HAFC (2025 - Q2)

Ladies and gentlemen, welcome to Hanmi Financial Corporation's Second Quarter 2025 Conference Call. As a reminder, today's call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the conference call over to Ben Brodkowitz, Investor Relations for the company. Please go ahead, Ben. Ben Brod

Thank you, operator, and thank you all for joining us today to discuss Hanmi second 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. Discussions 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.

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2025 results. I am pleased with Hanmi team's consistent execution this quarter, building on our progress in the previous quarter for a solid first half of the year. We delivered further margin expansion and drove growth in our loan portfolio with a healthy contributions from C&I and residential mortgage loans. Deposit growth was also solid for the quarter with a continued contribution from commercial accounts and new branches. Importantly, asset quality improved significantly from an already strong base with a notable reductions in criticized and nonaccrual loans. This progress is a testament to our focus and proactive portfolio management through vigilant and prompt actions. Now let me review some key highlights of the quarter. Net income for the first quarter was $15.1 million or $0.50 per diluted share compared to $17.7 million and $0.58, respectively, in the first quarter. The decline in net income was primarily due to an increase in credit loss expense. Our return on average assets was 0.79% and return on average equity was 7.8%. Pre-provision net revenues grew 3.7% or $1 million, showing the strength of our core business. Once again, we expected net interest margin increasing by 5 basis points to 3.07%, primarily driven by lower funding costs. As I just mentioned, asset quality is excellent, improved significantly from the first quarter due to our proactive portfolio management actions. Net charge-offs for the second quarter were considerably higher than the first quarter, reflecting the $8.6 million charge-off on the $20 million nonaccrual syndicated commercial real estate office loan we identified last quarter. While disappointing, we believe this action brings the matter closer to resolution and is not reflective of any systematic issues. Total loans increased $6.31 billion, 0.4% on a linked-quarter basis or 1.6% annualized with a higher C&I and residential mortgage loan production during the quarter. Deposits increased by 1.7% in the second quarter, driven by new commercial accounts and meaningful contribution from our new branches. This growth underscores our ability to continuously forge new customer relationships while strengthening our long-standing ones. Noninterest-bearing demand deposits have increased by over 7% from the second quarter of 2024 and continue to represent a noteworthy percentage of total deposits at 31.3%. Noninterest income increased to 4.5%, primarily reflecting the success of our SBA efforts. We continue to maintain disciplined control over our operating expenses, holding our efficiency ratio constant at 55.7% compared to the prior quarter. During the second quarter, we also expanded our commercial banking capabilities by successfully recruiting talented new bankers in both C&I and SBA lending to support growth in these key asset classes. Given the strength of our loan pipeline, we are increasing our quarterly SBA production target to $45 million to $50 million from $40 million to $45 million for the second half of 2025. Turning now to our Corporate Korea Initiative. Although the economic outlook remains dynamic, we continue to add new relationships with the Korean manufacturers through our new branch in the Metro Atlanta area, where many Korean companies have U.S. manufacturing presence. We anticipate new loan production from them in the second half of 2025. Our USKC loan and deposit portfolios remained steady in the quarter with both portfolios in the low to mid-teens as a percentage of total loans and deposits. While the current economic environment is evolving, we remain optimistic about the long-term growth potential of our USKC initiative. That said, many of our USKC customers are taking a wait-and-see approach as they look for greater clarity around tariffs and their potential impact on the broader economy. Looking ahead, we believe Hanmi is well positioned for growth as we execute on our key strategic initiatives and priorities, which include driving loan growth in the low to mid-single-digit range with a focus on expanding our SBA activities and our C&I portfolios, while reducing our exposure to CRE as a percentage of the overall portfolio; building on the meaningful improvement in our C&I and SBA loan pipelines as our customers continue to adapt to the current economic environment; leveraging our strong liquidity position and maintaining robust credit metrics, which support our standing as a well-capitalized bank; preserving our significantly improved asset quality through proactive management of our portfolio and disciplined credit administration. In summary, we delivered a solid operating performance in the first half of the year fueling our momentum. We remain deeply engaged with our customers, responding to their needs as they navigate the evolving market environment and its effect on their businesses. When I look at our performance through the first half of 2025, I see the strength and execution of our growth strategy. New loan production has increased 33% over the previous year. Pre-provision net revenues have increased 31% and net interest margin is 31 basis points higher. Our customer-centric approach enables our team to deliver exceptional service and innovative market-leading solutions. Coupled with our continued focus and disciplined expense management and strong asset quality, we are well positioned to drive sustainable growth and deliver long-term value to our shareholders. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss second quarter loan production and deposit gathering in more detail.

