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As filed with the Securities and Exchange Commission on June 21, 2024
Registration Statement No. 333-
UNITED STATES
SECURITIESAND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
S-4
REGISTRATION STATEMENT
UNDER
THESECURITIES ACT OF 1933
HOPE BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 6021 95-4849715
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
3200 Wilshire Boulevard, Suite 1400
Los Angeles, California 90010
(800)
731-2265
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Angelee J. Harris
General Counsel and Secretary
Hope Bancorp, Inc.
3200Wilshire Boulevard, Suite 1400
Los Angeles, California 90010
(213)
639-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Mark Kelson Lawrence Spaccasi
Brian H. Blaney Ned Quint
MarilynKim Luse Gorman,PC
Greenberg Traurig, LLP 5335 Wisconsin Ave., N.W., Suite 780
1840 Century Park East, Suite 1900 Washington, D.C. 20015
Los Angeles, California 90067 (202)
(310) 274-2000
586-3856
Approximate date of commencement of proposed sale of the securities to the
public:
As soon as practicable after this RegistrationStatement becomes effective and
on completion of the merger described in the enclosed proxy statement/prospectus
.
If the securities beingregistered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the followingbox and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list theSecurities Act
registration statement number of the earlier effective registration statement
for the same offering.
Indicateby check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the
definitions of "largeaccelerated filer," "accelerated filer," "smaller
reporting company," and "emerging growth company" in Rule
12b-2
of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the Registrant has
elected not to use the extendedtransition period for complying with any new or
revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.
If applicable, place an X in the box to designate the appropriate rule
provision relied upon in conducting this transaction:
Exchange Act Rule
13e-4(i)
(Cross-Border Issuer Tender Offer)
Exchange Act Rule
14d-1(d)
(Cross-Border Third-Party Tender Offer)
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until theRegistrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this RegistrationStatement shall
become effective on such date as the U.S. Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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The information in this preliminary proxy statement/prospectus is not complete
and maybe changed. The securities described herein may not be sold until the
registration statement filed with the U.S. Securities and Exchange Commission
is declared effective. This preliminary proxy statement/prospectus is not an
offer to sell thesesecurities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROXY STATEMENT/PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 21, 2024
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
To the Stockholders of Territorial Bancorp Inc.:
On April 26, 2024, Territorial Bancorp Inc. (which we refer to as
"Territorial") and Hope Bancorp, Inc. (which we refer to as"Hope") entered
into an Agreement and Plan of Merger (which we refer to as the "Merger
Agreement") pursuant to which Territorial will merge with and into Hope (which
we refer to as the "Merger"), with Hope as thesurviving corporation in the
Merger. Following the completion of the Merger, or such later time as Hope may
determine, Territorial Savings Bank, a wholly owned subsidiary of Territorial,
will merge with and into Bank of Hope, a wholly ownedsubsidiary of Hope (which
we refer to as the "Bank Merger"), with Bank of Hope as the surviving bank in
the Bank Merger. If the Merger is completed, Territorial's stockholders as of
the completion of the Merger will be entitled toreceive, for each share of
Territorial common stock owned, 0.8048 shares of Hope common stock (which we
refer to as the "Exchange Ratio"). Based on the Exchange Ratio, and on the
closing stock price of Hope common stock of $[] as of[], 2024, on the Nasdaq
Global Select Market, as reported by the
Wall Street Journal
, the latest practicable trading day before the date of this proxy
statement/prospectus, the value of the per share merger consideration payable
toholders of Territorial common stock was approximately $[] as of such date.
Based on the number of shares of Hope common stock andTerritorial common stock
outstanding as of April 26, 2024, the date of the Merger Agreement, it is
expected that Hope stockholders will hold approximately 94.4%, and Territorial
stockholders will hold approximately 5.6%, of the shares of thecombined
company outstanding immediately after the effective time of the Merger (which
we refer to as the "Effective Time").
The market prices of both Hope common stock and Territorial common stock will
fluctuate before the completion of the Merger. You should obtaincurrent stock
price quotations for Hope common stock and Territorial common stock before you
vote. Hope common stock is listed for trading on the Nasdaq Global Select
Market under the symbol "HOPE", and Territorial common stock is listedfor
trading on the Nasdaq Global Select Market under the symbol "TBNK".
The Merger cannot be completed unless the MergerAgreement is adopted and
approved by the affirmative vote of a majority of all issued and outstanding
shares of Territorial entitled to vote thereon. The closing of the Merger is
also subject to the receipt of required regulatory approvals and thesatisfaction
of the other conditions specified in the Merger Agreement.
The Merger Agreement will be voted on at a special meeting ofTerritorial
stockholders, which will be held in a virtual-only format on [], 2024 at [],
Hawaii Time, at []. At the special meeting, holders of Territorial common
stock as of the close of business on [], 2024, the recorddate for the meeting,
are entitled to notice of, and to vote at, the meeting to adopt and approve
the Merger Agreement as described in this proxy statement/prospectus.
Territorial stockholders as of the record date will also be asked to approve
acompensation proposal on a
non-binding,
advisory basis and a proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies in favor of the proposal to adopt
and approvethe Merger Agreement, as described in this proxy statement/prospectus
. Certain executive officers and each of the directors of Territorial, who are
also Territorial stockholders, have entered into a voting and support
agreement with Hope pursuant towhich they have agreed to vote "
FOR
" the adoption and approval of the Merger Agreement, subject to the terms of
the voting and support agreement. Additional information regarding the voting
process for the Territorial specialmeeting is included in this proxy
statement/prospectus.
Your vote is very important, regardless of the number of shares of
Territorialcommon stock you own. To ensure your representation at the
Territorial special meeting, please take time to vote by following the
instructions contained in this proxy statement/prospectus and on your proxy
card.
Please vote promptly whether ornot you expect to attend the Territorial
special meeting virtually. Submitting a proxy now will not
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prevent you from being able to vote at the Territorial special meeting. We
cannot complete the transactions contemplated by the Merger Agreement unless
Territorial stockholders approve the MergerAgreement and the Merger. The
affirmative vote of a majority of the outstanding shares of Territorial common
stock is required to approve the Merger Agreement and the Merger.
The board of directors of Territorial (which we refer to as the "Territorial
Board of Directors") unanimously recommends thatTerritorial stockholders vote
"
FOR
"
the proposal to approve the Merger Agreement and
"
FOR
"
the other matters to be considered at the Territorial special meeting.
Inconsidering the recommendation of the Territorial Board of Directors, you
should be aware that certain directors and executive officers of Territorial
may have interests in the Merger that are different from, or in addition to,
theinterests of Territorial stockholders generally. See the section entitled "
The Merger--Interests of Territorial's Directors and Executive Officers in the
Merger
" of this proxy statement/prospectus.
This proxy statement/prospectus describes the special meeting of Territorial
stockholders, the Merger, the documents relating to the Mergerand other
related matters.
Please read carefully the entire proxy statement/ prospectus, including the
section entitled "
Risk Factors
" beginning on page
21
, for a discussionof the risks relating to the proposed Merger, and the
annexes and documents incorporated by reference into the proxy statement/prospec
tus.
If you have any questions regarding this proxy statement/prospectus, you may
contact Laurel Hill Advisory Group, Territorial's proxysolicitor, by calling
toll-free at (888)
742-1305.
Banks and brokers should call (516)
933-3100.
Sincerely,
[]
Allan S. Kitagawa
Chairman of the Board, President and
ChiefExecutive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED ORDISAPPROVED THE MERGER OR OTHER TRANSACTIONS
DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS OR THE SECURITIES TO BE ISSUED
PURSUANT TO THE MERGER UNDER THIS PROXY STATEMENT/PROSPECTUS NOR HAVE THEY
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS ISACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES TO BE ISSUED IN THE MERGER ARE NOTSAVINGS OR DEPOSIT ACCOUNTS
OR OTHER OBLIGATIONS OF ANY BANK OR
NON-BANK
SUBSIDIARY OF EITHER TERRITORIAL OR HOPE, AND THEY ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHERGOVERNMENTAL AGENCY.
This proxy statement/prospectus is dated [], 2024 and is first being mailed or
otherwise delivered toTerritorial stockholders on or about [], 2024.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [
], 2024
To the Stockholders of Territorial Bancorp Inc.:
TIME AND DATE: [], Hawaii time, on [], 2024.
PLACE: Virtual-only format, [].
BUSINESS ITEMS: (1)
To approve and adopt the Agreement and
Plan of Merger, dated as ofApril 26, 2024 (the
"Merger Agreement"), by and between Hope Bancorp,
Inc. ("Hope") and Territorial Bancorp Inc.
("Territorial"), and to approve the transactions
contemplated by the Merger Agreement, including
themerger (the "Merger") of Territorial with and
into Hope (collectively, the "Merger Proposal");
(2)
To approve a
non-binding,
advisoryproposal to approve the compensation
payable to the named executive officers
of Territorial in connection with the
Merger (the "Compensation Proposal"); and
(3)
To approve the adjournment of the Territorial
special meeting, ifnecessary or appropriate, to solicit
additional proxies if there are insufficient votes
at the time of the Territorial special meeting
to approve the Merger Proposal, or to ensure that
any supplement or amendment to the accompanying
proxystatement/prospectus is timely provided to
Territorial stockholders (the "Adjournment Proposal").
RECORD DATE: The board of directors of Territorial (the "Territorial Board of
Directors") has fixed the close of business on [], 2024 as the record date
for the Territorial special meeting. Only holders of record of
Territorialcommon stock as of the close of business on the record date for the
Territorial special meeting are entitled to notice of the Territorial
special meeting or any adjournment or postponement thereof. Only holders
of record of Territorial common stockare entitled to vote at the
Territorial special meeting or any adjournment or postponement thereof.
PROXY VOTING: It is important that your shares be represented
and voted at the meeting. You can vote your
shares via the Internet, by telephone, or by
completing and returning the proxy card or
voting instruction card sent to you. You can
revokeyour proxy at any time before its exercise
at the special meeting by following the
instructions in the accompanying proxy statement.
NO APPRAISAL RIGHTS: Under Maryland law, Territorial common
stockholders are not entitled
to appraisal rights.
BOARD RECOMMENDATIONS: The Territorial Board of
Directors unanimously
recommends that Territorial
stockholders vote "
FOR
" the Merger Proposal, "
FOR
" the Compensation Proposal and "
FOR
" the AdjournmentProposal.
By Order of the Territorial Board of Directors,
[]
Vernon Hirata
Corporate Secretary
[], 2024
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ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and financial
information about Hope from documents filed with the U.S.Securities and
Exchange Commission (which we refer to as the "SEC") that are not included in
or delivered with this proxy statement/prospectus. You can obtain any of the
documents filed with or furnished to the SEC by Hope at no cost fromthe SEC's
website at www.sec.gov. You may also request copies of these documents,
including documents incorporated by reference in this proxy statement/prospectus
, at no cost by requesting them in writing or by telephone at the
appropriateaddress below:
For Hope documents incorporated by reference:
Hope Bancorp, Inc.
3200 WilshireBlvd., Suite 1400
Los Angeles, California 90010
Telephone:
(213) 639-1700
Attention: Corporate Secretary
You will not be charged for any of these documents that you request. To obtain
timely delivery of these documents, Territorial stockholdersmust request them
no later than five business days before the date of the Territorial special
meeting. This means that Territorial stockholders requesting documents must do
so by [
], 2024.
You should rely only on the information contained in, or incorporated by
reference into, this proxy statement/prospectus. No one has beenauthorized to
provide you with information that is different from that contained in, or
incorporated by reference into, this proxy statement/prospectus. You should
assume that the information in this proxy statement/prospectus is accurate
only as ofthe date of this proxy statement/prospectus. You should assume that
the information incorporated by reference to another document into this proxy
statement/prospectus is accurate as of the date of such document. Neither the
mailing of this proxystatement/prospectus to Territorial stockholders, nor the
issuance by Hope of shares of its common stock in connection with the Merger,
will create any implication to the contrary.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities, or thesolicitation of a
proxy, in any jurisdiction to or from any person to whom it is unlawful to
make any such offer or solicitation in such jurisdiction. Except where the
context otherwise indicates, information contained in this proxystatement/prospe
ctus regarding Hope has been provided by Hope and information contained in
this proxy statement/prospectus regarding Territorial has been provided by
Territorial.
See the section entitled "
Where You Can Find More Information
" for more details.
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TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING 1
SUMMARY 11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 19
RISK FACTORS 21
INFORMATION ABOUT THE TERRITORIAL SPECIAL MEETING 26
TERRITORIAL PROPOSALS 29
PROPOSAL NO. 1 29
PROPOSAL NO. 2 30
PROPOSAL NO. 3 31
INFORMATION ABOUT HOPE BANCORP, INC. 32
INFORMATION ABOUT TERRITORIAL BANCORP INC. 33
DESCRIPTION OF BUSINESS OF TERRITORIAL BANCORP INC. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TERRITORIAL BANCORP INC. 41
THE MERGER 69
Terms of the Merger 69
Background of the Merger 69
Territorial's Reasons for the Merger; Recommendation of the Territorial Board of Directors 74
Opinion of Territorial's Financial Advisor 77
Interests of Territorial's Directors and Executive Officers in the Merger 88
Regulatory Approvals Required for the Merger 91
Public Trading Markets 93
Appraisal or Dissenters' Rights in the Merger 93
THE MERGER AGREEMENT 94
Explanatory Note Regarding the Merger Agreement 94
Structure of the Merger 94
Merger Consideration 95
Fractional Shares 95
Governing Documents 95
Treatment of Territorial RSU Awards 95
Closing and Effective Time of the Merger 96
Exchange of Shares 96
Representations and Warranties 97
Covenants and Agreements 99
Agreement Not to Solicit Other Offers 106
Conditions to Complete the Merger 108
Termination of the Merger Agreement 109
Effect of Termination 109
Termination Fee 110
Expenses and Fees 110
Amendment, Waiver, and Extension of the Merger Agreement 110
Governing Law 111
Specific Performance 111
VOTING AND SUPPORT AGREEMENT 112
ACCOUNTING TREATMENT 113
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 114
DESCRIPTION OF HOPE SECURITIES 117
COMPARISON OF STOCKHOLDERS' RIGHTS 119
LEGAL MATTERS 129
EXPERTS 129
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DEADLINES FOR SUBMITTING STOCKHOLDER PROPOSALS 130
WHERE YOU CAN FIND MORE INFORMATION 131
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TERRITORIAL BANCORP INC. AND SUBSIDIARIES F-1
ANNEX A A-1
ANNEX B B-1
ANNEX C C-1
ii
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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
The following are some questions that you may have about the Merger and the
Territorial special meeting, and brief answers tothose questions. We urge you
to read carefully the remainder of this proxy statement/prospectus because the
information in this section does not provide all of the information that might
be important to you with respect to the Merger or theTerritorial special
meeting. Additional important information is also contained in the documents
incorporated by reference into this proxy statement/prospectus. See the
section entitled "
Where You Can Find MoreInformation
".
Q: What is the Merger?
A: Hope and Territorial have entered into an Agreement and Plan of Merger, dated as of April
26, 2024 (whichwe refer to as the "Merger Agreement"). Under the Merger Agreement,
Territorial will merge with and into Hope in a transaction we refer to as the "Merger",
with Hope as the surviving corporation in the Merger. Immediatelyfollowing the Merger,
or at a later time as determined by Hope, Territorial's wholly owned subsidiary, Territorial
Savings Bank, a Hawaii state-chartered member savings bank, will merge with and
into Hope's wholly owned subsidiary, Bank ofHope, a California state-chartered bank, in a
transaction we refer to as the "Bank Merger", with Bank of Hope as the surviving bank.
Pursuant to the terms and subject to the conditions set forth in the Merger
Agreement, Territorial stockholders will receive Hope common stockfor their
shares of Territorial common stock (plus cash in lieu of fractional shares).
At the effective time of the Merger (which we refer to as the "Effective
Time"), each outstanding share of Territorial common stock (except for
treasurystock or shares owned by Territorial or Hope, in each case other than
shares (x) held in trust accounts, managed accounts, mutual funds and the
like, or otherwise held in a fiduciary or agency capacity that are
beneficially owned by thirdparties, or (y) held, directly or indirectly, as a
result of debts previously contracted) will be converted into the right to
receive 0.8048 shares of Hope common stock (which we refer to as the "Exchange
Ratio"). No fractional sharesof Hope shares will be issued in the Merger and
holders of Territorial common stock will be entitled to receive cash in lieu
of fractional shares. Although the number of shares of Hope common stock that
each Territorial stockholder will receive isfixed, the market value of the
merger consideration will fluctuate with the market price of Hope common stock
and will not be known at the time Territorial stockholders vote on the Merger
Agreement. Based on the Exchange Ratio, and on the closingstock price of Hope
common stock of $[] as of [], 2024, on the Nasdaq Global Select Market, as
reported by the
Wall Street Journal
, the latest practicable trading day before the date of this proxy
statement/prospectus, the valueof the per share merger consideration payable
to holders of Territorial common stock was approximately $[] as of such date.
As aresult of the foregoing, based on the number of shares of Hope common
stock and Territorial common stock outstanding as of April 26, 2024, the date
of the Merger Agreement, it is expected that Hope stockholders will hold
approximately 94.4%,and Territorial stockholders will hold approximately 5.6%,
of the shares of the combined company outstanding immediately after the
Effective Time.
The Merger cannot be completed unless the Merger Agreement is adopted and
approved by the affirmative vote of a majority of all issued andoutstanding
shares of Territorial entitled to vote thereon. The closing of the Merger is
also subject to the receipt of approvals of
non-objections
or waivers from the Board of Governors of the Federal ReserveSystem (which we
refer to as the "Federal Reserve Board"), the Federal Deposit Insurance
Corporation (which we refer to as the "FDIC"), and the California Department
of Financial Protection and Innovation (which we refer to asthe "California
DFPI"). Notice of the Merger must also be provided to the Hawaii Department of
Commerce and Consumer Affairs, Division of Financial Institutions (which we
refer to as the "Hawaii DCCA" and, together with theFederal Reserve Board,
FDIC and California DFPI, the "Bank Regulatory Authorities"), and the
satisfaction of the other conditions specified in the Merger Agreement.
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Q: Why am I receiving this proxy statement/prospectus?
A: We are delivering this document to you because it is a proxy statement being used by the board of
directors ofTerritorial (which we refer to as the "Territorial Board of Directors") to solicit
proxies of Territorial stockholders in connection with approval and adoption of the Merger
Agreement and related matters. It describes the proposals to bepresented at the special meeting.
This document is also a prospectus that is being delivered to Territorial
stockholdersbecause, in connection with the Merger, Hope will be issuing to
Territorial stockholders shares of Hope common stock as merger consideration.
This proxy statement/prospectus contains important information about the
Merger Agreement, the Merger and other related matters, the proposalsbeing
voted on at the Territorial special meeting, and important information to
consider in connection with an investment in Hope common stock. You should
read it carefully and in its entirety. The enclosed materials allow you to
have your shares ofTerritorial common stock voted by proxy without attending
the Territorial special meeting virtually. Your vote is important, and we
encourage you to submit your proxy as soon as possible, whether or not you
intend to attend the Territorial specialmeeting virtually.
Q: What are Territorial stockholders being asked to vote on at the Territorial special meeting?
A: Territorial is soliciting proxies from its stockholders with respect to the following proposals:
. a proposal to adopt and approve the Merger Agreement (which we refer to as the "Merger Proposal");
. a proposal to approve, on a
non-binding,
advisory basis, the compensationpayable to Territorial's named executive officers in
connection with the Merger (which we refer to as the "Compensation Proposal"); and
. a proposal to adjourn the Territorial special meeting, if necessary or appropriate, to
permit furthersolicitation of proxies in favor of the Merger Proposal, or to ensure
that any supplement or amendment to this proxy statement/prospectus is timely provided
to Territorial stockholders (which we refer to as the "Adjournment Proposal").
Q: What will Territorial stockholders receive in the Merger?
A: Pursuant to the terms and subject to the conditions set forth in the Merger
Agreement, Territorial stockholderswill receive Hope common stock for their
shares of Territorial common stock (plus cash in lieu of fractional shares).
Upon completion of the Merger, Territorial stockholders will receive 0.8048
shares of Hope common stock (which we refer to as the"Exchange Ratio"), for each
share of Territorial common stock held immediately prior to the Merger. Based
on the Exchange Ratio, and on the closing stock price of Hope common stock
of $[] as of [], 2024, on the Nasdaq GlobalSelect Market, as reported by the
Wall Street Journal
, the latest practicable trading day before the date of
this proxy statement/prospectus, the value of the per
share merger consideration payable to holders of Territorial
common stock wasapproximately $[] as of such date.
Hope will not issue any fractional shares of Hope common stock in the
Merger.Territorial stockholders who would otherwise be entitled to a fraction
of a share of Hope common stock upon the completion of the Merger will instead
receive, for such fraction of a share, an amount in cash (rounded to the
nearest cent) equal to theproduct of (i) the average closing sale price of
Hope common stock on the Nasdaq Global Select Market, as reported by the Wall
Street Journal, on the five full trading days ending on the trading day
immediately preceding the closing date of theMerger, multiplied by (ii) the
fraction of a share (rounded to the nearest
one-thousandth
when expressed in decimal form) of Hope common stock which such Territorial
stockholder would otherwise beentitled to receive pursuant to the Merger
Agreement.
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For illustrative purposes only, the following table summarizes the approximate
pre-tax
merger consideration that would be received by Territorial stockholders for
each share of Territorial common stock that they own, assuming [], 2024 as the
consummation date for the Merger.
Shares of Territorial common stock 1,000 (A )
Exchange Ratio 0.8048 (B )
Shares of Hope common stock received 804 (A)*(B) = (C )
Price per share of Hope commonstock $ [ ] (D )
(1)
Total value of Hope common stock received $ [ ] (C)*(D )
(1) Average closing sale price of Hope common stock on the five full trading days immediately
preceding the closingdate of the Merger on the Nasdaq Global Select Market, as reported by the
Wall Street Journal
.
For furtherinformation, see the section entitled "
The Merger--Terms of the Merger
".
Q: Will the value of the merger consideration change between the date of
this proxy statement/prospectus andthe time the Merger is completed?
A: Yes. Although the Exchange Ratio is fixed, the value of the merger consideration will fluctuate between thedate
of this proxy statement/prospectus and the completion of the Merger based upon the market value of Hope
common stock. Any fluctuation in the market price of Hope common stock after the date of this proxy statement/prospectus
will change thevalue of the shares of Hope common stock that Territorial stockholders will receive.
Based on the closing price pershare of Hope common stock on the Nasdaq Global
Select Market as of April 26, 2024, the last trading day before the date of
public announcement of the Merger, and the Exchange Ratio of 0.8048, the value
of the per share merger considerationpayable to holders of Territorial common
stock was approximately $8.82 per share as of such date. Based on the Exchange
Ratio of 0.8048, and on the closing stock price of Hope common stock of $[] as
of [], 2024, on the Nasdaq GlobalSelect Market, as reported by the
Wall Street Journal
, the latest practicable trading day before the date of this proxy
statement/prospectus, the value of the per share merger consideration payable
to holders of Territorial common stock wasapproximately $[] as of such date.
We urge you to obtain current market quotations for Hope and Territorial, each
currently traded on the Nasdaq Global Select Market under the trading symbols
"HOPE" and "TBNK",respectively.
Q: How will the Merger affect Territorial equity awards?
A: At the Effective Time of the Merger:
. each time-based restricted stock unit award in respect of shares
of Territorial common stock that is outstandingas of immediately
prior to the Effective Time will automatically (without any
required action on the part of the holder thereof) fully vest;
. a prorated portion of each performance-based restricted stock unit
award in respect of shares of Territorialcommon stock that is
outstanding as of immediately prior to the Effective Time will
automatically (without any required action on the part of the holder
thereof) vest, with the portion that will vest equal to the product
of (i) the number ofrestricted stock units subject to such
performance-based restricted stock unit award that would have vested
based upon actual performance if the applicable performance period had
ended as of the most recent fiscal quarter of Territorial precedingthe
closing date or, if actual performance cannot be determined,
the target number of restricted stock units subject to such
performance-based restricted stock unit award and (ii) a fraction, the
numerator of which is the number of months inthe period beginning
on the first day of the applicable performance period and ending
on the closing date and the denominator of which is the total
number of months in the original applicable performance period; and
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. (i) each restricted stock unit in respect of each time-based restricted
stock unit award and each restrictedstock unit in respect of
each portion of a performance-based restricted stock unit award that
so vests shall be converted into the right to receive the merger
consideration (less applicable tax withholding) as soon as reasonably
practicable afterthe Effective Time, and (ii) each restricted
stock unit in respect of each portion of a performance-based
restricted stock unit award that does not vest shall be forfeited.
Q: How will the Merger affect the Territorial Savings Bank Amended and Restated Employee Stock Ownership Plan?
A: The Territorial Savings Bank Amended and Restated Employee Stock Ownership Plan (which we
refer to as the"Territorial ESOP") will be terminated prior to the Effective Time. The
Territorial ESOP is funded through a loan (which we refer to as the "ESOP Loan") from
Territorial to purchase shares of Territorial common stock, whichshares are allocated
to participants as the ESOP Loan is repaid. The unallocated shares are held in a separate
unallocated stock fund. Participants' account balances will become fully vested in
connection with the termination of the TerritorialESOP. Immediately prior to the Effective
Time, unallocated shares, having an aggregate value of outstanding balance of the
ESOP Loan as of the Effective Time, will be exchanged in satisfaction of the ESOP Loan.
Unallocated shares remaining after thesatisfaction of the ESOP Loan, if any, will be
released from pledge and allocated among the Territorial ESOP participants. In the event
that the aggregate value of the unallocated shares is less than outstanding balance of
the ESOP Loan at theEffective Time, all unallocated shares will be transferred to Territorial
in satisfaction of the ESOP Loan, which shall be deemed to have been paid in full.
All remaining shares of Territorial common stock owned by the Territorial ESOP will
beeligible to be converted into the right to receive the per share merger consideration.
Q: Does Hope pay regular dividends on its shares of common stock?
A: Yes, Hope has traditionally paid a quarterly dividend on its shares of common stock. The payment of dividendsis subject to
approval by the board of directors of Hope (which we refer to as the "Hope Board of Directors") as well as legal and regulatory
restrictions and safety and soundness considerations. Any payment of dividends in the future willdepend, in large part, on Hope's
earnings, capital requirements, financial condition, and other factors considered relevant by the Hope Board of Directors.
Hope declared quarterly cash dividends of $0.14 per share on its common stock
in each of 2023, 2022, and 2021. The amount of quarterly cashdividends paid on
shares of Hope common stock is subject to change based on the quarterly
dividend amounts approved by the Hope Board of Directors. For illustrative
purposes only, a holder of 1,000 shares of Hope common stock would have
receivedapproximately $560 in dividend payments in 2023.
Q: What are the U.S. federal income tax consequences of the Merger to Territorial stockholders?
A: It is intended that the Merger will qualify as a "reorganization" within the meaning
ofSection 368(a) of the Internal Revenue Code of 1986, as amended (which we
refer to as the "Code"), and the Merger Agreement is intended to be and is adopted
as a plan of reorganization for purposes of Sections 354, 361 and 368 ofthe
Code. It is a condition to the completion of the Merger that each party receives
a written opinion from its counsel to the effect that the Merger will qualify
as a "reorganization" within the meaning of Section 368(a) of the Code.If the
Merger so qualifies, a U.S. holder (as defined under the section entitled "
Material U.S. Federal Income Tax Consequences of the Merger
") of Territorial common stock generally
will not recognize any gain or
loss upon theexchange of Territorial
common stock for Hope common stock,
except with respect to cash received
in lieu of fractional shares of
Hope common stock. For further
information, see the section entitled "
Material U.S. Federal Income TaxConsequences of the Merger
".
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The tax consequences of the Merger to any particular Territorial stockholder
will depend onthat stockholder's particular facts and circumstances. You are
urged to consult your tax advisors for a full understanding of the particular
tax consequences of the Merger to them.
Q: Are there any risks that I should consider in deciding whether to vote for the approval
of the MergerProposal or the other proposals to be considered at the special meeting?
A: Yes. You should read and carefully consider the
risk factors set forth in the section entitled "
RiskFactors
". You also should read and carefully consider the risk factors related to an investment in Hope
contained in the documents that are incorporated by reference into this proxy statement/prospectus.
Q: If I am a Territorial stockholder, should I send in my Territorial stock certificate(s) now?
A: No. Please do not send in your Territorial stock certificate(s) with your proxy. After the Merger, an exchangeagent will
send you instructions for exchanging Territorial stock certificates for the merger consideration. See the section entitled "
The Merger Agreement--Exchange of Shares
".
Q: What should I do if I hold my shares of Territorial common stock in book-entry form?
A: If your shares of Territorial common stock are held in book-entry form, you are not required to take
anyadditional actions in connection with the conversion of your shares of Territorial common stock into shares
of Hope common stock at the Effective Time. After the completion of the Merger, shares of Territorial common
stock held in book-entry formwill automatically be exchanged for book-entry shares of Hope common stock.
Q: How does the Territorial Board of Directors recommend that I vote at the Territorial special meeting?
A: The Territorial Board of Directors unanimously recommends that you vote "
FOR
" the MergerProposal, "
FOR
" the Compensation Proposal, and "
FOR
" the Adjournment Proposal.
Q: When and where is the Territorial special meeting?
A: The Territorial special meeting will be held in a virtual-only format on [], 2024 at [], HawaiiTime, at [].
Even if you plan to attend the Territorial special meeting virtually, we
recommend that you voteyour shares in advance as described below so that your
vote will be counted if you later decide not to or become unable to attend the
special meeting virtually.
Q: What constitutes a quorum for the Territorial special meeting?
A: A majority of the voting power of the outstanding shares entitled to vote at the
meeting, present virtually orrepresented by proxy, shall constitute a quorum for the
transaction of business. Abstentions will be included in determining the number of
shares present at the meeting for the purpose of determining the presence of a quorum.
Q: What is the vote required to approve each proposal at the Territorial special meeting?
A: 1:
Merger proposal
. Standard: Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of theshares of Territorial outstanding and entitled to vote.
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. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Merger Proposal, it will have the same effect as a vote "AGAINST" the proposal.
2: Compensation Proposal
. Standard: Approval of the Compensation Proposal requires the affirmative
vote of a majority of the votes cast byTerritorial stockholders.
. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Merger Proposal, it will have no effect on the outcome of the proposal.
3: Adjournment proposal
. Standard: Approval of the Adjournment Proposal requires the affirmative
vote of a majority of the votes cast byTerritorial stockholders.
. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Adjournment Proposal, it will have no effect on the outcome of the proposal.
Q: Are there any Territorial stockholders already committed to voting in favor of the Merger Proposal?
A: Certain executive officers and each of the directors of Territorial, who are also
stockholders of Territorial,have entered into a voting and support agreement pursuant
to which they have agreed to vote in favor of the approval and adoption of the Merger
Agreement, subject to the terms of the voting and support agreement. As of the
record date for theTerritorial special meeting, such executive officers and directors
collectively and beneficially owned approximately []% of the outstanding shares of
Territorial common stock. For information regarding the voting and support agreement
andcertain holders of shares of Territorial common stock, see the section entitled "
Voting and Support Agreement
".
Q: Why is my vote important?
A: If you do not vote, it will be more difficult for Territorial to obtain the necessary
quorum to hold theTerritorial special meeting. In addition, your failure to submit a proxy
or vote virtually, or failure to instruct your bank, broker or other nominee how to
vote, or abstention, will have the same effect as a vote "AGAINST" the MergerProposal.
Q: Why am I being asked to consider and vote on the Compensation Proposal?
A: Under SEC rules, Territorial is required to seek a
non-binding,
advisory vote with respect to the compensation that may be paid or become payable to
its named executive officers that is based on or otherwise relates to the Merger.
Q: What happens if holders of Territorial common stock do not approve, by
non-binding,
advisory vote, the Compensation Proposal?
A: The vote on the Compensation Proposal is separate and apart from the votes
to approve the other proposals beingpresented at the Territorial special
meeting. Because the vote on the Compensation Proposal is advisory in nature
only, it will not be binding upon Territorial, Hope, or the combined company
in the Merger. Accordingly, the Merger-relatedcompensation will be paid to
Territorial's named executive officers to the extent payable in accordance
with the terms of their compensation agreements and arrangements even if the
holders of Territorial common stock do not approve theCompensation Proposal.
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Q: Who is entitled to vote at the Territorial special meeting?
A: The record date for the Territorial special meeting is [], 2024. All
holders of Territorial common stockwho held shares at the close of
business on the record date for the special meeting are entitled to
receive notice of, and to vote at, the Territorial special meeting.
Each holder of Territorial common stock is entitled to cast one vote on each
matter voted on at the special meeting for each share ofTerritorial common
stock that such holder owned of record as of the record date. As of the close
of business on the record date for the Territorial special meeting, there were
[] outstanding shares of Territorial common stock.
Q: What do I need to do now?
A: After you have carefully read this proxy statement/prospectus and have decided
how you wish to vote your sharesof Territorial common stock, please vote your
shares promptly so that your shares are represented and voted at the Territorial
special meeting. If you hold your shares in your name as a stockholder of record,
you must complete, sign, date and mailyour proxy card in the enclosed postage-paid
return envelope as soon as possible. If you hold your shares in "street
name" through a bank, broker or other nominee, you must direct your bank, broker
or other nominee how to vote inaccordance with the voting instruction card.
Q: How can I vote my shares of Territorial common stock?
A: A holder of Territorial common stock may vote by proxy or virtually at the
Territorial special meeting. If youhold your shares of Territorial common
stock in your name as a holder of record, to submit a proxy, you, as a
holder of Territorial common stock, may use one of the following methods:
. By telephone: by calling the toll-free number indicated on the accompanying proxy card and following the recordedinstructions.
. Through the Internet: by visiting the website indicated on the accompanying proxy card and following theinstructions.
. By mail: by completing and returning the accompanying proxy card in the enclosed postage-paid
envelope. Theenvelope requires no additional postage if mailed in the United States.
If you intend to submit your proxy by telephoneor via the Internet, you must
do so by 11:59 p.m., Eastern Time, on the day before the special meeting. If
you intend to submit your proxy by mail, your completed proxy card must be
received prior to the special meeting.
If a holder's shares are held in "street name" by a bank, broker, or other
nominee, the holder should check the voting form usedby that firm to determine
whether the holder may vote by telephone or the Internet.
Even if you plan to attend the Territorial specialmeeting virtually, we
recommend that you vote your shares in advance as described below so that your
vote will be counted if you later decide not to or become unable to attend the
special meeting.
Q: How can I vote my shares held in the Territorial Savings Bank 401(k) Plan?
A: If you are a participant in the Territorial Savings Bank 401(k) Retirement Plan (which we refer to asthe
"Territorial 401(k) Plan") and indirectly hold shares of Territorial common stock through the Territorial
401(k) Plan, you may instruct the Territorial 401(k) Plan trustee to vote any shares of Territorial common
stock held in yourTerritorial 401(k) Plan account as of the Territorial record date ONLY by following the
separate voting instructions provided by the Territorial 401(k) Plan trustee. Your Territorial 401(k)
Plan vote authorization form must be received by 11:59p.m., Eastern Time, on [], 2024. The telephonic and
internet voting cutoff for providing your Territorial 401(k) Plan vote authorization is 11:59 p.m., Eastern
Time, on [], 2024. Territorial, as the Territorial 401(k) Planadministrator, has instructed the Territorial
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401(k) Plan trustee to vote any shares in the Territorial 401(k) Plan trustee for which participants have not issued timely
voting instructions in the same proportion as the votes received onshares that participants have provided voting instructions.
Q: How can I vote my shares held in the Territorial ESOP?
A: If you are a participant in the Territorial ESOP and indirectly hold shares of
Territorial common stock throughthe Territorial ESOP, you may instruct the Territorial
ESOP trustee to vote any shares of Territorial common stock held in your Territorial
ESOP account as of the Territorial record date ONLY by following the separate voting
instructions provided bythe Territorial ESOP trustee. Your Territorial ESOP vote
authorization form must be received by 11:59 p.m., Eastern Time, on [], 2024. The telephonic
and internet voting cutoff for providing your Territorial ESOP vote authorization is
11:59p.m., Eastern Time, on [], 2024. Under the terms of the Territorial ESOP, the
Territorial ESOP trustee votes all shares held by the Territorial ESOP, but each
Territorial ESOP participant may direct the trustee how to vote the shares ofTerritorial
common stock allocated to his or her account. The Territorial ESOP trustee will vote
all unallocated shares of Territorial common stock held by the Territorial ESOP and
allocated shares for which no voting instructions are received inthe same proportion
as shares for which it has received timely voting instructions, so long as such vote
is solely in the interests of participants and beneficiaries and in accordance with
the requirements of the Employee Retirement Income SecurityAct of 1974, as amended.
Q: If my shares are held in "street name" by my bank or broker, will my bank or broker automaticallyvote my shares for me?
A: No. Your bank or broker cannot vote your shares without instructions
from you. If your shares are held in"street name" through a bank,
broker or other nominee, you must provide the record holder of your
shares of Territorial common stock with instructions on how to vote
the shares. Please follow the voting instructions provided by the bank
orbroker. You may not vote shares held in street name by returning
a proxy card directly to Territorial, or by voting virtually at the
Territorial special meeting, unless you provide a "legal proxy",
which you must obtain from your broker,bank, or other nominee. Further,
brokers, banks, or other nominees who hold shares of Territorial
common stock on behalf of their customers may not give a proxy to
Territorial to vote those shares with respect to any of the proposals
withoutspecific instructions from their customers, as brokers,
banks, and other nominees do not have discretionary voting power on
these matters. Failure to instruct your bank or broker how to vote
will have the same effect as a vote "AGAINST"the Merger Proposal.
Q: Can I change my vote after I have delivered my proxy or voting instruction card?
A: Yes. If you are the record holder of your shares, you may revoke your proxy in any of the following ways:
. Re-submitting
your vote via the Internet or by telephone, by 11:59 p.m.,Eastern Time, on [.], 2024;
. Submitting another properly completed proxy card bearing a later date which is received prior to the meetingdate;
. Attending the special meeting virtually, notifying the corporate secretary and voting by ballot at the specialmeeting; or
. Submitting a written notice that you are revoking your proxy. The notice
must be sent to 1003 Bishop Street,Pauahi Tower, Suite 500, Honolulu,
Hawaii 96813, Attention: Corporate Secretary, and must be received before
your Territorial common stock has been voted at the special meeting.
If your shares are held by a broker, bank, or other nominee, you should
contact your broker, bank, or other nominee to change your vote.
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Participants in the Territorial 401(k) Plan may change their instructions to
the Territorial401(k) Plan trustee with respect to voting of the shares of
Territorial common stock held in their Territorial 401(k) Plan account by
submitting to the Territorial 401(k) Plan trustee another signed instruction
card bearing a later date, providedthat such new instruction card must be
received by the Territorial 401(k) Plan trustee on or prior to the last date
for submission of such instructions with respect to the Territorial special
meeting designated in the separate voting instructionsprovided by the
Territorial 401(k) Plan trustee.
Participants in the Territorial ESOP may change their instructions to the
TerritorialESOP trustee with respect to voting of the shares of Territorial
common stock held in their Territorial ESOP account by submitting to the
Territorial ESOP trustee another signed instruction card bearing a later date,
provided that such newinstruction card must be received by the Territorial
ESOP trustee on or prior to the last date for submission of such instructions
with respect to the Territorial special meeting designated in the separate
voting instructions provided by theTerritorial ESOP trustee.
Q: What should I do if I receive more than one set of voting materials?
A: Territorial stockholders may receive more than one set of voting materials, including multiple copies
of thisproxy statement/prospectus and multiple proxy cards or voting instruction cards. For example,
if you hold shares of Territorial common stock in more than one brokerage account, you will receive a
separate voting instruction card for each brokerageaccount in which you hold such shares. If you are a
holder of record of Territorial common stock and your shares are registered in more than one name, you
will receive more than one proxy card. Please complete, sign, date and return each proxy cardand voting
instruction card that you receive or otherwise follow the voting instructions set forth in this proxy
statement/prospectus to ensure that you vote every share of Territorial common stock that you own.
Q: How do I attend the Territorial special meeting?
A: Only stockholders as of the close of business on [] (or their authorized
representatives) will beallowed to participate in the Territorial
special meeting online. The link to the virtual meeting will be: [].
To participate in the meeting online, stockholders will need the
16-digit
control numberincluded on their proxy card or voting
instruction form. If you own your shares through
a bank, broker, or other nominee, please review the
materials sent to you by that firm to find your
16-digit
controlnumber.
Q: Will I be able to submit questions at the Territorial special meeting?
A: A question and answer session will be held during the Territorial special meeting, and
stockholders will beable to submit questions during the meeting by visiting []. Territorial
will try to answer as many stockholder-submitted questions as time permits that comply
with the meeting rules of conduct posted on the virtual special meeting website.
Q: Will Territorial be required to submit the Merger Proposal to its stockholders even if the
Territorial Boardof Directors has withdrawn, modified or qualified its recommendation?
A: Yes. Unless the Merger Agreement is terminated before the Territorial special meeting,
Territorial is requiredto submit the Merger Proposal to its stockholders even
if the Territorial Board of Directors has withdrawn, modified or qualified its
recommendation that Territorial stockholders adopt and approve the Merger Agreement.
Q: Are Territorial stockholders entitled to appraisal rights?
A: No, under Maryland law, Territorial stockholders are not entitled to appraisal rights.
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Q: What are the interests of Territorial's directors and executive officers in the Merger, if any?
A: In considering the recommendation of the Territorial Board of
Directors, Territorial stockholders should beaware that some of the
directors and executive officers of Territorial have interests in the
Merger that are different from, or in addition to, the interests of
Territorial's other stockholders generally. These interests include:
rights ofcertain executive officers under their existing employment
agreements and related settlement agreements; rights of certain executive
officers under supplemental executive retirement agreements and
a benefit restoration plan; rights underTerritorial's equity-based
benefit programs and awards, including the acceleration of vesting of
restricted stock units; rights under the Territorial ESOP; rights under
a restrictive covenant agreement; rights to continued indemnification
andinsurance coverage by Hope after the Merger for acts and omissions
occurring before the Merger. The Territorial Board of Directors
was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and relatedtransactions.
Q: When do you expect to complete the Merger?
A: Hope and Territorial expect to complete the Merger by year-end 2024. However, neither Hope
nor Territorial canassure you of when or if the Merger will be completed. Territorial must
obtain the approval of the Merger Proposal by the Territorial stockholders at the Territorial
special meeting, and Hope must obtain necessary regulatory authorizations,approvals and/or
non-objections.
In addition, each party is required to
satisfy certain other closing conditions.
Q: What happens if the Merger is not completed?
A: If the Merger is not completed, Territorial stockholders will not receive any consideration for their shares ofTerritorial
common stock in connection with the Merger. Instead, Territorial will remain an independent company and your
shares of Territorial common stock will remain outstanding. In addition, if the Merger Agreement is terminated in
certaincircumstances, a termination fee may be required to be paid by Territorial to Hope. See the section entitled "
The Merger Agreement--Termination Fee
" for a complete discussion of the circumstances under which
any such terminationfee would be required to be paid.
Q: Whom should I call with questions?
A: If you have any questions concerning the Merger or this proxy statement/prospectus,
would like additionalcopies of this proxy statement/prospectus, or need
help voting your shares of Territorial common stock, please contact Laurel Hill
Advisory Group, Territorial's proxy solicitor, by calling toll-free at (888)
742-1305.
Banks and brokers should call (516)
933-3100.
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SUMMARY
This summary highlights selected information from this proxy statement/prospectu
s. It may not contain all of the information that isimportant to you. We urge
you to read carefully the entire proxy statement/ prospectus, including the
annexes and exhibits, and the other documents to which we refer in order to
fully understand the Merger. In addition, we incorporate by referenceimportant
business and financial information about Hope into this proxy statement/prospect
us. You may obtain the information incorporated by reference into this proxy
statement/prospectus without charge by following the instructions in the
sectionentitled "
Where You Can Find More Information
". Each item in this summary refers to the page of this proxy statement/prospect
us on which the subject is discussed in more detail.
The Merger (page 69)
The terms andconditions of the Merger are contained in the Merger Agreement, a
copy of which is attached to this proxy statement/prospectus as
Annex
A
and is incorporated by reference herein in its entirety. All descriptions in
thissummary and elsewhere in this proxy statement/prospectus of the terms and
conditions of the Merger are qualified in their entirety by reference to the
Merger Agreement. Please read the Merger Agreement carefully for a more
complete understanding ofthe Merger.
Under the Merger Agreement, Territorial will merge with and into Hope in a
transaction we refer to as the "Merger",with Hope as the surviving corporation
in the Merger. Immediately following the Merger, or at a later time as
determined by Hope, Territorial's wholly owned subsidiary, Territorial Savings
Bank, a Hawaii state-chartered member savings bank,will merge with and into
Hope's wholly owned subsidiary, Bank of Hope, a California state-chartered
bank, in a transaction we refer to as the Bank Merger, with Bank of Hope as
the surviving bank. Following the completion of the Merger and theBank Merger,
the legacy Territorial franchise in Hawaii will continue to do business under
the Territorial Savings Bank brand as a trade name of Bank of Hope.
Pursuant to the terms and subject to the conditions set forth in the Merger
Agreement, Territorial stockholders will receive Hope common stockfor their
shares of Territorial common stock (plus cash in lieu of fractional shares).
At the Effective Time, each outstanding share of Territorial common stock
(except for treasury stock or shares owned by Territorial or Hope, in each
case otherthan shares (x) held in trust accounts, managed accounts, mutual
funds and the like, or otherwise held in a fiduciary or agency capacity that
are beneficially owned by third parties, or (y) held, directly or indirectly,
as a result ofdebts previously contracted) will be converted into the right to
receive 0.8048 shares of Hope common stock (which we refer to as the "Exchange
Ratio"). No fractional shares of Hope shares will be issued in the Merger and
holders ofTerritorial common stock will be entitled to receive cash in lieu of
fractional shares. Although the number of shares of Hope common stock that
each Territorial stockholder will receive is fixed, the market value of the
merger consideration willfluctuate with the market price of Hope common stock
and will not be known at the time Territorial stockholders vote on the Merger
Agreement. Based on the Exchange Ratio, and on the closing stock price of Hope
common stock of $[] as of[], 2024, the value of the per share merger
consideration payable to holders of Territorial common stock was approximately
$[] as of such date.
Hope will not issue any fractional shares of Hope common stock in the Merger.
Territorial stockholders who would otherwise be entitled to afraction of a
share of Hope common stock upon the completion of the Merger will instead
receive, for such fraction of a share, an amount in cash (rounded to the
nearest cent) equal to the product of (i) the average closing sale price of
Hopecommon stock on the Nasdaq Global Select Market, as reported by the Wall
Street Journal, on the five full trading days ending on the trading day
immediately preceding the closing date of the Merger, multiplied by (ii) the
fraction of a share(rounded to the nearest
one-thousandth
when expressed in decimal form) of Hope common stock which such Territorial
stockholder would otherwise be entitled to receive pursuant to the Merger
Agreement.
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For illustrative purposes only, the following table summarizes the approximate
pre-tax
merger consideration that would be received by Territorial stockholders for
each share of Territorial common stock that they own, assuming [], 2024 as the
consummation date for the Merger.
Shares of Territorial common stock 1,000 (A)
Exchange Ratio 0.8048 (B)
Shares of Hope common stock received 804 (A)*(B) = (C)
Price per share of Hope commonstock $ [] (D)
(1)
Total value of Hope common stock received $ [] (C)*(D)
(1) Average closing sale price of Hope common stock on the five full trading days immediately
preceding the closingdate of the Merger on the Nasdaq Global Select Market, as reported by the
Wall Street Journal
.
Although theExchange Ratio is fixed, the value of the merger consideration
will fluctuate between the date of this proxy statement/prospectus and the
completion of the Merger based upon the market value of Hope common stock. Any
fluctuation in the market priceof Hope common stock after the date of this
proxy statement/prospectus will change the value of the shares of Hope common
stock that Territorial stockholders will receive.
Based on the closing price per share of Hope common stock on the Nasdaq Global
Select Market as of April 26, 2024, the last trading daybefore the date of
public announcement of the Merger, and the Exchange Ratio of 0.8048, the value
of the per share merger consideration payable to holders of Territorial common
stock was approximately $8.82 per share as of such date. Based on theExchange
Ratio of 0.8048, and on the closing stock price of Hope common stock of $[] as
of [], 2024, the latest practicable trading day before the date of this proxy
statement/prospectus, the value of the per share merger considerationpayable
to holders of Territorial common stock was approximately $[] as of such date.
We urge you to obtain current market quotations for Hope and Territorial, each
currently traded on the Nasdaq Global Select Market under the trading
symbols"HOPE" and "TBNK", respectively.
Territorial's Reasons for the Merger; Recommendation of the Territorial Board
of Directors(page 74)
The Territorial Board of Directors has unanimously (i) determined that the
Merger Agreement and the transactionscontemplated thereby, including the
Merger, are advisable and in the best interests of Territorial and the
Territorial stockholders, and (ii) adopted and approved the Merger Agreement
and the transactions contemplated thereby, including theMerger. The
Territorial Board of Directors unanimously recommends that Territorial
stockholders vote "
FOR
" the Merger Proposal, "
FOR
" the Compensation Proposal, and "
FOR
" the Adjournment Proposal.For the factors considered by the Territorial Board
of Directors in reaching its decision to adopt the Merger Agreement, see the
section entitled "
The Merger--Territorial's Reasons for the Merger; Recommendation of the
TerritorialBoard of Directors
".
Opinion of Territorial's Financial Advisor (page 77)
In connection with the Merger, Territorial's financial advisor, Keefe,
Bruyette & Woods, Inc. (which we refer to as"KBW"), delivered a written
opinion, dated April 26, 2024, to the Territorial Board of Directors as to the
fairness, from a financial point of view and as of the date of the opinion, to
the holders of Territorial common stock of theExchange Ratio in the proposed
Merger. The full text of the opinion, which describes the procedures followed,
assumptions made, matters considered, and qualifications and limitations on
the review undertaken by KBW in preparing the opinion, isattached as
Annex C
to this proxy statement/prospectus.
The opinion was for the information of, and was directed to, theTerritorial
Board of Directors (in its capacity as such) in connection with its
consideration of the financial terms of the Merger. The opinion did
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not address the underlying business decision of Territorial to engage in the
Merger or enter into the Merger Agreement or constitute a recommendation to
the Territorial Board of Directors inconnection with the Merger, and it does
not constitute a recommendation to any holder of Territorial common stock or
any stockholder of any other entity as to how to vote in connection with the
Merger or any other matter.
For a description of the opinion of KBW, see the section entitled "
The Merger--Opinion of Territorial's FinancialAdvisor
".
Information About the Territorial Special Meeting (page 26)
The special meeting will be held in a virtual-only format on [], 2024 at [],
Hawaii Time, at []. At the virtual specialmeeting, Territorial stockholders
will be asked to consider and vote upon the following matters:
. a proposal to adopt and approve the Merger Agreement (which we refer to as the "Merger Proposal");
. a proposal to approve, on a
non-binding,
advisory basis, the compensationpayable to Territorial's named executive officers in
connection with the Merger (which we refer to as the "Compensation Proposal"); and
. a proposal to approve one or more adjournments of the Territorial special meeting, if necessary
or appropriate,including adjournments to permit further solicitation of proxies in favor of the
Merger Proposal, or to ensure that any supplement or amendment to this proxy statement/prospectus
is timely provided to Territorial stockholders (which we refer to asthe "Adjournment Proposal").
The Territorial Board of Directors has fixed the close of business on [],2024
as the record date for determining the holders of Territorial common stock
entitled to receive notice of and to vote at the special meeting.
As of the record date, there were [] shares of Territorial common stock
outstanding and entitled to vote at the Territorial specialmeeting, held by
approximately [] holders of record. Each share of Territorial common stock
entitles the holder to one vote at the Territorial special meeting on each
proposal to be considered at the special meeting. Certain executiveofficers
and each of the directors of Territorial, who are also stockholders of
Territorial, have entered into a voting and support agreement pursuant to
which they have agreed to vote in favor of the Merger Proposal, subject to the
terms of thevoting and support agreement. As of the record date, such
executive officers and directors collectively and beneficially owned
approximately []% of the outstanding shares of Territorial common stock. For
information regarding the voting andsupport agreement and certain holders of
shares of Territorial common stock, see the section entitled "
Voting and Support Agreement
".
Approval of the Merger Proposal requires the affirmative vote of the holders
of a majority of the shares of Territorial outstanding andentitled to vote. If
you mark "ABSTAIN" on your proxy, or fail to instruct your bank, broker or
other nominee with respect to the Merger Proposal, it will have the same
effect as a vote "AGAINST" the proposal.
Approval of the Compensation Proposal and the Adjournment Proposal each
require the affirmative vote of a majority of the votes cast byTerritorial
stockholders. If you mark "ABSTAIN" on your proxy, or fail to instruct your
bank, broker or other nominee with respect to the proposal, it will have no
effect on the outcome of the proposal.
For further information, see the section entitled "
Information About the Territorial Special Meeting
".
Voting and Support Agreement (page 112)
Certain executive officers and each of the directors of Territorial, who are
also stockholders of Territorial, have entered into a voting andsupport
agreement pursuant to which they have agreed to vote in favor of the
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Merger Proposal, subject to the terms of the voting and support agreement. As
of the record date, such executive officers and directors collectively and
beneficially owned approximately[]% of the outstanding shares of Territorial
common stock. For information regarding the voting and support agreement and
certain holders of shares of Territorial common stock, see the section
entitled "
Voting and SupportAgreement
".
Material U.S. Federal Income Tax Consequences of the Merger (page 114)
It is intended that the Merger will qualify as a "reorganization" within the
meaning of Section 368(a) of the Internal RevenueCode of 1986, as amended
(which we refer to as the "Code"), and the Merger Agreement is intended to be
and is adopted as a plan of reorganization for purposes of Sections 354, 361
and 368 of the Code. It is a condition to the completion ofthe Merger that
each party receives a written opinion from its counsel to the effect that the
Merger will qualify as a "reorganization" within the meaning of Section 368(a)
of the Code. If the Merger so qualifies, a U.S. holder (asdefined under the
section entitled "
Material U.S. Federal Income Tax Consequences of the Merger
") of Territorial common stock generally will not recognize any gain or loss
upon the exchange of Territorial common stock for Hopecommon stock, except
with respect to cash received in lieu of fractional shares of Hope common
stock. For further information, see the section entitled "
Material U.S. Federal Income Tax Consequences of the Merger
".
The tax consequences of the Merger to any particular Territorial stockholder
will depend on that stockholder's particular facts andcircumstances. You are
urged to consult your tax advisors for a full understanding of the particular
tax consequences of the Merger to them.
Interests of Territorial's Directors and Executive Officers in the Merger
(page 88)
In considering the recommendation of the Territorial Board of Directors with
respect to the Merger, Territorial stockholders should be awarethat some of
Territorial's directors and executive officers have interests in the Merger
that may be different from, or in addition to, the interests of the other
Territorial stockholders. The Territorial Board of Directors was aware of
andconsidered these interests during its deliberations of the merits of the
Merger and in determining to recommend to Territorial stockholders that they
vote for the Merger Proposal and thereby approve the transactions contemplated
by the MergerAgreement, including the Merger. Those interests include:
. severance benefits to be paid under employment agreements in the event of a qualifying
termination of employmentfollowing the Merger, and related settlement agreements;
. benefits to be received under supplemental executive retirement agreements and a benefit restoration plan;
. the treatment of equity awards at the Effective Time;
. the treatment of Territorial common stock under the Territorial ESOP;
. a restrictive covenant agreement that has been entered into with one of Territorial's executive officers;and
. Hope has agreed to provide certain ongoing indemnification and insurance coverage to the directors and
executiveofficers of Territorial following the Merger for acts or omissions occurring prior to the Merger.
For a more completedescription of these interests, see the section entitled "
The Merger--Interests of Territorial's Directors and Executive Officers in the
Merger
".
Regulatory Approvals Required for the Merger (page 91)
Subject to the terms of the Merger Agreement, both Hope and Territorial have
agreed to use their reasonable best efforts and cooperate topromptly prepare
and file, or cause to be prepared and filed, all necessary
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applications, notices and other documentation to obtain as soon as practicable
all regulatory authorizations, permits, consents, approvals and/or
non-objections
(which we refer to as "Regulatory Authorizations") necessary or advisable to
complete the transactions contemplated by the Merger Agreement. These include
Regulatory Authorizationsfrom, among others, the Federal Reserve Board, the
FDIC, and the California DFPI, and a formal notification to the Hawaii DCCA.
The initial filing of regulatory applications or notification, as applicable,
to each Bank Regulatory Authority isexpected to occur on or before July 24,
2024. Discussions regarding the Regulatory Authorizations have been held with
each Bank Regulatory Authority.
Although neither Hope nor Territorial knows of any reason why it cannot obtain
these Regulatory Authorizations in a timely manner, Hope andTerritorial cannot
be certain when or if they will be obtained, or that the granting of these
Regulatory Authorizations will not involve the imposition of conditions on the
completion of the Merger or the Bank Merger. For more information, see
thesection entitled "
The Merger--Regulatory Approvals Required for the Merger
".
Conditions to Complete the Merger (page 108)
Each party's obligation to complete the Merger is subject to the satisfaction
or waiver (to the extent permitted under applicablelaw) of certain conditions,
including: (i) the adoption and approval of the Merger Agreement by the
requisite vote of the Territorial stockholders; (ii) the receipt of all
required Regulatory Authorizations and expiration or termination ofall
statutory waiting periods in respect thereof, each as described above, and no
such Regulatory Authorization shall have resulted in the imposition of a
"materially burdensome regulatory condition", as defined in the Merger
Agreement;(iii) authorization for listing on the Nasdaq Global Select Market
of the shares of Hope common stock to be issued in the Merger; (iv)
effectiveness of the registration statement on Form
S-4
withrespect to the shares of the Hope common stock to be issued in the Merger;
(v) the absence of any order, injunction, decree or other legal restraint
preventing the completion of the Merger or the transactions contemplated by
the MergerAgreement or making the completion of the Merger or the transactions
contemplated by the Merger Agreement illegal; (vi) the accuracy of the
representations and warranties of the other party, subject to specified
materiality standards;(vii) performance in all material respects by the other
party of its obligations under the Merger Agreement; (viii) receipt by each
party of an opinion of legal counsel to the effect that on the basis of facts,
representations andassumptions set forth or referred to in such opinion, the
Merger will qualify as a "reorganization" within the meaning of Section 368(a)
of the Code; and (ix) the absence of a material adverse effect on the other
party.
Neither Hope nor Territorial can be certain when, or if, the conditions to the
Merger will be satisfied or waived, or that the Merger will becompleted. For
more information, see the section entitled "
The Merger Agreement--Conditions to Complete the Merger
".
Terminationof the Merger Agreement (page 109)
The Merger Agreement may be terminated prior to the Effective Time under the
followingcircumstances:
. by mutual written consent of Hope and Territorial;
. by either Hope or Territorial if
any governmental entity that must
grant a requisite Regulatory
Authorization hasdenied approval and/or
non-objection
of the Merger or the
Bank Merger and
such denial has become final and
non-appealable
or any governmental entity of
competentjurisdiction
has issued a final and
non-appealable
order, injunction, decree or other legal restraint or prohibition permanently enjoining or otherwise
prohibiting or making illegal the Merger or the BankMerger, unless the failure to obtain a
requisite Regulatory Authorization is due to the failure of the party seeking to terminate the
Merger Agreement to perform or observe its covenants and agreements under the Merger Agreement;
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. by either Hope or Territorial if the Merger has not been completed on or before
the 12 month anniversary of thedate of the Merger Agreement (which we refer to
as the "Termination Date"), unless the failure of the Merger to be completed by
such date is due to the failure of the party seeking to terminate the Merger
Agreement to fulfill itsobligations under the Merger Agreement (provided that
either party has the right to extend the Termination Date for two additional
three month periods if such party believes in good faith that the requisite
Regulatory Authorizations are likely to beobtained during such extension period);
. by either Hope or Territorial if requisite approval of Territorial stockholders is not obtained at
the specialmeeting of stockholders convened therefor, or any adjournment or postponement thereof;
. by either Hope or Territorial (provided that the terminating party is not then in material breach of anyrepresentation,
warranty, covenant or other agreement contained in the Merger Agreement) if there is a breach of any of the
covenants or agreements or any of the representations or warranties (or any such representation or warranty ceases to
betrue) set forth in the Merger Agreement on the part of Territorial, in the case of a termination by Hope, or Hope,
in the case of a termination by Territorial, which either individually or in the aggregate would constitute, if
occurring orcontinuing on the date the Merger is completed, the failure of a closing condition of the terminating party
and which is not cured within 45 days following written notice to the party committing such breach (or such fewer
days as remain prior to theTermination Date), or by its nature or timing cannot be cured during such period; or
. by Hope prior to such time as the requisite Territorial vote is obtained, if (i) the Territorial Board ofDirectors
shall have (1) failed to recommend in this proxy statement/prospectus that the stockholders of Territorial approve the
Merger Agreement, (2) withheld, withdrawn, modified or qualified such recommendation in a manner adverse toHope, (3)
adopted, approved, recommended or endorsed an alternative Acquisition Proposal (as defined in the section entitled "
The Merger Agreement--Agreement
Not to Solicit Other Offers
") or publicly announced its intentionto do so, (4) failed to publicly and without qualification recommend against acceptance
of a tender offer or exchange offer constituting an alternative Acquisition Proposal that has been publicly disclosed within
10 business days after thecommencement of such tender or exchange offer, or (5) publicly proposed to do any of the foregoing,
or (ii) Territorial or the Territorial Board of Directors has breached its obligations relating to stockholder approval or the
non-solicitation
of Acquisition Proposals.
For more information, see the sectionentitled "
The Merger Agreement--Termination of the Merger Agreement".
Termination Fee (page 110)
If the Merger Agreement is terminated under certain circumstances, including
circumstances involving alternative Acquisition Proposals andchanges in the
recommendation of the Territorial Board of Directors, Territorial will be
required to pay to Hope a termination fee equal to $3,000,000.
For more information, see the section entitled "
The Merger Agreement--Termination Fee
".
Comparison of Stockholders' Rights (page 119)
The rights of Territorial stockholders will change as a result of the Merger
due to differences in Hope's and Territorial's governingdocuments. The rights
of Territorial stockholders are governed by Maryland law and by Territorial's
articles of incorporation and bylaws. Upon the completion of the Merger,
Territorial stockholders immediately prior to the Effective Time willbecome
Hope stockholders, as the continuing legal entity after the Merger, and their
rights as Hope stockholders will therefore be governed by Delaware law and
Hope's second amended and restated certificate of incorporation and amended
andrestated bylaws.
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See the section entitled "
Comparison of Stockholders' Rights
" for adescription of the material differences in stockholders' rights under
each of the Hope and Territorial governing documents.
Accounting Treatment(page 113)
The Merger will be accounted for as an acquisition of Territorial by Hope
under the acquisition method of accounting inaccordance with generally
accepted accounting principles in the United States (which we refer to as
"GAAP") for financial reporting and accounting purposes.
Public Trading Markets (page 93)
Hopecommon stock is listed for trading on the Nasdaq Global Select Market
under the symbol "HOPE". Following the Merger, shares of Hope common stock
will continue to be traded on the Nasdaq Global Select Market.
Territorial common stock is listed for trading on the Nasdaq Global Select
Market under the symbol "TBNK". Following the Merger,Territorial common stock
will be delisted from the Nasdaq Global Select Market and deregistered under
the Securities Exchange Act of 1934, as amended (which we refer to as the
"Exchange Act").
Comparative Market Prices
The followingtable shows the closing prices of Hope common stock and
Territorial common stock as reported on April 26, 2024, the last trading day
before the date of public announcement of the Merger, and on, 2024, the
lastpracticable trading day before the date this proxy statement/prospectus
was printed and mailed. This table also presents the pro forma equivalent per
share value of a share of Territorial common stock on those dates. The pro
forma equivalent pershare value was calculated by multiplying the closing
price of Hope common stock on those dates by 0.8048, the Exchange Ratio in the
Merger.
Hope Territorial Pro Forma
common stock common stock equivalent value of
one share of
Territorial
common stock
April 26, 2024 $ 10.96 $ 7.07 $ 8.82
, 2024 $ $ $
The market price of Hope common stock will fluctuate between the date of this
proxy statement/prospectus andthe completion of the Merger. Consequently, the
total dollar value of the Hope common stock that you will receive upon
completion of the Merger may be significantly higher or lower than its value
as of the date of this proxy statement/prospectus. Weadvise you to obtain
current market quotations for Hope common stock and Territorial common stock.
We can provide no assurance as to future prices of Hope common stock or
Territorial common stock.
Information About the Companies (page 32)
Hope
Hope is abank holding company headquartered in Los Angeles, California. Hope
was incorporated in Delaware in 2000. Hope offers commercial and retail
banking loan and deposit products through its wholly-owned subsidiary, Bank of
Hope, a Californiastate-chartered bank. From its roots as a Korean-American
focused bank, it has grown to be one of the largest independent commercial
banks headquartered in California and serve a multi-ethnic population of
customers around the United States.Hope's network of branches and loan
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production offices includes locations in California, New York, Texas,
Washington, Illinois, New Jersey, Virginia, Georgia, Florida, Alabama,
Colorado, and Oregon and includes a representativeoffice in Seoul, South Korea.
Hope's principal business activities are conducted through Bank of Hope and
primarily consist ofearning interest on loans and investment securities, which
are primarily funded by customer deposits and other borrowings. Operating
revenues consist of the difference between interest received and interest
paid, gains and losses on the sale offinancial assets, and fees earned for
financial services provided to its customers. Interest rates are highly
sensitive to many factors that are beyond Hope's control, such as general
economic conditions, new legislation and the policies ofvarious governmental
and regulatory authorities. Although Hope's business may vary with local and
national economic conditions, such variations are not generally seasonal in
nature.
Hope offers a full suite of commercial, corporate and consumer loan, deposit and
fee-based
productsand services, including commercial and commercial real estate lending,
Small Business Administration lending, residential mortgage and other consumer
lending, treasury management services, foreign currency exchange solutions,
interest rate riskhedging products, and other and international trade
financing, among others. Hope's website at www.bankofhope.com offers internet
banking services and applications in both English and Korean.
Hope's common stock is traded on the Nasdaq Global Select Market under the
symbol "HOPE". The principal executive offices ofHope are located at 3200
Wilshire Blvd., Suite 1400, Los Angeles, California 90010, and its telephone
number is
(213) 639-1700.
Territorial
Territorial is a savings and loan holding company that is headquartered in
Honolulu, Hawaii. Territorial operates primarily through its whollyowned
subsidiary, Territorial Savings Bank. Territorial provides loan and deposit
products and services primarily to individual customers through 28 branches
located throughout Hawaii as of March 31, 2024. At March 31, 2024,Territorial
had consolidated assets of $2.2 billion, consolidated deposits of $1.6 billion
and consolidated stockholders' equity of $250.0 million.
Territorial Savings Bank's business consists primarily of accepting deposits
from the general public and investing those deposits,together with funds
generated from operations and borrowings, in
one-
to four-family residential mortgage loans and investment securities. To a much
lesser extent, Territorial Savings Bank also originates homeequity loans and
lines of credit, construction, commercial and other nonresidential real estate
loans, consumer loans, multi-family mortgage loans and other loans.
Territorial Savings Bank offers a variety of deposit accounts, including
passbook andstatement savings accounts, certificates of deposit, money market
accounts, commercial and regular checking accounts and Super NOW accounts.
Through its subsidiary, Territorial Financial Services, Inc., Territorial
engage in insurance agencyactivities. Territorial Savings Bank also offer
various
non-deposit
investments to its customers, including annuities and mutual funds, through a
third-party broker-dealer.
Territorial's common stock is traded on the Nasdaq Global Select Market under
the symbol "TBNK". The principal executiveoffices of Territorial are located
at 1003 Bishop Street, Pauahi Tower, Suite 500, Honolulu, Hawaii 96813, and
its telephone number is (808)
946-1400.
Risk Factors (page 21)
You shouldcarefully read and consider all the information contained in or
incorporated by reference into this proxy statement/prospectus in deciding how
to vote for the proposals presented in the proxy statement/prospectus. In
particular, you should considerthe factors described under the section
entitled "
Risk Factors
" beginning on page 21 and in Hope's Annual Report on Form
10-K
for the year ended December 31, 2023, and in otherdocuments incorporated by
reference into this proxy statement/prospectus. See the section entitled "
Where You Can Find More Information
".
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus that are not
statements of historical fact constitute forward-lookingstatements within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended
(which we refer to as the "Private Securities Litigation Reform Act"),
notwithstanding that such statements are not specifically identifiedas such.
In addition, certain statements may be contained in Hope's or Territorial's
future filings with the SEC, in press releases, and in oral and written
statements made by Hope or Territorial or with their respective approval that
arenot statements of historical fact and constitute
forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
These statements include, but are not limited to, descriptions ofthe Merger,
Hope's and Territorial's respective financial condition, results of
operations, asset and credit quality trends, profitability and business plans
or opportunities. Forward-looking statements can be identified by the use of
thewords "anticipate," "believe," "contemplate," "could," "estimate,"
"expect," "intend," "may," "outlook," "plan," "should," and"will," and other
words of similar meaning. These forward-looking statements express
management's current expectations or forecasts of future events and, by their
nature, are subject to risks and uncertainties. There are a number offactors
that could cause actual results or outcomes to differ materially from those in
such statements. Factors that might cause such a difference include, but are
not limited to: the risk that the cost savings and any revenue synergies from
theMerger may not be fully realized or may take longer than anticipated to be
realized; disruption to the parties' businesses as a result of the
announcement and pendency of the Merger; the occurrence of any event, change
or other circumstancesthat could give rise to the termination of the Merger
Agreement; the risk that the integration of each party's operations will be
materially delayed or will be more costly or difficult than expected or that
the parties are otherwise unable tosuccessfully integrate each party's
businesses into the other's businesses; the failure to obtain the necessary
approvals by the stockholders of Territorial; the amount of the costs, fees,
expenses and charges related to the Merger; theability of Hope to obtain
required Regulatory Authorizations (and the risk that such Regulatory
Authorizations may result in the imposition of conditions that could adversely
affect the combined company or the expected benefits of the transaction);reputat
ional risk and the reaction of each company's customers, suppliers, employees
or other business partners to the Merger; the failure of the closing
conditions in the Merger Agreement to be satisfied, or any unexpected delay in
closing theMerger; the possibility that the Merger may be more expensive to
complete than anticipated, including as a result of unexpected factors or
events; the dilution caused by Hope's issuance of additional shares of its
common stock in the Merger; amaterial adverse change in the financial
condition of Territorial or Hope; competition; government legislation,
regulations and policies; the ability of Hope or Territorial to execute its
business plan; unanticipated changes in Hope's orTerritorial's liquidity
position, including, but not limited to, changes in Hope's or Territorial's
access to sources of liquidity and capital to address its liquidity needs;
changes in economic conditions and economic and businessuncertainty which
could materially impact credit quality trends and the ability to generate
loans and gather deposits; inflation and governmental responses to inflation,
including increasing interest rates; market, economic, operational,
liquidity,credit, and interest rate risks associated with Hope's or
Territorial's business; Hope's or Territorial's ability to successfully manage
its credit risk and the sufficiency of its allowance for credit losses; the
potential impactof current and future business combinations on Hope's or
Territorial's performance and financial condition, including such company's
ability to successfully integrate businesses and the success of revenue-generati
ng and cost-reductioninitiatives; failure or circumvention of Hope's or
Territorial's internal controls; operational risks or risk management failures
Hope or Territorial or critical third parties, including, without limitation,
with respect to dataprocessing, information systems, cybersecurity,
technological changes, vendor issues, business interruption, and fraud risks;
significant changes in accounting, tax or regulatory practices or
requirements; new legal obligations or liabilities orunfavorable resolutions
of litigation; disruptive technologies in payment systems and other services
traditionally provided by banks; failure or disruption of Hope's or
Territorial's information systems; computer hacking and othercybersecurity
threats; the effects of climate change on Hope or Territorial and their
respective customers, borrowers, or service providers; political and economic
uncertainty and instability; the impacts of pandemics, epidemics and other
infectiousdisease outbreaks; other matters discussed in this proxy
statement/prospectus; and other factors identified in filings with the SEC by
Hope or Territorial. These forward-looking statements are made only as of the
date of this proxystatement/prospectus and are not guarantees of future
results, performance or outcomes.
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Such forward-looking statements are based on assumptions and estimates, which
althoughbelieved to be reasonable, may turn out to be incorrect. Therefore,
undue reliance should not be placed upon these estimates and statements.
Neither Hope nor Territorial can assure that any of these statements,
estimates, or beliefs will be realizedand actual results or outcomes may
differ from those contemplated in these forward-looking statements. Neither
Hope nor Territorial undertake any obligation to publicly update any
forward-looking statements, whether as a result of new information,future
events, or otherwise after the date of this proxy statement/prospectus. You
are advised to consult further disclosures Hope and Territorial may make on
related subjects in their respective filings with the SEC.
Investors should consider these risks, uncertainties, and other factors in
addition to risk factors included in Hope's andTerritorial's respective Annual
Reports on Form
10-K
for the year ended December 31, 2023, and other filings with the SEC.
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RISK FACTORS
In addition to general investment risks and the other information contained in
or incorporated by reference into this proxystatement/prospectus, including
the matters addressed under the section entitled "Cautionary Statement
Regarding Forward-Looking Statements", you should carefully consider the
following risk factors relating to the consummation of theMerger and to Hope
following the Merger in deciding how to vote for the proposals presented in
this proxy statement/prospectus.
Because themarket price of Hope common stock will fluctuate, Territorial
stockholders cannot be certain of the market value of the merger consideration
they will receive.
In the Merger, each share of Territorial common stock issued and outstanding
immediately prior to the Effective Time (except for treasury stockor shares
owned by Territorial or Hope, in each case other than in a fiduciary or agency
capacity or as a result of debts previously contracted) will receive the right
to receive 0.8048 shares of Hope common stock. No fractional shares of
Hopeshares will be issued in the Merger and holders of Territorial common
stock will be entitled to receive cash in lieu of fractional shares. The
Exchange Ratio is fixed and will not be adjusted for changes in the market
price of Hope common stock orTerritorial common stock. Changes in the price of
Hope common stock or Territorial common stock between now and the time of the
Merger will affect the value that Territorial stockholders will receive in the
Merger. Neither Hope nor Territorial ispermitted to terminate the Merger
Agreement as a result of any increase or decrease in the market price of Hope
common stock.
Stock pricechanges may result from a variety of factors, including general
market and economic conditions, changes in Hope's or Territorial's respective
businesses, operations and prospects, the recent volatility in the prices of
securities in globalfinancial markets, including market prices of Hope,
Territorial and other banking companies, regulatory considerations and tax
laws, many of which are beyond Hope's and Territorial's control. Therefore, at
the time of the Territorialspecial meeting, Territorial stockholders will not
know the market value of the consideration that Territorial stockholders will
receive at the Effective Time. You should obtain current market quotations for
shares of Hope (NASDAQ: Hope) andTerritorial (NASDAQ: TBNK).
The market price of Hope common stock after the Merger may be affected by
factors different from those currentlyaffecting the shares of Hope common
stock.
In the Merger, Territorial stockholders will become Hope stockholders.
Hope'sbusiness differs from that of Territorial and certain adjustments may be
made to Hope's business as a result of the Merger. Accordingly, the results of
operations of the combined company and the market price of Hope common stock
after thecompletion of the Merger may be affected by factors different from
those currently affecting the results of operations of Hope. For a discussion
of the business of Hope and of certain factors to consider in connection with
that business, see thedocuments incorporated by reference in this proxy
statement/prospectus and referred to under the section entitled "
Where You Can Find More Information
".
Combining Hope and Territorial may be more difficult, costly or time-consuming
than expected, and the anticipated benefits and cost savings of theMerger may
not be realized.
Hope and Territorial have operated and, until the completion of the Merger,
will continue to operateindependently. The success of the Merger, including
anticipated benefits and cost savings, will depend, in part, on Hope's and
Territorial's ability to successfully combine and integrate the businesses of
Hope and Territorial in a mannerthat permits growth opportunities and does not
materially disrupt existing customer relations or result in decreased revenues
due to loss of customers. It is possible that the integration process could
result in the loss of key employees, thedisruption of either company's ongoing
businesses or inconsistencies in standards, controls, procedures and policies
that adversely affect the combined company's ability to maintain relationships
with clients, customers, depositors andemployees or to achieve the anticipated
benefits and cost savings of the
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Merger. The loss of key employees could adversely affect Hope's ability to
successfully conduct its business, which could have an adverse effect on
Hope's financial results and thevalue of Hope's common stock after the Merger.
If Hope and Territorial experience difficulties with the integration process,
the anticipated benefits of the Merger may not be realized fully, or at all,
or may take longer to realize thanexpected. As with any merger of financial
institutions, there also may be business disruptions that cause Hope and/or
Territorial to lose customers or cause customers to remove their accounts from
Hope and/or Territorial and move their business tocompeting financial
institutions. Integration efforts between the two companies will also divert
management attention and resources. These integration matters could have an
adverse effect on each of Hope and Territorial during this transition
periodand for an undetermined period after completion of the Merger on the
combined company. In addition, the actual cost savings of the Merger could be
less than anticipated.
Regulatory approvals may not be received, may take longer than expected, or
may impose conditions that are not presently anticipated or that could havean
adverse effect on the combined company following the Merger.
Before the Merger may be completed, Hope and Territorial mustobtain all
necessary Regulatory Authorizations from the Bank Regulatory Authorities.
Other authorizations, permits, consents, approvals,
non-objections,
and/or waivers from other regulators could also berequired. In determining
whether to grant these Regulatory Authorizations, the Bank Regulatory
Authorities consider a variety of factors, including the regulatory standing
of each party and the factors described under the section entitled"
The Merger--Regulatory Approvals Required for the Merger
". An adverse development in either party's regulatory standing or these
factors could result in an inability to obtain any such Regulatory
Authorization or delaytheir receipt. The Bank Regulatory Authorities may
impose conditions on the completion of the Merger or require changes to the
terms of the Merger. Such conditions or changes could have the effect of
delaying or preventing completion of the Mergeror imposing additional costs on
or limiting the revenues of the combined company following the Merger, any of
which might have an adverse effect on the combined company following the
Merger.
Additionally, under the terms of the Merger Agreement, Hope and Territorial
are not required to take actions or agree to conditions inconnection with
obtaining any Regulatory Authorizations from governmental entities that would
reasonably be expected to have a material adverse effect on Hope and its
subsidiaries, taken as a whole, after giving effect to the Merger (measured on
ascale relative to Territorial and its subsidiaries, taken as a whole) (which
we refer to as a "materially burdensome regulatory condition"). See the
section entitled "
The Merger--Regulatory Approvals Required for theMerger
".
The combined company may be unable to retain Territorial or Hope personnel
successfully after the Merger is completed.
The success of the Merger will depend in part on the combined company's
ability to retain the talents and dedication of keyemployees currently
employed by Territorial and Hope. It is possible that these employees may
decide not to remain with Territorial or Hope while the Merger is pending or
with the combined company after the Merger is consummated. If key
employeesterminate their employment, or if an insufficient number of employees
are retained to maintain effective operations, the combined company's business
activities may be adversely affected and management's attention may be
diverted fromsuccessfully integrating Territorial to hiring suitable
replacements, all of which may cause the combined company's business to
suffer. In addition, Hope may not be able to locate suitable replacements for
any key employees who leave thecombined company or to offer employment to
potential replacements on reasonable terms.
Certain of Territorial's directors and executiveofficers have interests in the
Merger that may differ from the interests of Territorial stockholders.
Territorial stockholdersshould be aware that some of Territorial's directors
and executive officers have interests in the Merger that may be different
from, or in addition to, the interests of the other Territorial stockholders
generally. These interests andarrangements may create potential conflicts of
interest. The
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Territorial Board of Directors was aware of these interests and considered
these interests, among other matters, when making its decision to approve the
Merger Agreement and in recommending thatTerritorial stockholders vote in
favor of adopting and approving the Merger Agreement.
For a more complete description of theseinterests, see the section entitled "
The Merger--Interests of Territorial's Directors and Executive Officers in the
Merger
".
Termination of the Merger Agreement could negatively impact Hope or Territorial.
If the Merger Agreement is terminated, there may be various adverse
consequences and Territorial and/or Hope may experience negative reactionsfrom
the financial markets and from their respective customers and employees. For
example, Hope's or Territorial's businesses may have been impacted adversely
by the failure to pursue other beneficial opportunities due to the focus
ofmanagement on the Merger, without realizing any of the anticipated benefits
of completing the Merger. Additionally, if the Merger Agreement is terminated,
the market price of Hope common stock or Territorial common stock could
decline to the extentthat the current market prices reflect a market
assumption that the Merger will be completed. If the Merger Agreement is
terminated under certain circumstances, Territorial may be required to pay
Hope a termination fee of $3,000,000.
The Merger Agreement limits Territorial's ability to pursue alternative
Acquisition Proposals, requires Territorial to pay a termination fee
of$3,000,000 under limited circumstances, including circumstances relating to
Acquisition Proposals, and may discourage other companies from trying to
acquire Territorial.
The Merger Agreement prohibits Territorial from initiating, soliciting,
knowingly encouraging or knowingly facilitating certain alternativethird-party
Acquisition Proposals. See the section entitled "
The Merger Agreement--Agreement Not to Solicit Other Offers
". The Merger Agreement also provides that Territorial will be required to pay
a termination fee to Hope inthe amount of $3,000,000 in the event that the
Merger Agreement is terminated under certain circumstances, including an
adverse recommendation change by the Territorial Board of Directors. See the
section entitled "
The MergerAgreement--Termination Fee
". These provisions might discourage a potential competing acquiror that might
have an interest in acquiring all or a significant part of Territorial from
considering or proposing such an acquisition.
The ability of Hope and Territorial to complete the Merger is subject to the
satisfaction (or waiver by the parties) of the closing conditions set forthin
the Merger Agreement, some of which are outside of the parties' control.
