Earnings Call Transcript - HAFC Q1 2025

Operator, Operator

Ladies and gentlemen, welcome to Hanmi Financial Corporation's First Quarter 2025 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.

Ben Brodkowitz, Investor Relations

Thank you, operator, and thank you all for joining us today to discuss Hanmi's first quarter 2025 results. This afternoon, Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today's call. Both documents are available in 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. 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 in our Form 10-Q. With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Bonnie Lee, CEO

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2025 results. We are off to a good start to the year with strong deposit growth, another quarter of margin expansion, and continued disciplined expense management. Our credit quality remains strong, and we saw a healthy increase in deposits from our USKC customers. These results reflect the strength of our relationship-based banking model, a key differentiator for Hanmi in the markets we serve. Now let me review key highlights of the first quarter. Net income was $17.7 million or $0.58 per diluted share, an increase of 17% and 16%, respectively, compared to the first quarter of 2024. Our return on average assets was 0.94% and return on average equity was 8.92%. We achieved our third consecutive quarter of net interest margin expansion, which increased by 11 basis points to 3.02%, driven by our ability to lower funding costs. Total loans grew to $6.28 billion or 0.5% on a linked quarter basis with solid loan production across all of our loan categories. This is particularly notable since the first quarter is a seasonally slower quarter for loan production. Noninterest income grew 5%, primarily due to the sale of SBA loans, which provides Hanmi with revenue diversification, enhanced risk management, and capital deployment for loan growth. Deposits grew by 3% in the first quarter, driven by new commercial accounts and contributions from new branches. This growth reflects our success in continuing to build new relationships while deepening those with existing customers. Noninterest-bearing demand deposits have increased by 7% over the past year and remain solid as a percentage of total deposits at 31.2%. Our operating expenses remained well managed, and this resulted in an efficiency ratio of 55.69%, our best quarterly performance since the fourth quarter of 2023. Turning to our USKC initiative, one of our core growth strategies. Our USKC loan portfolio remained stable at approximately 15% of our total loans. However, deposits increased significantly and now represent 15% of total deposits, up from 13% at the end of 2024. Since opening our representative office in Seoul, South Korea late last year, we have seen a growing level of interest in Hanmi's capabilities and services. Establishing a local presence has significantly increased activity levels, delivering the visibility we had hoped for. We see growing opportunities to establish new relationships, particularly among midsized companies, and we believe we are well positioned to further expand our reach and strengthen our brand among Korean companies that are looking to establish or expand their footprint in the United States. As we continue to execute our strategy of diversifying and growing our loan and deposit portfolio, we maintained strong asset quality. Our asset quality reflects our focus on high-quality loans, along with disciplined underwriting and credit administration. Our allowance for credit losses as a percentage of loans remained stable at 1.12%. In addition to upholding our asset quality, we made progress in further expanding our geographic footprint. In March, we successfully opened a branch in Duluth, Georgia, which is a part of the Atlanta metropolitan market. This is our first branch in this rapidly growing market, which is home to the third largest Korean community in the United States. In just the first month, we have seen strong production and are pleased with the growing momentum. The Metro Atlanta region is also a major center for Korean manufacturing investment, particularly in automobiles and clean energy. In fact, just last week, our new team there attended the World Korean Business Convention, an event that convened the Korean business community from around the world in the heart of Duluth. This was a terrific opportunity to introduce Hanmi and our specialized USKC services to more than 15,000 attendees, ranging from local businesses to multinational corporations. As we look ahead to the balance of 2025, we are continuing to focus on executing our growth strategy and our top priorities include the following: generating loan growth in the low to mid-single-digit range with a focus on further expanding our C&I portfolio while reducing CRE as a percentage of the portfolio. While our current loan pipeline is solid, like all banks, we will continue to monitor the macroeconomic environment closely, given the elevated level of uncertainty that currently exists. We will continue to pursue residential mortgage sales to supplement our fee revenues and manage our balance sheet. We plan to hire additional banking talent to expand our C&I business in target verticals and increase our core deposit growth. And finally, we will maintain strong asset quality through our disciplined credit administration practices. In summary, we delivered strong operating performance in the first quarter, reflecting solid growth and ongoing momentum from 2024. As always, we remain closely engaged with our customers to better understand how evolving market conditions are affecting their businesses. This approach ensures our team is providing exceptional service and market-leading products our customers need. This, combined with ongoing expense management, asset quality discipline positions us well to drive growth and long-term value to our shareholders. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss first quarter loan production and deposit gathering in more detail.

