for the first quarter was 26%, reflecting both the tax benefit from the first quarter's vesting of equity-based compensation and the lower California apportionment factor. We expect the effective tax rate to increase in future quarters, eventually bringing the annual effective tax rate to approximately 27% for the year. During the first quarter, Hanmi repurchased $4.8 million of common stock under the share repurchase plan, representing 185,707 shares at an average price of $25.89. At the end of the first quarter, 2.15 million shares were available under the plan. In addition, Hanmi bought $1.1 million of common stock from employees to satisfy their tax liabilities upon the vesting of their restricted stock and performance stock awards. Hanmi's tangible common equity per share increased 1.1% to $26.56 per share and the ratio of tangible common equity to tangible assets increased 12 basis points from 9.99% to 10.11%. With that, I will turn it back to Bonnie.

Thank you, Ron. We believe the favorable trends that we have seen in our business position us to deliver strong shareholder results in 2026. Our priorities and expectations for 2026 remain unchanged from what we communicated on our last earnings call. We expect loan growth in the low to mid-single-digit range while continuing to prioritize further diversification across the portfolio. Our focus remains on growing deposits to support loan growth while preserving a stable well-balanced funding profile. Key priorities include deepening existing customer relationships, attracting new clients, and further strengthening our core deposit base with a particular emphasis on growing noninterest-bearing deposits. We remain committed to disciplined expense management. While we are making selective investments in talent and technology to support our long-term growth strategy, we continue to operate efficiently, emphasizing initiatives that enhance productivity and maintain cost discipline across the organization. Finally, we'll continue to take a prudent approach to credit management to preserve strong asset quality. Conservative underwriting practices, active portfolio oversight, and rigorous risk analysis remain central to our operating philosophy and will guide our decision-making as economic conditions evolve. We are encouraged about the opportunities ahead and look forward to keeping you updated on our ongoing progress. Thank you. We'll now open the call to answer questions. Operator, please go ahead.

Our first question is from Matthew Clark with Piper Sandler. This is Adam Kroll on for Matthew Clark.

Yes. So maybe just starting out on loan growth, had solid loan production during the quarter, and I see the breakdown in the deck that just shows the strong growth in C&I during the quarter. I guess, was there any specific industry or geography driving that? And then do you expect C&I to be the main driver of the low to mid-single-digit growth for the year?

Yes, sure. We do expect the C&I to be the focus, continuing with our portfolio diversification. But we expect the growth to come from other portfolios as well. As far as the C&I production during the first quarter, it's pretty fairly broad-based in terms of different business types and industry.

Got it. I appreciate the color there. Maybe switching to credit. I was just wondering if you could provide any additional color on the retail loan that migrated to special mention or the hospitality loan that migrated to class during the quarter and maybe how you see the situation playing out?

Sure. So first of all, we did have a $1.2 million loan to the initiative downgraded to special mention. This is a retail commercial real estate loan. The loan is current with a past due payment history. The loan was downgraded due to the loss of one of their major tenants. However, despite the vacancy of this tenant, the property continues to generate sufficient income to service the debt. Furthermore, this credit is supported by personal guarantees with a substantial network. So accordingly, at this time, we do not expect any loss from this particular credit. The second credit, which is a $5 million substandard credit, is a C&I loan in the hospitality industry. The subject business was impacted by extensive renovation construction of the hotel where the subject business is located. As the construction is complete, we expect performance to improve to support stability during the slow period. The modification was granted, and we downgraded the loan. The sponsor on this credit has substantial experience and a strong network. So the loan is paying as agreed under the modification, and we do not expect the loan to become a loss at this time.

Got it. I really appreciate the color there. Last one for me is just, do you expect to remain active on share repurchases, just given your healthy capital levels and just where the shares trade today?

Yes, Adam. I think looking at the strength of the balance sheet, the excellent asset quality, and the trends of earnings, I think it's fair to anticipate the Board will continue probably in an amount not too dissimilar from what we saw in the first quarter.

Thanks for the question. Maybe to kick it off on expenses, these were very well controlled in what's usually a seasonally higher quarter with payroll taxes and whatnot. As you look ahead with your strategic plan, can you remind us any planned investments you have for the year? And if there's any kind of puts in case of this $38 million level that we should be considering as we think through the run rate as we go ahead?

Kelly, we do not have any, what I would consider significant notions relative to expenditures. I would characterize them as ordinary. That said, in looking at the somewhat favorable counterbalancing of seasonal effects, I have a sense that we'll probably continue at the first quarter trend with some things that I know will happen, but I couldn't tell you which direction they're going to go in. But I would think the first quarter is a fairly indicative idea of how we may play out for the rest of the year.

Okay. That's helpful. And how about the pipeline for SBA? I think there's been some rule changes there. Just wondering, it looks like it was a pretty solid quarter for gain on sale, but wondering if there's any anticipated impact from changes in kind of the pipeline there.

Yes. So we gave guidance of $45 million to $50 million. In certain quarters, the seasonally high quarters, we give $50 million to $55 million per quarter. Given the guideline change and the eligibility for SBA loans, we're going to continue with the $45 million to $50 million range of SBA production.