The Merger Agreement contains a number ofconditions that must be fulfilled in
order to complete the Merger. Those conditions include, but are not limited
to: approval of the Merger Agreement and the Merger by Territorial
stockholders, receipt of all required Regulatory Authorizations,absence of any
law, statute or regulation, or any order, injunction or other legal restraint
or prohibition preventing the completion of the Merger, effectiveness of the
registration statement of which this proxy statement/prospectus is a part,
theaccuracy of the representations and warranties of both parties (subject to
applicable materiality qualifiers), and the performance, in all material
respects, by both parties of their respective covenants and agreements. See
the section entitled
"The Merger Agreement--Conditions to
Completion of the Merger"
for a more complete discussion of the conditions to the completion of the
Merger. These conditions to the closing of the Merger may not be fulfilled in
atimely manner, or at all, and, accordingly, the Merger may not be completed.
In addition, the parties can mutually decide to terminate the Merger Agreement
at any time, before or after stockholder approval, or Hope or Territorial may
elect toterminate the Merger Agreement in certain other circumstances.
Hope and Territorial will be subject to business uncertainties and
contractualrestrictions while the Merger is pending, which could disrupt
Hope's and Territorial's relationships with their customers, business partners
and others, as well as their operating results and business generally.
Whether or not the Merger is ultimately consummated, uncertainty about the
effect of the Merger on employees and customers may have an adverseeffect on
Hope and Territorial and, consequently, the combined
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company. These uncertainties may impair Hope's and Territorial's ability to
attract, retain and motivate key personnel until the Merger is completed, and
could cause customers andothers that deal with Hope or Territorial to seek to
change existing business relationships with Hope or Territorial, respectively.
Retention of certain employees by Territorial and Hope may be challenging
while the Merger is pending, as certainemployees may experience uncertainty
about their future roles with the combined company. If key employees depart
because of issues relating to the uncertainty and difficulty of integration,
or a desire not to remain with Territorial or Hope and,ultimately, the
combined company, the combined company's business could be harmed. In
addition, subject to certain exceptions, Territorial and Hope has each agreed
to operate its business in the ordinary course and use commercially
reasonableefforts to preserve its business organization, employees and
business relationships prior to closing. See the section entitled "
The Merger Agreement--Covenants and Agreements
" for a description of the restrictive covenantsapplicable to Territorial and
Hope.
The shares of Hope common stock to be received by Territorial stockholders as
a result of the Merger will havedifferent rights from the shares of
Territorial common stock.
In the Merger, Territorial stockholders will become Hopestockholders and their
rights as Hope stockholders will be governed by Delaware law and the governing
documents of Hope following the Merger. The rights associated with Hope common
stock are different from the rights associated with Territorialcommon stock.
See the section entitled "
Comparison of Stockholders' Rights
" for a discussion of the different rights associated with Hope common stock.
Territorial and Hope are expected to incur significant costs related to the
Merger and integration. If the Merger is not completed, Hope and Territorialwill
have incurred substantial expenses without realizing the expected benefits of
the Merger.
Each of Hope and Territorial hasincurred and will incur substantial expenses
in connection with the negotiation and completion of the transactions
contemplated by the Merger Agreement. These costs include legal, financial
advisory, accounting, consulting and other advisory fees,severance/employee
benefit-related costs, filing fees and other regulatory fees, printing costs
and other related costs. Some of these costs are payable by either Territorial
or Hope regardless of whether or not the Merger is completed. If theMerger is
not completed, Hope and Territorial would have to recognize these expenses
without realizing the expected benefits of the Merger.
Thefuture results of the combined company following the Merger may suffer if
the combined company does not effectively manage its expanded operations.
Following the Merger, the size of the business of the combined company will
increase beyond the current size of either Hope's orTerritorial's businesses.
The combined company's future success will depend, in part, upon its ability
to manage this expanded business, which may pose challenges for management,
including challenges related to the management andmonitoring of new operations
and associated increased costs and complexity. The combined company may also
face increased scrutiny from governmental authorities as a result of the
increased size of its business and the Merger. There can be noassurances that
the combined company will be successful or that it will realize the expected
operating efficiencies, revenue enhancement or other benefits currently
anticipated from the Merger.
Territorial stockholders will have a reduced ownership and voting interest in
the combined company after the Merger and will exercise less influenceover
management, as compared to their ownership and voting interests in Territorial.
Territorial stockholders currently have theright to vote in the election of
the Territorial Board of Directors and on other matters affecting Territorial.
Upon completion of the Merger, each Territorial stockholder who receives
shares of Hope common stock will become a Hope stockholder, witha percentage
ownership of Hope
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that is smaller than such stockholder's current percentage ownership of
Territorial. Based on the number of shares of Territorial common stock
outstanding on April 26, 2024, the date ofthe Merger Agreement, and the shares
of Hope common stock expected to be issued in the Merger, the Territorial
stockholders as a group will receive shares in the Merger constituting
approximately
5.6
% of the outstanding sharesof Hope common stock immediately after the Merger,
and current Hope stockholders as a group will own approximately
94.4
% of the outstanding shares of Hope common stock immediately after the Merger.
Because of this, Territorialstockholders may have less influence on the
management and policies of the combined company than they now have on the
management and policies of Territorial.
Issuance of shares of Hope common stock in connection with the Merger may
adversely affect the market price of Hope common stock.
In connection with the payment of the merger consideration, Hope expects to
issue approximately
7.2 million shares of Hope commonstock to Territorial stockholders. The
issuance of these new shares of Hope common stock may depress or result in
fluctuations in the market price of Hope common stock, including a stock price
decrease.
The opinion received by the Territorial Board of Directors from Territorial's
financial advisor prior to the execution of the Merger Agreement doesnot
reflect any changes in circumstances that may have occurred since the date of
such opinion.
The opinion of KBW was rendered tothe Territorial Board of Directors on, and
dated, April 26, 2024. Changes in the operations and prospects of Territorial,
general market and economic conditions and other factors which may be beyond
the control of Hope and Territorial may havealtered the value of Hope and/or
Territorial or the market prices of shares of Hope common stock and/or
Territorial common stock as of the date of this proxy statement/prospectus, or
may alter such value and market prices by the time the Merger iscompleted. The
opinion from KBW, dated April 26, 2024, does not speak as of any date other
than the date of such opinion.
Stockholderlitigation could prevent or delay the completion of the Merger or
otherwise negatively impact the business and operations of Hope and
Territorial.
Securities class action lawsuits and derivative lawsuits are often brought
against public companies that have entered into merger agreements.Stockholders
of Territorial may file lawsuits against Hope, Territorial and/or the
directors and officers of either company in connection with the Merger. One of
the conditions to the closing is that no order, injunction or decree issued by
anycourt, agency or governmental entity of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Merger or
any of the other transactions contemplated by the Merger Agreement be in
effect. If any plaintiffwere successful in obtaining an injunction prohibiting
Hope or Territorial defendants from completing the Merger or any of the other
transactions contemplated by the Merger Agreement, then such injunction may
delay or prevent the effectiveness ofthe Merger and could result in
significant costs to Hope and/or Territorial, including any cost associated
with the indemnification of directors and officers of each company. Hope and
Territorial may incur costs in connection with the defense orsettlement of any
stockholder lawsuits filed in connection with the Merger. Such litigation
could have an adverse effect on the financial condition and results of
operations of Hope and Territorial and could prevent or delay the completion
of theMerger.
Territorial stockholders will not have appraisal or dissenters' rights in the
Merger.
Appraisal or dissenters' rights are statutory rights that, if applicable under
law, enable stockholders to dissent from an extraordinarytransaction, such as
a merger, and to demand that the corporation pay the fair value for their
shares as determined by a court in a judicial proceeding instead of receiving
the consideration offered to stockholders in connection with theextraordinary
transaction. Pursuant to Maryland law, holders of Territorial common stock
will not be entitled to dissenters' or appraisal rights in the Merger with
respect to their shares of Territorial common stock.
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INFORMATION ABOUT THE TERRITORIAL SPECIAL MEETING
This section contains information for holders of Territorial common stock
about the special meeting that Territorial has called to allowholders of
Territorial common stock to consider and vote on the Merger Agreement and
other related matters. This proxy statement/prospectus is accompanied by a
notice of the special meeting of holders of Territorial common stock and a
form of proxycard that the Territorial Board of Directors is soliciting for
use by the holders of Territorial common stock at the special meeting and at
any adjournments or postponements of the special meeting.
Date, Time and Place of the Special Meeting
The special meeting will be held in a virtual-only format on [], 2024 at [],
Hawaii Time, at [].
Purpose of the Territorial Special Meeting
At the special meeting, Territorial stockholders will be asked to consider and
vote upon the following proposals:
. the Merger Proposal;
. the Compensation Proposal; and
. the Adjournment Proposal.
Recommendation of the Territorial Board of Directors
The Territorial Board of Directors unanimously recommends that Territorial
stockholders vote "
FOR
" the Merger Proposal,"
FOR
" the Compensation Proposal, and "
FOR
" the Adjournment Proposal.
Record Date; Shares Entitled to Vote
The record date for the Territorial special meeting is [], 2024. All holders
of Territorial common stock who held shares at the close ofbusiness on the
record date for the special meeting are entitled to receive notice of, and to
vote at, the Territorial special meeting. Each holder of Territorial common
stock is entitled to cast one vote on each matter voted on at the
specialmeeting for each share of Territorial common stock that such holder
owned of record as of the record date. As of the close of business on the
record date for the Territorial special meeting, there were [] outstanding
shares of Territorialcommon stock.
Quorum
A majority ofthe voting power of the outstanding shares entitled to vote at
the meeting, present virtually or represented by proxy, shall constitute a
quorum for the transaction of business. If you return a valid proxy card or
attend the special meetingvirtually, your shares will be counted for
determining whether there is a quorum, even if you abstain from voting.
Broker non-votes also
will be counted for determining the existence of a quorum. A
broker non-vote occurs
when a broker, bank or other nominee holding shares of Territorial common
stock for a beneficial owner does not vote on a particular proposal because
the nominee does not havediscretionary voting power with respect to that item
and has not received voting instructions from the beneficial owner.
Vote Required; Treatment ofAbstentions and Failure to Vote
1. Merger proposal
. Standard: Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of theshares of Territorial outstanding and entitled to vote.
. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Merger Proposal, it will have the same effect as a vote "AGAINST" the proposal.
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2. Compensation Proposal
. Standard: Approval of the Compensation Proposal requires the affirmative
vote of a majority of the votes cast byTerritorial stockholders.
. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Merger Proposal, it will have no effect on the outcome of the proposal.
3. Adjournment proposal
. Standard: Approval of the Adjournment Proposal requires the affirmative
vote of a majority of the votes cast byTerritorial stockholders.
. Effect of abstentions and broker
non-votes:
If you fail to vote, mark"ABSTAIN" on your proxy card, or fail to instruct your bank, broker or other
nominee with respect to the Adjournment Proposal, it will have no effect on the outcome of the proposal.
Attending the Special Meeting
Onlystockholders as of the close of business on [] (or their authorized
representatives) will be allowed to participate in the Territorial special
meeting online. The link to the virtual meeting will be: []. To participate in
the meetingonline, stockholders will need the
16-digit
control number included on their proxy card or voting instruction form.
If you own your shares through a bank, broker, or other nominee, please review
the materials sent to you by that firm to find your
16-digit
control number.
Voting of Proxies
A holder of Territorial common stock may vote by proxy or virtually at the
Territorial special meeting. If you hold your shares of Territorialcommon
stock in your name as a holder of record, to submit a proxy, you, as a holder
of Territorial common stock, may use one of the following methods:
. By telephone: by calling the toll-free number indicated on the accompanying proxy card and following the recordedinstructions.
. Through the Internet: by visiting the website indicated on the accompanying proxy card and following theinstructions.
. By mail: by completing and returning the accompanying proxy card in the enclosed postage-paid
envelope. Theenvelope requires no additional postage if mailed in the United States.
If you intend to submit your proxy by telephoneor via the Internet, you must
do so by 11:59 p.m., Eastern Time, on the day before the special meeting. If
you intend to submit your proxy by mail, your completed proxy card must be
received prior to the special meeting.
If a holder's shares are held in "street name" by a bank, broker, or other
nominee, the holder should check the voting formused by that firm to determine
whether the holder may vote by telephone or the Internet.
Even if you plan to attend the Territorialspecial meeting virtually, we
recommend that you vote your shares in advance as described below so that your
vote will be counted if you later decide not to or become unable to attend the
special meeting.
Delivery of Proxy Materials
As permittedby applicable law, only one copy of this proxy statement/prospectus
is being delivered to Territorial stockholders residing at the same address,
unless such Territorial stockholders have notified Territorial of their desire
to receive multiplecopies of the proxy statement/prospectus.
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Territorial will promptly deliver, upon oral or written request, a separate
copy of theproxy statement/prospectus to any Territorial stockholder residing
at an address to which only one copy of such document was mailed. Requests for
additional copies should be directed to Territorial's proxy solicitor, Laurel
Hill AdvisoryGroup, at 2 Robbins Lane, Suite 201, Jericho, New York 11753;
telephone: (888)
742-1305.
How to Revoke YourProxy
If you are the record holder of your shares, you may revoke your proxy in any
of the following ways:
. Re-submitting
your vote via the Internet or by telephone, by 11:59 p.m.,Eastern Time, on [.], 2024;
. Submitting another properly completed proxy card bearing a later date which is received prior to the meetingdate;
. Attending the special meeting virtually, notifying the corporate secretary and voting by ballot at the specialmeeting; or
. Submitting a written notice that you are revoking your proxy. The notice
must be sent to 1003 Bishop Street,Pauahi Tower, Suite 500, Honolulu,
Hawaii 96813, Attention: Corporate Secretary, and must be received before
your Territorial common stock has been voted at the special meeting.
If your shares are held by a broker, bank, or other nominee, you should
contact your broker, bank, or other nominee to change your vote.
Participants in the Territorial 401(k) Plan may revoke their instructions to
the Territorial 401(k) Plan trustee with respect to voting of theshares of
Territorial common stock held in their Territorial 401(k) Plan account by
submitting to the Territorial 401(k) Plan trustee another signed instruction
card bearing a later date, provided that such new instruction card must be
received bythe Territorial 401(k) Plan trustee on or prior to the last date
for submission of such instructions with respect to the Territorial special
meeting designated in the separate voting instructions provided by the
Territorial 401(k) Plan trustee.
Participants in the Territorial ESOP may revoke their instructions to the
Territorial ESOP trustee with respect to voting of the shares ofTerritorial
common stock held in their Territorial ESOP account by submitting to the
Territorial ESOP trustee another signed instruction card bearing a later date,
provided that such new instruction card must be received by the Territorial
ESOPtrustee on or prior to the last date for submission of such instructions
with respect to the Territorial special meeting designated in the separate
voting instructions provided by the Territorial ESOP trustee.
Proxy Solicitation
Territorial issoliciting your proxy. Territorial will pay for this proxy
solicitation. In addition to soliciting proxies by mail, Laurel Hill Advisory
Group, a proxy solicitation firm, will assist Territorial in soliciting
proxies for the Territorial specialmeeting. Territorial will pay Laurel Hill
Advisory Group a fee of $7,500 plus
out-of-pocket
expenses and charges for telephone calls made and received in connection
withthe solicitation. Additionally, directors, officers and employees of
Territorial and Territorial Savings Bank may solicit proxies personally and by
telephone. None of these persons will receive additional or special
compensation for solicitingproxies. Territorial will, upon request, reimburse
brokers, banks and other nominees for their expenses in sending proxy
materials to their customers who are beneficial owners and obtaining their
voting instructions.
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TERRITORIAL PROPOSALS
PROPOSAL NO. 1
MERGER PROPOSAL
Territorial is asking its stockholders to approve and adopt the Merger
Agreement, and to approve the Merger. Territorial stockholders shouldread this
proxy statement/prospectus carefully and in its entirety, including the
annexes, for more detailed information concerning the Merger Agreement, the
Merger and the Bank Merger. A copy of the Merger Agreement is attached to this
proxystatement/prospectus as
Annex
A
.
After careful consideration, the Territorial Board of Directors determined
that the Merger Agreement and the transactions contemplated by theMerger
Agreement are advisable and in the best interests of Territorial and its
stockholders and unanimously approved and adopted the Merger Agreement, the
Merger, the Bank Merger, and the other transactions contemplated by the Merger
Agreement. See"
The
Merger--Territorial's Reasons for the Merger; Recommendation of the
Territorial Board of Directors
" beginning on page 74 for a more detailed discussion of the recommendation of
the Territorial Boardof Directors.
Approval of the Merger Proposal requires the presence of a quorum and the
affirmative vote of the holders a majority of thecommon stock outstanding and
entitled to vote. Abstentions and
broker non-votes will
have the same effect as a vote against this proposal.
The Territorial Board of Directors unanimously recommends a vote "FOR" the
Merger Proposal.
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PROPOSAL NO. 2
COMPENSATION PROPOSAL
Asrequired by Item 402(t) of
Regulation S-K and
Regulation 14A of the Securities Exchange Act of 1934, as amended, Territorial
is providing its stockholders with the opportunity to cast an
advisory, non-binding vote
on the compensation that may become payable to its named executive officers in
connection with the completion of the Merger, as disclosed in the section of
this proxystatement/prospectus entitled "
The Merger--Interests of Territorial's Directors and Executive Officers in the
Merger
", beginning on page 88 of this proxy statement/prospectus, and the related
table and narratives.
Territorial believes that the information regarding compensation that may
become payable to its named executive officers in connection withthe
completion of the Merger is reasonable and demonstrates that Territorial's
executive compensation program was designed appropriately and structured to
ensure the retention of talented executives and a strong alignment with the
long-terminterests of Territorial stockholders. This vote is not intended to
address any specific item of compensation, but rather the overall compensation
that may become payable to Territorial's named executive officers in
connection with thecompletion of the Merger. In addition, this vote is
separate and independent from the vote of stockholders to approve the Merger
Proposal.
Territorial asks that its stockholders vote "
FOR
" the following resolution:
RESOLVED, that the compensation that may become payable to Territorial's named
executive officers in connection with the completion of theMerger, as
disclosed in the section entitled "
The Merger--Interests of Territorial's Directors and Executive Officers in the
Merger
", beginning on page 88 of this proxy statement/prospectus, and the related
tables andnarrative, is hereby APPROVED.
Approval of this proposal is not a condition to the completion of the Merger.
Additionally, this vote isadvisory and, therefore, it will not be binding on
Territorial, nor will it overrule any prior decision or require the
Territorial Board of Directors (or any committee thereof) to take any action.
Accordingly, the Merger-related compensation will bepaid to Territorial's
named executive officers to the extent payable in accordance with the terms of
their compensation agreements and other contractual arrangements even if
Territorial stockholders do not approve the proposals to approve theMerger-relat
ed executive compensation.
Approval of the Territorial Compensation Proposal requires the presence of a
quorum and theaffirmative vote of a majority of the votes cast on the
proposal. Abstentions and
broker non-votes will
have no effect on the outcome of voting on this proposal.
The Territorial Board of Directors unanimously recommends that Territorial
stockholders vote "FOR" the approval of theCompensation Proposal.
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PROPOSAL NO. 3
ADJOURNMENT PROPOSAL
Territorial is submitting a proposal for consideration at the special meeting
to authorize the named proxies to authorize the TerritorialBoard of Directors
to adjourn or postpone the special meeting, if necessary, to permit further
solicitation of proxies in favor of the Merger Proposal or to ensure that any
supplement or amendment to this proxy statement/prospectus is timelyprovided
to Territorial stockholders. Even though a quorum may be present at the
Territorial special meeting, it is possible that Territorial may not have
received sufficient votes to approve the Merger Proposal by the time of the
meeting. In thatevent, the Territorial Board of Directors would need to
adjourn the Territorial special meeting in order to solicit additional
proxies. This proposal relates only to authorization of the Territorial Board
of Directors to adjourn or postpone thespecial meeting, if necessary, to
permit further solicitation of proxies in favor of the Merger Agreement
proposal or to ensure that any supplement or amendment to this proxy
statement/prospectus is timely provided to Territorial stockholders. Ifthe
Territorial special meeting is adjourned to a date not more than 120 days
after the original record date, Territorial is not required to give notice of
the time and place of the adjourned meeting. Territorial may also postpone the
specialmeeting to a date not more than 120 days after the original record
date. Notice of the date, time and place to which the special meeting is
postponed must be given not less than ten days prior to such date.
Approval of the Adjournment Proposal requires the presence of a quorum and the
affirmative vote of a majority of the votes cast on theproposal. Abstentions
and
broker non-votes will
have no effect on the outcome of voting on this proposal.
The Territorial Board of Directors unanimously recommends that Territorial
stockholders vote "FOR" authorization of theTerritorial Board of Directors to
adjourn or postpone the Territorial special meeting, if necessary, to permit
further solicitation of proxies in favor of the Merger Proposal or to ensure
that any supplement or amendment to the proxystatement/prospectus is timely
provided to Territorial stockholders.
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INFORMATION ABOUT HOPE BANCORP, INC.
Hope is a bank holding company headquartered in Los Angeles, California. Hope
was incorporated in Delaware in 2000. Hope offers commercial andretail banking
loan and deposit products through its wholly-owned subsidiary, Bank of Hope, a
California state-chartered bank. From its roots as a Korean-American focused
bank, it has grown to be one of the largest independent commercial
banksheadquartered in California and serve a multi-ethnic population of
customers around the United States. Hope's network of branches and loan
production offices includes locations in California, New York, Texas,
Washington, Illinois, New Jersey,Virginia, Georgia, Florida, Alabama,
Colorado, and Oregon and includes a representative office in Seoul, South
Korea.
Hope'sprincipal business activities are conducted through Bank of Hope and
primarily consist of earning interest on loans and investment securities,
which are primarily funded by customer deposits and other borrowings.
Operating revenues consist of thedifference between interest received and
interest paid, gains and losses on the sale of financial assets, and fees
earned for financial services provided to its customers. Interest rates are
highly sensitive to many factors that are beyondHope's control, such as
general economic conditions, new legislation and the policies of various
governmental and regulatory authorities. Although Hope's business may vary
with local and national economic conditions, such variations arenot generally
seasonal in nature.
Hope offers a full suite of commercial, corporate and consumer loan, deposit and
fee-based
products and services, including commercial and commercial real estate
lending, Small Business Administration lending, residential mortgage and other
consumer lending, treasury management services, foreigncurrency exchange
solutions, interest rate risk hedging products, and other and international
trade financing, among others. Hope's website at www.bankofhope.com offers
internet banking services and applications in both English and Korean.
Hope's common stock is traded on the Nasdaq Global Select Market under the
symbol "HOPE". The principal executive offices ofHope are located at 3200
Wilshire Blvd., Suite 1400, Los Angeles, California 90010, and its telephone
number is
(213) 639-1700.
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INFORMATION ABOUT TERRITORIAL BANCORP INC.
Territorial is a savings and loan holding company that is headquartered in
Honolulu, Hawaii. Territorial was formed as a Maryland corporationin 2008.
Territorial operates primarily through its wholly owned subsidiary,
Territorial Savings Bank. Territorial provides loan and deposit products and
services primarily to individual customers through 28 branches located
throughout Hawaiias of March 31, 2024. At March 31, 2024, Territorial had
consolidated assets of $2.2 billion, consolidated deposits of $1.6 billion and
consolidated stockholders' equity of $250.0 million.
Territorial Savings Bank's business consists primarily of accepting deposits
from the general public and investing those deposits,together with funds
generated from operations and borrowings, in
one-
to four-family residential mortgage loans and investment securities. To a much
lesser extent, Territorial Savings Bank also originates homeequity loans and
lines of credit, construction, commercial and other nonresidential real estate
loans, consumer loans, multi-family mortgage loans and other loans.
Territorial Savings Bank offers a variety of deposit accounts, including
passbook andstatement savings accounts, certificates of deposit, money market
accounts, commercial and regular checking accounts and Super NOW accounts.
Through its subsidiary, Territorial Financial Services, Inc., Territorial
engages in insurance agencyactivities. Territorial Savings Bank also offers
various
non-deposit
investments to its customers, including annuities and mutual funds, through a
third-party broker-dealer.
Territorial's common stock is traded on the Nasdaq Global Select Market under
the symbol "TBNK". The principal executiveoffices of Territorial are located
at 1003 Bishop Street, Pauahi Tower, Suite 500, Honolulu, Hawaii 96813, and
its telephone number is (808)
946-1400.
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DESCRIPTION OF BUSINESS OF TERRITORIAL BANCORP INC.
Market Area
Territorial conductsbusiness from its corporate offices and from its 28
full-service branch offices located throughout the State of Hawaii.
The largestsector of Hawaii's economy is the visitor industry. In August 2023,
wildfires on Maui caused tremendous economic damage, including damaging or
destroying more than 2,300 structures. Lahaina was one of the most popular
tourist destinations onMaui and many historical sites, businesses and visitor
accommodations were damaged or destroyed. Although the visitor industry had
been impacted by the Maui wildfires, it has recovered faster than economists
had anticipated. The Hawaii TourismAuthority reported that total visitors were
9.6 million in 2023, a 4.4% increase compared to 9.2 million in 2022. Total
visitor spending in 2023 totaled $20.8 billion, a 5.5% increase compared to
$19.7 billion in 2022. Most ofthe visitors to the state in 2023 were from the
continental United States.
Public sector construction projects continue to provide largescale jobs such
as renovations and expansions of airports, roads and public utilities,
including the Honolulu rail project. Residential construction is expected to
continue to grow and expand to meet Maui's rebuilding needs and a
continuedstrong demand for homes on all islands.
Federal spending is the second largest contributor to Hawaii's economy and
accounts for 8.9%of the state's gross domestic product. In December 2023, the
U.S. Senate and U.S. House approved a new defense spending bill that includes
$1.6 billion for infrastructure projects in Hawaii. Hawaii is expected to
continue to play a majorrole in any future U.S. military plans because of
Hawaii's central location in the Pacific region and emerging threats to
national defense from North Korea and China.
The number of single-family homes sold on the island of Oahu, the largest real
estate market in Hawaii, totaled 2,560 units in 2023, adecrease of 26.3%
compared to sales in 2022. The median price paid on Oahu for a single-family
home in 2023 was $1.1 million, a decrease of 5.0% compared to the median price
in 2022. The number of condominium sales, a notable portion ofthe overall
housing market, totaled 4,573 units in 2023, a decrease of 28.0% compared to
sales in 2022. The median price paid on Oahu for condominiums in 2023 was
$509,000, a decrease of 0.3% compared to the median price in 2022. Theactivity
in the single-family and condominium market has slowed down due to high
mortgage rates and home prices and a lack of inventory as homeowners who have
relatively low rates on their existing mortgage are reluctant to sell their
homes.
Maui County is the second largest real estate market in Hawaii. Sales of
existing single-family homes on Maui totaled 729 units in 2023, a28.7%
decrease compared to the number of units sold in 2022. The median price paid
for a single-family home in Maui County in 2023 was $1.2 million, an increase
of 8.6% compared to the median price in 2022. The number of condominium
salestotaled 969 units in 2023, a decrease of 36.3% compared to the number of
units sold in 2022. The median price paid in Maui County for condominiums in
2023 was $833,000, a 7.4% increase compared to the median price in 2022. The
median priceof single-family homes and condominium prices in Maui County
continued to rise in 2023 because of the strong demand for housing and stress
on the existing inventory of homes available for sale due to the wildfires.
Competition
Territorial faces intensecompetition in its market area both in making loans
and attracting deposits. Territorial competes with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies,
Fintech, mutual funds, insurance companies andinvestment banking firms. Some
of Territorial's competitors have greater name recognition and market presence
that benefit them in attracting business and offer certain services that
Territorial does not or cannot provide.
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Territorial's deposit sources are primarily concentrated in the communities
surroundingits banking offices, located in all four counties in the State of
Hawaii. As of June 30, 2023 (the latest date for which information is publicly
available), Territorial ranked fifth in FDIC insured deposit market share in
the State of Hawaii(out of 13 banks and thrift institutions with offices in
Hawaii), with a 2.9% market share. As of that date, Territorial's largest
market share was in the County of Hawaii, where it ranked fifth in deposit
market share (out of eight banks andthrift institutions with offices in the
County) with a 4.4% market share.
Lending Activities
Territorial's primary lending activity is the origination of
one-
to four-family residentialmortgage loans. To a much lesser extent, Territorial
also originates home equity loans and lines of credit, construction,
commercial and other nonresidential real estate loans, consumer loans,
multi-family mortgage loans and commercial businessloans.
One-
to Four-Family Residential Mortgage Loans
. At March 31, 2024,$1.3 billion, or 97.3% of Territorial's total loan
portfolio, consisted of
one-
to four-family residential mortgage loans. Territorial offers conforming,
fixed-rate and adjustable-rate residentialmortgage loans with maturities
generally up to 30 years. Historically, there has been little demand for
adjustable-rate mortgage loans in its market area.
One-
to four-family residential mortgage loans are generally underwritten according
to Freddie Macguidelines, and Territorial refers to loans that conform to such
guidelines as "conforming loans". Territorial generally originates both fixed-
and adjustable-rate mortgage loans in amounts up to the maximum conforming
loan limits asestablished by the Federal Housing Finance Agency, which is
$1,149,825 for single-family homes located in the State of Hawaii for 2024.
Territorial also originates loans above this amount, which are referred to as
"jumbo loans".Territorial generally originates fixed-rate jumbo loans with
terms of up to 30 years. Territorial has not originated significant amounts of
adjustable-rate jumbo loans in recent years due to customer preference for
fixed-rate loans in its marketarea. Territorial generally underwrites jumbo
loans in a manner similar to conforming loans. Jumbo loans are not uncommon in
its market area.
Territorial may originate loans with
loan-to-value
ratios inexcess of 80%, up to and including a
loan-to-value
ratio of 100%. Territorial generally requires private mortgage insurance for
loans with
loan-to-value
ratios in excess of 80%. During the three months ended March 31, 2024, it did
not originate any
one-
tofour-family mortgage residential mortgage loans with
loan-to-value
ratios in excess of 80%. During the year ended December 31, 2023, it
originated $1.5 millionof
one-
to four-family residential mortgage loans with
loan-to-value
ratios in excess of 80%. Territorial offers a variety ofcredit programs for
low-
to moderate-income and first-time home purchasers. These include its first
time home purchaser program, where the borrower will receive up to a 50 basis
point reduction in pointscharged in connection with the loan. Territorial also
originates first mortgage loans to lower-income individuals who reside in
rural census tracts where the U.S. Department of Agriculture will issue a
second mortgage and complete the underwritingof the loan, subject to its
review before origination. Territorial also offers both Federal Housing
Administration (FHA) and Veterans Administration (VA) fixed-rate loans.
Other than its loans for the construction of
one-
to four-family residential mortgage loans (describedunder "
--Nonresidential Real Estate Loans
" below), Territorial currently does not originate new "interest only"
mortgage loans on
one-
to four-family residential properties(where the borrower pays interest for an
initial period, after which the loan converts to a fully amortizing loan).
Territorial also does not offer loans that provide for negative amortization
of principal, such as "Option ARM" loans,where the borrower can pay less than
the interest owed on their loan, resulting in an increased principal balance
during the life of the loan. Territorial does not offer "subprime loans"
(loans that generally target borrowers with weakenedcredit histories typically
characterized by payment delinquencies, previous charge-offs, judgments,
bankruptcies, or borrowers with questionable repayment capacity as evidenced
by low credit scores or high debt-burden ratios) or
Alt-A
loans (traditionally defined as nonconforming loans having less than full
documentation).
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Nonresidential Real Estate Loans
.
Territorial'snonresidential real estate loans consist primarily of commercial
real estate loans and construction loans for residential real estate projects.
These loans totaled $12.6 million, or 1.0% of its loan portfolio as of March
31, 2024. Thecommercial real estate properties primarily include owner-occupied
light industrial properties. Territorial generally seeks to originate
commercial real estate loans with initial principal balances of $1.0 million
or less. Loans secured bycommercial real estate totaled $8.5 million, or 0.7%,
of its total loan portfolio at March 31, 2024, and consisted of ten loans
outstanding with an average loan balance of approximately $851,000. All of its
nonresidential real estateloans are secured by properties located in its
primary market area. At March 31, 2024, its largest commercial real estate
loan had a principal balance of $2.7 million and was secured by real property
and improvements utilized as an officebuilding. During the
COVID-19
pandemic, this loan was modified to allow for the deferral of six months of
interest to the maturity date of the loan in 2030. This loan was performing in
accordance with itsmodified loan terms at March 31, 2024.
Commercial real estate loans generally carry higher interest rates and have
shorter termsthan
one-
to four-family residential mortgage loans. Commercial real estate loans,
however, entail greater credit risks compared to
one-
to four-family residentialmortgage loans, as they typically involve larger
loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment of loans secured by income-producing
properties typically depends, in large part, onsufficient income from the
property to cover operating expenses and debt service. Changes in economic
conditions that are not in the control of the borrower or lender could affect
the value of the collateral for the loan or the future cash flow ofthe
property. Additionally, any decline in real estate values may be more
pronounced for commercial real estate than for residential properties.
Territorial also originates a limited amount of construction loans to
experienced developers, almost exclusively for the construction ofresidential
real estate projects. Construction loans are also made to individuals for the
construction of their personal residences. Construction loans to individuals
are generally "interest-only" loans during the construction period, andconvert
to permanent, amortizing loans following the completion of construction. At
March 31, 2024, construction loans totaled $2.3 million, or 0.2% of total
loans receivable. At March 31, 2024, the additional unadvanced portion ofthese
construction loans totaled $1.3 million.
Construction financing generally involves greater credit risk than
long-termfinancing on improved, owner-occupied real estate. Risk of loss on a
construction loan depends largely upon the accuracy of the initial estimate of
the value of the property at completion of construction compared to the
estimated cost (includinginterest) of construction and other assumptions. If
the estimate of construction cost is inaccurate, Territorial may be required
to advance additional funds beyond the amount originally committed in order to
protect the value of the property.Moreover, if the estimated value of the
completed project is inaccurate, the borrower may hold a property with a value
that is insufficient to assure full repayment of the construction loan upon
the sale of the property. In the event Territorialmakes a land acquisition
loan on property that is not yet approved for the planned development, there
is the risk that approvals will not be granted or will be delayed. Territorial
currently does not have any land acquisition development andconstruction
loans. Construction loans also expose Territorial to the risk that
improvements will not be completed on time in accordance with specifications
and projected costs. In addition, the ultimate sale or rental of the property
may not occuras anticipated.
Loan Originations, Purchases, Sales and Servicing
.
All mortgage loans that Territorialoriginates are underwritten pursuant to its
policies and procedures, which incorporate standard Freddie Mac underwriting
guidelines. Territorial originates both adjustable-rate and fixed-rate loans.
However, in its market area, customer demand isprimarily for fixed-rate loans.
Territorial's loan origination and sales activity may be adversely affected by
a rising interest rate environment that typically results in decreased loan
demand. Most of its
one-
to four-family residential mortgage loan originations are generated by its
branch managers and employees located in its banking offices and its
additional commissioned loan officers located in itscorporate headquarters.
Territorial also advertises throughout its market area. Territorial also
receives loans from mortgage brokers, mortgage bankers and other financial
institutions that work with its staff to process and close these loans.Territori
al underwrites and approve all of these loans. Territorial also obtains
mortgage loan applications and
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refer these applications to other financial institutions and mortgage bankers
for a fee. Mortgage loan applications are referred to other financial
institutions and mortgage bankers becausethese companies may not require a
full-appraisal of the property being mortgaged as Territorial does, may offer
better loan terms and may be able to close the loan faster. In addition,
Territorial may decide to refer the loan application toanother company because
it does not want to add a loan with the applicable type of credit quality or
collateral to its loan portfolio. During the three months ended March 31,
2024, Territorial referred $510,000 of mortgage loans to otherfinancial
institutions and mortgage bankers and received fees of $3,000, and during
2023, it referred $8.1 million of such loans and received fees of $86,000.
Territorial sells loans to assist it in managing interest rate risk.
Territorial sold residential mortgage loans held for sale (all fixed-rateloans,
with terms of ten years or longer) with principal balances of $827,000 and
$5.4 million during the years ended December 31, 2023 and 2022, respectively.
Territorial did not sell any residential mortgage loans during the three
monthsended March 31, 2024. Territorial had no loans classified as held for
sale at March 31, 2024, December 31, 2023 or 2022.
Territorial sells its loans without recourse, except for normal representations
and warranties provided in sales transactions. Territorialprimarily sells
loans on a servicing released basis where servicing is transferred to a third
party at the time the loan is sold. At March 31, 2024 and December 31, 2023,
Territorial was servicing loans owned by others with a principalbalance of
$32.6 million and $33.2 million, respectively. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent borrowers, supervising foreclosures and propertydispositio
ns in the event of unremedied defaults, making certain insurance and tax
payments on behalf of the borrowers and generally administering the loans.
Territorial retains a portion of the interest paid by the borrower on the
loans it servicesas consideration for its servicing activities. For the three
months ended March 31, 2024 and the year ended December 31, 2023, Territorial
received servicing fees of $22,000 and $91,000, respectively. At March 31,
2024 andDecember 31, 2023, substantially all of the loans serviced for Freddie
Mac and Fannie Mae were performing in accordance with their contractual terms
and Territorial believes that there are no material repurchase obligations
associated withthese loans.
Loan Approval Procedures and Authority
. Territorial's lending activities follow written,nondiscriminatory
underwriting standards and loan origination procedures established by the
Territorial Board of Directors. The loan approval process is intended to
assess the borrower's ability to repay the loan and value of the property
thatwill secure the loan. To assess the borrower's ability to repay,
Territorial reviews the borrower's employment and credit history and
information on the historical and projected income and expenses of the
borrower.
Territorial's policies and loan approval limits are established by the
Territorial Board of Directors. Aggregate lending relationships inamounts up
to $5.0 million can be approved by designated individual officers or officers
acting together with specific lending approval authority. Relationships in
excess of $5.0 million require the approval of the Loan Committee of
theTerritorial Board of Directors.
Territorial Savings Bank also uses automated systems to underwrite
one-
to four-family residential mortgage loans up to the maximum conforming loan
limits as established by the Federal Housing Finance Agency, which is
$1,149,800 in the State of Hawaii for 2024. Territorialgenerally requires
appraisals of all real property securing
one-
to four-family residential real estate loans, and on property securing home
equity loans and lines of credit. All appraisers are licensedappraisers and
all third-party appraisers are approved by the Territorial Board of Directors
annually.
Investments
The Territorial Board of Directors has primary responsibility for establishing
and overseeing its investment policy. The Territorial Board ofDirectors has
delegated authority to implement the investment policy to its
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Investment Committee, consisting of its President and Chief Executive Officer,
its Vice Chairman and
Co-Chief
Operating Officer, its Executive VicePresident and Chief Financial Officer,
its Executive Vice President of Finance, and its Vice President and Senior
Treasury Analyst. The investment policy is reviewed at least annually by the
Investment Committee, and any changes to the policy aresubject to approval by
the full Territorial Board of Directors. The overall objectives of the
investment policy are to maintain a portfolio of high quality and diversified
investments to maximize interest income over the long term and to
minimizerisk, to provide collateral for borrowings, to provide additional
earnings when loan production is low, and to reduce its tax liability. The
policy dictates that investment decisions give consideration to the safety of
principal, liquidityrequirements and potential returns. Territorial's
Executive Vice President and Chief Financial Officer executes its securities
portfolio transactions as directed by the Investment Committee. All purchase
and sale transactions are reported tothe Territorial Board of Directors on a
monthly basis.
Territorial's current investment policy permits investments in securitiesissued
by the United States Government as well as mortgage-backed securities and
direct obligations of Fannie Mae, Freddie Mac, and Ginnie Mae. The investment
policy also permits, with certain limitations, investments in certificates of
deposit,bank-owned life insurance, collateralized mortgage obligations,
municipal securities, and stock in the Federal Home Loan Bank (FHLB) and the
Federal Reserve Bank (FRB). Territorial purchases stock in the FHLB in order
to obtain services such asdemand deposit accounts, certificates of deposit,
security safekeeping services, and borrowings in the form of advances. As a
member of the Federal Reserve System, Territorial is required to hold stock in
the FRB.
Territorial's current policies do not permit hedging activities, such as
engaging in futures, options or swap transactions, or investingin high-risk
mortgage derivatives, such as collateralized mortgage obligation residual
interests, real estate mortgage investment conduit residual interests, or
stripped mortgage-backed securities. As of March 31, 2024 and December
31,2023, Territorial held no asset-backed securities other than mortgage-backed
securities. As a state savings bank, Territorial Savings Bank is not permitted
to invest in equity securities.
The Investments -- Debt and Equity Securities
topic of the Financial Accounting Standards Board Accounting Standards
Codification(FASB ASC) requires that, at the time of purchase, Territorial
designates a security as either
held-to-maturity,
available-for-sale,
or trading, based upon its ability and intent to hold the security until
maturity. Securities in the
available-for-sale
and trading classifications are reported at fair market value and securities
in the
held-to-maturity
classification are reported at amortized cost. A periodic review and
evaluation of the
available-for-sale
and
held-to-maturity
securities portfolios is conducted to determineif the fair market value of any
security has declined below its carrying value and whether an allowance for
credit losses, charge to earnings or other comprehensive loss is necessary.
Held-to-maturity
securities utilize the CECL methodology to estimate expected credit losses.
Available-for-sale
securities in an unrealized loss position are evaluated for impairment. If
Territorial does not have the intent to sell a security and it is not
morelikely than not that Territorial will be required to sell a security,
impairment occurs when the present value of the remaining cash flows is less
than the remaining amortized cost basis. The difference between the present
value of remaining cashflows and the remaining amortized cost basis is
considered a credit loss. If a credit loss has occurred, impairment is
recorded by writing down the value of a security to the present value of
remaining cash flows as a charge to earnings. Thedifference between the book
value of the security after the write down and the fair market value is
considered as other comprehensive loss, which is a reduction of stockholders'
equity.
Territorial's investment securities at March 31, 2024 consisted of
held-to-maturity
and
available-for-sale
mortgage-backed securities with a carrying valueof $677.6 million and $19.5
million, respectively. Territorial's investment securities at December 31,
2023 consisted of
held-to-maturity
and
available-for-sale
mortgage-backed securities with a carrying value of $685.7 million and $20.2
million, respectively. At each of these dates, all of itsmortgage-backed
securities were issued by Fannie Mae, Freddie Mac, or Ginnie Mae. At each of
these dates, none of the collateral underlying its securities portfolio was
considered subprime or
Alt-A,
andTerritorial did not hold any common or preferred stock issued by Freddie
Mac or Fannie Mae as of that date. The fair values of its securities are
usually based on published or security dealers' market values.
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Mortgage-backed securities are securities issued in the secondary market that
arecollateralized by pools of mortgages. Certain types of mortgage-backed
securities are commonly referred to as "pass-through" certificates because the
principal and interest of the underlying loans is "passed through"
toinvestors, net of certain costs, including servicing and guarantee fees.
Mortgage-backed securities typically are collateralized by pools of
one-
to four-family or multi-family mortgages. Territorial investsprimarily in
mortgage-backed securities backed by
one-
to four-family mortgages. The interest rate of the security is lower than the
interest rates of the underlying loans to allow for payment of servicing
andguarantee fees. Ginnie Mae, a United States Government agency, and
government-sponsored enterprises, such as Fannie Mae and Freddie Mac, either
guarantee the payments or guarantee the timely payment of principal and
interest to investors.Mortgage-backed securities are more liquid than
individual mortgage loans since there is an active trading market for such
securities. In addition, mortgage-backed securities may be used to
collateralize public deposits and borrowings. Investmentsin mortgage-backed
securities involve a risk that actual payments will be greater or less than
the prepayment rate estimated at the time of purchase, which may require
adjustments to the amortization of any premium or accretion of any
discountrelating to such interests, thereby affecting the net yield on its
securities.
Sources of Funds
General
.
Deposits traditionally have been its primary source of funds for its
investment and lendingactivities. Territorial also borrows from the FHLB, FRB,
and from securities dealers through securities sold under agreements to
repurchase to supplement cash flow needs, to lengthen the maturities of
liabilities for interest rate risk managementpurposes and to manage its cost
of funds. Territorial's additional sources of funds are loan and security
repayments, maturing investments, retained earnings, income on other earning
assets, and the proceeds of loan and security sales.
Deposits
.
At March 31, 2024 and December 31, 2023, deposits totaled $1.6 billion, or
82.4% of totalliabilities. Territorial offers a variety of deposit accounts
with a range of interest rates and terms. Territorial's deposit accounts
consist of passbook and statement savings accounts, certificates of deposit,
money market accounts,commercial and regular checking accounts and Super NOW
accounts. Historically, Territorial has not accepted brokered deposits.
Territorial accepts deposits primarily from the areas in which its offices are
located. Territorial relies on itscompetitive pricing and products, convenient
locations, and quality customer service to attract and retain deposits.
Interest rates paid,maturity terms, service fees, and withdrawal penalties are
established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies, market interest rates, liquidity
requirements, and its deposit growth goals.
Borrowings
.
Territorial's borrowings consist of advances from the FHLB and the FRB Bank
Term Funding Program(BTFP), and funds borrowed from securities sold under
agreements to repurchase. At March 31, 2024, its FHLB advances totaled $242.0
million, or 12.5% of total liabilities, FRB BTFP advances totaled $50.0
million, or 2.6% of totalliabilities, and securities sold under agreements to
repurchase totaled $10.0 million, or 0.5% of total liabilities. At March 31,
2024, Territorial had access to additional FHLB and FRB advances of up to
$613.1 million and$163.5 million, respectively. At December 31, 2023, its FHLB
advances totaled $242.0 million, or 12.2% of total liabilities, FRB BTFP
advances totaled $50.0 million, or 2.5% of total liabilities, and securities
sold underagreements to repurchase totaled $10.0 million, or 0.5% of total
liabilities. At December 31, 2023, Territorial had access to additional FHLB
and FRB BTFP advances of up to $612.6 million and $152.0 million,
respectively.Advances from the FHLB are secured by its investment in the
common stock of the FHLB as well as by a blanket pledge on its assets not
otherwise pledged. Advances from the FRB BTFP are secured by mortgage-backed
securities. Securities sold underagreements to repurchase are secured by
mortgage-backed securities.
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Subsidiary Activities
Territorial Savings Bank owns 100% of the common stock of Territorial
Financial Services, Inc., a Hawaii corporation that is authorized toengage in
insurance activities. At March 31, 2024 and at December 31, 2023, Territorial
Savings Bank's investment in Territorial Financial Services, Inc. was $12,000,
and Territorial Financial Services, Inc. had assets of$74,000 as of those
dates.
Personnel
As of March 31, 2024, Territorial had 223 full-time employees and 10 part-time
employees. Territorial's employees are not representedby any collective
bargaining group. Management believes that it has a good working relationship
with its employees.
Territorial views itsemployees as its most important asset. Territorial
recognizes that its success depends on training and developing its employees.
Territorial provides job training and personal development opportunities by
offering classes which can be attendedonline or in person.
Territorial provides a competitive compensation and benefits program to help
meet the needs of its employees. Inaddition to salaries, these programs
include an employee stock ownership plan, a 401(k) Plan, healthcare and
insurance benefits, flexible spending accounts, paid time off, family leave,
and an employee assistance program. These programs may alsoinclude annual
bonuses and a 401(k) Plan employer matching and annual contributions.
Properties
Territorial operates from its corporate office in Honolulu, Hawaii, and from
its 28 full-service branches located in the State of Hawaii. Ofits 28
branches, 23 are located on the island of Oahu, and all but one of its
branches are leased properties. The net book value of its premises, land and
equipment was $7.1 million at March 31, 2024.
In August 2023, wildfires on the island of Maui destroyed its Lahaina branch
office. Territorial's branch was leased and the leaseholdimprovements and
furniture and fixtures had a book value of $5,000, which was written off in
the quarter ended September 30, 2023.
LegalProceedings
From time to time, Territorial is involved as plaintiff or defendant in
various legal proceedings arising in the ordinarycourse of business. At March
31, 2024, Territorial was not involved in any legal proceedings, the outcome
of which it believes would be material to its financial condition or results
of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
RESULTS OF OPERATIONS OF TERRITORIAL BANCORP INC.
You should read this discussion in conjunction with the Consolidated Financial
Statements of Territorial and the related notes to suchConsolidated Financial
Statements that appear elsewhere in this proxy statement/prospectus.
Overview
Territorial has historically operated as a traditional thrift institution. The
significant majority of Territorial's assets consist oflong-term, fixed-rate
residential mortgage loans and mortgage-backed securities, which Territorial
has funded primarily with deposit inflows, cash balances at the Federal
Reserve Bank, loan and securities repayments, advances from the Federal
HomeLoan Bank and the Federal Reserve Bank, proceeds from securities sold
under agreements to repurchase, and proceeds from loan and security sales. As
a result, Territorial may be vulnerable to increases in interest rates, as its
interest-bearingliabilities mature or reprice more quickly than its
interest-earning assets, as occurred in 2023.
Territorial has continued its focus onoriginating
one-
to four-family residential real estate loans. Territorial's emphasis on
conservative loan underwriting has resulted in continued low levels of
nonperforming assets. Territorial'snonperforming assets, which include
nonaccrual loans, $2.2 million, or 0.10% of total assets at March 31, 2024,
compared to $2.3 million, or 0.10% of total assets at December 31, 2023, and
$2.3 million, or 0.11% of totalassets at December 31, 2022. Territorial
recorded credit loss provisions of $19,000 and a reversal of credit loss
provisions of $100,000 during the three months ended March 31, 2024 and 2023,
respectively. The credit loss provisions in thethree months ended March 31,
2024 was primarily due to an increase in Territorial's consumer and commercial
loan portfolios, an increase in forecasted charge-offs in the consumer loan
portfolio, and a decrease in forecasted prepayments inthe commercial loan
portfolio. The reversal of credit loss provisions in the three months ended
March 31, 2023 was primarily due to an improvement in economic conditions.
Territorial recorded a reversal of credit loss provisions of $3,000
underAccounting Standards Codification (which we refer to as "ASC") 326 and a
reversal of loan loss provisions of $576,000 under ASC 310 for the years ended
December 31, 2023 and 2022, respectively. ASC 326 requires organizations
tomeasure all expected credit losses for financial instruments based on
historical experience, current conditions, and reasonable and supportable
forecasts. The reversal of credit loss provisions in 2023 was primarily due to
a decrease inTerritorial's real estate portfolio's forecasted charge-offs that
was partially offset by a decrease in its forecasted prepayments. The reversal
of loan loss provisions in 2022 occurred primarily due to improvements in the
qualitativefactors used to calculate the allowance for loan losses due to
decreases in Hawaii's unemployment rate and in the amount of loans in the loan
payment deferral program.
All of Territorial Savings Bank's investments in mortgage-backed securities
and collateralized mortgage obligations have been issued byFreddie Mac or
Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae,
which is a U.S. government agency. These agencies guarantee the payment of
principal and interest on Territorial Savings Bank's mortgage-backedsecurities.
Territorial does not own any preferred stock issued by Fannie Mae or Freddie
Mac. As of March 31, 2024, December 31, 2023, and December 31, 2022,
Territorial's additional borrowing capacity at the Federal Home LoanBank of
Des Moines was $613.1 million, $612.6 million, and $769.1 million,
respectively. As of March 31, 2024, December 31, 2023, and December 31, 2022,
Territorial's additional borrowing capacity at the FederalReserve Bank was
$163.5 million, $207.2 million, and $4.5 million, respectively.
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Critical Accounting Policies and Estimates
Territorial considers accounting policies that require management to exercise
significant judgment or discretion or make significantassumptions that have,
or could have, a material impact on the carrying value of certain assets or on
income, to be critical accounting policies. Territorial considers the
following to be its critical accounting policies:
Allowance for Credit Losses (ACL) on Loans and Securities
. Territorial's determination of the amount of its allowance forcredit loss
(which we refer to as "ACL") is a critical accounting estimate and includes
Management's estimate of future credit losses. Loans are
charged-off
against the ACL when Managementbelieves a loan is uncollectable and credited
if subsequent recoveries are made. Changes in the ACL, and the related loan
loss provision, can materially affect net income.
On January 1, 2023, Territorial adopted ASC 326, Financial Instruments -
Credit Losses to estimate its allowance for credit losses.This standard is
known as the current expected credit loss (which we refer to as "CECL")
standard and replaces the incurred loss approach. CECL requires an estimate of
the credit losses expected over the life of financial instruments. Theincurred
loss approach delays the recognition of a credit loss until the "probable"
loss event was "incurred". The allowance for credit losses is an estimate that
is subject to uncertainty due to the assumptions and significantjudgements
used in the estimation process.
The estimate of the allowance for credit losses using the CECL approach is
based on relevantinformation about past events, current conditions, and
reasonable and supportable forecasts that affect the collectability of loans.
The historical loss experience is the starting point for estimating expected
credit losses. Territorial considerswhether the historical loss experience
should be adjusted for asset specific risk characteristics or current
conditions at the reporting date that did not exist over the historical
reporting period. These qualitative adjustments can include changesin the
economy, loan underwriting standards, and delinquency trends. Territorial then
considers future economic conditions as part of the
one-year
reasonable and supportable forecast period. The
one-year
reasonable and supportable forecast period includes estimates of economic
conditions which affects the performance of the loan portfolios. After the
one-year
reasonable and supportable forecast period, losses are based on historical
loss rates, or reversion rate, for the remaining expected life of the loan.
Territorial's loan portfolio is segmented into three pools for estimating its
allowance for credit losses on loans: real estate,commercial, and consumer
loans. They were established upon the adoption of ASU
2016-13.
Only three pools are used to segment Territorial's loan portfolio because
loans within the pools share similar riskcharacteristics and were originated
using similar underwriting standards. Loans that do not share similar risk
characteristics would be evaluated on an individual basis and excluded from
the collective evaluation. Historically, Territorial hasdisclosed information
about its loans and allowance based on class of financing receivable. The
portfolio segments align with the class of financing receivables as follows:
. Real estate
:
One-
to four-family residential, multi-familyresidential, and commercial mortgage;
. Commercial
: Commercial loans other than mortgage loans; and
. Consumer
: Home equity loans, loans on deposit accounts, and all other consumer loans.
Collateral dependent loans are not considered to share the same risk
characteristics with the three pools discussedabove. A loan is considered to
be collateral dependent when the borrower is experiencing financial difficulty
and repayment is expected to be provided substantially through the sale or
operation of the collateral. For loans which are considered tobe collateral
dependent, Territorial has elected to estimate the expected credit loss based
on the fair value of the collateral less selling costs. If the fair value of
the collateral less selling costs is less than the loan's amortized costbasis,
Territorial records a partial
charge-off
to reduce the loan's amortized cost basis for the difference between the
collateral fair value less selling costs and the amortized cost basis.
The historical loss experience of the real estate and consumer loan pools were
determined using a vintage method. This method tracks loss andprepayment
activity of loans that are originated during a specified time
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period, or vintage, over the course of the loan's term. The pool's loss and
prepayment reversion rates are calculated as a percentage of the net loss and
prepayments to the originalloan balance. The historical loss experience of the
commercial loan pool was determined using a reporting period method. This
method measures historical losses incurred during a specified reporting
period. The pool's loss and prepaymentreversion rates are calculated as a
percentage of the beginning balance of the reporting period.
The amortized cost of the real estatepool totaled $1.3 billion at March 31,
2024 and represented 98.7% of Territorial's total loans. The amortized cost of
the consumer and commercial loan pools totaled $16.7 million at March 31, 2024
and represented 1.3% ofTerritorial's total loans. The amortized cost of the
real estate pool totaled $1.3 billion at December 31, 2023 and represented
98.9% of Territorial's total loans. The amortized cost of the consumer and
commercial loan poolstotaled $14.4 million at December 31, 2023 and
represented 1.1% of Territorial's total loans.
The allowance for creditlosses is generally sensitive to economic conditions
and assumptions built into the model that estimates credit losses. As of
December 31, 2023, the residential real estate pool represents 98.9% of
Territorial's loans and changes ineconomic factors for the consumer and
commercial pools would not have a material impact on the allowance. For the
residential real estate portfolio, the Hawaii Housing Price Index (which we
refer to as "HPI") and National Mortgage Ratesare used to project net
charge-offs. A negative change in the forecasted Hawaii HPI equivalent to 25%
of the change similar to what occurred during the 2007 to 2009 Great Recession
and a 0.5% decrease in National Mortgage rates would lead to a smallincrease
in the rate of delinquencies and consequently charge-offs for these borrowers.
For the allowance on November 30, 2023, the changes above would increase the
quantitative forecast component of the allowance for these loans by 0.041%,
or0.027% to 0.068%. This would increase the dollar losses by $42,000 over a
12-month
forecast. The net charge-offs on the residential real estate pool was based on
the 2007 to 2009 Great Recession period. Ifonly 2007 was used to calculate the
net charge-offs on the residential real estate pool, the allowance for credit
losses at November 30, 2023 would increase by approximately $1.0 million. If
the 2007 to 2008 period was used to calculatethe net charge-offs on the
residential real estate pool, the allowance for credit losses at November 30,
2023, would increase by approximately $600,000. Due to the low historical loss
rates, small changes in the economic cycle will have nominalimpacts on the
overall allowance. This sensitivity analysis is hypothetical and provided only
to indicate the potential impact changes in economic conditions and the effect
these assumptions may have on the allowance estimate. Additionally, changesin
factors and inputs may be directionally inconsistent, such that improvement in
one factor may offset deterioration in others.
Territorial is required to utilize the CECL methodology to estimate expected
credit losses with respect to
held-to-maturity
(which we refer to as "HTM") investment securities. Since all of Territorial's
HTM investment securities were issued by U.S. government agencies or U.S.
government-sponsoredenterprises, which include the explicit and/or implicit
guarantee of the U.S. government and have a long history of no credit losses,
Territorial has not recorded a credit loss on these securities. The unrealized
losses on these securities were dueto changes in interest rates, relative to
when the securities were purchased, and are not due to decreases in the credit
quality of the securities.
Available for sale (which we refer to as "AFS") investment securities in an
unrealized loss position are evaluated for impairment.Territorial first
assesses whether it intends to sell, or it is more likely than not that it
will be required to sell, the security before recovery of its amortized cost
basis. If either of the criteria regarding intent or requirement to sell
ismet, the investment securities amortized cost basis is written down to fair
value through income. For AFS debt securities that do not meet the
aforementioned criteria, Territorial evaluates whether the decline in fair
value has resulted from creditlosses or other factors. In making this
assessment, management considers the extent to which fair value is less than
amortized cost, any changes to the rating of the security by a rating agency,
and adverse conditions specifically related to thesecurity, among other
factors. If this assessment indicates that a credit loss exists, the present
value of cash flows expected to be collected from the investment security are
compared to the amortized cost basis of the security. If the presentvalue of
cash flows expected to be collected is less than the amortized cost basis, a
credit loss exists and an ACL is recorded
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for the credit loss, limited by the amount that the fair value is less than
the amortized cost basis. Any impairment that has not been recorded through an
ACL is recognized in other comprehensiveincome. Territorial has not recorded
an ACL related to its AFS investment securities.
Deferred Tax Assets
.
Deferred tax assets and liabilities are recognized for the estimated future
tax effects attributable to temporary differences and carryforwards. A
valuation allowance may be required if, based on the weight of available
evidence, it is morelikely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporarydifferences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income andprojections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not Territorial will realize the
benefits of these deductible differences. There was no valuationallowance for
deferred tax assets as of March 31, 2024 and December 31, 2023 and 2022.
Defined Benefit RetirementPlan
.
Defined benefit plan obligations and related assets of Territorial's defined
benefit retirement plan are presented in Note 17 of the Notes to Consolidated
Financial Statements of Territorial at and for the years endedDecember 31,
2023 and 2022. Effective December 31, 2008, the defined benefit retirement
plan was frozen and all plan benefits were fixed as of that date. Plan assets,
which consist primarily of marketable equity securities and mutualfunds, are
typically valued using market quotations. Plan obligations and the annual
pension expense are determined by an independent actuary through the use of a
number of assumptions. Key assumptions in measuring the plan obligations
include thediscount rate and the expected long-term rate of return on plan
assets. In determining the discount rate, Territorial utilizes a yield that
reflects the top 50% of the universe of bonds, ranked in the order of the
highest yield. These bonds providecash flows that match the timing of expected
benefit payments. Asset returns are based upon the anticipated average rate of
earnings expected on the invested funds of the plans.
At December 31, 2023, Territorial used weighted-average discount rates of
5.40% and 5.10% for calculating annual pension expense andprojected plan
liabilities, respectively, and an expected long-term rate of return on plan
assets of 6.75% for calculating annual pension expense. For both the discount
rate and the asset return rate, a range of estimates could reasonably have
beenused, which would affect the amount of pension expense and pension
liability recorded.
A decrease in the discount rate or an increase inthe asset return rate would
have reduced Territorial's pension expense in 2023, while an increase in the
discount rate or a decrease in the asset return rate would have the opposite
effect. A 25 basis point decrease in the discount rateassumptions would have
decreased Territorial's 2023 pension expense by $2,000 and would have
increased the
year-end
2023 pension liability by $392,000, while a 25 basis point decrease in the
asset returnrate would have increased the 2023 pension expense by $44,000.
Comparison of Financial Condition
Assets
. At March 31, 2024, Territorial's total assets were $2.2 billion, a decrease
of $43.6 million, or2.0%, from December 31, 2023. The decrease in assets was
primarily due to a $36.6 million decrease in cash and cash equivalents and an
$8.8 million decrease in total investment securities which were partially
offset by a$1.1 million increase in total loans.
At December 31, 2023, Territorial's total assets were $2.2 billion, an
increaseof $67.1 million, or 3.1%, from December 31, 2022. The increase was
primarily caused by an $86.1 million increase in cash and cash equivalents and
an $8.7 million increase in total loans, which were partially offset by a$32.7
million decrease in total investment securities.
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Cash and Cash Equivalents
.
Cash and cash equivalents were$90.1 million at March 31, 2024, a decrease of
$36.6 million, or 28.9%, since December 31, 2023. The decrease in cash and
cash equivalents was primarily caused by a $36.5 million decrease in deposits,
primarily due tocustomers seeking higher interest rates than what Territorial
offers.
At December 31, 2023, Territorial's cash and cashequivalents were $126.7
million, an increase of $86.1 million, or 212.3%, from $40.6 million at
December 31, 2022. The increase was primarily due to a $101.0 million increase
in Federal Home Loan Bank advances, a$50.0 million increase in Federal Reserve
Bank advances, and a $32.7 million decrease in total investment securities,
which was partially offset by a $79.5 million decrease in deposits and an $8.7
million increase in total loans.Territorial increased liquidity during 2023 in
response to recent market concerns in the banking industry.
Loan
Portfolio Composition.
The following table sets forth the composition of Territorial's loan portfolio
at the dates indicated.
March 31, 2024 December 31, 2023 December 31, 2022
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate loans:
First mortgage:
One- $ 1,275,897 97.26 % $ 1,277,544 97.48 % $ 1,253,558 96.51 %
to four-family residential
Multi-family residential 5,604 0.43 5,855 0.45 6,448 0.50
Construction, commercial and other 12,554 0.96 11,631 0.89 23,903 1.84
Home equity loans and lines of credit 9,219 0.70 7,058 0.54 6,426 0.49
Other loans 8,485 0.65 8,453 0.64 8,597 0.66
Total loans 1,311,759 100.00 % 1,310,541 100.00 % 1,298,932 100.00 %
Other items:
Unearned fees and discounts, net (2,047 ) (1,989 ) (2,136 )
Allowance for credit/loan losses (5,142 ) (5,121 ) (2,032 )
Loans receivable, net $ 1,304,570 $ 1,303,431 $ 1,294,764
During the three months ended March 31, 2024, the loan portfolio increased by
$1.1 million, or 0.1%.The increase in the loan portfolio primarily occurred as
the origination of new loans exceeded principal repayments. During the year
ended December 31, 2023, total loans increased by $11.6 million as new loan
originations exceeded loanrepayments and sales.
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Loan Portfolio Maturities and Yields.
The following table summarizes thescheduled maturities of Territorial's loan
portfolio at March 31, 2024. Demand loans, loans having no stated repayment
schedule or maturity, and overdraft loans are reported as being due in one
year or less.
One- Multi-family Construction, Home Other
to residential commercial equity loans
four-family real and loans
residential estate other and
real real lines
estate estate of
credit
Due Amount Weighted Amount Weighted Amount Weighted Amount Weighted Amount Weighted
Following Average Average Average Average Average
March Rate Rate Rate Rate Rate
31,
2024
(Dollars in thousands)
One $ 19 4.98 % $ 141 9.50 % $ 726 5.00 % $ 41 10.52 % $ 350 7.86 % $
year
or
less
After 3,069 3.74 100 6.50 1,578 4.99 1,455 10.59 3,038 6.42
one
year
through
five
years
After 33,907 4.06 4,801 4.54 7,983 4.14 1,294 9.49 4,926 3.23
five
years
through
15
years
After 1,238,902 3.65 562 4.25 2,267 5.99 6,429 5.08 171 5.04
15
years
Total $ 1,275,897 3.66 % $ 5,604 4.67 % $ 12,554 4.63 % $ 9,219 6.59 % $ 8,485 4.60 % $
Total
Amount Weighted
Average
Rate
1,277 6.46 %
9,240 5.94
52,911 4.17
1,248,331 3.66
1,311,759 3.69 %
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at March 31,2024 that are contractually due after March
31, 2025.
Due After March 31, 2025
Fixed Adjustable Total
(In thousands)
Real estate loans:
First mortgage:
One- $ 1,275,645 $ 233 $ 1,275,878
to four-family residential
Multi-family residential 5,463 -- 5,463
Construction, commercial and other 10,502 1,326 11,828
Home equity loans and lines of credit 1,141 8,037 9,178
Other loans 6,814 1,321 8,135
Total loans $ 1,299,565 $ 10,917 $ 1,310,482
Securities
.
Total investment securities, including $19.5 million ofinvestment securities
available for sale, were $697.1 million at March 31, 2024, or 31.8% of total
assets. During the three months ended March 31, 2024, the investment
securities portfolio decreased by $8.8 million, or 1.3%. Thedecrease in the
investment securities balance was primarily due to principal repayments. All
of the mortgage-backed securities were issued by Fannie Mae, Freddie Mac, or
Ginnie Mae. At March 31, 2024, none of the underlying collateral for
thesecurities consisted of subprime or
Alt-A
(traditionally defined as nonconforming loans having less than full
documentation) loans.
At December 31, 2023, total investment securities, including $20.2 million of
investment securities available for sale, were$705.9 million, or 31.6% of
assets. The investment securities portfolio decreased from $738.6 million at
December 31, 2022 as repayments exceeded security purchases. All of the
mortgage-backed securities were issued by Fannie Mae,Freddie Mac, or Ginnie
Mae. At December 31, 2023, none of the underlying collateral consisted of
subprime or
Alt-A
loans (traditionally defined as nonconforming loans having less than full
documentation).At December 31, 2023, Territorial held no common or preferred
stock of Fannie Mae or Freddie Mac.
Any unrealized loss on individualmortgage-backed securities as of March 31,
2024 and December 31, 2023 and 2022 was caused by increases in market interest
rates subsequent to purchase. All of Territorial's mortgage-backed securities
are guaranteed by U.S.government-sponsored enterprises or a U.S. government
agency. Since
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the decline in market value has been attributable to changes in interest rates
and not credit quality, Territorial continues to have the intent not to sell
these investments, and it is not morelikely than not that it will be required
to sell such investments prior to the recovery of the amortized cost basis. No
allowance for credit losses was recorded for these securities as of March 31,
2024 or December 31, 2023. Prior to theadoption of ASU
2016-13,
Territorial did not consider any of its securities to be other-than-temporarily
impaired.
Portfolio Maturities and Coupons
.
The composition and maturities of the investment securities portfolio atMarch
31, 2024 are summarized in the following table. Maturities are based on the
final contractual payment dates, and do not reflect the impact of prepayments
or early redemptions that may occur. No
tax-equivalent
adjustments have been made, as Territorial did not hold any
tax-free
investment securities at March 31, 2024.
One Year More More More
or Less than than than
One Year Five Ten
through Years Years
Five through
Years Ten
Years
Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighte
Cost Average Cost Average Cost Average Cost Average
Coupon Coupon Coupon Coupon
(Dollars in thousands)
Available-for-sale:
Mortgage-backed
securities
issued
by
U.S.
government-sponsored
enterprises:
Fannie -- -- -- -- -- -- $ 4,261 3.00 % $ 4,
Mae
Freddie -- -- -- -- -- -- 18,154 2.99 18,
Mac
Total -- -- -- -- -- -- $ 22,415 2.99 % $ 22,
available-for-sale
Held-to-maturity:
Mortgage-backed
securities
issued
by
U.S.
government
agencies
or
government-sponsoredenterprises:
Fannie -- -- $ 9 6.20 % $ 6 6.53 % $ 368,845 2.28 %
Mae
Freddie -- -- -- -- -- -- 289,822 2.53 289,
Mac
Collateralized -- -- -- -- -- -- 1,171 1.62 1,
mortgage
obligations
Ginnie -- -- 3 3.63 -- -- 17,722 3.34
Mae
Total -- -- $ 12 5.66 % $ 6 6.53 % $ 677,560 2.41 %
held-to-maturity
Total -- -- $ 12 5.66 % $ 6 6.53 % $ 699,975 2.43 %
Total
d Amortized Fair Weighted
Cost Value Average
Coupon
261 $ 3,716 3.00 %
154 15,767 2.99
415 $ 19,483 2.99 %
$ 368,860 $ 292,135 2.28 %
822 238,276 2.53
171 1,023 1.62
17,725 15,856 3.34
$ 677,578 $ 547,290 2.42 %
$ 699,993 $ 566,773 2.43 %
Bank-Owned Life Insurance
.
Territorial invests in bank-owned life insurance toprovide it with a funding
source for its benefit plan obligations. Bank-owned life insurance also
generally provides noninterest income that is nontaxable. Interagency federal
guidance generally limits Territorial's investment in bank-ownedlife insurance
to 25% of Territorial Saving's Bank's Tier 1 capital plus its allowance for
credit/loan losses. At March 31, 2024, this limit was $61.0 million, and
Territorial had invested $48.9 million in bank-owned lifeinsurance at that
date.
Deposits
. Deposits totaled $1.6 billion, or 82.4% of total liabilities at March 31,
2024and December 31, 2023. Territorial offers a variety of deposit accounts
with a range of interest rates and terms. Territorial's deposit accounts
consist of savings accounts, certificates of deposit, money market accounts,
commercial andregular checking accounts, and Super NOW accounts. Historically,
Territorial has not accepted, and does not currently have, brokered deposits.
Territorial accepts deposits primarily from the areas in which its offices are
located. Territorial relieson its competitive pricing and products, convenient
locations and quality customer service to attract and retain deposits.
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Interest rates paid, maturity terms, service fees and withdrawal penalties are
establishedon a periodic basis. Deposit rates and terms are based primarily on
current operating strategies, market interest rates, liquidity requirements
and Territorial's deposit growth goals.
During the three months ended March 31, 2024, deposits decreased by $36.5
million, or 2.2%. The decrease in deposits was primarilydue to decreases of
$22.0 million in passbook savings accounts, $8.7 million in checking accounts,
$5.2 million in certificates of deposit, and $1.1 million in money market
accounts. The decrease in deposits occurred primarily ascustomers sought
higher interest rates than what Territorial offers.
During the year ended December 31, 2023, Territorial'sdeposits decreased by
$79.5 million, or 4.6%. The decrease in deposits was primarily due to
decreases of $171.6 million in savings accounts and $7.6 million in checking
accounts, which were partially offset by an increase of$102.7 million in
certificates of deposit during the year ended December 31, 2023. The changes
in deposits occurred primarily as customers transferred funds from savings
accounts with relatively low interest rates to Territorial'scertificates of
deposit with higher interest rates or withdrew their deposits and sought
higher interest rates elsewhere.
AtMarch 31, 2024, Territorial had a total of $527.3 million in certificates of
deposit, of which $504.2 million had remaining maturities of one year or less.
Territorial has the ability to attract and retain deposits by adjusting
theinterest rates offered.
The following tables set forth the distribution of Territorial's average total
deposit accounts (includinginterest-bearing and
non-interest-bearing
deposits), by account type, for the periods indicated.
For the Three Months Ended March 31,
2024 2023
Average Percent Weighted Average Percent Weighted
Balance Average Balance Average
Rate Rate
(Dollars in thousands)
Deposit type:
Non-interest-bearing $ 72,463 4.5 % -- % $ 74,777 4.4 % -- %
Savings accounts 732,471 45.2 0.72 875,870 51.3 0.16
Certificates of deposit 525,835 32.5 4.15 438,593 26.0 2.89
Money market 2,873 0.2 0.14 5,273 0.3 0.08
Checking and Super NOW 284,517 17.6 0.02 296,024 17.5 0.02
Total deposits $ 1,618,159 100.0 % 1.75 % $ 1,690,537 100.0 % 0.87 %
For the Year Ended December 31,
2023 2022
Average Percent Weighted Average Percent Weighted
Balance Average Balance Average
Rate Rate
(Dollars in thousands)
Deposit type:
Non-interest-bearing $ 75,331 4.5 % -- % $ 74,283 4.4 % -- %
Savings accounts 802,833 48.6 0.31 1,028,244 60.3 0.09
Certificates of deposit 479,566 29.0 3.53 292,809 17.2 1.33
Money market 4,627 0.3 0.11 5,481 0.3 0.09
Checking and Super NOW 290,636 17.6 0.02 303,802 17.8 0.02
Total deposits $ 1,652,993 100.0 % 1.23 % $ 1,704,619 100.0 % 0.29 %
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The following table sets forth Territorial's estimate of uninsured deposits
(in excessof the federal deposit insurance limit of $250,000) that is
calculated on the same basis used for regulatory reporting. Territorial has no
deposits that are uninsured for any other reason.
At At December 31,
March 31, 2024
2023 2022
(In thousands)
Uninsured $ 164,295 $168,463 $ 212,984
non-maturity
deposits:
Uninsured deposits with remaining maturities:
Three months or less 159,056 197,189 162,354
Over three months to six months 40,145 18,311 41,961
Over six months to twelve months 36,149 29,687 20,167
Over twelve months 4,587 5,794 15,132
239,937 250,981 239,614
Total uninsured deposits $ 404,232 $ 419,444 $ 452,598
As of March 31, 2024, the aggregate amount of outstanding certificates of
deposit in amounts greater thanor equal to $250,000 was $269.2 million. As of
March 31, 2024, certificates of deposit owned by state and local governments
in amounts greater than or equal to $250,000 was $157.9 million, and was
collateralized by mortgage-backedsecurities. The following table sets forth
the maturity of certificates of deposit in amounts greater than or equal to
$250,000 as of March 31, 2024.
At March 31, 2024
(In thousands)
Three months or less $ 163,590
Over three months through six months 54,655
Over six months through one year 47,167
Over one year to three years 3,204
Over three years 540
Total $ 269,156
Borrowings
. Total borrowings were $302.0 million, at March 31, 2024 andDecember 31,
2023, compared to $151.0 million at December 31, 2022. Territorial's
borrowings consist of advances from the Federal Home Loan Bank and Federal
Reserve Bank and funds borrowed under securities sold under agreementsto
repurchase. At March 31, 2024, Territorial's Federal Home Loan Bank advances
totaled $242.0 million, or 12.5% of total liabilities, compared with $242.0
million, or 12.2% of total liabilities at December 31, 2023 and$141.0 million,
or 7.4% of total liabilities at December 31, 2022. At March 31, 2024,
Territorial's Federal Reserve Bank advances totaled $50.0 million, or 2.6% of
total liabilities, compared to $50.0 million, or 2.5%of total liabilities at
December 31, 2023. Territorial had no Federal Reserve Bank advances at
December 31, 2022. At March 31, 2024 and December 31, 2023 and 2022,
Territorial's securities sold under agreements to repurchasetotaled $10.0
million, or 0.5% of total liabilities. At March 31, 2024 and December 31, 2023
and 2022, Territorial had the capability to borrow up to $613.1 million,
$612.6 million, and $769.1 million in the form ofadditional advances from the
Federal Home Loan Bank, respectively, and $163.5 million, $207.2 million, and
$4.5 million from the Federal Reserve Bank, respectively.
Stockholders' Equity
. Total stockholders' equity was $250.0 million at March 31, 2024, a decrease
of$1.1 million, or 0.4%, from $251.1 million at December 31, 2023. The
decrease in stockholders' equity was primarily due to the net loss, an
increase in the unrealized loss on
available-for-sale
securities, and dividends declared.
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At December 31, 2023, total stockholders' equity was $251.1 million, adecrease
of $5.5 million, or 2.1%, from $256.6 million at December 31, 2022. The
decrease in stockholders' equity occurred primarily due to dividends declared,
shares repurchased, and the reduction of retained earnings from theadoption of
the CECL accounting standard exceeding net income.
Average Balances and Yields
The following tables set forth average balances, yields and rates, and certain
other information for the periods indicated. No
tax-equivalent
yield adjustments were made, as Territorial did not hold any
tax-free
investments. All average balances are daily average balances. Nonaccrual loans
wereincluded in the computation of average balances and are included with
accrual loans in the tables. However, no interest income was attributed to
nonaccrual loans. The yields set forth below include the effect of net
deferred costs, discounts, andpremiums that are amortized or accreted to
interest income of $37,000, $64,000, $190,000, and $103,000 for the three
months ended March 31, 2024 and 2023 and the years ended December 31, 2023 and
2022, respectively.
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For the Three Months
Ended March 31,
2024 2023
Average Interest Yield/Rate Average Interest Yield/Rate
Outstanding (1) Outstanding (1)
Balance Balance
(Dollars in thousands)
Interest-earning
assets:
Loans:
Real
estate
loans:
First
mortgage:
One- $ 1,271,731 $ 11,635 3.66 % $ 1,250,060 $ 10,948 3.50 %
to
four-family
residential
(2)
Multi-family 5,690 67 4.71 4,766 61 5.12
residential
Construction, 12,040 139 4.62 24,041 251 4.18
commercial,
and other
Home equity 8,135 132 6.49 6,279 104 6.63
loans
and lines
of credit
Other 8,222 92 4.48 8,439 90 4.27
loans
Total 1,305,818 12,065 3.70 1,293,585 11,454 3.54
loans
Investment
securities:
Mortgage-backed securities 702,434 4,313 2.46 740,350 4,540 2.45
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
(2)
Total 702,434 4,313 2.46 740,350 4,540 2.45
securities
Other 120,104 1,613 5.37 67,217 727 4.33
investments
Total 2,128,356 17,991 3.38 2,101,152 16,721 3.18
interest-earning
assets
Non-interest-earning 88,794 88,719
assets
Total $ 2,217,150 $ 2,189,871
assets
Interest-bearing
liabilities:
Savings $ 732,471 1,315 0.72 % $ 875,870 346 0.16 %
accounts
Certificates 525,835 5,449 4.15 438,593 3,168 2.89
of
deposit
Money 2,873 1 0.14 5,273 1 0.08
market
accounts
Checking 284,517 14 0.02 296,024 15 0.02
and Super
NOW
accounts
Total 1,545,696 6,779 1.75 1,615,760 3,530 0.87
interest-bearing
deposits
Federal 242,000 1,810 2.99 192,333 1,054 2.19
Home Loan
Bank
advances
Federal 50,000 595 4.76 -- -- --
Reserve
Bank
advances
Securities 10,000 46 1.84 10,000 46 1.84
sold under
agreements to
repurchase
Total 1,847,696 9,230 2.00 1,818,093 4,630 1.02
interest-bearing
liabilities
Non-interest-bearing 116,895 116,103
liabilities
Total 1,964,591 1,934,196
liabilities
Stockholders' 252,559 255,675
equity
Total $ 2,217,150 $ 2,189,871
liabilities and
stockholders'
equity
Net $ 8,761 $ 12,091
interest
income
Net 1.38 % 2.16 %
interest
rate
spread
(3)
Net $ 280,660 $ 283,059
interest-earning
assets
(4)
Net 1.65 % 2.30 %
interest
margin
(5)
Interest-earning 115.19 % 115.57 %
assets to
interest-bearing
liabilities
(1) Annualized by using the ratio of the number of months in a year over the number of months in the period.
(2) Average balance includes loans or investments held to maturity and available for sale, as applicable.
(3) Net interest rate spread represents the difference between the yield on average
interest-earning assets and thecost of average interest-bearing liabilities.
(4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
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For the Year Ended December 31,
2023 2022
Average Interest Yield/Rate Average Interest Yield/Rate
Outstanding (1) Outstanding (1)
Balance Balance
(Dollars in thousands)
Interest-earning
assets:
Loans:
Real
estate
loans:
First
mortgage:
One- $ 1,263,674 $ 45,149 3.57 % $ 1,252,960 $ 43,448 3.47 %
to
four-family
residential
(1)
Multi-family 5,720 274 4.79 5,700 244 4.28
residential
Construction, 18,906 779 4.12 22,309 919 4.12
commercial,
and other
Home equity 6,976 475 6.81 6,572 365 5.55
loans
and lines
of credit
Other 8,373 366 4.37 8,640 342 3.96
loans
Total 1,303,649 47,043 3.61 1,296,181 45,318 3.50
loans
Investment
securities:
Mortgage-backed securities 726,166 17,918 2.47 709,817 16,211 2.28
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
(1)
Total 726,166 17,918 2.47 709,817 16,211 2.28
securities
Other 83,038 4,127 4.97 59,828 1,173 1.96
investments
Total 2,112,853 69,088 3.27 2,065,826 62,702 3.04
interest-earning
assets
Non-interest-earning 87,414 88,875
assets
Total $ 2,200,267 $ 2,154,701
assets
Interest-bearing
liabilities:
Savings $ 802,833 2,469 0.31 % $ 1,028,244 950 0.09 %
accounts
Certificates 479,566 16,951 3.53 292,809 3,908 1.33
of
deposit
Money 4,627 5 0.11 5,481 5 0.09
market
accounts
Checking 290,636 59 0.02 303,802 62 0.02
and Super
NOW
accounts
Total 1,577,662 19,484 1.23 1,630,336 4,925 0.30
interest-bearing
deposits
Federal 240,647 6,636 2.76 141,899 2,107 1.48
Home Loan
Bank
advances
Federal 3,123 154 4.93 -- -- --
Reserve
Bank
advances
Securities 10,000 183 1.83 10,000 183 1.83
sold under
agreements to
repurchase
Total 1,831,432 26,457 1.44 1,782,235 7,215 0.40
interest-bearing
liabilities
Non-interest-bearing 116,224 114,356
liabilities
Total 1,947,656 1,896,591
liabilities
Stockholders' 252,611 258,110
equity
Total $ 2,200,267 $ 2,154,701
liabilities and
stockholders'
equity
Net $ 42,631 $ 55,487
interest
income
Net 1.83 % 2.64 %
interest
rate
spread
(2)
Net $ 281,421 $ 283,591
interest-earning
assets
(3)
Net 2.02 % 2.69 %
interest
margin
(4)
Interest-earning 115.37 % 115.91 %
assets to
interest-bearing
liabilities
(1) Average balance includes loans or investments held to maturity and available for sale, as applicable.
(2) Net interest rate spread represents the difference between the yield on average
interest-earning assets and thecost of average interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The following tables presents the effects of changing rates and volumes on
Territorial's net interest income for the periods indicated.The rate column
shows the effects attributable to changes in rate (changes in rate multiplied
by prior volume). The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate). The total
columnrepresents the sum of the prior columns. For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately based on the changes due to rate and the
changes due to volume. Therewere no
out-of-period
items or adjustments for the three months ended March 31, 2024 or 2023 or the
years ended December 31, 2023 or 2022.
Three Months Ended March 31,
2024 vs. 2023
Increase Total
(Decrease) Increase
Due to (Decrease)
Volume Rate
(In thousands)
Interest-earning
assets:
Loans:
Real estate
loans:
First
mortgage:
One- $ 189 $ 498 $ 687
to four-family
residential
Multi-family 10 (4 ) 6
residential
Construction, (141 ) 29 (112 )
commercial and other
Home equity loans 30 (2 ) 28
and lines of credit
Other (2 ) 4 2
loans
Total 86 525 611
loans
Mortgage-backed securities issued by U.S. government (247 ) 20 (227 )
agencies or U.S. government-sponsoredenterprises
Other 679 207 886
investments
Total interest-earning 518 752 1,270
assets
Interest-bearing
liabilities:
Savings (47 ) 1,016 969
accounts
Certificates 714 1,567 2,281
of deposit
Money market -- -- --
accounts
Checking and Super (1 ) -- (1 )
NOW accounts
Total interest-bearing 666 2,583 3,249
deposits
Federal Home Loan 313 443 756
Bank advances
Federal Reserve 595 -- 595
Bank advances
Total interest-bearing 1,574 3,026 4,600
liabilities
Change in net $ (1,056 ) $ (2,274 ) $ (3,330 )
interest income
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Year Ended December 31,
2023 vs. 2022
Increase Total
(Decrease) Increase
Due to (Decrease)
Volume Rate
(In thousands)
Interest-earning
assets:
Loans:
Real estate
loans:
First
mortgage:
One- $ 374 $ 1,327 $ 1,701
to four-family
residential
Multi-family 1 29 30
residential
Construction, (140 ) -- (140 )
commercial and other
Home equity loans 24 86 110
and lines of credit
Other (11 ) 35 24
loans
Total 248 1,477 1,725
loans
Mortgage-backed securities issued by U.S. government 380 1,327 1,707
agencies or U.S. government-sponsoredenterprises
Other 596 2,358 2,954
investments
Total interest-earning 1,224 5,162 6,386
assets
Interest-bearing
liabilities:
Savings (158 ) 1,677 1,519
accounts
Certificates 3,638 9,405 13,043
of deposit
Money market (1 ) 1 --
accounts
Checking and Super (3 ) -- (3 )
NOW accounts
Total interest-bearing 3,476 11,083 14,559
deposits
Federal Home Loan 2,029 2,500 4,529
Bank advances
Federal Reserve 154 -- 154
Bank advances
Total interest-bearing 5,659 13,583 19,242
liabilities
Change in net $ (4,435 ) $ (8,421 ) $ (12,856 )
interest income
Comparison of Operating Results for the Three Months Ended March 31, 2024 and
2023
General
.
Territorial had a net loss of $482,000 for the three months ended March 31,
2024, a$2.8 million, or 120.8%, decrease in earnings compared to net income of
$2.3 million for the three months ended March 31, 2023. The decrease in
earnings was primarily due to a $3.3 million decrease in net interest income,
a$447,000 increase in
non-interest
expense, and a $119,000 increase in credit loss provisions. These decreases in
earnings were partially offset by a $1.1 million decrease in income taxes.
Net Interest Income
. Net interest income decreased by $3.3 million, or 27.5%, to $8.8 million for
the three monthsended March 31, 2024 from $12.1 million for the three months
ended March 31, 2023. Interest expense increased by $4.6 million or 99.4%, due
to a 98 basis point increase in the cost of average interest-bearing
liabilities and a$29.6 million increase in the average balance of
interest-bearing liabilities. Interest income increased by $1.3 million, or
7.6%, due to a 20 basis point increase in the yield on average interest-earning
assets and a $27.2 millionincrease in the average balance of interest-earning
assets. Since the significant majority of Territorial's loan and securities
portfolios have fixed interest rates, the average rates on these assets have
not repriced as quickly as itsinterest-bearing liabilities during this period
of rising market interest rates. The net interest rate spread and net interest
margin were 1.38% and 1.65%, respectively, for the three months ended March
31, 2024, compared to 2.16% and 2.30%respectively, for the three months ended
March 31, 2023. The decreases in the net interest rate spread and in the net
interest margin are attributable to the 98 basis point
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increase in the cost of average interest-bearing liabilities, which was
partially offset by the 20 basis point increase in the yield on average
interest-earning assets.
Interest Income
.
Interest income increased by $1.3 million, or 7.6%, to $18.0 million for the
threemonths ended March 31, 2024 from $16.7 million for the three months ended
March 31, 2023. Interest income on other investments increased by $886,000, or
121.9%, to $1.6 million for the three months ended March 31, 2024 from$727,000
for the three months ended March 31, 2023. The increase in interest income on
other investments was primarily due to an increase in the interest earned on
Territorial's cash balances at the Federal Reserve Bank. Territorial'saverage
cash balance at the Federal Reserve Bank increased by $51.0 million from $53.5
million during the three months ended March 31, 2023, to $104.5 million during
the three months ended March 31, 2024. In addition, theyield earned increased
from 4.07% for the three months ended March 31, 2023 to 5.02% for the three
months ended March 31, 2024. Interest income on loans increased by $611,000,
or 5.3%, to $12.1 million for the three months endedMarch 31, 2024 from $11.5
million for the three months ended March 31, 2023. The increase in interest
income on loans occurred because of a 16 basis points, or 4.5%, increase in
the yield primarily due to an increase in market ratesand a $12.2 million, or
0.9% increase in the average balance of loans which occurred as new loan
originations exceeded loan repayments. These increases were partially offset
by a decrease in interest income on securities of $227,000, or 5.0%,to $4.3
million for the three months ended March 31, 2024 from $4.5 million for the
three months ended March 31, 2023. The decrease in interest income on
securities occurred primarily because of a $37.9 million, or 5.1%,decrease in
the average balance of securities due to security repayments.
Interest Expense
.
Interest expenseincreased by $4.6 million, or 99.4%, to $9.2 million for the
three months ended March 31, 2024 from $4.6 million for the three months ended
March 31, 2023. Interest expense on interest-bearing deposits increased by$3.2
million, or 92.0%, to $6.8 million for the three months ended March 31, 2024
from $3.5 million for the three months ended March 31, 2023. The increase in
interest expense on interest-bearing deposits was primarily dueto a 126 basis
point increase in the rate paid on certificates of deposit and a $87.2 million
increase in the average balance of certificates of deposit. The average rate
paid on certificates of deposit increased to 4.15% for the three monthsended
March 31, 2024, from 2.89% for the three months ended March 31, 2023. Interest
expense on savings accounts increased by $969,000, or 280.1%, to $1.3 million
for the three months ended March 31, 2024 from $346,000 for thethree months
ended March 31, 2023. The increase in interest expense on savings accounts
occurred primarily because of a 56 basis point increase in the rate which was
partially offset by a $143.4 million, or 16.4%, decrease in the averagebalance
of savings accounts. The increase in the rates on certificates of deposit and
savings accounts were primarily due to increases in market interest rates. The
changes in the average balance of savings accounts and certificates of
depositoccurred primarily as customers transferred funds from savings accounts
with relatively low interest rates to Territorial's certificates of deposit
with higher interest rates or withdrew their deposits and sought higher
interest rateselsewhere. Interest expense on Federal Home Loan Bank advances
rose by $756,000, or 71.7%, from $1.1 million for the three months ended March
31, 2023 to $1.8 million for the three months ended March 31, 2024. The
increase ininterest expense occurred because of an 80 basis point increase in
the cost of Federal Home Loan Bank advances and a $49.7 million, or 25.8%,
increase in the average Federal Home Loan Bank advance balance. The increase
in the cost and theaverage balance of Federal Home Loan Bank advances was due
to additional Federal Home Loan Bank advances obtained in 2023 to enhance
Territorial's liquidity and to fund the decrease in deposits. Interest expense
on advances from the FederalReserve Bank was $595,000 for the three months
ended March 31, 2024 due to a $50.0 million advance from the BTFP that was
obtained to enhance Territorial's liquidity and to fund the decrease in
deposits. There were no advances fromthe Federal Reserve Bank during the three
months ended March 31, 2023.
Provision for Credit Losses
.
Territorial recorded credit loss provisions of $19,000 and a reversal of
credit loss provisions of $100,000 during the three months ended March 31,
2024 and 2023, respectively. The credit loss provisions in the three months
endedMarch 31, 2024 was primarily due to an increase in Territorial's consumer
and commercial loan portfolios, an increase in forecasted charge-offs in the
consumer loan portfolio,
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and a decrease in forecasted prepayments in the commercial loan portfolio. The
reversal of the credit loss provisions in the three months ended March 31,
2023 was primarily due to animprovement in economic conditions. The provisions
recorded resulted in ratios of the allowance for credit losses to total loans
of 0.39% and 0.40% at March 31, 2024 and 2023, respectively. Nonaccrual loans
totaled $2.2 million atMarch 31, 2024, or 0.17% of total loans at that date,
compared to $2.4 million of nonaccrual loans at March 31, 2023, or 0.18% of
total loans at that date. Nonaccrual loans as of March 31, 2024 and 2023
consisted primarily of
one-
to four-family residential real estate loans. The allowance at March 31, 2024
and 2023 reflects management's best estimate of losses over the life of loans
in Territorial's portfolio inaccordance with the CECL approach. For additional
information see Note (6), "Loans Receivable and Allowance for Credit Losses"
in the Notes to Consolidated Financial Statements of Territorial, included
elsewhere in this proxystatement/prospectus.
Noninterest Income
.
The following table summarizes changes in noninterest incomebetween the three
months ended March 31, 2024 and 2023.
Three Months Ended Change
March 31,
2024 2023 $ Change % Change
(Dollars in thousands)
Service and other fees $ 273 $ 310 $ (37 ) (11.9) %
Income on bank-owned life insurance 246 203 43 21.2 %
Net gain on sale of loans -- 1 (1 ) (100.0) %
Other 74 75 (1 ) (1.3) %
Total $ 593 $ 589 $ 4 0.7 %
Noninterest Expense.
The following table summarizes changes in noninterest expense between thethree
months ended March 31, 2024 and 2023.
Three Months Ended Change
March 31,
2024 2023 $ Change % Change
(Dollars in thousands)
Salaries and employee benefits $ 4,962 $ 5,404 $ (442 ) (8.2) %
Occupancy 1,738 1,623 115 7.1 %
Equipment 1,323 1,312 11 0.8 %
Federal deposit insurance premiums 496 245 251 102.4 %
Other general and administrative expenses 1,541 1,029 512 49.8 %
Total $ 10,060 $ 9,613 $ 447 4.6 %
Noninterest expense increased by $447,000 for the three months ended March 31,
2024 compared to the threemonths ended March 31, 2023. The increase in other
general and administrative expenses was primarily due to increases in legal
expenses and other professional fees. The increase in federal deposit
insurance premiums was primarily due to anincrease in the FDIC premium rate
retroactive to October 1, 2023. The increase in occupancy expense was
primarily due to increases in office building repairs and maintenance
expenses. The decrease in salaries and employee benefits was primarilydue to a
decrease in compensation expense and employee stock ownership plan expenses
which was partially offset by an increase in equity incentive plan expenses.
Income Tax (Benefit) Expense.
The income tax benefit was $243,000 for the three months ended March 31, 2024,
reflecting aneffective tax benefit rate of 33.5%, compared to income tax
expense of $851,000 for the three months ended March 31, 2023, reflecting an
effective tax rate of 26.9%.
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Comparison of Operating Results for the Years Ended December 31, 2023 and 2022
General
.
Net income decreased by $11.1 million, or 68.9%, to $5.0 million for the year
endedDecember 31, 2023 from $16.2 million for the year ended December 31,
2022. The decrease in net income was primarily due to a $12.9 million decrease
in net interest income, a $1.7 million decrease in noninterest income, and
a$573,000 decrease in reversals of credit/loan loss provisions. These
decreases in net income were partially offset by a $3.5 million decrease in
income taxes and a $530,000 decrease in noninterest expense.
Net Interest Income
. Net interest income decreased by $12.9 million, or 23.2%, to $42.6 million
for the year endedDecember 31, 2023 from $55.5 million for the year ended
December 31, 2022. Interest expense increased by $19.2 million, or 266.7%, to
$26.5 million for the year ended December 31, 2023 from $7.2 million for
theyear ended December 31, 2022. The increase in interest expense was
primarily due to a 104 basis point increase in the cost of interest-bearing
liabilities and, to a lesser extent, a $49.2 million increase in the average
balance ofinterest-bearing liabilities. Interest income increased by $6.4
million, or 10.2%, to $69.1 million for the year ended December 31, 2023 from
$62.7 million for the year ended December 31, 2022. The increase in
interestincome was primarily due to a 23 basis point increase in the yield on
average interest-earning assets and, to a lesser extent, a $47.0 million
increase in the average balance of interest-earning assets. Since the
significant majority ofTerritorial's loan and securities portfolios have fixed
interest rates, the average rates on these assets have not risen as quickly as
the average rate on its interest-bearing liabilities during this period of
rising market interest rates. Thenet interest rate spread and net interest
margin were 1.83% and 2.02%, respectively, for the year ended December 31,
2023, compared to 2.64% and 2.69%, respectively, for the year ended December
31, 2022. The decrease in the net interestrate spread and the net interest
margin are attributable to the 104 basis point increase in the cost of average
interest-bearing liabilities, which was partially offset by the 23 basis point
increase in the yield of average interest-earning assets.
Interest Income
.
Interest income increased by $6.4 million, or 10.2%, to $69.1 million for the
yearended December 31, 2023 from $62.7 million for the year ended December 31,
2022. Interest income on other investments increased by $3.0 million, or
251.8%, to $4.1 million for the year ended December 31, 2023 from$1.2 million
for the year ended December 31, 2022. The increase in interest income on other
investments was primarily due to an increase in the yield on Territorial's
average cash balance at the Federal Reserve Bank from 1.12% for theyear ended
December 31, 2022 to 4.68% for the year ended December 31, 2023. The increase
in the yield on Territorial's cash balance at the Federal Reserve Bank
occurred because of an increase in the fed funds rate. The increase in
theyield on Territorial's cash balance at the Federal Reserve Bank was
augmented by a $19.7 million increase in the average cash balance. Interest
income on loans increased by $1.7 million, or 3.8%, from $45.3 million for the
yearended December 31, 2022 to $47.0 million for the year ended December 31,
2023. The increase in interest income on loans occurred because of an 11 basis
point increase in the yield and a $7.5 million increase in the averagebalance
of loans which occurred as new loan originations exceeded loan repayments and
loan sales. Interest income on investment securities increased by $1.7
million, or 10.5%, to $17.9 million for the year ended December 31, 2023
from$16.2 million for the year ended December 31, 2022. The increase in
interest income on securities occurred primarily because of a 19 basis point
increase in the average yield on securities and a $16.3 million increase in
the averagesecurities balance. The increase in the average securities yield
occurred because the yield on the securities purchased, primarily in 2022, was
higher than the average portfolio yield. The securities purchased in 2022
caused an increase in theaverage securities balance in 2023.
Interest Expense
. Interest expense increased by $19.2 million, or 266.7%, to$26.5 million for
the year ended December 31, 2023 from $7.2 million for the year ended December
31, 2022. Interest expense on interest-bearing deposits increased by $14.6
million, or 295.6%, to $19.5 million for theyear ended December 31, 2023 from
$4.9 million for the year ended December 31, 2022. The increase in interest
expense on interest-bearing deposits was primarily due to a 220 basis point
increase in the rate paid on certificates ofdeposit, which was augmented by a
$186.8 million, or 63.8%, increase in the average balance of certificates of
deposit. The rate paid on certificates of deposit increased to 3.53% for the
year ended December 31, 2023 from 1.33% for theyear
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ended December 31, 2022 primarily due to increases in market interest rates.
Interest expense on savings accounts increased by $1.5 million, or 159.9%, to
$2.5 million for yearended December 31, 2023 from $950,000 for the year ended
December 31, 2022. The increase in interest expense on savings accounts
occurred primarily because of a 22 basis point increase in the rate, which was
partially offset by a$225.4 million, or 21.9% decrease in the average balance
of savings accounts. The changes in the average balance of savings accounts
and certificates of deposit occurred primarily as customers transferred funds
from savings accounts withrelatively low interest rates to Territorial's
certificates of deposit with higher interest rates or withdrew their deposits
and sought higher interest rates elsewhere. Interest expense on Federal Home
Loan Bank advances rose by$4.5 million, or 215.0%, to $6.6 million for year
ended December 31, 2023 from $2.1 million for the year ended December 31,
2022. The increase in interest expense on Federal Home Loan Bank advances
occurred because of a128 basis point increase in the cost of advances. This
increase to interest expense was augmented by a $98.7 million, or 69.6%
increase in the average Federal Home Loan Bank advance balance. The increase
in the cost and the average balance ofFederal Home Loan Bank advances was
primarily due to $125.0 million of additional Federal Home Loan Bank advances
obtained in 2023 to enhance Territorial's liquidity and to fund the decrease
in deposits. Interest expense on advances fromthe Federal Reserve Bank was
$154,000 for the year ended December 31, 2023. In 2023, Territorial obtained a
$50.0 million advance from the BTFP.
Provision for Credit/Loan Losses
.
Based on Territorial's analysis of the factors described in "
--Critical Accounting Policies and Estimates--Allowance for Credit Losses
(ACL) on Loans and Securities
" above, Territorial recorded a reversal of credit loss provision of $3,000
under ASC 326 and a reversal of loan loss provisionof $576,000 under ASC 310
for the years ended December 31, 2023 and 2022, respectively.The reversal of
credit loss provisions in 2023 was primarily due to a decrease in
Territorial's real estate portfolio's forecastedcharge-offs that was partially
offset by a decrease in its forecasted prepayments. The reversal of the loan
loss provision in 2022 occurred primarily due to a decrease in the amount of
loans in Territorial's loan payment deferral program,Hawaii's unemployment
rate and the size of Territorial's loan portfolio. The loan payment deferral
program was created to assist borrowers who were experiencing financial
hardship due to the
COVID-19
pandemic. The provisions recorded resulted in ratios of the allowance for
credit/loan losses to total loans of 0.39% and 0.16% at December 31, 2023 and
2022, respectively. For the years ended December 31, 2023 and 2022,
Territorial had netcharge-offs of $117,000 and $61,000, respectively.
Nonaccrual loans totaled $2.3 million at December 31, 2023 and 2022.
Territorial has provided for all losses that can be reasonably estimated at
December 31, 2023 and 2022.
Noninterest Income
.
The following table summarizes changes in noninterest income for the years
endedDecember 31, 2023 and 2022.
Year Ended December 31, Change 2023/2022
2023 2022 $ Change % Change
(Dollars in thousands)
Service and other fees $ 1,327 $ 1,416 $ (89 ) (6.3) %
Income on bank-owned life insurance 855 792 63 8.0 %
Net gain (loss) on sale of loans 10 (3 ) 13 (433.3) %
Other 279 2,004 (1,725 ) (86.1) %
Total $ 2,471 $ 4,209 $ (1,738 ) (41.3) %
Noninterest income decreased by $1.7 million, or 41.3%, to $2.5 million for
the year endedDecember 31, 2023 from $4.2 million for the year ended December
31, 2022. Other income decreased primarily due to $1.1 million of proceeds on
bank-owned life insurance received during the year ended December 31, 2022.
Inaddition, $713,000 of pension income was recognized in the year ended
December 31, 2022 primarily due to an increase in the return on assets in the
defined benefit pension plan and a reduction in the interest costs on the
benefit obligation.
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Noninterest Expense
.
The following table summarizes changes innoninterest expense for the years
ended December 31, 2023 and 2022.
Year Ended Change 2023/2022
December 31,
2023 2022 $ Change % Change
(Dollars in thousands)
Salaries and employee benefits $ 20,832 $ 22,259 $ (1,427 ) (6.4)%
Occupancy 6,910 6,708 202 3.0%
Equipment 5,156 5,006 150 3.0%
Federal deposit insurance premiums 982 573 409 71.4%
Other general and administrative expenses 4,388 4,252 136 3.2%
Total $ 38,268 $ 38,798 $ (530 ) (1.4)%
Noninterest expense decreased by $530,000, or 1.4%, to $38.3 million for the
year ended December 31,2023 from $38.8 million for the year ended December 31,
2022. The decrease in salaries and employee benefits was primarily due to a
decrease in bonus accruals, stock benefit plan expenses, and employee stock
option program expenses whichwas partially offset by a decrease in deferred
salary expenses for originating new loans. The increase in federal deposit
insurance premiums was primarily due to an increase in the FDIC premium rate
beginning January 1, 2023. The increase inoccupancy expense was primarily due
to increases in repairs and maintenance expense. The increase in equipment
expenses was primarily due to an increase in data processing expense,
furniture and fixture expense, and service bureau expense, which waspartially
offset by a decrease in depreciation on furniture and fixtures. Other general
and administrative expenses increased primarily due to an increase in legal
fees.
Income Tax Expense
. Income tax expense for 2023 was $1.8 million with an effective tax rate of
26.5% compared to$5.3 million with an effective tax rate of 24.8%. The
decrease in income tax expense was due to a $14.6 million decrease in income
before income taxes. The increase in the effective tax rate during 2023 was
primarily due to the receipt of$1.1 million of proceeds on bank-owned life
insurance in 2022 that was not taxable.
Nonperforming and Problem Assets
When a residential mortgage loan or home equity line of credit is 15 days past
due, Territorial attempts personal, direct contact with theborrower to
determine when payment will be made. On the first day of the following month,
Territorial mails a letter reminding the borrower of the delinquency, and will
send an additional letter when a loan is 60 days or more past due. If
necessary,subsequent late notices are issued and the account will be monitored
on a regular basis thereafter. By the 121
st
day of delinquency, unless the borrower has made arrangements to bring the
loancurrent, Territorial will refer the loan to legal counsel to commence
foreclosure proceedings.
Commercial business loans, commercial realestate loans, and consumer loans are
generally handled in the same manner as residential mortgage loans or home
equity lines of credit. All commercial business loans that are 15 days past
due are immediately referred to Territorial's seniorlending officer. In
addition, Territorial generates past due notices and attempt direct contact
with a borrower when a consumer loan is 10 days past due. Because consumer
loans are generally unsecured, Territorial may commence collection
proceduresearlier for consumer loans than for residential mortgage loans or
home equity lines of credit.
Loans are generally placed on nonaccrualstatus when payment of principal or
interest is more than 90 days contractually delinquent or when, in the opinion
of management, collection of principal or interest in full appears doubtful.
When loans are placed on a nonaccrual status, unpaidaccrued interest is fully
reversed. The interest
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payments received on nonaccrual loans are recorded as a reduction of
principal. The loan may be returned to accrual status if both principal and
interest payments are brought current and fullpayment of principal and
interest is expected.
Nonperforming Assets
.
The table below sets forth the amountsand categories of Territorial's
nonperforming assets (loans and real estate owned) at the dates indicated.
At December 31,
At March 2023 2022
31, 2024
(Dollars in
thousands)
Nonaccrual
loans:
Real estate
loans:
First
mortgage:
One- $ 2,026 $ 2,079 $ 2,279
to four-family
residential
Home equity loans 9 11 16
and lines of credit
Other 170 170 6
loans
Total nonaccrual 2,205 2,260 2,301
loans
Real estate
owned:
Real estate
loans:
First
mortgage:
One- -- -- --
to four-family
residential
Total real -- -- --
estate owned
Total nonperforming 2,205 2,260 2,301
assets
Loans delinquent 90 days or greater -- -- --
and still accruing interest
Modified loans still
accruing interest:
Real estate
loans:
First
mortgage:
One- 694 697 414
to four-family
residential
Total modified loans 694 697 414
still accruing interest
Total nonperforming assets, accruing loans delinquent for $ 2,899 $ 2,957 $ 2,715
90 days or more and modified loans stillaccruing interest
Ratios:
Nonperforming loans 0.17 % 0.17 % 0.18 %
to total loans
Nonperforming assets 0.10 % 0.10 % 0.11 %
to total assets
Territorial had four
one-
to four-family residential mortgage loanstotaling $792,000 that were modified
as of March 31, 2024. Three of the loans, totaling $694,000, were performing
in accordance with their modified terms and accruing interest, at March 31,
2024. One of the loans, for $98,000, was 59 dayspast due and not accruing
interest at March 31, 2024. Territorial had five
one-
to four-family residential mortgage loans totaling $860,000 that were modified
as of December 31, 2023. Four of theloans, totaling $758,000, were performing
in accordance with their modified terms and accruing interest at December 31,
2023. One of the loans, for $102,000, was 59 days past due and not accruing
interest at December 31, 2023. Territorialhad four
one-
to four-family residential loans totaling $824,000 that were modified as of
December 31, 2022. Two of the loans, totaling $414,000, were performing in
accordance with their modified termsand accruing interest at December 31,
2022. Two of the loans, totaling $410,000, were performing in accordance with
its modified terms but not accruing interest at December 31, 2022.
Territorial's loan modifications include extendingloan terms, adjustment to
the loan's interest rate and loan payment deferrals.
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Delinquent Loans
. The following table sets forth Territorial's loandelinquencies by type and
by amount at the dates indicated. Loans with a formal loan payment deferral
plan in place are not considered contractually past due or delinquent if the
borrower is in compliance with the loan payment deferral plan.
Loans Delinquent For
60-89 Days 90 Days or Over Total
Number Amount Number Amount Number Amount
(Dollars in thousands)
At March 31, 2024
Real estate loans:
First mortgage:
One- -- $ -- 1 $ 87 1 $ 87
to four-family residential
Other loans 3 170 2 1 5 171
Total loans 3 $ 170 3 $ 88 6 $ 258
At December 31, 2023
Real estate loans:
First mortgage:
One- -- -- 4 $ 227 4 $ 227
to four-family residential
Other loans 1 -- 1 -- 2 --
Total loans 1 -- 5 $ 227 6 $ 227
At December 31, 2022
Real estate loans:
First mortgage:
One- 1 $ 409 4 $ 559 5 $ 968
to four-family residential
Other loans 1 -- 2 6 3 6
Total loans 2 $ 409 6 $ 565 8 $ 974
Real Estate Owned
. Real estate acquired by Territorial as a result of foreclosure or by deed
inlieu of foreclosure is classified as real estate owned. When property is
acquired it is recorded at estimated fair value at the date of foreclosure
less the cost to sell, establishing a new cost basis. Estimated fair value
generally represents theprice a buyer would be willing to pay on the basis of
current market conditions, including normal terms from other financial
institutions. Holding costs and declines in estimated fair value result in
charges to expense after acquisition. AtMarch 31, 2024 and December 31, 2023
and 2022, Territorial had no real estate owned.
Classification ofAssets
.
Territorial's policies, consistent with regulatory guidelines, provide for the
classification of loans and other assets as substandard, doubtful, or loss. An
asset is considered substandard if it is inadequatelyprotected by the current
net worth and paying capacity of the obligor or the fair value of collateral
pledged, if any. Substandard assets include those assets characterized by the
distinct possibility that Territorial will sustain some loss if thedeficiencies
are not corrected. Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard with the added characteristic that
the weaknesses present make collection or liquidation in full, on the basis
ofcurrently existing facts, conditions, and values, highly questionable and
improbable. Assets (or portions of assets) classified as loss are those
considered uncollectible and of such little value that their continuance as
assets is not warranted.
Territorial maintains an allowance for credit losses using an estimate of
future losses over the expected life of its financialinstruments at a balance
sheet date. Territorial's determination as to the classification of its assets
and the amount of its allowance for credit losses is subject to review by bank
regulators, who can require that Territorial establishadditional allowances.
Territorial regularly reviews its asset portfolio to determine whether any
assets require classification in accordance with applicable regulations. On
the basis of Territorial's review of
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its assets at March 31, 2024, Territorial had substandard assets of $2.7
million, loss assets of $248, and no doubtful assets. Substandard assets at
March 31, 2024 included$2.1 million of nonperforming loans and $571,000 of
modified loans. At December 31, 2023, Territorial had substandard assets of
$2.7 million and no loss or doubtful assets. Substandard assets at December
31, 2023 included$2.2 million of nonperforming loans and $577,000 of modified
loans. At December 31, 2022, Territorial had substandard assets of $2.5
million, and no loss or doubtful assets. Substandard assets at December 31,
2022 included$1.9 million of nonperforming loans and $597,000 of modified
loans. Territorial generally classifies any loan that is delinquent 90 days or
more as substandard. Loans which have been delinquent for fewer days may also
be classified assubstandard.
In addition to classifying assets as substandard, doubtful, or loss,
Territorial also categorizes assets as special mention.A special mention asset
has potential weaknesses that deserve management's close attention. If left
uncorrected, these potential weaknesses may result in the deterioration of the
repayment prospects for the asset or in the Territorial SavingsBank's credit
position at some future date. Territorial designates loans that are 30 to 89
days delinquent as special mention. Loans which have been delinquent for fewer
days may also be categorized as special mention. At December 31, 2023and 2022,
special mention assets were $327,000 and $409,000, respectively. Territorial
had no special mention assets at March 31, 2024.
Allocation of Allowance for Credit/Loan Losses
.
The following table sets forth the allowance for credit/loanlosses allocated
by loan category and the percent of loans in each category to total loans at
the dates indicated. The allowance for credit/loan losses allocated to each
category is not necessarily indicative of future losses in any particularcategor
y. The allowance for credit/loan losses for each category is affected by the
national and Hawaii economies as well as other factors. The allocation of a
portion of the allowance to one category of loans does not preclude its
availability toabsorb losses in other categories.
At December 31,
At March 2023 2022
31, 2024
Allowance Percent Allowance Percent Allowance Percent
for of for of for of
Credit Loans Credit Loans Loan Loans
Losses in Each Losses in Each Losses in Each
Category Category Category
to to to
Total Total Total
Loans Loans Loans
(Dollars in thousands)
Real estate
loans:
First
mortgage:
One- $ 4,433 97.26 % $ 4,448 97.48 % $ 1,259 96.51 %
to four-family
residential
Multi-family 20 0.43 23 0.45 4 0.50
residential
Construction, 26 0.96 27 0.89 434 1.84
commercial and other
Home equity loans 129 0.70 101 0.54 1 0.49
and lines of credit
Other 534 0.65 522 0.64 75 0.66
loans
Total allocated 5,142 100.00 % 5,121 100.00 % 1,773 100.00 %
allowance
Unallocated -- -- 259
Total $ 5,142 $ 5,121 $ 2,032
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At or For the Three Months Ended March 31,
2024 2023
Allowance for credit losses to total loans at end of period 0.39 % 0.40 %
Nonaccrual assets to total loans at end of period 0.17 % 0.18 %
Allowance for credit losses to nonaccrual loans at end of period 233.20 % 216.15 %
Net charge-offs to average loans outstanding:
Residential Mortgage -- % -- %
Construction, Commercial & Other Mortgage Loans -- % -- %
Home Equity Loans and Lines of Credit -- % -- %
Consumer & Other 0.06 % 0.17 %
At or For the Year Ended December 31,
2023 2022
Allowance for credit/loan losses to total loans at end of year 0.39 % 0.16 %
Nonaccrual assets to total loans at end of year 0.17 % 0.18 %
Allowance for credit/loan losses to nonaccrual loans at end of year 226.59 % 88.31 %
Net charge-offs to average loans outstanding:
Residential Mortgage -- % -- %
Construction, Commercial & Other Mortgage Loans -- % -- %
Home Equity Loans and Lines of Credit -- % -- %
Consumer & Other 0.87 % 0.71 %
Management of Market Risk
General
. Territorial's most significant form of market risk is interest rate risk
because, as a financial institution, themajority of its assets and liabilities
are sensitive to changes in interest rates. Therefore, a principal part of
Territorial's operations is to manage interest rate risk and limit the
exposure of its net interest income to changes in marketinterest rates. The
Territorial Board of Directors has established an Asset/Liability Management
Committee, which is responsible for evaluating the interest rate risk inherent
in Territorial's assets and liabilities, for determining the levelof risk that
is appropriate, given its business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent
with the guidelines approved by the Board of Directors.
Territorial has historically operated as a traditional thrift institution and
a significant majority of its assets consist of long-term,fixed-rate
residential mortgage loans and mortgage-backed securities, which it has funded
primarily with checking and savings accounts and borrowings. There is also
little demand for adjustable-rate mortgage loans in the Hawaii market area.
This hasresulted in Territorial being particularly vulnerable to increases in
interest rates, as its interest-bearing liabilities mature or reprice more
quickly than its interest-earning assets.
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Territorial continues its efforts to reduce interest rate risk. During the
three month endedMarch 31, 2024, Territorial did not sell any fixed-rate
mortgage loans. In 2023 and 2022, Territorial sold fixed-rate mortgage loans
with principal balances of $827,000 and $5.4 million, respectively. During the
three months endedMarch 31, 2024, Federal Home Loan Bank advances remained
constant and for the year ended December 31, 2023, Federal Home Loan Bank
advances increased by $101.0 million. These advances lengthened the maturity
of Territorial'sliabilities and increased its liquidity. In addition,
Territorial may utilize the following strategies to further reduce its
interest rate risk:
. Continuing efforts to increase core checking and savings accounts, which are
less rate-sensitive thancertificates of deposit and which provide a stable,
low-cost
source of funds;
. Continuing to repay short-term borrowings;
. Maintaining overnight cash balances at the Federal Reserve Bank or a portfolio of short-term investments;
. Purchasing mortgage-backed securities with shorter durations;
. Selling a portion of the fixed-rate mortgage loans Territorial originates to Freddie Mac or Fannie Mae;
. Extending the maturity of liabilities by obtaining longer-term fixed-rate public deposits,
Federal Home Loan Bankadvances and securities sold under agreements to repurchase;
. Subject to the maintenance of credit quality standards, originating commercial loans and home equity lines
ofcredit, which have adjustable interest rates and shorter average lives than first mortgage loans; and
. Maintaining relatively high regulatory capital ratios.
Territorial's policies do not permit hedging activities, such as engaging in
futures, options, or swap transactions, or investing inhigh-risk mortgage
derivatives, such as collateralized mortgage obligation residual interests,
real estate mortgage investment conduit residual interests, or stripped
mortgage-backed securities. Territorial does not have any current plans to
sellloans classified as
held-for-investment.
EconomicValue of Equity
.
Territorial uses an interest rate sensitivity analysis that computes changes
in the economic value of equity (EVE) of its cash flows from assets,
liabilities, and
off-balance
sheet items in the event of a range of assumed changes in market interest
rates. EVE represents the market value of portfolio equity and is equal to the
present value of assets minus the present value of liabilities, with
adjustments made for
off-balance
sheet items. This analysis assesses the risk of loss in market-risk-sensitive
instruments in the event of an instantaneous and sustained 100 to 400 basis
point increase or decrease in market interestrates with no effect given to any
steps that Territorial might take to counter the effect of that interest rate
movement. A basis point equals
one-hundredth
of one percent, and 100 basis points equals onepercent. An increase in
interest rates from 3% to 4% would mean, for example, a 100 basis point
increase in the "Change in Interest Rates" column below.
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The following table presents Territorial's internal calculations of the
estimatedchanges in its EVE as of March 31, 2024 that would result from the
designated instantaneous changes in the interest rate yield curve.
Change in Estimated EVE Estimated Percentage EVE Ratio as a Increase
Interest Rates (2) Increase Change in EVE Percent of (Decrease) in
(bp) (Decrease) in Present Value EVE Ratio as a
(1) EVE of Assets Percent of
(3)(4) Present Value of
Assets
(3)(4)
(Dollars in thousands)
+400 $ (31,821 ) $ (204,616 ) (118.42) % (2.15)% (11.47)%
+300 $ 13,197 $ (159,598 ) (92.36) % 0.85% (8.47)%
+200 $ 62,787 $ (110,008 ) (63.66) % 3.80% (5.52)%
+100 $ 116,510 $ (56,285 ) (32.57) % 6.66% (2.66)%
0 $ 172,795 $ -- -- % 9.32% --%
-100 $ 226,616 $ 53,821 31.15 % 11.54% 2.22%
-200 $ 276,798 $ 104,003 60.19 % 13.34% 4.02%
-300 $ 317,456 $ 144,661 83.72 % 14.54% 5.22%
-400 $ 314,354 $ 141,559 81.92 % 13.95% 4.63%
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the difference between the present value of an institution's assets and liabilities.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earningassets.
(4) EVE Ratio represents EVE divided by the present value of assets.
Certain shortcomings are inherent in the methodologies used in determining
interest rate risk through changes in EVE. Modeling changes in EVErequires
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the EVE table presented assumes that the composition of Territorial'sint
erest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of theduration or repricing of specific assets and liabilities.
Accordingly, although the EVE table provides an indication of Territorial's
interest rate risk exposure at a particular point in time, such measurements
are not intended to and do notprovide a precise forecast of the effect of
changes in market interest rates on Territorial's EVE and net interest income
and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations.
Territorial's primary obligations include meeting the borrowingneeds of its
customers, fulfilling deposit withdrawals, interest payments on deposits, and
repayment of borrowings. Territorial Savings Bank's primary sources of funds
consist of deposit inflows, cash balances at the Federal Reserve Bank, loanand
security repayments, advances from the Federal Home Loan Bank, securities sold
under agreements to repurchase and proceeds from loan and security sales.
While maturities and scheduled amortization of loans and securities are
predictable sourcesof funds, deposit flows and mortgage and mortgage-backed
security prepayments are greatly influenced by general interest rates,
economic conditions and competition. Territorial has established an
Asset/Liability Management Committee, consisting ofits President and Chief
Executive Officer, Vice Chairman and
Co-Chief
Operating Officer, Executive Vice President and Chief Financial Officer,
Executive Vice President of Finance, and Vice President and SeniorTreasury
Analyst, which is responsible for establishing and monitoring Territorial's
liquidity targets and strategies in order to ensure that sufficient liquidity
exists for meeting the borrowing needs and deposit withdrawals of its
customersas well as unanticipated contingencies. Territorial believes that is
has enough sources of liquidity to satisfy its short- and long-term liquidity
needs as of March 31, 2024.
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Territorial regularly monitors and adjusts its investments in liquid assets
based upon itsassessment of:
(i) expected loan demand;
(ii) purchases and sales of investment securities;
(iii) expected deposit flows and borrowing maturities;
(iv) yields available on interest-earning deposits and securities; and
(v) the objectives of Territorial's asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits or
securities and may also be used to pay off short-term borrowings.
Territorial's most liquid asset is cash. The amount of this asset is dependent
on its operating, financing, lending and investingactivities during any given
period.
At March 31, 2024, Territorial's cash and cash equivalents totaled $90.1
million. AtMarch 31, 2024, Territorial had the ability to borrow an additional
$613.1 million and $163.5 million from the Federal Home Loan Bank and Federal
Reserve Bank, respectively. In addition, Territorial had the ability to borrow
up to$125.1 million, using its unpledged securities as collateral, from the
Federal Reserve Bank or using securities sold under agreements to repurchase.
At December 31, 2023, Territorial's cash and cash equivalents totaled $126.7
million. At December 31, 2023, Territorialhad the ability to borrow an
additional $612.6 million and $207.2 million from the Federal Home Loan Bank
and Federal Reserve Bank, respectively. In addition, Territorial had the
ability to borrow up to $129.7 million, using itsunpledged securities as
collateral, from the Federal Reserve Bank or using securities sold under
agreements to repurchase.
Advances fromthe Federal Home Loan Bank, advances from the Federal Reserve
Bank, and securities sold under agreements to repurchase were $242.0 million,
$50.0 million, and $10.0 million, respectively, at March 31, 2024 and December
31,2023. Advances from the Federal Home Loan Bank and securities sold under
agreements to repurchase were $141.0 million and $10.0 million, respectively,
at December 31, 2022. Territorial did not have any Federal Reserve Bank
borrowingsat December 31, 2022.
Territorial's cash flows are derived from operating activities, investing
activities and financingactivities as reported in its Consolidated Statements
of Cash Flows included in its Consolidated Financial Statements.
At March 31,2024, Territorial had $1.7 million in loan commitments outstanding
for fixed-rate loans and had $14.8 million in unused lines of credit to
borrowers. At December 31, 2023, Territorial had $1.3 million in loan
commitmentsoutstanding for fixed-rate loans and had $14.9 million in unused
lines of credit to borrowers. Certificates of deposit due within one year of
March 31, 2024 totaled $504.2 million, or 31.5% of total deposits. If these
deposits do notremain with Territorial, Territorial may be required to seek
other sources of funds, including loan and security sales, brokered deposits,
securities sold under agreements to repurchase, and Federal Home Loan Bank and
Federal Reserve Bank advances.Depending on market conditions, Territorial may
be required to pay higher rates on such deposits or other borrowings than it
currently pays on the certificates of deposit due on or before March 31, 2025.
Territorial has the ability to attractand retain deposits by adjusting the
interest rates offered.
Territorial's primary investing activities are originating loans andpurchasing
mortgage-backed securities. During the three months ended March 31, 2024 and
2023, Territorial originated $19.2 million and $21.2 million of loans,
respectively. During the three months ended March 31, 2023,Territorial
purchased securities with a total face value of $6.8 million. Territorial did
not purchase any securities in the three months ended March 31,
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2024. During the years ended December 31, 2023 and 2022, Territorial
originated $100.8 million and $150.9 million of loans, respectively. In 2023
and 2022, Territorial purchasedsecurities with a total face value of $6.8
million and $169.4 million, respectively.
Financing activities consist primarily ofactivity in deposit accounts, Federal
Home Loan Bank advances, Federal Reserve Bank advances, securities sold under
agreements to repurchase, stock repurchases and dividend payments. Territorial
experienced a net decrease in deposits of$36.5 million for the three months
ended March 31, 2024. The decrease in deposits occurred primarily as customers
sought higher interest rates than what Territorial offers. Territorial
experienced a net decrease in deposits of$79.5 million for the year ended
December 31, 2023 and a net increase in deposits of $34.3 million for the year
ended December 31, 2022. The decrease in deposits for 2023 occurred as
customers sought higher interest rates thanwhat Territorial offers. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by Territorial and its local competitors, and by other
factors. At March 31, 2024 and December 31, 2023,Federal Home Loan Bank and
Federal Reserve Bank advances were $242.0 million and $50.0 million,
respectively. Federal Home Loan Bank borrowings were $141.0 million at
December 31, 2022. Territorial had no Federal Reserve Bankborrowings at
December 31, 2022.
As a separate legal entity, Territorial is required to have liquidity to fund
stock repurchases anddividend payments to shareholders and for other corporate
purposes. Shares repurchased reduce the amount of shares issued and
outstanding. The repurchased shares may be reissued in connection with
share-based compensation plans and for generalcorporate purposes. During the
years ended December 31, 2023 and 2022, Territorial repurchased 250,882 and
262,621 shares of common stock, respectively, at an average cost of $16.05 and
$22.75 per share, respectively, as part of the repurchaseprograms authorized
by the Board of Directors. No shares were repurchased during the three months
ended March 31, 2024. At March 31, 2024 and December 31, 2023 and 2022, on a
stand-alone basis, Territorial had cash in banks of$17.5 million, $18.5
million, and $28.5 million, respectively.
Territorial Savings Bank is subject to various regulatorycapital requirements,
including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and
off-balance
sheet items to broad risk categories. At March 31, 2024 and December 31, 2023
and 2022, Territorial Savings Bank exceeded all regulatory capital
requirements and are considered to be "wellcapitalized" under regulatory
guidelines. Territorial is not subject to regulatory capital requirements
because its total assets are less than $3.0 billion.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
Commitments
. As a financial services provider, Territorial routinely is a party to
various financial instruments with
off-balance-sheet
risks, such as commitments to extend credit and unused lines of credit. While
these contractual obligations represent Territorial's potential future cash
requirements, a significant portion ofcommitments to extend credit may expire
without being drawn upon. Such commitments are subject to the same credit
policies and approval process accorded to loans Territorial makes. In
addition, Territorial enters into commitments to sell mortgageloans.
Territorial sells loans under agreements that contain representations and
warranties related to, among other things, the origination and characteristics
of the mortgage loans. Territorial may be required to repurchasemortgage loans
that it has sold in cases of breaches of these representations and warranties.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 3 of the Notes
to Consolidated Financial Statement at March 31, 2024 andfor the three months
ended March 31, 2024 and 2023, and Note 2(w) of the Notes to Consolidated
Financial Statement at and for the years ended December 31, 2023 and 2022.
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Impact of Inflation and Changing Prices
Territorial's Consolidated Financial Statements and related notes have been
prepared in accordance with U.S. GAAP. U.S. GAAP generallyrequires the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in
theincreased cost of Territorial's operations. Unlike industrial companies,
Territorial's assets and liabilities are primarily monetary in nature. As a
result, changes in market interest rates have a greater impact on performance
than theeffects of inflation.
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THE MERGER
Terms of the Merger
Each of the Hope Board of Directors and the Territorial Board of Directors has
unanimously approved the Merger Agreement. The Merger Agreementprovides that,
pursuant to the terms and subject to the conditions set forth in the Merger
Agreement, Territorial will merge with and into Hope, with Hope as the
surviving corporation, which is referred to as the Merger. Following the
Merger,Territorial's wholly owned subsidiary, Territorial Savings Bank, a
Hawaii state-chartered member savings bank, will merge with and into Hope's
wholly owned subsidiary, Bank of Hope, a California state-chartered bank, with
Bank of Hope asthe surviving bank, which is referred to as the Bank Merger.
Each share of Territorial common stock issued and outstanding immediatelyprior
to the Effective Time, except for treasury stock or certain shares owned by
Hope or Territorial, will be converted into the right to receive 0.8048 shares
of Hope common stock. Territorial stockholders who would otherwise be entitled
to afraction of a share of Hope common stock in the Merger will instead
receive, for the fraction of a share, an amount in cash (rounded to the
nearest cent) based on the Hope closing share value.
As a result of the foregoing, based on the number of shares of Hope common
stock and Territorial common stock outstanding as of April 26,2024, the date
of the Merger Agreement, it is expected that Hope stockholders will hold
approximately 94.4%, and Territorial stockholders will hold approximately
5.6%, of the shares of the combined company outstanding immediately after the
effectivetime of the Merger (which we refer to as the "Effective Time").
Territorial stockholders are being asked to approve and adoptthe Merger
Agreement. See the section entitled "
The Merger Agreement
" for additional and more detailed information regarding the legal documents
that govern the Merger, including information about conditions to the
completion of theMerger and provisions for terminating or amending the Merger
Agreement. Hope stockholders are not entitled to voting rights in connection
with the Merger.
Background of the Merger
Since Territorial's initial public offering in 2009 in connection with
Territorial Savings Bank's conversion from the mutual form oforganization to
the stock form of organization, the Territorial Board of Directors and senior
management have periodically reviewed and assessed Territorial's strategic
alternatives and the business and regulatory environments facingTerritorial
and Territorial Savings Bank. As part of this process, the Territorial Board
of Directors has periodically considered strategic alternatives, including a
possible merger or sale transaction, and has consulted periodically
withrepresentatives of KBW regarding these matters. KBW is a nationally
recognized investment banking firm with substantial experience advising
financial institutions with respect to mergers and acquisitions and other
matters. KBW served asTerritorial's marketing agent in connection with its
2009 public offering.
In August 2023, at the KBW annual community bankingconference, representatives
of KBW, which included one representative who has provided investment banking
services and advice to Territorial since before Territorial's initial public
offering, engaged in conversations with representatives ofHope on topics that
included Hope's potential expansion to the Hawaii market, the banking
environment in Hawaii and various potential partnerships, including with
Territorial. No pricing or other potential deal terms were discussed, as
Hopemerely expressed interest in an exploratory meeting with representatives
of Territorial.
Following this conversation, a representative ofKBW met with Territorial's
Chairman, President and Chief Executive Officer Allan S. Kitagawa and other
members of Territorial's executive management to discuss Hope's interest in an
exploratory meeting with representatives ofTerritorial, at which meeting the
participants
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reviewed the state of the bank merger market in general, Territorial's
potential future operating results as a standalone entity, and information
regarding a potential merger transactionwith Hope, including the possible
structure and timing of a transaction. The potential merger transaction with
Hope was also compared to a potential merger transaction with another
potential partner for Territorial. The potential partner was theholding
company for a financial institution headquartered in Hawaii ("Company A"). As
part of Mr. Kitagawa's regular involvement in discussions with members of the
Hawaii banking community, a director of Company A had previouslyexpressed
interest in discussing a combination between Company A and Territorial if
Territorial were ever interested.
At a board meetingheld August 30, 2023, the Territorial Board of Directors was
informed of Hope's interest in an exploratory meeting with representatives of
Territorial and also reviewed the information discussed at the earlier meeting
among members ofTerritorial's executive management and the representative of
KBW. It was noted that no offer or correspondence had been provided by Hope,
nor had Hope provided any term sheet or letter of intent regarding the terms
of a possible transactionwith Territorial. The Territorial Board of Directors
also reviewed the public informational materials that Hope had provided at the
2023 KBW community banking conference, and discussed the impact a strategic
transaction could have on Territorial andTerritorial Savings Bank, including
stockholders, employees, customers and the local community. After further
discussion with management, the Territorial Board of Directors requested legal
advice on their fiduciary duties when assessing strategictransactions in
general and, specifically, in response to inquiries like the one made by Hope.
The Territorial Board of Directorsrecessed the meeting until the following
day. At the reconvened meeting, which was attended by members of Territorial's
executive management, representatives of KBW, and special legal counsel, Luse
Gorman, PC ("Luse Gorman"), theboard discussed with Luse Gorman the board's
fiduciary duties in general, as well as in a merger transaction. The board
reviewed financial information, including projections, prepared by the
management of Territorial and current marketmetrics with respect to a possible
transaction involving Hope. The board also considered expectations in the
market for banking institutions in general and, with management's input,
specific expectations for Territorial in the near-term. Inaddition, the board
considered the anticipated adverse regulatory and financial environment that
would likely face Territorial, particularly in light of recent market interest
rate increases, and their impact on Territorial's balance sheet,capital levels
and operations, as well as Territorial's ability to pay dividends and engage
in stock repurchases. The board discussed the operations and recent financial
performance of Hope, its possible strategic fit with Territorial, and
theboard's desire to ascertain the nature and level of Hope's interest in a
possible combination. After further discussion, the board voted unanimously to
authorize Mr. Kitagawa and others he deemed appropriate, to meet with
representativesof Hope and engage in discussions at Hope's request, in order
to learn more about Hope, its business and its intentions with respect to
Territorial, and report back to the Board or a Committee on the progress.
On September 12, 2023, Mr. Kitagawa and each of Territorial's Co-Chief
Operating Officers, Ralph Y. Nakatsuka and Vernon Hirata, met withKevin S.
Kim, the President and Chief Executive Officer of Hope. Mr. Kim expressed
Hope's interest in pursuing a strategic combination with Territorial due
primarily to Territorial's deposits and retail footprint in Hawaii. The
partiesdiscussed Hope's overall strategy for a combination with Territorial,
including how Hope could utilize Territorial's footprint and infrastructure in
Hawaii and how Hope's more diverse product and service offerings would
benefitTerritorial's customers. Mr. Kitagawa indicated that he would need to
consult with the Territorial Board of Directors and contact Mr. Kim if there
was any interest in further discussions.
On September 19, 2023, Mr. Kitagawa held a discussion with the director of
Company A who had previously expressed interest in discussing acombination
between Company A and Territorial. Mr. Kitagawa explained that Territorial was
beginning to review potential partners that previously expressed interest in a
transaction with Territorial and who could make sense from a combination
orpartnering standpoint. The director of Company A indicated that he would
discuss the matter with the appropriate representatives of Company A and get
back to Mr. Kitagawa.
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At a board meeting held September 21, 2023, Mr. Kitagawa summarized for the
TerritorialBoard of Directors the discussions he had with Mr. Kim and the
director of Company A. The board discussed with Luse Gorman the steps
typically involved in a potential merger transaction. The board discussed
other institutions that could makeadvantageous partners and had previously
expressed interest in a combination with Territorial. It was noted that a
financial institution headquartered in the West Coast of the mainland United
States ("Company B") had previously expressedinterest in Territorial and had a
similar operational strategy and market approach as Hope, including its
interest in the Hawaii market for expansion. As a result of these discussions,
the Board authorized Mr. Kitagawa and management, with theassistance of KBW
and Luse Gorman, to take the appropriate steps to continue discussions with
Hope and, if it was interested, Company A, and to negotiate appropriate
confidentiality agreements and provide such interested parties access
topreliminary information so that they could submit non-binding letters of
intent for review by the board. The board also authorized management, with the
assistance of KBW, to reach out to Company B, provided, that it was determined
that Company Bpossessed the financial capability and could be an attractive
partner to engage in a strategic transaction with Territorial, and to report
back to the board.
On September 25, 2023, Messrs. Kitagawa and Hirata met with the President of
Company A and its general counsel to discuss a possible strategicpartnership.
On September 26, 2023, Territorial and Hope entered into a mutual
confidentiality agreement to facilitate further discussionby allowing for the
sharing of non-public information between the parties and, ultimately, for
detailed reciprocal due diligence. The confidentiality agreement also included
customary standstill provisions applicable to each of Territorialand Hope,
several of which, including restrictions on transactions involving the other
party's publicly traded securities, ceased to apply to Territorial and Hope,
as applicable, if the other party entered into a definitive business
combinationagreement with a third party. Territorial entered into similar
confidentiality agreements with Company A and Company B on September 27, 2023
and October 12, 2023, respectively.
On October 10, 2023, Messrs. Kitagawa, Nakatsuka and Hirata met with the
President of Company B to discuss the potential transaction.
Following the execution of the confidentiality agreements, each of Hope,
Company A and Company B was given access to the virtual data roomcontaining
information regarding Territorial and Territorial Savings Bank.
On November 9, 2023, representatives of Company A informedTerritorial that
Company A had decided that it was not interested in pursuing a transaction
with Territorial.
On November 10, 2023, Hopesubmitted a non-binding indication of interest
letter ("IOI").
The Territorial Board of Directors met on November 21, 2023,with representatives
of KBW and legal counsel attending, to review the results of the solicitation
process and the terms of the IOI received from Hope. The Territorial Board of
Directors also reviewed preliminary pricing information that had beenprovided
to KBW by representatives of Company B's financial advisor. The board again
reviewed the state of the bank merger market in general, as well as general
market conditions affecting financial institutions. Hope's IOI proposed
anall-stock transaction with a fixed exchange ratio of 0.6689 shares of Hope
common stock for each share of Territorial common stock, reflecting an implied
offer price of $6.12 for each share of Territorial common stock as of the date
of the IOI. TheTerritorial Board of Directors again reviewed its fiduciary
duties with legal counsel, as well as Territorial's prospects on a standalone
basis, including financial projections prepared by management of Territorial.
After lengthy discussion,the Territorial Board of Directors directed KBW to
contact Hope and Company B and request that representatives of each company
meet with the board for the board to better assess each company, the strategic
fit they would have with Territorial andplans for how they would operate in
Hawaii.
On November 27, 2023, Company B submitted an IOI, proposing an all-stock
transaction with arange for a fixed exchange ratio, representing an implied
offer price of $5.76 to $6.32 for each share of Territorial common stock.
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On November 27, 2023, Hope submitted an update to its initial IOI, proposing
an all-stocktransaction with a fixed exchange ratio of 0.6850 shares of Hope
common stock for each share of Territorial common stock, reflecting an implied
offer price of $6.60 for each share of Territorial common stock.
On November 29, 2023, representatives of each of Hope and Company B met with
the Territorial Board of Directors to provide information abouttheir
respective organizations and a potential transaction with Territorial.
Representatives of KBW were present at these meetings. These individuals
responded to questions from members of the Territorial Board of Directors and
representatives ofKBW. Following these meetings, the Territorial Board of
Directors discussed various matters, including the exposure of Hope and
Company B to commercial real estate, given recent market conditions. The
Territorial Board of Directors recessed themeeting until the following day,
and continued discussions of a potential merger with Hope and Company B,
including the financial prospects of a combined entity, potential integration
issues and other matters. The Territorial Board of Directors alsoconsidered
Territorial's prospects as an independent company, including discussion of
future operating results as well as expected potential enhanced regulatory
scrutiny due to the impact of market interest rate increases on Territorial'sloa
n portfolio and interest rate risk position. The Territorial Board of
Directors determined to continue its considerations of pursuing a transaction
with Hope or Company B, or not pursuing a transaction and instead remaining an
independentcompany.
Following discussions between representatives of KBW and Hope's financial
advisor regarding changes in market interestrates, on December 7, 2023, Hope
submitted a further update to its initial IOI, proposing an all-stock
transaction with a fixed exchange ratio of 0.7550 shares of Hope common stock
for each share of Territorial common stock.
The Territorial Board of Directors met on December 18, 2023, with
representatives of KBW and legal counsel attending, to review and comparethe
proposals from Hope and Company B. The Territorial Board of Directors
discussed how the range of value proposed by Company B was less attractive
than the latest offer from Hope, which reflected an implied offer price of
$8.98 for each share ofTerritorial common stock using Hope's market price as
of December 15, 2023. The Territorial Board of Directors again considered
Territorial's prospects as an independent company, and discussed the
likelihood of Hope increasing its pricingoffer if Territorial were to provide
Hope with exclusive negotiating rights with Territorial. Based upon these
discussions, including consideration of Hope's higher capital levels than
Company B and Hope's prior experience with mergertransactions, the Territorial
Board of Directors instructed KBW to inform Company B that Territorial would
no longer engage in discussions with Company B. A representative of KBW
informed a representative of Company B's financial advisor ofthis decision on
December 19, 2023.
On December 26, 2023, Hope submitted a revised IOI, proposing an all-stock
transaction with a fixedexchange ratio of 0.8700 shares of Hope common stock
for each share of Territorial common stock, reflecting an implied offer price
of $10.51 for each share of Territorial common stock using Hope's market price
as of December 22, 2023. Therevised IOI included a request to negotiate
exclusively with Hope for a period of 90 days from the date of execution of
the revised IOI by Territorial. The parties negotiated the terms of the
revised IOI.
On January 3, 2024, the Territorial Board of Directors met to review the terms
of the revised IOI, with representatives of KBW and Luse Gormanin attendance
at the meeting. The board reviewed with a representative of KBW financial
information regarding the potential transaction based on the revised IOI,
discussed the current interest rate environment, and considered the financial
andregulatory prospects of remaining independent. The Territorial Board of
Directors also reviewed detailed financial and market information about Hope.
Following these discussions, the Territorial Board of Directors authorized Mr.
Kitagawa to enterinto the revised IOI with Hope. On January 3, 2024, Mr.
Kitagawa executed the revised IOI, including an agreement to negotiate
exclusively with Hope for a period of 75 days.
Over the following weeks, Hope conducted due diligence on Territorial and
Territorial conducted reverse due diligence on Hope.
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At a regular board meeting held January 26, 2024, the Territorial Board of
Directorsreviewed projected operating results for Territorial over a five-year
period and discussed management's expectations of experiencing operating
losses for 2024, 2025 and 2026, primarily due to the impact of the increase in
market interest rateson the loan portfolio and overall business operations. A
representative of KBW joined the meeting and updated the Territorial Board of
Directors on the status of the transaction.
On February 5, 2024, Hope's legal counsel distributed an initial draft of the
Merger Agreement to Luse Gorman. Between February 5, 2024,and April 26, 2024,
multiple drafts of the Merger Agreement were exchanged, and representatives of
Hope's legal counsel and representatives of Territorial's legal counsel
participated in calls to discuss and negotiate various matters,including the
Merger Agreement and other ancillary agreements and documents.
On February 26, 2024, the Territorial Board of Directorsheld a special meeting
that was attended by Mr. Kim, as well as Hope's Chief Financial Officer,
Julianna Balicka, and representatives of KBW. Mr. Kim and Ms. Balicka provided
additional information about Hope's operations and operatingresults, and
answered questions posed by the Territorial directors.
As the initial 75-day exclusivity period was nearing its expirationdate, on
March 7, 2024, the Territorial Board of Directors voted to extend the
exclusivity period to April 30, 2024, and authorized senior management to
execute an agreement with respect to such extension so that the parties could
continue withtheir due diligence on each other and assess any integration
issues related to the combination of the parties' operations and staff. The
Territorial Board of Directors also discussed ongoing due diligence activity.
On March 7, 2024, the parties agreed to the extension of the exclusivity period.
At a regular board meeting held April 3, 2024, a representative of KBW joined
the meeting and updated the Territorial Board of Directors onthe status of the
transaction.
On April 17, 2024, following continued due diligence and refined pricing
analysis by Hope, Hope'sfinancial advisor informed representatives of KBW of
Hope's proposed revised exchange ratio of 0.8048 shares of Hope common stock
for each share of Territorial common stock, reflecting an implied offer price
of $8.27 for each share ofTerritorial common stock as of that date.
On April 18, 2024, the Territorial Board of Directors held a special meeting,
withrepresentatives of KBW and Luse Gorman in attendance, to discuss the
then-current status of the Merger Agreement negotiations. The Territorial
Board of Directors reviewed the terms of the transaction based on the revised
proposed exchange ratio, aswell as history of the changes in the exchange
ratio and resulting pricing, and again considered its prospects on a
standalone basis. The Territorial Board of Directors received a report on the
reverse due diligence conducted on Hope. Legal counselreviewed the most recent
draft of the Merger Agreement and, together with management, updated the
Territorial Board of Directors on terms that were still under negotiation.
The Territorial Board of Directors met on April 26, 2024, with representatives
of KBW and legal counsel in attendance, to review the finalMerger Agreement
and ancillary documents, and to consider the approval of the Merger Agreement
and the transactions contemplated by it. Before the meeting, the Territorial
Board of Directors had been provided the proposed Merger Agreement and
afinancial presentation prepared by KBW. The board reviewed in detail the
pricing and other financial terms of the proposed Merger Agreement. Legal
counsel again discussed the board's fiduciary duties in connection with the
proposed transaction.At this meeting, KBW reviewed the financial aspects of
the proposed merger and rendered to the Territorial board an opinion to the
effect that, as of such date and subject to the procedures followed,
assumptions made, matters considered, andqualifications and limitations on the
review undertaken by KBW as set forth in its opinion, the exchange ratio in
the proposed merger was fair, from a financial point of view, to the holders
of Territorial common stock. All questions posed by thedirectors were answered
by management, representatives of KBW or legal counsel, as
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appropriate. Legal counsel also discussed the proposed resolutions regarding
the proposed merger that the independent members of the board (all directors
except for Mr. Kitagawa) would berequested to approve, as well as the proposed
resolutions regarding the proposed merger that the full board would be
requested to approve. After further discussion, the independent members of the
Territorial Board of Directors voted unanimously toapprove the Merger
Agreement with Hope in substantially the form presented and voted unanimously
to approve the executive compensation arrangements of senior officers,
including Mr. Kitagawa. Following this vote, and after considering the
proposedMerger Agreement, and ancillary documents, and taking into
consideration the matters discussed at the meeting and at prior meetings of
the Territorial Board of Directors, the Territorial Board of Directors voted
unanimously to approve the MergerAgreement in substantially the form
presented, to recommend that Territorial stockholders vote to approve the
Merger Agreement and the merger, and to authorize management, with the
assistance of counsel, to finalize and execute the Merger Agreementand all
related documents.
On April 26, 2024, Territorial and Hope executed the Merger Agreement and, on
April 29, 2024, before theopening of the stock markets, issued a joint press
release to publicly announce the execution of the Merger Agreement.
Territorial's Reasons for the Merger; Recommendation of the Territorial Board
of Directors
After careful consideration, the Territorial Board of Directors, at a special
meeting held on April 26, 2024, unanimously(i) determined that the Merger
Agreement and the transactions contemplated thereby, including the Merger, are
advisable and in the best interests of Territorial and its stockholders, (ii)
approved and adopted the Merger Agreement, and(iii) authorized and approved
the execution, delivery and performance of the Merger Agreement and the
consummation of the transactions contemplated thereby, including the Merger.
Accordingly, the Territorial Board of Directors unanimouslyrecommends that
Territorial stockholders vote "FOR" the Merger proposal, "FOR" the
Compensation Proposal, and "FOR" the Adjournment Proposal.
In reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby, including the Merger, and to recommendthat Territorial
stockholders approve the Merger Agreement, the Territorial Board of Directors
evaluated the Merger Agreement, the Merger and the other transactions
contemplated by the Merger Agreement in consultation with Territorial'smanagemen
t, as well as with Territorial's financial and legal advisors, and considered
a number of factors, including the following:
. each of Territorial's and Hope's respective business, operations, financial
condition, stockperformance, asset quality, earnings, markets and prospects;
. the strategic rationale for the Merger;
. Territorial's and Hope's respective strategic outlooks and corporate cultures;
. the ability of the combined company to have greater scale that may enable it to attract additional customers andemployees
and have the ability to invest and spread increasing costs more effectively in technology, risk and compliance;
. its view that the combined company will have the scale, resources and capabilities to drive technology andinfrastructure
investments to enhance the customer experience by leveraging the strengths of both Territorial and Hope;
. the expectation of the Territorial Board of Directors that the combined company
will have a strong capitalposition upon completion of the transaction;
. the fact that Territorial stockholders will become stockholders of Hope and will continue
to shareproportionately in the business successes of the legacy Territorial business;
. its knowledge of the current and prospective environment in the financial services industry in general,
includingeconomic conditions and the interest rate and regulatory environments, increased operating
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costs resulting from regulatory and compliance
mandates, increasing competition from both banks
and non-bank financial
and financial technologyfirms, current financial market conditions and the likely effects of these factors on
Territorial's and the combined company's potential growth, development, productivity and strategic options;
. its view with respect to other strategic alternatives potentially available to Territorial, including continuingas
a stand-alone company, engaging in a strategic combination with another party or a sale to a potential
acquirer, and its belief as to the availability of these alternatives and that any such available alternatives
would not deliver the financialand operational benefits that could be achieved in the proposed Merger with Hope;
. its view that the cost savings and synergies created by the Merger create material
value for the Territorialshareholders and enable reinvestment of additional capital;
. the fact that both Territorial and Hope have similar commitments to their respective customers and communities;
. its belief that the two companies' corporate cultures and business
philosophies are complementary andcompatible, and its belief that
the complementary cultures will facilitate the successful integration
of the two companies and implementation of the transaction;
. its review and discussions concerning the due diligence examination of the operations, financial
condition,credit quality, earnings, risk management and regulatory compliance programs and prospects of Hope;
. the expectation that the requisite regulatory approvals could be obtained in a timely fashion;
. the benefits and opportunities Hope will bring to the combined company;
. the expectation that the transaction will be
generally tax-free for
United States federal income tax purposes to Territorial stockholders;
. the fact that the exchange ratio would be fixed, with no adjustment in the Merger consideration to be received
byTerritorial stockholders as a result of possible increases or decreases in the trading price of Territorial
or Hope stock following the announcement of the Merger, which the Territorial Board of Directors believed was
consistent with market practicefor transactions of this type and with the strategic purpose of the transaction;
. the premium to Territorial stockholders based on the fixed exchange
ratio and the relative prices of thecompanies' stock at the
time of the Merger announcement that affords Territorial stockholders
a share of the anticipated transaction synergies at closing;
. the greater market capitalization of the combined organization and trading volume and liquidity of Hope commonstock in the event
Territorial stockholders desire to sell the shares of Hope common stock to be received by them upon completion of the Merger;
. the fact that Territorial stockholders will have an opportunity to vote on the approval of the Merger Agreementand the Merger;
. the opinion, dated April 26, 2024, of KBW to the Territorial Board of
Directors as to the fairness, from afinancial point of view and as of the
date of the opinion, to the holders of Territorial common stock of the
exchange ratio in the proposed Merger, as more fully described below under "
--Opinion of Territorial's
FinancialAdvisor
";
. the terms of the Merger Agreement, which Territorial reviewed with its legal advisor, including
therepresentations, warranties, covenants, deal protection and termination provisions contained therein;
. the analyses presented by Luse Gorman, PC as to the structure of the Merger, the
Merger Agreement, the fiduciaryand legal obligations applicable to directors when
considering a sale or Merger of a company, and the process that Territorial
(including the Territorial Board of Directors) employed in considering the Merger;
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. under the terms of the Merger Agreement, the ability of the Territorial
Board of Directors, in response to anunsolicited third-party proposal
or an intervening event, to withdraw its recommendation to the
Territorial stockholders if it concludes in good faith (after receiving
the advice of its outside counsel, and with respect to financial
matters, itsfinancial advisor) that making or continuing to make its
recommendation to the Territorial stockholders would more likely than
not result in a violation of its fiduciary duties under applicable law;
. the effects of the Merger on Territorial's employees, including the prospects for continued
employment andthe severance and other benefits agreed to be provided by Hope; and
. the impact of the Merger on depositors, customers and communities served by Territorial and the expectation thatthe
combined entity will continue to provide quality service to the communities and customers currently served by Territorial.
The Territorial Board of Directors also considered the potential risks related
to the transaction, but concluded that the anticipated benefitsof combining
with Hope were likely to outweigh these risks. These potential risks include,
among others:
. the possibility that the anticipated benefits of the transaction will not be realized when
expected or at all,including as a result of the impact of, or difficulties arising from, the
integration of the two companies or as a result of the strength of the economy, general market
conditions and competitive factors in the areas where Territorial and Hopeoperate businesses;
. the possible diversion of management attention and resources from other strategic opportunities and
operationalmatters while working to implement the transaction and integrate the two companies;
. the risk of losing key employees during the pendency of the Merger and thereafter;
. the restrictions on the conduct of Territorial's business during the period between execution
of the MergerAgreement and the consummation of the Merger, which could potentially delay or
prevent Territorial from undertaking business opportunities that might arise or certain other
actions it might otherwise take with respect to its operations absent thependency of the Merger;
. the potential effect of the Merger on Territorial's overall business, including
its relationships withcustomers, employees, suppliers and regulators;
. the fact that Territorial stockholders would not be entitled to appraisal or dissenters' rights inconnection with the Merger;
. the possibility of encountering difficulties in achieving anticipated cost savings and
synergies in the amountscurrently estimated or within the time frame currently contemplated;
. certain anticipated Merger-related costs, which could also be higher than expected;
. the regulatory and other approvals required in connection with the Merger and the Bank Merger and the
risk thatsuch regulatory approvals will not be received or will not be received in a timely manner
or may impose burdensome or unacceptable conditions that may adversely affect the anticipated operations,
synergies and financial results of the combinedcompany following the completion of the Merger;
. the fact that the Merger Agreement contains certain restrictions on the ability
of Territorial to solicitproposals for alternative transactions or engage
in discussions regarding such proposals, including the requirement for Territorial
to pay Hope a termination fee of $3,000,000 in certain circumstances;
. the fact that the exchange ratio is fixed, which could result in a decrease in the value of the
mergerconsideration in the event of a decrease in the trading price of Hope's common stock;
. the potential for legal claims challenging the Merger;
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. the risk that the Merger may not be completed despite the combined efforts of Territorial and Hope or thatcompletion
may be unduly delayed, including as a result of delays in obtaining the requisite regulatory approvals; and
. the other risks described under the sections entitled "Cautionary Statement Regarding
Forward-LookingStatements" and "Risk Factors" beginning on pages 19 and 21, respectively.
The foregoing discussion ofthe information, risks and factors considered by
the Territorial Board of Directors is not intended to be exhaustive but
includes the material factors and risks considered by the Territorial Board of
Directors. In reaching its decision to approvethe Merger Agreement and the
transactions contemplated thereby, including the Merger, the Territorial Board
of Directors did not quantify or assign any relative weights to the factors
considered, and individual directors may have given differentweights to
different factors. The Territorial Board of Directors considered all these
factors as a whole in evaluating the Merger Agreement and the transactions
contemplated thereby, including the Merger.
For the reasons set forth above, the Territorial Board of Directors determined
that the Merger Agreement and the transactions contemplated bythe Merger
Agreement are advisable, fair to and in the best interests of Territorial and
its shareholders, and approved the Merger Agreement and the transactions
contemplated thereby, including the Merger.
In considering the recommendation of the Territorial Board of Directors, you
should be aware that certain directors and executive officers ofTerritorial
may have interests in the Merger that are different from, or in addition to,
interests of stockholders of Territorial generally and may create potential
conflicts of interest. The Territorial Board of Directors was aware of
theseinterests and considered them when evaluating and negotiating the Merger
Agreement and the transactions contemplated thereby, including the Merger, and
in recommending to Territorial stockholders that they vote in favor of the
Territorial Mergerproposal. See "
--Interests of Territorial's Directors and Executive Officers in the Merger
" beginning on page 88.
For the reasons set forth above, the Territorial Board of Directors
unanimously recommends that the Territorial stockholders vote"FOR" the Merger
Proposal and "FOR" the other proposals to be considered at the Territorial
special meeting.
Opinion of Territorial's Financial Advisor
Territorial engaged KBW to render financial advisory and investment
bankingservices to Territorial, including an opinion to the Territorial Board
of Directors as to the fairness, from a financial point of view, to the common
stockholders of Territorial of the Exchange Ratio in the proposed Merger.
Territorial selected KBWbecause KBW is a nationally recognized investment
banking firm with substantial experience in transactions similar to the
Merger. As part of its investment banking business, KBW is continually engaged
in the valuation of financial servicesbusinesses and their securities in
connection with mergers and acquisitions.
As part of its engagement, representatives of KBW attendedthe meeting of the
Territorial Board of Directors held on April 26, 2024, at which the
Territorial Board of Directors evaluated the proposed Merger. At this meeting,
KBW reviewed the financial aspects of the proposed Merger and rendered to
theTerritorial board an opinion to the effect that, as of such date and
subject to the procedures followed, assumptions made, matters considered, and
qualifications and limitations on the review undertaken by KBW as set forth in
its opinion, theExchange Ratio in the proposed Merger was fair, from a
financial point of view, to the holders of Territorial common stock. The
Territorial Board of Directors approved the Merger Agreement at this meeting.
The description of the opinion set forth herein is qualified in its entirety
by reference to the full text of the opinion, which is attachedas
Annex C
to this proxy statement/prospectus and is incorporated herein by reference,
and describes the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by KBW inpreparing
the opinion.
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KBW's opinion speaks only as of the date of the opinion. The opinion was for
theinformation of, and was directed to, the Territorial Board of Directors (in
its capacity as such) in connection with its consideration of the financial
terms of the Merger. The opinion addressed only the fairness, from a financial
point of view, ofthe Exchange Ratio in the Merger to the holders of
Territorial common stock. It did not address the underlying business decision
of Territorial to engage in the Merger or enter into the Merger Agreement or
constitute a recommendation to theTerritorial Board of Directors in connection
with the Merger, and it does not constitute a recommendation to any holder of
Territorial common stock or any stockholder of any other entity as to how to
vote in connection with the Merger or any othermatter, nor does it constitute
a recommendation regarding whether or not any such stockholder should enter
into a voting, stockholders' or affiliates' agreement with respect to the
Merger or exercise any dissenters' or appraisalrights that may be available to
such stockholder.
KBW's opinion was reviewed and approved by KBW's Fairness OpinionCommittee in
conformity with its policies and procedures established under the requirements
of Rule 5150 of the Financial Industry Regulatory Authority.
In connection with the opinion, KBW reviewed, analyzed and relied upon
material bearing upon the financial and operating condition ofTerritorial and
Hope and bearing upon the Merger, including, among other things:
. a draft of the Merger Agreement dated April 25, 2024 (the most recent draft then made available to KBW);
. the audited financial statements and Annual Reports on Form
10-K
for thethree fiscal years ended December 31, 2023 of Territorial;
. the audited financial statements and Annual Reports on Form
10-K
for thethree fiscal years ended December 31, 2023 of Hope;
. certain regulatory filings of Territorial and Hope and their respective
subsidiaries, including as applicable,the quarterly reports on Form FR
Y-9C
and the quarterly call reports required to be filed (as the case may be) with
respect to each quarter during the three-year period ended December 31, 2023;
. certain other interim reports and other communications of Territorial and Hope to their respective stockholders;and
. other financial information concerning the businesses and operations of Territorial and Hope furnished
to KBW byTerritorial and Hope or that KBW was otherwise directed to use for purposes of KBW's analyses.
KBW'sconsideration of financial information and other factors that it deemed
appropriate under the circumstances or relevant to its analyses included,
among others, the following:
. the historical and current financial position and results of operations of Territorial and Hope;
. the assets and liabilities of Territorial and Hope;
. a comparison of certain financial and stock market information for Territorial and Hope with
similar informationfor certain other companies the securities of which were publicly traded;
. financial and operating forecasts and projections of Territorial that were
prepared by Territorial management,provided to and discussed with KBW
by such management and used and relied upon by KBW at the direction of such
management and with the consent of the Territorial Board of Directors;
. publicly available consensus "street estimates" of Hope, as well as assumed long-term Hope
growth ratesprovided to KBW by Hope management, all of which information was discussed with KBW
by Hope management and used and relied upon by KBW based on such discussions, at the direction
of Territorial management and with the consent of the TerritorialBoard of Directors; and
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. estimates regarding certain pro forma financial effects of the Merger on Hope (including, without limitation,
thecost savings expected to result or be derived from the Merger) that were prepared by Hope management,
provided to and discussed with KBW by such management and used and relied upon by KBW based on such discussions,
at the direction of Territorialmanagement and with the consent of the Territorial Board of Directors.
KBW also performed such other studies andanalyses as it considered appropriate
and took into account its assessment of general economic, market and financial
conditions and its experience in other transactions, as well as its experience
in securities valuation and knowledge of the bankingindustry generally. KBW
also participated in discussions held by the managements of Territorial and
Hope regarding the past and current business operations, regulatory relations,
financial condition and future prospects of their respective companiesand such
other matters as KBW deemed relevant to its inquiry. In addition, KBW
considered the results of the efforts undertaken by Territorial, with KBW's
assistance, to solicit indications of interest from third parties regarding a
potentialtransaction with Territorial.
In conducting its review and arriving at its opinion, KBW relied upon and
assumed the accuracy andcompleteness of all of the financial and other
information that was provided to or discussed with it or that was publicly
available and KBW did not independently verify the accuracy or completeness of
any such information or assume anyresponsibility or liability for such
verification, accuracy or completeness. KBW relied upon the management of
Territorial as to the reasonableness and achievability of the financial and
operating forecasts and projections of Territorial referred toabove (and the
assumptions and bases therefor), and KBW assumed that such forecasts and
projections represented the best currently available estimates and judgments
of such management and that such forecasts and projections would be realized
in theamounts and in the time periods estimated by such management. KBW
further relied, with the consent of Territorial, upon Hope management as to
the reasonableness and achievability of the publicly available consensus
"street estimates" ofHope, the assumed long-term Hope growth rates, and the
estimates regarding certain pro forma financial effects of the Merger on Hope
(including, without limitation, the cost savings expected to result or be
derived from the Merger), all as referredto above (and the assumptions and
bases for all such information), and KBW assumed that all such information
represented, or in the case of the Hope "street estimates" referred to above
that such estimates were consistent with, the bestcurrently available
estimates and judgments of Hope management and that the forecasts, projections
and estimates reflected in such information would be realized in the amounts
and in the time periods estimated.
It is understood that the portion of the foregoing financial information of
Territorial and Hope that was provided to KBW was not preparedwith the
expectation of public disclosure and that all of the foregoing financial
information, including the publicly available consensus "street estimates" of
Hope referred to above, was based on numerous variables and assumptions
thatare inherently uncertain (including, without limitation, factors related
to general economic and competitive conditions and, in particular, the
widespread disruption, extraordinary uncertainty and unusual volatility
arising from global tensions andpolitical unrest, economic uncertainty,
inflation, rising interest rates, the
COVID-19
pandemic and, in the case of the banking industry, recent actual or threatened
regional bank failures, including theeffect of evolving governmental
interventions and
non-interventions)
and, accordingly, actual results could vary significantly from those set forth
in such information. KBW assumed, based on discussions withthe respective
managements of Territorial and Hope and with the consent of the Territorial
Board of Directors, that all such information provided a reasonable basis upon
which KBW could form its opinion and KBW expressed no view as to any
suchinformation or the assumptions or bases therefor. KBW relied on all such
information without independent verification or analysis and did not in any
respect assume any responsibility or liability for the accuracy or
completeness thereof.
KBW also assumed that there were no material changes in the assets,
liabilities, financial condition, results of operations, business orprospects
of either Territorial or Hope since the date of the last financial statements
of each such entity that were made available to KBW. KBW is not an expert in
the independent verification of the adequacy of allowances for loan and lease
lossesand KBW assumed, without independent verification and with
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Territorial's consent, that the aggregate allowances for loan and lease losses
for each of Territorial and Hope are adequate to cover such losses. In
rendering its opinion, KBW did not makeor obtain any evaluations or appraisals
or physical inspection of the property, assets or liabilities (contingent or
otherwise) of Territorial or Hope, the collateral securing any of such assets
or liabilities, or the collectability of any suchassets, nor did KBW examine
any individual loan or credit files, nor did it evaluate the solvency,
financial capability or fair value of Territorial or Hope under any state or
federal laws, including those relating to bankruptcy, insolvency or
othermatters. KBW made note of the classification by each of Territorial and
Hope of its loans and owned securities as either held to maturity or held for
investment, on the one hand, or held for sale or available for sale, on the
other hand, and alsoreviewed reported fair value
marks-to-market
and other reported valuation information, if any, relating to such loans or
owned securities contained in the respectivefinancial statements of
Territorial and Hope, but KBW expressed no view as to any such matters.