Anthony Kim, Chief Banking Officer

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 $346 million, up $7 million or 2% from the prior quarter with a weighted average rate of 7.35% compared to 7.37% last quarter. The increase in loan production was primarily due to an increase in residential lending, SBA, and equipment finance, while CRE was flat and C&I declined from the fourth quarter levels. We remain disciplined with our underwriting as we seek opportunities that meet our high-quality standards in the current rate environment. CRE production was $147 million, flat compared to the prior quarter with continued production from our California region. The elevated interest rate environment continues to impact traditional and refinancing activity. We remain pleased with the quality of our CRE portfolio. At origination, it had a weighted average loan-to-value ratio of approximately 48% and a weighted average debt service coverage ratio of 2.2x. SBA loan production increased by $6 million from the prior quarter to $55 million, exceeding the high end of our quarterly target range of $40 million to $45 million. This steady production highlights the impact of our key team hires and the growth we're driving among small businesses in our markets. During the quarter, we sold approximately $32 million of SBA loans from our portfolio. C&I production during the first quarter was $42 million, a decrease of $18 million or 30%. However, total commitments for our commercial lines of credit were over $1 billion in the first quarter, up 6% or 22% on an annualized basis. Outstanding balances declined by 6%, resulting in a utilization rate of 38%, down from 43% last quarter. Residential mortgage loan production was $55 million for the first quarter, up 37% from the previous quarter due to higher demand for purchase transactions as interest rates declined from the elevated levels. Residential mortgage loans represent 16% of our total loan portfolio, the same as one year ago. As Bonnie noted, during the first quarter, we sold approximately $10 million of residential mortgages from our portfolio and are currently exploring additional sales contingent on market conditions. Corporate Korea continues to contribute to our total production. However, production slowed from the previous quarter due to heightened levels of economic uncertainty and seasonality. USKC loan balances were $932 million, down $5 million or 0.5% from the prior quarter and represent approximately 15% of our total loan portfolio equivalent to last quarter. Turning to deposits, in the first quarter, deposits were up 3% from the previous quarter, driven by new commercial accounts and contributions from new branches. We continue to expand our partnership with our Corporate Korea clients and saw strong deposit production of $85 million or a 166% increase compared to the previous quarter. Our team is making good progress in adding new relationships that we believe can grow over time. At quarter end, Corporate Korea deposits represented 15% of our total deposits and 17% of our demand deposits. The composition of our deposit base remains stable, which reflects the success of our relationship banking model. During the first quarter, our mix of noninterest-bearing deposits remained healthy at 31% of total bank deposits. Our credit quality also remained stable during the first quarter. The provision for operating loss expense increased from the prior quarter due to a CRE loan that was downgraded to nonperforming status. Although the ratio of nonperforming assets to total assets increased slightly while other credit metrics were essentially flat versus the prior quarter. We are confident that the overall credit quality of our portfolio remains strong. 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 Santarosa, Chief Financial Officer

Thank you, Anthony, and good afternoon to all. Beginning with net interest income, we generated a 3.1% quarter-over-quarter increase, posting $55.1 million for the first quarter of 2025. Net interest margin also improved nicely to 3.02% for the first quarter, up 11 basis points from the prior quarter. The growth in our net interest income and net interest margin was principally due to a decrease in deposit interest expense and a decline in deposit rates. For the first quarter of 2025, deposit interest expense declined 6.6% from the previous quarter, and the average rate paid on interest-bearing deposits fell 27 basis points to 3.69%. Average loans increased 1.4% for the first quarter, as the average loan yield declined 2 basis points to 5.95%. Noninterest income was $7.7 million, up 5% from the previous quarter, largely due to an increase in SBA gains. Gains from SBA loan sales were $2 million, up 39% from the previous quarter as the volume of loans sold increased 49% to $3.2 million, while trade premiums declined 71 basis points to 7.82%. Noninterest expenses were $35 million for the first quarter, up 1.3% from the previous quarter. However, our efficiency ratio improved to 55.7% on higher revenues. The quarter-over-quarter increase in noninterest expense was primarily due to the 2024 fourth quarter $1.6 million OREO gain. In summary, pre-provision net revenues for the first quarter increased 6% sequentially, reflecting growth in net interest revenues and margin, a solid contribution from our SBA business, and disciplined expense management. Credit loss expense for the first quarter was $2.7 million, including a loan loss provision of $2.4 million and a provision for off-balance sheet items of $300,000. First quarter net charge-offs were $1.9 million or 13 basis points of average loans, and the allowance to loans remains constant at 1.12%. Our equity capital and capital ratios continue to be strong. During the first quarter, we repurchased 50,000 shares at an average price of $22.49. In addition, lower interest rates drove a 15.2% decrease in our negative AOCI from the prior quarter. Tangible book value per share increased 2.6% to $24.49, and our tangible equity to tangible asset ratio was 9.59%. The company's preliminary common equity Tier 1 ratio was 12.13%, and the bank's preliminary total capital ratio was 14.48%. With that, I will turn it back to Bonnie.

Bonnie Lee, CEO

Thank you, Ron. We are proud of the solid start we have delivered in 2025 and are energized by the long-term opportunities we see ahead. While we are cautious about the current level of economic uncertainty, our focus remains on delivering personalized relationship-driven banking that helps our customers achieve their goals while driving long-term value for our shareholders. We are guided by a clear strategic compass, expanding our core deposit base, deepening relationships within targeted markets, deposit-rich verticals, and growing in key markets. This consistent disciplined approach has served us well through the cycle of change, and we remain confident in our ability to execute and deliver sustainable, profitable growth. Thank you. We'll now open the call for your questions. Operator, please open the line up to the questions.

Operator, Operator

Our first question comes from the line of Gary Tenner with D.A. Davidson.

Ahmad Hasan, Analyst

I'm Ahmad Hasan on for Gary. So I saw some really solid loan production this quarter. So just wondering, how is the pipeline looking and any potential tariff impacts to the clients you're seeing.

Anthony Kim, Chief Banking Officer

Looking at the second quarter pipeline, it appears to be in good shape. However, due to tariffs and uncertainty in the economic environment, loan demand may decrease in the third and fourth quarters. Currently, the pipeline seems solid. Regarding the tariffs, conversations with our USKC customers indicate they are in a better position than domestic U.S. companies, as they have been preparing since the tariffs were first mentioned during the Trump administration. Additionally, about one-third of our Corporate Korea customers operate in Tier 1 and Tier 2 of the automotive sector in the Georgia and Alabama area, producing domestically and thus not affected by the tariffs. Overall, our customers are optimistic and believe the situation is manageable without causing major harm. Furthermore, there is a 90-day hold on the tariffs, leading our customers to hope for negotiations between the countries, which could resolve the situation.

Ahmad Hasan, Analyst

That is some great color. And I saw some very well-controlled expenses this quarter. I know there was a bit of noise in the last quarter. So how should we model expenses for the rest of the year?

Ron Santarosa, Chief Financial Officer

So in the second quarter of each fiscal year, that's when our annual merit and promotions become effective. So we would anticipate for the second quarter, probably a 3% to 4% increase in salaries and benefits. There's a small reduction, of course, because of the seasonality of payroll taxes, etc., that occur in the first quarter. So outside of that, the other expenses or expense components should behave, again, generally in line with inflation.