Okay. Very good. Got it. Maybe lastly for me. I mean, you guys have had some migration into special mention. And I think notably, as you did note, they're paying. It highlights our proactive nature. As you survey your customer base, how are you feeling now versus say, a year ago? And any kind of notable changes in terms of what you guys are watching more carefully? And what gives you confidence in ultimately the low level of loss content in that book?

Sure. As we proactively review and communicate with our loan customers, including what's coming for the renewal trade customers, in terms of overall trend, particularly on small businesses or consumer loans like residential mortgage loans, we don't see the negative trend compared to last year or last quarter. The migration that I have for us is really due to our initiative and look as we communicate with each individual customer. The loans that have migrated are very specific to the customer and to this relationship, for example. As I had mentioned, the construction from where the business is located is very unique to customer specifics, not forming any type of trend. As we proactively work on the renewals, we have experienced higher payoffs during the first quarter. As we look at the trends, if we are concerned about a certain trend, we communicate to the customers early on and we ask customers to pay off the loan. So that has been done as well. We are looking across our entire portfolio. So that's where we find comfort, as it's borrower specific. In our past history, some of the loans we put in the special mention category at one time were higher than the levels we are today. We had resolutions on most of those loans over the past couple of quarters as well. Therefore, we are very optimistic about the loans that are in the downgraded category and that we will aggressively work to come to a resolution, as evidenced by one of the nonaccrual loans of $10 million from which we had a successful collection of $9.7 million this quarter. So we will continue with the process.

Our next question is from Ahmad Hasan with D.A. Davidson.

On for Gary Tanner here. First question is on NIM dynamics. I appreciate the detail on Slide 10. If I see correctly here, there's about $1 billion in CDs rolling off in the next quarter. Do you think that would be the key driver and that could potentially push NIM up further from here? Or will loan yields kind of offset that in the next couple of quarters?

Yes, Ahmad. So what we tried to point out, with the time deposit book being the percentage that it is of the total interest-bearing deposit book, the pickup that you would envision as those CDs are repriced at current rates, while enticing as a percentage of the book, becomes rather small. And that's why we're just not seeing as much of a benefit to the interest-bearing deposit costs month to date. But there is something there. I think the other two elements that would potentially provide a positive bump to NIM, but again, it's going to be in a smaller contribution than we've experienced in previous quarters, are both the securities book and the loan book. I'll first touch on the securities book, and then I'll let Anthony talk about the loan book. But on the securities book, we have substantial cash flow occurring here in 2026 that will reprice into a more current rate idea, let's just say 3% and whatever basis points you want to assign to the right of that whole number. So there will be some lift coming from the securities book. And then I'll let Anthony talk about the loan book.

Yes, sure. We have CRE maturing for the next 12 months, totaling about $1 billion. It's weighted average rate is high. So we should be able to reprice these loans and renew the loan with a much higher rate. To give you more detail on the CD maturity, about $1 billion maturing with a weighted average in the second quarter and another approximately $1.16 billion maturing in the second half of the year with medium to high 3% percentages. For reference points from the first quarter, about $800 million in retail CDs matured at low 4%. We're able to retain 77% of that with 40 basis points lower. So it's not much, but we do have an opportunity to add some benefit to the net interest margin.

Just to add, just on the $1 billion maturing CRE loans, as Anthony said, it's currently priced at high 4%, close to 5%. If you look at the first quarter, the new loan yield is coming in around 6.5% on average, right? So there will be that pickup. That's what we are expecting may contribute to the expansion of the net interest margin going forward.

Great. That is really helpful. And then maybe one more on, you guys seem really excited about Corporate Korea initiatives, and that seems to be going really well. Just any color on client sentiment over there given the macro recently?

Yes. Based on the conversations with some of the customers, they no longer see tariffs as an obstacle. I think it's beyond them. But ongoing economic uncertainty and rising energy prices and inflation are making companies very cautious about taking on additional lines and loans. So they're opting to use their excess cash instead. That part of the approach is contributing to subdued loan demand. As economic certainty improves, we're hoping to see recoveries in loan demand. We continue to see influences of deposit coming from Korea for them to prepare for investments in the U.S. So that's why we had a surge of deposit increase in the first quarter and an increase in the U.S. KC portfolio.

Great. That makes sense. And maybe last one for me. Any kind of planned new hires for this year? I know you talked a bit about you bringing on new people this quarter. Can you talk a bit more about the planned new hires for the next couple of quarters?

Yes. Talent investment is one of our key focuses. So as we see opportunities, definitely, we will pick up talented bankers. However, we do keep in mind the return on investment for what we embed in. For the last couple of years, we have managed investment tied to talent investment and the performance that comes up. The timing is carefully balanced to avoid any overarching impact on the bank overall. So it's a continuation of our ongoing hiring process.

Thank you. We have no further questions in the queue at this time. I will now turn the call back over to Ms. Bonnie Lee for concluding remarks.

Thank you for joining our call today. We appreciate your interest in Hanmi and look forward to sharing our progress with you throughout the year.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference.