Hanmi Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered steady profitability with diluted EPS of $0.58 (flat QoQ, +16% YoY) on stronger net interest income and lower funding costs; net interest margin expanded 11 bps to 3.02% and efficiency ratio improved to 55.69%.
• Deposits rose 2.9% QoQ to $6.62B with noninterest-bearing demand deposits at 31.2%; loans grew 0.5% QoQ to $6.28B, supported by residential mortgage and SBA production.
• Asset quality mixed: criticized loans fell slightly, but nonperforming loans increased to $35.6M (0.57% of loans) due to a $20M syndicated office CRE loan moving to nonaccrual; ACL/loans held at 1.12%.
• Versus S&P Global consensus, EPS modestly beat (0.58 vs 0.574*) while revenue missed (company operating revenue $62.8M vs S&P revenue actual 60.1M* on a different definition); narrative catalysts: continued NIM expansion and deposit mix improvement, offset by office CRE nonaccrual.
• Management reiterated a balanced growth strategy (low-to-mid single-digit loan growth, prioritize C&I, expand USKC deposits) and expects margin expansion to slow as CD repricing benefits diminish; Q2 salaries/benefits to rise ~3–4% with annual merits.

What Went Well and What Went Wrong

What Went Well

• “We achieved our third consecutive quarter of net interest margin expansion, up 11 basis points to 3.02%, primarily driven by lower funding costs.” — Bonnie Lee, CEO.
• Deposits grew 2.9% QoQ, with healthy noninterest-bearing demand mix (31.2%); branch openings supported new commercial accounts.
• Noninterest income rose 5% QoQ to $7.7M, led by higher SBA gain-on-sale ($2.0M), as SBA loan sale volume increased to $32.2M.

What Went Wrong

• Nonperforming loans increased to $35.6M (0.57% of loans) largely due to a $20.0M syndicated office CRE loan moved to nonaccrual; a $6.2M specific allowance was established.
• Credit loss expense rose to $2.7M from $0.9M QoQ, reflecting the loan downgrade; net charge-offs were $1.9M (0.13% annualized).
• C&I production declined 30% QoQ to $42M, and equipment finance balances continued to drift lower; management cited macro uncertainty and seasonality.

Transcript

Operator (participant)

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. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Ben Brodkowitz, investor relations for the company. Please go ahead.

Ben Brodkowitz (Head of 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. Excuse me. Thank you for joining us today to discuss our first quarter 2025 results. We are off to a good start to the year with a strong deposit growth, another quarter of a 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 a net interest margin expansion, which increased by 11 bps 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 a 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. Non-interest 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.

Non-interest-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 remain well-managed, and this results 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 remains stable at approximately 15% of 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 and delivered the visibility we had hoped for.

We see growing opportunities to establish new relationships, particularly among mid-sized companies, and 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 remains 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. We will maintain strong asset quality through our disciplined credit administration practices. In summary, we deliver 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 the 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 2.2 times. SBA loan production increased $6 million from the prior quarter to $55 million, exceeding the high end of our quarterly target range of $40-$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 loan production. However, production slowed from the previous quarter due to the heightened levels of economic uncertainty and the 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 a strong deposit production of $85 million, or 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 non-interest-bearing deposits remained healthy at 31% of total bank deposits. Our credit quality also remained stable during the first quarter.

The provision for credit loss expense increased from the prior quarter due to a CRE loan that was downgraded to non-performing status. Although the ratio of non-performing 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. I will hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on our first-quarter financial results. Ron?

Ron Santarosa (CFO)

Thank you, Anthony, and a 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 bps 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 bps to 3.69%. Average loans increased 1.4% for the first quarter as the average loan yield declined 2 bps to 5.95%. Non-interest 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 bps to 7.82%. Non-interest 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 non-interest 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 bps of average loans, and the allowance to loans remained constant at 1.12%. Our equity capital and capital ratios continued 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 one 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: expand our core deposit base, deepen relationships within targeted markets, deposit-rich verticals, and grow 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 (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing these star keys. One moment, please, while we poll for questions. Our first question comes from the line of Gary Tenner with DA Davidson. Please proceed with your question.

Hey, guys. I'm Matt standing in for Gary. We saw some really solid loan production this quarter. 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's pretty healthy. Because of the tariff and the uncertainty in the economic environment, the loan demand may soften up in third quarter and fourth quarter, but at this time, the pipeline looks solid. As far as the tariff goes, based on the conversation we had, particularly with our USKC customers, they appear to be in a better position than domestic companies in the U.S. because they've been preparing themselves since the Trump administration initially mentioned that tariff. Additionally, roughly one-third of our Corporate Korea customers are tier one and tier two of the automotive industry in the Georgia-Alabama corridor. For obvious reasons, they are producing domestically, so they are not impacted by tariff. In general, our customers are more optimistic, and they think it's manageable and it's not a detrimental impact.

We have a 90-day hold on the tariff, so they're hoping for some type of negotiation between the nations. If that happens, then I think this will pass us.

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

Ron Santarosa (CFO)

In the second quarter of each fiscal year, that's when our annual merits and promotions become effective. We would anticipate for the second quarter probably the 3% to 4% idea 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. Outside of that idea, the other expenses or expense components should behave, again, generally in line with inflation.

