Hanmi Financial Corporation

Ladies and gentlemen, welcome to the Omni Financial Corporation's fourth quarter and full year 2024 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, please press star zero on your telephone keypad. I'd like to turn the conference over to Ben Brockowitz, investor relations for the company. Please go ahead.

Thank you, Matt, and thank you all for joining us today to discuss Hominy's fourth quarter and full year 2024 results. This afternoon, Hominy 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 hominy.com. I'm here today with Bonnie Lee, President and Chief Executive Officer of Hominy 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'd 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 Form 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 fourth quarter and four-year 2024 results. Before we begin, I want to address the devastating fires in the Los Angeles area that began earlier this month. Los Angeles has been Hami's home for over 40 years, and we are deeply saddened by these events and their profound impact on our community. We have been in close contact with our team members and customers. I am pleased to report that fortunately, there has been no direct impact to our employees' homes, nor significant collateral loss or business interruption to our commercial customers. We want to thank the firefighters, first responders, and volunteers who have been instrumental in helping those affected. We know the road to the recovery will be a long one, and HANMI stands by as a trusted resource to provide assistance as the situation continues to evolve. Now, turning to our results, strong operational execution by our team in the fourth quarter resulted in a successful close to 2024 and provided a solid foundation for continued momentum in 2025. Throughout 2024, we focused on managing the factors within our control as we navigated constantly evolving and dynamic market environment. We continued to execute our strategy, leveraging our proven relationship banking model to further grow and diversify our customer base and loan portfolio. We maintained a sharp focus on prudent credit administration and disciplined expense management and we made meaningful progress in advancing our corporate career initiative. Now, let me review some highlights of the past year. Net income for 2024 reached $62.2 million, or $2.05 per diluted share. Our return on average assets were 0.83%, and return on average equity was a 7.97%. We made significant strides in diversifying our loan portfolio and deposit franchises. In line with our diversification strategy, we increased our CNI portfolio by 16%, driven by strong contribution from our USKC initiative, as well as the acquisition of new relationships throughout our network. We also closely manage our commercial real estate exposure in line with our ongoing efforts to reduce the CRE as a percentage of our portfolio over time. Importantly, Growth in our CNI portfolio contribute to the increase in non-interest-bearing demand deposits, which I'll come back to in a moment. We sold $88.4 million in residential mortgage loans into the secondary market throughout the year, generating $1.5 million of non-interest income while also strengthening our balance sheet. Deposits grew by 2.5 percent in 2024, driven by a 4.6% increase in non-interest-bearing deposits, which now account for 32.6% of total deposits. This strong performance reflects our success in building and nurturing lasting relationships with our customers, who rely on us to provide the quality banking products and services they need. In today's highly competitive banking space, Our ability to cultivate a holistic customer relationship is an important advantage. As I have highlighted in the past, our Corporate Korea, or USKC, initiative is one of our core growth strategies. Through this initiative, our dedicated bankers build relationships with the U.S. domiciled subsidiaries of Korean companies, providing them with the banking advice, lines of credit, real estate investment loans, asset-based loans, and other services. We currently serve businesses in a wide range of industries, including real estate, auto part manufacturing, hospitality, energy, and more. In 2024, we grew our USKC loan portfolio by 23%, and it now represents 15% of our total loan portfolio, up from 12.3% last year. In addition, as I previewed last quarter, We opened a representative office in Seoul, South Korea, which marks a key milestone for Hamni. Through this office, we will enhance our communication and support for our customers and expand outreach to companies looking into the U.S. market. This office complements our existing Korea desks in Los Angeles, Orange County, San Diego, and Silicon Valley, and other key cities in New York, New Jersey, Georgia, and Texas. Based on the success of our USKC initiative, we will continue to pursue opportunities to expand into additional target markets. As we diversified and grew our loan portfolio, we maintain our firm commitment to asset quality. Our asset quality remains excellent, reflecting our focus on high-quality loans, disciplined underwriting, and vigilant credit administration. Additionally, non-performing assets as a percentage of total assets improved to 0.19% and allowance for credit losses remained healthy at 1.12%. In addition to maintaining strong asset quality, we focused on enhancing efficiencies and driving growth and profitability. We made meaningful progress in optimizing our branch network, our strategic initiative to evaluate consolidation, relocation, and growth opportunities. In 2024, we consolidated three branches, one in California, two in Texas. These actions contribute to loan and deposit growth and also result in cost savings. Non-interest expenses rose modestly, just 3.5 percent for the year, as we offset some of the inflationary pressure on salaries and employee benefits with the cost savings and other categories. In 2024, we made investments in digital systems, including a new loan origination system and an online account opening system. We expect that these investments will drive operational efficiencies and improve profitability over time. We continue to retain and attract top talent across the company. Despite a highly competitive market, our employee retention remains strong, and we make key hires across business lines. I attribute our success in attracting and retaining diverse talent to our strong corporate culture and values, which are grounded in integrity, transparency, fairness, and collaboration. These attributes have established Hamni as a bank employer of choice. Finally, our strong financial and capital position allowed us to invest in growth while continuing to reward our shareholders. I am pleased to report that our board approved an 8% increase in our quarterly dividend to $0.27 per share for our next dividend payment in February. This increase underscores our confidence in our growth strategy and our commitment to delivering shareholder value. As we look ahead to 2025, we are focused on executing our growth strategy and building upon the momentum we created in 2024. Our top priorities include generating low to mid single digit loan growth with a focus on further expanding our CNI exposure while reducing CRE as a percentage of the portfolio. Continuing to sell residential mortgage and SBA loans in the secondary market to strengthen the balance sheet. Hiring additional bankers to expand our CNI business with experience in target verticals and increase our core deposit growth. maintaining our discipline credit administration practices and excellent exit quality. And last, advancing our branch optimization efforts, including the recent closure of a Korea Town Plaza branch in Los Angeles and the opening of a new branch in the greater Atlanta region in the near future. In summary, we are well-positioned to drive growth and deliver value to our shareholders in 2025 and beyond. With our relationship-driven banking model and strategic initiatives, including Corporate Korea, small business lending, and branch optimization, we remain confident that we can deliver sustainable growth by providing excellent products and services to our customers and communities. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss fourth quarter loan production and deposit gathering in more detail. Anthony?