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. Second quarter loan production was $330 million down $60 million or 4.7% from the prior quarter with a weighted average interest rate of 7.10% compared to [ 7.35% ] last quarter. The decrease in loan production was primarily due to a decrease in CRE, SBA and equipment finance, partially offset by higher residential and C&I production. We continue to be disciplined and selective with our underwriting to ensure we only pursue opportunities that meet our high-quality standards. CRE production was $112 million, down 24% from the prior quarter given our selective approach. The elevated interest rate environment continues to impact traditional and refinancing activity. We remain pleased with the quality of our CRE portfolio. It has a weighted average loan-to-value ratio of approximately 47% and weighted average debt service coverage ratio of 2.2x. SBA loan production decreased $8 million from the prior quarter to $47 million, but still exceeded the high end of our quarterly target range. The study production highlights the impact of our recent team hires and the growth we're driving among small businesses in our markets. On a year-to-date basis, SBA production increased 20%. During the quarter, we sold approximately $35.4 million of SBA loans from our portfolio and recognized a gain of $2.2 million during the quarter. C&I production during the second quarter was $53 million, an increase of $11 million or 26%. The increase was due primarily to adding new C&I talent and our efforts to further grow this portfolio. Total commitments for our commercial lines of credit remained healthy and over $1 billion in the second quarter, up 3% or 12% on an annualized basis. Outstanding balances increased by 2%, resulting in a utilization rate of 38%, consistent with the prior quarter. Residential mortgage loan production was $84 million for the second quarter, up 52% from the previous quarter due primarily to increased activities of our correspondent lenders. Of note, most of our current lending opportunities continue to be in the purchase market as refinance activity remains subdued. Residential mortgage loans represent approximately 16% of our total loan portfolio, consistent with the previous quarter. During the second quarter, we did not finalize the sale of residential mortgages. However, this was completed at the beginning of the third quarter. We'll continue to explore additional sales, contingent on market conditions. Although we are making good progress expanding our USKC relationships, many of these customers are temporarily on the sidelines as they await greater clarity given the current economic conditions. USKC loan balances were $842 million, representing approximately 13% of total loan portfolio. Turning to deposits. In the second quarter, deposits were up 1.7% from the prior quarter driven by new commercial accounts and contributions from our new branches. Deposit production for USKC customers were down slightly from the previous quarter, but remained solid at $61 million. Our team is making good progress adding new relationships that we believe can grow over time. At quarter end, Corporate Korea deposits represented 14% of our total deposits and 16% of our demand deposits. The composition of our deposit base remains stable, which reflects the success of our relationship banking model. During the second quarter, our mix of noninterest-bearing deposits remained healthy at 31% of total bank deposits. Asset quality improved significantly from the first quarter due to proactive portfolio management, as criticized loans decreased 72%, reflecting $85 million in loan upgrades and $20 million in loan payments. Nonaccruals also decreased 27% and loan delinquencies declined to 0.17% of total loans. Our credit quality remains strong, which we expect to continue given our vigilant credit administration practices. And now I'll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on our second quarter financial results.