Estimates of values of companies and assets do not purport to be appraisals or
necessarily reflect the prices at which companies or assets may actuallybe
sold. Such estimates are inherently subject to uncertainty and should not be
taken as KBW's view of the actual value of any companies or assets.
KBW assumed, in all respects material to its analyses:
. that the Merger and any related transactions (including, without limitation, the Bank Merger) would be completedsubstantially
in accordance with the terms set forth in the Merger Agreement (the final terms of which KBW assumed would
not differ in any respect material to KBW's analyses from the draft reviewed by KBW and referred to above), with
noadjustments to the Exchange Ratio and with no other consideration or payments in respect of Territorial common stock;
. that the representations and warranties of each party in the Merger Agreement and in all
related documents andinstruments referred to in the Merger Agreement were true and correct;
. that each party to the Merger Agreement and all related documents would perform all of
the covenants andagreements required to be performed by such party under such documents;
. that there were no factors that would delay or subject to any adverse conditions, any necessary
regulatory orgovernmental approval for the Merger or any related transactions and that all
conditions to the completion of the Merger and any related transactions would be satisfied
without any waivers or modifications to the Merger Agreement or any of therelated documents; and
. that in the course of obtaining the necessary regulatory, contractual, or
other consents or approvals for theMerger and any related transactions,
no restrictions, including any divestiture requirements, termination
or other payments or amendments or modifications, would be imposed
that would have a material adverse effect on the future results ofoperations
or financial condition of Territorial, Hope or the pro forma entity,
or the contemplated benefits of the Merger, including without limitation
the cost savings expected to result or be derived from the Merger.
KBW assumed that the Merger would be consummated in a manner that complies
with the applicable provisions of the Securities Act of 1933, asamended, the
Securities Exchange Act of 1934, as amended, and all other applicable federal
and state statutes, rules and regulations. KBW was further advised by
representatives of Territorial that Territorial relied upon advice from its
advisors(other than KBW) or other appropriate sources as to all legal,
financial reporting, tax, accounting and regulatory matters with respect to
Territorial, Hope, the Merger and any related transaction, and the Merger
Agreement. KBW did not provideadvice with respect to any such matters.
KBW's opinion addressed only the fairness, from a financial point of view, as
of the dateof the opinion, of the Exchange Ratio in the Merger to the holders
of Territorial common stock. KBW expressed no view or opinion as to any other
terms or aspects of the Merger or any term or aspect of any related
transactions (including the BankMerger and the actions relating to The
Territorial Savings Bank Amended and Restated Employee Stock Ownership Plan to
be taken in connection with the Merger), including without limitation, the
form or
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structure of the Merger or any such related transaction, any consequences of
the Merger or any such related transaction to Territorial, its stockholders,
creditors or otherwise, or any terms,aspects, merits or implications of any
employment, consulting, retention, voting, support, stockholder or other
agreements, arrangements or understandings contemplated or entered into in
connection with the Merger or otherwise. KBW's opinionwas necessarily based
upon conditions as they existed and could be evaluated on the date of such
opinion and the information made available to KBW through the date of such
opinion. There is currently significant volatility in the stock and
otherfinancial markets arising from global tensions and political unrest,
economic uncertainty, inflation, rising interest rates, the
COVID-19
pandemic and, in the case of the banking industry, recent actual orthreatened
regional bank failures, including the effect of evolving governmental
interventions and
non-interventions.
Developments subsequent to the date of KBW's opinion may have affected, and
mayaffect, the conclusion reached in KBW's opinion and KBW did not and does
not have an obligation to update, revise or reaffirm its opinion. KBW's
opinion did not address, and KBW expressed no view or opinion with respect to:
. the underlying business decision of Territorial to engage in the Merger or enter into the Merger Agreement;
. the relative merits of the Merger as compared to any strategic alternatives that are, have been
or may beavailable to or contemplated by Territorial or the Territorial Board of Directors;
. the fairness of the amount or nature of any compensation to any of Territorial's officers, directors oremployees,
or any class of such persons, relative to the compensation to the holders of Territorial common stock;
. the effect of the Merger or any related transaction on, or the
fairness of the consideration to be received by,holders of any
class of securities of Territorial (other than the holders of
Territorial common stock, solely with respect to the Exchange Ratio
as described in KBW's opinion and not relative to the consideration
to be received by holders ofany other class of securities)
or holders of any class of securities of Hope or any other
party to any transaction contemplated by the Merger Agreement;
. the actual value of Hope common stock to be issued in the Merger;
. the prices, trading range or volume at which Territorial common stock
or Hope common stock would trade followingthe public announcement
of the Merger or the prices, trading range or volume at which Hope
common stock would trade following the consummation of the Merger;
. any advice or opinions provided by any other advisor to any of the parties to
the Merger or any other transactioncontemplated by the Merger Agreement; or
. any legal, regulatory, accounting, tax or similar matters relating to
Territorial, Hope, their respectivestockholders, or relating to or arising out
of or as a consequence of the Merger or any related transactions (including
the Bank Merger), including whether or not the Merger would qualify as a
tax-free
reorganization for United States
federal income tax purposes.
In performing its analyses, KBW made numerous assumptionswith respect to
industry performance, general business, economic, market and financial
conditions and other matters, which are beyond the control of KBW, Territorial
and Hope. Any estimates contained in the analyses performed by KBW are
notnecessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses.
Additionally, estimates of the value of businesses or securities do not
purport to be appraisals or toreflect the prices at which such businesses or
securities might actually be sold. Accordingly, these analyses and estimates
are inherently subject to substantial uncertainty. In addition, KBW's opinion
was among several factors taken intoconsideration by the Territorial Board of
Directors in making its determination to approve the Merger Agreement and the
Merger. Consequently, the analyses described below should not be viewed as
determinative of the decision of the Territorial Boardof Directors with
respect to the fairness of the Exchange Ratio. The type and amount of
consideration payable in the Merger were determined through negotiation
between Territorial and Hope and the decision of Territorial to enter into the
MergerAgreement was solely that of the Territorial Board of Directors.
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The following is a summary of the material financial analyses presented by KBW
to theTerritorial Board of Directors in connection with its opinion. The
summary is not a complete description of the financial analyses underlying the
opinion or the presentation made by KBW to the Territorial Board of Directors,
but summarizes thematerial analyses performed and presented in connection with
such opinion. The financial analyses summarized below include information
presented in tabular format. The tables alone do not constitute a complete
description of the financial analyses.The preparation of a fairness opinion is
a complex analytic process involving various determinations as to appropriate
and relevant methods of financial analysis and the application of those
methods to the particular circumstances. Therefore, afairness opinion is not
readily susceptible to partial analysis or summary description. In arriving at
its opinion, KBW did not attribute any particular weight to any analysis or
factor that it considered, but rather made qualitative judgments as tothe
significance and relevance of each analysis and factor. Accordingly, KBW
believes that its analyses and the summary of its analyses must be considered
as a whole and that selecting portions of its analyses and factors or focusing
on theinformation presented below in tabular format, without considering all
analyses and factors or the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleadingor incomplete view of the process underlying its
analyses and opinion.
Implied Transaction Multiples for the Proposed Merger
Utilizing an implied transaction value for the proposed Merger of $8.91 per
outstanding share of Territorial common stock, orapproximately $79.4 million
in the aggregate (inclusive of the implied value of unvested Territorial
restricted stock units), based on the 0.8048x Exchange Ratio in the proposed
Merger and the closing price of Hope common stock onApril 24, 2024, KBW
reviewed with the Territorial Board of Directors implied transaction multiples
for the proposed Merger, including, among others, the following, which were
based on publicly available earnings per share (which we refer to as"EPS")
consensus "street estimates" of Territorial, financial forecasts and
projections of Territorial provided by Territorial management and historical
financial information of Territorial as of December 31, 2023:
Implied Transaction Price / 2024 EPSEstimate 57.5x /NM (2)
(1)
Implied Transaction Price / 2025 EPSEstimate 18.0x /NM (2)
(1)
Implied Transaction Price / December 31, 2023 Tangible Book Value per Share 0.31x
Implied Transaction Price / December 31, 2023 Adjusted Tangible Book Value per Share 4.75x
(3)
(1) First multiples based on consensus "street" estimates of Territorial and second multiples based
onfinancial forecasts and projections of Territorial provided by Territorial management.
(2) Omitted as not meaningful ("NM") because less than 0.0x.
(3) Adjusted Tangible Book Value per Share calculated by subtracting the total
after-tax
interest rate fair value marks on loans, held to maturity securities and deposits.
Territorial Selected Companies Analysis
Using publicly available information, KBW compared the financial performance,
financial condition and market performance of Territorial to 15selected major
exchange-traded banks and thrifts headquartered in the Western region of the
United States with total assets between $1.5 billion and $4.0 billion. Merger
targets and mutual holding companies were excluded from the selectedcompanies.
The selected companies were as follows (shown in descending order of total
assets by column):
Bank of Marin Bancorp First Northwest Bancorp
Coastal Financial Corporation OP Bancorp
Sierra Bancorp Eagle Bancorp Montana, Inc.
Five Star Bancorp Timberland Bancorp, Inc.
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FS Bancorp, Inc. Oak Valley Bancorp
Northrim BanCorp, Inc. Plumas Bancorp
PCB Bancorp Riverview Bancorp, Inc.
BayCom Corp
To perform this analysis, KBW used profitability and other financial
information for the most recent completedfiscal quarter (which we refer to as
"MRQ") or latest 12 months (which we refer to as "LTM") available (which, in
all cases, were the periods ended December 31, 2023) or as of the end of such
periods and market priceinformation as of April 24, 2024. In addition, KBW
used 2024 and 2025 EPS estimates taken from financial forecasts and
projections of Territorial provided by Territorial management and publicly
available consensus "street estimates"for the selected companies to the extent
publicly available (2024 consensus "street" estimates were not publicly
available for two of the selected companies and 2025 consensus "street"
estimates were not publicly available forthree of the selected companies).
Where consolidated holding company level financial data for the selected
companies was unreported, subsidiary bank level data was utilized to calculate
ratios (subsidiary bank level data necessary to calculateCommon Equity Tier 1
Ratio and Total Capital Ratio was also not then publicly available for one of
the selected companies). Certain financial data presented in the tables below
may not correspond to the data presented in Territorial'shistorical financial
statements as a result of the different periods, assumptions and methods used
to compute the financial data presented.
KBW's analysis showed the following concerning the financial performance of
Territorial and the selected companies:
Selected Companies
Territorial Average Median 25 75
th th
Percentile Percentile
MRQ Core Return on Average Assets 0.06 % 0.92 % 0.89 % 0.57 % 1.27 %
(1)
MRQ Core Return on Average Tangible CommonEquity 0.5 % 11.3 % 11.0 % 8.5 % 14.1 %
(1)
MRQ Net Interest Margin 1.78 % 3.73 % 3.43 % 3.17 % 4.15 %
MRQ Fee Income / Revenue 6.0 % 17.2 % 14.9 % 10.0 % 19.6 %
(2)
MRQ Efficiency Ratio 94.6 % 63.4 % 59.7 % 71.3 % 54.8 %
(1) Based on core net income after taxes and before extraordinary
items, less net income attributable tononcontrolling interest, gain
on the sale of held to maturity and available for sale securities,
amortization of intangibles, goodwill and nonrecurring items.
(2) Excluded gains/losses on sale of securities.
KBW's analysis also showed the following concerning the financial condition of
Territorial and, to the extent publicly available, theselected companies:
Selected Companies
Territorial Average Median 25 75
th th
Percentile Percentile
Tangible Common Equity / Tangible Assets 11.23 % 8.74 % 8.39 % 7.91 % 9.34 %
CET1 Ratio 28.3 % 12.9 % 12.8 % 10.6 % 15.2 %
Total Capital Ratio 28.9 % 15.2 % 14.5 % 13.7 % 16.8 %
Loans / Deposits 80.0 % 85.1 % 90.1 % 73.9 % 97.1 %
Loan Loss Reserves / Loans 0.39 % 1.36 % 1.18 % 1.11 % 1.26 %
Nonperforming Assets / Loans + OREO 0.17 % 0.37 % 0.34 % 0.50 % 0.25 %
MRQ Net Charge-offs / Average Loans 0.01 % 0.48 % 0.04 % 0.10 % 0.00 %
In addition, KBW's analysis showed the following concerning the market
performance of Territorial and, tothe extent publicly available, the selected
companies (excluding the impact of the adjusted tangible book value
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per share multiple of one of the selected companies, which multiple was
considered not meaningful because it was less than 0.0x, and the impact of the
dividend payout ratio of one of the selectedcompanies, which was ratio was
considered not meaningful because it was greater than 100%):
Selected Companies
Territorial Average Median 25 75
th th
Percentile Percentile
One-Year (59.2 %) 3.3 % 3.2 % (7.3 %) 14.4 %
Stock Price Change
One-Year (56.9 %) 7.1 % 8.8 % (5.2 %) 19.2 %
Stock Total Return
Year-to-Date (34.8 %) (17.7 %) (16.2 %) (18.2 %) (14.9 %)
StockPrice Change
Price / Tangible Book Value per Share 0.26x 1.02x 0.96x 0.76x 1.23x
Price / Adj. Tangible Book Value perShare 3.88x 1.59x 1.60x 1.26x 1.90x
(1)
Price / 2024 EPS Estimate NM (2) 12.1x 10.2x 9.0x 12.8x
Price / 2025 EPS Estimate NM (2) 8.4x 8.5x 7.4x 9.2x
Dividend Yield 2.8 % 3.7 % 3.6 % 2.8 % 4.9 %
LTM Dividend Payout Ratio 35.1 % 33.4 % 30.7 % 21.8 % 42.3 %
(1) Adjusted Tangible Book Value per Share calculated by subtracting the total
after-tax
interest rate fair value marks on loans, held to maturity securities and deposits.
(2) Omitted as not meaningful ("NM") because less than 0.0x.
No company used as a comparison in the above selected companies analysis is
identical to Territorial Accordingly, an analysis of these resultsis not
mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies involved.
Hope Selected Companies Analysis
Using publicly available information, KBW compared the financial performance,
financial condition and market performance of Hope to 21 selectedmajor
exchange-traded banks and thrifts headquartered in the Western region of the
United States with total assets between $5 billion and $50 billion. Merger
targets and mutual holding companies were excluded from the selected companies.
The selected companies were as follows (shown in descending order of total
assets by column):
Banc of California, Inc. Banner Corporation
First Interstate BancSystem, Inc. National Bank Holdings Corporation
Glacier Bancorp, Inc. TriCo Bancshares
First Hawaiian, Inc. LendingClub Corporation
Bank of Hawaii Corporation Central Pacific Financial Corp.
Cathay General Bancorp Hanmi Financial Corporation
WaFd, Inc Heritage Financial Corporation
Axos Financial, Inc. Preferred Bank
Heartland Financial USA, Inc. Westamerica Bancorporation
Pacific Premier Bancorp, Inc. Heritage Commerce Corp
CVB Financial Corp.
To perform this analysis, KBW used profitability and other financial
information for the most recent completedfiscal quarter or latest 12 months
available (which, in all cases, were the periods ended December 31, 2023) or
as of the end of such periods and market price information as of April 24,
2024. In addition, KBW used 2024 and 2025 EPSestimates taken from publicly
available consensus "street estimates" for Hope and the selected companies to
the extent publicly available (2025 consensus "street" estimates were not
publicly available for one of the selectedcompanies). Where consolidated
holding company level financial data for the selected companies was
unreported, subsidiary bank level data was utilized to calculate ratios.
Certain financial
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data presented in the tables below may not correspond to the data presented in
Hope's historical financial statements as a result of the different periods,
assumptions and methods used tocompute the financial data presented.
KBW's analysis showed the following concerning the financial performance of
Hope and theselected companies:
Selected Companies
Hope Average Median 25 75
th th
Percentile Percentile
MRQ Core Return on Average Assets 0.79 % 1.09 % 1.04 % 0.83 % 1.35 %
(1)
MRQ Core Return on Average Tangible CommonEquity 9.8 % 13.3 % 14.5 % 11.3 % 17.1 %
(1)
MRQ Net Interest Margin 2.72 % 3.46 % 3.31 % 2.92 % 3.86 %
MRQ Fee Income / Revenue 6.8 % 14.4 % 13.7 % 11.2 % 16.7 %
(2)
MRQ Efficiency Ratio 61.9 % 58.2 % 58.8 % 61.9 % 55.6 %
(1) Based on core net income after taxes and before extraordinary
items, less net income attributable tononcontrolling interest, gain
on the sale of held to maturity and available for sale securities,
amortization of intangibles, goodwill and nonrecurring items.
(2) Excluded gains/losses on sale of securities.
KBW's analysis also showed the following concerning the financial condition of
Hope and the selected companies:
Selected Companies
Hope Average Median 25 75
th th
Percentile Percentile
Tangible Common Equity / Tangible Assets 8.85 % 8.54 % 8.77 % 6.85 % 9.89 %
CET1 Ratio 12.3 % 12.7 % 12.0 % 11.3 % 12.9 %
Total Capital Ratio 13.9 % 15.1 % 14.6 % 13.8 % 15.5 %
Loans / Deposits 93.9 % 81.2 % 81.3 % 76.5 % 92.2 %
Loan Loss Reserves / Loans 1.15 % 1.46 % 1.19 % 1.09 % 1.43 %
Nonperforming Assets / Loans + OREO 0.33 % 0.36 % 0.25 % 0.50 % 0.13 %
MRQ Net Charge-offs / Average Loans 0.05 % 0.34 % 0.05 % 0.12 % 0.01 %
In addition, KBW's analysis showed the following concerning the market
performance of Hope and, to theextent publicly available, the selected
companies (excluding the impact of the adjusted tangible book value per share
multiple of one of the selected companies, which multiple was considered not
meaningful because it was less than 0.0x, the impactof the 2024 EPS multiple
of one of the selected companies, which multiple was considered not meaningful
because it was greater than 30.0x, and the impact of the dividend payout
ratios of two of the selected companies, which ratios were considerednot
meaningful because they were greater than 100%):
Selected Companies
Hope Average Median 25 75
th th
Percentile Percentile
One-Year 14.8 % 9.8 % 9.0 % 0.6 % 16.8 %
Stock Price Change
One-Year 21.9 % 14.5 % 12.6 % 4.8 % 21.3 %
Stock Total Return
Year-to-Date (8.4 )% (10.6 )% (13.6 )% (15.7 )% (4.2 )%
StockPrice Change
Price / Tangible Book Value per Share 0.80x 1.35x 1.25x 1.07x 1.56x
Price / Adj. Tangible Book Value perShare 1.02x 1.97x 1.96x 1.47x 2.32x
(1)
Price / 2024 EPS Estimate 10.5x 11.4x 10.7x 9.2x 12.4x
Price / 2025 EPS Estimate 8.5x 10.0x 9.8x 8.5x 10.9x
Dividend Yield 5.1 % 4.1 % 3.8 % 3.5 % 4.9 %
LTM Dividend Payout Ratio 50.5 % 41.7 % 38.2 % 29.0 % 54.5 %
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(1) Adjusted Tangible Book Value per Share calculated by subtracting the total
after-tax
interest rate fair value marks on loans, held to maturity securities and deposits.
No company used as a comparison in the above selected companies analysis is
identical to Hope Accordingly, an analysis of these results is notmathematical.
Rather, it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies
involved.
Relative Contribution Analysis
KBW analyzed the relative standalone contribution of Hope and Territorial to
various pro forma balance sheet and income statement items and thecombined
market capitalization of the combined entity. This analysis did not include
purchase accounting adjustments or cost savings. To perform this analysis, KBW
used (i) balance sheet data for Hope and Territorial as of December 31,2023,
(ii) publicly available consensus "street estimates" of Hope, (iii) financial
forecasts and projections of Territorial provided by Territorial management,
and (iv) market price information as of April 24, 2024. Theresults of KBW's
analysis are set forth in the following table, which also compares the results
of KBW's analysis with the implied pro forma ownership percentages of Hope and
Territorial stockholders in the combined company based on the0.8048x Exchange
Ratio provided for in the Merger Agreement:
Hope Territorial
% of Total % of Total
Ownership at 0.8048x Exchange Ratio:
Pro Forma Ownership 94.4 % 5.6 %
Balance Sheet:
Total Assets 90 % 10 %
Gross Loans Held for Investment 91 % 9 %
Total Deposits 90 % 10 %
Tangible Common Equity 87 % 13 %
Adjusted Tangible Common Equity 99 % 1 %
(1)
Income Statement:
2024 Estimated Net Income 100 % 0 %
2025 Estimated Net Income 100 % 0 %
Market Capitalization:
Pre-Deal 95 % 5 %
Market Capitalization
(1) Calculated by subtracting the total December 31, 2023
after-tax
interest rate fair value marks on loans, held to maturity securities and deposits from tangible common equity.
Financial Impact Analysis
KBW performed a pro forma financial impact analysis that combined projected
income statement and balance sheet information of Hope andTerritorial. Using
(i) closing balance sheet estimates assumed as of December 31, 2024 for Hope
and Territorial taken from publicly available consensus "street estimates" of
Hope and financial forecasts and projections ofTerritorial provided by
Territorial management, (ii) EPS estimates for Hope and Territorial taken from
publicly available consensus "street estimates" of Hope and financial
forecasts and projections of Territorial provided byTerritorial management,
(iii) assumed long-term growth rates for Hope provided by Hope management, and
(iv) pro forma assumptions (including, without limitation, the cost savings
expected to result from the Merger as well as certainpurchase accounting
adjustments and other Merger-related adjustments and restructuring charges
assumed with respect thereto and assumptions relating to the sale of
Territorial's held to maturity and available for sale securities portfoliofollow
ing the Merger) provided by Hope management, KBW analyzed the potential
financial impact of the Merger on certain projected financial results of Hope.
This analysis indicated the Merger could be accretive to Hope's estimated 2025
EPS andestimated 2026
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EPS and could be dilutive to Hope's estimated tangible book value per share at
closing assumed as of December 31, 2024. Furthermore, the analysis indicated
that, pro forma for theMerger, each of Hope's tangible common equity to
tangible assets ratio, Tier 1 Leverage Ratio, Common Equity Tier 1 Ratio, Tier
1 Capital Ratio and Total Risk-based Capital Ratio at closing assumed as of
December 31, 2024 could be lower.For all of the above analysis, the actual
results achieved by Hope following the Merger may vary from the projected
results, and the variations may be material.
Territorial Dividend Discount Model Analysis
KBW performed a dividend discount model analysis of Territorial to estimate a
range for the implied equity value of Territorial. In thisanalysis, KBW used
financial forecasts and projections relating to the earnings and assets of
Territorial provided by Territorial management, and KBW assumed discount rates
ranging from 13.0% to 17.0%. The range of values was derived by adding(i) the
present value of the implied future excess capital available for dividends
that Territorial could generate over the period from December 31, 2024 through
December 31, 2029 as a standalone company, and (ii) the presentvalue of
Territorial's implied terminal value at the end of such period. KBW assumed
that Territorial would maintain a tangible common equity to tangible assets
ratio of 11.00% and would retain sufficient earnings to maintain that level.
Incalculating the terminal value of Territorial, KBW applied a range of 0.3x
to 0.7x Territorial's estimated December 31, 2029 tangible common equity. This
dividend discount model analysis resulted in a range of implied values per
share ofTerritorial common stock of $4.70 to $11.57.
The dividend discount model analysis is a widely used valuation methodology,
but the resultsof such methodology are highly dependent on the assumptions
that must be made, including asset and earnings growth rates, terminal values,
and discount rates. The foregoing dividend discount model analysis did not
purport to be indicative of theactual values or expected values of Territorial.
Hope Dividend Discount Model Analysis
KBW performed a dividend discount model analysis of Hope to estimate a range
for the implied equity value of Hope. In this analysis, KBW usedpublicly
available consensus "street estimates" of Hope and assumed long-term growth
rates for Hope provided by Hope management, and KBW assumed discount rates
ranging from 11.0% to 15.0%. The range of values was derived by adding(i) the
present value of the implied future excess capital available for dividends
that Hope could generate over the period from December 31, 2024 through
December 31, 2029 as a standalone company, and (ii) the present value ofHope's
implied terminal value at the end of such period. KBW assumed that Hope would
maintain a tangible common equity to tangible assets ratio of 9.00% and would
retain sufficient earnings to maintain that level. In calculating the
terminalvalue of Hope, KBW applied a range of 10.0x to 14.0x Hope's estimated
2030 earnings. This dividend discount model analysis resulted in a range of
implied values per share of Hope common stock of $12.19 to $18.45.
The dividend discount model analysis is a widely used valuation methodology,
but the results of such methodology are highly dependent on theassumptions
that must be made, including asset and earnings growth rates, terminal values,
and discount rates. The foregoing dividend discount model analysis did not
purport to be indicative of the actual values or expected values of Hope or
the proforma combined company.
Miscellaneous
KBW acted as financial advisor to Territorial in connection with the proposed
Merger and did not act as an advisor to or agent of any otherperson. As part
of its investment banking business, KBW is continually engaged in the
valuation of bank and bank holding company securities in connection with
acquisitions, negotiated underwritings, secondary distributions of listed and
unlistedsecurities, private placements and valuations for various other
purposes. As specialists in the securities of banking companies, KBW has
experience in, and knowledge of, the valuation of banking enterprises. KBW and
its affiliates, in the ordinarycourse of its and their
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broker-dealer businesses (and further to existing sales and trading
relationships between Territorial and KBW broker-dealer affiliates), may from
time to time purchase securities from, and sellsecurities to, Territorial and
Hope. In addition, as market makers in securities, KBW and its affiliates may
from time to time have a long or short position in, and buy or sell, debt or
equity securities of Territorial or Hope for its and their ownrespective
accounts and for the accounts of its and their respective customers and
clients. KBW employees may also from time to time maintain individual
positions in Territorial. As Territorial was previously informed by KBW, such
positionscurrently include an individual position in shares of Territorial
common stock held by a senior member of the KBW advisory team providing
services to Territorial in connection with the proposed Merger.
Pursuant to the KBW engagement agreement, Territorial agreed to pay KBW a cash
fee equal to 1.50% of the aggregate merger consideration,$150,000 of which
became payable to KBW with the rendering of KBW's opinion and the balance of
which is contingent upon the closing of the Merger. Territorial also agreed to
reimburse KBW for reasonable
out-of-pocket
expenses and disbursements incurred in connection with its retention and to
indemnify KBW against certain liabilities relating to or arising out of KBW's
engagement or KBW's role inconnection therewith. Other than in connection with
the present engagement, in the two years preceding the date of its opinion,
KBW did not provide investment banking or financial advisory services to
Territorial. In the two years preceding the dateof its opinion, KBW did not
provide investment banking or financial advisory services to Hope. KBW may in
the future provide investment banking and financial advisory services to
Territorial or Hope and receive compensation for such services.
Interests of Territorial's Directors and Executive Officers in the Merger
As described below, some of Territorial's directors and executive officers
have interests in the Merger that may be different from, or inaddition to, the
interests of Territorial stockholders generally. The Territorial Board of
Directors was aware of these interests and considered them in approving the
Merger Agreement.
Restricted Stock Unit Awards
Each outstanding Territorial time-based restricted stock unit, including those
held by the directors and executive officers of Territorial,will automatically
vest in full and all restrictions on those restricted stock units shall lapse,
effective as of the effective time of the Merger. In addition, a
pro-rated
portion of each Territorialrestricted stock unit that is subject to
performance-based vesting will automatically vest in an amount equal to the
product of (i) the number of restricted stock units subject to performance-based
award that would have vested based upon actualperformance if the applicable
performance period had ended as of the most recent fiscal quarter of
Territorial preceding the Closing Date or, if actual performance cannot be
determined, the target number of restricted stock units subject to
theperformance-based restricted stock unit, and (ii) a fraction, the numerator
of which is the number of months in the period beginning on the first day of
the applicable performance period and ending on the Closing Date and the
denominator ofwhich is the total number of months in the original applicable
performance period. Each restricted stock unit, or portion thereof, that
vests, whether time-based or performance-based, will be converted into the
right to receive the same mergerconsideration as other holders of Territorial
common stock pursuant to the terms of the Merger Agreement. The following
table sets forth the number of unvested restricted stock unit awards held by
each director, each named executive officer ofTerritorial as of April 26,
2024, the date the Merger Agreement was executed, that would become vested,
assuming target performance, as a result of the Merger. The estimated value of
the restricted stock unit awards is based on (a) theaverage closing market
price of Hope common stock over the first five business days following the
first public announcement of the transaction beginning on April 30, 2024,
multiplied by (b) the exchange ratio of 0.8048, for a per sharemerger
consideration of $8.46, multiplied by (c) the target number of shares subject
to each restricted stock award.
Name Unvested Territorial Aggregate Value of
Restricted Stock Unit Awards Restricted Stock Unit Awards
Allan S. Kitagawa 51,284 $ 433,863
Vernon Hirata 21,363 $ 180,731
Ralph Y. Nakatsuka 21,363 $ 180,731
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Indemnification and Directors' and Officers' Liability Insurance
The Merger Agreement provides that from and after the Effective Time, Hope
will indemnify and hold harmless, to the extent(subject to applicable law)
such persons are indemnified as of the date of the Merger Agreement by
Territorial pursuant to Territorial's articles of incorporation, Territorial's
bylaws, the governing or organizational documents of anysubsidiary of
Territorial or any indemnification agreements in existence as of the date of
the Merger Agreement that have been disclosed to Hope, all present and former
directors or officers of Territorial and its subsidiaries (in their capacity
assuch) against any costs, expenses (including reasonable attorneys' fees) and
liabilities, whether arising before or after the Effective Time, based on or
arising out of the fact that such person is or was a director or officer of
Territorial orits subsidiaries, and pertaining to matters existing or
occurring at or prior to the Effective Time, and will also advance expenses to
such persons to the fullest extent permitted by applicable law, provided that
such person provides an undertakingto repay such advances if it is ultimately
determined that such person is not entitled to indemnification.
The Merger Agreement furtherrequires Hope, as the surviving entity in the
Merger, to maintain for a period of six years after the Effective Time,
Territorial's existing directors' and officers' liability insurance policy, or
policies with a substantiallycomparable insurer of at least the same coverage
and amounts and containing terms and conditions that are no less advantageous
to the insured, with respect to claims against the present and former officers
and directors of Territorial or any of itssubsidiaries arising from facts or
events that occurred at or prior to the consummation of the Merger. However,
Hope is not required to spend annually more than 250% of the current annual
premium paid as of the date of the Merger Agreement byTerritorial for such
insurance.
Employment Agreements
Territorial Savings Bank is party to employment agreements with each of Allan
S. Kitagawa, Chairman of the Board, President, and ChiefExecutive Officer,
Vernon Hirata, Vice Chairman,
Co-Chief
Operating Officer, General Counsel and Corporate Secretary, and Ralph Y.
Nakatsuka, Vice Chairman,
Co-Chief
Operating Officer. Territorial is party to separate employment agreements with
each executive, which have largely identical provisions as the Territorial
Savings Bank agreements, except that the employment agreements provide that
Territorial willmake any payments not made by Territorial Savings Bank under
its agreements with the executives and that the executives will not receive
any duplicate payments under the employment agreements. The employment
agreements each provide for three-yearterms, subject to annual renewal by the
Board of Directors for an additional year beyond the then-current expiration
date.
Upontermination of employment (other than a termination in connection with a
change in control), each executive would be required to adhere to a
one-year
noncompetition provision. However, the noncompetitionprovision does not apply
in connection with a change in control and will not apply following the
closing date of the Merger.
Effective asof the effective time of the Merger, the employment agreements
will be superseded by the settlement agreements discussed below.
Supplemental Executive Retirement Agreements
Territorial Savings Bank provides supplemental executive retirement benefits
(which we refer to as "SERPs") to each of Messrs.Kitagawa, Hirata, and
Nakatsuka. Under Mr. Kitagawa's supplemental executive retirement agreement,
he is entitled to receive an amount equal to the present value of $600,000 per
year for 15 years payable in a lump sum on the first dayof the month upon
retirement after attaining age 66. Under the supplemental executive retirement
agreements with Messrs. Hirata and Nakatsuka, each executive is entitled to
receive an annual benefit upon retirement after age 66 equal to 65% of
theaverage of his compensation for the three years immediately preceding his
termination of employment reduced by the sum of the benefits payable under the
pension plan and Social Security benefits. Mr. Hirata's benefits will be paid
inmonthly installments for 15 years and Mr. Nakatsuka will receive a lump sum
equal to the present value of installments over 15 years.
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Under such SERPs for Messrs. Hirata and Nakatsuka, if the executive
officer'semployment is terminated within three years following a change in
control, the executive officer will receive the normal retirement benefit
without any reduction for amounts payable under the pension plan or Social
Security.
The employment of each of the executive officers with Territorial and
Territorial Bank will terminate on the closing date of the Merger,
thustriggering the payout of the SERP benefits and triggering the adjustment
to the payment amount for Messrs. Hirata and Nakatsuka as described above.
Employee Stock Ownership Plan and Supplemental Employee Stock Ownership Plan
Territorial Savings Bank sponsors an employee stock ownership plan ("ESOP")
for eligible employees, including Messrs. Kitagawa,Hirata and Nakatsuka. The
ESOP holds unallocated shares of Territorial stock the trustee purchased at
the time the ESOP was implemented and which was funded with a loan from
Territorial. Prior to the Closing Date of the Merger, Territorial SavingsBank
will terminate the ESOP and the outstanding ESOP indebtedness will be repaid
from unallocated ESOP shares. Any remaining ESOP debt will be cancelled. Each
share of Territorial common stock held in the Territorial ESOP will be
converted into theright to receive, without interest, the merger consideration.
Territorial Savings Bank also sponsors the Supplemental Employee StockOwnership
Plan ("Supplemental ESOP") to provide Messrs. Kitagawa, Hirata and Nakatsuka
with benefits that they otherwise would be entitled to under the
tax-qualified
ESOP but for limitations imposedby the Internal Revenue Code. Benefits are
generally payable in a cash lump sum within 90 days of the first to occur of:
(i) the participant's separation from service; (ii) the participant's death;
(iii) theparticipant's disability; or (iv) a change in control of Territorial
Savings Bank or Territorial. Thus, the benefits will become payable as a
result of the Merger.
Settlement Agreements
In connection with the Merger, the executive officers entered settlement
agreements with Territorial and Territorial Savings Bank, which becomeeffective
immediately prior to the effective time of the Merger. Pursuant to the
settlement agreements, the executive officers' employment with Territorial and
Territorial Savings Bank will terminate effective as of the closing date of
theMerger and the executive officers have resigned from all director, officer
and other positions with Territorial and Territorial Savings Bank effective as
of the closing date of the Merger.
The settlement agreements supersede, replace and terminate the executive
officers' respective employment agreements with Territorial andTerritorial
Bank. In exchange for terminating their existing employment agreements and
executing a release of claims subject to certain customary carve-outs, the
executive officers will receive lump sum cash payments within five days after
theclosing date of the Merger subject to their continued employment with
Territorial and Territorial Bank through the closing date of the Merger and
their execution of a release of claims (subject to certain customary
carve-outs). The settlementagreements provide that if the payments under the
agreements, together with any other payments or benefits to which the
executive officer has the right to receive from Territorial Savings Bank or
Territorial (or any other party), would constitute an"excess parachute
payment" (as defined in Section 280G(b)(2) of the Code), payments pursuant to
the settlement agreement shall be reduced to the extent necessary to ensure
that no portion of such payments will be subject to the excisetax imposed by
Section 4999 of the Code. The amount of the cash payments that Messrs.
Kitagawa, Hirata and Nakatsuka are entitled to receive under their settlement
agreements is $4,556,146, $347,314 and $2,149,761, respectively, subject tothe
reduction for Section 280G if applicable.
The settlement agreements provide that the executive officers will not be
eligible toreceive an annual bonus for 2024 unless the Merger closes on or
after January 1, 2025 or an annual bonus for 2025. The settlement agreements
include a release of claims that has been executed by the executive officers
(subject to certaincustomary carve-outs), eliminate the "tax
gross-up"
provision relating to Section 280G of the Code that otherwise would have
applied under the SERPs and require the executive officers to providetransition
services upon request for two years following the closing date of the Merger.
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Restrictive Covenant Agreement
In connection with the Merger, Bank of Hope entered into a restrictive
covenant agreement with Mr. Hirata. The restrictive covenantagreement provides
that for a period of 36 months following the Closing Date, Mr. Hirata will not
compete with Hope or Bank of Hope and will not solicit the customers or
employees of Hope or Bank of Hope. In addition, the restrictive covenantagreemen
t contains customary and standard
non-disparagement
and
non-disclosure
provisions. In exchange for Mr. Hirata's performance of the covenants set
forthin the restrictive covenant agreement, and subject to his continued
employment with Territorial and Territorial Bank through the closing date of
the merger, the restrictive covenant agreement provides that Mr. Hirata will
receive payments of$900,000 within five days of the Closing Date and $900,000
within five days of the end of the
36-month
restricted period. The restrictive covenant agreement provides that if the
payments under the agreement,together with any other payments or benefits to
which Mr. Hirata has the right to receive from Territorial Savings Bank or
Territorial (or any other party), would constitute an "excess parachute
payment" (as defined inSection 280G(b)(2) of the Code), the payments shall be
reduced to the extent necessary to ensure that no portion of such payments
will be subject to the excise tax imposed by Section 4999 of the Code.
Regulatory Approvals Required for the Merger
To complete the Merger, Hope and Territorial need to obtain authorizations,
permits, consents, approvals and/or
non-objections
(which we refer to as "Regulatory Authorizations") from, or make filings with,
applicable U.S. federal and state bank regulatory authorities and other
regulatory authorities. Subjectto the terms of the Merger Agreement, Hope and
Territorial have agreed to cooperate with each other and use reasonable best
efforts to promptly prepare and file all necessary applications, notices and
other documentation, to effect all applications,notices, petitions and
filings, to obtain as promptly as practicable all authorizations, permits,
consents, approvals and/or
non-objections
from all third parties, regulatory agencies and governmental entitieswhich are
necessary or advisable to consummate the transactions contemplated by the
Merger Agreement (including the Merger), and to comply with the terms and
conditions of all such Regulatory Authorizations from all such regulatory
agencies andgovernmental entities. These include Regulatory Authorizations
from the Bank Regulatory Authorities.
Under the terms of the MergerAgreement, Hope and Territorial will not be
required to take actions or agree to conditions in connection with obtaining
the foregoing Regulatory Authorizations from governmental entities, including
the Bank Regulatory Authorities, that wouldreasonably be expected to have a
material adverse effect on Hope and its subsidiaries, taken as a whole, after
giving effect to the Merger (measured on a scale relative to Territorial and
its Subsidiaries, taken as a whole) (which we refer to as a"materially
burdensome regulatory condition").
The regulatory approval and/or
non-objection
of an application means only that the regulatory criteria for approval and/or
non-objection
has been satisfied or waived. It does not mean that theapproving authority has
determined that the consideration to be received by Territorial stockholders
in the Merger is fair. Regulatory approval and/or
non-objection
does not constitute an endorsement orrecommendation of the Merger.
Hope and Territorial believe that the Merger does not raise significant
regulatory concerns and that theywill be able to obtain all requisite
Regulatory Authorizations. However, there can be no assurance that all of the
Regulatory Authorizations described below will be obtained and, if obtained,
there can be no assurances regarding the timing of theRegulatory Authorizations,
the companies' ability to obtain the Regulatory Authorizations on
satisfactory terms, or the absence of litigation challenging such Regulatory
Authorizations. In addition, there can be no assurance that suchRegulatory
Authorizations will not impose conditions or requirements that, individually
or in the aggregate, would or could reasonably be expected to have a material
adverse effect on the financial condition, results of operations, assets
orbusiness of Hope following the completion of the Merger. There can likewise
be no assurances that U.S. federal or state regulatory authorities will not
attempt to challenge the Merger or, if such a challenge is made, what the
result of suchchallenge will be.
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Federal Reserve Board and the FDIC
The Merger is subject to the approval of the Federal Reserve Board pursuant to
section 3 of the Bank Holding Company Act of 1956, as amended(which we refer
to as the "BHC Act") with respect to the Merger. The Bank Merger is also
subject to the approval of the FDIC pursuant to section 18(c) of the Federal
Deposit Insurance Act (which we refer to as the "Bank MergerAct"), 12 U.S.C.
1828(c) to operate Territorial Savings Bank's branches as licensed branches of
Bank of Hope pursuant to the Bank Merger Act; and to acquire any subsidiaries
of Territorial Savings Bank and operate them as operatingsubsidiaries of Bank
of Hope, pursuant to 12 U.S.C. (s) 1828(c)(2)(c) and 12 C.F.R. (s) 303.62. The
Federal Reserve Board and the FDIC take into consideration a number of factors
when acting on applications under section 3 of the BHC Act andthe Bank Merger
Act, respectively. These factors include the effect of the Merger on
competitiveness in affected banking markets, the financial and managerial
resources (including consideration of the capital adequacy, liquidity, and
earningsperformance, as well as the competence, experience and integrity of
the officers, directors and principal stockholders, and the records of
compliance with applicable laws and regulations) and future prospects of the
combined company. The FederalReserve Board and the FDIC also consider the
effectiveness of the applicant in combatting money laundering, the convenience
and needs of the communities to be served, as well as the extent to which the
proposal would result in greater or moreconcentrated risks to the stability of
the U.S. banking or financial system. Neither the Federal Reserve Board nor
the FDIC may approve a proposal that would have significant adverse effects on
competition or on the concentration of resources in anybanking market.
In considering an application under section 3 of the BHC Act and the Bank
Merger Act, each of the Federal Reserve Boardand the FDIC also reviews the
records of performance of the relevant insured depository institutions under
the Community Reinvestment Act (which we refer to as the "CRA"), pursuant to
which the Federal Reserve Board and the FDIC must alsotake into account the
record of performance of each of Hope and Territorial in meeting the credit
needs of the entire community, including
low-
and moderate-income neighborhoods, served by their depositoryinstitution
subsidiaries. As part of the review process in merger transactions, the
Federal Reserve Board and the FDIC each frequently receive protests from
community groups and others. In their most recent CRA performance evaluations,
Bank of Hopeand Territorial Savings Bank each received an overall
"satisfactory" regulatory CRA rating.
The initial submission of theapplications to the Federal Reserve Board and the
FDIC is expected to occur on or before July 24, 2024.
State Banking Agencies
Bank of Hope is a California-chartered nonmember commercial bank whose primary
regulators are the FDIC and the California DFPI.Under California banking law,
Bank of Hope must file an application for approval of the Bank Merger with the
Commissioner of the California DFPI (the "CA Commissioner") pursuant to
Division 1.6 of the California Financial Code. The initialsubmission of the
application to the CA Commissioner is expected to occur on or before July 24,
2024.
Territorial Savings Bank is aHawaii-chartered state member savings bank whose
primary regulators are the Federal Reserve Board and the Hawaii DCCA. Pursuant
to
Section 412:12-104(b)
of the Hawaii Code of Financial Institutions, Bankof Hope will be required to
submit a notification letter to the Commissioner of Financial Institutions of
the Hawaii DCCA, providing notification of the Bank Merger. The submission of
the notification letter to the Commissioner of the Hawaii DCCA isexpected to
occur on or before July 24, 2024.
Each of Bank of Hope and Territorial Savings Bank have held discussions
regarding theapplication and notification with the California DFPI and the
Hawaii DCCA, respectively.
Department of Justice
In addition to the Federal Reserve Board and the FDIC and the state banking
agencies discussed above, the Antitrust Division of the Departmentof Justice
(which we refer to as the "DOJ") conducts a concurrent
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competitive review of the Merger to analyze the Merger's competitive effects
and determine whether the Merger would result in a violation of the antitrust
laws. Transactions approved underSection 3 of the BHC Act or the Bank Merger
Act generally may not be completed until 30 days after the approval of the
applicable federal agency is received, during which time the DOJ may challenge
the transaction on antitrust grounds.With the approval of the applicable
federal agency and the concurrence of the DOJ, the waiting period may be
reduced to no less than 15 days. The commencement of an antitrust action would
stay the effectiveness of such an approval unless a courtspecifically ordered
otherwise. In reviewing the Merger, the DOJ could analyze the Merger's effect
on competition differently than the Federal Reserve Board, and, thus, it is
possible that the DOJ could reach a different conclusion than theFederal
Reserve Board regarding the Merger's effects on competition. A determination
by the DOJ not to object to the Merger may not prevent the filing of antitrust
actions by private persons or state attorneys general.
Additional Regulatory Approvals and Notices
Additional notifications and/or applications requesting approval may be
submitted to various other federal, state and
non-U.S.
regulatory authorities and self-regulatory organizations.
Public Trading Markets
Hope common stock is listed for trading on the Nasdaq Global Select Market
under the symbol "HOPE", and Territorial commonstock is listed for trading on
the Nasdaq Global Select Market under the symbol "TBNK". Following the Merger,
shares of Hope common stock will continue to be traded on the Nasdaq Global
Select Market.
Under the Merger Agreement, Hope will cause the shares of Hope common stock to
be issued in the Merger and to be approved for listing on theNasdaq Global
Select Market, subject to official notice of issuance, prior to the Effective
Time and the Merger Agreement provides that neither Hope nor Territorial will
be required to complete the Merger if such shares are not authorized
forlisting on the Nasdaq Global Select Market. In addition, following the
Merger, Territorial common stock will be delisted from the Nasdaq Global
Select Market and deregistered under the Exchange Act.
Appraisal or Dissenters' Rights in the Merger
Pursuant to Maryland law, holders of Territorial common stock will not be
entitled to dissenters' or appraisal rights in the Merger withrespect to their
shares of Territorial common stock.
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THE MERGER AGREEMENT
This section of the proxy statement/prospectus describes the material terms of
the Merger Agreement. The description in this section andelsewhere in this
proxy statement/prospectus is subject to, and qualified in its entirety by
reference to, the complete text of the Merger Agreement, which is attached as
Annex A to this proxy statement/prospectus and incorporated by referenceherein.
This summary does not purport to be complete and may not contain all of the
information about the Merger Agreement that is important to you. We urge you
to read the full text of the Merger Agreement, as it is the legal document
governing theMerger. This section is not intended to provide you with any
factual information about Hope or Territorial. Such information can be found
elsewhere in this proxy statement/prospectus and in the public filings that
Hope and Territorial make with theSEC, as described in the section entitled
"Where You Can Find More Information".
Explanatory Note Regardingthe Merger Agreement
The Merger Agreement and this summary of terms are included to provide you
with information regarding the termsof the Merger Agreement. Factual
disclosures about Hope and Territorial contained in this proxy statement/prospec
tus or in the public reports of Territorial or Hope filed with the SEC may
supplement, update or modify the factual disclosures aboutHope and Territorial
contained in the Merger Agreement. The Merger Agreement contains representations
and warranties by Territorial, on the one hand, and by Hope, on the other
hand, made solely for the benefit of the other. The representations,warranties
and covenants made in the Merger Agreement by Hope and Territorial were
qualified and subject to important limitations agreed to by Hope and
Territorial in connection with negotiating the terms of the Merger Agreement.
In particular, inyour review of the representations and warranties contained
in the Merger Agreement and described in this summary, it is important to bear
in mind that the representations and warranties were negotiated with the
principal purpose of establishingcircumstances in which a party to the Merger
Agreement may have the right not to consummate the Merger if the representations
and warranties of the other party prove to be untrue due to a change in
circumstance or otherwise, and allocating riskbetween the parties to the
Merger Agreement, rather than establishing matters as facts. The representations
and warranties also may be subject to a contractual standard of materiality
different from that generally applicable to stockholders andreports and
documents filed with the SEC, and some were qualified by the matters contained
in the confidential disclosure schedules that Hope and Territorial each
delivered in connection with the Merger Agreement and certain documents filed
with theSEC. Moreover, information concerning the subject matter of the
representations and warranties, which do not purport to be accurate as of the
date of this proxy statement/prospectus, may have changed since the date of
the Merger Agreement.Accordingly, the representations and warranties in the
Merger Agreement should not be relied on by any persons as characterizations
of the actual state of facts about Hope and Territorial at the time they were
made or otherwise. Please the sectionentitled "
Where You Can Find More Information
".
Structure of the Merger
Each of Territorial's and Hope's respective boards of directors has
unanimously approved and adopted the Merger Agreement. The MergerAgreement
provides for Territorial to merge with and into Hope, with Hope continuing as
the surviving entity in the Merger. Following the completion of the Merger, or
such later time as Hope may determine, Territorial Savings Bank, a wholly
ownedsubsidiary of Territorial, will merge with and into Bank of Hope, a
wholly owned subsidiary of Hope, with Bank of Hope as the surviving bank in
the Bank Merger.
Prior to the consummation of the Merger, Hope and Territorial may, by mutual
agreement, change the method or structure of effecting thecombination of Hope
and Territorial if and to the extent they both deem such change to be
necessary, appropriate or desirable; provided, however that no such change may
(i) alter or change the Exchange Ratio; (ii) adversely affect the taxtreatment
of Territorial stockholders or Hope stockholders pursuant to the Merger
Agreement; (iii) prevent the Merger from qualifying as a "reorganization"
within the
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meaning of Section 368(a) of the Code; (iv) adversely affect the tax treatment
of Territorial or Hope pursuant to the Merger Agreement; or (v) materially
impede or delay theconsummation of the transactions contemplated by the Merger
Agreement in a timely manner.
Merger Consideration
Each share of Territorial common stock issued and outstanding immediately
prior to the Effective Time, except for shares of Territorial commonstock
owned by Territorial as treasury stock or owned by Territorial or Hope (in
each case, other than shares of Territorial common stock (i) held in trust
accounts, managed accounts, mutual funds and the like, or otherwise held in a
fiduciaryor agency capacity, that are beneficially owned by third parties, or
(ii) held, directly or indirectly, by Territorial or Hope in respect of debts
previously contracted, which will be cancelled, retired and cease to exist and
no mergerconsideration will be delivered or exchanged), will be converted into
the right to receive 0.8048 shares of Hope common stock (which we refer to as
the "Exchange Ratio").
If, prior to the Effective Time, the outstanding shares of Territorial common
stock or Hope common stock are increased, decreased, changedinto or exchanged
for a different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, or
there isany extraordinary dividend or distribution, an appropriate and
proportionate adjustment will be made to the merger consideration to give Hope
stockholders and Territorial stockholders the same economic effect as
contemplated by the Merger Agreementprior to such event; provided that this
provision will not permit Territorial or Hope to take any action with respect
to its respective securities that is prohibited by the terms of the Merger
Agreement.
Fractional Shares
Hope will not issue any fractional shares of Hope common stock in the Merger.
Instead, a former holder of Territorial common stock whootherwise would have
received a fraction of a share of Hope common stock will receive an amount in
cash rounded to the nearest cent. This cash amount will be determined by
multiplying (i) the average of the closing-sale prices of Hope commonstock on
the Nasdaq Global Select Market as reported by the Wall Street Journal for the
consecutive period of five full trading days ending on the date preceding the
closing date of the Merger by (ii) the fraction of a share (rounded to
thenearest
one-thousandth
when expressed in decimal form) of Hope common stock which such holder would
otherwise be entitled to receive.
Governing Documents
At the Effective Time, the amended and restated bylaws of Hope as in effect
immediately prior to the Effective Time shall be the bylaws of thecombined
company until thereafter amended in accordance with applicable law.
Treatment of Territorial RSU Awards
Except as otherwise agreed to between Territorial and Hope, at or immediately
prior to the Effective Time, with respect to each restrictedstock unit award
in respect of shares of Territorial common stock that is outstanding
immediately prior to the Effective Time, (i) each Territorial restricted stock
unit award that is subject to time-based vesting will automatically,
andwithout any required action on the part of the holder thereof, fully vest,
(ii) a
pro-rated
portion of each Territorial restricted stock unit award that is subject to
performance-based vesting willautomatically, and without any required action
on the part of the holder thereof vest, with the portion that will vest equal
to the product of (A) the number of Territorial restricted stock units subject
to performance-based vesting that wouldhave vested based upon actual
performance if the applicable performance period had ended as of the most
recent fiscal quarter of Territorial preceding the closing date or, if actual
performance cannot be determined, the target number of Territorialrestricted
stock units subject to performance-based vesting
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and (B) a fraction, the numerator of which is the number of months in the
period beginning on the first day of the applicable performance period and
ending on the closing date and thedenominator of which is the total number of
months in the original applicable performance period (disregarding the effect
of this paragraph on the length of the performance period), and (iii) (A) each
Territorial restricted stock unit that issubject to time-based vesting and
each portion of a Territorial restricted stock unit that is subject to
performance-based vesting that so vests shall be converted into the right to
receive the merger consideration (less the portion of the mergerconsideration
in respect thereof withheld to pay applicable taxes required to be withheld,
if any, with respect to the settlement of such restricted stock units) as soon
as reasonably practicable after the Effective Time, and (B) each portionof a
Territorial restricted stock unit that is subject to performance-based vesting
that does not vest shall be forfeited.
Closing and Effective Time of the Merger
The Merger will become effective upon (a) filing of the articles of merger
with the Department of Assessments and Taxation of the State ofMaryland and
the certificate of merger with the Secretary of State of the State of
Delaware, or (b) such later date and time as may be specified in the articles
of merger and the certificate of merger in accordance with applicable law.
Theclosing will occur by electronic exchange of documents at 10:00 a.m.,
Pacific time, no later than three business days after the satisfaction or
waiver (subject to applicable law) of all of the conditions set forth in the
Merger Agreement (other thanthose conditions that by their nature can only be
satisfied at the closing of the Merger, but subject to the satisfaction or
waiver thereof), unless another date, time or place is agreed to in writing by
Hope and Territorial.
Exchange of Shares
Exchange Procedures
As promptly as practicable after the Effective Time, but in no event later
than five business days thereafter, Hope will cause theexchange agent to mail
to each holder of record of one or more old certificates (which, for purposes
of this proxy statement/prospectus, shall be deemed to include certificates or
book-entry account statements) representing shares of Territorialcommon stock
immediately prior to the Effective Time, a letter of transmittal and
instructions for use in effecting the surrender of such old certificate(s) in
exchange for new certificates (which, for purposes of this proxy statement/prosp
ectus,shall be deemed to include certificates or, at Hope's option, evidence
in book-entry form) representing the number of whole shares of Hope common
stock and any cash in lieu of fractional shares, which shares of Territorial
common stockrepresented by such old certificate(s) shall have been converted
into the right to receive pursuant to the Merger Agreement, as well as any
dividends or distributions to be paid pursuant to the Merger Agreement as
described in
"--Dividends and Distributions
" below.
If an old certificate for Territorial common stock has been lost, stolen
ordestroyed, the exchange agent will issue the consideration in the Merger
upon receipt of (i) an affidavit of that fact by the claimant and (ii) if
required by Hope, the posting of a bond by such claimant in an amount as Hope
may determineis reasonably necessary as indemnity against any claim that may
be made against it with respect to such old certificate.
After theEffective Time, there will be no further transfers on the stock
transfer books of Territorial of Territorial common stock that were issued and
outstanding immediately prior to the Effective Time.
Withholding
Eachof Hope and the exchange agent will be entitled to deduct and withhold
from any consideration otherwise payable pursuant to the Merger Agreement the
amounts it is required to deduct and withhold under the Code or any provision
of state, local, or
non-U.S.
tax law. If any such amounts are withheld and paid over to the appropriate
governmental authority, such amounts will be treated for all purposes of the
Merger Agreement as having been paid to the holderfrom whom they were withheld.
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Dividends and Distributions
No dividends or other distributions declared or made with respect to Hope
common stock with a record date after the effective date will be paidto the
holder of any
un-surrendered
old certificate representing shares of Territorial common stock until the
holder surrenders such old certificate in accordance with the Merger
Agreement. After the surrenderof an old certificate in accordance with the
Merger Agreement, the record holder thereof will be entitled to receive any
such dividends or other distributions, without any interest, which had
previously become payable with respect to the wholeshares of Hope common stock
which the shares of Territorial common stock represented by such old
certificate have been converted into the right to receive under the Merger
Agreement.
Representations and Warranties
The Merger Agreement contains representations and warranties made by
Territorial to Hope and Hope to Territorial relating to a number ofmatters,
including the following:
. corporate matters, including due organization and qualification and subsidiaries;
. capitalization;
. authority relative to execution and delivery of the Merger Agreement and the absence of conflicts
with, orviolations of, organizational documents or other obligations as a result of the Merger;
. required governmental and other regulatory and self-regulatory filings and consents and approvals in connectionwith the Merger;
. reports governmental entities;
. financial statements, internal controls, books and records, and absence of undisclosed liabilities;
. broker's fees payable in connection with the Merger;
. the absence of certain changes or events since December 31, 2023;
. legal proceedings;
. tax matters;
. employee matters and employee benefit plan matters;
. compliance with applicable laws;
. absence of agreements with governmental entities; and
. absence of action or circumstance that would prevent the Merger from
qualifying as a "reorganization"under Section 368(a) of the Code.
The Merger Agreement contains additional representations and warranties made
byTerritorial with respect to:
. certain material contracts;
. risk management instruments;
. environmental matters;
. investment securities and commodities;
. real property ownership and leases;
. intellectual property and computer systems;
. related party transactions;
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. inapplicability of takeover statutes;
. opinion of its financial advisor;
. loan portfolio matters;
. insurance matters;
. subordinated indebtedness;
. the trust business of Territorial and its subsidiaries; and
. mortgage banking activities.
The representations and warranties in the Merger Agreement are (i) subject, in
some cases, to specified exceptions and qualificationscontained in the
confidential disclosure schedules delivered by Hope and Territorial,
respectively, and (ii) qualified by the reports of Hope or Territorial, as
applicable, filed with the SEC during the period from January 1, 2021
throughthe time prior to the execution and delivery of the Merger Agreement
(excluding, in each case, any risk factor disclosures in the risk factor
section or any "forward-looking statements" disclaimer or any other statements
that are similarly
non-specific
or cautionary, predictive or forward-looking in nature).
In addition, certainrepresentations and warranties of Hope and Territorial are
qualified as to "materiality" or "material adverse effect". For purposes of
the Merger Agreement, a "material adverse effect", when used in reference to
eitherHope and Territorial or Hope as the surviving entity in the Merger,
means any effect, change, event, circumstance, condition, occurrence or
development that, either individually or in the aggregate, has had or would
reasonably be expected to have amaterial adverse effect on (i) the business,
properties, assets, liabilities, results of operations or financial condition
of such party and its subsidiaries taken as a whole or (ii) the ability of
such party to timely consummate thetransactions contemplated by the Merger
Agreement.
However, a material adverse effect described in clause (i) above will not
bedeemed to include the impact of:
. changes, after the date of the Merger Agreement, in GAAP or applicable regulatory accounting requirements;
. changes, after the date of the Merger Agreement, in laws, rules or regulations general applicability to companiesin the
industries in which such party and its subsidiaries operate, or interpretations thereof by courts or governmental entities;
. changes, after the date of the Merger Agreement, in global, national or regional political conditions (includingany
outbreak, continuation or escalation of war (whether or not declared), cyberattack, sabotage, act of terrorism or military
action) or in economic or market (including equity, credit and debt markets, as well as changes in interest rates)conditions
affecting the financial services industry generally and not specifically relating to such party or its subsidiaries;
. changes, after the date of the Merger Agreement, resulting from hurricanes,
earthquakes, tornados, floods orother natural disasters or from any outbreak of
any disease or other public health event or emergencies (including any law,
directive or guideline issued by a governmental agency in response thereto);
. public disclosure of the execution of the Merger Agreement or public disclosure
of the consummation of thetransactions contemplated by the Merger Agreement
(including any effect on a party's relationships with its customers or
employees) (however, the foregoing will not apply for purposes of certain
representations and warranties relating to(i) the absence of conflicts
with, or violations of, organizational documents or other obligations as a
result of the Merger, (ii) required governmental and other regulatory and
self-regulatory filings and Regulatory Authorizations inconnection with the
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Merger or the Bank Merger and (iii) employee benefit plans) or actions expressly required by the Merger Agreement or that are
taken with the prior written consent of the other party incontemplation of the transactions contemplated by the Merger Agreement;
. a decline in the trading price of a party's common stock or the failure, in
and of itself, to meet earningsprojections or internal financial forecasts
(provided that the underlying causes of such decline or failure may be taken
into account in determining whether a material adverse effect has occurred); or
. the expenses incurred by a party in negotiating, documenting, effecting
o consummating the transactionscontemplated by the Merger Agreement;
except, with respect to the first, second, third and fourth bullets described
above, to theextent that the effects of such change are materially
disproportionately adverse to the business, properties, assets, liabilities,
results of operations or financial condition of such party and its
subsidiaries, taken as a whole, as compared toother companies in the industry
in which such party and its subsidiaries operate.
The representations and warranties in the MergerAgreement do not survive the
Effective Time.
Covenants and Agreements
Conduct of Businesses Prior to the Consummation of the Merger
Prior to the Effective Time (or earlier termination of the Merger Agreement),
except as expressly contemplated or permitted by the MergerAgreement, required
by law or any governmental entity or as consented to in writing by the other
party (such consent not to be unreasonably withheld, conditioned or delayed),
and subject to certain specified exceptions, each of Hope and Territorialwill,
and will cause its subsidiaries to (a) use commercially reasonable efforts to
conduct their respective businesses in the ordinary course in all material
respects consistent with past practices and maintain and preserve intact its
businessorganization, employees and advantageous business relationships and
(b) take no action that would reasonably be expected to adversely affect or
materially delay the ability of either Territorial or Hope to obtain any
necessary RegulatoryAuthorizations of any governmental entity required for the
transactions contemplated by the Merger Agreement or to consummate the
transactions contemplated thereby on a timely basis.
Additionally, Territorial has undertaken further covenants. Prior to the
Effective Time (or earlier termination of the Merger Agreement),subject to
specified exceptions, Territorial may not, and Territorial may not permit any
of its subsidiaries to, without the prior written consent of Hope (such
consent not to be unreasonably withheld, conditioned or delayed), undertake
thefollowing:
. incur any indebtedness for borrowed money (other than indebtedness of Territorial or any of
its wholly ownedsubsidiaries to Territorial or any of its subsidiaries) or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations of any other
individual, corporation or other entity (the incurrence of indebtedness in theordinary
course of business in connection with the creation of deposit liabilities, issuance of letters
of credit, sales of certificates of deposits, purchases of federal funds or borrowings
from either the Federal Reserve Bank of San Francisco orthe Federal Home Loan Bank, in each
case with a maturity not in excess of six months are not prohibited by this covenant);
. adjust, split, combine or reclassify any capital stock;
. make, declare, pay or set a record date for any dividend, or make any other
distribution on, or directly orindirectly redeem, purchase or otherwise acquire,
any shares of its capital stock or other equity or voting securities or any
securities or obligations convertible (whether currently convertible or
convertible only after the passage of time or theoccurrence of certain events)
into or exchangeable for any shares of its capital stock, except, in each
case, (i) dividends paid by any of Territorial's subsidiaries to Territorial
or any of its wholly owned subsidiaries, (ii) regularquarterly cash dividends
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by Territorial at a rate not in excess of $0.11 per share of Territorial common
stock, or (iii) the acceptance of shares of Territorial common stock as payment
for the exercise price orwithholding taxes incurred in connection with the exercise
of stock options or the vesting or settlement of equity compensation awards;
. grant any stock options, stock appreciation rights, performance shares,
restricted stock units, restricted sharesor other equity-based
awards or interests, or grant any individual, corporation or other
entity any right to acquire any shares of its capital stock;
. issue, sell or otherwise permit to become outstanding any additional shares of capital stock,
voting securitiesor equity interests or securities convertible (whether currently convertible
or convertible only after the passage of time or the occurrence of certain events) or exchangeable
into, or exercisable for, any shares of its capital stock, votingsecurities or equity
interests, including any securities of Territorial or any of its subsidiaries, or any options,
warrants, or other rights of any kind to acquire any shares of capital stock, voting securities
or equity interest, including anysecurities of Territorial or any of its subsidiaries, except
pursuant to the settlement of equity compensation awards in accordance with their terms;
. sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties, deposits or assets toany
business or to any individual, corporation or other entity other than a wholly owned subsidiary, or cancel, release
or assign any indebtedness to any such person or any claims held by any such person, in each case other than in the
ordinarycourse of business, or pursuant to contracts or agreements in force at the date of the Merger Agreement;
. except for foreclosure or acquisitions of control in a fiduciary or similar capacity
or in satisfaction of debtspreviously contracted in good faith in the ordinary
course of business, or except securities investments in the ordinary course of
business,, make any material investment in or acquisition of (whether by purchase of
stock or securities,contributions to capital, property transfers, purchase of any
property or assets of any person, merger or consolidation, or formation of a joint
venture or otherwise) any other person or the property, deposits or assets of any
other person, in eachcase, other than a wholly owned subsidiary of Territorial;
. except in the ordinary course of business (i) terminate, materially
amend, or waive any material provisionof, certain material agreements
identified in the Merger Agreement; make any change in any instrument
or agreement governing the terms of any of its securities, or
material lease or contract, other than normal renewals of contracts
and leaseswithout material adverse changes of terms to Territorial,
or (ii) enter into any contract that would constitute a material
agreement if it were in effect on the date of the Merger Agreement;
. except as contemplated by the terms of any Territorial benefit plan existing as of the date of the
MergerAgreement, (i) enter into, establish, adopt or terminate any Territorial benefit plan, or any
arrangement that would be a Territorial benefit plan if in effect on the date of the Merger Agreement,
(ii) increase the compensation payable toany employee, officer, director, or independent contractor,
except with respect to employees who are not officers and whose target total annual compensation is
not in excess of $100,000, for annual base salary or whose wage increases in the ordinarycourse of
business that do not exceed four percent (4%) of such individual's base salary or wage rate in effect
as of the date of the Merger Agreement, (iii) pay or award, or commit to pay or award, any bonuses or
incentive compensation,(iv) grant or accelerate the vesting of any equity or equity-based awards or
other compensation, (v) negotiate or enter into any new, or amend any existing, employment, severance,
change in control, retention, bonus, guarantee, collectivebargaining agreement or similar agreement
or arrangement, (vi) fund any rabbi trust or similar arrangement, (vii) terminate the employment or
services of any Territorial officer or employee whose target total annual compensation is greaterthan
$50,000, other than for cause, or (viii) hire or promote any officer or any employee, independent
contractor or consultant who has target total annual compensation greater than $100,000, (ix) waive,
release or limit any restrictivecovenant obligation of any current or former employee or contractor of
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Territorial or any of its subsidiaries, or (x) extend the term of any employment
agreement, other than in the ordinary course of business consistent with past practice;
. settle any material claim, suit, action or proceeding, except (i) in the ordinary course of business in anamount
and for consideration not in excess of $100,000 individually or in the aggregate, and that would not impose
any material restriction on the business of it or its subsidiaries or, after the Effective Time, Hope, or (ii)
such materialclaim, suit, action or proceeding where Territorial or any of its subsidiaries is the plaintiff;
. take any action or knowingly fail to take any action where such action or failure to act could reasonably beexpected
to prevent the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code;
. amend its charter or bylaws or comparable governing document of its subsidiaries;
. merge or consolidate itself or any of its subsidiaries with any other person, or restructure,
reorganize orcompletely or partially liquidate or dissolve it or any such subsidiaries;
. materially restructure or materially change its investment securities, derivatives, wholesale funding orbank-owned life
insurance portfolio or its interest rate exposure, through purchases, sales or otherwise, or the manner in which the portfolio
is classified or reported or purchase any security rated below investment grade, except as may be requiredby GAAP or by
applicable laws, regulations, guidelines or policies imposed by any governmental entity or requested by a governmental entity;
. take any action that is intended or expected to result in the conditions to the Merger
from being satisfied, orbe a material violation of any provision of the Merger Agreement;
. implement or adopt any material change in its accounting principles, practices or methods, other than as
requiredby GAAP or by applicable laws, regulations, guidelines or policies imposed by any governmental entity;
. (i) enter into any new line of business or (ii) make, renegotiate, renew, increase, extend,
modify orpurchase any loan, other than in accordance with Territorial's loan policies and
procedures in effect as of the date of the Merger Agreement, provided however, that the prior
notification and approval of Hope is required for any loan that is$2,000,000 or greater;
. make any material changes in policies and practices with respect to (i)
underwriting, pricing, originating,acquiring, selling servicing, buying
or selling rights to service loans, (ii) investment, deposit pricing,
risk and asset liability management or other banking and operating
matters (including any change in the maximum ratio or similar limitsas
a percentage of capital exposure applicable with respect to the loan
portfolio or any segment thereof) or (iii) hedging, in each case, except
as required by applicable law or requested by a governmental entity;
. make, or commit to make, any capital expenditures (other than included in Territorial's capital budget
whichhas been made available to Hope) in excess of $75,000 individually or $250,000 in the aggregate;
. make, change or revoke any material tax election, change an annual
tax accounting period, adopt or change anymaterial tax accounting
method, file any amended material tax return, , settle or compromise
any tax liability, audit, dispute, claim or assessment or agree to an
extension or waiver of the limitation period to any material tax audit,
dispute, claimor assessment, grant any power of attorney with respect
to material taxes, surrender any right to claim a refund of material
taxes, or enter into any closing agreement with respect to taxes;
. schedule, make application for the opening, relocation or closing of any, or open, relocate or close
any, branchoffice, loan production office or other significant office or operations facility;
. materially reduce the amount of insurance coverage or fail to renew any material existing
insurance policy, ineach case, with respect to the key employees, properties or assets;
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. without providing concurrent notice to Hope, undertake any response, action, or customer or public
communicationwith regard to (i) any event resulting in unauthorized access to or the disruption or misuse of
an information system or information stored on an information system, including but not limited to such
information pertaining to Territorial'sor its subsidiaries' customers, or (ii) any ransomware event;
. other than in consultation with Hope schedule, conduct, or participate in any earnings calls or analyst meetings;or
. agree to take, make any commitment to take, or adopt any resolutions of the Territorial
Board of Directors orsimilar governing body in support of, any of the foregoing.
Additionally, Hope has undertaken further covenants. Priorto the Effective
Time (or earlier termination of the Merger Agreement), subject to specified
exceptions, Hope may not, and Hope may not permit any of its subsidiaries to,
without the prior written consent of Territorial (such consent not to
beunreasonably withheld, conditioned or delayed), undertake the following:
. amend its charter or bylaws in a manner that would materially and adversely affect the holders of Territorialcommon stock,
or adversely affect the holders of holders of Territorial common stock relative to other holders of Hope common stock;
. (i) adjust, split, combine or reclassify any capital stock of Hope, or (ii) make, declare or pay
anyextraordinary dividend, or make any other extraordinary distribution on, any shares of Hope common stock;
. merge or consolidate itself or any of its subsidiaries that
are "significant subsidiaries" within themeaning of Rule
1-02
of Regulation
S-X
of the SEC with any other person, or restructure, reorganize or completely
or partially liquidate or dissolve itself or any suchsubsidiaries;
. enter into agreements with respect to, or consummate, any mergers or business combinations, or any acquisition ofany other
person or business that would reasonably be expected to prevent, impede or materially delay the consummation of the Merger;
. take any action that is intended or expected to result in the conditions to the Merger
from being satisfied or bea violation of any provision of the Merger Agreement;
. take any action or knowingly fail to take any action where such action or failure to act could reasonably beexpected
to prevent the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code; or
. agree to take, make any commitment to take, or adopt any resolutions of the Territorial
Board of Directors orsimilar governing body in support of, any of the foregoing.
Regulatory Matters
Hope and Territorial have agreed to, and have agreed to cause its subsidiaries
to, cooperate with each other and use their respectivereasonable best efforts
to take all actions necessary, proper or advisable to promptly prepare and
file all necessary documentation, to effect all applications, notices,
petitions and filings, to obtain as promptly as practicable (i) allauthorization
s, permits, consents, approvals and/or
non-objections
of all third parties, (ii) all requisite Regulatory Authorizations of the
governmental entities, which are necessary or advisable toconsummate the
transactions contemplated by the Merger Agreement, and to comply with the
terms and conditions of all such requisite Regulatory Authorizations from all
such governmental entities.
Each of Hope and Territorial has agreed to use its reasonable best efforts to
respond to any request for information from a governmentalentity and resolve
any objection that may be asserted by any governmental entity with respect to
the Merger Agreement or the transaction contemplated thereby. However, in no
event will
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Territorial or Hope, or any of their respective subsidiaries be required, and
neither Territorial or Hope, nor any of their respective subsidiaries be
permitted (without the written consent ofthe other party), to take any action,
or commit to take any action, or agree to any condition or restriction, in
connection with obtaining the required Regulatory Authorizations of
governmental entities that would reasonably be expected to have amaterial
adverse effect on Hope and its subsidiaries, taken as a whole, or after giving
effect to the Merger and the Bank Merger.
To theextent permitted by applicable law and subject to the terms of the
Merger Agreement, Hope and Territorial have also agreed to furnish each other
with all information reasonably necessary or advisable in connection with this
proxystatement/prospectus and any statement, filing, notice or application to
any governmental entity in connection with the Merger, the Bank Merger, and
the other transactions contemplated by the Merger Agreement, as well as to
keep each other apprisedof the status of matters related to the consummation
of the transactions contemplated by the Merger Agreement.
Territorial Savings Bank Amended and Restated Employee Stock Ownership Plan
As soon as practicable after notice of the special meeting stockholders is
delivered to Territorial stockholders, Territorial will request thatthe
respective trustees of the Territorial Savings Bank Amended and Restated
Employee Stock Ownership Plan (which we refer to as the "Territorial ESOP")
and the Territorial 401(k) Plan take all necessary action required by the
respectiveplan documents, and for the Territorial ESOP in accordance with
Section 409(e)(2) of the Code, to conduct a pass-through vote of the
participants and beneficiaries to direct the respective trustee as to the
manner in which the Territorialcommon stock are allocated to the account of
such participant or beneficiary are to be voted. In no event will Hope or
Territorial be entitled to receive any information identifying how any
individual participant directed the trustees to vote theshares allocated to
such participant's account.
Prior to the Effective Time, Territorial will amend the Territorial ESOP,
asreasonably acceptable to Hope, to permanently discontinue contributions to
and terminate the Territorial ESOP, contingent upon the closing of the Merger
and effective as of the date immediately preceding the closing date of the
Merger. TheTerritorial ESOP amendment will provide that the accounts of all
participants in the Territorial ESOP will become fully vested upon termination
of the Territorial ESOP, and that each share of Territorial common stock held
in the Territorial ESOPwill be converted into the right to receive, without
interest, the merger consideration. Notwithstanding anything to the contrary
in the Merger Agreement, Territorial may continue to accrue and make
contributions to the Territorial ESOP, subject toapplicable deduction and
annual allocation limitations, from the date of the Merger Agreement through
the termination date of the Territorial ESOP in an amount sufficient to cover
(but not to exceed) the loan payments which become due in theordinary course
on the outstanding ESOP Loan to the Territorial ESOP prior to the termination
of the Territorial ESOP and, at the discretion of Territorial, may make a
pro-rated payment on the ESOP Loan for the plan year during which the closing
ofthe Merger occurs through and including the end of the calendar month
immediately preceding the closing, prior to the termination of the Territorial
ESOP.
To the extent not filed by Territorial before the closing date of the Merger,
as soon as administratively practicable following the closingdate, Hope will
submit an application to the IRS requesting a favorable determination with
respect to the amendment and termination of the Territorial ESOP. The
amendment to the Territorial ESOP will provide that participants have the
right toreceive partial distributions of up to 50% of the account balances
credited to the Territorial ESOP participants as of the closing date of the
Merger, taking into account the merger consideration received by the
Territorial ESOP, as soon asadministratively practicable after the closing
date, with the remaining portion to be distributed as soon as administratively
practicable after receipt by Hope of the Territorial ESOP determination letter.
Immediately prior to the Effective Time, a portion of the Territorial ESOP's
unallocated shares, having an aggregate value of outstandingbalance of the
ESOP Loan as of the Effective Time, will be exchanged in satisfaction of the
ESOP Loan. Unallocated shares remaining after the satisfaction of the ESOP
Loan, if any, will
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be released from pledge and allocated among the Territorial ESOP participants.
In the event that the aggregate value of the Territorial ESOP unallocated
shares is less than outstanding balance ofthe ESOP Loan at the Effective Time,
all Territorial ESOP unallocated shares will be transferred to Territorial in
satisfaction of the ESOP Loan which shall be deemed to have been paid in full.
All remaining shares of Territorial common stock ownedby the Territorial ESOP
shall be eligible to be converted into the right to receive the merger
consideration pursuant to the Merger Agreement and allocated in accordance
with the terms of the Territorial ESOP and the Territorial ESOP amendment.
As soon as administratively practicable following receipt of the Territorial
ESOP determination letter, Hope, in its capacity as plan sponsor,will cause
the trustee of the Territorial ESOP to make, and the trustee of the
Territorial ESOP will make, distributions from the Territorial ESOP until all
remaining account balances of the Territorial ESOP participants and
beneficiaries have beendistributed and the Territorial ESOP shall be
liquidated.
Employee Matters
The Merger Agreement provides that during the period commencing on the closing
date and ending on the first anniversary thereof (or an earliertermination of
employment), Hope will provide to each employees of Territorial or its
subsidiaries as of immediately prior to the Effective Time and who continues
in employment with Territorial or any of its subsidiaries following the
EffectiveTime, with employee benefits (excluding equity and equity based
compensation, incentive compensation, defined benefit pensions, deferred
compensation, retention benefits, change in control benefits and employee
stock ownership plan benefits) thatare substantially similar in the aggregate
to the employee benefits (other than excluded benefits) provided to similarly
situated employees of Hope; provided that Hope may satisfy this obligation by
providing such continuing employees with employeebenefits (other than excluded
benefits) that are substantially comparable in the aggregate to the employee
benefits (other than excluded benefits) provided by Territorial to such
continuing employees immediately prior to the Effective Time. Within
areasonable period of time following the Effective Time, each continuing
employee will also be eligible to participate in any 401(k) plan now or
hereafter established and maintained by Hope on the same terms and conditions
that apply to Hopeemployees generally, with credit for prior service with
Territorial and its subsidiaries (and their respective predecessors) for
purposes of eligibility and vesting (but not benefit accrual), as permitted
under the respective plans and applicablelaw; provided that the foregoing will
not apply to the extent it would result in duplication of benefits.
Hope will provide, or cause asubsidiary of Hope to provide, the continuing
employees, from the Effective Time and ending on the first anniversary of the
closing date (or an earlier termination of employment), health insurance
coverage either under Hope's group healthinsurance plans as available to
similar situated employees of Hope or by continuing Territorial's group health
insurance plans so that no continuing employee incurs a gap in coverage;
provided that such coverage provided by Hope or a subsidiaryof Hope will
include "in-network" coverage for the geographic locations covered by the
Territorial's group health insurance plans immediately prior to the closing
date.
The Merger Agreement also provides that, with respect to any welfare benefit
plans of Hope in which any continuing employees become eligibleto participate
on or after the Effective Time (which we refer to as "new plans"), Hope will
use commercially reasonable efforts to: (i) waive all exclusions and waiting
periods with respect to participation and coverage requirementsapplicable to
such continuing employees and their eligible dependents under any new plans,
except to the extent such pre-existing conditions, exclusions or waiting
periods would apply under the analogous Territorial benefit plan, (ii)
provideeach such continuing employee and their eligible dependents with credit
for any co-payments and deductibles paid during the year in which the closing
date occurs prior to the Effective Time under a Territorial benefit plan (to
the same extent thatsuch credit was given under the analogous Territorial
benefit plan prior to the Effective Time) in satisfying any applicable
deductible or out-of-pocket requirements under any new plans, and (iii)
recognize all service of such continuingemployees with Territorial and its
subsidiaries (and their respective predecessors, if applicable) for all
purposes
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in any new plan to the same extent that such service was taken into account
under the analogous Territorial benefit plan prior to the Effective Time;
provided that the foregoing servicerecognition will not apply (A) to the
extent it would result in duplication of benefits for the same period of
services, (B) for purposes of any defined benefit pension plan or benefit plan
that provides retiree welfare benefits, or(C) to any benefit plan that is a
frozen plan or provides grandfathered benefits.
The Merger Agreement provides that Territorialwill amend the Territorial
401(k) Plan to eliminate the right for participants to invest in shares of
employer securities effective no later than the closing date. In the event
that Hope requests Territorial to terminate the Territorial 401(k) Planprior
to closing, Hope agrees to take all commercially reasonable steps necessary or
appropriate, including adopting any necessary amendments, with respect to the
Territorial 401(k) Plan (i) to provide that continuing employees will be
eligibleto participate in Hope's 401(k) plan within a reasonable period of
time following the closing date, and (ii) thereafter to accept roll-overs of
benefits from the Territorial 401(k) Plan to Hope's 401(k) plan for continuing
employees(excluding loan rollovers if Hope's 401(k) plan does not allow loan
rollovers).
The Merger Agreement provides that, immediatelyafter the Effective Time, Hope,
by virtue of the Merger, will, by operation of law, be bound by all employment
and change in control agreements and/or supplemental retirement plans that
Territorial has with certain of its current and formerofficers, directors and
employees as set forth in the Merger Agreement, except to the extent any such
agreement has been terminated or superseded by agreement of any such officer,
director or employee of Hope or its subsidiaries. For the avoidanceof doubt,
immediately after the Bank Merger, Bank of Hope, by virtue of the Bank Merger,
will, by operation of law, be bound by all employment and change in control
agreements and/or supplemental retirement plans that Territorial Savings Bank
haswith its current and former officers, directors and employees listed in the
Merger Agreement, except to the extent any such agreement has been terminated
or superseded by agreement of any such officer, director or employee of Hope
or itssubsidiaries.