Ahmad Hasan, Analyst

That sounds good. And just last one for me on the capital deployment front. I saw you repurchased some shares this quarter. And given the current depressed stock price, I think you guys are trading under tangible book. Should we expect any elevated repurchases?

Ron Santarosa, Chief Financial Officer

As we've commented before in our prior investor calls, the Board looks at the dividend and looks at share repurchases each quarter. And based upon that analysis, which looks forward a bit in terms of what we can expect, we lay out our plans. So with that said, we've demonstrated now, I think, at least four consecutive quarters, if I'm not mistaken, or close thereto of share repurchase at various amounts from a low of $25,000 to a high of $75,000. So that probably is not unreasonable. But again, the determination isn't made until the Board meets and then we execute on that plan.

Operator, Operator

Our next question comes from the line of Kelly Motta with KBW.

Kelly Motta, Analyst

Maybe starting off on the margin. You had some tremendous expansion here, and I appreciate the color in the deck about that shows the cadence of the CD repricing over the next couple of quarters. Wondering if you could share, Ron, as you have in the past, the spot rate on deposits here in March as well as where new CDs are coming on at this point.

Ron Santarosa, Chief Financial Officer

Sure, Kelly. So you did make reference to the supplemental deck, and on our footnote on that same page, it does indicate the price for the month of March. So the CDs for the month of March were at 4.1%, and the average interest-bearing deposit cost for the month of March was 3.67%. So beginning with just the cost of time deposits at 4.10% for the month of March, if you look on that same page, you'll see that the average for the quarter was 4.17%. So only off by about 7 basis points, if you will. And then if you look at the maturing CDs for the second quarter, their average is 4.41%. And again, you're looking at about a 30 basis points differential. So there will still be some relief in the second quarter. And again, probably in the third quarter. But the pace and the magnitude of the change continues to diminish. So I anticipate that the rate of change will continue to slow. So the margin expansion, while it still may be present, will probably subside to what we've experienced in the fourth quarter of last year and the first quarter of this year. When you look at the average cost of interest-bearing deposits for the month of March at 3.67%, that's right on top of the average for the quarter at 3.67%. So you can kind of tell even from that perspective, which takes into consideration our nonmaturity deposits, that rate of change will continue to slow. So a long way of saying there'll probably be margin expansion, all things being equal. But again, I anticipate the rate of change to be much, much slower than we experienced over the most recent quarters.

Kelly Motta, Analyst

Got it. That's helpful. I just wanted to follow up on margin. It seems that new loans continue to yield well above book values. Can you provide the amount of loans that are maturing or have adjustable rates resetting for the remainder of the year?

Ron Santarosa, Chief Financial Officer

Right. So again, refer to that same page. You can see that the average yield on the entire loan book is pretty much holding a 6 handle. And when it drops to a 5 handle, it really hugs 6 pretty closely. So even though the incremental addition to the loan book is coming at rates higher than the average, the percentage of that increment is fairly small given the $6.5 billion of the loan book. So it's probably more realistic to assume the loan book will continue its average with a slight upward bias. But again, I would emphasize slight. So I think that's how I would start to think about loan yields.

Kelly Motta, Analyst

Okay. That's super helpful. I appreciate the color. Turning to credit, you did have the migration of that NPL. I think the release calls out that it's maybe a syndicated credit. Can you provide a bit more color as to what the borrower industry or type? I think it might be in CRE. And then what kind of reserve you have put up against it?

Bonnie Lee, CEO

Sure. Yes. It is a syndicated commercial real estate. It is office property in the central business district. It has been paid as agreed. However, as it matured in early January, the lender and the sponsor have been discussing the renewal or the extension of the loan, but they have not been able to come to an agreement as of yet. So we are continuously monitoring the progress based on the collateral shortfall that we have provided $6.2 million reserved during the quarter.

Kelly Motta, Analyst

Okay. That's helpful. And last question from me about how large is the syndicated book as a percentage of your loan book?