Thank you, Anthony, and good afternoon to all. As Bonnie noted, our pre-provision net revenues increased 3.7% quarter-over- quarter, reflecting higher levels of net interest income and noninterest income and expanding net interest margin and well-controlled noninterest expenses. Looking to the components of pre-provision net revenues, we generated a 3.7% increase in net interest income, posting $57.1 million for the second quarter. Net interest margin also improved by 5 basis points to 3.07%. The growth in net interest income was principally due to lower rates on interest-bearing deposits, a higher volume of average loans and 1 extra day in the quarter. The growth in net interest margin primarily reflected a 9 basis point benefit from lower levels of borrowed funds offset by a 6 basis point reduction in the contribution from loans and interest-bearing deposits. Notably, the average loan-to-deposit ratio for the second quarter was 95.4%, and down from 97.4% for the first quarter. Noninterest income was $8.1 million, up 4.5% from the first quarter due to a higher level of SBA gains and income from a bank- owned life insurance policy. Gains on SBA loan sales were $2.2 million, up 8% from the first quarter with a 10% higher volume of loans sold totaling $35.4 million, while trade premiums declined 21 basis points to 7.61%. As Anthony noted, we did not conclude the sale of residential mortgage loans during the second quarter, and as a result, we had $41.9 million of residential mortgage loans classified as held for sale at quarter end. The sale of these loans closed early in the third quarter for a gain of $699,000. For the second quarter, noninterest expense was $36.3 million, up 3.9% from the first quarter. However, the efficiency ratio remained the same at 55.7%. Salaries increased 5.2%, reflecting annual merit increases and promotions, along with, however, lower amounts of capitalized salaries. Since quarterly loan production was lower, capitalized salaries were also lower, comprising $400,000 of the quarter-over-quarter increase. Advertising and promotion expenses were higher in the second quarter due to the opening of our Atlanta branch and other promotions. During the quarter, we also sold our sole OREO property for a gain of $596,000. Credit loss expense for the second quarter was $7.6 million and included a loan loss provision of $7.5 million and a provision for off-balance sheet items of $100,000. Notwithstanding the higher level of net charge-offs, the provision also reflects an increase in estimated loss rates for quantitative and qualitative considerations in the allowance and an increase in loans outstanding. Net loan charge-offs were $11.4 million. This included the $8.6 million loan charge-off on the nonaccrual commercial real estate loan identified last quarter for which there was a specific allowance of $6.2 million. As a percentage of average loans, net loan charge-offs annualized were 73 basis points for the second quarter compared with 13 basis points for the first quarter. Excluding the large loan charge-off, net loan charge-offs would have been 18 basis points for the second quarter. At the end of the second quarter, the allowance for credit losses stood at 1.06% of loans. As Bonnie and Anthony mentioned earlier, our asset quality metrics are strong with delinquent loans, criticized loans and nonaccrual loans, all less than 1% of total loans. Our capital ratios also remained strong. During the second quarter, in addition to the $0.27 per share common dividend declared and paid, Hanmi repurchased 70,000 shares of common stock at an average price of $23.26 for a total of $1.6 million. Tangible common book value per share increased to $24.91 and the ratio of tangible common equity to tangible assets was 9.58%. Hanmi's preliminary common Tier 1 capital ratio was 10.63% and the bank's preliminary total capital ratio was 14.39%. With that, I will turn it back to Bonnie.

Thank you, Ron. We are pleased with the progress we have achieved thus far in 2025 and remain encouraged by the long-term growth opportunities ahead. Although we are mindful of the current economic conditions, our unwavering focus is on delivering bespoke relationship-driven banking services that facilitate our customers' objectives and create value for our shareholders. Our strategy is clear: to broaden our loan and deposit base, strengthen and establish new relationships within select deposit-rich markets and drive growth in key regions. This steady and disciplined methodology has served us well through challenging economic conditions, and we are confident in our ability to execute effectively and deliver sustained profitable growth. Thank you. We'll now open the call to answer your questions. Operator, please open up the line.

[Operator Instructions] Our first question today is coming from Kelly Motta from KBW.

Maybe starting off on loan growth. I think in your prepared remarks, you reiterated the low- to mid-single-digit range. Mid-single digits would imply a step-up from the second half of the year. Just wondering if you could provide some color as to how the pipelines are holding up, the composition of growth ahead? And what would get you towards the upper end of that range?

Sure, Kelly. So in general, our second half, in terms of production, is usually higher than the first half of the year. And going into the third quarter, we already have a very strong pipeline of new loans, much higher than the second quarter initial pipeline. So with that, as long as the payoffs remain within the range as well as for the line credit customers, line utilization and fluctuations remain, we could probably reach the mid-single digit as we speak.