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on loan production. Fourth quarter loan production was $339 million, down $9 million, or 2.5% from the third quarter, with a weighted average interest rate of 7.37% compared to 7.92% last quarter. We remain disciplined in our underwriting practices as we seek opportunities that meet our high-quality standards in the current rate environment. CRA production was $147 million from $110 million in the third quarter, due mainly to increased production in the industrial sector. We continue to be pleased with the quality of our CRA portfolio. It has a weighted average load-to-value ratio of approximately 48% and a weighted average debt service coverage ratio of 2.2 times. SBA loan production decreased $2 million in the fourth quarter to $50 million, from $52 million in the third quarter. However, it still exceeded our quarterly target range of $40 to $45 million. The key hires we made to our SBA team have helped us to achieve this consistent production level and to continue generating growth in small businesses in our markets. Further illustrating our success in CNA lending, commitments for our commercial lines of credit were $1.18 billion in the fourth quarter and were up 9.3% year-over-year. Outstanding balances increased by 27.3% to $504 million and utilization improved to 43% from 37% compared to last year. CNI production during the fourth quarter was $60 million, a decrease of $45 million or 43% from the prior quarter, which was particularly high. For the full year, CNI production increased 50% to $275 million. Residential mortgage loan production was $40 million for the fourth quarter. Most of our current lending opportunities continue to be in the purchase market as refinance activity remains subdued. Residential mortgage loans represented 15% of our total loan portfolio, During the fourth quarter, we sold approximately 18 million of residential mortgages from our portfolio and are currently exploring additional portfolio sales contingent on market conditions. With respect to corporate Korea, once again, we saw healthy demand from these customers who accounted for 91 million of total loan production. Our efforts to expand and grow these relationships are continuing to bear fruit. USKC loan balances were $937 million, up $19 million, or 2% from the third quarter, and represent 15% of our total loan portfolio. Loan production for the full year was commendable in the context of uncertain environment. However, higher payoffs in 2024, which increased 17% year over year, resulted in a modest increase in our loan portfolio. Next. I'll discuss deposits. In the fourth quarter, deposits were up 0.5% from the previous quarter, although our demand deposit accounts grew 2.2% or 8.8% annualized. We continue to expand our partnership base with our corporate credit clients, whose deposits increased 0.1% or to $25 million in the quarter. Our team is making progress, building new relationships that we believe have the potential for long-term growth. At quarter end, corporate real deposit represented 13% of our total deposits and 16% of our total demand deposits. The composition of our deposit base remains relatively stable, which reflects the success of our relationship-driven banking model. During the fourth quarter, our mix of non-interest-bearing deposits increased from 32% to 33%. And now I'll hand the call over to Ryan Santarosa, our Chief Financial Officer, for more details on our fourth quarter financial results.

