Good day, and welcome to the Hope Bancorp 2024 First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Nicholas. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2024 First Quarter Investor Conference Call. As usual, we will begin -- we will be using a slide presentation to accompany our discussion this morning, including an earnings call presentation and a merger agreement presentation, both of which are available in the Presentations page of our Investor Relations website. Beginning on Slide 2, let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events as well as statements regarding the proposed transaction between Hope Bancorp and Territorial Bancorp including the expected time line for completing the transaction, future financial and operating results, benefits and synergies of the proposed transaction and other statements about the future expectations, beliefs, goals, plans and prospects of Hope Bancorp as well as the combined entities. These statements constitute forward-looking statements and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The closing of the proposed transaction is subject to regulatory approvals, the approval of the shareholders of Territorial Bancorp and other customary closing conditions. If the transaction is consummated, we may not achieve anticipated synergies, cost savings and other benefits from the transaction as a result of higher-than-anticipated transaction costs, deposit attrition, operating costs, customer loss and business disruption following the merger, including difficulties in integrating the 2 operations. In addition, some of the information referenced on this call today are non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the safe harbor statements in our press release issued this morning. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. Now we have allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, our Chief Financial Officer. Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let us begin on Slide 3 with a brief overview of the quarter. For the first quarter of 2024, we earned net income of $25.9 million or $0.20 per diluted share compared with net income of $26.5 million or $0.22 per diluted share for the fourth quarter of 2023. Excluding notable items, our net income was $27.4 million, and our earnings per share were $0.23. Notable items this quarter comprised merger-related costs of $1 million or $752,000 after tax, an incremental FDIC special assessment of $1 million or $721,000 after tax and the restructuring cost of $143,000 or $103,000 after tax. Last quarter, net income, excluding notable items, was $38.3 million or $0.32 per diluted share. Notable items in the fourth quarter comprised restructuring charges and an FDIC special assessment. Moving on to Slide 4. This morning, we announced a definitive agreement to acquire Territorial Bancorp, the parent company of Territorial Savings Bank, a $2.2 billion in asset institution based in the state of Hawai'i. This transaction creates the largest U.S. regional bank catering to multiethnic customers across the Continental United States and the Hawai'ian Islands. Founded in 1921, Territorial has been supporting their local communities and providing personal financial services to their customers for over a century. Hope is excited to be partnering with a bank that shares our values, and we intend to preserve and continue to build on territorials long and storage legacy. To ensure continuity of service for the customer base and employees. After the close of the transaction, the legacy Territorial franchise will continue to do business under the Territorial Savings Bank brand as a trade name of Bank of Hope. The partnership with Territorial expands our footprint into the attractive Hawai'i…

Thank you, Kevin, and good morning, everyone. Beginning with Slide 10. Our net interest income totaled $115 million for the first quarter of 2024, a decrease of 9% from the fourth quarter. This largely reflects a decline in average loans and a higher cost of interest-bearing deposits, partially offset by a decrease in average CDs and wholesale borrowings. Net interest margin for the 2024 first quarter contracted 15 basis points to 2.55%. At the end of the first quarter, we paid off $1 billion of our Bank Term Funding Program borrowings and the remaining $695 million was paid off in early April. We used interest-earning cash for the payoff. The positive spread earned on BTFP borrowings contributed approximately $3.6 million to net interest income in the first quarter. All else equal, the payoff of the BTFP should be a positive to our net interest margin going forward. Moving on to Slide 11. Our average loans of $13.7 billion decreased 2% linked quarter. The average yield on our loan portfolio increased 1 basis point to 6.25%. As Kevin referenced, our lending team's momentum is rebuilding and loan growth trends are improving. Average deposits of $14.9 million decreased 3% quarter-over-quarter and the weighted average cost of interest-bearing deposits increased 19 basis points. In the first quarter of 2024, we absorbed the renewal of promotional CDs from the year ago first quarter. I would like to highlight that month-to-date in April 2024, the spot cost of our deposits has decreased slightly as we benefit from an improved pricing approach following our line of business focused reorganization. On to Slide 12. Our noninterest income was $8 million for the first quarter compared with $9 million for the fourth quarter of 2023. Growth in deposit service fees was offset by a decrease in other noninterest…

Thank you, Julianna. Moving on to the outlook on Slide 15. Our pending transaction with Territorial Bancorp is expected to close by year-end 2024 and does not impact our fourth quarter 2024 outlook. In terms of our fourth quarter 2024 outlook, relative to the fourth quarter 2023 actuals, we have the following updates. Fourth quarter to fourth quarter, we still expect average loans to grow at a percentage rate in the low single digits, up from $14.05 billion in the fourth quarter of 2023. In terms of net interest income, we utilized the current implied forward interest rate curve in our baseline. Therefore, we are factoring in 1 Fed fund's target rate cut of 25 basis points in September. This compares with 5 Fed fund's target rate cuts implied by the forward curve in January of 2024. Accordingly, we now expect net interest income for the fourth quarter of '24 to decline between 5% and 7% from $126 million in the fourth quarter of 2023. This includes the net impact of the payoff of the bank term funding program, which contributed a positive $4 million to our net interest income in the fourth quarter of 2023. Year-to-date, secondary market premiums for SBA loan sales have improved, and we are likely to resume SBA loan sale activity with a small volume in the second quarter. Fourth quarter to fourth quarter, we still continue to expect operating expenses to decrease by over 5% from $85 million in the fourth quarter of 2023. Our outlook translates into positive operating leverage when comparing the fourth quarter of 2024 with the fourth quarter of 2023 with the decrease in expenses plus the gains from the resumption of SBA sales exceeding net interest income pressure. Finally, in our 2024 outlook, we continue to assume an essentially…

[Operator Instructions] First question comes from Gary Tenner with D.A. Davidson.