As of the Effective Time, Hope or one of its subsidiaries will (i) honor any
vacation or personal time off (other thansick leave) (which we refer to as
"PTO") that has accrued but is unused under the applicable policies of
Territorial (including any PTO carried over from a prior year in accordance
with Territorial's policies) and (ii) recognizeall service of any continuing
employee with Territorial and its subsidiaries for purposes of determining PTO
in accordance with the policy in effect for continuing employees after the
closing date.
For any continuing employee whose employment is terminated by Hope and its
subsidiaries within the two year period following the closing dateunder
certain circumstances which would entitle the continuing employee to severance
benefits under the Territorial Savings Bank separation pay plan as in effect
as of the date of the Merger Agreement, Hope will, or will cause a subsidiary
of Hopeto, provide such continuing employee with the severance benefits
determined in accordance with the separation pay plan (for the avoidance of
doubt, subject to the release requirement in the separation pay plan).
Territorial will be permitted to establish a retention pool/stay bonus of up
to $150,000, providing for retention/stay bonuses to be paid toemployees of
Territorial or Territorial Savings Bank who remain employed with Territorial
or Territorial Savings Bank until the date that is six months after the
closing date (or such earlier date mutually agreed upon by Territorial and
Hope inwriting) (other than employees who are subject to employment contracts
or other individual contracts providing for severance), such bonuses to be
paid reasonably promptly following such date. The employees who will receive a
retention/stay bonus andthe amount of the retention/stay bonus for each such
employee will be determined by a mutual written agreement of Territorial and
Hope. As a condition to receiving any payment pursuant to an arrangement
implemented pursuant to the Merger Agreement,the employee will be required to
execute a general release of claims and covenant not to sue, in a form
mutually agreed upon by Territorial and Hope, within the time frame required
by such release and will not revoke such release.
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Nothing in the Merger Agreement will create any third-party beneficiary rights
in anyindividual, require Hope, Territorial or any of their respective
subsidiaries to continue the employment of any individual for any particular
period of time or constitute or be construed to an amendment to, or be
construed to prohibit the amendmentor termination of, any employee benefit
plan.
Director and Officer Indemnification and Insurance
The Merger Agreement provides that from and after the Effective Time, Hope
will indemnify and hold harmless, to the extent (subject toapplicable law)
such persons are indemnified as of the date of the Merger Agreement by
Territorial pursuant to Territorial's articles of incorporation, Territorial's
bylaws, the governing or organizational documents of any subsidiary
ofTerritorial or any indemnification agreements in existence as of the date of
the Merger Agreement that have been disclosed to Hope, all present and former
directors or officers of Territorial and its subsidiaries (in their capacity
as such) againstany costs, expenses (including reasonable attorneys' fees) and
liabilities, whether arising before or after the Effective Time, based on or
arising out of the fact that such person is or was a director or officer of
Territorial or itssubsidiaries, and pertaining to matters existing or
occurring at or prior to the Effective Time, and will also advance expenses to
such persons to the fullest extent permitted by applicable law, provided that
such person provides an undertaking torepay such advances if it is ultimately
determined that such person is not entitled to indemnification.
The Merger Agreement requiresHope, as the surviving entity in the Merger, to
maintain for a period of six years after the Effective Time, Territorial's
existing directors' and officers' liability insurance policy, or policies with
a substantially comparableinsurer of at least the same coverage and amounts
and containing terms and conditions that are no less advantageous to the
insured, with respect to claims against the present and former officers and
directors of Territorial or any of itssubsidiaries arising from facts or
events that occurred at or prior to the consummation of the Merger. However,
Hope is not required to spend annually more than 250% of the current annual
premium paid as of the date of the Merger Agreement byTerritorial for such
insurance (which we refer to as the "Premium Cap"), and if such premiums for
such insurance would at any time exceed that amount, then Hope will maintain
policies of insurance which, in Hope's good faithdetermination, provide the
maximum coverage available at an annual premium equal to the Premium Cap. In
lieu of the foregoing, Territorial, in consultation with Hope, may, in
consultation with, and upon obtaining the consent of, Hope, obtain at orprior
to the Effective Time a six-year "tail" policy under Territorial's existing
directors and officers insurance policy providing equivalent coverage to that
described in the preceding sentence if such a policy can be obtained foran
amount that, in the aggregate, does not exceed the Premium Cap.
Certain Additional Covenants
The Merger Agreement also contains additional covenants, including, among
others, covenants relating to the filing of this proxystatement/prospectus,
obtaining required consents, the listing of the shares of Hope common stock be
issued in the Merger, access to information of the other company, advice of
changes, exemption from takeover restrictions, stockholder litigationrelating
to the transactions contemplated by the Merger Agreement, the consolidation of
operating functions, the assumption by Hope of Territorial's indebtedness, and
public announcements with respect to the transactions contemplated by
theMerger Agreement. Territorial is required to inform Hope prior to making,
renewing or otherwise modifying certain types of loans above specified amounts
as set forth in the Merger Agreement.
Agreement Not to Solicit Other Offers
Territorial has agreed that it will, and will cause each of its subsidiaries
and representatives to, immediately cease, and cause to beterminated, any
activities, discussions or negotiations conducted before the date of the
Merger Agreement with any person other than Hope with respect to any
Acquisition Proposal.
Territorial has agreed that it will not, and will cause each of its
subsidiaries and use its reasonable best efforts to cause its and
theirrespective officers, directors, employees agents, advisors and
representatives not to,
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directly or indirectly, (i) initiate, solicit, knowingly encourage or
knowingly facilitate any inquiries or proposals with respect to any
Acquisition Proposal, (ii) engage orparticipate in any negotiations concerning
any Acquisition Proposal, (iii) provide any confidential or nonpublic
information or data to, or have or participate in any discussions with, any
person relating to any Acquisition Proposal (other thanthe parties to the
Merger Agreement and their representatives), or (iv) unless the Merger
Agreement has been terminated, approve or enter into any term sheet, letter of
intent, commitment, memorandum of understanding, agreement in principle,acquisit
ion agreement, Merger Agreement or other agreement in connection with or
relating to any Acquisition Proposal. However, prior to the approval of the
Merger Agreement by the Territorial stockholders, if Territorial receives an
unsolicitedbona fide written Acquisition Proposal that was not the result of a
breach of the restrictions on Acquisition Proposals set forth above,
Territorial may, and may permit its subsidiaries and its and its subsidiaries'
representatives to, furnishor cause to be furnished confidential or nonpublic
information or data and participate in such negotiations or discussions with
the person making the Acquisition Proposal but only to the extent that, prior
to doing so, the Territorial Board ofDirectors concludes in good faith (after
receiving the advice of its outside legal counsel, and with respect to
financial matters, its outside financial advisors) that (A) the Acquisition
Proposal constitutes or is reasonably likely to lead toa Superior Proposal and
(B) failure to take such actions would be more likely than not to result in a
violation of its fiduciary duties under applicable law; provided, further,
that, prior to providing any confidential or nonpublic information,such party
must provide such information to the other party to the Merger Agreement and
enter into a confidentiality agreement with the person making such Acquisition
Proposals on terms no less favorable to Territorial than the confidentialityagre
ement between Territorial and Hope, and which confidentiality agreement cannot
provide such person with any exclusive right to negotiate with Territorial.
For purposes of the Merger Agreement, an "Acquisition Proposal" means other
than the transactions contemplated by the MergerAgreement, any offer, proposal
or inquiry relating to, or any third party indication of interest in, (i) any
acquisition or purchase, direct or indirect, of 25% or more of the
consolidated assets of Territorial and its subsidiaries or 25% ormore of any
class of equity or voting securities of a party or its subsidiaries whose
assets, individually or in the aggregate, constitute 25% or more of the
consolidated assets of Territorial, (ii) any tender offer (including a
self-tenderoffer) or exchange offer that, if consummated, would result in such
third party beneficially owning 25% or more of any class of equity or voting
securities of Territorial or its subsidiaries whose assets, individually or in
the aggregate, constitute25% or more of the consolidated assets of
Territorial, or (iii) a merger, consolidation, share exchange, business
combination, reorganization, recapitalization, liquidation, dissolution or
other similar transaction involving Territorial or itssubsidiaries whose
assets, individually or in the aggregate, constitute 25% or more of the
consolidated assets of Territorial.
Forpurposes of the Merger Agreement, a "Superior Proposal" means any
unsolicited bona fide written offer or proposal made by a third party to
consummate an Acquisition Proposal that the Territorial Board of Directors
determines in good faith(after receiving the advice of its outside legal
counsel and, with respect to financial matters, its outside financial
advisors) (i) would, if consummated, result in the acquisition of all, but not
less than all, of the issued and outstandingshares of Territorial common stock
or all, or substantially all, of the assets of Territorial; (ii) would result
in a transaction that, (A) involves consideration to the holders of the shares
of Territorial common stock that is, afteraccounting for payment of the
Termination Fee that may be required hereunder, more favorable, from a
financial point of view, than the consideration to be paid to the holders of
shares of Territorial common stock pursuant to the Merger Agreement,considering,
among other things, the nature of the consideration being offered, and any
material regulatory approvals or other risks associated with the timing of the
proposed transaction beyond, or in addition to, those specifically
contemplated bythe Merger Agreement, and which proposal is not conditioned
upon obtaining financing is, and (B) is, in light of the other terms of such
proposal, more favorable to holders of the shares of Territorial common stock
than the Merger and the othertransactions contemplated by the Merger
Agreement; and (iii) is reasonably likely to be completed on the terms
proposed, in each case, taking into account all legal, financial, regulatory
and other aspects of the Acquisition Proposal.
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Territorial has agreed to promptly (within 24 hours) advise Hope following
receipt ofany Acquisition Proposal or any inquiry which could reasonably be
expected to lead to an Acquisition Proposal, and the substance thereof
(including the terms and conditions of and the identity of the person making
such inquiry or AcquisitionProposal), will provide Hope with an unredacted
copy of any such Acquisition Proposal and any draft agreements, proposals or
other material received from or on behalf of the person making such inquiry or
Acquisition Proposal in connection with suchinquiry or Acquisition Proposal,
and keep Hope apprised of any related developments, discussions and
negotiations on a current basis, including any amendments to or revisions of
the terms of such inquiry or Acquisition Proposal.
Conditions to Complete the Merger
Hope's and Territorial's respective obligations to complete the Merger are
subject to the satisfaction or, where legally permissible,waiver, at or prior
to the Effective Time, of the following conditions:
. the requisite Territorial stockholder vote having been obtained;
. the admission for listing on the Nasdaq Global Select Market, subject to
official notice of issuance, of the Hopecommon stock to be issued in the Merger;
. all requisite Regulatory Authorizations having been obtained and
remaining in full force and effect, and allstatutory waiting periods
in respect thereof having expired or been terminated, without the
imposition of any materially burdensome regulatory condition;
. the effectiveness of the registration statement of which this proxy statement/prospectus is a part, and
theabsence of any stop order (or proceedings for such purpose initiated or threatened and not withdrawn);
. no order, injunction or decree by any court or governmental entity of
competent jurisdiction or other legalrestraint or prohibition preventing
the consummation of the Merger, the Bank Merger or any of the other
transactions contemplated by the Merger Agreement being in effect, and no
statute, rule, regulation, order, injunction or decree having beenenacted,
entered, promulgated or enforced by any governmental entity which
prohibits or makes illegal the consummation of the Merger, the Bank Merger
or any of the other transactions contemplated by the Merger Agreement;
. the accuracy of the representations and warranties of the other party contained in the Merger
Agreement as of thedate on which the Merger Agreement was entered into and as of the date on which
the Merger is completed, subject to the materiality standards provided in the Merger Agreement
(and the receipt by each party of an officers' certificate from theother party to such effect);
. the performance by the other party in all material respects of all obligations,
covenants and agreements requiredto be performed by it under the Merger Agreement
at or prior to the date on which the Merger is completed (and the receipt by
each party of an officers' certificate from the other party to such effect);
. receipt by each party of an opinion of legal counsel to the effect
that on the basis of facts, representationsand assumptions set
forth or referred to in such opinion, the Merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Code;
. since the date of the Merger Agreement, no material adverse effect with respect to the other party havingoccurred; and
. solely with respect to Hope's obligation to close, Territorial's
delivery of a properly executed FIRPTAcertification and IRS Form W-9.
Neither Territorial nor Hope can provide assurance as to when or if all of
theconditions to the Merger can or will be satisfied or waived by the
appropriate party.
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Termination of the Merger Agreement
The Merger Agreement can be terminated at any time prior to the consummation
of the Merger, whether before or after the receipt of therequisite Hope vote
or the requisite Territorial vote, in the following circumstances:
. by mutual written consent of Hope and Territorial;
. by either Hope or Territorial if any governmental entity that must grant a requisite Regulatory
Authorization hasdenied approval and/or non-objection of the Merger or the Bank Merger
and such denial has become final and nonappealable or any governmental entity of competent
jurisdiction has issued a final and nonappealable order, injunction, decree or otherlegal
restraint or prohibition permanently enjoining or otherwise prohibiting or making illegal
the Merger or the Bank Merger, unless the failure to obtain a requisite Regulatory
Authorization is due to the failure of the party seeking to terminatethe Merger Agreement
to perform or observe its obligations, covenants and agreements under the Merger Agreement;
. by either Hope or Territorial if the Merger has not been completed on or before the date which is 12
monthsafter the date of the Merger Agreement (which we refer to as the "Termination Date"), provided that
the right to terminate the Merger Agreement due to the failure of the Merger to be completed by such date
will not be available to anyparty whose failure to fulfill any obligation under the Merger Agreement
was the cause of, or resulted in, the failure of the closing to occur by such date. Notwithstanding the
above, the Merger Agreement provides that either party has the right toextend the Merger Agreement
for two additional three-month periods after the Termination Date if it believes in good faith that
the requisite Regulatory Authorizations are likely to be obtained during any such three-month period;
. by either Hope or Territorial if requisite approval of Territorial stockholders is not obtained at
the specialmeeting of stockholders convened therefor, or any adjournment or postponement thereof;
. by either Hope or Territorial (provided that the terminating party is not then in material breach of anyrepresentation,
warranty, obligation, covenant or other agreement contained in the Merger Agreement) if there is a breach of any of
the obligations, covenants or agreements or any of the representations or warranties (or any such representation orwarranty
ceases to be true) set forth in the Merger Agreement on the part of Territorial, in the case of a termination by
Hope, or Hope, in the case of a termination by Territorial, which either individually or in the aggregate would constitute,
ifoccurring or continuing on the date the Merger is completed, the failure of a closing condition of the terminating
party and which is not cured within 45 days following written notice to the party committing such breach, or by its
nature or timingcannot be cured during such period (or such fewer days as remain prior to the Termination Date); or
. by Hope prior to such time as the requisite Territorial vote is obtained, if (i)
the Territorial Board ofDirectors shall have made a recommendation change or (ii)
Territorial or the Territorial Board of Directors has breached its obligations
relating to stockholder approval or the non-solicitation of Acquisition Proposals.
Neither Hope nor Territorial is permitted to terminate the Merger Agreement as
a result of any increase or decrease in the market price ofHope common stock
or Territorial common stock.
Effect of Termination
If the Merger Agreement is terminated, it will become void and have no effect,
except that (i) none of Territorial or Hope will berelieved or released from
any liabilities or damages arising out of its actual and intentional fraud or
willful and material breach of any provision of the Merger Agreement, and (ii)
designated provisions of the Merger Agreement will survivethe termination,
including those relating to payment of fees and expenses, the confidential
treatment of information and the Termination Fee described below.
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Termination Fee
Territorial will pay Hope a termination fee equal to $3,000,000 in cash (which
we refer to as the "Termination Fee") if the MergerAgreement is terminated in
the following circumstances:
. in the event that after the date of the Merger Agreement, a bona fide Acquisition Proposal
has been communicatedto or made known to senior management or the Territorial Board
of Directors, or has been made directly to Territorial stockholders generally, or any
person has publicly announced (and not withdrawn) an Acquisition Proposal with respect
toTerritorial, and thereafter (i) the Merger Agreement is terminated (A) by either Hope
or Territorial because the Merger has not been completed prior to the Termination Date
(and Territorial has not obtained stockholder approval of theMerger Proposal) and all
other conditions for Territorial to close the Merger had been satisfied or were capable
of being satisfied at a time prior to such termination, (B) by Hope or Territorial because
the approval of the Merger Proposal byTerritorial stockholders has not been obtained,
or (C) by Hope as a result of a willful breach of a representation, warranty, covenant
or other agreement in the Merger Agreement by Territorial that would constitute the
failure of a closingcondition and that has not been cured during the permitted time period,
or by its nature cannot be cured during such period, and (ii) prior to the date that
is 12 months after the date of such termination, Territorial enters into a definitiveagreement
for, or consummates a transaction with respect to an Acquisition Proposal; or
. if the Merger Agreement is terminated by Hope because prior to receipt of
the Territorial stockholders'adoption and approval of the Merger Agreement,
(i) the Territorial Board of Directors has (A) failed to recommend in the
proxy statement/prospectus that the stockholders of Territorial approve the
Merger Agreement, or withdrawn, modifiedor qualified such recommendation in
a manner adverse to Hope, or publicly disclosed that it intends to do so,
or failed to recommend against acceptance of a tender offer or exchange
offer constituting a competing Acquisition Proposal that has beenpublicly
disclosed within ten business days after the commencement of such tender
or exchange offer or (B) recommended or endorsed a competing Acquisition
Proposal or publicly disclosed its intention to do so, or failed to issue
a press releaseannouncing its unqualified opposition to such competing
Acquisition Proposal within ten business days after a competing Acquisition
Proposal is publicly announced or (ii) Territorial or the Territorial Board
of Directors has willfully andmaterially breached its obligations relating
to stockholder approval or the non-solicitation of Acquisition Proposals.
The Termination Fee and any amounts payable by Territorial in connection
therewith, constitute liquidated damages and not a penalty, andexcept in the
case of fraud or willful and material breach, will be the sole monetary remedy
of the other party in the event of a termination of the Merger Agreement under
specified circumstances.
Expenses and Fees
Except as otherwise provided in the Merger Agreement, all costs and expenses
incurred in connection with the Merger Agreement and thetransactions
contemplated thereby will be paid by the party incurring such expense. The
Merger Agreement provides that the costs and expenses of printing and mailing
the proxy statement and all filing and other fees paid to the SEC or any
othergovernmental entity in connection with the Merger or the Bank Merger will
be borne equally by Territorial and Hope.
Amendment, Waiver, and Extension of the Merger Agreement
Subject to compliance with applicable law, the Merger Agreement may be amended
by the parties at any time before or after the receipt of therequisite
Territorial vote, except that after the receipt of the requisite Territorial
vote, there may not be, without further approval of Territorial stockholders,
any amendment to the Merger Agreement that requires such further approval of
suchstockholders under applicable law.
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At any time prior to the Effective Time, each of the parties may, to the
extent legallyallowed, (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in
the representations and warranties of the other party contained in the Merger
Agreement or in anydocument delivered by such other parties pursuant to the
Merger Agreement, and (iii) waive compliance with any of the agreements or
satisfaction of any conditions for its benefit contained in the Merger
Agreement, except that after the receiptof the requisite Territorial vote,
there may not be, without further approval of Territorial stockholders, any
extension or waiver of the Merger Agreement or any portion thereof that
requires such further approval of such stockholders underapplicable law.
Governing Law
The Merger Agreement is governed by and will be construed in accordance with
the laws of the State of Delaware, without regard to anyapplicable conflicts
of law, except the articles of merger will be governed by the laws of the
State of Maryland and the Delaware certificate of merger will be governed by
the laws of the State of Delaware.
Specific Performance
Hope and Territorial will be entitled to specific performance of the terms of
the Merger Agreement, including an injunction or injunctions toprevent
breaches or threatened breaches of the Merger Agreement or to enforce
specifically the performance of the terms and provisions of the Merger
Agreement (including the parties' obligations to consummate the Merger), in
addition to anyother remedy to which they are entitled at law or in equity.
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VOTING AND SUPPORT AGREEMENT
The following describes certain material provisions of the voting and support
agreement. This description of the voting and supportagreement is subject to,
and qualified in its entirety by reference to, the form of voting and support
agreement, which is attached to this proxy statement/prospectus as Annex B and
is incorporated by reference into this proxystatement/prospectus. We urge you
to read the form of voting and support agreement carefully and in its entirety.
Concurrently withthe execution of the Merger Agreement, on April 26, 2024,
Hope entered into a voting and support agreement with certain executive
officers and each of the directors of Territorial, who are also Territorial
stockholders, in their respectivecapacities as Territorial stockholders and
not in their capacities as an officer or director, as the case may be. As of
the record date for the Territorial annual meeting, such executive officers
and directors collectively and beneficially ownedapproximately []% of the
outstanding shares of Territorial common stock.
Pursuant to the voting and support agreement, each suchstockholder agrees to,
among other things, at any meeting or action of stockholders of Territorial
called to vote upon the Merger (a) vote his or her shares of Territorial
common stock (or otherwise provide a proxy, consent or votinginstruction or
direction) in favor of the approval of the Merger Agreement and the Merger and
any other matters required to be approved or adopted in order to effect the
Merger and the transactions contemplated by the Merger Agreement, (b)
notinitiate any proxy solicitation or undertake any other efforts against the
Merger Agreement, the Merger or the transactions contemplated by the Merger
Agreement, and (c) not vote his or her shares of Territorial common stock in
favor of, orotherwise support, an alternative Acquisition Proposal or any
action that is intended to, or could reasonably be expected to materially
impede, interfere with, delay or otherwise materially and adversely affect the
Merger or the transactionscontemplated by the Merger Agreement. Each such
stockholder also agrees not to transfer, except in certain limited
circumstances, his or her shares prior to the time that the Merger Agreement
is approved by Territorial stockholders without the priorwritten consent of
Hope.
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ACCOUNTING TREATMENT
The Merger will be accounted for as an acquisition of Territorial by Hope
under the acquisition method of accounting in accordance with GAAPfor
financial reporting and accounting purposes. After the Merger, the results of
operations of Territorial will be included in the consolidated financial
statements of Hope. The merger consideration will be allocated based on the
fair values of theassets acquired and the liabilities assumed. Any excess of
merger consideration over fair value of the net tangible and identified
intangible assets of Hope acquired will be recorded as goodwill. Any
identified intangible asset may be amortized bycharges to operations under
GAAP.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general discussion of the material U.S. federal income tax
consequences of the Merger to U.S. holders (as definedbelow) of Territorial
common stock that exchange their shares of Territorial common stock for shares
of Hope common stock in the Merger. The following discussion is based upon the
Code, the U.S. Treasury regulations promulgated thereunder andjudicial and
administrative authorities, rulings and decisions, in each case as in effect
as of the date of this proxy statement/prospectus. These authorities may
change, possibly with retroactive effect, and any such change could affect
theaccuracy of the statements and conclusions set forth in this discussion.
This discussion assumes that the Merger will be consummated in accordance with
the Merger Agreement as described in this proxy statement/prospectus. The
following discussionapplies only to U.S. holders of Territorial common stock
who hold such shares as a capital asset within the meaning of Section 1221 of
the Code (generally, property held for investment).
For purposes of this discussion, the term "U.S. holder" means a beneficial
owner of Territorial common stock that is, for U.S.federal income tax
purposes, (1) an individual citizen or resident of the United States, (2) a
corporation, or entity treated as a corporation for U.S. federal income tax
purposes, organized in or under the laws of the United States, anystate
thereof or the District of Columbia, (3) a trust if (a) a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to control
allsubstantial decisions of the trust or (b) such trust has a valid election
in effect to be treated as a U.S. person for U.S. federal income tax purposes
or (4) an estate, the income of which is subject to U.S. federal income
taxation,regardless of its source.
Further, this discussion does not purport to consider all aspects of U.S.
federal income taxation that might berelevant to U.S. holders in light of
their particular circumstances and does not apply to holders subject to
special treatment under the U.S. federal income tax laws (such as, for
example, dealers or brokers in securities, commodities or foreigncurrencies;
traders in securities that elect to apply a mark-to-market method of
accounting; banks and certain other financial institutions; insurance
companies; mutual funds; tax-exempt organizations; holders subject to the
alternative minimum taxprovisions of the Code; persons who are required to
recognize income or gain with respect to the Merger no later than such income
or gain is required to be reported on an applicable financial statement under
Section 451(b) of the Code;partnerships, S corporations or other pass-through
entities (or investors therein); regulated investment companies; real estate
investment trusts; controlled foreign corporations; passive foreign investment
companies; former citizens or residents ofthe United States; U.S. expatriates;
U.S. holders whose functional currency is not the U.S. dollar; holders who
hold shares of Territorial common stock as part of a hedge, straddle,
constructive sale or conversion transaction or other integratedinvestment;
holders who own Territorial common stock through retirement plans, individual
retirement accounts, or other tax-deferred accounts; holders who acquired
Territorial common stock pursuant to the exercise of employee stock options,
througha tax qualified retirement plan or otherwise as compensation; or
holders who actually or constructively own more than 5% of Territorial's
common stock).
Moreover, this discussion does not address any tax consequences arising under
the unearned income Medicare contribution tax pursuant to theHealth Care and
Education Reconciliation Act of 2010, any withholding considerations under the
Foreign Account Tax Compliance Act of 2010 (including the U.S. Treasury
regulations issued thereunder and intergovernmental agreements entered
intopursuant thereto or in connection therewith), nor does it address any tax
consequences arising under the laws of any state, local or non-U.S.
jurisdiction, or under any U.S. federal laws other than those pertaining to
the income tax. In addition,this discussion does not address any alternative
minimum tax consequences of the Merger.
If an entity or arrangement treated as apartnership for U.S. federal income
tax purposes is a holder of Territorial common stock, the tax treatment of a
partner in such partnership generally will depend on the status of the partner
and the activities of the partnership. Any entity treatedas a partnership for
U.S. federal income tax
purposes that is a holder of Territorial common stock, and any partners in
such partnership, should consulttheir own tax advisors regarding the tax
consequences of the Merger to their specific circumstances.
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All holders of Territorial common stock should consult their tax advisors
regarding thespecific tax consequences to them of the Merger in light of their
particular facts and circumstances, including the applicability and effect of
the alternative minimum tax and any state, local, non-U.S. and other tax laws
and of changes in thoselaws.
In General
The obligations of Territorial and Hope to consummate the Merger are
conditioned on Territorial's and Hope's receipt of opinions fromtheir tax
counsel, Luse Gorman, PC and Greenberg Traurig, LLP, respectively, in each
case, dated as of the closing date, to the effect that the Merger will qualify
as a "reorganization" within the meaning of Section 368(a) of theCode. These
opinions will be based on, among other things, certain representations and
assumptions as to factual matters made by Territorial and Hope, as well as on
certain covenants and undertakings by Territorial and Hope. If any of
therepresentations, assumptions, covenants or undertakings upon which these
opinions are based is incorrect, incomplete, inaccurate or violated, the
validity of these opinions may be affected and the tax consequences of the
Merger could differ fromthose described in this proxy statement/prospectus. In
addition, these opinions will be based on current law and cannot be relied on
if current law changes with retroactive effect.
The opinions described above will not be binding on the Internal Revenue
Service (which we refer to as the "IRS") or any court. Hopeand Territorial
have not sought and will not seek any ruling from the IRS regarding any
matters relating to the Merger, and as a result, there can be no assurance
that the IRS will not assert, or that a court would not sustain, a position
contraryto any of the conclusions set forth below.
Material U.S. Federal Income Tax Consequences of the Merger to U.S. Holders
ofTerritorial Common Stock
On the basis that the Merger qualifies as a "reorganization" within the
meaning ofSection 368(a) of the Code, the U.S. federal income tax consequences
of the Merger to U.S. holders of Territorial common stock generally will be as
follows:
. a U.S. holder who receives solely shares of Hope common stock (or receives Hope common stock
and cash solely inlieu of a fractional share) in exchange for shares of Territorial common
stock generally will not recognize any gain or loss upon the Merger, except with respect
to the cash received in lieu of a fractional share of Hope common stock as describedbelow;
. the aggregate tax basis of the Hope common stock received by a U.S. holder in the Merger
(including fractionalshare interests in Hope common stock deemed received and exchanged
for cash as described below) will be equal to such holder's aggregate tax basis in
the Territorial common stock surrendered in exchange for the Hope common stock; and
. a U.S. holder's holding period for the shares of Hope common stock
received in the Merger (including anyfractional shares deemed received and
redeemed for cash as described below) will include the holding period
of the shares of Territorial common stock surrendered in the Merger.
A U.S. holder that acquired different blocks of shares of Territorial common
stock at different times or at different prices should consultits tax advisors
regarding the determination of its adjusted basis in, and its holding period
of, shares of Hope common stock received in the Merger.
A U.S. holder of Territorial common stock who receives cash in lieu of a
fractional share of Hope common stock, generally will be treated ashaving
received such fractional share of Hope common stock pursuant to the Merger and
then as having received cash in redemption of such fractional share. Any such
holder generally will recognize gain or loss equal to the difference between
theamount of cash received and the adjusted tax basis in the fractional share
of Hope common stock (as set forth above). Such gain or loss generally will be
capital gain or loss, and will be long-term capital gain or loss if, as of the
effective dateof the Merger, the holding period for such fractional share
(including the holding period of shares of Territorial common stock
surrendered therefor)
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exceeds one year. Long-term capital gains of certain non-corporate U.S.
holders of Territorial common stock, including individuals, are generally
taxed at preferential rates. The deductibility ofcapital losses is subject to
limitations.
Backup Withholding
Backup withholding (currently 24%) at the applicable rate may apply to a
holder of Territorial common stock with respect to certain payments,including
payments of cash made pursuant to the Merger unless such holder of Territorial
common stock (a) is a corporation or is within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a correcttaxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Backup withholding is not an additional tax. Any amount
withheld underthe backup withholding rules may be refunded or credited against
a U.S. holder's United States federal income tax liability if the required
information is supplied to the IRS in a timely manner.
Information Reporting
A U.S. holder of Territorial common stock, as a result of having received Hope
common stock in connection with the Merger, will be required toretain records
pertaining to the Merger and will be required to file with such U.S. holder's
U.S. federal income tax return for the year in which the Merger takes place a
statement setting forth certain facts relating to the Merger. Inaddition, each
U.S. holder of Territorial common stock who is a "significant holder" will be
required to file a statement with such holder's U.S. federal income tax return
in accordance with Treasury RegulationsSection 1.368-3(b) setting forth
certain information, including the parties to the Merger, the date of the
Merger and such holder's basis in the Territorial common stock surrendered. A
"significant holder" is a holder ofTerritorial common stock who, immediately
before the Merger, owned at least 1% of the vote or value of the outstanding
capital stock of Territorial or securities of Territorial with a basis for
federal income tax purposes of at least $1 million.
This discussion of certain material U.S. federal income tax consequences is
not intended to be, and should not be construed as, taxadvice. All holders of
Territorial common stock should consult their tax advisors with respect to the
application of U.S. federal income tax laws to their particular situations as
well as any tax consequences arising under the U.S. federal estate orgift tax
rules, or under the laws of any state, local, non-U.S. or other taxing
jurisdiction or under any applicable tax treaty.
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DESCRIPTION OF HOPE SECURITIES
As a result of the Merger, Territorial stockholders who receive shares of Hope
common stock in the Merger will become stockholders of Hope.Your rights as a
stockholder of Hope will be governed by the Delaware General Corporation Law
(which we refer to as the "DGCL"), Hope's certificate of incorporation, as
currently in effect, and Hope's bylaws, as currently ineffect. The following
briefly summarizes the material terms of Hope common stock that will be issued
in connection with the Merger. We urge you to read the applicable provisions
of the DGCL and Hope's certificate of incorporation and bylaws,which are
incorporated herein by reference and will be sent to stockholders of
Territorial upon request. See the section entitled "Where You Can Find More
Information".
Authorized Capital Stock
Hope'sauthorized capital stock consists of 300,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. As of [], 2024, there were [] shares of Hope
commonstock outstanding and no shares of Hope preferred stock outstanding.
Description of Hope Common Stock
Voting Rights
Holders of Hope common stock are entitled to one vote per share on all matters
voted on by the stockholders, including the election ofdirectors. Hope's
certificate of incorporation and bylaws do not provide for cumulative voting
in the election of directors.
Dividend Rights
Holders of Hope common stock are entitled to receive dividends, if any, as may
be declared from time to time by the Hope Board of Directors inits discretion
out of funds legally available for the payment of dividends, subject to any
preferential dividend rights granted to the holders of any outstanding Hope
preferred stock.
Liquidation Rights
In the event of Hope's liquidation, the holders of Hope common stock will be
entitled to share ratably in any distribution of Hope'sassets after payment of
all debts and other liabilities and the preferences payable to holders of
shares of Hope preferred stock then outstanding, if any.
Applicable Anti-Takeover Law
Set forth below is a summary of the provisions of Hope's certificate of
incorporation and bylaws that could have the effect of delaying orpreventing a
change in control of Hope. The following description is only a summary and it
is qualified by reference to Hope's certificate of incorporation and bylaws
and relevant provisions of the DGCL.
Blank Check Preferred Stock
Hope's certificate of incorporation authorizes 10,0000,000 undesignated shares
of Hope preferred stock and permits the Hope Board ofDirectors to issue
preferred stock with rights or preferences that could impede the success of
any attempt to change control of Hope. For example, the Hope Board of
Directors, without stockholder approval, may create or issue preferred stock
withconversion rights that could adversely affect the voting power of the
holders of Hope common stock as well as rights to such preferred stock, in
connection with implementing a stockholder rights plan. This provision may be
deemed to have a potentialanti-takeover effect,
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because the issuance of such preferred stock may delay or prevent a change of
control of Hope. Furthermore, shares of preferred stock, if any are issued,
may have other rights, including economicrights, senior to Hope common stock,
and, as a result, the issuance thereof could depress the market price of Hope
common stock.
NoCumulative Voting
Hope's certificate of incorporation and bylaws do not provide holders of Hope
common stock cumulativevoting rights in the election of directors. The absence
of cumulative voting could have the effect of preventing stockholders holding
a minority of Hope common stock from obtaining representation on the Hope
Board of Directors. The absence ofcumulative voting might also, under certain
circumstances, render more difficult or discourage a merger, tender offer or
proxy contest favored by a majority of Hope stockholders, the assumption of
control by a holder of a large block of Hope stockor the removal of incumbent
management.
Advance Notice Requirements for Stockholder Proposals and Director Nominees
Hope's bylaws require its stockholders seeking to make nominations of
candidates for election as directors or to bring other businessbefore a
meeting of Hope stockholders to provide timely notice of their intent in
writing. To be timely, a stockholder's notice must be delivered to Hope's
secretary at its principal executive offices not less than 100 days nor more
than120 days prior to the first anniversary of the immediately preceding
annual meeting of the stockholders; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or after such
anniversary date, notice bythe stockholder, to be timely, must be so received
not later than the close of business on the tenth day following the earlier of
the date on which Hope first gives notice or publicly announce the date of the
meeting. A stockholder's noticemust include certain information about the
stockholder and the nominee or proposal as specified in Hope's bylaws. These
advance notice provisions may restrict the ability of the stockholders to make
nominations for directors at or bringbusiness before a meeting of Hope
stockholders.
Listing
Hope common stock is traded on the Nasdaq Global Select Market under the
trading symbol "HOPE".
Transfer Agent
Hope's transferagent is Computershare Trust Company, N.A.
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COMPARISON OF STOCKHOLDERS' RIGHTS
If the Merger is completed, Territorial stockholders will receive shares of
Hope common stock in the Merger. Hope is organized under thelaws of the State
of Delaware, and Territorial is organized under the laws of the State of
Maryland. The following is a summary of the material differences between (1)
the current rights of Hope stockholders under Hope's certificate ofincorporation
, as currently in effect, and Hope's bylaws, as currently in effect, and (2)
the current rights of Territorial stockholders under the Territorial's
articles of incorporation, as currently in effect, and Territorial'sbylaws, as
currently in effect.
Territorial and Hope believe that this summary describes the material
differences between therights of Territorial stockholders as of the date of
this proxy statement/prospectus and the rights of Hope stockholders as of the
date of this proxy statement/prospectus; however, it does not purport to be a
complete description of thosedifferences. Copies of Territorial's and Hope's
governing documents have been filed with the SEC. To find out where copies of
these documents can be obtained, see the section entitled "Where You Can Find
More Information".
Delaware Maryland
Organizational Documents The rights of The rights of Territorial
Hope stockholders stockholders are
are governed by Hope's governed by
certificate of Territorial's articles of
incorporation, incorporation,
bylaws and the DGCL. bylaws and the MGCL.
Authorized Capital Stock The authorized capital The authorized capital
stock of Hope stock of Territorial
consists of 300,000,000 consists of
shares of common 100,000,000 shares of
stock, par value common stock, par value
$0.001 per share, and $0.001 per share,
10,000,000 shares of and 50,000,000 shares
preferred stock, par of preferred stock,
value $0.001 per par value $0.001 per
share. As of December share. As of March
31, 2023, there were 31, 2024, there were
120,126,786shares 8,826,613shares of
of Hope common stock Territorial common
and no shares of stock and no shares of
preferred stock issued preferred stock issued
and outstanding. and outstanding.
Limitation on Hope's certificate Territorial's articles of incorporation provide that
Voting Rights of incorporation no record holders of any outstanding common stock
and bylaws do not of Territorial that is beneficially owned, directly
limit voting or indirectly, by a person who beneficially owns
rights of holders more than 10% of thethen-outstanding shares of common
based on the number stock of Territorial will be permitted to vote
of shares of stock any shares held in excess of the 10% limit unless,
they may hold. before the person acquired beneficial ownership of
such shares in excess of the 10% limit, such
acquisition of shareswas approved by a majority of the
unaffiliated directors on the Territorial Board of
Directors. The Territorial Board of Directors has the
power to construe and apply the provisions in the
articles of incorporation regarding the 10% limitation
onvoting rights and to make all determinations
necessary or desirable to implement such provisions.
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Number, Removal and The Hope Board of Directors Territorial's articles of
Classification currently has 12 members incorporation and bylaws provide
of Board of Directors and will continue to have that the number of directors of
12 members after the Territorial shall, by virtue
consummation of the ofTerritorial's election made
Merger. The bylaws ofHope to be governed by Section
provide that the number of 3-804(b) of the MGCL, be fixed
directors may be no less from time to time exclusively
than five and no more than by vote of the Territorial
25, with the exact number Board of Directors; provided,
to be fixed by resolution however, that such number shall
of the Hope Board of never be less than theminimum
Directors. The Hope Board number of directors required
of Directors is not divided by the MGCL. Currently, the
into classes having Territorial Board of Directors
different terms ofoffice. is set at six directors.
Hope's bylaws provide that Territorial's articles of incorporation and bylaws provide
any director or the entire further that the directors, other than those who may
board ofdirectors may be be elected by the holders of preferredstock, shall be
removed by the divided into three classes, as nearly equally as possible,
holders of a creating a staggered board of directors. At each annual
majority of the meeting of stockholders, directors elected to succeed
voting power those directors whose terms expire will be elected for a
of all the then term ofoffice to expire at the third succeeding annual
outstanding meeting of stockholders after their election or for such
shares then shorter period of time as the Territorial Board of Directors
entitled to vote may determine, with each director to hold office until
at an election his or her term expires anduntil his or her successor
of directors. has been duly elected and qualified. The vote of a plurality
of the votes cast at a meeting is required to elect
Hope's certificate of directors of Territorial. Stockholders are not permitted
incorporation does not provide to cumulate their votes in the election ofdirectors.
for cumulative voting
by stockholders in the Territorial's articles of incorporation
election of directors, and provide that, subject to therights
Hope's bylaws providesfor of the holders of any series of
directors to be elected preferred stock then outstanding, any
by a plurality of the director, or the entire board of
votes cast at a meeting directors, may be removed from office
of stockholders for the at any time, but only for cause and
election of directors, only by the affirmative vote of the
except in case of vacancies holders of atleast two-thirds of the
and newly created directorships voting power of all of the then-shares
resulting from any of capital stock of Territorial
increase in the authorized outstanding and entitled to vote
number ofdirectors. generally in the election of directors
(after giving effect to the restrictions
on voting rights describedabove),
voting together as a single class.
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Vacancies on the Hope's bylaws provide that vacancies Territorial's bylaws provide that any
Board of Directors and newly created directorships vacancy occurring in the Territorial
resulting from an increase in the Board of Directors, including vacancies
authorized number of directors resulting from an increase in the
may be filled by a majority of number of directors or the death,
the directors then in office, resignation or removal of a director,
whether or not less than aquorum, may befilled only by the affirmative
or by a sole remaining director. vote of two-thirds of the remaining
Each director so elected shall directors then in office, even if such
hold office until the earlier of directors do not constitute a quorum.
the expiration of the term of A director elected to fill a vacancy
office of the director whom the will be elected to serve for the
director has replaced, a successor remainder of the fullterm of the class
is duly elected and qualified, of directors in which the vacancy
or the earlierof such director's occurred and until the director's
death, resignation, or removal. successor is elected and qualified.
Amendment of Articles or Unless otherwise provided Except with respect to amending
Certificate of therein, under Section 242 of the the articles of incorporation by
Incorporation DGCL an amendment to the certificate the Territorial Board of Directors
of incorporation requires to increase or decrease the
a board resolutionsetting forth number ofshares authorized for
the amendment proposed, declaring issuance, or as otherwise allowed by
its advisability, and directing the MGCL, any amendment to the
that such amendment be articles of incorporation must be
considered by stockholders at approved by the Territorial Board
a special meeting or the next of Directors and also by a majority
annual meeting, and approval by of the outstanding shares of
a majority of the outstanding Territorial's votingstock; provided,
stock entitled to voteon the however, that approval by at least
amendment, unless the certificate 80% of the outstanding voting
of incorporation imposes a stock is generally required to amend
greater approval requirement. certain provisions, including:
Hope's certificate of .
the limitation
incorporation on voting rights
does not provide of persons who
for a greater approval beneficially
requirement and own more than 10% of the
so it may be outstandingshares
amended with of common stock;
approval of the
Hope Board ofDirectors and .
the division of the
the majority Territorial Board of
of outstanding Directors into three
stock entitled to vote. staggered classes;
.
the supermajority
voterequirement
for stockholders to
remove directors,
with such
removal being
only for cause;
.
the ability of the
Territorial Board of
Directors to amend and
repeal the bylaws;
.
the ability of
theTerritorial Board
of Directors to
evaluate a variety of
factors in evaluating
offers to purchase
or otherwise acquire
Territorial;
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.
the validity and
effectiveness of any action
lawfully authorized by
theaffirmative vote
of the holders of a
majority of the total
number of outstanding
shares of common stock;
.
the number of
stockholders
constituting a
quorum or required for
stockholder consent;
.
indemnification
byTerritorial;
.
limitationof liability
for money damages; and
.
the provision of the
articles of incorporation
requiring approval of at
least 80% of theoutstanding
voting stock to amend certain
provisions of the articles
of incorporation, including
those listed above.
Amendment of Bylaws Hope's certificate of Territorial's articles of incorporation provide that the
incorporation grants power to bylaws may be amended by the affirmative vote of a majority
amend the bylaws to the Hope of Territorial's directors or by the stockholders by
Board of Directors, and the affirmative vote of at least 80% of the totalvotes
Hope's bylaws provide that eligible to be voted at a duly constituted meeting
the bylaws may be amended of stockholders. Any amendment of this supermajority
by the stockholders or the requirement for amendment of the bylaws would also require
Hope Board of Directors. the approval of 80% of the outstanding voting stock.
Special Meetings Hope's bylaws provide that special Territorial's bylaws provide that, unless approved by
of Stockholders meetings of stockholders may be called unaffiliated directors, special meetings of stockholders
by resolution adopted by a majority can be called by only the President, a majority of
of the Hope Board of Directors the total number of directors that Territorial would
or by written request of stockholders have ifthere were no vacancies on the Territorial
owning in the aggregate 10% Board of Directors, or the Secretary upon the written
or more of theoutstanding shares request of stockholders entitled to cast at least a
of Hope outstanding common stock. majority of all votes entitled to vote at the meeting.
Notice of Stockholder Hope's bylaws provide that Territorial's
Meetings written notice of any bylaws require that
stockholders' meeting notice of stockholder
must be given to each meetings be
stockholder entitled to given not less
vote not less than ten than ten nor more
days nor more than 60 than 90 days before
days before the meeting. the meeting.
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Notice of Stockholder Nominations of persons for Only such business
Proposals election to the Hope Board shall be conducted
and Director Nominations of Directors and the proposal as shall have been brought
of business other than before annual meeting
nominations to be considered of Territorial
by the stockholders may be stockholders (i)
made at an annual meeting as specified
of stockholders only (i) by inthe notice of
or at thedirection of the the meeting, (ii)
chairman of the meeting; (ii) by or at the
pursuant to the notice of the direction of the
meeting; or (iii) by any Territorial Board
stockholder of Hope who is of Directors or
a stockholder of record as (iii) by any stockholder
of the record date of the who: (1) is
meeting, who is entitled to a stockholder of
vote at the meeting and who record on the date
complieswith the notice such stockholder
procedures set forth in the gives the notice
Hope bylaws. For the avoidance provided for in the
of doubt, the foregoing bylaws andon the
clause (iii) is the exclusive record date for
means for a stockholder to the determination
make director nominations and of stockholders
submit other business (other entitled to vote
than matters properly included at such annual
inthe corporation's notice meeting; and (2)
of meeting of stockholders complies with the
and proxy statement under notice procedures
Rule 14a-8 under the Exchange set forth in the bylaws.
Act) before an annual
meeting of stockholders. Nominations of
persons for election
to the Territorial
Board of
Directors at a meeting of
stockholders at
which directors are
to be elected
only (i) by orat
the direction of
the Territorial
Board of Directors
or (ii) by
any stockholder
who (1) is a
stockholder of
record on the
date such stockholder
gives the
notice provided
for in the bylaws
and on the record
date for the
determination
ofstockholders entitled
to vote at such
meeting, and
(2) complies
with the notice
procedures set forth
in the bylaws.
With respect to nominations and
business to be properly brought
before an annual meeting by a
stockholder, the stockholder
must have given timely
noticethereof in writing to the
Secretary of Territorial and,
with respect to stockholder
proposals, such business must
otherwise be a proper matter
for action by stockholders.
To be timely, a stockholder's
notice must be delivered or
mailed to andreceived by the
Secretary at Territorial's
principal executive office of the
Corporation not less than 80
days nor more than 90 days prior
to any such meeting; provided,
however, that if less than
90 days' notice or prior public
disclosureof the date of
the meeting is given to
stockholders, such written notice
shall be delivered or mailed to
and received by the Secretary
at the principal executive
office not later than the tenth
day following the day on which
notice of the meetingwas
mailed to stockholders or such
public disclosure was made.
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A stockholder's notice with respect to stockholder proposals or nominations
must include: (i) the name and address of suchstockholder as they appear
on Territorial's books and of the beneficial owner, if any, on whose behalf
the proposal is made; (ii) the class or series and number of shares of
capital stock of Territorial which are owned beneficially or ofrecord by
such stockholder and such beneficial owner; and (iii) a representation that
such stockholder intends to appear in person or by proxy at the annual meeting
to bring such business or nomination before the meeting, as applicable.
A stockholder's notice with respect to stockholder proposals must also
set forth asto each matter such stockholder proposes to bring before the
annual meeting: (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting; and(ii) a description of all arrangements
or understandings between such stockholder and any other person or
persons in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in suchbusiness.
A stockholder's notice with respect to nominations must also setforth (a) as to each person
whom the stockholder proposes to nominate for election as a director, all information relating
to such person that would indicate such person's qualification under the bylaws including an
affidavit that suchperson would not be disqualified under the provisions of the bylaws and such
information relating to such person that is required to be disclosed in connection with solicitations
of proxies for election of directors, or is otherwise required, ineach case pursuant to
Regulation 14A under the Exchange Act, or any successor rule or regulation; and (b) as to the
stockholder giving the notice: (i) a description of all arrangements or understandingsbetween
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such stockholder and each proposed
nominee and any other person or persons
pursuant to which the nomination(s) are
to be made by such stockholder; and
(ii) any other information relating to
such stockholder that would berequired
to be disclosed in a proxy statement
or other filings required to be made
in connection with solicitations of
proxies for election of directors
pursuant to Regulation 14A under the
Exchange Act or any successor rule or
regulation. Suchnotice must be accompanied
by a written consent of each proposed
nominee to be named as a nominee and
to serve as a director if elected.
Payment of Dividends The DGCL permits the payment of Holders of
dividends to stockholders only Territorial common
out of surplus (as defined in the stock are entitled
DGCL) or, if there is no such to receive
surplus, net profits for the such dividends as the
fiscal year in which the dividend Territorial Board
is declared and for the preceding of Directors
fiscalyear; provided, however may declare out
that dividends may not be paid of funds legally
out of net profits if, after the available for
payment of such dividend, Hope's such payment,
capital would be less than subject to the rights of
the capital represented by the holders of preferredstock.
outstanding stock of all classes
having a preference upon
thedistribution of Hope's assets.
Appraisal and Under the DGCL, stockholders generally Holders of Territorial stock are not
Dissenters' Rights have appraisal rights in connection with entitled to exercise any rights
certain mergers or consolidations in which of an objecting stockholder
the corporation is participating, subject provided for under the MGCL unless
to specified procedural requirements. the Territorial Board of Directors,
Under the DGCL, however, nodissenters' pursuant to a resolution
rights are available for stock, such as approved by a majority of the
Hope's, listed on the Nasdaq Global Select directorsthen in office, determines
Market, except where the stockholder is that such rights apply with
required to accept for the stock anything respect to all or any classes or
other than: (a) stock listed on a national series of stock, to one or more
securitiesexchange or held of record by transactions occurring after the
more than 2,000 holders; (b) stock of the date of such determination in
surviving corporation; (c) cash in lieu connection with which holders of
of fractional shares; or (d) any combination such shares would otherwise
of foregoing clauses (a), (b) and (c). beentitled to exercise such rights.
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Indemnification Hope's certificate of incorporation provides Territorial's articles of
and Liability for Hope to indemnify any and all directors, incorporation also provide
Exculpation of officers, employees and agents to the for indemnification of (i)
Directors and Officers fullestextent permitted under Section 145 of Territorial's current and
the DGCL, and its bylaws provides similar former directors andofficers,
coverage for officers and directors. Section whether serving Territorial
145 of the DGCL provides that, subject to or at its request any other
certain limitations in the case of derivative entity, to the fullest
suits brought by acorporation's stockholders extent required or permitted
in its name, a corporation may indemnify by the MGCL, including
any person who was or is made a party to any the advancement of expenses
threatened, pending or completed action, under the procedures and
suit or proceeding on account of being or having to the fullest extent permitted
been a director, officer, employee oragent by law; and(ii) other
of the corporation (or is or was serving employees and agents to
at the request of the corporation in such such extent as authorized
capacity for another corporation, partnership, by the Territorial Board of
joint venture, trust or other enterprise) Directors and permitted by
against expenses, including attorney's law; provided, however,
fees, judgments, fines andamounts paid in that, except as provided in
settlement actually and reasonably incurred the articles of incorporation
by him or her in connection with the action, with respect to proceedings
suit or proceeding through, among other things, to enforce rightsto
a majority vote of the directors who were indemnification, Territorial
not parties to the action, suit or proceeding, will indemnify any indemnitee
even ifless than a quorum, if the person: in connection with
(i) acted in good faith and in a manner he a proceeding (or part
or she reasonably believed to be in or not thereof) initiated by the
opposed to the best interests of the indemnitee only if the
corporation; and (ii) with respect to a criminal proceeding (or part thereof)
action or proceeding, had no reasonablecause was authorized by the
to believe his or her conduct was unlawful. Territorial Board of Directors.
Section 145 of the Maryland law applicable
DGCL alsopermits to Territorial
indemnification generally provides
by a corporation that a corporation
against expenses mayindemnify a director
(including attorneys' or officer who
fees) actually is a party to a
and reasonably threatened, pending
incurred by such or completed proceeding
person in connection unless it is
with the defense established that (i)
or settlement the director's act
of such action or omission was
or suit if the material to the matter
person acted in giving rise to the
good faith and in proceeding and was
amanner the person committed inbad faith
reasonably believed or was the result
to be in or not of active and
opposed to the deliberate dishonesty;
best interests of (ii) the director
the corporation, actually received an
except that no improper personal
indemnification benefit in money,
may be made in respect property, or services;
of any claim, or (iii) in the
issue or matter case of any criminal
as to which the proceeding, the
person is adjudged director had
to be liable reasonablecause to believe
to thecorporation that the act or
unless and only omission was unlawful.
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Delaware Maryland
to the extent
that the Delaware
Court of Chancery
or the court
in which the
action or suit
was brought
determines upon
application that
the person is
fairly and reasonably
entitled to
indemnity for the
expenses which
the court deemsto
be proper.
Limitation of Hope's certificate of incorporation Territorial's articles of
Personal Liability provides that a director incorporation also provide
of Directors and Officers or officer of Hope will not for indemnification of (i)
be liable to Hope or its Territorial's current and
stockholders for monetary damages former directors andofficers,
for breach of fiduciary duty whether serving Territorial
as a director or officer to the or at its request any other
fullest extentpermitted by entity, to the fullest
Delaware law. Section 102(b)(7) extent required or permitted
of the DGCL provides that a by the MGCL, including
corporation may include in its the advancement of expenses
certificate of incorporation a under the procedures and
provision eliminating or limiting to the fullest extent permitted
the personal liability of by law; and(ii) other
a director or officer of the employees and agents to
corporation or itsstockholders such extent as authorized
for monetary damages for by the Territorial Board of
breach of fiduciary duty as a Directors and permitted by
director; provided that such law; provided, however,
provision may not eliminate or that, except as provided in
limit the liability of a director the articles of incorporation
for: (i) a breach of the with respect to proceedings
duty of loyalty; (ii) acts or to enforce rightsto
omissions not in good faith indemnification, Territorial
orthat involve intentional will indemnify any indemnitee
misconduct or a knowing violation in connection with
of law; (iii) unlawful payments a proceeding (or part
of dividends, certain stock thereof) initiated by the
repurchases or redemptions; indemnitee only if the
or (iv) any transaction from proceeding (or part thereof)
which the director derived an was authorized by the
improper personal benefit. Territorial Board of Directors.
Maryland law applicable
to Territorial
generally provides
that a corporation
mayindemnify a director
or officer who
is a party to a
threatened, pending
or completed proceeding
unless it is
established that (i)
the director's act
or omission was
material to the matter
giving rise to the
proceeding and was
committed inbad faith
or was the result
of active and
deliberate dishonesty;
(ii) the director
actually received an
improper personal
benefit in money,
property, or services;
or (iii) in the
case of any criminal
proceeding, the
director had
reasonablecause to believe
that the act or
omission was unlawful.
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Delaware Maryland
Exclusive Forum Hope's certificate of incorporation and bylaws Territorial's governing
provide that unless it consents in writing to documents do
the selection of an alternative forum, the Court not include a forum
of Chancery of the State of Delaware will be selection clause.
the sole and exclusive forum for anystate law claim
for: (i) any derivative action or proceeding
brought on behalf of Hope, (ii) any action
asserting a claim of breach of or based on a
fiduciary duty owed by director or officer
or other employee of Hope to Hope or Hope
stockholders,(iii) any action or other proceeding
asserting a claim against Hope arising pursuant to
any provision of the DGCL or Hope's certificate
of incorporation or bylaws, or (iv) any action
asserting a claim against Hope governed by the
internalaffairs doctrine or (v) any action or
other proceeding to interpret, apply, enforce
or determine the validity of, or otherwise
asserting a claim arising pursuant to, any provision
of Hope's certificate of incorporation or
bylaws. Unless Hopeconsents in writing to the
selection of an alternative forum, the federal
district courts of the United States shall be
the exclusive forum for the resolution of any
complaint asserting a cause of action arising under
the Securities Act of 1933, asamended (which
we refer to as the "Securities Act"). Any person
or entity purchasing or otherwise acquiring
any interest in shares of capital stock of Hope
will be deemed to have notice of and to have
consented to the forum selectionprovision of
Hope's certificate of incorporation and bylaws.
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LEGAL MATTERS
The validity of the Hope common stock to be issued in connection with the
Merger will be passed upon for Hope by Greenberg Traurig, LLP.
Certain U.S. federal income tax consequences relating to the Merger will be
passed upon for Hope by Greenberg Traurig, LLP and for Territorialby Luse
Gorman, PC.
EXPERTS
The consolidated financial statements of Hope Bancorp, Inc. incorporated in
this proxy statement/prospectus by reference to Hope's AnnualReport on Form
10-K for the year ended December 31, 2023, filed on February 28, 2024 have
been so incorporated in reliance upon the report of Crowe LLP, an independent
registered public accounting firm, given on the authority of said firmas
experts in auditing and accounting.
The consolidated financial statements of Territorial Bancorp Inc. as of
December 31, 2023 and2022, and for the years then ended, included in this
proxy statement/prospectus have been audited by Moss Adams LLP, an independent
registered public accounting firm, as stated in their report (which report
expresses an unqualified opinion andincludes an explanatory paragraph related
to a change in the method of accounting for the allowance for credit losses on
loans). Such consolidated financial statements are included in reliance upon
the report of such firm given upon their authorityas experts in accounting and
auditing.
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DEADLINES FOR SUBMITTING STOCKHOLDER PROPOSALS
Territorial must receive proposals that stockholders seek to include in the
proxy statement for the Company's annual meeting ofstockholders to be held in
2025 (which we refer to as the "Territorial 2025 Annual Meeting") no later
than December 17, 2024. If the Territorial 2025 Annual Meeting is held on a
date more than 30 calendar days from May 16, 2025,a stockholder proposal must
be received by a reasonable time before Territorial begins to print and mail
its proxy solicitation for such annual meeting. Any stockholder proposals will
be subject to the requirements of the proxy rules adopted by theSEC.
In order to solicit proxies in support of director nominees other than
Territorial's nominees for Territorial 2025 AnnualMeeting, a person must
provide notice postmarked or transmitted electronically to Territorial's
executive office, Pauahi Tower, 1003 Bishop Street, Suite 500, Honolulu,
Hawaii 96813, or tbi@territorialsavings.net, no later than March 17,2025. Any
such notice and solicitation will be subject to the requirements of the proxy
rules adopted by the SEC.
Territorial'sbylaws generally provide that any stockholder desiring to make a
proposal for new business at an annual meeting of stockholders or to nominate
one or more candidates for election as directors must submit written notice
filed with the Secretary ofTerritorial not less than 80 days nor more than 90
days prior to any such annual meeting; provided, however, that if less than 90
days' notice or prior public disclosure of the date of the annual meeting is
given to stockholders,such written notice shall be delivered or mailed to and
received by the Secretary of Territorial at Territorial's principal executive
office not later than the tenth day following the day on which notice of the
meeting was mailed tostockholders or such public disclosure was made.
The Territorial 2025 Annual Meeting is expected to be held on May 15, 2025.
For theTerritorial 2025 Annual Meeting, the notice would have to be received
between February 14, 2025 and February 24, 2025. The stockholder must also
provide certain information in the notice, as set forth in Territorial's
bylaws. Failureto comply with these advance notice requirements will preclude
such nominations or new business from being considered at the meeting.
Territorial will not hold the Territorial 2025 Annual Meeting if the Merger is
completed prior to the date that Territorial is required underapplicable law
to hold the Territorial 2025 Annual Meeting.
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WHERE YOU CAN FIND MORE INFORMATION
Hope has filed with the SEC a registration statement under the Securities Act
that registers the issuance of the shares of Hope common stockto be issued in
connection with the Merger. This proxy statement/prospectus is a part of that
registration statement and constitutes the prospectus of Hope and a proxy
statement for Territorial stockholders. The registration statement,
includingthis proxy statement/prospectus and the attached annexes, exhibits
and schedules, contains additional relevant information about Hope and Hope
common stock.
Hope and Territorial also file reports, proxy statements, and other
information with the SEC under the Exchange Act. The SEC maintains awebsite at
https://www.sec.gov that contains reports, proxy statements, and other
information about issuers, such as Hope and Territorial, who file
electronically with the SEC. The reports and other information filed by Hope
with the SEC are alsoavailable at Hope's website at www.bankofhope.com. The
reports and other information filed by Territorial with the SEC are also
available at Territorial's website at www.territorialsavings.net. The web
addresses of the SEC, Hope andTerritorial are included as inactive textual
references only. Except as specifically incorporated by reference into this
proxy statement/prospectus, information on those web sites is not part of this
proxy statement/prospectus.
The SEC allows Hope to incorporate by reference information in this proxy
statement/prospectus. This means that Hope can disclose importantinformation
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this proxy
statement/prospectus, except for any information that is superseded
byinformation that is included directly in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference thedocuments listed
below that Hope previously filed with the SEC (other than documents or
information deemed to have been furnished and not filed according to SEC
rules). They contain important information about Hope and its financial
condition.
Hope filings (SEC File No. 000-50245)
. Annual Report on Form 10-K filed on
February 28, 2024
for the year ended December 31, 2023;
. Definitive Proxy Statement on Schedule 14A filed on
April 12, 2024
for Hope's 2024 Annual Meeting of Stockholders;
. Quarterly Report on Form 10-Q filed on
May 7, 2024
for the quarterly period ended March 31, 2024;
. Current Reports on Form 8-K filed
January 30, 2024
,
March 22, 2024
,
April 29, 2024
, and
May 29, 2024
, other than those portions of the documents deemed to be furnished and notfiled; and
. Definitive Additional Materials on Schedule 14A filed on
April 30, 2024
and
May 9, 2024
.
Hope also incorporates by reference the description of Hope common stock
contained in
Exhibit 4.11
to Hope's Annual Report on Form 10-K for the year ended December 31, 2023
filed on February 28, 2024 with the SEC, including any amendment or report
filed for the purpose of updating such description.
In addition, Hope incorporates by reference additional documents filed with
the SEC under Sections 13(a), 13(c), 14 and 15(d) of the ExchangeAct between
the date of this proxy statement/prospectus and the date of the Territorial
special meeting, provided that such issuer is not incorporating by reference
any information furnished to, but not filed with, the SEC.
Except where the context otherwise indicates, Hope has supplied all
information contained or incorporated by reference in this proxystatement/prospe
ctus relating to Hope, and Territorial has supplied all information contained
in this proxy statement/prospectus relating to Territorial.
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Documents incorporated by reference are available from Hope without charge,
excluding anyexhibits to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in this proxy statement/prospectus.
You can obtain documents incorporated by reference in this proxy statement/prosp
ectus by requesting them inwriting or by telephone at the following address
and phone number:
For Hope documents incorporated by reference:
Hope Bancorp, Inc.
3200 WilshireBlvd., Suite 1400
Los Angeles, California 90010
Telephone: (213) 639-1700
Territorial stockholders requesting documents must request them no later than
five business days before the date of the Territorial specialmeeting. This
means that Territorial stockholders requesting documents must do so by [
], 2024. Territorial stockholders will not be charged for any of these
documents that you request
.
If you request any incorporateddocuments from Hope, Hope will mail them to you
by first class mail, or another equally prompt means, within one business day
after receiving your request.
Neither Hope nor Territorial has authorized anyone to give any information or
make any representation about the Merger or the companiesthat is different
from, or in addition to, that contained in this proxy statement/prospectus or
in any of the materials that have been incorporated in this proxy
statement/prospectus. Therefore, if anyone gives you information of this sort,
youshould not rely on it. If you are in a jurisdiction where offers to
exchange or sell, or solicitations of offers to exchange or purchase, the
securities offered by this proxy statement/prospectus or the solicitation of
proxies is unlawful, or if youare a person to whom it is unlawful to direct
these types of activities, then the offer presented in this proxy
statement/prospectus does not extend to you. The information contained in this
proxy statement/prospectus speaks only as of the date ofthis proxy
statement/prospectus unless the information specifically indicates that
another date applies.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Unaudited Consolidated Financial Statements as of March 31, 2024 and for the three monthsended March 31, 2024 and 2023
Consolidated Balance Sheets (Unaudited) at March 31, 2024 and December 31, 2023 F-2
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2024 and 2023 F-3
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2024 and 2023 F-4
Consolidated Statements of Stockholders' Equity (Unaudited) for the Three Months Ended March 31, 2024 and 2023 F-5
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2024 and 2023 F-7
Notes to Consolidated Financial Statements (Unaudited) F-9
Audited Consolidated Financial Statements as of and for the years ended December 31, 2023and 2022
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Portland, Oregon, PCAOB ID:659) F-30
Consolidated Balance Sheets at December 31, 2023 and 2022 F-32
Consolidated Statements of Income for the years ended December 31, 2023 and 2022 F-33
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023 and 2022 F-34
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2023 and 2022 F-35
Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-36
Notes to Consolidated Financial Statements F-38
All financial statement schedules have been omitted as the required
information either is not applicable or is included in the financial
statements or relatednotes.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
March 31, December 31,
2024 2023
ASSETS
Cash and cash $ 90,059 $ 126,659
equivalents
Investment securities available 19,483 20,171
for sale, at fair value
Investment securities held to maturity, at amortized cost (fair value of 677,578 685,728
$547,290 and $568,128 atMarch 31, 2024 and December 31, 2023, respectively)
Loans 1,309,712 1,308,552
receivable
Allowance for (5,142 ) (5,121 )
credit losses
Loans receivable, net of 1,304,570 1,303,431
allowance for credit losses
Federal Home Loan 12,232 12,192
Bank stock, at cost
Federal Reserve 3,182 3,180
Bank stock, at cost
Accrued interest 6,281 6,105
receivable
Premises and 7,144 7,185
equipment, net
Right-of-use 12,080 12,371
asset, net
Bank-owned 48,884 48,638
life insurance
Income taxes 604 344
receivable
Deferred income 2,820 2,457
tax assets, net
Prepaid expenses 8,112 8,211
and other assets
Total assets $ 2,193,029 $ 2,236,672
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,600,148 $ 1,636,604
Advances from the 242,000 242,000
Federal Home Loan Bank
Advances from the 50,000 50,000
Federal Reserve Bank
Securities sold under 10,000 10,000
agreements to repurchase
Accounts payable and 20,113 23,334
accrued expenses
Lease 17,597 17,297
liability
Advance payments by borrowers 3,155 6,351
for taxes and insurance
Total 1,943,013 1,985,586
liabilities
Commitments and
contingencies: (Note 16)
Stockholders'
Equity:
Preferred stock, $0.01 par value; authorized -- --
50,000,000 shares, no shares issued oroutstanding
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and 88 88
outstanding 8,826,613shares at March 31, 2024 and December 31, 2023
Additional 48,098 48,022
paid-in capital
Unearned (2,324 ) (2,447 )
ESOP shares
Retained 210,771 211,644
earnings
Accumulated other (6,617 ) (6,221 )
comprehensive loss
Total stockholders' 250,016 251,086
equity
Total liabilities and $ 2,193,029 $ 2,236,672
stockholders' equity
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
2024 2023
Interest income:
Loans $ 12,065 $ 11,454
Investment securities 4,313 4,540
Other investments 1,613 727
Total interest income 17,991 16,721
Interest expense:
Deposits 6,779 3,530
Advances from the Federal Home Loan Bank 1,810 1,054
Advances from the Federal Reserve Bank 595 --
Securities sold under agreements to repurchase 46 46
Total interest expense 9,230 4,630
Net interest income 8,761 12,091
Provision (reversal of provision) for credit losses 19 (100 )
Net interest income after provision (reversal of provision) for credit losses 8,742 12,191
Noninterest income:
Service and other fees 273 310
Income on bank-owned life insurance 246 203
Net gain on sale of loans -- 1
Other 74 75
Total noninterest income 593 589
Noninterest expense:
Salaries and employee benefits 4,962 5,404
Occupancy 1,738 1,623
Equipment 1,323 1,312
Federal deposit insurance premiums 496 245
Other general and administrative expenses 1,541 1,029
Total noninterest expense 10,060 9,613
(Loss) income before income taxes (725 ) 3,167
Income tax (benefit) expense (243 ) 851
Net (loss) income $ (482 ) $ 2,316
Basic (loss) earnings per share $ (0.06 ) $ 0.26
Diluted (loss) earnings per share $ (0.06 ) $ 0.26
Cash dividends declared per common share $ 0.05 $ 0.23
Basic weighted-average shares outstanding 8,588,137 8,774,634
Diluted weighted-average shares outstanding 8,630,719 8,806,744
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2024 2023
Net (loss) income $ (482 ) $ 2,316
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on securities (396 ) 337
Total other comprehensive (loss) income, net of tax (396 ) 337
Comprehensive (loss) income $ (878 ) $ 2,653
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in thousands, except per share data)
Common Common Additional Unearned Retained Accumulated Total
Shares Stock Paid-in ESOP Earnings Other Stockholders'
Outstanding Capital Shares Comprehensive Equity
Loss
Balances at 8,826,613 $ 88 $ 48,022 $ (2,447 ) $ 211,644 $ (6,221 ) $ 251,086
December 31, 2023
Net -- -- -- -- (482 ) -- (482 )
loss
Other comprehensive -- -- -- -- -- (396 ) (396 )
loss
Cash dividends declared -- -- -- -- (391 ) -- (391 )
($0.05 per share)
Share-based -- -- 81 -- -- -- 81
compensation
Allocation of -- -- (5 ) 123 -- -- 118
12,234 ESOP shares
Balances at 8,826,613 $ 88 $ 48,098 $ (2,324 ) $ 210,771 $ (6,617 ) $ 250,016
March 31, 2024
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in thousands, except per share data)
Common Common Additional Unearned Retained Accumulated Total
Shares Stock Paid-in ESOP Earnings Other Stockholders'
Outstanding Capital Shares Comprehensive Equity
Loss
Balances at 9,071,076 $ 91 $ 51,825 $ (2,936 ) $ 215,314 $ (7,744 ) $ 256,550
December 31, 2022
Net -- -- -- -- 2,316 -- 2,316
income
Other comprehensive -- -- -- -- -- 337 337
income
Cumulative change in (2,319 ) (2,319 )
accounting principle
(1)
Cash dividends declared -- -- -- -- (1,975 ) -- (1,975 )
($0.23 per share)
Share-based 4,540 -- (42 ) -- -- -- (42 )
compensation
Allocation of -- -- 159 122 -- -- 281
12,234 ESOP shares
Repurchase of shares (69,065 ) (1 ) (1,386 ) -- -- -- (1,387 )
of common stock
Balances at 9,006,551 $ 90 $ 50,556 $ (2,814 ) $ 213,336 $ (7,407 ) $ 253,761
March 31, 2023
(1) Represents the impact of the adoption of Accounting Standard Update 2016-13.
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2024 2023
Cash flows from operating activities:
Net (loss) income $ (482 ) $ 2,316
Adjustments to reconcile net (loss) income to net cash from operating activities:
Provision (reversal of provision) for credit losses 19 (100 )
Depreciation and amortization 242 292
Deferred income tax (benefit) expense (220 ) 266
Accretion of fees, discounts, and premiums, net (60 ) (90 )
Amortization of right-of-use asset 695 716
Origination of loans held for sale -- (355 )
Proceeds from sales of loans held for sale -- 356
Gain on sale of loans, net -- (1 )
ESOP expense 118 281
Share-based compensation expense 81 (42 )
Net increase in accrued interest receivable (169 ) (13 )
Income on bank-owned life insurance (246 ) (203 )
Net decrease (increase) in prepaid expenses and other assets 99 (154 )
Net decrease in accounts payable and accrued expenses (3,183 ) (1,661 )
Net decrease in lease liability (104 ) (694 )
Net decrease in advance payments by borrowers for taxes and insurance (3,196 ) (2,691 )
Net (decrease) increase in income taxes payable (260 ) 196
Net cash used in operating activities (6,666 ) (1,581 )
Cash flows from investing activities:
Purchases of investment securities held to maturity -- (6,693 )
Principal repayments on investment securities held to maturity 8,162 8,879
Principal repayments on investment securities available for sale 159 220
Principal repayments on loans receivable, net of loan originations (1,126 ) 409
Purchases of Federal Home Loan Bank stock (40 ) (5,087 )
Proceeds from redemption of Federal Home Loan Bank stock -- 840
Purchases of Federal Reserve Bank stock (3 ) (7 )
Purchases of premises and equipment (202 ) (116 )
Net cash from (used in) investing activities 6,950 (1,555 )
(Continued)
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2024 2023
Cash flows from financing activities:
Net decrease in deposits $ (36,456 ) $ (54,179 )
Proceeds from advances from the Federal Home Loan Bank -- 126,000
Repayments of advances from the Federal Home Loan Bank -- (21,000 )
Proceeds from advances from the Federal Reserve Bank 100,000 --
Repayments of advances from the Federal Reserve Bank (100,000 ) --
Repurchases of common stock -- (1,345 )
Cash dividends paid (428 ) (2,033 )
Net cash (used in) from financing activities (36,884 ) 47,443
Net change in cash and cash equivalents (36,600 ) 44,307
Cash and cash equivalents at beginning of the period 126,659 40,553
Cash and cash equivalents at end of the period $ 90,059 $ 84,860
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 9,128 $ 4,318
Income taxes 237 390
Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased through stock swap and net settlement transactions $ -- $ 43
Establishment of right-of-use asset, net of incentives and modifications 404 118
Establishment of lease liability, net of modifications 404 118
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization
Territorial Bancorp Inc. (the Company) is a Maryland corporation and is the
holding company for Territorial Savings Bank (the Bank).Territorial Savings
Bank is a Hawaii state-chartered bank headquartered in Honolulu, Hawaii and is
a member of the Federal Reserve System. Territorial Savings Bank has one
subsidiary, Territorial Financial Services, Inc.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
of Territorial Bancorp Inc. have been prepared in accordancewith U.S.
generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included inannual financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations.
These unaudited interim condensed consolidated financial statements and notes
should be read in conjunction with theCompany's consolidated financial
statements and notes thereto filed as part of the Annual Report on Form 10-K
for the year ended December 31, 2023. In the opinion of management, all
adjustments necessary for a fair presentation have beenmade and consist only
of normal recurring adjustments. Interim results of operations are not
necessarily indicative of results to be expected for the year.
(b) Allowance of Credit Losses (ACL) on Loans and Securities
The current expected credit losses (CECL) accounting standard requires an
estimate of the credit losses expected over the life of the financialinstrument.
CECL replaces the incurred loss approach that delayed the recognition of a
credit loss until it was probable that a loss event occurred. The ACL is a
valuation account that is deducted from the loans' amortized cost basis to
presentthe net amount expected to be collected on the loans. Loans are charged
off against the ACL during the period when management deems the loan to be
uncollectible and all interest previously accrued but not collected is
reversed against the currentperiod ACL.
The estimate of expected credit losses is based on information about past
events, current conditions, and reasonable andsupportable forecasts that
affect the collectability of financial instruments. Historical loss experience
is generally the starting point for estimating expected credit losses. The
Company considers whether the historical loss experience should beadjusted for
asset specific risk characteristics or current conditions at the reporting
date that did not exist over the historical reporting period. These
qualitative adjustments can include changes in the economy, loan underwriting
standards, anddelinquency trends. The Company then considers future economic
conditions as part of the one year reasonable and supportable forecast period.
Our loan portfolio is segmented into three pools for estimating our allowance
for credit losses on loans: real estate, commercial, andconsumer loans. They
were established upon the adoption of Accounting Standards Update (ASU)
2016-13. Only three pools are used to segment our loan portfolio because loans
within the pools share similar risk characteristics and were originated
usingsimilar underwriting standards. Loans that do not share similar risk
characteristics would be evaluated on an individual basis and excluded from
the collective evaluation. Historically, we have disclosed information about
our loans and allowancebased on class of financing receivable. The portfolio
segments align with the class of financing receivables as follows:
. Real estate: One- to four-family residential, multi-family residential, and commercial mortgage
. Commercial: Commercial loans other than mortgage loans
. Consumer: Home equity loans, loans on deposit accounts, and all other consumer loans
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Collateral dependent loans are not considered to share the same risk
characteristics withthe three pools discussed above. A loan is considered to
be collateral dependent when the borrower is experiencing financial difficulty
and repayment is expected to be provided substantially through the sale or
operation of the collateral. For loanswhich are considered to be collateral
dependent, the Company has elected to estimate the expected credit loss based
on the fair value of the collateral less selling costs. If the fair value of
the collateral less selling costs is less than theloan's amortized cost basis,
the Company records a partial charge-off to reduce the loan's amortized cost
basis for the difference between the collateral fair value less selling costs
and the amortized cost basis.
The ACL on loans and accrued interest is calculated on a loan by loan basis.
If the loan's amortized cost basis is less than the totalpresent value of cash
flows calculated using a discounted cash flow approach, the ACL is equal to
the amortized cost basis minus the total present value of cash flows on the
loan discounted by the loan's effective interest rate. The expectedcash flows
include estimates of loan charge-offs, recoveries, and prepayments. Economic
variables which have a strong correlation with our historical loan
charge-offs, recoveries, and prepayments are utilized in forecasting loan
charge-offs,recoveries, and prepayments during the one year reasonable and
supportable forecast period. After the reasonable and supportable forecast
period, the historical reversion rate is used to calculate loan charge-offs,
recoveries, and prepayments forthe remaining expected life of the loan. The
reversion rate is based on historical averages and applied on a straight-line
basis. Qualitative adjustments may be made to account for current conditions
and forward looking events not captured in thequantitative calculation. The
forecast and reversion rate utilize historical behavior during select periods
of time. Our Real Estate and Consumer loan pools utilize a vintage approach
where historical losses, recoveries, and prepayment experience isdetermined
using loans that have originated within a specified period. Our Commercial
loans utilize a reporting period approach where historical losses, recoveries,
and prepayment experience is considered during a selected historical period of
time.Off-balance sheet forecasts utilize a reporting period approach.
Loans receivable are stated at amortized cost which includes theprincipal
amount outstanding, less the allowance for credit losses, deferred loan
origination fees and costs, commitment fees, and cumulative net charge-offs.
Interest income on loans receivable is accrued as earned. Accrued interest
receivable onloans was $4.7 million and $4.6 million as of March 31, 2024 and
December 31, 2023, respectively, and is included in accrued interest
receivable on the Consolidated Balance Sheet.
The Company determines delinquency status by considering the number of days
full payments required by the contractual terms of the loan arepast due. The
Company has a policy of placing loans on a nonaccrual basis when 90 days or
more contractually delinquent or when, in the opinion of management,
collection of all or part of the principal balance appears doubtful, unless
the loansare well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued and not collected
is reversed against current period provision for credit losses. For nonaccrual
loans, the Companyrecords payments received as a reduction in principal. A
nonaccrual loan may be restored to an accrual basis when principal and
interest payments are current and full payment of principal and interest is
expected.
The Company's off-balance sheet credit exposures are comprised of unfunded
portions of existing loans, such as lines of credit andconstruction loans, and
commitments to originate loans that are not conditionally cancellable by the
Company. Under the CECL accounting standard, expected credit losses on these
amounts are calculated using a forecasted estimate of thelikelihood that
funding of the unfunded amount/commitment will occur and the historical
reversion rate. Changes to the reserve for off-balance sheet credit exposures
are recorded through increases or decreases to the provision for credit
losseson the Consolidated Statements of Income. There were no reserves for
off-balance sheet credit exposures at March 31, 2024 or December 31, 2023.
While management utilizes its best judgment and information available, the
adequacy of the ACL and the reserve for off-balance sheet creditexposures is
determined by certain factors outside of the Company's control, such as the
performance of our portfolios, changes in the economic environment including
economic uncertainty, changes in interest rates and loan prepayments, and
theview of the regulatory authorities toward classification of
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assets and the level of ACL and the reserve for off-balance sheet credit
exposures. Additionally, the level of ACL and the reserve for off-balance
sheet credit exposures may fluctuate based onthe balance and mix of the loan
portfolio, changes in loan prepayments and off-balance sheet credit exposures,
changes in charge-off rates, and changes in forecasted economic conditions. If
actual results differ significantly from our assumptions,our ACL and the
reserve for off-balance sheet credit exposures may not be sufficient to cover
inherent losses in our loan portfolio, resulting in additions to our ACL and
an increase in the provision for credit losses.
The Company is required to utilize the CECL methodology to estimate expected
credit losses with respect to held-to-maturity (HTM) investmentsecurities.
Since all of the Company's HTM investment securities were issued by U.S.
government agencies or U.S. government-sponsored enterprises, which include
the explicit and/or implicit guarantee of the U.S. government and have a
longhistory of no credit losses, the Company has not recorded a credit loss on
these securities. The unrealized losses on these securities were due to
changes in interest rates, relative to when the securities were purchased, and
are not due todecreases in the credit quality of the securities.
Available for sale (AFS) investment securities in an unrealized loss position
areevaluated for impairment. The Company first assesses whether it intends to
sell, or it is more likely than not that it will be required to sell, the
security before recovery of its amortized cost basis. If either of the
criteria regarding intent orrequirement to sell is met, the investment
securities amortized cost basis is written down to fair value through income.
For AFS debt securities that do not meet the aforementioned criteria, the
Company evaluates whether the decline in fair valuehas resulted from credit
losses or other factors. In making this assessment, management considers the
extent to which fair value is less than amortized cost, any changes to the
rating of the security by a rating agency, and adverse conditionsspecifically
related to the security, among other factors. If this assessment indicates
that a credit loss exists, the present value of cash flows expected to be
collected from the investment security are compared to the amortized cost
basis of thesecurity. If the present value of cash flows expected to be
collected is less than the amortized cost basis, a credit loss exists and an
ACL is recorded for the credit loss, limited by the amount that the fair value
is less than the amortized costbasis. Any impairment that has not been
recorded through an ACL is recognized in other comprehensive income. The
Company has not recorded an ACL related to our AFS investment securities.
Changes in the ACL are recorded as a provision (or reversal of provision) for
credit losses. Losses are charged against the ACL whenmanagement believes the
uncollectibility of an AFS security is confirmed or when either of the
criteria regarding intent or requirement to sell is met.