Got it. Okay. That's helpful. And then on the margin, you had some continued improvement in deposit costs, so the rate at which is slowing. I believe in the past, you provided a spot deposit rate. And I'm wondering if you could provide the color on that as well as the cadence of time deposit repricing and if there's still an additional pickup from that if we get a rate cut here later this quarter.

Sure, Kelly. So first, looking at interest-bearing deposit costs. So for the quarter, average interest-bearing deposit costs were 3.64%. For the month of June, interest-bearing deposit costs were 3.6%. So you can see they're about 4 basis points down. With respect to time deposits or CDs, they were 4.05% for the quarter. They were 4.01% for the month of June. So again, down about 4 basis points. When you look at our maturities that are coming in the third quarter, the average rate of those maturing CDs is 4.12%. So roughly 10, 11 basis point differential from where we are for the month of June. So all of that said, I would continue to expect net interest margin to increase. However, the rate of increase, I think, will continue to slow given the proportion of time deposits to the total portfolio. And again, expecting no other rate increases -- or decreases, I'm sorry, for the remainder of the year. I just think you'll continue to see kind of a diminishing benefit of net interest margin growth.

Got it. That's helpful. And then maybe last one for me on credit. You guys obviously had the one larger net charge-off that impacted the provision this quarter. But stepping back from that, it seems like criticized assets are down meaningfully. And if I'm hearing you right, the commentary on credit is actually quite constructive as we look ahead. Can you provide some additional color as to what gives you the confidence and kind of the drivers that brought criticized asset -- criticized levels down? As well as -- was this larger loan, an office credit? And I think you have some substantial portion of that matures over the next year. So I realize there's a lot in that question, but I'm just hoping to get more color all around on that.

Sure. So within the quarter, we had a very good success in resolving the loans in -- particularly in the special mention category, totaling over $100 million -- close to $106 million. So mainly, it's in 2 loans. The first loan, the borrower really stepped up and increased commitment, expressing the commitment by paying down the loan by $20 million. And the second loan, with the improved operating performance and then partial paydown in the prior period, we were able to upgrade on these 2 loans. But not only on the special mention loan, but in the nonperforming category, even in the past to between [ 30 and 89], all metrics have improved tremendously, and an already very solid, very strong asset quality numbers. And one of the reasons we repeatedly commented is our very proactive portfolio management and then also slicing dicing over the portfolio, and that has come to the result. And the loan that we charge-off of $8.6 million. This is a syndicated office property and the only syndicated office CRE loan that we have. And it has been paid as agreed with the satisfactory debt service coverage. However, when it matured in early January, the lead lender and the sponsor have not come to the terms for resolution. So in the -- during the second quarter, with an updated appraisal, we recorded the $8.6 million charge-off for the collateral shortfall. While disappointing, we believe this is the best course of action and a collateral-dependent loan. So -- and that's why we provided the charge-off.

Yes. Kelly, if I may add on the office portfolio, other than the one large credit that just Bonnie mentioned, we closely monitor all other loans of $550 million, approximately $200 million are maturing within this year. We looked at all the credits. There's no major credit issues or repricing risk that we are seeing right now. So other than those one large one-off loans, we don't see any other major credit issues at this time.

[Operator Instructions] Our next question is coming from Gary Tenner from D.A. Davidson.

I'm Ahmad Hasan on for Gary. I've got a quick one on loan growth. So given the strong C&I production this quarter, should we expect C&I to drive loan growth in the back half of the year? Sorry, if I missed this earlier.

Yes. Looking at the pipeline coming into third quarter, C&I pipeline -- level of the C&I pipeline is much higher than that of second quarter. And it is our intention to target more C&I with a higher deposit opportunities. That's been our effort from the past year. So yes, C&I, along with our mortgage and SBA will drive the growth.

Yes. In addition to that, I think that in terms of just as I mentioned earlier, the production in the second quarter is generally high for us for the last couple of years. So we will see -- we expect to see more increased activity. So including the C&I, it could possibly come from the CRE as well. But one noticeable area is that residential mortgage and SBA loans for the last couple of quarters have really contributed to the production and the net balance growth.