I wanted to ask for some more color, if possible, in terms of some of the financials around the deal, including what your expectations are for onetime merger expenses, thoughts around credit marks and projected cost saves and timing of those.

Gary, this is Julianna. The deal marks as you know, are something that is going to reflect the forward rate curve or the valuation at that point in time. So those will shift. But right now, we are assuming deal marks of approximately about 15% on the loans, approximately 17% change on the securities. And on the loans, we're assuming that accretion on that will be lower in the first couple of years, accretion income because this is a residential mortgage portfolio, right, that's going to be a little bit more longer dated. The average life of it will be 7 years, but we expect to prepay to be back-end loaded when interest rate changes, change in life events. So we're not assuming a front-loaded accretion. In terms of the deal expenses, we're assuming deal expenses, and we're still working out some of the related expenses as we go through our integration planning process will be in the $25 million to $30 million range. And the cost saves, we're assuming 75% in the first year. And then 100% in the subsequent year. I will say that this is not necessarily a cost saves transaction. This is a strategic market expansion transaction that provides us an excellent high-quality core deposit base. And the -- and we are focused on making sure that the customer experience and transition period is seamless. So unlike maybe in-market transaction, the cost saves are going to be the number that I just told you about.

Okay. I appreciate that. And then just more broadly, as it relates to the Territorial franchise and how you're thinking about that market longer term, I know if you go back several years, growth of Territorial's deposits have lagged the state of Hawai'i in total. I wonder if you guys could provide any kind of color in terms of why that may have been the case? And kind of how you're thinking about approaching that market longer term?

Well, we believe that Territorial's long legacy in the State of Hawai'i has established a very good market presence in Hawai'i. And with our larger balance sheet and our broader array of banking products and services, I think we have really good market share expansion opportunities in Hawai'i. And this will also become a very beneficial experience for the customers of Territorial.

Gary, if I can just add real quick that you asked about the transaction expenses. What I quoted to you was the pretax number. So I just want to make sure that's clear.

Did you share that 27.5% of Territorial interest expenses will be the expected cost savings.

And the cost savings will be 27.5%. It just happens to be in the same range as the deal cost.

[Operator Instructions] The next question comes from Chris McGratty with KBW.

Kevin or Julianna, I just want to go to Slide 3 for a second, the double-digit earnings accretion that you referenced, Julianna, you mentioned that accretable isn't going to be notably higher or front-loaded. If you were to kind of unpack the double digit, like how much is purchase accounting versus just core, I would say.

Well, I mean in the current interest rate environment, accretion is core. But between the 3, it's going to be mixed -- between the kind of 3 components of EPS accretion, it's going to be a combination of cost saves, right, which are going to be phased in over time as we do the transition. The accretion on the balance sheet. And then the third component will be balance sheet restructuring, repositioning Territorial does provide us balance sheet liquidity optionality with their securities and their cash position. So there will be some redeployment of that as well built into our earnings accretion and we're going through our transaction -- I mean, integration planning process right now. So as we kind of tighten up the model in the sense of going through this process, we will share more details.

Okay. Great. And if I could just add one more. The interest rate marks are understandably large. But aside from that, maybe a little bit more color on just the perception of the credit portfolio, the diligence you did, any portfolios that might not be core to the legacy Hope Bancorp.

It's an excellent asset quality portfolio. We took a look at it in multiple ways through the due diligence process. Obviously, we needed to make sure that we had the marks on the balance sheet correctly estimated between interest rate and credit. I mean, with NPA ratio of only 10 basis points. I mean this is -- 97% of that is the residential mortgage portfolio and a low LTV. It's a clean asset quality portfolio.

[Operator Instructions] The next question comes from John Deysher with Pinnacle.

I was just curious if you could tell us how this deal came about? How you found Territorial? And were there any other bidders for the bank?

Well, this is Kevin. Well, my counterpart at Territorial and I have had casual interactions over the years. And in the current interest rate environment, both of us concluded that a strategic partnership between Hope and Territorial would be very, very compelling. So we had engaged a serious conversations from the -- towards the end of 2023. And we came up with announcing the deal signing this morning. So I understand that Territorial has talked to other potential buyers. But from strategic perspective, they must have concluded that Hope would be the most ideal deal partner for this for this deal.

Okay. That's helpful. You're going to keep the franchise intact. What about the management team at Territorial? Who is going to be running [indiscernible]

Yes. We plan to maintain most of the customer-facing and frontline employees at Territorial. And we believe that capitalizing on their very good reputation and traditionally good services and loyal customers at Territorial would be very important for us to continue after the close. So we will retain most of the employees. And the cost savings will come from mainly [indiscernible], corporate and public company expenses that will be redundant after the close. Like we said, this is not a deal for mainly cost savings or elimination of competition. This is more of a strategic merger to improve our market share growth opportunities in the new market.

[Operator Instructions] The next question comes from Gary Tenner with D.A. Davidson with a follow-up.

I had just a quick follow-up. Julianna, in terms of your comment regarding the deposit rates month-to-date April, were you referencing that relative to the full quarter average from the first quarter?

Just [indiscernible] March 31 spots. So from March 31 spot...

Did you give us the March 31 spot? If I missed it, I apologize.

No. Our March 31 spot was 367 for total deposits, and we're down several basis points from that as of right now in April.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Actually -- excuse me, may I make a comment. The spot that I just quoted to Gary at 367 excludes some cost benefits that we have from hedge accounting on our deposit book. So the hedge adjusted spot is present in our average balance sheet is 342, and we're down several basis points from that 342. So I just wanted to clarify that. Apologies.

Once again, thank you all for joining us today, and we look forward to speaking with you next quarter. So long, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.