(3) Recently Issued and Adopted Accounting Pronouncements
In June 2022, the Financial Accounting Standards Board (FASB) issued ASU
2022-03, Fair Value Measurement of Equity Securities Subject toContractual
Sale Restrictions to clarify that contractual sale restrictions should not be
considered in the measurement of the fair value of an equity security. The
Company owns stock in the Federal Reserve Bank (FRB) and in the Federal Home
LoanBank (FHLB) which is valued at historical cost which approximates fair
value. Ownership of stock is a condition for services the Company receives
from the FRB and FHLB. The stock is not publicly traded and can only be
issued, exchanged, redeemed orrepurchased by the FRB and the FHLB. ASU 2022-03
was effective for fiscal years beginning after December 15, 2023. The Company
adopted the standard on January 1, 2024, and it did not have a material effect
on its consolidated financialstatements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:
Codification Amendments in Response to the U.S.Securities and Exchange
Commission's (SEC) Disclosure Update and Simplification Initiative. The ASU is
intended to clarify or improve disclosure and presentation requirements of a
variety of topics. Many of the amendment will allow users tomore easily
compare entities subject to the SEC's existing disclosures with those entities
that were not previously subject to the requirements and align the
requirements in the FASB accounting standard codification with the
SEC'sregulations. The Company is currently evaluating the effects that ASU
2023-06 will have on its consolidated financial statements.
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In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):
Improvementsto Reportable Segment Disclosures. This ASU is intended to improve
financial reporting by requiring disclosure of incremental segment information
on an annual and interim basis to enable investors to develop more
decision-useful financial analyses.This ASU will be effective for fiscal years
beginning after December 31, 2023, and interim periods within fiscal years
beginning after December 15, 2024. Early adoption is permitted. The Company
does not expect the adoption of this ASU tohave a material effect on its
consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic
740):Improvements to Income Tax Disclosures. The ASU is intended to enhance
the transparency and decision usefulness of income tax disclosures. This ASU
will be effective for fiscal years beginning after December 15, 2024. The
Company is currentlyevaluating the effects that ASU 2023-09 will have on its
consolidated financial statements.
(4) Cash and Cash Equivalents
The table below presents the balances of cash and cash equivalents:
March 31, December 31,
(Dollars in thousands) 2024 2023
Cash and due from banks $ 10,714 $ 10,471
Interest-earning deposits in other banks 79,345 116,188
Cash and cash equivalents $ 90,059 $ 126,659
Interest-earning deposits in other banks consist primarily of deposits at the
Federal Reserve Bank of SanFrancisco.
(5) Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and related
ACL of investment securities are as follows:
Amortized Gross Estimated
Unrealized
(Dollars in Cost Gains Losses Fair ACL
thousands) Value
March 31,
2024:
Available-for-sale:
Mortgage-backed securities issued by $ 22,415 $ -- $ (2,932 ) $ 19,483 $ --
U.S. government-sponsored enterprises
Held-to-maturity:
Mortgage-backed securities issued by U.S. government 677,578 36 (130,324 ) 547,290 --
agencies or U.S. government-sponsoredenterprises
Total $ 699,993 $ 36 $ (133,256 ) $ 566,773 $ --
December
31, 2023:
Available-for-sale:
Mortgage-backed securities issued by $ 22,563 $ -- $ (2,392 ) $ 20,171 $ --
U.S. government-sponsored enterprises
Held-to-maturity:
Mortgage-backed securities issued by U.S. government 685,728 68 (117,668 ) 568,128 --
agencies or U.S. government-sponsoredenterprises
Total $ 708,291 $ 68 $ (120,060 ) $ 588,299 $ --
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The amortized cost and estimated fair value of investment securities by
maturity date atMarch 31, 2024 are shown below. Incorporated in the maturity
schedule are mortgage-backed securities, which are allocated using the
contractual maturity as a basis. Expected maturities may differ from
contractual maturities because issuers mayhave the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Estimated
(Dollars in thousands) Cost Fair Value
Available-for-sale:
Due after 10 years $ 22,415 $ 19,483
Total $ 22,415 $ 19,483
Held-to-maturity:
Due within 5 years $ 12 $ 12
Due after 5 years through 10 years 6 6
Due after 10 years 677,560 547,272
Total $ 677,578 $ 547,290
The Company did not sell any held-to-maturity or available-for-sale securities
during the three months endedMarch 31, 2024 and 2023.
Investment securities with amortized costs of $549.7 million and $555.8
million at March 31, 2024 andDecember 31, 2023, respectively, were pledged to
secure deposits made by state and local governments, securities sold under
agreements to repurchase, transaction clearing accounts, and Federal Reserve
Bank borrowings. Included in these amountswere $220.9 million and $74.0
million pledged to the Federal Reserve Bank's discount window at March 31,
2024 and December 31, 2023, respectively, and $52.6 million and $202.1 million
pledged to the Federal Reserve Bank's BankTerm Funding Program at March 31,
2024 and December 31, 2023, respectively.
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Provided below is a summary of investment securities which were in an
unrealized lossposition at March 31, 2024 and December 31, 2023. The Company
does not intend to sell securities until such time as the value recovers or
the securities mature and it is not more likely than not that the Company will
be required to sellthe securities prior to recovery of value or the securities
mature.
Less Than 12 Months Total
12 Months or Longer
Description Fair Unrealized Fair Unrealized Number Fair Unrealized
of Value Losses Value Losses of Value Losses
securities Securities
(Dollars
in
thousands)
March
31,
2024:
Available-for-sale:
Mortgage-backed $ -- $ -- $ 19,483 $ (2,932 ) 4 $ 19,483 $ (2,932 )
securities issued by
U.S. government-sponsored
enterprises
Held-to-maturity:
Mortgage-backed securities -- -- 544,088 (130,324 ) 152 544,088 (130,324 )
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
Total $ -- $ -- $ 563,571 $ (133,256 ) 156 $ 563,571 $ (133,256 )
December
31,
2023:
Available-for-sale:
Mortgage-backed $ -- $ -- $ 20,171 $ (2,392 ) 4 $ 20,171 $ (2,392 )
securities issued by
U.S. government
sponsored enterprises
Held-to-maturity:
Mortgage-backed securities 10,326 (107 ) 554,514 (117,561 ) 152 564,840 (117,668 )
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
Total $ 10,326 $ (107 ) $ 574,685 $ (119,953 ) 156 $ 585,011 $ (120,060 )
Mortgage-Backed Securities.
The unrealized losses on the Company's investment inmortgage-backed securities
were caused by increases in market interest rates subsequent to purchase. All
of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae,
which are U.S. government-sponsored enterprises, or Ginnie Mae,which is a U.S.
government agency. Since the decline in market value is attributable to
changes in interest rates and not credit quality, the Company does not intend
to sell these investments until maturity, and it is not more likely than not
thatthe Company will be required to sell such investments prior to recovery of
its cost basis, no allowance for credit losses was recorded for these
securities as of March 31, 2024 or December 31, 2023.
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(6) Loans Receivable and Allowance for Credit Losses
The components of loans receivable, net of allowance for credit losses (ACL)
as of March 31, 2024 and December 31, 2023 are asfollows:
March 31, December 31,
(Dollars in thousands) 2024 2023
Real estate loans:
First mortgages:
One- to four-family residential $ 1,275,897 $ 1,277,544
Multi-family residential 5,604 5,855
Construction, commercial, and other 12,554 11,631
Home equity loans and lines of credit 9,219 7,058
Total real estate loans 1,303,274 1,302,088
Other loans:
Loans on deposit accounts 180 196
Consumer and other loans 8,305 8,257
Total other loans 8,485 8,453
Total loans 1,311,759 1,310,541
Net unearned fees and discounts (2,047 ) (1,989 )
Total loans, net of unearned fees and discounts 1,309,712 1,308,552
Allowance for credit losses (5,142 ) (5,121 )
Loans receivable, net of allowance for credit losses $ 1,304,570 $ 1,303,431
The table below presents the activity in the allowance for credit losses by
portfolio segment:
Real Commercial Consumer
(Dollars in thousands) Estate Loans Loans Unallocated Totals
Three months ended March 31, 2024:
Balance, beginning of period $ 4,502 $ 514 $ 105 $ -- $ 5,121
(Reversal of provision) provision for credit losses (26 ) 12 33 -- 19
4,476 526 138 -- 5,140
Charge-offs (2 ) -- (6 ) -- (8 )
Recoveries 9 -- 1 -- 10
Net recoveries (charge-offs) 7 -- (5 ) -- 2
Balance, end of period $ 4,483 $ 526 $ 133 $ -- $ 5,142
Three months ended March 31, 2023:
Balance, beginning of period $ 1,263 $ 434 $ 76 $ 259 $ 2,032
Adoption of ASU No. 2016-13 3,393 71 4 (259 ) 3,209
(Reversal of provision) provision for credit losses (27 ) (88 ) 15 -- (100 )
4,629 417 95 -- 5,141
Charge-offs -- -- (15 ) -- (15 )
Recoveries -- -- 1 -- 1
Net charge-offs -- -- (14 ) -- (14 )
Balance, end of period $ 4,629 $ 417 $ 81 $ -- $ 5,127
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The credit loss provisions in the three months ended March 31, 2024 was
primarily dueto an increase in our consumer and commercial loan portfolios, an
increase in forecasted charge-offs in the consumer loan portfolio, and a
decrease in forecasted prepayments in the commercial loan portfolio. The
reversal of credit loss provisions inthe three months ended March 31, 2023 was
primarily due to an improvement in economic conditions.
The Company primarily uses theaging of loans to monitor the credit quality of
its loan portfolio. The table below presents by credit quality indicator, loan
class, and year of origination, the amortized cost basis of the Company's
loans as of March 31, 2024.
Revolving
Loans
Amortized
Cost Basis
Amortized Cost of Term Loans by Origination Year
(Dollars in thousands) 2024 2023 2022 2021 2020 Prior Total
March 31, 2024:
Commercial
30 - 59 days past due $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- -- -- --
Loans not past due 55 613 336 4,797 -- 1,013 1,236 8,050
Total Commercial 55 613 336 4,797 -- 1,013 1,236 8,050
Consumer
30 - 59 days past due 9 -- -- -- -- -- -- 9
60 - 89 days past due -- -- -- -- -- -- 170 170
90 days or more past due -- -- -- -- -- -- 1 1
Loans not past due 97 46 73 13 3 52 8,194 8,478
Total Consumer 106 46 73 13 3 52 8,365 8,658
Real Estate
30 - 59 days past due -- -- -- -- -- 98 -- 98
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- 87 -- 87
Loans not past due 15,987 90,595 128,031 281,382 182,584 594,240 -- 1,292,819
Total Real Estate 15,987 90,595 128,031 281,382 182,584 594,425 -- 1,293,004
Total $ 16,148 $ 91,254 $ 128,440 $ 286,192 $ 182,587 $ 595,490 $ 9,601 $ 1,309,712
The Company did not have any revolving loans that converted to term loans
during the three months endedMarch 31, 2024.
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The table below presents by credit quality indicator, loan class, and year of
origination,the amortized cost basis of the Company's loans as of December 31,
2023.
Revolving
Loans
Amortized
Cost Basis
Amortized Cost of Term Loans by Origination Year
(Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total
December 31, 2023
Commercial
30 - 59 days past due $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- -- -- --
Loans not past due 387 353 4,836 -- 203 856 1,230 7,865
Total Commercial 387 353 4,836 -- 203 856 1,230 7,865
Consumer
30 - 59 days past due 4 -- -- -- -- -- -- 4
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- -- -- --
Loans not past due 271 80 20 4 14 42 6,137 6,568
Total Consumer 275 80 20 4 14 42 6,137 6,572
Real Estate
30 - 59 days past due -- -- -- -- -- 428 -- 428
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- 140 87 -- 227
Loans not past due 91,195 129,148 283,571 183,887 91,113 514,546 -- 1,293,460
Total Real Estate 91,195 129,148 283,571 183,887 91,253 515,061 -- 1,294,115
Total $ 91,857 $ 129,581 $ 288,427 $ 183,891 $ 91,470 $ 515,959 $ 7,367 $ 1,308,552
The Company did not have any revolving loans that converted to term loans
during the year endedDecember 31, 2023.
The following table presents by loan class and year of origination, the gross
charge-offs recorded during thethree months ended March 31, 2024 and 2023.
(Dollars in thousands) 2024 2023 2022 2021 2020 Prior Total
Three months ended March 31, 2024:
One- to four-family residential mortgages $ -- $ -- $ -- $ -- $ -- $ 2 $ 2
Loans on deposit accounts -- 3 -- -- -- -- 3
Consumer and other -- 3 -- -- -- -- 3
Total $ -- $ 6 $ -- $ -- $ -- $ 2 $ 8
(Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total
Three months ended March 31, 2023:
Loans on deposit accounts $ 15 $ -- $ -- $ -- $ -- $ -- $ --
Total $ 15 $ -- $ -- $ -- $ -- $ -- $ --
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The table below presents the aging of loans and accrual status by class of
loans, net ofunearned fees and discounts. Loans with a formal loan payment
deferral plan in place are not considered contractually past due or delinquent
if the borrower is in compliance with the loan payment deferral plan.
(Dollars in 30 - 60 - 90 Days Total Loans Total Nonaccrual Loans
thousands) 59 89 or Past Not Loans Loans 90
Days Days More Due Past Days
Past Past Past Due or
Due Due Due More
Past
Due
and
Still
Accruing
March 31,
2024:
One- to four-family $ 98 $ -- $ 87 $ 185 $ 1,273,726 $ 1,273,911 $ 2,026 $ --
residential mortgages
Multi-family -- -- -- -- 5,597 5,597 -- --
residential mortgages
Construction, commercial, -- -- -- -- 12,493 12,493 -- --
and other mortgages
Home equity loans -- -- -- -- 9,221 9,221 9 --
and lines of credit
Loans on deposit -- -- -- -- 180 180 -- --
accounts
Consumer 9 170 1 180 8,130 8,310 170 --
and other
Total $ 107 $ 170 $ 88 $ 365 $ 1,309,347 $ 1,309,712 $ 2,205 $ --
December
31, 2023:
One- to four-family $ 428 $ -- $ 227 $ 655 $ 1,274,960 $ 1,275,615 $ 2,079 $ --
residential mortgages
Multi-family -- -- -- -- 5,848 5,848 -- --
residential mortgages
Construction, commercial, -- -- -- -- 11,570 11,570 -- --
and other mortgages
Home equity loans -- -- -- -- 7,060 7,060 11 --
and lines of credit
Loans on deposit -- -- -- -- 196 196 -- --
accounts
Consumer 4 -- -- 4 8,259 8,263 170 --
and other
Total $ 432 $ -- $ 227 $ 659 $ 1,307,893 $ 1,308,552 $ 2,260 $ --
The table below presents the amortized cost basis of loans on nonaccrual
status as of March 31, 2024 andDecember 31, 2023.
(Dollars in thousands) Nonaccrual Nonaccrual Total
Loans With Loans Without Nonaccrual
a Related ACL a Related ACL Loans
March 31, 2024
One- to four-family residential mortgages $ 1,535 $ 491 $ 2,026
Home equity loans and lines of credit 9 -- 9
Consumer and other 170 -- 170
Total Nonaccrual Loans and Leases $ 1,714 $ 491 $ 2,205
December 31, 2023:
One- to four-family residential mortgages $ 1,030 $ 1,049 $ 2,079
Home equity loans and lines of credit 11 -- 11
Consumer and other 170 -- 170
Total Nonaccrual Loans and Leases $ 1,211 $ 1,049 $ 2,260
All payments received while on nonaccrual status are applied against the
principal balance of the loan.
When a mortgage loan becomes seriously delinquent (90 days or more
contractually past due), it displays weaknesses that may result in a loss.As a
loan becomes more delinquent, the likelihood of the borrower repaying the loan
decreases and the loan becomes more collateral dependent. A mortgage loan
becomes collateral
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dependent when the proceeds for repayment can be expected to come only from
the sale or operation of the collateral and not from borrower repayments.
Generally, appraisals are obtained after aloan becomes collateral dependent or
is four months delinquent. The carrying value of collateral-dependent loans is
adjusted to the fair value of the collateral less selling costs. Any
commercial real estate, commercial, construction or equity loanthat has a loan
balance in excess of a specified amount is also periodically reviewed to
determine whether the loan exhibits any weaknesses and is performing in
accordance with its contractual terms. The amortized cost basis of
collateral-dependentloans, excluding accrued interest receivable, was $87,000
and $227,000 at March 31, 2024 and December 31, 2023, respectively. These
loans were collateralized by residential real estate in Hawaii. As of March
31, 2024 andDecember 31, 2023, the fair value of the collateral less selling
costs of these collateral-dependent loans exceeded the amortized cost basis.
There was no ACL on collateral-dependent loans.
The Company had no real estate owned as of March 31, 2024 or December 31,
2023. There was one one- to four-family residentialmortgage loan for $87,000
in the process of foreclosure at March 31, 2024. There were two one- to
four-family residential mortgage loans totaling $227,000 in the process of
foreclosure at December 31, 2023.
Nearly all of our real estate loans are collateralized by real estate located
in the State of Hawaii. Loan-to-value ratios on these realestate loans
generally do not exceed 80% at the time of origination.
During the three months ended March 31, 2023, the Company soldmortgage loans
held for sale with principal balances of $360,000 and recognized a gain of
$1,000. The Company did not sell any mortgage loans in the three months ended
March 31, 2024. The Company had no loans held for sale at March 31,2024 or
2023.
The Company serviced loans for others with principal balances of $32.6 million
at March 31, 2024 and $33.2 million atDecember 31, 2023. Of these amounts,
$19.1 million and $19.3 million of loan balances relate to securitizations for
which the Company continues to hold the related mortgage-backed securities at
March 31, 2024 and December 31, 2023,respectively. The amount of contractually
specified servicing fees earned for the three months ended March 31, 2024 and
2023 was $22,000 and $23,000, respectively. The fees are reported in service
and other fees in the Consolidated Statementsof Income.
(7) Advances from the Federal Home Loan Bank
Federal Home Loan Bank advances are secured by a blanket pledge on the Bank's
assets not otherwise pledged. At March 31, 2024 andDecember 31, 2023, our
credit limit with the FHLB of Des Moines was equal to 45% of Territorial
Savings Bank's total assets and we had the capacity to borrow an additional
$613.1 million and $612.6 million, respectively.
Advances outstanding consisted of the following:
March 31, 2024 December 31, 2023
(Dollars in thousands) Amount Weighted Amount Weighted
Average Average
Rate Rate
Due within one year $ 82,000 1.40 % $ 82,000 1.40 %
Due over 1 year to 2 years 45,000 2.87 45,000 2.87
Due over 2 years to 3 years 40,000 3.70 20,000 3.20
Due over 3 years to 4 years 35,000 4.22 30,000 4.24
Due over 4 years to 5 years 40,000 4.41 60,000 4.32
Due over 5 years to 6 years -- -- 5,000 4.38
Total $ 242,000 2.96 % $ 242,000 2.96 %
(8) Advances from the Federal Reserve Bank
In March 2023, the FRB created a new Bank Term Funding Program (BTFP) to make
additional funding available to eligible depository institutions.The BTFP
ceased making new loans on March 11, 2024. This
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program offered loans up to a one year term that can be prepaid without
penalty. The amount that could be borrowed was based upon the par value of the
securities pledged as collateral to the FRB.
Advances outstanding consisted of the following:
March 31, 2024 December 31, 2023
(Dollars in thousands) Amount Weighted Amount Weighted
Average Average
Rate Rate
Due within one year $ 50,000 4.76 % $ 50,000 4.89 %
Total $ 50,000 4.76 % $ 50,000 4.89 %
(9) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as financings and
the obligations to repurchase the identical securities sold arereflected as a
liability with the securities collateralizing the agreements classified as an
asset. Securities sold under agreements to repurchase are summarized as
follows:
March 31, 2024 December 31, 2023
(Dollars in thousands) Repurchase Weighted Repurchase Weighted
Liability Average Liability Average
Rate Rate
Maturing:
1 year or less $ 10,000 1.81 % $ 5,000 1.88 %
Over 1 year to 2 years -- -- 5,000 1.73
Total $ 10,000 1.81 % $ 10,000 1.81 %
Below is a summary comparing the carrying value and fair value of securities
pledged to secure repurchaseagreements, the repurchase liability, and the
amount at risk at March 31, 2024. The amount at risk is the greater of the
carrying value or fair value over the repurchase liability and refers to the
potential loss to the Company if the securedlender fails to return the
security at the maturity date of the agreement. All the agreements to
repurchase are with JP Morgan Securities and the securities pledged are
mortgage-backed securities issued and guaranteed by U.S. government agencies
orU.S. government-sponsored enterprises. The fair value of the securities
pledged must exceed the repurchase liability by 5.00%. In the event of a
decline in the fair value of securities pledged to less than the required
amount due to marketconditions or principal repayments, the Company is
obligated to pledge additional securities or other suitable collateral to cure
the deficiency.
(Dollars in thousands) Carrying Fair Repurchase Amount Weighted
Value of Value of Liability at Risk Average
Securities Securities Months to
Maturity
Maturing:
Over 90 days $ 14,046 $ 11,758 $ 10,000 $ 4,046 9
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(10) Offsetting of Financial Liabilities
Securities sold under agreements to repurchase are subject to a right of
offset in the event of default. See Note 9, Securities Sold UnderAgreements to
Repurchase, for additional information.
Gross Gross Net Gross Amount Not Net
Amount Amount Amount of Offset in the Amount
of Offset Liabilities Balance
Recognized in the Presented Sheet
Liabilities Balance in the
Sheet Balance
Sheet
(Dollars in Financial Cash Collateral
thousands) Instruments Pledged
March 31,
2024:
Securities sold under $ 10,000 $ -- $ 10,000 $ 10,000 $ -- $--
agreements to repurchase
December
31, 2023:
Securities sold under $ 10,000 $ -- $ 10,000 $ 10,000 $ -- $ --
agreements to repurchase
(11) Employee Stock Ownership Plan
Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock
Ownership Plan (ESOP) for eligible employees. The ESOPborrowed $9.8 million
from the Company and used those funds to acquire 978,650 shares, or 8%, of the
total number of shares issued by the Company in its initial public offering.
The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased with the loan proceeds and will be
repaid by the ESOP over the 20-year term of the loan with fundsfrom
Territorial Savings Bank's contributions to the ESOP and dividends payable on
the shares. The interest rate on the ESOP loan is an adjustable rate equal to
the prime rate, as published in The Wall Street Journal. The interest rate
adjustsannually and will be the prime rate on the first business day of the
calendar year.
Shares purchased by the ESOP are held by a trustee inan unallocated suspense
account, and shares are released annually from the suspense account on a
pro-rata basis as principal and interest payments are made by the ESOP to the
Company. The trustee allocates the shares released among participants onthe
basis of each participant's proportional share of compensation relative to all
participants. As shares are committed to be released from the suspense
account, Territorial Savings Bank reports compensation expense based on the
average fairvalue of shares released with a corresponding credit to
stockholders' equity. The shares committed to be released are considered
outstanding for earnings per share computations. Compensation expense
recognized for the three months endedMarch 31, 2024 and 2023 amounted to
$118,000 and $281,000, respectively.
Shares held by the ESOP trust were as follows:
March 31, December 31,
2024 2023
Allocated shares 632,172 619,938
Unearned shares 232,431 244,665
Total ESOP shares 864,603 864,603
Fair value of unearned shares, in thousands $ 1,873 $ 2,728
The ESOP restoration plan is a nonqualified plan that provides supplemental
benefits to certain executives whoare prevented from receiving the full
benefits contemplated by the ESOP's benefit formula. The supplemental cash
payments consist of payments representing shares that cannot be allocated to
the participants under the ESOP due to IRS limitationsimposed on tax-qualified
plans. We accrue for these benefits over the period during which employees
provide services to earn these benefits. For the three months ended March 31,
2024 and 2023, we accrued $11,000 and $7,000, respectively, forthe ESOP
restoration plan.
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(12) Share-Based Compensation
The shareholders of Territorial Bancorp Inc. adopted the 2010 Equity Incentive
Plan and the 2019 Equity Incentive Plan. These plans provide forthe award of
stock options and restricted stock to key officers and directors. In
accordance with the Compensation - Stock Compensation topic of the FASB ASC,
the cost of the equity incentive plans is based on the fair value of the
awards onthe grant date. The fair value of time-based restricted stock is
based on the closing price of the Company's stock on the grant date. The fair
value of performance-based stock that will vest based on a performance
condition is based on theclosing price of the Company's stock on the date of
grant. The fair value of performance-based restricted stock that will vest on
a market condition is based on a Monte Carlo valuation of the Company's stock
on the date of grant. The costof the awards will be recognized on a
straight-line basis over the three-year vesting period during which
participants are required to provide services in exchange for the awards.
There are 42,680 remaining shares available for new awards under the2019
Equity Plan.
The Company recognized compensation expense, measured as the fair value of the
share-based award on the date of grant,on a straight-line basis over the
vesting period. Share-based compensation is recorded in the Consolidated
Statements of Operations as a component of salaries and employee benefits with
a corresponding increase in stockholders' equity. Thetable below presents
information on compensation expense and the related tax benefit for all
share-based awards:
Three Months Ended
March 31,
(Dollars in thousands) 2024 2023
Compensation expense $ 81 $ (42 )
Income tax benefit 22 (11 )
Share-based compensation expense and the income tax benefit had credit
balances during the three months endedMarch 31, 2023. The credit balances
occurred when the number of performance-based restricted stock units (PRSUs),
which are based on a performance condition, decreased because the Company's
three-year return on average equity declined incomparison to a peer group of
banks.
Restricted Stock
Restricted stock awards are accounted for as fixed grants using the fair value
of the Company's stock at the time of grant. Unvestedrestricted stock may not
be disposed of or transferred during the vesting period. Restricted stock
carries the right to receive dividends, although dividends attributable to
restricted stock are retained by the Company until the shares vest, atwhich
time they are paid to the award recipient. Unvested restricted stock that is
time-based contain nonforfeitable dividend rights. Accrued dividends on
restricted stock that do not vest based on performance or market conditions
areforfeited.
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The table below presents the time-based restricted stock activity:
Time-Based Weighted
Restricted Average Grant
Stock Date Fair
Value
Unvested at December 31, 2023 25,738 $ 21.61
Granted -- --
Vested -- --
Forfeited -- --
Unvested at March 31, 2024 25,738 $ 21.61
Unvested at December 31, 2022 23,664 $ 24.15
Granted -- --
Vested 4,540 21.05
Forfeited -- --
Unvested at March 31, 2023 19,124 $ 24.89
As of March 31, 2024, the Company had $288,000 of unrecognized compensation
costs related to time-basedrestricted stock.
The table below presents the PRSUs that will vest on a performance condition:
Performance- Weighted
Based Restricted Average Grant
Stock Units Date Fair
Based on a Value
Performance
Condition
Unvested at December 31, 2023 44,967 $ 22.85
Granted -- --
Vested -- --
Forfeited 12,797 26.77
Unvested at March 31, 2024 32,170 $ 21.30
Unvested at December 31, 2022 43,557 $ 23.63
Granted -- --
Vested -- --
Forfeited 16,348 21.05
Unvested at March 31, 2023 27,209 $ 25.18
The fair value of these PRSUs is based on the fair value of the Company's
stock on the date of grant. Asof March 31, 2024, the Company had no
unrecognized compensation costs related to these PRSUs since meeting the
performance condition is not probable. Compensation expense up to $457,000 may
be recognized in the future if achievement of theperformance condition becomes
probable. Performance will be measured over a three-year performance period
and will be cliff vested. The performance condition is measured quarterly by
comparing the Company's three-year return on average equityto a peer group of
banks. The Company's percentile ranking in the peer group is used to adjust
the number of PRSUs that are expected to vest.
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The table below presents the PRSUs that will vest on a market condition:
Performance- Monte Carlo
Based Restricted Valuation of
Stock Units the Company's
Based on a Stock
Market Condition
Unvested at December 31, 2023 11,245 $ 22.31
Granted -- --
Vested -- --
Forfeited 3,199 26.00
Unvested at March 31, 2024 8,046 $ 20.85
Unvested at December 31, 2022 10,889 $ 24.04
Granted -- --
Vested -- --
Forfeited 4,087 22.16
Unvested at March 31, 2023 6,802 $ 25.16
As of March 31, 2024, the Company had $50,000 of unrecognized compensation
costs related to the PRSUsthat are based on a market condition. The market
value of PRSUs that will vest on a market condition is determined by a Monte
Carlo valuation of the Company's stock as of the grant date. Performance will
be measured over a three-yearperformance period and will be cliff vested. The
market condition is measured quarterly by comparing the Company's three-year
average total stock return to a peer group of other banks. The Company's
percentile ranking in the peer groupdetermines how many PRSUs will vest.
(13) Earnings Per Share
Holders of unvested restricted stock accrue dividends at the same rate as
common shareholders and they both share equally in undistributedearnings.
Unvested restricted stock awards that are time-based contain nonforfeitable
rights to dividends or dividend equivalents and are considered to be
participating securities in the earnings per share computation using the
two-class method.Under the two-class method, earnings are allocated to common
shareholders and participating securities according to their respective rights
to earnings. Unvested restricted stock awards that vest based on performance
or market conditions are notconsidered to be participating securities in the
earnings per share calculation because accrued dividends on shares that do not
vest are forfeited.
The table below presents the information used to compute basic and diluted
earnings per share:
Three Months Ended
March 31,
(Dollars in thousands, except per share data) 2024 2023
Net (loss) income $ (482 ) $ 2,316
Income allocated to participating securities (1 ) (19 )
Net (loss) income available to common shareholders $ (483 ) $ 2,297
Weighted-average number of shares used in:
Basic earnings per share 8,588,137 8,774,634
Dilutive common stock equivalents:
Stock options and restricted stock units 42,582 32,110
Diluted earnings per share 8,630,719 8,806,744
Net (loss) income per common share, basic $ (0.06 ) $ 0.26
Net (loss) income per common share, diluted $ (0.06 ) $ 0.26
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(14) Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other
comprehensive loss, net of taxes:
(Dollars in thousands) Unfunded Unrealized Total
Pension Loss/(Gain) on
Liability Securities
Three months ended March 31, 2024
Balances at beginning of period $ 4,466 $ 1,755 $ 6,221
Other comprehensive loss, net of taxes -- 396 396
Net current period other comprehensive loss -- 396 396
Balances at end of period $ 4,466 $ 2,151 $ 6,617
Three months ended March 31, 2023
Balances at beginning of period $ 5,746 $ 1,998 $ 7,744
Other comprehensive income, net of taxes -- (337 ) (337 )
Net current period other comprehensive income -- (337 ) (337 )
Balances at end of period $ 5,746 $ 1,661 $ 7,407
The table below presents the tax effect on each component of accumulated other
comprehensive loss:
Three Months Ended March 31,
2024 2023
(Dollars in thousands) Pretax Tax After Pretax Tax After
Amount Tax Amount Tax
Amount Amount
Unrealized loss (gain) on securities $ 540 $ (144 ) $ 396 $ (459 ) $ 122 $ (337 )
Total $ 540 $ (144 ) $ 396 $ (459 ) $ 122 $ (337 )
(15) Revenue Recognition
The Company's contracts with customers are generally short term in nature,
with cycles of one year or less. These can range from animmediate term for
services such as wire transfers, foreign currency exchanges, and cashier's
check purchases, to several days for services such as processing annuity and
mutual fund sales. Some contracts may be of an ongoing nature, such
asproviding deposit account services, including ATM access, check processing,
account analysis, and check ordering. However, provision of an assessable
service and payment for such service is usually concurrent or closely timed.
Contracts related tofinancial instruments, such as loans, investments, and
debt, are excluded from the scope of this reporting requirement.
After analyzingthe Company's revenue sources, including the amount of revenue
received, the timing of services rendered, and the timing of payment for these
services, the Company has determined that the rendering of services and the
payment for such servicesare generally closely matched. Any differences are
not material to the Company's Consolidated Financial Statements. Accordingly,
the Company generally records income when payment for services is received.
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Revenue from contracts with customers is reported in service and other fees in
othernoninterest income in the Consolidated Statements of Operations. The
table below reconciles the revenue from contracts with customers and other
revenue reported in those line items:
(Dollars in thousands) Service and Other Total
Other Fees
Three months ended March 31, 2024
Revenue from contracts with customers $ 240 $ 40 $ 280
Other revenue 33 34 67
Total $ 273 $ 74 $ 347
Three months ended March 31, 2023
Revenue from contracts with customers $ 275 $ 42 $ 317
Other revenue 35 33 68
Total $ 310 $ 75 $ 385
(16) Leases
The table below presents lease costs and other information for the periods
indicated:
Three Months Ended
March 31,
(Dollars in thousands) 2024 2023
Lease costs:
Operating lease costs $ 666 $ 705
Short-term lease costs 163 104
Variable lease costs 43 43
Total lease costs $ 872 $ 852
Cash paid for amounts included in measurement of lease liabilities $ 195 $ 769
ROU assets obtained in exchange for new operating lease liabilities $ 404 $ 118
Future minimum rental commitments under noncancellable operating leases are as
follows:
(Dollars in thousands) March 31,
2024
2024 $ 2,625
2025 2,228
2026 2,086
2027 2,001
2028 1,709
Thereafter 8,910
Total 19,559
Less present value discount (1,962 )
Present value of leases $ 17,597
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The table below presents additional lease-related information:
March 31, March 31,
2024 2023
Weighted-average remaining lease term (years) 9.76 8.80
Weighted-average discount rate 2.14 % 2.09 %
(17) Fair Value
In accordance with the Fair Value Measurements and Disclosures topic of the
FASB ASC, the Company groups its financial assets and liabilitiesmeasured or
disclosed at fair value into three levels based on the markets in which the
financial assets and liabilities are traded and the reliability of the
assumptions used to determine fair value as follows:
. Level 1 -- Valuation is based upon quoted prices (unadjusted) for
identical assets or liabilities tradedin active markets. A quoted
price in an active market provides the most reliable evidence of fair
value and shall be used to measure fair value whenever available.
. Level 2 -- Valuation is based upon quoted prices for similar instruments
in active markets, quotedprices for identical or similar instruments
in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
. Level 3 -- Valuation is generated from model-based techniques that use significant assumptions notobservable
in the market. These unobservable assumptions reflect management's own estimates of assumptions that
market participants would use in pricing the asset or liability. Valuation techniques include use of
discounted cash flow models andsimilar techniques that require the use of significant judgment or estimation.
In accordance with the Fair ValueMeasurements and Disclosures topic, the
Company bases its fair values on the price that it would expect to receive if
an asset were sold or the price that it would expect to pay to transfer a
liability in an orderly transaction between marketparticipants at the
measurement date. Also as required, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when developing
fair value measurements.
The Company uses fair value measurements to determine fair value disclosures.
Investment securities available for sale and derivatives arerecorded at fair
value on a recurring basis. From time to time, the Company may be required to
record other financial assets at fair value on a nonrecurring basis, such as
loans held for sale, individually evaluated loans and investments, andmortgage
servicing assets. These nonrecurring fair value adjustments typically involve
application of the lower of cost or fair value accounting or write-downs of
individual assets.
Investment Securities Available for Sale
. The estimated fair values of mortgage-backed securities issued by
U.S.government-sponsored enterprises are considered Level 2 inputs because the
valuation for investment securities utilized pricing models that varied based
on asset class and included trade, bid, and other observable market
information.
Interest Rate Contracts
. The Company may enter into interest rate lock commitments with borrowers on
loans intended to be sold.To manage interest rate risk on the lock
commitments, the Company may also enter into forward loan sale commitments.
The interest rate lock commitments and forward loan sale commitments are
treated as derivatives and are recorded at their fair valuedetermined by
referring to prices quoted in the secondary market for similar contracts. The
fair value inputs are considered Level 2 inputs. Interest rate contracts that
are classified as assets are included with prepaid expenses and other assets
onthe Consolidated Balance Sheet while interest rate contracts that are
classified as liabilities are included with accounts payable and accrued
expenses.
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The estimated fair values of the Company's financial instruments are as follows:
Carrying Fair Value Measurements Using
Amount
(Dollars in thousands) Fair Value Level 1 Level 2 Level 3
March 31, 2024
Assets
Cash and cash equivalents $ 90,059 $ 90,059 $ 90,059 $ -- $ --
Investment securities available for sale 19,483 19,483 -- 19,483 --
Investment securities held to maturity 677,578 547,290 -- 547,290 --
Loans receivable, net 1,309,712 1,095,737 -- -- 1,095,737
FHLB stock 12,232 12,232 -- 12,232 --
FRB stock 3,182 3,182 -- 3,182 --
Accrued interest receivable 6,281 6,281 158 1,472 4,651
Liabilities
Deposits 1,600,148 1,596,514 -- 1,072,875 523,639
Advances from the Federal Home Loan Bank 242,000 238,033 -- 238,033 --
Advances from the Federal Reserve Bank 50,000 49,815 -- 49,815 --
Securities sold under agreements to repurchase 10,000 9,755 -- 9,755 --
Accrued interest payable 1,285 1,285 -- 537 748
December 31, 2023
Assets
Cash and cash equivalents $ 126,659 $ 126,659 $ 126,659 $ -- $ --
Investment securities available for sale 20,171 20,171 -- 20,171 --
Investment securities held to maturity 685,728 568,128 -- 568,128 --
Loans receivable, net 1,303,431 1,120,704 -- -- 1,120,704
FHLB stock 12,192 12,192 -- 12,192 --
FRB stock 3,180 3,180 -- 3,180 --
Accrued interest receivable 6,105 6,105 79 1,441 4,585
Liabilities
Deposits 1,636,604 1,633,164 -- 1,104,171 528,993
Advances from the Federal Home Loan Bank 242,000 238,380 -- 238,380 --
Advances from the Federal Reserve Bank 50,000 50,049 -- 50,049 --
Securities sold under agreements to repurchase 10,000 9,700 -- 9,700 --
Accrued interest payable 1,183 1,183 -- 157 1,026
At March 31, 2024 and December 31, 2023, neither the commitment fees received
on commitments toextend credit nor the fair value thereof was material to the
Consolidated Financial Statements of the Company.
The table below presentsthe balance of assets and liabilities measured at fair
value on a recurring basis:
(Dollars in thousands) Level 1 Level 2 Level 3 Total
March 31, 2024
Investment securities available for sale $ -- $ 19,483 $ -- $ 19,483
December 31, 2023
Investment securities available for sale $ -- $ 20,171 $ -- $ 20,171
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There were no assets or liabilities measured at fair value on a nonrecurring
basis as ofMarch 31, 2024 or December 31, 2023.
(18) Subsequent Events
Hope Bancorp Merger Agreement
OnApril 26, 2024, Hope Bancorp, Inc., a Delaware corporation ("Hope Bancorp"),
and Territorial Bancorp Inc., a Maryland corporation ("Territorial Bancorp"),
entered into an Agreement and Plan of Merger (the "MergerAgreement"). Under
the terms of the Merger Agreement, Territorial Bancorp shareholders will
receive a fixed exchange ratio of 0.8048 share of Hope Bancorp common stock in
exchange for each share of Territorial Bancorp common stock they own, ina 100%
stock-for-stock transaction valued at approximately $78.6 million, based on
the closing price of Hope Bancorp's common stock on April 26, 2024. The
transaction is intended to qualify as a tax-free reorganization for
TerritorialBancorp shareholders.
The transaction is subject to regulatory approvals, the approval of
Territorial Bancorp shareholders, and thesatisfaction of other customary
closing conditions.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
TerritorialBancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Territorial
Bancorp, Inc. and subsidiaries (the "Company") as of December 31,2023 and
2022, the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for the years then ended, and the related
notes (collectively referred to as the "consolidated financialstatements"). In
our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2023 and 2022, and the consolidated results of itsoperations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed inNotes 2 and 7 to the consolidated financial statements, the
Company changed its method of accounting for credit losses on loans in 2023
due to the adoption of Accounting Standards Update No. 2016-13,
Financial Instruments - CreditLosses
.
Basis for Opinion
Theseconsolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audit
s
. We are a public accountingfirm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent
with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules andregulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.
Thosestandards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not
required to have, nor werewe engaged to perform, an audit of its internal
control over financial reporting in accordance with the standards of the
PCAOB. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not forthe purpose of expressing
an opinion on the effectiveness of the Company's internal control over
financial reporting in accordance with the standards of the PCAOB.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error
orfraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included
evaluating theaccounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit mattercommunicated below is a matter arising from the
current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that
(1) relates to accounts or disclosures that arematerial to the consolidated
financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financialstatements, taken as
a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
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Allowance for Credit Losses - Loans
As described in Notes 2 and 7 to the consolidated financial statements, the
Company's allowance for credit losses on loans was $5,121,000 atDecember 31,
2023, including the cumulative-effect adjustment from the adoption of
Accounting Standards Update No. 2016-13 on January 1, 2023 of $3,209,000. The
allowance for credit losses provides for future credit losses, based
onmanagement's estimate using relevant information about past events, current
conditions, and reasonable and supportable forecasts that affect the
collectability of loans (CECL methodology). The allowance for credit losses
includes the selectionof a prepayment assumption and a historical period used
to determine the loss rate, both of which have a higher degree of management
subjectivity. The allowance for the real estate segment comprises
approximately 88% of the total allowance forcredit losses on loans.
We identified the prepayment assumption and the historical period used in
determining the loss rate used in the allowance forcredit losses calculation
for the real estate segment as a critical audit matter. Auditing management's
judgments regarding the selection of these items involved a high degree of
subjectivity due to the nature of audit evidence to address thismatter.
The primary procedures we performed to address this critical audit matter
included:
. Evaluating the appropriateness of the Company's selection of the prepayment assumption and the
historicalperiod used in determining the loss rate in the CECL methodology for the real estate segment.
. Testing the mathematical accuracy and computation of the allowance for credit losses for the real estate
segmentby re-performing or independently calculating significant elements of the allowance for reasonableness.
/s/ Moss Adams LLP
Portland, Oregon
March 15, 2024
We have served as the Company's auditor since 2015.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2023 and 2022
(Dollars in thousands, except share data)
December 31, December 31,
2023 2022
ASSETS
Cash and cash $ 126,659 $ 40,553
equivalents
Investment securities available 20,171 20,821
for sale, at fair value
Investment securities held to maturity, at amortized cost (fair value 685,728 717,773
of $568,128 and $591,084 atDecember 31, 2023 and 2022, respectively)
Loans 1,308,552 1,296,796
receivable
Allowance for (5,121 ) (2,032 )
credit/loan losses
Loans receivable, net of 1,303,431 1,294,764
allowance for credit/loan losses
Federal Home Loan 12,192 8,197
Bank stock, at cost
Federal Reserve 3,180 3,170
Bank stock, at cost
Accrued interest 6,105 6,115
receivable
Premises and 7,185 7,599
equipment, net
Right-of-use 12,371 14,498
asset, net
Bank-owned 48,638 47,783
life insurance
Income taxes 344 --
receivable
Deferred income 2,457 1,643
tax assets, net
Prepaid expenses 8,211 6,676
and other assets
Total assets $ 2,236,672 $ 2,169,592
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,636,604 $ 1,716,152
Advances from the 242,000 141,000
Federal Home Loan Bank
Advances from the 50,000 --
Federal Reserve Bank
Securities sold under 10,000 10,000
agreements to repurchase
Accounts payable and 23,334 24,180
accrued expenses
Lease 17,297 15,295
liability
Income taxes -- 838
payable
Advance payments by borrowers 6,351 5,577
for taxes and insurance
Total 1,985,586 1,913,042
liabilities
Commitments and contingencies:
(Note 22 and 24)
Stockholders'
Equity:
Preferred stock, $0.01 par value; authorized -- --
50,000,000 shares, no shares issued oroutstanding
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 88 91
8,826,613 and9,071,076 shares at December 31, 2023 and 2022, respectively
Additional 48,022 51,825
paid-in capital
Unearned (2,447 ) (2,936 )
ESOP shares
Retained 211,644 215,314
earnings
Accumulated other (6,221 ) (7,744 )
comprehensive loss
Total stockholders' 251,086 256,550
equity
Total liabilities and $ 2,236,672 $ 2,169,592
stockholders' equity
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 2023 and 2022
(Dollars in thousands, except per share data)
2023 2022
Interest income:
Loans $ 47,043 $ 45,318
Investment securities 17,918 16,211
Other investments 4,127 1,173
Total interest income 69,088 62,702
Interest expense:
Deposits 19,484 4,925
Advances from the Federal Home Loan Bank 6,636 2,107
Securities sold under agreements to repurchase 183 183
Advances from the Federal Reserve Bank 154 --
Total interest expense 26,457 7,215
Net interest income 42,631 55,487
Reversal of provision for credit/loan losses (3 ) (576 )
Net interest income after reversal of provision for credit/loan losses 42,634 56,063
Noninterest income:
Service and other fees 1,327 1,416
Income on bank-owned life insurance 855 792
Net gain (loss) on sale of loans 10 (3 )
Other 279 2,004
Total noninterest income 2,471 4,209
Noninterest expense:
Salaries and employee benefits 20,832 22,259
Occupancy 6,910 6,708
Equipment 5,156 5,006
Federal deposit insurance premiums 982 573
Other general and administrative expenses 4,388 4,252
Total noninterest expense 38,268 38,798
Income before income taxes 6,837 21,474
Income taxes 1,810 5,318
Net income $ 5,027 $ 16,156
Basic earnings per share $ 0.58 $ 1.81
Diluted earnings per share $ 0.57 $ 1.80
Cash dividends declared per common share $ 0.74 $ 1.02
Basic weighted-average shares outstanding 8,636,495 8,865,946
Diluted weighted-average shares outstanding 8,684,092 8,920,714
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2023 and 2022
(Dollars in thousands)
2023 2022
Net income $ 5,027 $ 16,156
Other comprehensive income (loss), net of tax:
Unfunded pension liability 1,280 (222 )
Unrealized gain (loss) on securities 243 (1,998 )
Total other comprehensive income (loss), net of tax 1,523 (2,220 )
Comprehensive income $ 6,550 $ 13,936
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2023 and 2022
(Dollars in thousands, except share data)
Common Common Additional Unearned Retained Accumulated Total
Shares Stock Paid-in ESOP Earnings Other Stockholders'
Outstanding Capital Shares Comprehensive Equity
Loss
Balances at 9,324,060 $ 93 $ 56,951 $ (3,425 ) $ 208,227 $ (5,524 ) $ 256,322
December 31, 2021
Net -- -- -- -- 16,156 -- 16,156
income
Other comprehensive -- -- -- -- -- (2,220 ) (2,220 )
loss
Cash dividends declared -- -- -- -- (9,069 ) -- (9,069 )
($1.02 per share)
Share-based 19,227 -- 480 -- -- -- 480
compensation
Allocation of -- -- 602 489 -- -- 1,091
48,933 ESOP shares
Repurchase of shares (272,211 ) (2 ) (6,208 ) -- -- -- (6,210 )
of common stock
Balances at 9,071,076 $ 91 $ 51,825 $ (2,936 ) $ 215,314 $ (7,744 ) $ 256,550
December 31, 2022
Net -- -- -- -- 5,027 -- 5,027
income
Other comprehensive -- -- -- -- -- 1,523 1,523
income
Cumulative change in -- -- -- -- (2,319 ) -- (2,319 )
accounting principle (1)
Cash dividends declared -- -- -- -- (6,378 ) -- (6,378 )
($.74 per share)
Share-based 12,729 -- 177 -- -- -- 177
compensation
Allocation of -- -- 203 489 -- -- 692
48,933 ESOP shares
Repurchase of shares (257,192 ) (3 ) (4,183 ) -- -- -- (4,186 )
of common stock
Balances at 8,826,613 $ 88 $ 48,022 $ (2,447 ) $ 211,644 $ (6,221 ) $ 251,086
December 31, 2023
(1) Represents the impact of the adoption of Accounting Standard Update 2016-13.
See Note 7 to the consolidatedfinancial statements for additional information.
See accompanying Notes to Consolidated Financial Statements.
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2023 and 2022
(Dollars in thousands)
Year Ended
December 31,
2023 2022
Cash flows from operating activities:
Net income $ 5,027 $ 16,156
Adjustments to reconcile net income to net cash from operating activities:
Reversal of provision for credit/loan losses (3 ) (576 )
Depreciation and amortization 1,093 1,181
Deferred income tax (benefit) expense (525 ) 1,090
Accretion of fees, discounts, and premiums, net (367 ) (171 )
Amortization of right-of-use asset 2,820 2,946
Origination of loans held for sale (813 ) (5,302 )
Proceeds from sales of loans held for sale 823 5,299
(Gain) loss on sale of loans, net (10 ) 3
Net loss on disposal of premises and equipment 5 --
Proceeds from bank-owned life insurance -- (1,138 )
ESOP expense 692 1,091
Share-based compensation expense 177 480
Net increase in accrued interest receivable (34 ) (329 )
Net increase in bank-owned life insurance (855 ) (792 )
Net (increase) decrease in prepaid expenses and other assets (1,537 ) 289
Net increase in accounts payable and accrued expenses 863 1,006
Net increase (decrease) in lease liability 1,309 (2,911 )
Net increase (decrease) in advance payments by borrowers for taxes and insurance 774 (630 )
Net decrease in income taxes payable (1,182 ) (1,026 )
Net cash from operating activities 8,257 16,666
Cash flows from investing activities:
Purchases of investment securities held to maturity (6,693 ) (142,336 )
Purchases of investment securities available for sale -- (24,760 )
Principal repayments on investment securities held to maturity 38,859 61,009
Principal repayments on investment securities available for sale 1,038 1,279
Principal repayments on loans receivable, net of loan originations (11,640 ) 8,739
Purchases of Federal Home Loan Bank stock (5,887 ) (1,304 )
Proceeds from redemption of Federal Home Loan Bank stock 1,892 1,280
Purchases of Federal Reserve Bank stock (11 ) (13 )
Proceeds from redemption of Federal Reserve Bank stock 1 --
Proceeds from bank-owned life insurance -- 5,569
Purchases of premises and equipment (685 ) (4,715 )
Net cash from (used in) investing activities 16,874 (95,252 )
(Continued)
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TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2023 and 2022
(Dollars in thousands)
2023 2022
Cash flows from financing activities:
Net (decrease) increase in deposits $ (79,548 ) $ 34,324
Proceeds from advances from the Federal Home Loan Bank 146,000 22,000
Repayments of advances from the Federal Home Loan Bank (45,000 ) (22,000 )
Proceeds from advances from the Federal Reserve Bank 90,020 --
Repayments of advances from the Federal Reserve Bank (40,020 ) --
Repurchases of common stock (4,065 ) (5,973 )
Cash dividends paid (6,412 ) (9,071 )
Net cash from financing activities 60,975 19,280
Net change in cash and cash equivalents 86,106 (59,306 )
Cash and cash equivalents at beginning of the year 40,553 99,859
Cash and cash equivalents at end of the year $ 126,659 $ 40,553
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 25,975 $ 6,549
Income taxes 3,516 5,254
Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased through stock swap and net settlement transactions $ 121 $ 236
Establishment of right-of-use asset, net of incentives and modifications 693 7,462
Establishment of lease liability, net of modifications 693 7,462
See accompanying Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
(1) Organization
Territorial Bancorp Inc. is a Maryland corporation and is the holding company
for Territorial Savings Bank. Territorial Savings Bank is aHawaii
state-chartered bank headquartered in Honolulu, Hawaii and is a member of the
Federal Reserve System. Territorial Savings Bank has one subsidiary,
Territorial Financial Services, Inc.
(2) Summary of Significant Accounting Policies
(a) Description of Business
Territorial Bancorp Inc. (the Company), through its wholly-owned subsidiary,
Territorial Savings Bank (the Bank), provides loan and depositproducts and
services primarily to individual customers through 28 branches located
throughout Hawaii. We deal primarily in residential mortgage loans in the
State of Hawaii. The Company's earnings depend primarily on its net interest
income,which is the difference between the interest income earned on
interest-earning assets (loans receivable and investments) and the interest
expense incurred on interest-bearing liabilities (deposit liabilities and
borrowings). Deposits traditionallyhave been the principal source of the
Bank's funds for use in lending, meeting liquidity requirements, and making
investments. The Company also derives funds from receipt of interest and
principal repayments on outstanding loans receivable andinvestments,
borrowings from the Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB),
securities sold under agreements to repurchase, and proceeds from issuance of
common stock.
(b) Principles of Consolidation
The Consolidated Financial Statements include the accounts and results of
operations of Territorial Bancorp Inc. and Territorial Savings Bankand its
wholly-owned subsidiary. Significant intercompany balances and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents includes cash and due from banks, interest-bearing
deposits in other banks, federal funds sold, and short-term,highly liquid
investments with original maturities of three months or less.
(d) Investment Securities
The Company classifies and accounts for its investment securities as follows:
(1) held-to-maturity debt securities in which the Companyhas the positive
intent and ability to hold to maturity are reported at amortized cost; (2)
trading securities that are purchased for the purpose of selling in the near
term are reported at fair value, with unrealized gains and losses includedin
current earnings; and (3) available-for-sale securities not classified as
either held-to-maturity or trading securities are reported at fair value, with
unrealized gains and losses excluded from current earnings and reported as a
separatecomponent of equity. At December 31, 2023 and 2022, the Company had
$20.2 million and $20.8 million, respectively, of securities classified as
available-for-sale and the remaining securites were classified as
held-to-maturity.
Gains or losses on the sale of investment securities are computed using the
specific-identification method. The Company amortizes premiums andaccretes
discounts associated with investment securities using the interest method over
the contractual life of the respective investment security. Such amortization
and accretion is included in the interest income line item in the
ConsolidatedStatements of Income. Interest income is recognized when earned.
(e) Loans Receivable
This policy applies to all loan classes. Loans receivable are stated at the
principal amount outstanding, less the allowance for credit losses,loan
origination fees and costs, and commitment fees. Interest on
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loans receivable is accrued as earned. The Company has a policy of placing
loans on a nonaccrual basis when 90 days or more contractually delinquent or
when, in the opinion of management,collection of all or part of the principal
balance appears doubtful. For nonaccrual loans, the Company records payments
received as a reduction in principal. The Company, considering current
information and events regarding the borrowers'ability to repay their
obligations, considers a loan to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is considered to be impaired,the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, if the
loan is considered to be collateral dependent, based on the fair value of
thecollateral less estimated costs to sell. Impairment losses are written off
against the allowance for loan losses. For nonaccrual impaired loans, the
Company records payments received as a reduction in principal. A nonaccrual
loan may be restored toan accrual basis when principal and interest payments
are current and full payment of principal and interest is expected.
(f) Loans Held for Sale
Loans held for sale are stated at the lower of aggregate cost or market value.
Net fees and costs of originating loans held for sale aredeferred and are
included in the basis for determining the gain or loss on sales of loans held
for sale.
(g) Deferred Loan Origination Fees and Unearned Loan Discounts
Loan origination and commitment fees and certain direct loan origination costs
are being deferred, and the net amount is recognized over thelife of the
related loan as an adjustment to yield. Net deferred loan fees are amortized
using the interest method over the contractual term of the loan, adjusted for
actual prepayments. Net unamortized fees on loans paid in full are recognized
as acomponent of interest income.
(h) Real Estate Owned
Real estate owned is valued at the time of foreclosure at fair value, less
estimated cost to sell, thereby establishing a new cost basis. TheCompany
obtains appraisals based on recent comparable sales to assist management in
estimating the fair value of real estate owned. Subsequent to acquisition,
real estate owned is valued at the lower of cost or fair value, less estimated
cost tosell. Declines in value are charged to expense through a direct
write-down of the asset. Costs related to holding real estate are charged to
expense while costs related to development and improvements are capitalized.
Net gains or losses recognizedon the sale of real estate owned are included in
other general and administrative expenses.
(i) Allowance for Credit Losses (ACL) on Loans and Securities
The current expected credit losses (CECL) accounting standard requires an
estimate of the credit losses expected over the life of the financialinstrument.
CECL replaces the incurred loss approach that delayed the recognition of a
credit loss until it was probable that a loss event occurred. The ACL is a
valuation account that is deducted from the loans' amortized cost basis to
presentthe net amount expected to be collected on the loans. Loans are charged
off against the ACL during the period when management deems the loan to be
uncollectible and all interest previously accrued but not collected is
reversed against the currentperiod ACL.
The estimate of expected credit losses is based on information about past
events, current conditions, and reasonable andsupportable forecasts that
affect the collectability of financial instruments. Historical loss experience
is generally the starting point for estimating expected credit losses. The
Company considers whether the historical loss experience should beadjusted for
asset specific risk characteristics or current conditions at the reporting
date that did not exist over the historical reporting period. These
qualitative adjustments can include changes in the economy, loan underwriting
standards, anddelinquency trends. The Company then considers future economic
conditions as part of the one year reasonable and supportable forecast period.
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Our loan portfolio is segmented into three pools for estimating our allowance
for creditlosses on loans: real estate, commercial, and consumer loans. They
were established upon the adoption of ASU 2016-13. Only three pools are used
to segment our loan portfolio because loans within the pools share similar
risk characteristics and wereoriginated using similar underwriting standards.
Loans that do not share similar risk characteristics would be evaluated on an
individual basis and excluded from the collective evaluation. Historically, we
have disclosed information about our loansand allowance based on class of
financing receivable. The portfolio segments align with the class of financing
receivables as follows:
. Real estate: One- to four-family residential, multi-family residential, and commercial mortgage
. Commercial: Commercial loans other than mortgage loans
. Consumer: Home equity loans, loans on deposit accounts, and all other consumer loans
Collateral dependent loans are not considered to share the same risk
characteristics with the three pools discussed above. A loan is consideredto
be collateral dependent when the borrower is experiencing financial difficulty
and repayment is expected to be provided substantially through the sale or
operation of the collateral. For loans which are considered to be collateral
dependent, theCompany has elected to estimate the expected credit loss based
on the fair value of the collateral less selling costs. If the fair value of
the collateral less selling costs is less than the loan's amortized cost
basis, the Company records apartial charge-off to reduce the loan's amortized
cost basis for the difference between the collateral fair value less selling
costs and the amortized cost basis.
The ACL on loans and accrued interest is calculated on a loan by loan basis.
If the loan's amortized cost basis is less than the totalpresent value of cash
flows calculated using a discounted cash flow approach, the ACL is equal to
the amortized cost basis minus the total present value of cash flows on the
loan discounted by the loan's effective interest rate. The expectedcash flows
include estimates of loan charge-offs, recoveries, and prepayments. Economic
variables which have a strong correlation with our historical loan
charge-offs, recoveries, and prepayments are utilized in forecasting loan
charge-offs,recoveries, and prepayments during the one year reasonable and
supportable forecast period. After the reasonable and supportable forecast
period, the historical reversion rate is used to calculate loan charge-offs,
recoveries, and prepayments forthe remaining expected life of the loan. The
reversion rate is based on historical averages and applied on a straight-line
basis. Qualitative adjustments may be made to account for current conditions
and forward looking events not captured in thequantitative calculation. The
forecast and reversion rate utilize historical behavior during select periods
of time. Our Real Estate and Consumer loan pools utilize a vintage approach
where historical losses, recoveries, and prepayment experience isdetermined
using loans that have originated in the same period. Our Commercial loans
utilize a reporting period approach where historical losses, recoveries, and
prepayment experience is considered during a selected historical period of
time.Off-balance sheet forecasts utilize a reporting period approach.
Loans receivable are stated at amortized cost which includes theprincipal
amount outstanding, less the allowance for credit/loan losses, deferred loan
origination fees and costs, commitment fees, and cumulative net charge-offs.
Interest income on loans receivable is accrued as earned. Accrued interest
receivableon loans was $4.6 million as of December 31, 2023, and is included
in accrued interest receivable on the Consolidated Balance Sheet.
The Company determines delinquency status by considering the number of days
full payments required by the contractual terms of the loan arepast due. The
Company has a policy of placing loans on a nonaccrual basis when 90 days or
more contractually delinquent or when, in the opinion of management,
collection of all or part of the principal balance appears doubtful, unless
the loansare well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued and not collected
is reversed against current period provision for credit losses. For nonaccrual
loans, the Companyrecords payments received as a reduction in principal. A
nonaccrual loan may be restored to an accrual basis when principal and
interest payments are current and full payment of principal and interest is
expected.
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The Company's off-balance sheet credit exposures are comprised of unfunded
portions ofexisting loans, such as lines of credit and construction loans, and
commitments to originate loans that are not conditionally cancellable by the
Company. Under the CECL accounting standard, expected credit losses on these
amounts are calculatedusing a forecasted estimate of the likelihood that
funding of the unfunded amount/commitment will occur and the historical
reversion rate. Changes to the reserve for off-balance sheet credit exposures
are recorded through increases or decreasesto the provision for credit losses
on the Consolidated Statements of Income. There were no reserves for
off-balance sheet credit exposures at December 31, 2023. Prior to the adoption
of the CECL accounting standard, the Company had areserve for off-balance
sheet credit exposures of $49,000 at December 31, 2022.
While management utilizes its best judgment andinformation available, the
adequacy of the ACL and the reserve for off-balance sheet credit exposures is
determined by certain factors outside of the Company's control, such as the
performance of our portfolios, changes in the economicenvironment including
economic uncertainty, changes in interest rates and loan prepayments, and the
view of the regulatory authorities toward classification of assets and the
level of ACL and the reserve for off-balance sheet credit exposures.Additionally
, the level of ACL and the reserve for off-balance sheet credit exposures may
fluctuate based on the balance and mix of the loan portfolio, changes in loan
prepayments and off-balance sheet credit exposures, changes in charge-off
rates,and changes in forecasted economic conditions. If actual results differ
significantly from our assumptions, our ACL and the reserve for off-balance
sheet credit exposures may not be sufficient to cover inherent losses in our
loan portfolio,resulting in additions to our ACL and an increase in the
provision for credit losses.
The Company is required to utilize the CECLmethodology to estimate expected
credit losses with respect to held-to-maturity (HTM) investment securities.
Since all of the Company's HTM investment securities were issued by U.S.
government agencies or U.S. government-sponsored enterprises,which include the
explicit and/or implicit guarantee of the U.S. government and have a long
history of no credit losses, the Company has not recorded a credit loss on
these securities. The unrealized losses on these securities were due to
changes ininterest rates, relative to when the securities were purchased, and
are not due to decreases in the credit quality of the securities.
Available for sale (AFS) investment securities in an unrealized loss position
are evaluated for impairment. The Company first assesses whetherit intends to
sell, or it is more likely than not that it will be required to sell, the
security before recovery of its amortized cost basis. If either of the
criteria regarding intent or requirement to sell is met, the investment
securitiesamortized cost basis is written down to fair value through income.
For AFS debt securities that do not meet the aforementioned criteria, the
Company evaluates whether the decline in fair value has resulted from credit
losses or other factors. Inmaking this assessment, management considers the
extent to which fair value is less than amortized cost, any changes to the
rating of the security by a rating agency, and adverse conditions specifically
related to the security, among other factors.If this assessment indicates that
a credit loss exists, the present value of cash flows expected to be collected
from the investment security are compared to the amortized cost basis of the
security. If the present value of cash flows expected to becollected is less
than the amortized cost basis, a credit loss exists and an ACL is recorded for
the credit loss, limited by the amount that the fair value is less than the
amortized cost basis. Any impairment that has not been recorded through anACL
is recognized in other comprehensive income. The Company has not recorded an
ACL related to our AFS investment securities.
Changes inthe ACL are recorded as a provision (or reversal of provision) for
credit losses. Losses are charged against the ACL when management believes the
uncollectibility of an AFS security is confirmed or when either of the
criteria regarding intent orrequirement to sell is met.
(j) Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control is
surrendered. Control is surrendered when the assets have been isolatedfrom the
Company, the transferee obtains the right to
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pledge or exchange the assets without constraint, and the Company does not
maintain effective control over the transferred assets. Mortgage loans sold
for cash are accounted for as sales as theabove criteria have been met.
Mortgage loans may also be packaged into securities that are issued and
guaranteed byU.S. government-sponsored enterprises or a U.S. government
agency. The Company receives 100% of the mortgage-backed securities issued.
The mortgage-backed securities received in securitizations are valued at fair
value and classified asheld-to-maturity. A gain or loss in the securitization
transactions is recognized for the difference between the fair value of the
mortgage-backed securities received and the amortized cost of the loans
securitized.
Mortgage loan transfers accounted for as sales and securitizations are without
recourse, except for normal representations and warrantiesprovided in sales
transactions, and the Company may retain the related rights to service the
loans. The retained servicing rights create mortgage servicing assets that are
accounted for in accordance with the Transfers and Servicing topic of theFASB
ASC. Mortgage servicing assets are initially valued at fair value and
subsequently at the lower of cost or fair value and are amortized in
proportion to and over the period of estimated net servicing income. The
Company uses a discounted cashflow model to determine the fair value of
retained mortgage servicing rights. The amount of mortgage servicing rights is
immaterial to the financial statement.
(k) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is principally computed on thestraight-line method
over the estimated useful lives of the respective assets. The estimated useful
life of buildings and improvements is 30 years, furniture, fixtures, and
equipment is 3 to 10 years, and automobiles are 3 years. Leaseholdimprovements
are amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset.
(l) Income Taxes
The Company files consolidated federal income tax and consolidated state
franchise tax returns.
Deferred tax assets and liabilities are recognized using the asset and
liability method of accounting for the future tax consequencesattributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measuredusing the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized inincome in the period that includes the enactment date.
We establish income tax contingency reserves for potential tax liabilities
relatedto uncertain tax positions. A liability for income tax uncertainties
would be recorded for unrecognized tax benefits related to uncertain tax
positions where it is more likely than not that the position will be sustained
upon examination by a taxingauthority.
As of December 31, 2023 and 2022, the Company had not recognized a liability
for income tax uncertainties in theaccompanying Consolidated Balance Sheets
because management concluded that the Company does not have material uncertain
tax positions.
TheCompany recognizes interest and penalties related to tax liabilities in
other interest expense and other general and administrative expenses,
respectively, in the Consolidated Statements of Income.
Tax years 2020 and after currently remain subject to examination by the
Internal Revenue Service and by the Department of Taxation of the Stateof
Hawaii.
(m) Impairment of Long-Lived Assets
Long-lived assets, such as premises and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that thecarrying amount
of an asset may not be recoverable.
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Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated future cash flows expected to be
generated by the asset. If the carryingamount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in theConsolidated
Balance Sheets and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated.
(n) Pension Plan
Pension benefit costs (returns) are charged (credited) to salaries and
employee benefits expense or other income, and the corresponding prepaid(accrued
) pension cost is recorded in prepaid expenses and other assets or accounts
payable and accrued expenses in the Consolidated Balance Sheets. The Company's
policy is to fund pension costs in amounts that will not be less than the
minimumfunding requirements of the Employee Retirement Income Security Act of
1974 and will not exceed the maximum tax-deductible amounts. The Company
generally funds at least the net periodic pension cost, subject to limits and
targeted funded status asdetermined with the consulting actuary.
(o) Share-Based Compensation
The Company grants share-based compensation awards, including restricted stock
and restricted stock units, which are either performance-basedor time-based.
The fair value of the restricted stock and restricted stock unit awards were
based on the closing price of the Company's stock on the date of grant. The
cost of these awards are amortized in the Consolidated Statements of Incomeon
a straight-line basis over the vesting period. The amount of performance-based
restricted stock units that vest on a performance condition is remeasured
quarterly based on how the Company's return on average equity compares to the
SNL BankIndex. The number of performance-based restricted stock units that are
expected to vest based on the Company's return on average equity is determined
quarterly and the amortization of these stock awards is adjusted for any
changes in therestricted stock units that are expected to vest. The fair value
of performance-based restricted stock units that are based on how the
Company's total stock return compares to the SNL Bank Index was measured using
a Monte-Carlo valuation. Thenumber of performance-based restricted stock units
that are based on the Company's total stock return is amortized over the
vesting period and is not adjusted for performance.
(p) Supplemental Employee Retirement Plan (SERP)
The SERP is a noncontributory supplemental retirement plan covering certain
current and former employees of the Company. Benefits in theSERP plan are paid
after retirement, in addition to the benefits provided by the Pension Plan.
The Company accrues SERP costs over the estimated period until retirement by
charging salaries and employee benefits expense in the ConsolidatedStatements
of Income, with a corresponding credit to accounts payable and accrued
expenses in the Consolidated Balance Sheets.
(q) Employee Stock Ownership Plan (ESOP)
The cost of shares issued to the ESOP, but not yet allocated to participants,
is shown as a reduction of stockholders' equity.Compensation expense is based
on the market price of shares as they are committed to be released to
participant accounts. Dividends on allocated ESOP shares reduce retained
earnings; dividends on unearned ESOP shares reduce debt and accruedinterest.
(r) Earnings Per Share
We have two forms of our outstanding common stock: common stock and unvested
restricted stock awards. Holders of unvested restricted stockawards receive
dividends at the same rate as common shareholders and they both share equally
in undistributed earnings. Unvested restricted stock awards that are
time-based contain nonforfeitable rights to dividends or dividend equivalents
areconsidered to be participating securities in the earnings per share
computation using the two-class method. Under the two-class method, earnings
are allocated to common shareholders and participating securities
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according to their respective rights to earnings. Unvested restricted stock
awards that vest based on performance or market conditions are not considered
to be participating securities inthe earnings per share calculation because
accrued dividends on shares that do not vest are forfeited.
Basic earnings per share iscomputed by dividing net income allocated to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income allocated to common shareholders by the sumof the weighted-average
number of shares outstanding plus the dilutive effect of stock options and
restricted stock. ESOP shares not committed to be released are not considered
outstanding.
(s) Common Stock Repurchase Program
The Company adopted common stock repurchase programs in which shares
repurchased reduce the amount of shares issued and outstanding. Therepurchased
shares may be reissued in connection with share-based compensation plans and
for general corporate purposes. During 2023 and 2022, the Company repurchased
250,882 and 262,621 shares of common stock, respectively, at an average cost
of$16.05 and $22.75 per share, respectively, as part of the repurchase
programs authorized by the Board of Directors.
(t) Bank-Owned Life Insurance
The Company's investment in bank-owned life insurance is based on cash
surrender value. The Company invests in bank-owned life insuranceto provide a
funding source for benefit plan obligations. Bank-owned life insurance also
generally provides noninterest income that is nontaxable. Federal regulations
generally limit the investment in bank-owned life insurance to 25% of
theBank's Tier 1 capital plus the allowance for loan losses. At December 31,
2023, this limit was $61.0 million and the Company had invested $48.6 million
in bank-owned life insurance at that date.
(u) Leases
The Company records a right-of-use (ROU) asset for those leases that convey
rights to control use of identified assets for a period of time inexchange for
consideration. The Company is also required to record a lease liability for
the present value of future payment commitments. The Company leases most of
its premises and some vehicles and equipment under operating leases expiring
onvarious dates through 2037. The majority of lease agreements relate to real
estate and generally provide that the Company pay taxes, insurance,
maintenance and certain other variable operating expenses applicable to the
leased premises. Variablelease components and nonlease components are not
included in the Company's computation of the ROU asset or lease liability. The
Company also does not include short-term leases in the computation of the ROU
asset or lease liability. Short-termleases are leases with a term at
commencement of 12 months or less. Short-term lease expense is recorded on a
straight-line basis over the term of the lease. Lease agreements do not
contain any residual value guarantees or restrictive covenants.
The value of the ROU asset and lease liability is impacted by the amount of
the periodic payment required, length of the lease term, leaseincentives and
the discount rate used to calculate the present value of the minimum lease
payments. Certain leases have renewal options at the expiration of the lease
terms. Generally, option periods are not included in the computation of the
leaseterm, ROU asset or lease liability because the Company is not reasonably
certain to exercise renewal options at the expiration of the lease terms.
Because the discount rates implicit in our leases are not known, discount
rates have been estimatedusing the rates for fixed-rate, amortizing advances
from the FHLB for the approximate terms of the leases.
(v) Use of Estimates
The preparation of the Consolidated Financial Statements requires management
to make a number of estimates and assumptions relating to thereported amount
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and the
reported
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amount of revenues and expenses during the reporting period. Significant items
subject to such estimates and assumptions include the allowance for credit
losses; valuation of certain investmentsecurities; valuation allowances for
deferred income tax assets; and assets and obligations related to employee
benefit plans. Accordingly, actual results could differ from those estimates.
(w) Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326):Measurement of Credit
Losses on Financial Instruments. The ASU changed the threshold for recognizing
losses from a "probable" to an "expected" model. The new model is referred to
as the current expected credit loss model andapplies to loans, leases,
held-to-maturity investments, loan commitments, and financial guarantees. The
standard requires the measurement of all expected credit losses for financial
assets as of the reporting date (including historical experience,current
conditions, and reasonable and supportable forecasts) and enhanced disclosures
that will help financial statement users understand the estimates and
judgments used in estimating credit losses and evaluating the credit quality
of anorganization's portfolio. The amendment was effective for fiscal years
beginning after December 15, 2019, including interim periods within those
fiscal years. In November 2019, the FASB issued an update that delayed the
effective date ofthe amendment for smaller reporting companies, as defined by
the Securities and Exchange Commission, to fiscal years beginning after
December 15, 2022. The Company is a smaller reporting company. The Company
adopted the standard onJanuary 1, 2023, and applied the standard's provisions
as a cumulative-effect adjustment to retained earnings as of January 1, 2023.
Upon adoption of the standard, the Company recorded a $3.2 million increase to
the reserve for creditlosses, which included a decrease of $49,000 in the
reserves for off-balance sheet credit exposures. This resulted in a $2.3
million after-tax decrease to retained earnings as of January 1, 2023. The tax
effect resulted in anincrease in deferred tax assets.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit
Losses (Topic 326): TroubledDebt Restructurings and Vintage Disclosures. The
ASU eliminates the accounting guidance for loans modified as troubled debt
restructurings by creditors while enhancing disclosure requirements for
certain loan refinancings and restructurings bycreditors when a borrower is
experiencing financial difficulty. Additionally, the ASU requires public
business entities to disclose current-period gross write-offs by year of
origination for financing receivables and net investments in leases. ThisASU
was effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years, upon the Company's adoption of the
amendments in ASU 2016-13. The Company adopted the standard on January 1,2023,
and it did not have a material effect on the Company's consolidated financial
statements.
In June 2022, the FASB issued ASU2022-03, Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions to clarify that
contractual sale restrictions should not be considered in the measurement of
the fair value of an equity security. The Company owns stockin the Federal
Reserve Bank (FRB) and in the Federal Home Loan Bank (FHLB) which is valued at
historical cost which approximates fair value. Ownership of stock is a
condition for services the Company receives from the FRB and FHLB. The stock
is notpublicly traded and can only be issued, exchanged, redeemed or
repurchased by the FRB and the FHLB. ASU 2022-03 is effective for fiscal years
beginning after December 15, 2023. The Company does not expect the adoption of
this ASU to have amaterial effect on its consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:Codificati
on Amendments in Response to the SEC's Disclosure Update and Simplification
Initiative. The ASU is intended to clarify or improve disclosure and
presentation requirements of a variety of topics. Many of the amendment will
allow usersto more easily compare entities subject to the SEC's existing
disclosures with those entities that were not previously subject to the
requirements and align the requirements in the FASB accounting standard
codification with the SEC'sregulations. The Company is currently evaluating
the effects that ASU 2023-06 will have on its consolidated financial
statements.
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In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):
Improvementsto Reportable Segment Disclosures. This ASU is intended to improve
financial reporting by requiring disclosure of incremental segment information
on an annual and interim basis to enable investors to develop more
decision-useful financial analyses.This ASU will be effective for fiscal years
beginning after December 31, 2023, and interim periods within fiscal years
beginning after December 15, 2024. Early adoption is permitted. The Company
does not expect the adoption of this ASU tohave a material effect on its
consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic
740):Improvements to Income Tax Disclosures. The ASU is intended to enhance
the transparency and decision usefulness of income tax disclosures. This ASU
will be effective for fiscal years beginning after December 15, 2024. The
Company is currentlyevaluating the effects that ASU 2023-09 will have on its
consolidated financial statements.
(3) Cash and Cash Equivalents
The table below presents the balances of cash and cash equivalents:
December 31,
(Dollars in thousands) 2023 2022
Cash and due from banks $ 10,471 $ 9,722
Interest-earning deposits in other banks 116,188 30,831
Cash and cash equivalents $ 126,659 $ 40,553
Interest-earning deposits in other banks consist primarily of deposits at the
Federal Reserve Bank of SanFrancisco.
(4) Investment Securities
The amortized cost and fair values of investment securities are as follows:
Amortized Gross Estimated ACL
Cost Unrealized Fair Value
(Dollars in Gains Losses
thousands)
December
31, 2023:
Available-for-sale:
Mortgage-backed securities issued by $ 22,563 $ -- $ (2,392 ) $ 20,171 $ --
U.S. government-sponsored enterprises
Held-to-maturity:
Mortgage-backed securities issued by U.S. government 685,728 68 (117,668 ) 568,128 --
agencies or U.S. government-sponsoredenterprises
Total $ 708,291 $ 68 $ (120,060 ) $ 588,299 $ --
December
31, 2022:
Available-for-sale:
Mortgage-backed securities issued by $ 23,544 $ -- $ (2,723 ) $ 20,821
U.S. government-sponsored enterprises
Held-to-maturity:
Mortgage-backed securities issued by U.S. government 717,773 62 (126,751 ) 591,084
agencies or U.S. government-sponsoredenterprises
Total $ 741,317 $ 62 $ (129,474 ) $ 611,905
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The amortized cost and estimated fair value of investment securities by
maturity date atDecember 31, 2023 are shown below. Incorporated in the
maturity schedule are mortgage-backed securities, which are allocated using
the contractual maturity as a basis. Expected maturities may differ from
contractual maturities because issuersmay have the right to call or prepay
obligations with or without call or prepayment penalties.
(Dollars in thousands) Amortized Estimated
Cost Fair Value
Available-for-sale:
Due after 10 years $ 22,563 $ 20,171
Total $ 22,563 $ 20,171
Held-to-maturity:
Due within 5 years $ 14 $ 14
Due after 5 years through 10 years 7 6
Due after 10 years 685,707 568,108
Total $ 685,728 $ 568,128
The Company did not sell any held-to-maturity or available-for-sale securities
during 2023 and 2022.
Investment securities with amortized cost of $555.8 million and $272.8 million
at December 31, 2023 and 2022, respectively, were pledgedto secure deposits
made by state and local governments, securities sold under agreements to
repurchase, transaction clearing accounts, and Federal Reserve Bank
borrowings. Included in these amounts were $74.0 million and $5.4 million
pledged to theFederal Reserve Bank's discount window at December 31, 2023 and
2022, respectively, and $202.1 million pledged to the Federal Reserve Bank's
Term Funding Program at December 31, 2023.
Provided below is a summary of investment securities which were in an
unrealized loss position at December 31, 2023 and 2022. The Companydoes not
intend to sell securities until such time as the value recovers or the
securities mature and it is not more likely than not that the Company will be
required to sell the securities prior to recovery of value or the securities
mature.
Less Than 12 Months Total
12 Months or Longer
Description Fair Unrealized Fair Unrealized Number Fair Unrealized
of Value Losses Value Losses of Value Losses
securities Securities
(Dollars
in
thousands)
December
31,
2023:
Available-for-sale:
Mortgage-backed $ -- $ -- $ 20,171 $ (2,392 ) 4 $ 20,171 $ (2,392 )
securities issued by
U.S. government-sponsored
enterprises
Held-to-maturity:
Mortgage-backed securities 10,326 (107 ) 554,514 (117,561 ) 152 564,840 (117,668 )
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
Total $ 10,326 $ (107 ) $ 574,685 $ (119,953 ) 156 $ 585,011 $ (120,060 )
December
31,
2022:
Available-for-sale: -- -- -- -- -- -- --
Mortgage-backed $ 20,821 $ (2,723 ) $ -- $ -- 4 $ 20,821 $ (2,723 )
securities issued by
U.S. government
sponsored enterprises
Held-to-maturity:
Mortgage-backed securities 210,128 (22,209 ) 377,418 (104,542 ) 148 587,546 (126,751 )
issued by U.S. government
agencies or U.S.
government-sponsoredenterprises
Total $ 230,949 $ (24,932 ) $ 377,418 $ (104,542 ) 152 $ 608,367 $ (129,474 )
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Mortgage-Backed Securities.
The unrealized losses on the Company'sinvestment in mortgage-backed securities
were caused by increases in market interest rates subsequent to purchase. All
of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae,
which are U.S. government-sponsored enterprises, orGinnie Mae, which is a U.S.
government agency. Since the decline in market value is attributable to
changes in interest rates and not credit quality, and the Company does not
intend to sell these investments until maturity, and it is not more likelythan
not that the Company will be required to sell such investments prior to
recovery of its cost basis, no allowance for credit losses was recorded for
these securities as of December 31, 2023. Prior to the adoption of ASU
2016-13, the companydid not consider any of its investments to be
other-than-temporarily impaired as of December 31, 2022.
(5) Federal Home Loan Bank Stock
The Bank, as a member of the FHLB system, is required to obtain and hold
shares of capital stock in the FHLB. At December 31, 2023 and2022, the Bank
met such requirement. At December 31, 2023 and 2022, the Bank owned $12.2
million and $8.2 million, respectively, of capital stock of the FHLB Des
Moines.
The Company evaluated its investment in the stock of the FHLB Des Moines for
impairment. Based on the Company's evaluation of theunderlying investment,
including the long-term nature of the investment and the liquidity position of
the FHLB Des Moines, the Company did not consider its FHLB stock other-than-temp
orarily impaired. There were no observable, orderly transactions ata price
that would require the Company to update the value of the stock of the FHLB
Des Moines.
(6) Federal Reserve Bank Stock
The Bank, as a member of the Federal Reserve System, is required to hold
shares of capital stock of the FRB of San Francisco equal to 6% ofcapital and
surplus of the Bank. At December 31, 2023 and 2022 the Bank met such
requirement. At December 31, 2023 and 2022, the Bank owned $3.2 million of
capital stock of the FRB of San Francisco.
The Company evaluated its investment in the stock of the FRB of San Francisco
for impairment. Based on the Company's evaluation of theunderlying investment,
including the long-term nature of the investment and the liquidity position of
the FRB of San Francisco, the Company did not consider its FRB stock
other-than-temporarily impaired. There were no observable, orderlytransactions
at a price that would require the Company to update the value of the stock of
the FRB of San Francisco.