Thank you, Anthony, and good afternoon, all. For the fourth quarter, our net interest income increased 6.8% to $53.4 million, and our net interest margin increased 17 basis points to 2.91%. The growth in our net interest income and our net interest margin was principally due to the decline in the average rate paid on interest-bearing deposits, which was 3.96 percent, down 31 basis points from 4.27 percent for the prior quarter. The 2.2 percent growth in non-interest-bearing deposits contributed favorably to the increase in net interest margin. Average loans, as well as the average loan yield for the fourth quarter, was largely unchanged from the third quarter. The Fed lowered the federal funds rate twice during the fourth quarter for a total of 50 basis points. We followed suit by lowering the rates offered on our savings and money market accounts, as well as our rates on new time certificates of deposit. For December, the average rate paid on interest-bearing deposits was 3.83%, down 12 basis points from November. Looking at January to date, the average rate paid on interest-bearing deposits was down 25 basis points from the fourth quarter average of 3.96%. Turning to our non-interest income, we posted revenues of $7.4 million for the fourth quarter, down $1.1 million from the third quarter. This decline reflects an elevated level of non-interest income in the third quarter, primarily due to the $900,000 gain from the sale and leaseback of a branch property. Gains from sales of SBA loans were $1.4 million, with trade premiums of 8.53 percent, similar to the third quarter on slightly lower sales. Gains on sales of residential mortgages continued for the fourth consecutive quarter and were consistent with the third quarter, although the premiums declined. Non-interest expenses were $34.5 million for the fourth quarter, down 1.6% from the previous quarter, reflecting a $1.6 million gain on the sale of an OREO property. Absent this gain, non-interest expenses were up 3.1% due to seasonally higher advertising and promotion activities and higher legal fees built from collections and business activities. In addition, other operating expenses included a $500,000 charge for a guaranteed repair allowance on a previously acquired SBA loan, while the third quarter included a $300,000 reimbursement from a borrower for delinquent property taxes. Our pre-tax, pre-provision income for the fourth quarter jumped 12.2% from the third quarter from notable growth in our net interest revenues and well-managed non-interest expenses. credit loss expense for the fourth quarter was $900,000, effectively representing the entirety of our provision for loan losses, as the provision for off-balance sheet items was nil again this quarter. Turning to the allowance for credit losses, we had net loan recoveries of $129,000 for the fourth quarter, when combined with the provision, increased the allowance to $70.1 million, or 1.12% of loans. The increase in the allowance from the third quarter reflects an increase in specific allowances, while the allowance for qualitative and quantitative considerations remained largely unchanged. Turning to equity capital, our negative AOCI increased $15.4 million quarter over quarter due to higher interest rates at the end of the fourth quarter. The company repurchased 24,500 shares during the quarter at an average rate of $22.91. 1,230,500 shares remain under the share repurchase program. Tangible book value per share was $23.88 at the end of 2024, and our tangible equity to tangible asset ratio was 9.41%. The company's preliminary common tier one ratio was 12.11%, and the bank's preliminary total capital ratio was 14.43%. Both the company and the bank exceeded minimum regulatory capital ratios, and the bank exceeded the minimum ratios for the well-capitalized category. With that, I'm going to turn it back to Bonnie.

Thank you, Ron. Excuse me. As I mentioned, for many years now, we have consistently demonstrated our ability to navigate dynamic market conditions by staying focused on executing our relationship-driven banking strategy. Looking ahead, our priorities include extending our core deposit base, targeting deposit-rich business verticals, and entering new markets. I want to express my gratitude to the entire HOMI team for their exceptional efforts over the past year and their dedication to supporting our customers and our communities. We are excited about the opportunities ahead to provide our customers with a personalized relationship-based banking service and products to help them achieve their financial goals while also delivering value to our shareholders. Thank you. We'll now open the call for questions. Operator, please open the line up to the questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. First question here is from Kelly Amata from KBW. Please go ahead.

Hi, this is Charlie on for Kelly model. Thanks for the question.

The policy competition has been intense among your peers and your margin came in nicely. How's the competitive landscape for deposits looking and maybe expectations for that landscape and general deposit repricing trends into 2025? Thanks.

So within our space, deposit competition has been always fierce. Having said that, though, we try to, within our marketplace, not to be really the pricing leader. We base our whole strategy on the relationship banking model. And we don't necessarily have to open up or offer up the highest rates in the marketplace.

And that has been our continued practice.

Thank you. And I guess sticking with deposits, you guys saw a benefit from repricing CDs lower this quarter. Just wondering if you could give us what the rate is for those CDs rolling off versus coming on.

Yeah, for this quarter, being first quarter of 2025, we have a total of about $770 million rolling off at 4.70%. In last quarter, we, a little less than a billion, rolled off at 5.04%. We were able to reprice it at 4.02%.

So we have plenty of room to reprice down. Thank you. That's great.

And then switching to asset quality, your credit quality is solid, but SBA is something people are watching. Are you seeing anything on the SBA side? And I missed it in your prepared remarks, but remind us what your overall exposure to SBA is in the portfolio. Thank you.

Yeah, I mean, our SBA portfolio has been, you know, consistently performing really well.