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

As we've commented before in our prior investor calls, the board looks at the dividend and looks at share repurchases each quarter. Based upon that analysis, which looks forward a bit in terms of what we can expect, we lay out our plan. 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, I think, a low of 25,000 to a high of 75,000. That probably is not unreasonable, but again, the determination isn't made until the board meets, and then we execute on that plan.

Great. Thank you for taking my questions.

Operator (participant)

Thank you. Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Kelly Motta (Analyst)

Hey, guys. Good afternoon. Thanks for the question. Maybe starting off on the margin, you had some tremendous expansion here, and I appreciate the color and the depth 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, a spot rate on deposits here in March, as well as where new CDs are coming on at this point.

Ron Santarosa (CFO)

Sure, Kelly. You did make reference to the supplemental deck, and our footnote on that same page does indicate the price for the month of March. The CDs for the month of March was 4.1%, and the average interest-bearing deposit cost for the month of March was 3.67%. 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 seven bps, if you will. If you look at the maturing CDs for the second quarter, their average is 4.41%. Again, you're looking at about 30 bps differential. There will still be some relief in the second quarter and, again, probably in the third quarter.

The pace and the magnitude of the change continues to diminish. I anticipate that the rate of change will continue to slow. 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. You can kind of tell even from that perspective, which takes into consideration our non-maturity deposits, that the rate of change will continue to slow. One way of saying there'll probably be margin expansion, all things being equal. 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. Just a quick follow-up to close the loop on margin. Do you have, it looks like new loans are still coming up on well above book yields. Do you have the amount of loans that are maturing or adjustable rates resetting over the balance of the year here?

Ron Santarosa (CFO)

Right. Again, referring to that same page, you can see that the average yield on the entire loan book is pretty much holding a six handle. When it drops to a five handle, it really hugs six pretty closely. 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. It is probably more realistic to assume the loan book will continue its average with a slight upward bias. Again, I would emphasize slight. I think that is 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. Yeah. 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. 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. 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.

Kelly Motta (Analyst)

Okay. So it's relatively small.

Bonnie Lee (CEO)

It's a very small percentage.

Kelly Motta (Analyst)

Got it. Appreciate the color. I'll step back. Thank you.

Bonnie Lee (CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Adam Butler with Piper Sandler. Please proceed with your question.

Adam Butler (Analyst)

Hey, everyone. Good afternoon. This is Adam on for Matthew Clark. Thanks for taking the questions. If I could piggyback off of the credit question on the syndicated office CRE loan, just first, where are you guys in rank on the syndication? Are there banks above you? And how big is the overall loan itself?

Bonnie Lee (CEO)

Yeah. The entire loan is $200 million. We are about 10%. There are other lenders, a couple of other lenders that obviously have a higher portion. I think the lead bank has over 40% interest.

Adam Butler (Analyst)

Okay. That's helpful. 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)

Yeah. 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 do not see any potential issue at this time.

Adam Butler (Analyst)

Okay. That's helpful. Just moving back to the NIM, on your non-maturity 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)

Yeah. In first quarter, I think a little less than approximately $680 million, retail CD rolled up at 4.69%. We're able to retain 88% of that and reprice that at 77 bps lower, which is about 3.93%. I see, at least in the Korean American banking space, our competitors start to lower their CD rates, which is good news for us. Hopefully, in coming quarters, for the maturing CDs, we'll be able to lower the CD and retain it at reprice at high threes rather than low fours.

Adam Butler (Analyst)

Okay. That's helpful color. I mean, I see in Slide 10, your loan beta thus far, this downward rate cycle has been, I think it said 11%. I can calculate that. I'm just curious if we get more Fed rate cuts, do you expect that loan beta to kind of hover in the 10%-20% range, or do you kind of see a different outcome?

Ron Santarosa (CFO)

I guess you have to kind of think about it relative to the amount of change in a period. What we were trying to also illustrate in that particular slide, when you had a 500 bp increase in the Fed funds rate, you could see how the loan book behaved in that kind of rapid upward idea. There is a chance for some symmetry again, but if you move by 25 bps, which is not all that large, we should not anticipate a very high beta. It should be fairly low. When you get a deeper change, 50 bps to 100 bps, then that starts pushing on the idea of refinancing, prepays, things of that sort, which can then start to affect your beta and probably push it to the higher side. Remains to be seen.

As you can tell from the 100 bps that we've declined, which has been, with the exception of the first 50 bp move, been fairly slow, the loan yields really haven't moved all that much. I would put it into that context, Adam, and then allow you to kind of create the scenarios of the speed of change, the pace of change, the volume of change, because that's really what's at foot. You need to kind of have a sense of that or a view of that to kind of figure out where the loan yields may end up.

Adam Butler (Analyst)

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

Bonnie Lee (CEO)

Yeah. We provide a guidance of quarterly production of $42 million, $45 million a quarter. That guidance stands, and then just plus minus $5 million from that. Going into the second quarter, as Anthony mentioned, even our SBA, we do have a very solid SBA pipeline. In the first quarter, we did notice a drop in the premium from the year-end 2024. 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.

Adam Butler (Analyst)

Okay. Yeah, that makes sense to me. Those were all my questions. I appreciate you guys taking the time.

Bonnie Lee (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. 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 (participant)

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