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(7) Loans Receivable and Allowance for Credit Losses
The components of loans receivable, net of allowance for credit losses (ACL)
under ASC 326 as of December 31, 2023 and net of allowancefor loan losses
under ASC 310 as of December 31, 2022 are as follows:
December 31,
(Dollars in thousands) 2023 2022
Real estate loans:
First mortgages:
One- to four-family residential $ 1,277,544 $ 1,253,558
Multi-family residential 5,855 6,448
Construction, commercial, and other 11,631 23,903
Home equity loans and lines of credit 7,058 6,426
Total real estate loans 1,302,088 1,290,335
Other loans:
Loans on deposit accounts 196 216
Consumer and other loans 8,257 8,381
Total other loans 8,453 8,597
Total loans 1,310,541 1,298,932
Net unearned fees and discounts (1,989 ) (2,136 )
Total loans, net of unearned fees and discounts 1,308,552 1,296,796
Allowance for credit/loan losses (5,121 ) (2,032 )
Loans receivable, net of allowance for credit/loan losses $ 1,303,431 $ 1,294,764
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The table below presents the activity in the allowance for credit/loan losses
by portfoliosegment:
(Dollars in Residential Construction, Home Consumer Unallocated Totals
thousands) Mortgage Commercial, Equity and
and Loans Other
Other and
Mortgage Lines
Loans of
Credit
Year ended
December 31, 2023:
Balance, beginning $ 1,263 $ 434 $ 1 $ 75 $ 259 $ 2,032
of year
Adoption of ASU 3,393 71 (1 ) 5 (259 ) 3,209
No. 2016-13
(Reversal of provision) (110 ) 9 -- 98 -- (3 )
provision for credit losses
4,546 514 -- 178 -- 5,238
Charge-offs (75 ) -- -- (82 ) -- (157 )
Recoveries 31 -- -- 9 -- 40
Net (44 ) -- -- (73 ) -- (117 )
charge-offs
Balance, end $ 4,502 $ 514 $ -- $ 105 $ -- $ 5,121
of year
Year ended
December 31, 2022:
Balance, beginning $ 1,814 $ 435 $ 1 $ 89 $ 330 $ 2,669
of year
(Reversal of provision) (551 ) (1 ) -- 47 (71 ) (576 )
provision for loan losses
1,263 434 1 136 259 2,093
Charge-offs -- -- -- (62 ) -- (62 )
Recoveries -- -- -- 1 -- 1
Net -- -- -- (61 ) -- (61 )
charge-offs
Balance, end $ 1,263 $ 434 $ 1 $ 75 $ 259 $ 2,032
of year
We recorded a reversal of credit loss provision of $3,000 under ASC 326 for
the year ended December 31,2023 that was primarily due to a decrease in
provisions for the mortgage loan portfolio, which was partially offset by an
increase in provisions for the consumer loan portfolio. The decrease in
provisions in the mortgage loan portfolio wasprimarily due to a decrease in
forecasted charge-offs, which was partially offset by an increase in the loan
portfolio and a decrease in forecasted prepayments. The increase in provisions
for the consumer loan portfolio was primarily due to anincrease in the
consumer loan portfolio and forecasted charge-offs and a decrease in
forecasted prepayments. There were no reserves for off-balance sheet credit
exposures at December 31, 2023. Prior to the adoption of the CECL
accountingstandard, the Company had a reserve for off-balance sheet credit
exposures of $49,000 at December 31, 2022.
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The table below presents the balance in the allowance for loan losses and the
recordedinvestment in loans, net of unearned fees and discounts, by portfolio
segment, and based on impairment method as of December 31, 2022, as determined
in accordance with ASC 310 prior to the adoption of ASU 2016-13:
(Dollars in thousands) Residential Construction, Home Consumer Unallocated Totals
Mortgage Commercial, Equity and Other
and Other Loans and
Mortgage Lines of
Loans Credit
December 31, 2022:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment $ -- $ -- $ -- $ -- $ -- $ --
Collectively evaluated for impairment 1,263 434 1 75 259 2,032
Total ending allowance balance $ 1,263 $ 434 $ 1 $ 75 $ 259 $ 2,032
Loans:
Ending loan balance:
Individually evaluated for impairment $ 2,693 $ -- $ 16 $ -- $ 6 $ 2,715
Collectively evaluated for impairment 1,255,300 23,775 6,411 8,595 -- 1,294,081
Total ending loan balance $ 1,257,993 $ 23,775 $ 6,427 $ 8,595 $ 6 $ 1,296,796
The table below presents the balance of impaired loans individually evaluated
for impairment by class of loansas of December 31, 2022, in accordance with
ASC 310 prior to the adoption of ASU 2016-13:
(Dollars in thousands) Recorded Unpaid
Investment Principal
Balance
December 31, 2022:
With no related allowance recorded:
One- to four-family residential mortgages $ 2,693 $ 3,209
Home equity loans and lines of credit 16 30
Consumer loans 6 6
Total $ 2,715 $ 3,245
The table below presents the average recorded investment and interest income
recognized on impaired loans byclass of loans as of December 31, 2022, in
accordance with ASC 310 prior to the adoption of ASU
2016-13:
(Dollars in thousands) Average Interest Income
Recorded Recognized
Investment
2022:
With no related allowance recorded:
One- to four-family residential mortgages $ 2,776 $ 24
Home equity loans and lines of credit 17 --
Consumer loans 6 --
Total $ 2,799 $ 24
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There were no loans individually evaluated for impairment with a related
allowance for loanloss as of December 31, 2022. At December 31, 2022, loans
individually evaluated for impairment did not have an allocated allowance for
loan loss because they were written down to fair value at the time of
impairment. At December 31,2022, an impaired loan would also not have an
allocated allowance if the value of the property securing the loan, less the
cost to sell the property, was greater than the loan balance.
The Company primarily uses the aging of loans to monitor the credit quality of
its loan portfolio. The table below presents by credit qualityindicator, loan
class and year of origination, the amortized cost basis of the Company's loans
as of December 31, 2023:
Amortized Cost of Term Loans by Origination Year Revolving Loans
Amortized
Cost Basis
(Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total
December 31, 2023:
Commercial
30 - 59 days past due $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- -- -- --
Loans not past due 387 353 4,836 -- 203 856 1,230 7,865
Total Commercial 387 353 4,836 -- 203 856 1,230 7,865
Consumer
30 - 59 days past due 4 -- -- -- -- -- -- 4
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- -- -- -- --
Loans not past due 271 80 20 4 14 42 6,137 6,568
Total Consumer 275 80 20 4 14 42 6,137 6,572
Real Estate
30 - 59 days past due -- -- -- -- -- 428 -- 428
60 - 89 days past due -- -- -- -- -- -- -- --
90 days or more past due -- -- -- -- 140 87 -- 227
Loans not past due 91,195 129,148 283,571 183,887 91,113 514,546 -- 1,293,460
Total Real Estate 91,195 129,148 283,571 183,887 91,253 515,061 -- 1,294,115
Total $ 91,857 $ 129,581 $ 288,427 $ 183,891 $ 91,470 $ 515,959 $ 7,367 $ 1,308,552
The Company did not have any revolving loans that converted to term loans
during the year endedDecember 31, 2023.
The following table presents by loan class and year of origination, the gross
charge-offs recorded during the yearended December 31, 2023.
(Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total
Year ended December 31, 2023:
One- to four-family residential mortgages $ -- $ -- $ -- $ -- $ 13 $ 62 $ 75
Loans on deposit accounts 78 -- -- -- -- -- 78
Consumer and other 1 -- -- -- 3 -- 4
Total $ 79 $ -- $ -- $ -- $ 16 $ 62 $ 157
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The table below presents the aging of loans and accrual status by class of
loans, net ofunearned fees and discounts. Loans with a formal loan payment
deferral plan in place are not considered contractually past due or delinquent
if the borrower is in compliance with the loan payment deferral plan.
(Dollars in 30 - 60 - 90 Days Total Loans Total Nonaccrual Loans
thousands) 59 89 or Past Not Loans Loans 90
Days Days More Due Past Days
Past Past Past Due or
Due Due Due More
Past
Due
and
Still
Accruing
December
31, 2023:
One- to four-family $ 428 $ -- $ 227 $ 655 $ 1,274,960 $ 1,275,615 $ 2,079 $ --
residential mortgages
Multi-family -- -- -- -- 5,848 5,848 -- --
residential mortgages
Construction, commercial, -- -- -- -- 11,570 11,570 -- --
and other mortgages
Home equity loans -- -- -- -- 7,060 7,060 11 --
and lines of credit
Loans on deposit -- -- -- -- 196 196 -- --
accounts
Consumer 4 -- -- 4 8,259 8,263 170 --
and other
Total $ 432 $ -- $ 227 $ 659 $ 1,307,893 $ 1,308,552 $ 2,260 $ --
December
31, 2022:
One- to four-family $ -- $ 409 $ 559 $ 968 $ 1,250,586 $ 1,251,554 $ 2,279 $ --
residential mortgages
Multi-family -- -- -- -- 6,439 6,439 -- --
residential mortgages
Construction, commercial, -- -- -- -- 23,775 23,775 -- --
and other mortgages
Home equity loans -- -- -- -- 6,427 6,427 16 --
and lines of credit
Loans on deposit -- -- -- -- 217 217 -- --
accounts
Consumer 6 -- 6 12 8,372 8,384 6 --
and other
Total $ 6 $ 409 $ 565 $ 980 $ 1,295,816 $ 1,296,796 $ 2,301 $ --
The table below presents the amortized cost basis of loans on nonaccrual
status as of December 31, 2023and 2022.
December 31, 2023 December 31, 2022
(Dollars in thousands) Nonaccrual Nonaccrual Total Total Nonaccrual
Loans With a Loans Nonaccrual Loans
Related ACL Without a Loans
Related ACL
One- to four-family residential mortgages $ 1,030 $ 1,049 $ 2,079 $ 2,279
Home equity loans and lines of credit 11 -- 11 16
Consumer and other 170 -- 170 6
Total Nonaccrual Loans and Leases $ 1,211 $ 1,049 $ 2,260 $ 2,301
All payment received while on nonaccrual status are applied against the
principal balance of the loan.
When a mortgage loan becomes seriously delinquent (90 days or more
contractually past due), it displays weaknesses that may result in a loss.As a
loan becomes more delinquent, the likelihood of the borrower repaying the loan
decreases and the loan becomes more collateral-dependent. A mortgage loan
becomes collateral-dependent when the proceeds for repayment can be expected
to come onlyfrom the sale or operation of the collateral and not from borrower
repayments. Generally, appraisals are obtained after a loan becomes
collateral-dependent or is four months delinquent. The carrying value of
collateral-dependent loans is adjusted tothe fair value of the collateral less
selling costs. Any commercial real estate, commercial, construction or equity
loan that has a loan balance in excess of a specified amount is also
periodically reviewed to determine whether the loan exhibits anyweaknesses and
is performing in accordance with its contractual terms. The amortized cost
basis of collateral-dependent loans, excluding accrued interest
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receivable, was $227,000 and $559,000 at December 31, 2023 and 2022,
respectively. These loans were collateralized by residential real estate in
Hawaii. As of December 31, 2023 and2022, the fair value of the collateral less
selling costs of these collateral-dependent loans exceeded the amortized cost
basis. There was no ACL on collateral-dependent loans.
In August 2023, wildfires on Maui partially or completely destroyed 12 homes
which were collateral for $3.2 million of mortage loans held bythe Company.
Since the wildfire occurred, $300,000 of these loans have been paid off using
insurance proceeds. At December 31, 2023, the Company had $2.8 million of
mortgage loans which were collateralized by homes partially or completelydestroy
ed in the Maui wildfires and all of these loans were current. A $61,000
mortgage loan, which was collateralized by a home destroyed in the Maui
wildfire, is in the Bank's forbearance program which was designed to assit
borrowersexperiencing financial dificulties. The forbearance program allows
the borrower to defer his interest payments for six months. All of the homes
which were destroyed are insured and the Company does not expect to incur a
loss on these loans. TheCompany also has $18.7 million of mortgage loans on
Maui at December 31, 2023 which were not affected by the wildfires. As of
December 31, 2023, all of these loans were current. The $61,000 loan in the
forbearance program was the only loanmodifed in the year ended December 31,
2023. There were no loans modified during the year ended December 31, 2022.
The Companyhad no real estate owned as of December 31, 2023 or 2022. There
were two one- to four-family residential mortgage loans totaling $227,000 in
the process of foreclosure at December 31, 2023 and 2022.
Nearly all the Company's real estate loans are collateralized by real estate
located in the State of Hawaii. Loan-to-value ratios on thesereal estate loans
generally do not exceed 80% at the time of origination.
During the years ended December 31, 2023 and 2022, theCompany sold mortgage
loans held for sale with principal balances of $827,000 and $5.4 million,
respectively, and recognized a gain of $10,000 and a loss of $3,000,
respectively. The Company had no loans held for sale at December 31, 2023
or2022.
The Company serviced loans for others with principal balances of $33.2 million
and $36.0 million at December 31, 2023 and 2022,respectively. Of these
amounts, $19.3 million and $20.7 million of loan balances relate to
securitizations for which the Company continues to hold the related
mortgage-backed securities at December 31, 2023 and 2022, respectively. The
amount ofcontractually specified servicing fees earned was $91,000 and
$101,000 for 2023 and 2022, respectively. The fees are reported in service and
other fees in the Consolidated Statements of Income.
In the normal course of business, the Company has made loans to certain
directors and executive officers under terms which management believesare
consistent with the Company's general lending policies. Loans to directors and
executive officers amounted to $392,000 and $414,000 at December 31, 2023 and
2022, respectively.
(8) Accrued Interest Receivable
The components of accrued interest receivable are as follows:
December 31,
(Dollars in thousands) 2023 2022
Loans receivable $ 4,585 $ 4,595
Investment securities 1,441 1,497
Interest-bearing deposits 79 23
Total $ 6,105 $ 6,115
(9) Interest Rate Lock and Forward Loan Sale Commitments
The Company may enter into interest rate lock commitments with borrowers on
loans intended to be sold. To manage interest rate risk on the lockcommitments,
the Company may also enter into forward loan sale
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commitments. The interest rate lock commitments and forward loan sale
commitments are treated as derivatives and are recorded at their fair values
in prepaid expenses and other assets or inaccounts payable and accrued
expenses. Changes in fair value are recorded in current earnings. The Company
did not have any loans available for sale at December 31, 2023 or 2022.
There were no interest rate contracts at December 31, 2023 or 2022. There were
no gains and losses on derivatives for the year endedDecember 31, 2023. Gains
and losses on derivatives net to zero for the year ended December 31, 2022.
(10) Premises and Equipment
Premises and equipment are as follows:
December 31,
(Dollars in thousands) 2023 2022
Land $ 585 $ 585
Buildings and improvements 1,400 1,400
Leasehold improvements 18,053 17,949
Furniture, fixtures and equipment 6,613 6,766
Automobiles 96 130
26,747 26,830
Less accumulated depreciation and amortization (19,783 ) (19,494 )
6,964 7,336
Construction in progress 221 263
Total $ 7,185 $ 7,599
Depreciation expense was $1.1 million and $1.2 million for the years ended
December 31, 2023 and 2022,respectively.
(11) Deposits
Deposit accounts by type are summarized with their respective weighted-average
interest rates as follows:
December 31, 2023 December 31, 2022
(Dollars in thousands) Amount Rate Amount Rate
Non-interest bearing $ 66,757 -- % $ 68,095 -- %
Savings accounts 739,036 0.59 910,652 0.13
Certificates of deposit 532,433 4.11 429,687 2.67
Money market 3,595 0.10 5,372 0.10
Checking and Super NOW 294,783 0.02 302,346 0.02
Total $ 1,636,604 1.61 % $ 1,716,152 0.74 %
The maturity of certificate of deposit accounts at December 31, 2023 is as
follows (dollars inthousands):
Maturing in:
Due within 1 year $ 498,140
Due after 1 year through 2 years 20,142
Due after 2 years through 3 years 5,746
Due after 3 years through 4 years 3,743
Due after 4 years through 5 years 4,662
Total $ 532,433
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Certificates of deposit with balances greater than or equal to $250,000
totaled $280.1million and $257.9 million at December 31, 2023 and 2022,
respectively. Deposit accounts in the Bank are insured by the FDIC, generally
up to a maximum of $250,000 per account owner.
Interest expense by type of deposit is as follows:
Year ended December 31,
(Dollars in thousands) 2023 2022
Savings $ 2,469 $ 949
Certificates of deposit and money market 16,956 3,914
Checking and Super NOW 59 62
Total $ 19,484 $ 4,925
At December 31, 2023 and 2022, overdrawn deposit accounts totaled $169,000 and
$35,000, respectively, andhave been reclassified as loans in the Consolidated
Balance Sheets.
In the normal course of business, certain directors and executiveofficers (and
their associated and affiliated parties) maintain deposit accounts with the
Company totaling $4.5 million and $3.9 million at December 31, 2023 and 2022,
respectively.
(12) Advances from the Federal Home Loan Bank
Federal Home Loan Bank advances are secured by a blanket pledge on the Bank's
assets not otherwise pledged. At December 31, 2023 and2022, our credit line
with the FHLB Des Moines was equal to 45% of the Bank's total assets and we
had the capacity to borrow an additional $612.6 million and $769.1 million,
respectively.
Advances outstanding consisted of the following:
December 31,
2023 2022
(Dollars in thousands) Amount Weighted Amount Weighted
Average Average
Rate Rate
Due within one year $ 82,000 1.40 % $ 24,000 1.27 %
Due over 1 year to 2 years 45,000 2.87 82,000 1.40
Due over 2 years to 3 years 20,000 3.20 25,000 1.58
Due over 3 years to 4 years 30,000 4.24 10,000 1.97
Due over 4 years to 5 years 60,000 4.32 -- --
Due over 5 years to 6 years 5,000 4.38 -- --
Total $ 242,000 2.96 % $ 141,000 1.45 %
(13) Advances from the Federal Reserve Bank
In March 2023, the FRB created a new Bank Term Funding Program (BTFP) to make
additional funding available to eligible depository institutions.This program
offers loans up to one year term that can be prepaid without penalty. The
amount that can be borrowed is based upon the par value of the securities
pledged as collateral to the FRB. Advances can be requested under the BTFP
until atleast March 11, 2024.
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Advances outstanding consisted of the following:
December 31, 2023
(Dollars in thousands) Amount Weighted
Average
Rate
Due within one year $ 50,000 4.89 %
Total $ 50,000 4.89 %
(14) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as financings and
the obligations to repurchase the identical securities sold arereflected as a
liability with the securities collateralizing the agreements classified as an
asset. Securities sold under agreements to repurchase are summarized as
follows:
December 31, 2023 December 31, 2022
(Dollars in thousands) Repurchase Weighted Repurchase Weighted
Liability Average Liability Average
Rate Rate
Maturing:
1 year or less $ 5,000 1.88 % $ -- -- %
Over 1 year to 2 years 5,000 1.73 5,000 1.81
Over 2 years to 3 years -- -- 5,000 1.73
Total $ 10,000 1.81 % $ 10,000 1.81 %
Below is a summary comparing the carrying value and fair value of securities
pledged to secure repurchaseagreements, the repurchase liability, and the
amount at risk at December 31, 2023. The amount at risk is the greater of the
carrying value or fair value over the repurchase liability and refers to the
potential loss to the Company if thesecured lender fails to return the
security at the maturity date of the agreement. All the agreements to
repurchase are with JP Morgan Securities and the securities pledged are
mortgage-backed securities issued and guaranteed by U.S. governmentagencies or
U.S. government-sponsored enterprises. The fair value of the securities
pledged must exceed the repurchase liability by 5.00%. In the event of a
decline in the fair value of securities pledged to less than the required
amount due tomarket conditions or principal repayments, the Company is
obligated to pledge additional securities or other suitable collateral to cure
the deficiency.
(Dollars in thousands) Carrying Fair Repurchase Amount Weighted
Value of Value of Liability at Risk Average
Securities Securities Months to
Maturity
Maturing:
Over 90 days $ 14,230 $ 12,239 $ 10,000 $ 4,230 12
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(15) Offsetting of Financial Liabilities
Securities sold under agreements to repurchase are subject to a right of
offset in the event of default. See Note 14, Securities Sold UnderAgreements
to Repurchase, for additional information.
Gross Gross Net Gross Amount Not
Amount Amount Amount of Offset in the
of Offset Liabilities Balance
Recognized in the Presented Sheet
Liabilities Balance in the
Sheet Balance
Sheet
(Dollars in Financial Cash Net Amount
thousands) Instruments Collateral
Pledged
December
31, 2023:
Securities sold under $ 10,000 $ -- $ 10,000 $ 10,000 $ -- $ --
agreements to repurchase
December
31, 2022:
Securities sold under $ 10,000 $ -- $ 10,000 $ 10,000 $ -- $ --
agreements to repurchase
(16) Income Taxes
Allocation of federal and state income taxes between current and deferred
provisions is as follows:
(Dollars in thousands) 2023 2022
Current
Federal $ 1,767 $ 2,911
State 568 1,317
2,335 4,228
Deferred
Federal (396 ) 990
State (129 ) 100
(525 ) 1,090
Total $ 1,810 $ 5,318
The federal statutory corporate tax rate for the years ended December 31, 2023
and 2022 was 21%. Areconciliation of the tax provision based on the statutory
corporate rate on pretax income and the provision for taxes as shown in the
accompanying Consolidated Statements of Income is as follows:
(Dollars in thousands) 2023 2022
Income tax expense at statutory rate $ 1,436 $ 4,510
Income tax effect of:
State income taxes, net of federal income tax benefits 628 1,079
Other tax-exempt income (179 ) (166 )
Share-based compensation 12 9
Meal and entertainment expenses 53 49
Non-deductible executive compensation 70 119
Recovery on bank-owned life insurance -- (216 )
Other (210 ) (66 )
Total income tax expense $ 1,810 $ 5,318
Effective income tax rate 26.47 % 24.76 %
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The components of income taxes payable (receivable) are as follows:
December 31,
(Dollars in thousands) 2023 2022
Current taxes (receivable) payable:
Federal $ (932 ) $ (519 )
State 588 1,357
$ (344 ) $ 838
Deferred taxes receivable:
Federal $ (1,313 ) $ (707 )
State (1,144 ) (936 )
$ (2,457 ) $ (1,643 )
The current tax receivable at December 31, 2023, is primarily due to an
overpayment of federal estimatedtaxes. The estimated tax payment for the
fourth quarter of 2023 was calculated by annualizing the year-to-date federal
tax liability through September 30, 2023. The actual federal tax liability
through December 31, 2023, waslower than the projections made through
September 30, 2023.
The tax effects of temporary differences that give rise to significantportions
of the deferred tax assets and deferred tax liabilities are presented below:
December 31,
(Dollars in thousands) 2023 2022
Deferred tax assets:
Hawaii franchise tax $ 117 $ 377
Allowance for credit/loan losses 1,364 541
Employee benefit plans 2,672 2,714
Equity incentive plan 107 141
Deferred compensation 22 199
Net lease liability 1,312 212
Unrealized loss on securities available for sale 637 725
Other 11 16
6,242 4,925
Deferred tax liabilities:
Deferred loan costs 2,665 2,601
Premises and equipment 273 254
FHLB stock dividends 126 125
Prepaid expense 653 226
Premiums on loans sold 68 76
3,785 3,282
Net deferred tax assets $ 2,457 $ 1,643
Deferred tax assets and liabilities at December 31, 2023 and 2022 were
calculated using federal corporatetax rates of 21%.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that someportion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible.Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based
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upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely thannot the Company will realize the
benefits of these deductible differences. The amount of the deferred tax
assets considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced. There was novaluation
allowance for deferred tax assets as of December 31, 2023 and 2022.
(17) Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan (Pension Plan)
that covers certain employees with at least one year of service.The benefits
are based on years of service and the employees' compensation during the
service period. The Company's policy is to accrue the actuarially determined
pension costs and to fund pension costs within regulatory guidelines.
TheCompany reviews its assumptions on an annual basis and makes modifications
to the assumptions based on current rates and trends when it is appropriate to
do so. The effect of modifications to those assumptions is recorded in
accumulated othercomprehensive income beginning in 2006 and amortized to net
periodic benefit cost over future periods using the corridor method. The
Company believes that the assumptions utilized in recording its obligations
under the plan are reasonable based onits experience and market conditions.
In 2008, the Board of Directors approved changes to the Company's Pension
Plan. EffectiveDecember 31, 2008, there are no further accruals of benefits
for any participants and benefits do not increase with any additional years of
service. Employees already enrolled in the Pension Plan as of December 31,
2008 will be 100% vestedif they have at least five years of service. For
employees with less than five years of service, vesting would occur at the
employee's five-year anniversary date.
In addition, the Company sponsors a Supplemental Employee Retirement Plan
(SERP), a noncontributory supplemental retirement benefit plan, whichcovers
certain current and former employees of the Company for amounts in addition to
those provided under the Pension Plan.
The followingtable sets forth the status of the Pension Plan and SERP at the
dates indicated:
Pension Plan SERP
December 31,
(Dollars in thousands) 2023 2022 2023 2022
Accumulated benefit obligation at end of year $ 15,953 $ 15,865 $ 9,927 $ 9,947
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 15,866 $ 20,943 $ 9,948 $ 9,915
Service cost (income) 191 118 (200 ) (135 )
Interest cost 822 597 179 179
Actuarial loss (gain) 94 (4,802 ) -- --
Benefits paid (1,020 ) (990 ) -- (11 )
Benefit obligation at end of year 15,953 15,866 9,927 9,948
Change in plan assets:
Fair value of plan assets at beginning of year 18,336 23,125 -- --
Actual return on plan assets 2,789 (3,799 ) -- --
Employer contributions -- -- -- 11
Benefits paid (1,020 ) (990 ) -- (11 )
Fair value of plan assets at end of year 20,105 18,336 -- --
Funded status at end of year $ 4,152 $ 2,470 $ (9,927 ) $ (9,948 )
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Pension Plan SERP
December 31,
(Dollars in thousands) 2023 2022 2023 2022
Amounts recognized in the Consolidated Balance Sheets:
Prepaid expenses and other assets (Accounts payable and accrued expenses) $ 4,152 $ 2,470 $ (9,927 ) $ (9,948 )
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss $ 5,968 $ 7,708 $ -- $ --
Prior service cost 119 124 -- --
Accumulated other comprehensive loss, before tax $ 6,087 $ 7,832 $ -- $ --
The accumulated benefit obligation experienced an actuarial loss of $95,000 in
2023 and an actuarial gain of$4.8 million in 2022. The actuarial loss in 2023
was attributed to a decline in the discount rate used to calculate the benefit
obligation. The actuarial gain in 2022 was attributed to an increase in the
discount rate used to calculate the benefitobligation.
The following table sets forth the changes recognized in accumulated other
comprehensive loss for the years indicated:
Pension Plan
Year Ended December 31,
(Dollars in thousands) 2023 2022
Accumulated other comprehensive loss at beginning of year, before tax $ 7,832 $ 7,530
Actuarial net (gain) loss arising during the period (1,503 ) 517
Amortizations (recognized in net periodic benefit cost):
Actuarial loss (237 ) (210 )
Prior service cost (5 ) (5 )
Total recognized in other comprehensive loss (1,745 ) 302
Accumulated other comprehensive loss at end of year, before tax $ 6,087 $ 7,832
For the years ended December 31, 2023 and 2022, the following weighted average
assumptions were used todetermine benefit obligations at the end of the year:
Pension Plan SERP
Year Ended December 31,
2023 2022 2023 2022
Assumptions used to determine the year-end benefit obligations:
Discount rate 5.10 % 5.40 % 5.00 % 5.00 %
Rate of compensation increase N/A N/A 5.00 % 5.00 %
The dates used to determine retirement measurements for the Pension Plan were
December 31, 2023 and 2022.
The Company's investment strategy for the Pension Plan is to maintain a
consistent rate of return with primary emphasis on capitalappreciation and
secondary emphasis on income to enhance the purchasing
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power of the plan's assets over the long-term and to preserve capital. The
investment policy establishes a target allocation for each asset class that is
reviewed periodically and rebalancedwhen considered appropriate. Normal target
allocations at December 31, 2023 were 55% domestic equity securities, 10%
international equity securities and 35% bonds. Equity securities primarily
include stocks, investment in exchange traded fundsand large-cap, mid-cap and
small-cap mutual funds. Bonds include U.S. Treasuries, mortgage-backed
securities and corporate bonds of companies in diversified industries. Other
types of investments include money market funds and savings accountsopened
with the Company.
As of December 31, 2023 and 2022, the Pension Plan's assets measured at fair
value were classified asfollows:
Fair Value of Measurements at Report Date
Using:
(Dollars in thousands) Total Fair Quoted Prices Significant Significant
Value in Active Other Unobservable
Markets for Observable Inputs
Identical Inputs (Level 3)
Assets (Level 2)
(Level 1)
December 31, 2023:
Cash $ 622 $ 622 $ -- $ --
Equities 13,742 13,742 -- --
Mutual funds (1) 5,741 5,741 -- --
Total $ 20,105 $ 20,105 $ -- $ --
December 31, 2022:
Cash $ 1,452 $ 1,452 $ -- $ --
Equities 11,659 11,659 -- --
Mutual funds (1) 5,225 5,225 -- --
Total $ 18,336 $ 18,336 $ -- $ --
(1) This category includes mutual funds that invest in equities and bonds. The mutual fund managers have
theability to change the amounts invested in equities and bonds depending on their investment outlook.
Estimated futurebenefit payments reflecting expected future service at
December 31, 2023 are as follows:
(Dollars in thousands) Plan SERP
2024 $ 1,001 $ 319
2025 1,122 8,696
2026 1,195 95
2027 1,216 95
2028 1,224 95
2029 - 2033 6,017 473
Total $ 11,775 $ 9,773
For the years ended December 31, 2023 and 2022, the following weighted average
assumptions were used todetermine net periodic benefit cost for the fiscal
years shown:
Pension Plan SERP
Year Ended December 31,
2023 2022 2023 2022
Assumptions used to determine the net periodic benefit cost:
Discount rate 5.40 % 2.90 % 5.00 % 5.00 %
Expected return on plan assets 6.75 6.75 -- --
Rate of compensation increase N/A N/A 5.00 5.00
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The components of net periodic benefit cost were as follows:
Pension Plan SERP
Year Ended December 31,
(Dollars in thousands) 2023 2022 2023 2022
Net periodic benefit (income) cost for the year:
Service cost (income) $ 191 $ 118 $ (200 ) $ (135 )
Interest cost 822 597 179 179
Expected return on plan assets (1,192 ) (1,520 ) -- --
Amortization of prior service cost 5 5 -- --
Recognized actuarial loss 237 210 -- --
Recognized curtailment loss -- -- -- --
Net periodic benefit (income) cost for the year: $ 63 $ (590 ) $ (21 ) $ 44
The service cost component of net periodic benefit cost is included in
salaries and employee benefits in theConsolidated Statements of Income. The
other components of net periodic benefit cost including interest cost, the
return on plan assets and amortization of net loss are reported in other
income.
The expected return on plan assets is based on the weighted-average long-term
rates of return for the types of assets held in the plan. Theexpected return
on plan assets is adjusted when there is a change in the expected long-term
rate of return or in the composition of assets held in the plan. The discount
rate is based on the return of high-quality fixed-income investments that
canbe used to fund the benefit payments under the Company's defined benefit
plan.
The Company does not expect to make any contributionsto the Pension Plan or
the SERP in 2024.
The Company also has a 401(k) defined contribution plan and profit sharing
plan covering allemployees after one year of service. The 401(k) plan provides
for employer matching contributions, as determined by the Company, based on a
percentage of employees' contributions subject to a maximum amount defined in
the plan agreement.The Company's 401(k) matching contributions are based on 5%
of employees' contributions. The Company's contributions amounted to $64,000
each for the years 2023 and 2022. Matching contributions. The Company
contributes to theprofit sharing plan an amount determined by the Board of
Directors. No contributions were made to the profit sharing plan for years
ended December 31, 2023 and 2022.
(18) Employee Stock Ownership Plan
Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock
Ownership Plan (ESOP) for eligible employees. The ESOPborrowed $9.8 million
from the Company and used those funds to acquire 978,650 shares, or 8%, of the
total number of shares issued by the Company in its initial public offering.
The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased with the loan proceeds and will be
repaid by the ESOP over the 20-year term of the loan with fundsfrom
Territorial Savings Bank's contributions to the ESOP and dividends payable on
the shares. The interest rate on the ESOP loan is an adjustable rate equal to
the prime rate, as published in The Wall Street Journal. The interest rate
adjustsannually and will be the prime rate on the first business day of the
calendar year.
Shares purchased by the ESOP are held by a trustee inan unallocated suspense
account, and shares are released annually from the suspense account on a
pro-rata basis as principal and interest payments are made by the ESOP to the
Company. The trustee allocates the shares released among participants onthe
basis of each participant's proportional share of compensation relative to all
participants. As shares are committed to be released from the suspense
account, Territorial Savings Bank reports compensation expense based on the
average fairvalue of shares released with a corresponding credit to
stockholders' equity. The shares
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committed to be released are considered outstanding for earnings per share
computations. Compensation expense recognized for the years ended December 31,
2023 and 2022 amounted to $692,000and $1.1 million, respectively.
Shares held by the ESOP trust were as follows:
December 31, December 31,
2023 2022
Allocated shares 619,938 583,474
Unearned shares 244,665 293,598
Total ESOP shares 864,603 877,072
Fair value of unearned shares, in thousands $ 2,728 $ 7,049
The ESOP restoration plan is a non-qualified plan that provides supplemental
benefits to certain executives whoare prevented from receiving the full
benefits contemplated by the ESOP's benefit formula. The supplemental cash
payments consist of payments representing shares that cannot be allocated to
the participants under the ESOP due to IRS limitationsimposed on tax-qualified
plans. We accrue for these benefits over the period during which employees
provide services to earn these benefits. For the years ended December 31, 2023
and 2022, we accrued $13,000 and $144,000, respectively, for theESOP
restoration plan.
(19) Share-Based Compensation
The shareholders of Territorial Bancorp Inc. adopted the 2010 Equity Incentive
Plan and the 2019 Equity Incentive Plan. These plans provide forthe award of
stock options and restricted stock to key officers and directors. In
accordance with the Compensation -- Stock Compensation topic of the FASB ASC,
the cost of the equity incentive plans is based on the fair value of the
awards onthe grant date. The fair value of time-based restricted stock is
based on the closing price of the Company's stock on the grant date. The fair
value of performance-based stock that will vest based on a performance
condition is based on theclosing price of the Company's stock on the date of
grant. The fair value of performance-based restricted stock that will vest on
a market condition is based on a Monte Carlo valuation of the Company's stock
on the date of grant. The costof the awards will be recognized on a
straight-line basis over the three-year vesting period during which
participants are required to provide services in exchange for the awards.
There are 42,680 shares remaining available for new awards under the2019
Equity Plan.
The Company recognized compensation expense, measured as the fair value of the
share-based award on the date of grant,on a straight-line basis over the
vesting period. Share-based compensation is recorded in the Consolidated
Statements of Income as a component of salaries and employee benefits with a
corresponding increase in stockholders' equity. The tablebelow presents
information on compensation expense and the related tax benefit for all
share-based awards:
(In thousands) 2023 2022
Compensation expense $ 177 $ 480
Income tax benefit 48 131
Restricted Stock
Restricted stock awards are accounted for as a fixed grant using the fair
value of the Company's stock at the time of grant. Unvestedrestricted stock
may not be disposed of or transferred during the vesting period. Restricted
stock carries the right to receive dividends, although dividends attributable
to restricted stock may be retained by the Company until the shares vest,
atwhich time they are paid to the award recipient. Unvested restricted stock
that is time-based contain nonforfeitable dividend rights. Accrued dividends
on restricted stock that do not vest based on performance or market conditions
are forfeited.
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The table below presents the time-based restricted stock activity:
Restricted Weighted
Stock Average Grant
Date Fair
Value
Unvested at December 31, 2021 23,208 $ 24.61
Granted 12,013 23.77
Vested 11,557 24.68
Forfeited -- --
Unvested at December 31, 2022 23,664 $ 24.15
Granted 14,803 19.29
Vested 12,729 23.64
Forfeited -- --
Unvested at December 31, 2023 25,738 $ 21.61
During the year ended December 31, 2023, the Company issued 14,803 shares of
time-vested restricted stockto certain members of executive management under
the 2019 Equity Incentive Plan. The fair value of the restricted stock is
based on the value of the Company's stock on the date of grant. Time-vested
restricted stock will vest over three yearsfrom the date of the grant.
As of December 31, 2023, the Company had $359,000 of unrecognized compensation
costs related totime-vested restricted stock. The unrecognized compensation
costs are expected to be recognized over a weighted average period of 1.8
years.
The table below presents the performance-based restricted stock units (PRSUs)
that will vest on a performance condition:
Performance- Weighted
Based Average Grant
Restricted Date Fair
Stock Units Value
Based on a
Performance
Condition
Unvested at December 31, 2021 41,583 $ 24.68
Granted 14,412 23.77
Vested 7,670 27.30
Forfeited 4,768 27.30
Unvested at December 31, 2022 43,557 $ 23.63
Granted 17,758 19.29
Vested -- --
Forfeited 16,348 21.05
Unvested at December 31, 2023 44,967 $ 22.85
During the year ended December 31, 2023, the Company issued 17,758 PRSUs to
certain members of executivemanagement under the 2019 Equity Incentive Plan.
These PRSUs will vest three years after they are granted after our
Compensation Committee determines whether a performance condition that
compares the Company's return on average equity to theSNL Bank Index is
achieved. Depending on the Company's performance, the actual number of these
PRSUs that are issued at the end of the vesting period can vary between 0% to
150% of the target award. For the PRSUs, an estimate is made of thenumber of
shares expected to vest based on the probability that the performance criteria
will be achieved to determine the amount of compensation expense to be
recognized. This estimate is re-evaluated quarterly and total compensation
expense isadjusted for any change in the current period.
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The fair value of these PRSUs is based on the fair value of the Company's
stock on thedate of grant. As of December 31, 2023, the Company had no
unrecognized compensation costs related to these PRSUs since meeting the
performance condition is not probable. Compensation expense up to $685,000 may
be recognized in the future ifachievement of the performance condition becomes
probable. The unrecognized compensation costs would be expected to be
recognized over a weighted average period of 1.6 years. Performance will be
measured over a three-year period and will be cliffvested. The performance
condition is measured quarterly by comparing the company's three-year return
on average equity to a peer group of banks. The Company's percentile ranking
in the peer group is used to adjust the number of PRSU'sthat are expected to
vest.
The table below presents the PRSUs that will vest on a market condition:
Performance- Monte Carlo
Based Restricted Valuation of
Stock Units the Company's
Based on a Stock
Market Condition
Unvested at December 31, 2021 10,396 $ 24.03
Granted 3,603 24.42
Vested --
Forfeited 3,110 24.45
Unvested at December 31, 2022 10,889 $ 24.04
Granted 4,443 17.95
Vested -- --
Forfeited 4,087 22.16
Unvested at December 31, 2023 11,245 $ 22.31
During the year ended December 31, 2023, the Company issued 4,443 of PRSUs to
certain members ofexecutive management under the 2019 Equity Incentive Plan.
These PRSUs will vest three years after they are granted after our
Compensation Committee determines whether a market condition that compares the
Company's total stock return to the SNLBank Index is achieved. The number of
shares that will be expensed will not be adjusted for performance and will be
cliff vested. The market condition is measured quarterly by comparing the
Company's three-year average total stock return to apeer group of other banks.
The Company's percentile ranking in the peer group determines how many PRSUs
will vest. The fair value of these PRSUs is based on a Monte Carlo valuation
of the Company's stock on the date of grant. Theassumptions which were used in
the Monte Carlo valuation of the PRSUs are:
Grant date: April 3, 2023
Performance period: January 1, 2023 to December 31, 2025
2.75 year risk-free rate on grant date: 3.79%
December 31, 2022 closing price: $24.01
Closing stock price on date of grant: $19.29
Annualized volatility (based on 2.75 year historical volatility as of the
grant date): 26.1%
As of December 31, 2023, the Company had $60,000 of unrecognized compensation
costs related to the PRSUs that are based on a marketcondition. The
unrecognized compensation costs are expected to be recognized over a weighted
average period of 1.6 years.
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(20) Earnings Per Share
The table below presents the information used to compute basic and diluted
earnings per share:
(Dollars in thousands, except per share data) 2023 2022
Net income $ 5,027 $ 16,156
Income allocated to participating securities (48 ) (98 )
Net income available to common shareholders $ 4,979 $ 16,058
Weighted-average number of shares used in:
Basic earnings per share 8,636,495 8,865,946
Dilutive common stock equivalents:
Stock options and restricted stock units 47,597 54,768
Diluted earnings per share 8,684,092 8,920,714
Net income per common share, basic $ 0.58 $ 1.81
Net income per common share, diluted $ 0.57 $ 1.80
(21) Other Comprehensive Income (Loss)
The table below presents the changes in the components of accumulated other
comprehensive loss, net of taxes:
(Dollars in thousands) Unfunded Unrealized Total
Pension Loss on
Liability Securities
December 31, 2023:
Balances at beginning of year $ 5,746 $ 1,998 $ 7,744
Other comprehensive income, net of taxes (1,280 ) (243 ) (1,523 )
Net current period other comprehensive income (1,280 ) (243 ) (1,523 )
Balances at end of year $ 4,466 $ 1,755 $ 6,221
December 31, 2022:
Balances at beginning of year $ 5,524 $ -- $ 5,524
Other comprehensive loss, net of taxes 222 1,998 2,220
Net current period other comprehensive loss 222 1,998 2,220
Balances at end of year $ 5,746 $ 1,998 $ 7,744
The table below presents the tax effect on each component of other
comprehensive income and loss:
Year Ended December 31,
2023 2022
(Dollars in thousands) Pretax Tax After Tax Pretax Tax After Tax
Amount Amount Amount Amount
Unfunded pension liability $ (1,745 ) $ 465 $ (1,280 ) $ 302 $ (80 ) $ 222
Unrealized loss on securities (331 ) 88 (243 ) 2,723 (725 ) 1,998
Total $ (2,076 ) $ 553 $ (1,523 ) $ 3,025 $ (805 ) $ 2,220
(22) Commitments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any terms or conditions established inthe contract.
Commitments generally have fixed expiration dates or other
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termination clauses and may require payment of a fee. Since commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.The Company evaluates each
customer's creditworthiness on an individual basis. The Company's policy is to
require suitable collateral, primarily real estate, to be provided by
customers prior to disbursement of approved loans. AtDecember 31, 2023 and
2022, the Company had loan commitments aggregating to $1.3 million (interest
rates from 6.750% to 7.125%) and $1.2 million (interest rates from 5.250% to
5.500%), respectively, primarily consisting of fixed-rateresidential first
mortgage loans. In addition to commitments to originate loans, at December 31,
2023 and 2022, the Company had $14.9 million and $14.4 million, respectively,
in unused lines of credit to borrowers.
The Company is required by the Federal Reserve Bank to maintain reserves based
on the amount of deposits held. Effective March 25, 2020the Federal Reserve
Bank lowered the reserve requirement to zero percent, therefore, there were no
required reserve balances as of December 31, 2023 and 2022.
(23) Regulatory Capital and Supervision
Territorial Savings Bank and the Company are subject to various regulatory
capital requirements, including a risk-based capital measure. Therisk-based
capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories. The Company is not subject
to regulatorycapital requirements because its total assets are less than $3.0
billion. At December 31, 2023 and 2022, Territorial Savings Bank exceeded all
of the fully-phased in regulatory captial requirments and is considered to be
"wellcapitalized" under regulatory guidelines. In addition to establishing the
minimum regulatory capital requirements, the regulations limit capital
distributions and certain discretionary bonus payments to management if the
institution does nothold a "capital conservation buffer" consisting of 2.5% of
common equity Tier 1 capital to risk-weighted assets above the amount
necessary to meet its minimum risk-based capital requirements.
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The tables below presents the fully-phased in capital required to be
considered"well-capitalized" and meet the regulatory capital conservation
buffer requirement as a percentage of total and risk-weighted assets and the
percentage and the total amount of capital maintained for Territorial Savings
Bank and the Companyat December 31, 2023 and 2022:
(Dollars in thousands) Required Ratio Actual Amount Actual Ratio
December 31, 2023:
Tier 1 Leverage Capital
Territorial Savings Bank 5.00 % $ 238,972 10.86 %
Territorial Bancorp Inc. $ 257,307 11.69 %
Common Equity Tier 1 Risk-BasedCapital
(1)
Territorial Savings Bank 9.00 % $ 238,972 26.31 %
Territorial Bancorp Inc. $ 257,307 28.33 %
Tier 1 Risk-Based Capital
(1)
Territorial Savings Bank 10.50 % $ 238,972 26.31 %
Territorial Bancorp Inc. $ 257,307 28.33 %
Total Risk-Based Capital
(1)
Territorial Savings Bank 12.50 % $ 244,093 26.87 %
Territorial Bancorp Inc. $ 262,428 28.89 %
December 31, 2022:
Tier 1 Leverage Capital
Territorial Savings Bank 5.00 % $ 235,408 10.87 %
Territorial Bancorp Inc. $ 264,295 12.21 %
Common Equity Tier 1 Risk-BasedCapital
(1)
Territorial Savings Bank 9.00 % $ 235,408 25.98 %
Territorial Bancorp Inc. $ 264,295 29.16 %
Tier 1 Risk-Based Capital
(1)
Territorial Savings Bank 10.50 % $ 235,408 25.98 %
Territorial Bancorp Inc. $ 264,295 29.16 %
Total Risk-Based Capital
(1)
Territorial Savings Bank 12.50 % $ 237,488 26.20 %
Territorial Bancorp Inc. $ 266,375 29.39 %
(1) The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capitalratios are based
on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer.
Prompt Corrective Action provisions define specific capital categories based
on an institution's capital ratios. However, the regulatorsmay impose higher
minimum capital standards on individual institutions or may downgrade an
institution from one capital category to a lower category because of safety
and soundness concerns. Failure to meet minimum capital requirements can
initiatecertain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's Consolidated Financial Statements.
Prompt Corrective Action provisions impose certain restrictions on
institutions that are undercapitalized. The restrictions imposed becomeincreasin
gly more severe as an institution's capital category declines from
"undercapitalized" to "critically undercapitalized."
At December 31, 2023 and 2022, the Bank's capital ratios exceeded the minimum
capital thresholds for a "well-capitalized"institution. There are no
conditions or events that have changed the institution's category under the
capital guidelines.
Dependingon the amount of dividends to be paid, the Bank is required to either
notify or make application to the Federal Reserve Bank before dividends are
paid to the Company.
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Legislation enacted in 2018 requires the federal banking agencies, including
the FederalReserve Board, to establish a "community bank leverage ratio"
between 8% to 10% of average total consolidated assets for qualifying
institutions with assets of less than $10 billion. Institutions with capital
meeting the specifiedrequirements and electing to follow the alternative
framework would be deemed to comply with the applicable regulatory capital
requirements, including the risk based requirements. The federal regulators
have adopted 9% as the applicable ratio. Wehave not elected to follow the
alternative framework.
(24) Contingencies
The Company is involved in various claims and legal actions arising out of the
ordinary course of business. In the opinion of management, theultimate
disposition of these matters will not have a material adverse effect on the
Company's Consolidated Balance Sheets or Consolidated Statements of Income.
(25) Revenue Recognition
The Company's contracts with customers are generally short-term in nature,
with cycles of one year or less. These can range from animmediate term for
services such as wire transfers, foreign currency exchanges, and cashier's
check purchases, to several days for services such as processing annuity and
mutual fund sales. Some contracts may be of an ongoing nature, such
asproviding deposit account services, including ATM access, check processing,
account analysis and check ordering. However, provision of an assessable
service and payment for such service is usually concurrent or closely timed.
Contracts related tofinancial instruments, such as loans, investments, and
debt, are excluded from the scope of this accounting requirement.
After analyzingthe Company's revenue sources, including the amount of revenue
received, the timing of services rendered and the timing of payment for these
services, the Company has determined that the rendering of services and the
payment for such servicesare generally closely matched. Any differences are
not material to the Company's Consolidated Financial Statements. Accordingly,
the Company generally records income when payment for services is received.
Revenue from contracts with customers is reported in service and other fees
and in other noninterest income in the Consolidated Statements ofIncome. The
table below reconciles the revenue from contracts with customers and other
revenue reported in those line items:
(Dollars in thousands) Service and Other Total
Other Fees
Year ended December 31, 2023
Revenue from contracts with customers $ 1,186 $ 122 $ 1,308
Other revenue 141 157 298
Total $ 1,327 $ 279 $ 1,606
Year ended December 31, 2022
Revenue from contracts with customers $ 1,276 $ 221 $ 1,497
Other revenue 140 1,783 1,923
Total $ 1,416 $ 2,004 $ 3,420
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(26) Leases
The table below presents lease costs and other information for the years
indicated:
Year Ended
December 31,
(Dollars in thousands) 2023 2022
Lease costs:
Operating lease costs $ 2,757 $ 2,991
Short-term lease costs 511 296
Variable lease costs 163 165
Total lease costs $ 3,431 $ 3,452
Cash paid for amounts included in measurement of lease liabilities $ (991 ) $ 3,193
ROU assets obtained in exchange for new operating lease liabilities $ 693 $ 7,462
At December 31, 2023, future minimum rental commitments under noncancellable
operating leases are asfollows:
(Dollars in thousands) December 31,
2023
2024 $ 2,818
2025 2,199
2026 2,038
2027 1,961
2028 1,729
Thereafter 9,299
Total 20,044
Less lease incentives to be received in 2024 (729 )
Less present value discount (2,018 )
Present value of leases $ 17,297
The table below presents other lease related information:
December 31, December 31,
2023 2022
Weighted-average remaining lease term (years) 9.77 8.88
Weighted-average discount rate 2.15 % 2.03 %
The Company leased to a tenant certain property that it owns under a
non-cancelable lease that expires onDecember 31, 2031. Rental income comprised
of minimum rentals for 2023 and 2022 was $155,000 and $110,000, respectively.
(27) Fair Value of Financial Instruments
In accordance with the Fair Value Measurements and Disclosures topic of the
FASB ASC, the Company groups its financial assets and liabilitiesmeasured or
disclosed at fair value into three levels based on the markets in which the
financial assets and liabilities are traded and the reliability of the
assumptions used to determine fair value as follows:
. Level 1 -- Valuation is based upon quoted prices (unadjusted) for
identical assets or liabilities tradedin active markets. A quoted
price in an active market provides the most reliable evidence of fair
value and shall be used to measure fair value whenever available.
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. Level 2 -- Valuation is based upon quoted prices for similar instruments
in active markets, quotedprices for identical or similar instruments
in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
. Level 3 -- Valuation is generated from model-based techniques that use significant assumptions notobservable
in the market. These unobservable assumptions reflect management's own estimates of assumptions that
market participants would use in pricing the asset or liability. Valuation techniques include use of
discounted cash flow models andsimilar techniques that require the use of significant judgment or estimation.
In accordance with the Fair ValueMeasurements and Disclosures topic, the
Company bases its fair values on the price that it would expect to receive if
an asset were sold or the price that it would expect to pay to transfer a
liability in an orderly transaction between marketparticipants at the
measurement date. Also as required, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when developing
fair value measurements.
The Company uses fair value measurements to determine fair value disclosures.
Investment securities available for sale and derivatives arerecorded at fair
value on a recurring basis. From time to time, the Company may be required to
record other financial assets at fair value on a nonrecurring basis, such as
loans held for sale, impaired loans and investments, and mortgage
servicingassets. These nonrecurring fair value adjustments typically involve
application of the lower of cost or fair value accounting or write-downs of
individual assets.
Investment Securities Available for Sale
. The estimated fair values of mortgage-backed securities issued by
U.S.government-sponsored enterprises are considered Level 2 inputs because the
valuation for investment securities utilized pricing models that varied based
on asset class and included trade, bid and other observable market information.
Interest Rate Contracts
. The Company may enter into interest rate lock commitments with borrowers on
loans intended to be sold.To manage interest rate risk on the lock
commitments, the Company may also enter into forward loan sale commitments.
The interest rate lock commitments and forward loan sale commitments are
treated as derivatives and are recorded at their fair valuedetermined by
referring to prices quoted in the secondary market for similar contracts. The
fair value inputs are considered Level 2 inputs. Interest rate contracts that
are classified as assets are included with prepaid expenses and other assets
onthe Consolidated Balance Sheet while interest rate contracts that are
classified as liabilities are included with accounts payable and accrued
expenses.
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The estimated fair values of the Company's financial instruments are as follows:
Carrying Fair Value Fair Value Measurements Using
Amount
(Dollars in thousands) Level 1 Level 2 Level 3
December 31, 2023
Assets
Cash and cash equivalents $ 126,659 $ 126,659 $ 126,659 $ -- $ --
Investment securities available for sale 20,171 20,171 -- 20,171 --
Investment securities held to maturity 685,728 568,128 -- 568,128 --
Loans receivable, net 1,303,431 1,120,704 -- -- 1,120,704
FHLB stock 12,192 12,192 -- 12,192 --
FRB stock 3,180 3,180 -- 3,180 --
Accrued interest receivable 6,105 6,105 79 1,441 4,585
Liabilities
Deposits 1,636,604 1,633,164 -- 1,104,171 528,993
Advances from the Federal Home Loan Bank 242,000 238,380 -- 238,380 --
Advances from the Federal Reserve Bank 50,000 50,049 50,049 --
Securities sold under agreements to repurchase 10,000 9,700 -- 9,700 --
Accrued interest payable 1,183 1,183 -- 157 1,026
December 31, 2022
Assets
Cash and cash equivalents $ 40,553 $ 40,553 $ 40,553 $ -- $ --
Investment securities available for sale 20,821 20,821 -- 20,821 --
Investment securities held to maturity 717,773 591,084 -- 591,084 --
Loans receivable, net 1,294,764 1,180,840 -- -- 1,180,840
FHLB stock 8,197 8,197 -- 8,197 --
FRB stock 3,170 3,170 -- 3,170 --
Accrued interest receivable 6,115 6,115 23 1,497 4,595
Liabilities
Deposits 1,716,152 1,708,612 -- 1,286,465 422,147
Advances from the Federal Home Loan Bank 141,000 133,145 -- 133,145 --
Securities sold under agreements to repurchase 10,000 9,440 -- 9,440 --
Accrued interest payable 701 701 -- 33 668
At December 31, 2023 and 2022, neither the commitment fees received on
commitments to extend credit northe fair value thereof was material to the
Consolidated Financial Statements of the Company.
The table below presents the balance ofassets and liabilities measured at fair
value on a recurring basis:
(Dollars in thousands) Level 1 Level 2 Level 3 Total
December 31, 2023
Investment securities available for sale $ -- $ 20,171 $ -- $ 20,171
December 31, 2022
Investment securities available for sale $ -- $ 20,821 $ -- $ 20,821
There were no assets or liabilities measured at fair value on a nonrecurring
basis as of December 31,2023 or 2022.
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(28) Parent Company Only
Presented below are the condensed balance sheets, statements of income, and
statements of cash flows for Territorial Bancorp Inc.
Condensed Balance Sheets
December 31,
(Dollars in thousands) 2023 2022
Assets
Cash $ 18,453 $ 28,515
Investment in Territorial Savings Bank 232,751 227,663
Receivable from Territorial Savings Bank -- 408
Prepaid expenses and other assets 272 105
Total assets $ 251,476 $ 256,691
Liabilities and Equity
Other liabilities $ 390 $ 141
Equity 251,086 256,550
Total liabilities and equity $ 251,476 $ 256,691
Condensed Statements of Income
For the Year Ended
December 31,
(Dollars in thousands) 2023 2022
Interest and dividend income:
Dividends from Territorial Savings Bank $ -- $ 17,500
Interest-earning deposit with Territorial Savings Bank 4 4
Total interest and dividend income 4 17,504
Noninterest expense:
Salaries 42 42
Other general and administrative expenses 958 656
Total noninterest expense 1,000 698
(Loss) Income before income taxes and equity in undistributed earnings in subsidiaries (996 ) 16,806
Income taxes (315 ) (209 )
(Loss) Income before equity in undistributed earnings in subsidiaries (681 ) 17,015
Equity in undistributed earnings of Territorial Savings Bank, net of dividends 5,708 (859 )
Net income $ 5,027 $ 16,156
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Condensed Statements of Cash Flows
For the Year Ended
December 31,
(Dollars in thousands) 2023 2022
Cash flows from operating activities:
Net income $ 5,027 $ 16,156
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of Territorial Savings Bank, net of dividends (5,708 ) 859
Net decrease in prepaid expenses and other assets 933 1,275
Net increase (decrease) in other liabilities 163 (263 )
Net cash provided by operating activities 415 18,027
Cash flows from investing activities:
Investment in Territorial Savings Bank -- --
Net cash used in investing activities -- --
Cash flows from financing activities:
Repurchases of common stock (4,065 ) (5,973 )
Cash dividends paid (6,412 ) (9,071 )
Net cash used in financing activities (10,477 ) (15,044 )
Net (decrease) increase in cash (10,062 ) 2,983
Cash at beginning of the period 28,515 25,532
Cash at end of the period $ 18,453 $ 28,515
(29) Subsequent Events
On January 26, 2024, the Board of Directors of Territorial Bancorp Inc.
declared a quarterly cash dividend of $0.05 per share of commonstock. The
dividend was paid on February 23, 2024 to stockholders of record as of
February 9, 2024.
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Annex A
Execution Version
AGREEMENT AND PLAN OF MERGER
by and between
HOPEBANCORP, INC.
and
TERRITORIAL BANCORP INC.
Dated as of April 26, 2024
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TABLE OF CONTENTS
ARTICLE I THE MERGER A-1
1.1 The Merger A-1
1.2 Closing A-2
1.3 Effective Time A-2
1.4 Effects of the Merger A-2
1.5 Conversion of Company Common Stock A-2
1.6 Treatment of Company RSU Awards A-3
1.7 Parent Common Stock A-3
1.8 Certificate of Incorporation of Surviving Corporation A-3
1.9 Bylaws of Surviving Corporation A-3
1.10 Directors and Officers of Surviving Corporation A-3
1.11 Bank Merger A-4
1.12 Tax Consequences A-4
ARTICLE II EXCHANGE OF SHARES A-4
2.1 Parent to Make Merger Consideration Available A-4
2.2 Exchange of Shares A-4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY A-6
3.1 Corporate Organization A-6
3.2 Capitalization A-8
3.3 Authority; No Violation A-9
3.4 Consents and Approvals A-9
3.5 Reports A-10
3.6 Financial Statements A-11
3.7 Broker's Fees A-12
3.8 Absence of Certain Changes or Events A-12
3.9 Legal Proceedings A-12
3.10 Taxes and Tax Returns A-13
3.11 Employees and Employee Benefit Plans A-15
3.12 Compliance with Applicable Law A-19
3.13 Certain Contracts A-20
3.14 Agreements with Governmental Entities A-22
3.15 Risk Management Instruments A-22
3.16 Environmental Matters A-22
3.17 Investment Securities and Commodities A-23
3.18 Real Property A-23
3.19 Intellectual Property; Computer Systems A-24
3.20 Related Party Transactions A-25
3.21 State Takeover Laws A-26
3.22 Reorganization A-26
3.23 Opinion of Financial Advisor A-26
3.24 Company Information A-26
3.25 Loan Portfolio A-26
3.26 Insurance A-27
3.27 Subordinated Indebtedness A-28
3.28 Trust Business A-28
3.29 Mortgage Banking Activities A-28
3.30 Regulatory Approvability A-28
3.31 No Other Representations or Warranties A-28
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT A-29
4.1 Corporate Organization. A-29
4.2 Capitalization A-30
4.3 Authority; No Violation A-30
4.4 Consents and Approvals A-31
4.5 Reports A-32
4.6 Financial Statements A-32
4.7 Broker's Fees A-33
4.8 Absence of Certain Changes or Events A-34
4.9 Legal Proceedings A-34
4.10 Taxes, Tax Returns, and Employee Benefits A-34
4.11 Compliance with Applicable Law A-35
4.12 Agreements with Governmental Entities A-36
4.13 Reorganization A-36
4.14 Parent Information A-36
4.15 Regulatory Approvability A-36
4.16 No Other Representations or Warranties A-37
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS A-37
5.1 Conduct of Business Prior to the Effective Time A-37
5.2 Company Forbearances A-37
5.3 Parent Forbearances A-40
ARTICLE VI ADDITIONAL AGREEMENTS A-41
6.1 Regulatory Matters A-41
6.2 Access to Information A-42
6.3 Approvals of Company Stockholders A-43
6.4 Legal Conditions to Merger A-44
6.5 Stock Exchange Listing A-44
6.6 401(k) Plan A-45
6.7 ESOP Matters A-45
6.8 Indemnification; Directors' and Officers'Insurance A-46
6.9 Additional Agreements A-47
6.10 Advice of Changes A-47
6.11 Acquisition Proposals A-47
6.12 Public Announcements A-49
6.13 Change of Method A-49
6.14 Takeover Statutes A-49
6.15 Operating Functions A-50
6.16 Exemption from Liability under Section 16(b) A-50
6.17 Stockholder Litigation A-50
6.18 Assumption of Company Debt A-50
6.19 Transfer Agent Certificate A-51
6.20 280G Matters A-51
6.21 Employee Matters A-51
ARTICLE VII CONDITIONS PRECEDENT A-53
7.1 Conditions to Each Party's Obligation to Effect theMerger A-53
7.2 Conditions to Obligations of Parent A-53
7.3 Conditions to Obligations of the Company A-54
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ARTICLE VIII TERMINATION AND AMENDMENT A-55
8.1 Termination A-55
8.2 Effect of Termination A-56
ARTICLE IX GENERAL PROVISIONS A-57
9.1 Nonsurvival of Representations, Warranties and Agreements A-57
9.2 Amendment A-57
9.3 Extension; Waiver A-57
9.4 Expenses A-57
9.5 Notices A-57
9.6 Interpretation A-58
9.7 Counterparts A-59
9.8 Entire Agreement A-59
9.9 Governing Law; Jurisdiction A-59
9.10 Waiver of Jury Trial A-60
9.11 Assignment; Third-Party Beneficiaries A-60
9.12 Specific Performance A-60
9.13 Severability A-60
9.14 Confidential Supervisory Information A-61
9.15 Delivery by Electronic Transmission A-61
Annex A - List of Directors and Company Insiders Entering into Voting Agreement
Annex B - Form of Voting Agreement
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INDEX OF DEFINED TERMS
Term Section
$ 9.6
401(k) Plan 3.11 (h)
Acceptable Confidentiality Agreement 6.11 (a)
Acquisition Proposal 6.11 (c)
Affiliate 9.6
Agreement Preamble
Bank Merger 1.11
Bank Merger Agreement 1.11
Bank Merger Certificates 1.11
BHC Act 3.4
Blue Sky 3.4
Board Recommendation 6.3 (b)
BOLI 3.26 (b)
Borrower 3.25 (a)
business day 9.6
CARES Act 3.6 (e)
Certificate 1.5 (b)
Closing 1.2
Closing Date 1.2
Code Recitals
Company Preamble
Company Bank 1.11
Company Benefit Plans 3.11 (a)
Company Bylaws 3.1 (a)
Company Charter 3.1 (a)
Company Common Stock 1.5 (a)
Company Contract 3.13 (a)
Company Disclosure Schedule Article III
Company Indemnified Parties 6.8 (a)
Company Insiders 6.16
Company Leased Real Property 3.18 (b)
Company Meeting 6.3
Company Owned Properties 3.18 (a)
Company PRSU Award 1.6 (a)
Company Qualified Plan 3.11 (d)
Company Real Estate Leases 3.18 (b)
Company Regulatory Agreement 3.14
Company Reports 3.5 (b)
Company RSU Award 1.6 (a)
Company Subsidiary 3.1 (c)
Company Systems 3.19 (b)
Company TRSU Award 1.6 (a)
Confidentiality Agreement 6.2 (b)
Controlled Group Liability 3.11 (e)
CRA 3.12
Data Breach 3.19 (d)
Davidson 4.7
Defined Benefit Pension Plan 3.11 (f)
Delaware Certificate of Merger 1.3
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Term Section
Delaware Secretary 1.3
DGCL 1.1
DIF 3.1 (b)
dollar 9.6
Effective Time 1.3
Employment Matters 3.11 (q)
Enforceability Exceptions 3.3 (a)
Environmental Laws 3.16
ERISA 3.11 (a)
ERISA Affiliate 3.11 (e)
ESOP 3.11 (h)
ESOP Amendment 6.7 (b)
ESOP Loan 3.11 (i)
ESOP Unallocated Shares 3.11 (i)
Exchange Act 3.6 (c)
Exchange Agent 2.1
Exchange Fund 2.1
Exchange Ratio 1.5 (a)
FDIC 3.1 (b)
Federal Reserve Board 3.1 (a)
GAAP 3.1 (a)
Governmental Entity 3.5 (a)
HOLA 3.1
Intellectual Property 3.19 (a)
IRS 3.11 (b)
KBW 3.7
knowledge of Parent 9.6
knowledge of the Company 9.6
Laws 3.12
Licensed Intellectual Property 3.19 (a)
Liens 3.2 (c)
Loans 3.25 (a)
made available 9.6
Maryland Articles of Merger 1.3
Maryland Secretary 1.3
Material Adverse Effect 3.1 (a)
Materially Burdensome Regulatory Condition 6.1 (c)
MGCL 1.1
Merger 1.1
Merger Consideration 1.5 (a)
Multiple Employer Plan 3.11 (g)
New Certificates 2.1
New Plans 6.21 (c)
Notifying Party 6.10
Owned Intellectual Property 3.19 (a)
Parent Preamble
Parent Bank 1.1
Parent Benefit Plans 4.10 (b)
Parent Bylaws 1.9
Parent Certificate 1.8
Parent Common Stock 1.5 (a)
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Term Section
Parent Common Stock Closing Price 2.2 (e)
Parent Defined Benefit Pension Plan 4.10 (d)
Parent Disclosure Schedule Article IV
Parent Qualified Plans 4.10 (c)
Parent Regulatory Agreement 4.12
Parent Reports 4.5 (b)
Parent Subsidiary 4.1 (b)
Permitted Encumbrances 3.18 (a)
person 9.6
Personally Identifiable Information 3.19 (c)
Premium Cap 6.8 (b)
Proxy Statement 3.4
Recommendation Change 6.3 (b)
Regulatory Filing Period 6.1 (b)
Representatives 6.11 (a)
Requisite Company Vote 3.3 (a)
Requisite Regulatory Approvals 6.1 (b)
Restrictive Covenant 6.11 (w)
S-4 3.4
Sarbanes-Oxley Act 3.5 (b)
SEC 3.4
Securities Act 3.5 (b)
Separation Pay Plan 6.21 (f)
SRO 3.5 (a)
Subsidiary 3.1 (a)
Superior Proposal 6.11 (d)
Surviving Corporation 1.1
Takeover Statutes 3.21
Tax 3.10 (p)
Tax Return 3.10 (q)
Termination Date 8.1 (c)
Termination Fee 8.2 (b)
Total Borrower Commitment 3.25 (a)
Voting Agreements Recitals
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 26, 2024 (this "
Agreement
"), by and between Territorial Bancorp Inc., aMaryland corporation (the "
Company
"), and Hope Bancorp, Inc., a Delaware corporation ("
Parent
").
W IT N E S S E T H:
WHEREAS, the Board of Directors of the Company has unanimously (i) determined
that this Agreement and thetransactions contemplated hereby, including the
Merger, are in the best interests of the Company and the Company's
stockholders, and declared that this Agreement is advisable, and (ii) approved
and declared advisable the execution,delivery and performance by the Company
of this Agreement and the consummation of the transactions contemplated
hereby, including the Merger;
WHEREAS, the Board of Directors of Parent has unanimously (i) determined that
this Agreement and the transactions contemplated hereby,including the Merger,
are in the best interests of Parent and Parent's stockholders, and (ii)
approved and declared advisable the execution, delivery and performance by
Parent of this Agreement and the consummation of the transactionscontemplated
hereby, including the Merger;
WHEREAS, the Board of Directors of the Company, subject to the terms of this
Agreement, hasresolved to recommend that the Company's stockholders approve
this Agreement and to submit this Agreement to the Company's stockholders for
approval;
WHEREAS, for U.S. federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaningof Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "
Code
"), and this Agreement is intended to be and is adopted as a plan of
reorganization for purposes of Sections 354, 361 and 368 of the Code andwithin
the meaning of Section 1.368-2(g) and 1.368-3(a) of the Treasury Regulations;
WHEREAS, as an inducement to and condition ofParent's willingness to enter
into this Agreement, each of the directors and those other Company Insiders
listed on
Annex A
is concurrently entering into voting agreements, the form of which is attached
hereto as
Annex B
(the"
Voting Agreements
"), pursuant to which, among other things, such persons have agreed to vote
all of their shares of Company Common Stock in favor of approval of this
Agreement, the Merger, and any other matters required to beapproved or adopted
in order to effect the Merger and the other transactions contemplated hereby;
and
WHEREAS, the parties hereto desireto make certain representations, warranties
and agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to belegally bound
hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1
The Merger
. Subject to the terms and conditions of this Agreement, in accordance with
the Delaware General Corporation Law (the "
DGCL
") and the Maryland General Corporation Law (the "
MGCL
"), at theEffective Time, the Company shall merge with and into Parent (the "
Merger
"). Parent shall be the surviving corporation in the Merger (hereinafter
referred to in such capacity as the "
Surviving Corporation
") andshall
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continue its corporate existence under the laws of the State of Delaware. Upon
consummation of the Merger, the separate corporate existence of the Company
shall terminate.
1.2
Closing
. Subject to the terms and conditions of this Agreement, the closing of the
Merger (the"
Closing
") will occur by electronic exchange of documents at 10:00 a.m., Pacific time,
on a date which shall be no later than three (3) business days after the
satisfaction or waiver (subject to applicable law) of the latest tooccur of
the conditions set forth in
Article
VII
hereof (other than those conditions that by their nature can be satisfied only
at the Closing, but subject to the satisfaction or waiver of all conditions at
theClosing), unless another date, time or place is agreed to in writing by the
Company and Parent. The date on which the Closing occurs is referred to as the
"
Closing Date
."
1.3
Effective Time
. The Merger shall become effective upon (a) the filing of the articles of
mergerwith respect to the Merger (the "
Maryland Articles of Merger
") with the Department of Assessments and Taxation of the State of Maryland
(the "
Maryland Secretary
") and the certificate of merger (the "
DelawareCertificate of Merger
") with the Secretary of State of the State of Delaware (the "
Delaware Secretary
") or (b) such later date and time as may be specified in the Articles of
Merger and the Certificate of Merger inaccordance with the MGCL and the DGCL
(the "
Effective Time
").
1.4
Effects of theMerger
. At and after the Effective Time, the Merger shall have the effects set forth
in the applicable provisions of the DGCL and the MGCL.
1.5
Conversion of Company Common Stock
. At the Effective Time, by virtue of the Merger and without anyaction on the
part of Parent or the Company or the holder of any of the following securities:
(a) Subject to
Section
2.2(e)
, each share of the Company's common stock, par value $0.01 per share (the "
Company Common Stock
"), that is issued and outstanding immediately prior to the Effective Time
(other thanshares cancelled in accordance with
Section
1.5(c)
) shall be converted into 0.8048 shares (the "
Exchange Ratio
") of the Parent's common stock, par value $0.001 per share (the "
Parent CommonStock
") (such consideration, the "
Merger Consideration
").
(b) All of the shares of Company Common Stockconverted into the right to
receive the Merger Consideration pursuant to this
Article
I
shall no longer be outstanding and shall automatically be cancelled and shall
cease to exist as of the Effective Time, and eachcertificate (each, a "
Certificate
," it being understood that any reference herein to "Certificate" shall be
deemed to include reference to book-entry account statements relating to the
ownership of shares of Company CommonStock) previously representing any such
shares of Company Common Stock shall thereafter represent only the right to
receive (i) the Merger Consideration, including a certificate (it being
understood that any reference herein to a"certificate" representing shares of
Parent Common Stock shall be deemed to include, unless the context otherwise
requires, reference to book-entry account statements relating to the ownership
of shares of Parent Common Stock) representingthe number of whole shares of
Parent Common Stock which such shares of Company Common Stock represented by
such Certificate have been converted into the right to receive pursuant to
Section
1.5(a)
, (ii) cash in lieu offractional shares which the shares of Company Common
Stock represented by such Certificate have been converted into the right to
receive pursuant to
Section
1.5(a)
and
Section
2.2(e)
, without anyinterest thereon, and (iii) any dividends or distributions which
the holder thereof has the right to receive pursuant to
Section
2.2
. Certificates previously representing shares of Company Common Stock shall
beexchanged for the Merger Consideration and the other amounts specified in
the immediately preceding sentence upon the surrender of such Certificates in
accordance with
Section
2.2
, without any interest thereon. If, prior tothe Effective Time, the
outstanding shares of Parent Common Stock or Company Common Stock shall have
been increased, decreased, changed into or exchanged for a different number or
kind of shares or securities as a result of a reorganization,recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or other
similar change in capitalization, or there shall be any extraordinary dividend
or distribution, an appropriate and proportionate adjustment shall be madeto
the Merger Consideration;
provided
that nothing contained in this sentence shall be construed to permit the
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Company or Parent to take any action with respect to the outstanding shares of
Parent Common Stock or Company Common Stock, as applicable, that is expressly
prohibited by the terms of thisAgreement.
(c) Notwithstanding anything in this Agreement to the contrary, at the
Effective Time, all shares of Company Common Stock thatare owned by the
Company as treasury stock or owned by the Company or Parent (in each case
other than shares of Company Common Stock (i) held in trust accounts, managed
accounts, mutual funds and the like, or otherwise held in a fiduciary oragency
capacity that are beneficially owned by third parties or (ii) held, directly
or indirectly, by Company or Parent in respect of debts previously contracted)
shall be cancelled, retired and cease to exist and no Merger Consideration
shallbe delivered or exchanged therefor. Any shares of Parent Common Stock
that are issued and outstanding immediately prior to the Effective Time and
are owned by the Company shall be cancelled, retired and cease to exist.
1.6
Treatment of Company RSU Awards
.
(a) Except as otherwise agreed between the Company and Parent, at or
immediately prior to the Effective Time, with respect to each restrictedstock
unit award in respect of shares of Company Common Stock that is outstanding as
of immediately prior to the Effective Time (a "
Company RSU Award
"), (i) each Company RSU Award that is subject to time-based vesting (a"
Company TRSU Award
") shall automatically and without any required action on the part of the
holder thereof fully vest, (ii) a
pro-rated
portion of each Company RSU Award that is subjectto performance-based vesting
(a "
Company PRSU Award
") shall automatically and without any required action on the part of the
holder thereof vest, with the portion that shall vest equal to the product of
(A) the number ofrestricted stock units subject to such Company PRSU Award
that would have vested based upon actual performance if the applicable
performance period had ended as of the most recent fiscal quarter of the
Company preceding the Closing Date or, ifactual performance cannot be
determined, the target number of restricted stock units subject to such
Company PRSU Award and (B) a fraction, the numerator of which is the number of
months in the period beginning on the first day of theapplicable performance
period and ending on the Closing Date and the denominator of which is the
total number of months in the original applicable performance period
(disregarding the effect of this
Section
1.6
on thelength of the performance period), and (iii) (A) each restricted stock
unit in respect of each Company TRSU Award and each restricted stock unit in
respect of each portion of a Company PRSU Award that so vests shall be
converted into the rightto receive the Merger Consideration (less the portion
of the Merger Consideration in respect thereof withheld to pay applicable
Taxes required to be withheld, if any, with respect to the settlement of such
restricted stock units) as soon asreasonably practicable after the Effective
Time and (B) each restricted stock unit in respect of each portion of a
Company PRSU Award that does not vest shall be forfeited.
(b) At or prior to the Effective Time, the Company (or the Board of Directors
of the Company or its compensation committee, as applicable),shall take such
actions as are necessary to effectuate this
Section
1.6
.
1.7
Parent Common Stock
. At and after the Effective Time, each share of Parent Common Stock issued
and outstanding immediately prior to the Effective Time shall remain an issued
and outstanding share of common stock of Parent and shall not beaffected by
the Merger.
1.8
Certificate of Incorporation of Surviving Corporation
. At the EffectiveTime, the Amended and Restated Certificate of Incorporation
of Parent (as amended) (the "
Parent Certificate
"), as in effect at the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation untilthereafter amended in
accordance with applicable law.
1.9
Bylaws of Surviving Corporation
. At theEffective Time, the Amended and Restated Bylaws of Parent (the "
Parent Bylaws
"), as in effect immediately prior to the Effective Time, shall be the Bylaws
of the Surviving Corporation until thereafter amended in accordance
withapplicable law.
1.10
Directors and Officers of Surviving Corporation
. At the Effective Time, thedirectors and officers of the Surviving
Corporation shall be the directors and officers of Parent immediately prior to
the Effective Time
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with such individuals to serve in such capacities until such time as their
respective successors have been duly elected or appointed and qualified or the
earlier of their respective death,resignation or removal.
1.11
Bank Merger
. Immediately following the Merger or at such later time asParent may
determine, Territorial Savings Bank, a Hawaii state-chartered member savings
bank and a wholly-owned Subsidiary of the Company ("
Company Bank
"), will merge (the "
Bank Merger
") with and into Bank of Hope,a California state-chartered bank and a
wholly-owned Subsidiary of Parent ("
Parent Bank
"). Parent Bank shall be the surviving entity in the Bank Merger and,
following the Bank Merger, the separate corporate existence of Company
Bankshall cease. The parties hereto agree that the Bank Merger shall become
effective immediately after the Merger or at such later time as Parent may
determine. The Bank Merger shall be implemented pursuant to an agreement and
plan of merger, in a formto be mutually agreed upon by the parties (the "
Bank Merger Agreement
,"). The Company and Parent shall cause Company Bank and Parent Bank to
execute such certificates of merger and articles of merger and such other
agreements,documents and certificates as are necessary to make the Bank Merger
effective ("
Bank Merger Certificates
") immediately following the Merger or at such later time as Parent may
determine.
1.12
Tax Consequences
. It is intended that the Merger shall qualify as a reorganization within the
meaningof Section 368(a) of the Code, and this Agreement is intended to be and
is adopted as a plan of reorganization for the purposes of Sections 354, 361
and 368 of the Code and within the meaning of Section 1.368-2(g) and
1.368-3(a) ofthe Treasury Regulations.
ARTICLE II
EXCHANGE OF SHARES
2.1
Parent to Make Merger Consideration Available
. No later than one (1) business day prior to the Effective Time, Parent shall
deposit, or shall cause to be deposited, with an exchange agent designated by
Parent and reasonablyacceptable to the Company (the "
Exchange Agent
"), for the benefit of the holders of Certificates, for exchange in accordance
with this
Article
II
, (i) certificates or, at Parent's option, evidenceof shares in book entry
form (collectively, referred to herein as "
New Certificates
"), representing the shares of Parent Common Stock to be issued to holders of
Company Common Stock, and (ii) cash in lieu of fractional shares(such cash and
New Certificates for shares of Parent Common Stock, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "
Exchange Fund
"), to be issued pursuant to
Section
1.5
and paid pursuant to
Section
2.2
in exchange for outstanding shares of Company Common Stock.
2.2
Exchange of Shares
.
(a) As promptly as practicable after the Effective Time, but in no event later
than five (5) business days thereafter, Parent shall causethe Exchange Agent
to mail to each holder of record of one or more Certificates representing
shares of Company Common Stock immediately prior to the Effective Time that
have been converted at the Effective Time into the right to receive the
MergerConsideration pursuant to
Article
I
, a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates tothe Exchange Agent) and instructions for
use in effecting the surrender of the Certificates in exchange for the Merger
Consideration, and any cash in lieu of fractional shares, which shares of
Company Common Stock represented by such Certificate orCertificates shall have
been converted into the right to receive pursuant to this Agreement as well as
any dividends or distributions to be paid pursuant to
Section
2.2(b)
. Upon proper surrender of a Certificate orCertificates for exchange and
cancellation to the Exchange Agent, together with such properly completed
letter of transmittal, duly executed, the holder of such Certificate or
Certificates shall be entitled to receive in exchange therefor, asapplicable,
(i) a New Certificate representing that number of whole shares of Parent
Common Stock to which such holder of Company Common Stock shall have become
entitled pursuant to the provisions of
Article
I
and(ii) a check representing
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the amount of (A) any cash in lieu of fractional shares which such holder has
the right to receive in respect of the shares of Company Common Stock
represented by the Certificate orCertificates surrendered pursuant to the
provisions of this
Article
II
, and (B) any dividends or distributions which the holder thereof has the
right to receive pursuant to this
Section
2.2
,and the Certificate or Certificates so surrendered shall forthwith be
cancelled. No interest will be paid or accrued on any cash in lieu of
fractional shares or dividends or distributions payable to holders of
Certificates. Until surrendered ascontemplated by this
Section
2.2
, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive, upon surrender, the Merger Consideration
and any cash in lieu of fractionalshares or in respect of dividends or
distributions as contemplated by this
Section
2.2
.
(b) No dividends orother distributions declared or made with respect to Parent
Common Stock with a record date after the Effective Date shall be paid to the
holder of any unsurrendered Certificate until the holder thereof shall
surrender such Certificate in accordancewith this
Article
II
. After the surrender of a Certificate in accordance with this
Article
II
, the record holder thereof shall be entitled to receive any such dividends or
other distributions,without any interest thereon, which theretofore had become
payable with respect to the whole shares of Parent Common Stock which the
shares of Company Common Stock represented by such Certificate have been
converted into the right to receive.
(c) If any New Certificate representing shares of Parent Common Stock is to be
issued in a name other than that in which the Certificate orCertificates
surrendered in exchange therefor is or are registered, it shall be a condition
of the issuance thereof that the Certificate or Certificates so surrendered
shall be properly endorsed (or accompanied by an appropriate instrument
oftransfer) and otherwise in proper form for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other similar Taxes required by reason of the issuance of a
certificate representing sharesof Parent Common Stock in any name other than
that of the registered holder of the Certificate or Certificates surrendered,
or required for any other reason, or shall establish to the satisfaction of
the Exchange Agent that such Tax has been paid oris not payable.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares ofCompany Common Stock that were
issued and outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates representing such shares are presented for
transfer to the Exchange Agent, they shall be cancelled andexchanged for the
Merger Consideration and cash in lieu of fractional shares as provided in this
Article
II
.