Bonnie Lee, CEO

Sure. Our syndicated loan book total outstanding is about $255 million.

Operator, Operator

Our next question comes from the line of Adam Butler with Piper Sandler.

Adam Butler, Analyst

This is Adam speaking on behalf of Matthew Clark. I would like to follow up on the credit question regarding the syndicated office commercial real estate loan. First, can you tell me your ranking in the syndication? Are there other banks ahead of you? Also, what is the total size of the loan?

Bonnie Lee, CEO

Yes, the total loan is $200 million, and our share is approximately 10%. There are a few other lenders, some of whom hold larger portions, with one lender having over 40% interest.

Adam Butler, Analyst

Okay. That's helpful. And then just another question, looking at your overall office CRE portfolio. I think in the slide deck, you could see that it represents 9% of loans. I was just wondering if you could talk about some of the office loans that are coming due over the course of the next few quarters and how they're performing and how you're feeling about maturities and future repricing.

Anthony Kim, Chief Banking Officer

Yes. I think a little over $200 million is maturing in year 2025. We looked at it. We started talking to customers. Based on the conversation and the most recent operating statement, we don't see any potential issues at this time.

Adam Butler, Analyst

Okay. That's helpful. And then just moving back to the NIM. On your nonmaturity deposits, your money market and savings, you guys have been able to manage these costs down over the course of the past few quarters. Are you seeing greater ability to lower these costs still? I'm just curious how the conversations are going and how much flexibility you see with lowering those costs going forward.

Anthony Kim, Chief Banking Officer

Yes. In the first quarter, I think a little less than like $680 million. Retail CDs rolled off at 4.69%. We're able to retain 88% of that and repriced at 77 basis points lower, which is about 3.93%. And I see, at least in the Korean-American banking space, our competitors start to lower the CD rates, which is good news for us. So hopefully, in the coming quarters, for the maturing CDs, we'll be able to lower the CD and retain it at, reprice at high 3s rather than low 4s.

Adam Butler, Analyst

Okay. That’s helpful information. I have another question about the loan yields. I noticed in Slide 10 that your loan beta during the current downward rate cycle is around 11%. I can calculate that, but I'm wondering if we see additional Fed rate cuts, do you expect the loan beta to remain in the 10% to 20% range, or do you anticipate a different outcome?

Ron Santarosa, Chief Financial Officer

You need to consider the amount of change over a period. In the slide, we illustrated how the loan book reacted to a 500 basis point increase in the Fed fund rate, showing a rapid upward trend. There's a possibility for symmetry again; however, with a 25 basis point move, which is relatively small, we should expect a low beta. When changes are deeper, such as 50 to 100 basis points, it begins to influence refinancing and prepayments, which may increase our beta. We'll have to wait and see. From the 100 basis points we have experienced, which has been gradual with the exception of the first 50 basis points, loan yields have not changed significantly. I suggest keeping this in mind, Adam, as you think about the speed, pace, and volume of changes, as these factors are crucial in predicting the potential outcomes for loan yields.

Adam Butler, Analyst

Okay. I appreciate that. That's helpful. And then just one more for me on the fee side of things. It was nice to see SBA production step up again in 1Q. Can you just provide some of your updated expectations for the level of production you're expecting to see going forward?

Bonnie Lee, CEO

Yes. So we provided guidance of quarterly production of $42 million, $45 million a quarter. So that guidance stands and then just plus/minus $5 million from that. But going into the second quarter, as Anthony mentioned, even in our SBA, we do have a very solid SBA pipeline. In the first quarter, we did notice the drop in the premium from the year-end 2024. So assuming that the premium market holds similar to the first quarter, I think that we may be able to see the same type of whether the production or the expected premium income.

Operator, Operator

And we have reached the end of our question-and-answer session. I would like to turn the floor back to Bonnie Lee for closing remarks.

Bonnie Lee, CEO

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. Thank you.

Operator, Operator

Thank you. This does conclude today's conference, and we thank you for your participation. You may disconnect your lines at this time.