Right. That makes sense. And if I can follow up on a buyback question. I see the CET1 is north of 12% and buybacks picked up a tiny bit this quarter. Should we expect similar level of buybacks from you guys?

As I mentioned before, the decisions with respect to repurchases are framed each quarter by the Board of Directors. So what I offer to you is a backward look at the ranges in which we made purchases. I think over the past year plus from a low of $25,000 to a high of $75,000. So I would just point you to the past and to look at those ranges, and that might help you with your question.

Sounds good. And maybe last one for me on the expenses. It seems like you guys are holding the line there with a slight pickup in salaries. Should we expect expenses to remain relatively stable for the rest of the year?

I believe so. When you look at our quarterly spend, you'll see some seasonal patterns. Fourth quarter typically has a higher spend in advertising and promotions. First quarter, you see the payroll tax effects. So if you just think about the different seasonalities that occur, that said, I think we will be within relatively the same range as we are currently.

Next question is coming from Adam Kroll from Piper Sandler.

This is Adam Kroll on for Matthew Clark. So I guess to start on credit. I was just curious how much remaining exposure there is on the syndicated office loan? And could you just remind us how large the syndicated book is as a percent of the portfolio?

Yes. So on this particular subject, we have about $11 million outstanding.

And the syndicated portfolio represents approximately 4%, about $250 million-ish.

Got it. That's helpful. And then obviously, the reserve dropped a bit this quarter. And I was just curious, do you feel comfortable where it is today? Or do you plan to build that up kind of towards the 1.1% range?

We are very comfortable with the reserve at its current level. As we pointed out, there was growth attributed to not only an increase in loss factors, but also an increase in the outstanding portfolio. So looking out, we do anticipate the loan book to grow, with that then would follow an increase in the provision and potentially the coverage ratio depending on kind of the mix of the loan book. And then, again, the outlook this past quarter, there's still shades of declining economic performance, which could portend recessionary ideas. We need to see how the economic outlooks unfold as we go through the third and fourth quarter and where the sentiment might be lying with respect to those ideas.

Got it. That's super helpful. Last one for me is maybe just on the expense side. Do you have plans to add additional C&I and SBA bankers in the back half of the year? And is that kind of built into that stable expense guide?

So all the major hires we have completed during the first half. So in terms of a number of new relationship managers or marketing managers, I think it would be holding pretty steady.

Next question is a follow-up from Kelly Motta from KBW.

Thanks for letting me jump back in. Just a minor cleanup question for Ron. A lot of the California banks have announced revisions in their tax rate expectations with the change in the California law. Just wondering anything notable to note on a go-forward basis, or is this, call it, 29% a good approximation of the run rate ahead.

Yes, Kelly. So we fortunately or unfortunately, are largely based in California. And so the change in the apportionment is just not as large for us as it might be for other institutions. That said, the effective tax rate for the 6 months was 29.25%. So an effective tax rate of probably about 29.5-ish is probably indicative of how the year might turn out. We have a bit more discrete items in the first half of the year than we do in the second half of the year. And so the effective tax rate tends to drift up as we complete the year.

Got it. That's helpful. Last question for me on the occupancy line. I kind of expected that to tick up related to expansionary efforts. Is this $4.3 million a good go-forward run rate? Or is there anything to build in as you kind of like add -- have added there?

So in terms of expansion, I would imagine you're speaking to people. And for people, we have existing infrastructure that will accommodate any additional seats. So there's no expense push because of that idea. With respect to the branch footprint, as we've mentioned in the past, we annually take a look at how we are situated, and we will make decisions on consolidation, on relocation, on new markets. And so that will continue. But if you look backwards, I don't think that event or that idea manifested in any large increment or decrement to our spend. We kind of try to create headroom, fill in headroom, trying to keep things about the same but for inflation as best we can.

Got it. Thanks for the clarification. I must have thought you had expanded more recently than you have. Appreciate it.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments.

Thank you for participating in today's call. We value your interest in Hanmi and look forward to keeping you informed about our progress throughout the year. Thank You.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.