I gave you the list of numbers. So, we have approximately 100 and... I'm sorry, it's the wrong page here. Give me just a second, please. Go ahead, Donnie.

So, we actually have about 250 million of SBA exposure, and from the 250 million, about 116, 117 million is tied to the real estate.

Awesome. Thank you, guys. I'll step back. Thank you.

Our next question is from Matthew Quark from Piper Sandler. Please go ahead.

Hey, thank you. Just to follow up on the SBA discussion, can you just give us a sense for your credit box in that business and why you think your portfolio is holding up better than some others that we've seen?

Yeah, I've been asked this question a number of times, and I think I provided the same response. There are a lot of SBA lenders that produce SBA loans based on the projected cash flow. And first is, I think that we emphasize on the past performance as well as the past trends. So I think that's probably one of the differentiators. And also, within the SBA business, there are a lot of SBA lenders that deals with SBA brokers. our deals, we like to focus on driving debt from our footprint and our loan production offices versus the brokers.

Great.

And then just on your loan yields being pretty resilient given the rate cuts, anything unusual in that five, 0.97% loan yield? And if not, can you just remind us how much you have in truly floating loans?

Sure.

So, Matt, our floaters are fairly small relative to the portfolio. I think about 10% or less. And then we do have a cadre of Adjustable rate loans, which are basically the SBA product, which we price quarterly based on the prime. And then a cadre of adjustables and residential, which are your mix of three ones, five ones, seven ones. And then we have the smaller CRE loans, which are typically fixed for five years and then will float for the remaining two of their of their lives. So that blend keeps the rate fairly stable. We tried to illustrate that for you on page 19 of the accompanying slides where we trend the trend line for the loan yield portfolio relative to the change in the Fed funds and then relative to the changes in our cost of interest bearing deposits. So there's some staying power in that loan yield, as we'll continue to get the benefit of declining interest-bearing deposit costs.

Great. And then just back to the CD repricing, how much do you have coming due in the second quarter as well, and at what rate?

Second quarter, we have another $685 million at 4.42%.

Okay. Great.

And then lastly, just on the expense run rate, assuming we add back the Oreo recovery, what are your thoughts on the run rate and going into 1Q and kind of expense growth in general for the year?

So broadly, our expenses have basically been moving with inflation. When you get to quarterly analysis, you'll start to see you know, the seasonality in advertising and promotion, so they'll drop off in the first quarter. You'll see merits come in. They happen in the second quarter. So aside from, well, you would just seasonality type of ideas, you should just see them generally move with the general level of inflation.

Okay, great. Thank you. Next question is from Gary Tenner from DA Davidson. Please go ahead.

Hey, guys. I'm on for Gary Tenner. So loan production was essentially flat this quarter. What are you seeing there? Is that seasonality? And how should we think about loan growth in the first quarter of the year? Would like the mid-single or low to mid-single digit loan growth you guys guided to? Would that be back half-bated?

So, you know, considering the environment, our overall production was pretty solid. And, you know, it's a similar trend as the prior quarter, third quarter. You know, when we account for year over year, we didn't notice, as we mentioned in our comments, that this year we had the payoffs for the annual payoffs compared to the prior year, it went up 17%. So, you know, and then payoffs are something that's not, you know, within our control. So it's not so much about the production, but I think that where the payoffs going to end again this year, that, you know, we'll know, you know, what kind of net loan growth, but we are projecting low to mid single digit growth for the year.

Right, that makes a lot more sense. And should we expect deposit growth next year to match loan growth essentially?

It'll be a, yeah, it'll be a similar trend.

Okay, and then on the capital front, you guys mentioned it in the prepared remarks. You guys did some research this quarter. How should we model further repurchases? Should it be a similar trend or more opportunistic depending on the share prices?

Yeah, I would say it really depends on how the markets are performing in any particular quarter and what advantages that might present to us.

Sounds good. Thank you for taking my questions. Thank you.

Our next question is from Matthew Erdner from Jones Trading. Please go ahead.

Hey, guys. Thanks for taking the questions. Just a couple quick ones for me. You know, loan sales, it looks like you guys had the most you've sold in some time. Can you talk about, you know, just the opportunity there, you know, where you're seeing the gain of sale margins and, you know, kind of the expected pace that you're thinking for the next year in terms of loan sales?

Well, it's, it's all depends on the market condition, but, uh, uh, in 2024, we were able to sell total of 88.4 million, um, either to, um, investor or other community banks. Um, the premium ranges from 2% to 2.3, 2.4 ish. So we continue to explore the opportunity to sell a similar level of sales in 2025.

Got it. Thank you. As a final reminder, if you'd like to ask a question, it is star one.

If there are no further questions, I'd like to turn the floor back to management for any closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.