(e) Notwithstanding anything to the contrary contained herein, no certificates
or scrip representing fractional shares of Parent Common Stockshall be issued
upon the surrender for exchange of Certificates, no dividend or distribution
with respect to Parent Common Stock shall be payable on or with respect to any
fractional share, and such fractional share interests shall not entitle
theowner thereof to vote or to any other rights of a stockholder of Parent. In
lieu of the issuance of any such fractional share, Parent shall pay to each
former stockholder of the Company who otherwise would be entitled to receive
such fractionalshare an amount in cash (rounded to the nearest cent)
determined by multiplying (i) the average of the closing-sale prices of Parent
Common Stock on the Nasdaq Stock Exchange as reported by the
Wall Street Journal
for the five(5) full trading days ending on the trading day immediately
preceding the Closing Date ("
Parent Common Stock Closing Price
") by (ii) the fraction of a share (rounded to the nearest
one-thousandth
when expressed in decimal form) of Parent Common Stock which such holder would
otherwise be entitled to receive pursuant to
Section
1.5
. The parties acknowledge thatpayment of such cash consideration in lieu of
issuing fractional shares is not separately
bargained-for-consideration,
but merely represents a mechanical rounding offfor the purposes of avoiding
the expense and inconvenience that would otherwise be caused by the issuance
of such fractional shares.
(f)Any portion of the Exchange Fund that remains unclaimed by the stockholders
of the Company for twelve (12) months after the Effective Time shall be paid
to Parent. Any former stockholder of the Company that has not theretofore
complied withthis
Article
II
shall thereafter look only to Parent for payment of the Merger Consideration,
cash in lieu of fractional shares and any unpaid dividends and distributions
on the Parent Common
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Stock deliverable in respect of each former share of Company Common Stock such
former stockholder holds as determined pursuant to this Agreement, in each
case, without any interest thereon.Notwithstanding the foregoing, none of
Parent, the Company, the Surviving Corporation, the Exchange Agent or any
other person shall be liable to any former holder of shares of Company Common
Stock for any amount delivered in good faith to a publicofficial pursuant to
applicable abandoned property, escheat or similar laws.
(g) Each of Parent and the Exchange Agent shall be entitledto deduct and
withhold from any consideration otherwise payable pursuant to this Agreement
such amounts as it is required to deduct and withhold with respect to the
making of such payment under the Code or any provision of state, local or
foreignTax law. To the extent that amounts are so withheld by Parent or the
Exchange Agent, as the case may be, such withheld amounts (i) will be paid
over by Parent or the Exchange Act to the appropriate governmental authority
and (ii) will betreated for all purposes of this Agreement as having been paid
to the person in respect of which the deduction and withholding was made.
(h) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the personclaiming such
Certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such amount as Parent may determine is
reasonably necessary as indemnity against any claim that may be made against
it withrespect to such Certificate, the Exchange Agent will issue in exchange
for such lost, stolen or destroyed Certificate the Merger Consideration, and
any cash in lieu of fractional shares and dividends or distributions
deliverable in respect thereofpursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except (a) as disclosed in the disclosure schedule delivered by the Company to
Parent concurrently herewith (the "
CompanyDisclosure Schedule
");
provided
that (i) no such item is required to be set forth as an exception to a
representation or warranty if its absence would not result in the related
representation or warranty being deemed untrue orincorrect, (ii) the mere
inclusion of an item in the Company Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by the Company
that such item represents a material exception or fact, event orcircumstance
or that such item would reasonably be expected to result in a Material Adverse
Effect and (iii) any disclosures made with respect to a section of this
Article
III
shall be deemed to qualify (1) anyother section of this
Article
III
specifically referenced or cross-referenced and (2) other sections of this
Article
III
to the extent it is reasonably apparent on its face (notwithstandingthe
absence of a specific cross-reference) from a reading of the disclosure that
such disclosure applies to such other sections, or (b) as disclosed in any
Company Reports publicly filed with or furnished to the SEC by the Company
afterJanuary 1, 2023 and prior to the date hereof (but disregarding risk
factor disclosures contained under the heading "Risk Factors," or disclosures
of risks set forth in any "forward-looking statements" disclaimer or any
otherstatements that are similarly
non-specific
or cautionary, predictive or forward-looking in nature), the Company hereby
represents and warrants to Parent as follows:
3.1
Corporate Organization
.
(a) The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland and is asavings and loan
holding company duly registered with the Board of Governors of the Federal
Reserve System (the "
Federal Reserve Board
") under the Home Owners' Loan Act (the "
HOLA
"). The Company has thecorporate power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being
conducted. The Company is duly licensed or qualified to do business and in
good standing in each jurisdiction in which thenature of the business
conducted by it or the character or location of the properties and assets
owned or leased by it makes such licensing, qualification or standing
necessary, except where the failure to be so licensed, qualified or to be in
goodstanding would not, either individually or in
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the aggregate, reasonably be expected to have a Material Adverse Effect on the
Company. As used in this Agreement, the term "
Material Adverse Effect
" means, with respect toParent, the Company or the Surviving Corporation, as
the case may be, any effect, change, event, circumstance, condition,
occurrence or development that, either individually or in the aggregate, has
had or would reasonably be expected to have amaterial adverse effect on (i)
the business, properties, assets, liabilities, results of operations or
financial condition of such party and its Subsidiaries taken as a whole (
provided
that, with respect to this clause (i), MaterialAdverse Effect shall not be
deemed to include the impact of (A) changes, after the date hereof, in U.S.
generally accepted accounting principles ("
GAAP
") or applicable regulatory accounting requirements, (B) changes, afterthe
date hereof, in laws, rules or regulations of general applicability to
companies in the industries in which such party and its Subsidiaries operate,
or interpretations thereof by courts or Governmental Entities, (C) changes,
after the datehereof, in global, national or regional political conditions
(including any outbreak, continuation or escalation of war (whether or not
declared), cyberattack, sabotage, act of terrorism or military action) or in
economic or market (includingequity, credit and debt markets, as well as
changes in interest rates) conditions affecting the financial services
industry generally and not specifically relating to such party or its
Subsidiaries, (D) changes, after the date hereof, resultingfrom hurricanes,
earthquakes, tornados, floods or other natural disasters or from any outbreak
of any disease or other public health event or emergencies (including any law,
directive or guideline issued by a Governmental Entity in responsethereto),
(E) public disclosure of the execution of this Agreement, public disclosure or
consummation of the transactions contemplated hereby (including any effect on
a party's relationships with its customers or employees) (it being
understoodand agreed that the foregoing in this subclause (E) shall not apply
for purposes of the representations and warranties in
Sections
3.3(b)
,
3.4
,
3.11(n)
,
4.3(b
) and
4.4
), actions expresslyrequired by this Agreement or actions taken with the prior
written consent of the other party in contemplation of the transactions
contemplated hereby, (F) a decline in the trading price of a party's common
stock or the failure, in and ofitself, to meet earnings projections or
internal financial forecasts (it being understood that the underlying causes
of such decline or failure may be taken into account in determining whether a
Material Adverse Effect has occurred), or (G) theexpenses incurred by the
Company or Parent in negotiating, documenting, effecting and consummating the
transactions contemplated by this Agreement; except, with respect to
subclauses (A), (B), (C) or (D), to the extent that the effects of suchchange
are materially disproportionately adverse to the business, properties, assets,
liabilities, results of operations or financial condition of such party and
its Subsidiaries, taken as a whole, as compared to other companies in the
industry inwhich such party and its Subsidiaries operate) or (ii) the ability
of such party to timely consummate the transactions contemplated hereby. As
used in this Agreement, as to each party, the word "
Subsidiary
" shall have meaningascribed to it in Rule 1-02 of Regulation
S-X
promulgated by the SEC. True and complete copies of the Charter of the Company
(the "
Company Charter
") and Bylaws of the Company (the"
Company Bylaws
"), as in effect as of the date of this Agreement, have previously been made
available by the Company to Parent.
(b) Company Bank is a state-chartered member savings bank, validly existing
and in good standing under the laws of the State of Hawaii. Thedeposits of
Company Bank are insured by the Federal Deposit Insurance Corporation (the "
FDIC
") through the Deposit Insurance Fund (the "
DIF
") to the fullest extent permitted by law, all premiums and assessmentsrequired
to be paid in connection therewith have been paid when due and no proceedings
for the termination of such insurance are pending or threatened.
(c) Each Subsidiary of the Company (a "
Company Subsidiary
") (i) is duly organized and validly existing under the laws of itsjurisdiction
of organization, (ii) is duly qualified to do business and, where such concept
is recognized under applicable law, in good standing in all jurisdictions
(whether federal, state, local or foreign) where its ownership or leasing
ofproperty or the conduct of its business requires it to be so qualified and
in which the failure to be so qualified would reasonably be expected to have a
Material Adverse Effect on the Company and (iii) has all requisite corporate
power andauthority to own or lease its properties and assets and to carry on
its business as now conducted. There are no restrictions on the ability of any
Company Subsidiary to pay dividends or distributions except, (x) in the case
of a Subsidiary thatis a regulated entity, for restrictions on dividends or
distributions generally applicable to all such regulated entities, or (y) as
set forth in
Section
3.1(c)
of the Company Disclosure Schedule. Other than CompanyBank and those
Subsidiaries set forth in
Section
3.1(c)
of the Company Disclosure Schedule, there are no Company Subsidiaries. True
and complete copies of the
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organizational documents of each Company Subsidiary as in effect as of the
date of this Agreement have previously been made available by the Company to
the Parent. There is no person whoseresults of operations, cash flows, changes
in stockholders' equity or financial position are consolidated in the
financial statements of the Company other than the Company Subsidiaries.
3.2
Capitalization
.
(a) As of the date of this Agreement, the authorized capital stock of the
Company consists of 100,000,000 shares of Company Common Stock and50,000,000
shares of preferred stock, par value $0.01 per share. As of the date hereof,
there are (i) 8,832,235 shares of Company Common Stock issued and outstanding
(no shares of Company Common Stock that are unvested as of the date of
thisAgreement), (ii) no shares of Company preferred stock issued and
outstanding, (iii) 40,224 shares of Company Common Stock subject to
outstanding Company TRSU Awards, (iv) 53,473 shares of Company Common Stock
subject to outstanding Company PRSUAwards (assuming satisfaction of
performance goals in respect of incomplete performance periods at the target
level) and (v) 80,211 shares of Company Common Stock subject to outstanding
Company PRSU Awards (assuming satisfaction of performance goalsin respect of
incomplete performance periods at the maximum level). As of the date of this
Agreement, except as set forth in the immediately preceding sentence, there
are no other shares of capital stock or other equity securities of the
Companyissued, reserved for issuance or outstanding.
(b) All of the issued and outstanding shares of Company Common Stock have been
dulyauthorized and validly issued and are fully paid, nonassessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof. There are no bonds, debentures, notes or other indebtedness that have
the right to vote onany matters on which stockholders of the Company may vote.
Except as set forth on
Section
3.2(b)
of the Company Disclosure Schedule, no trust preferred or subordinated debt
securities of the Company are issued oroutstanding. Other than Company RSU
Awards issued prior to the date of this agreement, there are no outstanding
subscriptions, options, warrants, stock appreciation rights, phantom units,
scrip, rights to subscribe to, preemptive rights,anti-dilutive rights, rights
of first refusal or similar rights, puts, calls, commitments or agreements of
any character relating to, or securities or rights convertible or exchangeable
into or exercisable for, or valued by reference to, shares ofcapital stock or
other equity or voting securities of or ownership interest in the Company, or
contracts, commitments, understandings or arrangements by which the Company
may become bound to issue additional shares of its capital stock or
otherequity or voting securities of or ownership interests in the Company, or
that otherwise obligate the Company to issue, transfer, sell, purchase, redeem
or otherwise acquire, any of the foregoing. There are no voting trusts,
stockholder agreements,proxies or other agreements in effect with respect to
the voting or transfer of the Company Common Stock or other equity interests
of Company. No Subsidiary of the Company owns any shares of capital stock of
the Company.
(c) The Company owns, directly or indirectly, all of the issued and
outstanding shares of capital stock or other equity ownership interests ofeach
of the Company Subsidiaries, free and clear of any liens, claims, title
defects, mortgages, pledges, charges, encumbrances, and security interests
whatsoever ("
Liens
"), and all of such shares or equity ownership interests areduly authorized
and validly issued and are fully paid, nonassessable (except, with respect to
bank Subsidiaries, as provided under 12 U.S.C. (s) 55 or any comparable
provision of applicable federal or state law) and free of preemptive
rights,with no personal liability attaching to the ownership thereof. No
Company Subsidiary has or is bound by any outstanding subscriptions, options,
warrants, calls, rights, commitments or agreements of any character calling
for the purchase or issuanceof any shares of capital stock or any other equity
security of such Subsidiary or any securities representing the right to
purchase or otherwise receive any shares of capital stock or any other equity
security of such Subsidiary.
(d)
Section
3.2(d)
of the Company Disclosure Schedule sets forth, for each Company RSU Award
outstanding as of thedate hereof, (i) the holder of such Company RSU Award,
(ii) the number of shares of Company Common Stock subject to such Company RSU
Award and (iii) the vesting schedule of such Company RSU Award, including any
accelerated vestingprovisions.
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3.3
Authority; No Violation
.
(a) The Company has full corporate power and authority to execute and deliver
this Agreement and, subject to the stockholder and other actionsdescribed
below, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby (including the Merger and the Bank Merger) have been duly
and validlyapproved by the Board of Directors of the Company. The Board of
Directors of the Company has (i) determined that the transactions contemplated
hereby, on the terms and conditions set forth in this Agreement, are advisable
and in the bestinterests of the Company, (ii) adopted, approved and declared
advisable this Agreement and the transactions contemplated hereby (including
the Merger), (iii) directed that this Agreement and the transactions
contemplated hereby be submitted tothe Company's stockholders for approval at
a duly called and convened meeting of such stockholders, (iv) recommended that
the stockholders of the Company approve this Agreement (including the Merger)
and the transactions contemplatedhereby and (v) adopted and approved
resolutions to the foregoing effect. Except for the approval of this Agreement
by the affirmative vote of the holders of a majority of the outstanding shares
of Company Common Stock entitled to vote on theAgreement (the "
Requisite Company Vote
"), and the adoption and approval of the Bank Merger Agreement by the Company
as its sole shareholder, no other corporate proceedings on the part of the
Company are necessary to approve thisAgreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and (assuming due authorization,
execution and delivery by Parent) constitutes a valid and bindingobligation of
the Company, enforceable against the Company in accordance with its terms
(except in all cases as such enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization, fraudulent transfer or similar laws
affectingthe rights of creditors generally and the availability of equitable
remedies (the "
Enforceability Exceptions
")).
(b)Neither the execution and delivery of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby, including
the Merger and the Bank Merger, nor compliance by the Company with any of the
terms orprovisions hereof, will (i) assuming the Requisite Company Vote is
obtained, violate any provision of the Company Charter or the Company Bylaws
or (ii) assuming that the consents and approvals referred to in
Section
3.4
and the Requisite Company Vote are duly obtained, (x) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to the Company or any Company Subsidiaryor any of their respective
properties or assets or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an
event which, with notice or lapse of time, or both, wouldconstitute a default)
under, result in the termination of or a right of termination or cancellation
under, accelerate the performance required by, or result in the creation of
any Lien upon any of the respective properties or assets of the Companyor any
Company Subsidiary under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or any Company Subsidiary
is a party,or by which they or any of their respective properties or assets
may be bound, except (in the case of clause (ii) above) for such violations,
conflicts, breaches or defaults which, either individually or in the
aggregate, would not reasonablybe expected to have a Material Adverse Effect
on the Company.
(c) The Board of Directors of the Company Bank has approved the Bank
MergerAgreement. The Company, as the sole shareholder of the Company Bank, has
approved the Bank Merger Agreement, and the Bank Merger Agreement has been
duly executed by the Company Bank and (assuming due authorization, execution
and delivery by theParent Bank) constitutes a valid and binding obligation of
the Company Bank, enforceable against the Company Bank in accordance with its
terms (except in all cases as may be limited by the Enforceability Exceptions).
3.4
Consents and Approvals
. Except for (a) the filing of any required applications, filings andnotices
with the Nasdaq Stock Exchange, (b) the filing of any required applications,
filings and notices, as applicable, with the Governmental Entities and
approval of such applications, filings and notices, including the Requisite
RegulatoryApprovals, (c) the filing with the Securities and Exchange
Commission (the "
SEC
") of a proxy statement in
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definitive form relating to the meeting of the Company's stockholders to be
held in connection with this Agreement and the transactions contemplated
hereby (including any amendments orsupplements thereto, the "
Proxy Statement
"), and of the registration statement on Form S-4 in which the Proxy Statement
will be included as a prospectus, to be filed with the SEC by Parent in
connection with the transactionscontemplated by this Agreement (the "
S-4
") and declaration by the SEC of the effectiveness of the S-4, (d) the filing
of the Maryland Articles of Merger with the Maryland Secretary pursuant tothe
MGCL and the Delaware Certificate of Merger with the Delaware Secretary
pursuant to the DGCL, and the filing of the Bank Merger Certificates, (e) such
filings and approvals as are required to be made or obtained under the
securities or"
Blue Sky
" laws of various states in connection with the issuance of the shares of
Parent Common Stock pursuant to this Agreement and (f) the approval of the
listing of such Parent Common Stock on the Nasdaq Stock Exchange, noconsents
or approvals of or filings or registrations with any court, administrative
agency or commission or other governmental authority or instrumentality or SRO
are necessary in connection with (i) the execution and delivery by the Company
ofthis Agreement, (ii) the consummation by the Company of the Merger and the
other transactions contemplated hereby (including the Bank Merger), (iii) the
execution and delivery by the Company Bank of the Bank Merger Agreement or
(iv) theconsummation by the Company Bank of the Bank Merger.
3.5
Reports
.
(a) The Company and each of its Subsidiaries have timely filed or furnished
all reports, registrations and statements, together with anyamendments
required to be made with respect thereto, that they were required to file or
furnish since January 1, 2021 with (i) any state banking or financial
regulatory authority, including the Division of Financial Institutions,Departmen
t of Commerce and Consumer Affairs, State of Hawaii, and the California
Department of Financial Protection and Innovation, (ii) any other state
authority including the Maryland Secretary and the Delaware Secretary, (iii)
the SEC,(iv) the Federal Reserve Board, (v) the FDIC, (vi) any foreign
regulatory authority, and (vii) any self-regulatory organization (an "
SRO
") ((i) - (vii), each, a "
Governmental Entity
" and,collectively, the "
Governmental Entities
"), including, without limitation, any report, registration or statement
required to be filed or furnished pursuant to the laws, rules or regulations
of the United States, any state, anyforeign entity, or any Governmental
Entity, and have paid all fees and assessments due and payable in connection
therewith, except where the failure to file such report, registration or
statement or to pay such fees and assessments, eitherindividually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
on the Company. Except as set forth on
Section
3.5
of the Company Disclosure Schedule (i) other than normalexaminations conducted
by a Governmental Entity in the ordinary course of business of the Company and
its Subsidiaries, no Governmental Entity has initiated or has pending any
proceeding or, to the knowledge of the Company, investigation into thebusiness
or operations of the Company or any of its Subsidiaries since January 1, 2021,
(ii) there is no unresolved violation, criticism, or exception by any
Governmental Entity with respect to any report or statement relating to
anyexaminations or inspections of the Company or any of its Subsidiaries and
(iii) there have been no formal or informal inquiries by, or disagreements or
disputes with, any Governmental Entity with respect to the business,
operations, policies orprocedures of the Company or any of its Subsidiaries
since January 1, 2021, in the case of each of clauses (i) through (iii), which
is or would reasonably be expected to have, either individually or in the
aggregate, a Material AdverseEffect on the Company.
(b) An accurate copy of each final registration statement, prospectus, report,
schedule and definitive proxystatement filed with or furnished to the SEC by
the Company since January 1, 2021 pursuant to the Securities Act of 1933, as
amended (the "
Securities Act
"), or the Exchange Act (the "
Company Reports
") ispublicly available. Since January 1, 2021, no such Company Report, as of
the date thereof (and, in the case of registration statements and proxy
statements, on the dates of effectiveness and the dates of the relevant
meetings, respectively),contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances in
which they were made, not misleading, exceptthat information filed or
furnished as of a later date (but before the date of this Agreement) shall be
deemed to modify information as of an earlier date. As of their respective
dates, since January 1, 2021, all Company Reports filed orfurnished under the
Securities Act and the Exchange Act complied
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in all material respects with the published rules and regulations of the SEC
with respect thereto. As of the date of this Agreement, no executive officer
of the Company has failed in any respectto make the certifications required of
him or her under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 (the "
Sarbanes-Oxley Act
"). As of the date of this Agreement, there are no outstanding comments from
or unresolvedissues raised by the SEC with respect to any of the Company
Reports.
3.6
Financial Statements
.
(a) The financial statements of the Company and its Subsidiaries included (or
incorporated by reference) in the Company Reports (including therelated notes,
where applicable) (i) have been prepared from, and are in accordance with, the
books and records of the Company and its Subsidiaries, (ii) fairly present in
all material respects the consolidated results of operations, cashflows,
changes in stockholders' equity and consolidated financial position of the
Company and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth (subject in the case of unaudited
statements to
year-end
audit adjustments normal in nature and amount), (iii) complied, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the publishedrules and regulations
of the SEC with respect thereto, and (iv) have been prepared in accordance
with GAAP consistently applied during the periods involved, except, in each
case, as indicated in such statements or in the notes thereto. Thebooks and
records of the Company and its Subsidiaries have been, and are being,
maintained in all material respects in accordance with GAAP and any other
applicable legal and accounting requirements and reflect only actual
transactions. SinceJanuary 1, 2021, no independent public accounting firm of
the Company has resigned (or informed the Company that it intends to resign)
or been dismissed as independent public accountants of the Company as a result
of, or in connection with, anydisagreements with the Company on a matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. The financial statements of the Company Bank included in
the consolidated reports of condition andincome (call reports) of the Company
Bank complied, as of their respective dates of filing with the FDIC, in all
material respects with applicable accounting requirements and with the
published instructions of the Federal Financial InstitutionsExamination
Council with respect thereto.
(b) Except as would not reasonably be expected to have, either individually or
in theaggregate, a Material Adverse Effect on the Company, neither the Company
nor any of its Subsidiaries has any liability (whether absolute, accrued,
contingent or otherwise and whether due or to become due), except for those
liabilities that arereflected or reserved against on the consolidated balance
sheet of the Company included in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2023 (including any notes thereto) and for liabilities
incurred in the ordinarycourse of business since December 31, 2023, or in
connection with this Agreement and the transactions contemplated hereby.
(c) Therecords, systems, controls, data and information of the Company and its
Subsidiaries are recorded, stored, maintained and operated under means
(including any electronic, mechanical or photographic process, whether
computerized or not) that are underthe exclusive ownership and direct control
of the Company or its Subsidiaries or accountants (including all means of
access thereto and therefrom), except for any
non-exclusive
ownership and
non-direct
control that would not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect on the Company. The Company (i)
has implemented and maintains disclosurecontrols and procedures (as defined in
Rule
13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "
Exchange Act
")) to ensure that material information relating tothe Company, including its
Subsidiaries, is made known to the chief executive officer and the chief
financial officer of the Company by others within those entities as
appropriate to allow timely decisions regarding required disclosures and to
makethe certifications required by the Exchange Act and Sections 302 and 906
of the Sarbanes-Oxley Act, and (ii) has disclosed, based on its most recent
evaluation prior to the date hereof, to the Company's outside auditors and the
auditcommittee of the Company's Board of Directors (A) any significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting (as defined in Rule
13a-15(f)
promulgated under the Exchange Act) which would reasonably be expected to
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adversely affect the Company's ability to record, process, summarize and
report financial information, and (B) any fraud, whether or not material, that
involves management or otheremployees who have a significant role in the
Company's internal controls over financial reporting. Any such disclosures
were made in writing by management to the Company's auditor and audit
committee and true, correct and complete copiesof such disclosures have been
made available to the Parent. To the knowledge of the Company, there is no
reason to believe that the Company's chief executive officer and chief
financial officer will not be able to give the certificationsrequired pursuant
to the rules and regulations adopted pursuant to Section 404 of the
Sarbanes-Oxley Act, without qualification, when next due and for as long as
this Agreement continues in existence.
(d) Since January 1, 2021, (i) neither the Company nor any Company Subsidiary,
nor, to the knowledge of the Company, any director,officer, auditor,
accountant, or representative of the Company or any Company Subsidiary, has
received or otherwise had or obtained knowledge of any material complaint,
allegation, assertion or claim, whether written or oral, regarding
theaccounting or auditing practices, procedures, methodologies or methods
(including with respect to loan loss reserves, write-downs, charge-offs and
accruals) of the Company or any Company Subsidiary or their respective
internal accounting controls,including any material complaint, allegation,
assertion or claim that the Company or any Company Subsidiary has engaged in
questionable accounting or auditing practices, and (ii) no attorney
representing the Company or any Company Subsidiary,whether or not employed by
the Company or any Company Subsidiary, has reported evidence of a material
violation of securities laws, breach of fiduciary duty or similar violation by
the Company or any of its officers, directors, employees or agentsto the Board
of Directors of the Company or any committee thereof or to the knowledge of
the Company, to any director or officer of the Company.
(e) Except as would not reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect on the Company, theCompany has
complied with all requirements of the Coronavirus Aid, Relief, and Economic
Security (CARES) Act (the "
CARES Act
") and the Paycheck Protection Program administered by the Small Business
Administration, includingapplicable guidance, in connection with its
participation in the Paycheck Protection Program.
3.7
Broker
'
s Fees
. With the exception of the engagement of Keefe, Bruyette & Woods, Inc. ("
KBW
"), neither the Company nor any Company Subsidiary nor any of their respective
officers or directors hasemployed any broker, finder or financial advisor or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with the Merger or the other transactions contemplated by this
Agreement. The Company hasdisclosed to Parent as of the date hereof the
aggregate fees provided for in connection with the engagement by Company of
KBW related to the Merger and the other transactions contemplated hereby.
3.8
Absence of Certain Changes or Events
.
(a) Since December 31, 2023, no event or events have occurred that have had or
would reasonably be expected to have, either individuallyor in the aggregate,
a Material Adverse Effect on the Company.
(b) Except as disclosed on
Section
3.8(b)
of theCompany Disclosure Schedule and in connection with the transactions
contemplated by this Agreement, since December 31, 2023, the Company and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinarycourse of business.
3.9
Legal Proceedings
.
(a) Except as disclosed on
Section
3.9(a)
of the Company Disclosure Schedule, neither the Company nor any CompanySubsidiar
y is a party to any, and there are no pending or, to the knowledge of the
Company, threatened, legal, administrative, arbitral or other proceedings,
claims, actions or governmental or regulatory investigations of any nature
against theCompany or any Company Subsidiary or any of their current or former
directors or executive officers or challenging the validity or propriety of
the transactions contemplated by this Agreement. Company Disclosure Schedule
3.9(a) sets forth a true andcomplete list of all pending or threatened
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litigation against the Company, including lender liability and/or
counterclaims, in which damages or loss could reasonably exceed $100,000.
(b) There is no injunction, order, judgment, decree, or regulatory restriction
imposed upon the Company, any of its Subsidiaries or the assetsof the Company
or any Company Subsidiary (or that, upon consummation of the Merger, would
apply to the Surviving Corporation or any of its affiliates) that would
reasonably be expected to have, either individually or in the aggregate, a
MaterialAdverse Effect on the Company.
(c) Except as disclosed on
Section
3.9(a)
of the Company Disclosure Schedule, noclaims are outstanding under any of the
Company or its Subsidiaries' insurance policies that would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on the Company.
(d) No claims are outstanding against the Company or its Subsidiaries for
indemnification that would reasonably be expected to have, eitherindividually
or in the aggregate, a Material Adverse Effect on the Company.
3.10
Taxes and TaxReturns
.
(a) Each of the Company and its Subsidiaries has duly and timely filed or
caused to be filed (giving effect to allapplicable extensions) all material
Tax Returns required to be filed by any of them, and all such Tax Returns are
true, correct, and complete in all material respects. Neither Company nor any
of its Subsidiaries is the beneficiary of any extensionof time within which to
file any material Tax Return (other than extensions to file Tax Returns
obtained in the ordinary course of business).
(b) All material Taxes of the Company and its Subsidiaries that are due have
been fully and timely paid or adequate reserves therefor havebeen made on the
financial statements of the Company and its Subsidiaries included (or
incorporated by reference) in the Company Reports (including the related
notes, where applicable). Each of the Company and its Subsidiaries has
withheld and paidto the relevant Governmental Entity on a timely basis all
material Taxes required to have been withheld and paid in connection with
amounts paid or owing to any person.
(c) No claim has been made in writing by any Governmental Entity in a
jurisdiction where the Company or any Company Subsidiary does not fileTax
Returns that the Company or such subsidiary is or may be subject to taxation
by that jurisdiction.
(d) There are no Liens for Taxeson any of the assets of the Company or any
Company Subsidiary other than Liens for Taxes not yet due and payable.
(e) Neither the Companynor any of its Subsidiaries has received written notice
of assessment or proposed assessment in connection with any material amount of
Taxes, and there are no threatened in writing or pending disputes, claims,
audits, examinations, investigations,or other proceedings regarding any
material Tax of the Company and its Subsidiaries or the assets of the Company
and its Subsidiaries which have not been paid, settled or withdrawn or for
which adequate reserves have not been established.
(f) Neither the Company nor any of its Subsidiaries will be required to
include any item of income in, or exclude any item of deduction from,taxable
income for any taxable year (or portion thereof) ending after the Closing Date
as a result of any (i) intercompany transaction or excess loss account
described in Treasury regulations promulgated under Section 1502 of the Code
(orany corresponding or similar provision of state, local, or
non-
U.S. Tax law), (ii) installment sale or open transaction made on or prior to
the Closing Date, (iii) prepaid amount received on or prior tothe Closing
Date, (iv) change of, or use of an improper method of, accounting for a
taxable period ending on or prior to the Closing Date, or (v) "closing
agreement" described in Section 7121 of the Code (or any similar provisionof
state, local or
non-U.S.
law) entered into prior to the Closing.
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(g) Neither the Company nor any of its Subsidiaries is a party to or is bound
by any Taxsharing, allocation or indemnification agreement or arrangement
(other than (i) such an agreement or arrangement exclusively between or among
the Company and its Subsidiaries or (ii) a commercial agreement not primarily
related to Taxesand entered into in the ordinary course of business that
contains agreements or arrangements relating to the apportionment, sharing,
assignment or allocation of Taxes (such as financing agreements with Tax
gross-up
obligations or leases with Tax escalation provisions)). Neither the Company
nor any of its Subsidiaries has (i) been a member of an affiliated group
filing a consolidated federal income TaxReturn (other than a group of which
the Company was the common parent) or (ii) any liability for the Taxes of any
person (other than the Company or any Company Subsidiary) arising from the
application of Treasury regulationsection 1.1502-6, or any similar provision
of state, local or
non-U.S.
law, as a transferee or successor, by contract or otherwise.
(h) Neither the Company nor any of its Subsidiaries has distributed stock to
another person, or has had its stock distributed by anotherperson during the
two-year
period ending on the date hereof that was intended to be governed in whole or
in part by Section 355 of the Code.
(i) Neither the Company nor any of its Subsidiaries has engaged in any
"reportable transaction" within the meaning of TreasuryRegulation
section 1.6011-4(b)(1).
(j) Neither the Company nor any of its Subsidiaries has(i) deferred, extended
or delayed the payment of the employer's share of any "applicable employment
taxes" under Section 2302 of the CARES Act or any "applicable taxes" under IRS
Notice 2020-65, (ii) claimed anyTax credits under both (a) Sections 7001
through 7005 of the Families First Coronavirus Response Act (Public Law
116-127) and (b) Section 2301 of the CARES Act, or (iii) sought, nor intends
to seek, a covered loan underparagraph (36) of Section 7(a) of the Small
Business Act (15 U.S.C. 636(a)), as added by Section 1102 of the CARES Act.
(k) Neither the Company nor any of its Subsidiaries has waived any statute of
limitations in respect of Taxes or agreed to any extension oftime with respect
to a Tax assessment or deficiency.
(l) Neither the Company nor any of its Subsidiaries uses the reserve method
ofaccounting for bad debts described in Section 585(a)(1) of the Code.
(m) Neither the Company nor any of its Subsidiaries has been aUnited States
real property holding corporation within the meaning of Code (s)897(c)(2)
during the applicable period specified in Code (s)897(c)(1)(A)(ii).
(n) Except as set forth on
Section
3.10(n)
of the Company Disclosure Schedule, each of the Company and itsSubsidiaries is
an association treated as a corporation under Treasury Regulation
section 301.7701-2(b)(2).
(o) No private letter rulings (or other similar ruling), requests for such
rulings, gain recognition agreements or closing agreements havebeen entered
into with or issued by, or are pending with, any Governmental Entity with
respect to Company or any of its Subsidiary.
(p)As used in this Agreement, the term "
Tax
" or "
Taxes
" means any federal, state, local, or
non-U.S.
income, gross receipts, license, payroll, employment, excise, severance,stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer,registration, escheat and unclaimed property, value added,
alternative or
add-on
minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputedor not.
(q) As used in this Agreement, the term "
Tax Return
" means any return, declaration, report, claim for refund, orinformation
return or statement relating to Taxes, including any schedule or attachment
thereto, and including any amendment thereof, supplied or required to be
supplied to a Governmental Entity.
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3.11
Employees and Employee Benefit Plans
.(a)
Section
3.11(a)
of the Company Disclosure Schedule sets forth a true, correct and complete
list of all Company Benefit Plans. For purposes of this Agreement, "
Company Benefit Plans
" means all employeebenefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("
ERISA
")), whether or not subject to ERISA, and all stock option, stock purchase,
restricted stock, incentive,deferred compensation, retiree medical or life
insurance, retirement, savings, supplemental retirement, restoration,
retention, bonus, employment, change in control, termination or severance
plans, programs, agreements or arrangements that aremaintained, contributed to
or sponsored by, or required to be contributed to, the Company or any Company
Subsidiary for the benefit of any current or former employee, officer,
director or individual independent contractor of the Company or anyCompany
Subsidiary or any of their respective dependents or beneficiaries.
(b) The Company has heretofore made available to Parent trueand complete
copies of (i) each Company Benefit Plan, including any amendments thereto and
all related trust documents, insurance contracts or other funding vehicles,
and (ii) to the extent applicable, (A) the most recent summary plandescription
required under ERISA with respect to such Company Benefit Plan, (B) the most
recent annual report (Form 5500) filed with the Internal Revenue Service ("
IRS
"), (C) the most recently received IRS determination letterrelating to such
Company Benefit Plan, and (D) the most recently prepared actuarial report for
each Company Benefit Plan.
(c) EachCompany Benefit Plan has been established, operated and administered
in all material respects in accordance with its terms and the requirements of
all applicable laws, including ERISA and the Code.
(d)
Section
3.11(d)
of the Company Disclosure Schedule identifies each Company Benefit Plan that
is intended to bequalified under Section 401(a) of the Code (the "
Company Qualified Plans
"). The IRS has issued a favorable determination letter or advisory opinion,
as applicable, with respect to each Company Qualified Plan and the
relatedtrust, which letter or opinion has not been revoked (nor to the
knowledge of the Company has revocation been threatened), and, to the
knowledge of the Company, there are no existing circumstances and no events
have occurred that would reasonably beexpected to adversely affect the
qualified status of any Company Qualified Plan or the related trust.
(e) Except as set forth on
Section
3.11(e)
of the Company Disclosure Schedule, no Company Benefit Plan is subject to
Section 302 or Title IV of ERISA or Section 412, 430 or 4971 of the Code, and
during the immediately preceding six(6) years, no Controlled Group Liability
has been incurred by the Company or its ERISA Affiliates that has not been
satisfied in full, and, to the knowledge of the Company, no condition exists
that presents a material risk to the Company or itsERISA Affiliates of
incurring any such liability. For purposes of this Agreement, "
Controlled Group Liability
" means any and all liabilities (i) under Title IV of ERISA, (ii) under
Section 302 of ERISA or(iii) under Section 412 of the Code. For purposes of
this Agreement, "
ERISA Affiliate
" means, with respect to any entity, trade or business, any other entity,
trade or business that is, or was at the relevant time, amember of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1)
of ERISA that includes or included the first entity, trade or business, or
that is, or was at the relevant time, a member of the same"controlled group"
as the first entity, trade or business pursuant to Section 4001(a)(14) of
ERISA.
(f) With respect tothe plan disclosed on
Section
3.11(e)
of the Company Disclosure Schedule (the "
Defined Benefit Pension Plan
"), there has been no reportable event (within the meaning of Section 4043(c)
of ERISA), orany event requiring disclosure under Section 4063(a) or 4041(c)
of ERISA, and the transactions contemplated by this Agreement will not give
rise to any such event. There has been no event or condition which presents a
material risk oftermination of the Defined Benefit Pension Plan by the Pension
Benefit Guaranty Corporation, and no circumstances exist that constitute
grounds under Section 4042 of ERISA entitling the Pension Benefit Guaranty
Corporation to institute any suchproceeding. Further, no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, exists with respect to the Defined Benefit Pension
Plan, nor has there been any lien imposedunder Section 412(n) of the Code with
respect to the Defined Benefit Pension Plan. Except as set forth on
Section
3.11(f)
of the Company
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Disclosure Schedule, the fair market value of assets available for benefits
under the Defined Benefit Pension Plan exceeds the present value of
accumulated vested and nonvested accrued benefitsunder the Defined Benefit
Pension Plan, and also, on a plan termination basis, exceeds the value of
"benefit liabilities" under the Defined Benefit Pension Plan within the
meaning of Section 4001(a)(16) of ERISA. Neither the Companynor any of its
Subsidiaries nor ERISA Affiliates is required to provide security to the
Defined Benefit Pension Plan under Section 401(a)(29) of the Code.
(g) None of the Company, any of its Subsidiaries or any of their respective
ERISA Affiliates has, at any time during the last six(6) years, sponsored,
maintained, contributed to or been obligated to contribute to (i) any plan
that is a "multiemployer plan" within the meaning of Section 4001(a)(3) of
ERISA, (ii) a plan that has two or morecontributing sponsors, at least two of
whom are not under common control, within the meaning of Section 4063 of ERISA
(a "
Multiple Employer
Plan
"), or (iii) a plan that is subject to Section 302 or Title IV ofERISA or
Section 412, 430 or 4971 of the Code.
(h) The Company Common Stock owned by the Territorial Savings Bank Amended
andRestated Employee Stock Ownership Plan (the "
ESOP
") and the Territorial Savings Bank 401(k) Plan (the "
401(k) Plan
") at all times prior to the Reorganization have been "employer securities"
underSection 407(d)(1) of ERISA and Section 409(l) of the Code and "qualifying
employer securities" for purposes of Section 407(d)(5) of ERISA and Section
4975(e)(8) of the Code. The 401(k) Plan and the ESOP have compliedwith the
diversification requirements of their plan documents and Sections
401(a)(28)(B) and 401(a)(35) of the Code as applicable.
(i)Except with respect to the initial loan from the Company to the ESOP dated
July 10, 2009 (the "
ESOP Loan
"), there is no existing indebtedness of the ESOP and all shares of Company
Common Stock held by the ESOP, other than theshares which remained pledged as
collateral for the ESOP Loan (the "
ESOP Unallocated Shares
"), have been allocated to ESOP participants.
(j) The ESOP is now and at all times since its inception has been designed to
be an employee stock ownership plan described inSection 4975(e)(7) of the Code
and the regulations thereunder and to include a
tax-exempt
trust within the meaning of Section 501(a) of the Code. Each purchase or sale
of Company Common Stock by theESOP was determined to be in the interests of,
and fair from a financial point of view to, the participants and beneficiaries
in the ESOP by the ESOP's trustee. Each loan incurred by the ESOP has
satisfied the requirements ofSection 408(b)(3) of ERISA and Section 4975(d)(3)
of the Code. The purchase price paid by the ESOP each time Company Common
Stock was purchased by the ESOP did not exceed "adequate consideration" (as
defined in Section 3(18)of ERISA and the regulations issued thereunder) for
such Company Common Stock. With respect to the ESOP, (i) all the Company
contributions to the ESOP were deductible under Section 404 of the Code for
the year made; (ii) the votingrequirements of the ESOP and Section 409(e) of
the Code and the valuation requirements of Section 408(e) of ERISA have always
been complied with; (iii) no allocations were ever made in violation of
Section 409(n) of the Code; and(iv) the ESOP has never been subject to Section
409(p) of the Code.
(k) Except as set forth on
Section
3.11(k)
of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries sponsors any employee benefit plan or has any obligation with
respect to an arrangement that provides for anypost-employment or
post-retirement health or medical or life insurance benefits for retired or
former employees or their beneficiaries or dependents, except as required by
Section 4980B of the Code.
(l) All contributions required to be made to any Company Benefit Plan by
applicable law or by any plan document, and all premiums due orpayable with
respect to insurance policies funding any Company Benefit Plan, for any period
through the date hereof, have been timely made or paid in full or, to the
extent not required to be made or paid on or before the date hereof, have
beenfully reflected on the books and records of the Company, except as either
individually or in the aggregate, would not reasonably be expected to result
in any material liability to the Company and its Subsidiaries.
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(m) There are no pending or, or to the knowledge of the Company, threatened
claims (otherthan claims for benefits in the ordinary course), lawsuits or
arbitrations that have been asserted or instituted, and, to the knowledge of
the Company, no set of circumstances exists that would reasonably be expected
to give rise to a claim orlawsuit, against the Company Benefit Plans, any
fiduciaries thereof with respect to their duties to the Company Benefit Plans
or the assets of any of the trusts under any of the Company Benefit Plans,
except as, either individually or in theaggregate, would not reasonably be
expected to result in any material liability to the Company and its
Subsidiaries. Except as set forth on
Section
3.11(m)
of the Company Disclosure Schedule, no prohibited transactions(within the
meaning of Section 406 of ERISA and Code Section 4975(c)) have occurred with
respect to the Company Benefit Plan for which an exemption is not available,
and no fiduciary has any liability for breach of fiduciary duty or anyother
failure to act or comply in connection with the administration or investment
of the assets of the Company Benefit Plan. There are no voluntary correction
requests in process with the U.S. Department of Labor, the IRS or any other
GovernmentalEntity. The Company has satisfied all fiduciary duties in the
selection and oversight of each Company Benefit Plan fiduciary, including each
of the current and prior trustees of the ESOP and the 401(k) Plan.
(n) Except as set forth on
Section
3.11(n)
of the Company Disclosure Schedule, neither the execution and delivery ofthis
Agreement nor the consummation of the transactions contemplated hereby will
(either alone or in conjunction with any other event) (i) result in, cause the
vesting, exercisability or delivery of, or increase the amount or value of,
anybenefits under any Company Benefit Plan, (ii) cause the Company or any
Company Subsidiary to transfer or set aside any assets to fund any benefits
under any Company Benefit Plan, (iii) result in any limitation on the right of
the Companyor any Company Subsidiary to amend, merge, terminate or receive a
reversion of assets from any Company Benefit Plan or related trust or (iv)
result in any payment or benefit that may, individually or in combination with
any other payment orbenefit, be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code. The Company has made
available to Parent a copy of true, complete and correct copy of the most
recent calculationsperformed by or on behalf of the Company under Section 280G
of the Code in relation to the transactions contemplated by this Agreement.
(o) Except as set forth on
Section
3.11(o)
of the Company Disclosure Schedule, neither the Company nor any of
itsSubsidiaries is a party to any plan, program, agreement or arrangement that
provides for the
gross-up
or reimbursement of Taxes imposed under Section 409A or 4999 of the Code.
(p) Each Company Benefit Plan that is a "nonqualified deferred compensation
plan" (as defined in Section 409A(d)(1) of theCode) and any award thereunder,
in each case that is subject to Section 409A of the Code, has (i) since
January 1, 2021, been maintained and operated, in all material respects, in
good faith compliance with Section 409A of theCode and IRS Notice 2005-1 and
(ii) since January 1, 2021, been, in all material respects, in documentary and
operational compliance with Section 409A of the Code.
(q) Except as set forth in
Section
3.11(q)
of the Company Disclosure Schedule, each of the Company and itsSubsidiaries is
and during the past three (3) years has been in compliance, in all material
respects, with all applicable laws governing the employment of labor,
including all contractual commitments and all such laws relating to
discriminationor harassment in employment; terms and conditions of employment;
termination of employment; wages; overtime classification; hours; meal and
rest breaks; occupational safety and health; plant closings; employee
whistle-blowing; immigration andemployment eligibility verification; employee
privacy; defamation; background checks and other consumer reports regarding
employees and applicants; employment practices; negligent hiring or retention;
affirmative action and other employment-relatedobligations on federal
contractors and subcontractors; classification of employees, consultants and
independent contractors; labor relations; collective bargaining; unemployment
insurance; the collection and payment of withholding and/or socialsecurity
taxes and any similar tax; employee benefits; and workers' compensation
(collectively, "
Employment Matters
").
(r) There are no pending or, to the knowledge of the Company, threatened labor
grievances, lawsuits, arbitrations, administrative charges,controversies, or
unfair labor practice claims by any employee, independent
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contractor, former employee, or former independent contractor of the Company
or any of its Subsidiaries before the National Labor Relations Board, the
Equal Employment Opportunity Commission orany other Governmental Authority or
arbitration board or panel relating to any Employment Matters, nor are there
any pending, or to the knowledge of the Company, threatened investigations or
audits by any Governmental Authority relating to anyEmployment Matters of the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries is a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to any EmploymentMatters.
There are no pending or, to the knowledge of the Company, threatened strikes
or other material labor disputes against the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries is party to or
bound by anycollective bargaining or similar agreement with any labor
organization, or work rules or practices agreed to with any labor organization
or employee association applicable to employees of the Company or any of its
Subsidiaries and, to the knowledgeof the Company, there are no organizing
efforts by any union or other group seeking to represent any employees of the
Company and its Subsidiaries. No labor union, trade union, labor organization
or group of employees of the Company or any of itsSubsidiaries has made a
pending demand (in writing) for recognition or certification, and there are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened in writing to
bebrought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority.
(s) Each of the Company andits Subsidiaries: (i) has taken reasonable steps to
properly classify and treat all of their employees as "employees" and
independent contractors as "independent contractors"; (ii) has taken
reasonable steps to properlyclassify and treat all of their employees as
"exempt" or "nonexempt" from overtime requirements under applicable law; (iii)
has maintained legally adequate records regarding the service of all of their
employees, including,where required by applicable law, records of hours
worked; (iv) is not delinquent in any material payments to, or on behalf of,
any current or former employees or independent contractors for any services or
amounts required to be reimbursed orotherwise paid; (v) has withheld,
remitted, and reported all material amounts required by law or by agreement to
be withheld, remitted, and reported with respect to wages, salaries and other
payments to any current or former independentcontractors or employees; and
(vi) is not liable for any material payment to any trust or other fund
governed by or maintained by or on behalf of any Governmental Authority with
respect to unemployment compensation benefits, social security orother
benefits or obligations for any current or former independent contractors or
employees (other than routine payments to be made in the ordinary course of
business and consistent with past practice).
(t) Since January 1, 2021, neither the Company nor any of its Subsidiaries has
effectuated (i) a "plant closing" (asdefined in the WARN Act) affecting any
site of employment or one or more facilities or operating units within any
site of employment or facility of the Company or any of its Subsidiaries; or
(ii) a "mass layoff" (as defined in theWARN Act) affecting any site of
employment or facility of the Company or any of its Subsidiaries; and neither
the Company nor any of its Subsidiaries has been affected by any transaction
or engaged in layoffs or employment terminations sufficient innumber to
trigger application of any similar state or local law. Except as set forth in
Section
3.11(t)
of the Company Disclosure Schedule, no employee of the Company or any of its
Subsidiaries has suffered an"employment loss" (as defined in the WARN Act)
within the past six (6) months.
(u) Each employee of the Company or any ofits Subsidiaries is (i) a United
States citizen, (ii) a United States national, (iii) a lawful permanent
resident of the United States, or (iv) an alien authorized to work in the
United States either specifically for the Companyor one of its Subsidiaries or
for any United States employer. The Company or one of its Subsidiaries has
completed a Form I-9 (Employment Eligibility Verification) for each employee
hired, and each such Form I-9 has since been updated as required byapplicable
law and, to the knowledge of the Company, is correct and complete. For each
employee of the Company or any of its Subsidiaries employed in the United
States, an authorized official of the Company or one of its Subsidiaries has
reviewedthe original documentation relating to the identity and employment
authorization of such employee in compliance with applicable law and such
documentation appeared, to such official, to be genuine on its face and to
relate to the employee presentingsuch documentation.
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(v)
Section
3.11(v)(i)
of the Company Disclosure Schedule setsforth a true, correct and complete
listing, as of the date specified therein, of the name of each individual
employed by the Company or any of its Subsidiaries, together with such
employee's position or function; annual base salary or wage;status as "exempt"
or "nonexempt" for employment classification purposes; accrued leave as of the
date specified therein; any incentive or bonus arrangements with respect to
such employee; and any severance potentially payable tosuch employee upon
termination of employment. Company has provided or made available to Parent a
true, correct and complete listing, as of the date specified therein, of the
name of each individual engaged by the Company or any of its Subsidiariesas an
independent contractor, together with such individual's compensation
arrangement with the Company or any of its Subsidiaries and whether such
individual has entered into a written agreement regarding his or her
contractor engagement.Except as set forth in
Section
3.11(
a)
of the Company Disclosure Schedule, the employment of each employee of the
Company or any of its Subsidiaries and the engagement of each independent
contractor of the Company orany of its Subsidiaries is terminable at will by
the Company or the applicable Subsidiary without any penalty, liability,
severance obligation incurred by the Company or any of its Subsidiaries.
(w) To the knowledge of the Company, (i) no employee or independent contractor
of the Company or any of its Subsidiaries is in violationof any term of any
employment contract, consulting contract,
non-disclosure
agreement, common law
non-disclosure
obligation,
non-competition
agreement,
non-solicitation
agreement, proprietary information agreement or any other agreement relating
to confidential or proprietary information,intellectual property, competition,
or related matters ("Restrictive Covenant"); and (ii) the continued employment
by the Company and its Subsidiaries of their respective employees, and the
performance of the contracts with theCompany and its Subsidiaries by their
respective independent contractors, will not result in any such violation.
Neither the Company nor any of its Subsidiaries has received any notice
alleging that any such violation has occurred within the pastfive (5) years.
(x) Except as set forth on
Section
3.11(x)
of the Company Disclosure Schedule, (i) tothe knowledge of the Company, no
written allegations of sexual or racial harassment or sexual or race-based
misconduct have been made since January 1, 2021 against any Company Insiders,
(ii) since January 1, 2021, neither the Companynor any of its Subsidiaries has
entered into any settlement agreement related to allegations of sexual or
racial harassment or sexual or race-based misconduct by any Company Insiders,
and (iii) there are no proceedings currently pending or, tothe knowledge of
the Company, threatened related to any allegations of sexual or racial
harassment or sexual or race-based misconduct by any Company Insiders.
3.12
Compliance with Applicable Law
. The Company and each of its Subsidiaries hold, and have held at alltimes
since January 1, 2021, all charters, licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
and ownership of their respective properties, rights and assets under and
pursuant toeach (and have paid all fees and assessments due and payable in
connection therewith), except where neither the cost of failure to hold nor
the cost of obtaining and holding such license, franchise, permit or
authorization (nor the failure to payany fees or assessments) would, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company, and, to the knowledge of the Company, no
suspension or cancellation of any such necessary license,franchise, permit or
authorization is threatened. The Company and each of its Subsidiaries have
complied in all material respects with and are not in material default or
violation under any applicable federal, state, local or foreign law,
statute,order, constitution, treaty, convention, ordinance, code, decree,
rule, regulation, judgment, writ, injunction, policy, permit, authorization or
common law or agency requirement ("
Laws
") of any Governmental Entity relating to theCompany or any Company
Subsidiary, including, without limitation, all Laws related to data protection
or privacy, the USA PATRIOT Act, any laws, regulations or sanctions
administered by the Office of Foreign Assets Control of the United
StatesTreasury Department, the Bank Secrecy Act, the Equal Credit Opportunity
Act and Regulation B, the Fair Housing Act, the Community Reinvestment Act ("
CRA
"), the Fair Credit Reporting Act, the Truth in Lending Act and Regulation
Z,the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act,
the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, any regulations promulgated by the Consumer Financial
Protection Bureau, theInteragency Policy
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Statement on Retail Sales of Nondeposit Investment Products, the SAFE Mortgage
Licensing Act of 2008, the Real Estate Settlement Procedures Act and
Regulation X, and any other Law including thoserelating to bank secrecy,
discriminatory lending, financing or leasing practices, money laundering
prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley
Act, the Federal Deposit Insurance Corporation Improvement Act,and all agency
requirements relating to the origination, funding, sale and servicing of
mortgage, installment and consumer loans. Each of the Company's Subsidiaries
that is an insured depository institution is "well-capitalized" (asthat term
is defined in the relevant regulation of the institution's primary federal
bank regulator) and has a CRA rating of "satisfactory" and there are no facts
or circumstances (and such Subsidiary has not been advised of any suchfacts or
circumstances) that exist that would cause such Subsidiary to be deemed: (i)
not to be in satisfactory compliance in any material respect with CRA, and the
regulations promulgated thereunder; or (ii) not to be in satisfactorycompliance
in any material respect with the applicable privacy of customer information
requirements contained in any federal and state privacy laws and regulations,
including without limitation, in Title V of the Gramm-Leach-Bliley Act of 1999
andthe regulations promulgated thereunder. Neither the Company nor any
Subsidiary has been informed that its status as "well-capitalized" or
"satisfactory" for CRA purposes, as applicable, will change within one year.
Withoutlimitation, none of the Company or any Company Subsidiary, or to the
knowledge of the Company, no director, officer, employee, agent or other
person acting on behalf of the Company or any Company Subsidiary has, since
January 1, 2019, directlyor indirectly, (a) used any funds of the Company or
any Company Subsidiary for unlawful contributions, unlawful gifts, unlawful
entertainment or other expenses relating to political activity, (b) made any
unlawful payment to foreign ordomestic governmental officials or employees or
to foreign or domestic political parties or campaigns from funds of the
Company or any Company Subsidiary, (c) violated any provision that would
result in the violation of the Foreign CorruptPractices Act of 1977, as
amended, or any similar law, (d) established or maintained any unlawful fund
of monies or other assets of the Company or any Company Subsidiary, (e) made
any fraudulent entry on the books or records of the Companyor any Company
Subsidiary, or (f) made any unlawful bribe, unlawful rebate, unlawful payoff,
unlawful influence payment, unlawful kickback or other unlawful payment to any
person, private or public, regardless of form, whether in money,property or
services, to obtain favorable treatment in securing business to obtain special
concessions for the Company or any Company Subsidiary, to pay for favorable
treatment for business secured or to pay for special concessions already
obtainedfor the Company or any Company Subsidiary, or is currently subject to
any United States sanctions administered by the Office of Foreign Assets
Control of the United States Treasury Department. Except as would not, either
individually or in theaggregate, reasonably be expected to have a Material
Adverse Effect on the Company: since January 1, 2019, (i) the Company and each
of its Subsidiaries have properly administered all accounts for which it acts
as a fiduciary, including accountsfor which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment
advisor, in accordance with the terms of the governing documents and
applicable state, federal and foreign law; and (ii) none ofthe Company, any of
its Subsidiaries, or any of its or its Subsidiaries' directors, officers or
employees, has committed any breach of trust or fiduciary duty with respect to
any such fiduciary account, and the accountings for each suchfiduciary account
are true, correct and complete and accurately reflect the assets and results
of such fiduciary account.
3.13
Certain Contracts
.
(a) Except as set forth in
Section
3.13(a)
of the Company DisclosureSchedule, as of the date hereof, neither the Company
nor any of its Subsidiaries is a party to or bound by any contract, agreement,
arrangement, commitment or understanding (whether written or oral):
(i) with respect to the employment of any directors, officers, or employees
that requires the payment of more than $100,000annually in total cash
compensation which is not terminable on sixty (60) or fewer days' notice by
the Company or a Subsidiary without the payment of severance;
(ii) that, upon the execution or delivery of this Agreement, the Company
stockholder approval of this Agreement as contemplatedhereby or the
consummation of the transactions contemplated by this Agreement will (either
alone or upon the occurrence of any additional acts or events) result in any
cash
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payment (whether of severance pay or otherwise) becoming due from Parent, the
Company, the Surviving Corporation, or any of their respective Subsidiaries to
any officer or employee thereof;
(iii) which is a "material contract" (as such term is defined in Item
601(b)(10) of Regulation
S-K
promulgated by the SEC), and, notwithstanding
Section
3.13(a)
of the Company Disclosure Schedule, there is no such material contract other
than those documents, agreements orarrangements filed with the Company Reports
pursuant to Item 601(b)(10) of Regulation
S-K
promulgated by the SEC;
(iv) that contains a
non-compete
or client or customer
non-solicit
requirement (which for the avoidance of doubt shall not include any employee
non-solicit
requirement) or any other provision that materially restricts theconduct of
any line of business by the Company or any of its affiliates or upon
consummation of the Merger will materially restrict the ability of the
Surviving Corporation or any of its affiliates to engage in any line of
business;
(v) with or to a labor union or guild (including any collective bargaining
agreement);
(vi) except as required pursuant to
Section
1.6
, any of the benefits of which (including any stockoption plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan) will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of the execution and delivery of this Agreement, stockholderappro
val of this Agreement or the consummation of any of the transactions
contemplated by this Agreement, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(vii) that relates to the incurrence of indebtedness for borrowed money by the
Company or any Company Subsidiary (other thandeposit liabilities, trade
payables, federal funds purchased, advances and loans from the Federal Home
Loan Banks and securities sold under agreements to repurchase, in each case
incurred in the ordinary course of business consistent with pastpractice) in
the principal amount of $250,000 or more including any sale and leaseback
transactions, capitalized leases and other similar financing transactions;
(viii) that grants any right of first refusal, right of first offer or similar
right with respect to any material assets,rights or properties of the Company
or its Subsidiaries;
(ix) that is a consulting agreement or data processing, softwareprogramming or
licensing contract involving the payment of more than $150,000 per annum
(other than any such contracts which are terminable by the Company or any
Company Subsidiary on sixty (60) days or less notice without any required
paymentor other conditions, other than the condition of notice); or
(x) that involves aggregate payments or receipts by or to theCompany or any
Company Subsidiary in excess of $150,000 in any twelve-month period, other
than those terminable on sixty (60) days or less notice without payment by the
Company or any Subsidiary of the Company of any material penalty.
Each contract, arrangement, commitment or understanding of the type described
in this
Section
3.13(a)
whether or notset forth in the Company Disclosure Schedule, is referred to
herein as a "Company Contract", and neither the Company nor any of its
Subsidiaries has received notice of, any material violation of any Company
Contract by any of the partiesthereto.
(b) The Company has made available to the Parent a true, correct and complete
copy of each written Company Contract and eachwritten amendment to any Company
Contract.
Section
3.13(b)
of the Company Disclosure Schedule sets forth a true, correct and complete
description of any oral Company Contract and any oral amendment to any Company
Contract.
(c) Each Company Contract is valid and binding on Company or one of its
Subsidiaries, as applicable, and is in full force and effect,except as, either
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on the Company. Each Company Contract is enforceable
against the Company or the applicable Subsidiary and, to the knowledge of
theCompany, the counterparty thereto (except as may be
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limited by the Enforceability Exceptions). The Company and each of its
Subsidiaries has in all material respects performed all material obligations
required to be performed by it under eachCompany Contract. To the knowledge of
the Company, each third-party counterparty to each Company Contract has in all
material respects performed all obligations required to be performed by it
under such Company Contract, and no event or conditionexists which constitutes
or, after notice or lapse of time or both, will constitute, a material default
on the part of the Company or any Company Subsidiary under any such Company
Contract. Neither the Company nor any Subsidiary of the Company hasreceived or
delivered any notice of cancellation or termination of any Company Contract.
3.14
Agreementswith Governmental Entities
. Subject to
Section
9.14
, and except as set forth in
Section
3.14
of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is subject toany
cease-and-desist
or other order or enforcement action issued by, or is a party to any written
agreement, supervisory agreement, consent agreement or memorandum
ofunderstanding or similar agreement in effect with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or has been ordered to pay any civil money penalty by, or has
been since January 1,2021, a recipient of any supervisory letter from, or
since January 1, 2021, has adopted any policies, procedures or board
resolutions at the request or suggestion of any Governmental Entity that
currently restricts in any material respect orwould reasonably be expected to
restrict in any material respect the conduct of its business or that in any
material manner relates to its capital adequacy, its ability to pay dividends,
its credit or risk management policies, its management or itsbusiness (each,
whether or not set forth in the Company Disclosure Schedule, a "
Company Regulatory Agreement
"), nor has the Company or any Company Subsidiary been advised in writing or,
to the knowledge of the Company, orally, sinceJanuary 1, 2021, by any
Governmental Entity that it is considering issuing, initiating, ordering, or
requesting any such Company Regulatory Agreement, nor does the Company believe
that any such Company Regulatory Agreement is likely to beinitiated, ordered
or requested. The Company and its Subsidiaries are in compliance in all
material respects with each Company Regulatory Agreement to which it is a
party or is subject. The Company and its Subsidiaries have not received any
noticefrom any Governmental Entity indicating that the Company or its
Subsidiaries is not in compliance in any material respect with any Company
Regulatory Agreement.
3.15
Risk Management Instruments
. Except as would not reasonably be expected to have, individually or inthe
aggregate, a Material Adverse Effect on the Company, (a) all interest rate
swaps, caps, floors, option agreements, futures and forward contracts and
other similar derivative transactions and risk management arrangements,
whether enteredinto for the account of the Company, any of its Subsidiaries or
for the account of a customer of the Company or one of its Subsidiaries, were
entered into in the ordinary course of business and in accordance with
applicable rules, regulations andpolicies of any Governmental Entity and with
counterparties believed to be financially responsible at the time and are
legal, valid and binding obligations of the Company or one of its Subsidiaries
enforceable in accordance with their terms (exceptas may be limited by the
Enforceability Exceptions), and are in full force and effect and (b) the
Company and each of its Subsidiaries have duly performed all of their
obligations thereunder to the extent that such obligations to perform
haveaccrued, and, to the knowledge of the Company, there are no breaches,
violations or defaults or allegations or assertions of such by any party
thereunder.
3.16
Environmental Matters
. Except as would not reasonably be expected to have, individually or in
theaggregate, a Material Adverse Effect on the Company, or except as set forth
in
Section
3.16
of the Company Disclosure Schedule, the Company and its Subsidiaries are, to
the knowledge of the Company, in compliance, and havecomplied since January 1,
2021, with each federal, state or local law, regulation, order, decree,
permit, authorization, common law or agency requirement relating to: (a) the
protection or restoration of the environment, health and safetyas it relates
to hazardous substance exposure or natural resource damages, (b) the handling,
use, presence, disposal, release or threatened release of, or exposure to, any
hazardous substance, or (c) noise, odor, wetlands, indoor air,pollution,
contamination or any injury to persons or property from exposure to any
hazardous substance (collectively, "
Environmental Laws
"). There are no legal, administrative, arbitral or other proceedings, claims
or actions or, tothe knowledge of Company any private environmental
investigations
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or remediation activities or governmental investigations of any nature seeking
to impose, or that could reasonably be expected to result in the imposition,
on the Company or any CompanySubsidiary of any liability or obligation arising
under any Environmental Law, pending or threatened against the Company, which
liability or obligation would reasonably be expected to have, either
individually or in the aggregate, a Material AdverseEffect on the Company. To
the knowledge of the Company, there is no reasonable basis for any such
proceeding, claim, action or governmental investigation that would impose any
liability or obligation that would reasonably be expected to have,
eitherindividually or in the aggregate, a Material Adverse Effect on the
Company. The Company is not subject to any agreement, order, judgment, decree,
letter agreement or memorandum of understanding by or with any Governmental
Entity or other third partyimposing any liability or obligation with respect
to the foregoing that would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect on the Company.
3.17
Investment Securities and Commodities
.
(a) Each of the Company and its Subsidiaries has good title in all material
respects to all securities and commodities owned by it (exceptthose sold under
repurchase agreements), free and clear of any Liens, except as set forth in
the financial statements included in the Company Reports or to the extent such
securities or commodities are pledged in the ordinary course of business
tosecure obligations of the Company or its Subsidiaries. Such securities and
commodities are valued on the books of the Company in accordance with GAAP in
all material respects.
(b) The Company and its Subsidiaries and their respective businesses employ
investment, securities, commodities, risk management and otherpolicies,
practices and procedures that the Company believes are prudent and reasonable
in the context of such businesses, and the Company and its Subsidiaries have,
since January 1, 2021, been in compliance with such policies, practices
andprocedures in all material respects. Prior to the date of this Agreement,
the Company has made available to the Parent the material terms of such
policies, practices and procedures.
3.18
Real Property
.
(a)
Section
3.18(a)
of the Company Disclosure Schedule sets forth, as of the date hereof, a true,
correct andcomplete list of all the real property owned by the Company and its
Subsidiaries (collectively, "
Company
Owned Properties
"). Except as would not reasonably be expected to have, individually or in the
aggregate, a MaterialAdverse Effect on the Company, the Company has good and
marketable title to all Company Owned Property (except properties sold or
otherwise disposed of in accordance with
Sections
5.1
and
5.2
, free and clear of allLiens, and except statutory Liens securing payments not
yet due, Liens for real property Taxes and other governmental charges and
assessments not yet due and payable or that are being contested in good faith
by appropriate proceedings, and Liens ofcarriers, warehouseman, mechanics and
materialmen and other like Liens arising in the ordinary course of business
and where the underlying obligations are not delinquent, excluding, however,
any of which are recorded against the Company OwnerProperties), easements,
rights of way, and other similar encumbrances that do not materially affect
the value or use of the properties or assets subject thereto or affected
thereby or otherwise materially impair business operations at suchproperties
and such imperfections or irregularities of title or Liens as do not
materially affect the value or use of the properties or assets subject thereto
or affected thereby or otherwise materially impair business operations at such
properties(collectively, "
Permitted Encumbrances
").
(b)
Section
3.18(b)
of the Company DisclosureSchedule sets forth as of the date hereof, a true,
correct and complete list of all the real estate leases, subleases, licenses
and occupancy agreements (together with any amendments, modifications,
supplements, replacements, restatements andguarantees thereof or thereto,
including any oral amendments) to which the Company or any Company Subsidiary
is a party with respect to all real property leased, subleased, licensed or
otherwise used or occupied by the Company or any CompanySubsidiary on the date
hereof (collectively, the "
Company Leased Real Property
"), whether in the Company's or any of its Subsidiaries' capacity as lessee,
sublessee, licensee, lessor, sublessor or licensor, as the case maybe
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(the "
Company
Real Estate Leases
"). The Company or its Subsidiaries has valid leasehold interests in the
Company Leased Real Property, free and clear of all Liens, exceptPermitted
Encumbrances. Except as set forth in
Section
3.18(c)
of the Company Disclosure Schedule, each Company Real Estate Lease is (i)
valid, binding and in full force and effect without material default
thereunderby the lessee or, to the knowledge of the Company, the lessor, to
the knowledge of the Company, no lessor has made a claim of any breach or
default by the Company or any Company Subsidiary, and (ii) enforceable against
the Company or theapplicable Subsidiary and, to the knowledge of the Company,
the counterparty thereto (except as may be limited by the Enforceability
Exceptions). The Company and each of its Subsidiaries has in all material
respects performed all obligationsrequired to be performed by it under each
Company Real Estate Lease, and to the knowledge of the Company, each
counterparty to each Company Real Estate Lease has in all material respects
performed all obligations required to be performed by it undersuch Company
Real Estate Lease, and no event or condition exists which constitutes or,
after notice or lapse of time or both, will constitute, a material default on
the part of the Company or any Company Subsidiary under any Company Real
EstateLease or, to the knowledge of the Company, no event or condition exists
which constitutes, or after notice or lapse of time or both, will constitute a
material default on the part of a Company lessor. The Company has made
available to the Parent atrue, correct and complete copy of each written
Company Real Estate Lease and each written amendment to any Company Real
Estate Lease.
(c) Neither the Company nor any of its Subsidiaries has leased, subleased,
licensed or otherwise granted any person a right to use or occupyall or any
portion of any Company Owned Property or Company Leased Real Property except
as set forth in
Section
3.18(c)
of the Company Disclosure Schedule. There are no pending or, to the knowledge
of the Company,threatened condemnation proceedings against the Company Owned
Property or Company Leased Real Property.
3.19
Intellectual Property; Computer Systems
.
(a) The Company and each of its Subsidiaries owns, or is licensed to use (in
each case,free and clear of any material Liens), all Intellectual Property
necessary for the conduct of its business as currently conducted. Except as
would not reasonably be expected, either individually or in the aggregate, to
have a Material Adverse Effecton the Company, or except as set forth in
Section
3.19(a)
of the Company Disclosure Schedule, (a) (i) to the knowledge of the Company,
the use of any Owned Intellectual Property by the Company and its Subsidiaries
doesnot infringe, misappropriate or otherwise violate the rights of any
person, and the use of any Licensed Intellectual Property is in accordance
with any applicable license pursuant to which the Company or any Company
Subsidiary acquired the right touse any such Licensed Intellectual Property,
and (ii) to the knowledge of the Company, no person has asserted in writing to
the Company that the Company or any Company Subsidiary has infringed,
misappropriated or otherwise violated theIntellectual Property rights of such
person, (b) no person is challenging or, to the knowledge of the Company,
infringing on or otherwise violating, any right of the Company or any Company
Subsidiary with respect to any Owned IntellectualProperty, and (c) the Company
and its Subsidiaries have taken commercially reasonable actions to avoid the
abandonment, cancellation or unenforceability of all Owned Intellectual
Property by the Company and its Subsidiaries. For purposes ofthis Agreement, "
Intellectual Property
" means trademarks, service marks, brand names, internet domain names, logos,
symbols, certification marks, trade dress and other indications of origin, the
goodwill associated with theforegoing and registrations in any jurisdiction
of, and applications in any jurisdiction to register, the foregoing, including
any extension, modification or renewal of any such registration or
application; patents, applications for patents(including divisions,
continuations, continuations in part and renewal applications), all
improvements thereto, and any renewals, extensions or reissues thereof, in any
jurisdiction; trade secrets; and copyright registrations or applications
forregistration of copyrights in any jurisdiction, and any renewals or
extensions thereof. "
Owned Intellectual Property
" means Intellectual Property owned by the Company or the Parent or their
respective Subsidiaries, as applicable,necessary for the conduct of their
respective business as currently conducted. "
Licensed Intellectual Property
" means Intellectual Property licensed by the Company or the Parent or their
respective Subsidiaries, as applicable,necessary for the conduct of their
respective business as currently conducted.
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(b) The computer, information technology and data processing systems,
facilities andservices used by the Company or any Company Subsidiary,
including all software, hardware, networks, communications facilities,
platforms and related systems and services (collectively, the "
Company
Systems
"), are sufficientfor the conduct of the respective businesses of the Company
and Company Subsidiaries as currently conducted and the Company Systems are in
sufficiently good working condition to effectively perform all computing,
information technology and dataprocessing operations reasonably necessary for
the operation of the respective businesses of the Company and Company
Subsidiaries as currently conducted, in each case, except for such failures to
be reasonably sufficient or in sufficiently goodworking condition, or except
as set forth in
Section
3.19(b)
of the Company Disclosure Schedule. The Company and Company Subsidiaries have
taken and implemented commercially reasonable steps and safeguards (i)
toprotect Company Systems from unauthorized access and from disabling codes or
instructions, spyware, Trojan horses, worms, viruses or other software
routines that permit or cause unauthorized access to, or disruption,
impairment, disablement, ordestruction of, software, data or other materials
and (ii) for the purpose of reasonably mitigating the risks of Data Breaches.
Each of the Company and Company Subsidiaries has implemented commercially
reasonable appropriate backup and disasterrecovery policies, business
continuity plans, and incident response plans, which include procedures and
systems consistent with generally accepted industry standards that reasonably
mitigate the risk of any disruption to the operation of therespective
businesses of the Company and Company Subsidiaries as currently conducted.
(c) Each of the Company and Company Subsidiarieshas (i) been in material
compliance with all applicable Law relating to Personally Identifiable
Information, privacy, data security, cardholder data (including without
limitation the Payment Card Industry Data Security Standards), telephone
andtext message communication and marketing, including privacy and security
provisions of generally applicable Laws, (ii) contractually obligated all
third party service providers to comply with obligations in 3.19(c)(i) and
conducted commerciallyappropriate due diligence on such third party service
providers before allowing them to access Personally Identifiable Information,
(iii) complied in all material respects with all of its published privacy and
data security policies andinternal privacy and data security policies and
guidelines, including with respect to the collection, storage, transmission,
transfer, disclosure, destruction and use of information or data relating to
an identified or identifiable natural,individual person ("
Personally Identifiable Information
"), and (iv) taken commercially reasonable measures to protect Personally
Identifiable Information in its possession or control against Data Breaches,
loss, damage, andunauthorized access, use, modification, or other misuse.
(d) Except as set forth in
Section
3.19(d)
of theCompany Disclosure Schedule, neither the Company nor any of its
Subsidiaries have (i) to the knowledge of the Company, suffered any actual
unauthorized access, including accidental or unlawful destruction, loss,
alteration, disclosure of, oraccess to such Company Systems or Personally
Identifiable Information to Company Systems or Personally Identifiable
Information in its possession or control or processed on behalf of Company ("
Data Breach
"), (ii) received anywritten notice, request or other communication from any
supervisory authority or any regulatory authority relating to any Data Breach
or material breach or alleged material breach of their obligations under Laws
related to data protection and/orprivacy, (iii) received any written claim,
complaint or other communication from any data subject or other person
claiming a right to compensation under (or alleging breach of ) any applicable
Laws related to data protection and/or privacy or aData Breach or (iv) to the
knowledge of the Company, experienced circumstances that could reasonably be
expected to give rise to any of the consequences in the foregoing
subclauses (i)
-
(iii)
(inclusive).
(e) Each of the Company and Company Subsidiaries is and has been in material
compliance with the Graham-Leach-Bliley Act and the FairCredit Reporting Act.
3.20
Related Party Transactions
. Except as set forth in
Section
3.20
of the Company Disclosure Schedule, there are no transactions or series of
related transactions, agreements, arrangements or understandings, nor are
there any currently proposed transactions or series ofrelated transactions,
agreements, arrangements or understandings (other than (i) for payment of
salaries and bonuses in the ordinary course of business for services rendered
in the ordinary course of business, (ii) reimbursement ofcustomary and
reasonable expenses incurred
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on behalf of the Company and its Subsidiaries in the ordinary course of
business in accordance with the bona fide expense reimbursement policies of
the Company made available to the Parent,(iii) benefits due under any Company
Benefit Plan and (iv) loans that are not disclosed past due, nonaccrual or
troubled debt restructurings in the financial statements of the Company and
its Subsidiaries that (x) were made in theordinary course of business of the
Company or its Subsidiaries, (y) were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable loans with persons not related to the Companyor its Subsidiaries
and (z) did not involve more than normal risk of collectability or present
other unfavorable features), between or among (a) the Company or any Company
Subsidiary, on the one hand, and (b) (i) any (x) current orformer director,
president, vice president in charge of a principal business unit, division or
function (such as sales, administration or finance), or other officer or
person who performs a policy-making function, in each case, of the Company or
anyCompany Subsidiary or (y) person who beneficially owns (as defined in Rules
13d-3 and 13d-5 of the Exchange Act) 5% or more of the outstanding Company
Common Stock or (ii) any affiliate or immediate family member of any person
referencedin
clause (y)
, on the other hand.
3.21
State Takeover Laws
. The Board of Directors of theCompany has approved this Agreement and the
transactions contemplated hereby as required to render inapplicable to such
agreements and transactions Sections 3-602 and 3-702 of the MGCL and any
similar "moratorium," "controlshare," "fair price," "takeover" or "interested
stockholder" law (any such laws, "
Takeover Statutes
").
3.22
Reorganization
. The Company has not taken any action and is not aware of any fact or
circumstancethat could reasonably be expected to prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code.
3.23
Opinion of Financial Advisor
. Prior to the execution of this Agreement, the Board of Directors of
theCompany has received an opinion (which, if initially rendered verbally, has
been or will be confirmed by a written opinion, dated the same date) of KBW to
the effect that, as of the date of such opinion, and based upon and subject to
the factors,assumptions and limitations set forth therein, the Exchange Ratio
in the Merger is fair from a financial point of view to the holders of Company
Common Stock. Such opinion has not been amended or rescinded as of the date of
this Agreement.
3.24
Company Information
. The information relating to the Company and its Subsidiaries which is
providedby the Company or its representatives specifically for inclusion in
the Proxy Statement and the S-4, or in any other document filed with any other
Governmental Entity in connection herewith, will not contain any untrue
statement of a material factor omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The portion of the Proxy Statement (except for such portions
thereof that relate only to the Parent orany Parent Subsidiary) will comply in
all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder.
3.25
Loan Portfolio
.
(a) Except as set forth in
Section
3.25(a)
of the Company Disclosure Schedule, neither the Company nor any of
itsSubsidiaries is a party to any written or oral (i) loan, loan agreement,
note or borrowing arrangement (including leases, credit enhancements,
commitments, guarantees and interest-bearing assets) (collectively, "
Loans
") withany borrower (each, a "
Borrower
") in which the Company or any Subsidiary of the Company is a creditor which
as of December 31, 2023, had an outstanding balance plus unfunded commitments,
if any (collectively, the "
TotalBorrower Commitment
"), of $100,000 or more and under the terms of which the Borrower was, as of
December 31, 2023, over ninety (90) days or more delinquent in payment of
principal or interest, or (ii) Loans with any director,executive officer or 5%
or greater stockholder of the Company or any Company Subsidiary, or to the
knowledge of the Company, any affiliate of any of the foregoing. Set forth in
Section
3.25(a)
of the Company DisclosureSchedule is a true, correct and complete list of (A)
all of the Loans of the Company and its Subsidiaries that, as of December 31,
2023, were classified by the Company as "Other Loans Specially Mentioned,"
"SpecialMention," "Substandard," "Doubtful," "Loss," "Classified,"
"Criticized,"
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"Credit Risk Assets," "Concerned Loans," "Watch List" or words of similar
import, together with the principal amount of and accrued and unpaid interest
on each suchLoan and the identity of the borrower thereunder, together with
the aggregate principal amount of and accrued and unpaid interest on such
Loans, by category of Loan (e.g., commercial, consumer, etc.), together with
the aggregate principal amount ofsuch Loans by category and (B) each asset of
the Company or any Company Subsidiary that, as of December 31, 2023, is
classified as "Other Real Estate Owned" and the book value thereof.
(b)
Section
3.25(b)
of the Company Disclosure Schedule sets forth a true, correct and complete
list, as ofDecember 31, 2023, of each Loan of the Company or any Company
Subsidiary that is structured as a participation interest in a Loan originated
by another person (each, a "
Loan Participation
") including with respect to each suchLoan Participation, the originating
lender of the related Loan, the outstanding principal balance of the related
Loan, the amount of the outstanding principal balance represented by the Loan
Participation and the identity of the borrower of therelated Loan.
(c) Except as would not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effecton the Company, each Loan of the
Company and its Subsidiaries (i) is evidenced by notes, agreements or other
evidences of indebtedness that are true, genuine and what they purport to be,
(ii) to the extent carried on the books and recordsof the Company and its
Subsidiaries as secured Loans, has been secured by valid Liens, as applicable,
which have been perfected and (iii) is the legal, valid and binding obligation
of the obligor named therein, enforceable in accordance withits terms, subject
to the Enforceability Exceptions.
(d) Except as would not reasonably be expected, either individually or in
theaggregate, to have a Material Adverse Effect on the Company, each
outstanding Loan of the Company or any Company Subsidiary (including Loans
held for resale to investors) was solicited and originated, and is and has
been administered and, whereapplicable, serviced, and the relevant Loan files
are being maintained, in all material respects in accordance with the relevant
notes or other credit or security documents, the written underwriting
standards of the Company and its Subsidiaries(and, in the case of Loans held
for resale to investors, the underwriting standards, if any, of the applicable
investors) and with all applicable federal, state and local laws, regulations
and rules.
(e) None of the agreements pursuant to which the Company or any Company
Subsidiary has sold Loans or pools of Loans or participations in Loansor pools
of Loans contains any obligation to repurchase such Loans or interests therein
solely on account of a payment default by the obligor on any such Loan.
(f) There are no outstanding Loans made by the Company or any Company
Subsidiary to any "executive officer" or other"insider" (as each such term is
defined in Regulation O promulgated by the Federal Reserve Board) of the
Company or its Subsidiaries, other than Loans that are subject to and that
were made and continue to be in compliance with RegulationO or that are exempt
therefrom.
(g) Since January 1, 2021, neither the Company nor any of its Subsidiaries has
been subject to anyfine, suspension, settlement, contract or other
understanding or other administrative agreement or sanction by, or any
reduction in any loan purchase commitment from, any Governmental Entity
relating to the origination, sale or servicing of mortgageor consumer Loans.
3.26
Insurance
.
(a) The Company and its Subsidiaries are insured with reputable insurers
against such risks and in such amounts as the management of theCompany
reasonably has determined to be prudent and consistent with industry practice,
and the Company and its Subsidiaries are in compliance in all material
respects with their insurance policies, each of which is listed in
Section
3.26(a)
of the Company Disclosure Schedule, and are not in default under any of the
terms thereof, each such policy is outstanding and in full force and effect
and, except for policies insuring against potentialliabilities of officers,
directors and employees of the Company and its
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Subsidiaries, the Company or the relevant Subsidiary thereof is the sole
beneficiary of such policies, and all premiums and other payments due under
any such policy have been paid, and all claimsthereunder have been filed in
due and timely fashion.
(b)
Section
3.26(b)
of the Company Disclosure Schedulesets forth a true, correct and complete
description of all bank owned life insurance ("
BOLI
") owned by Company Bank or its Subsidiaries, including the value of its BOLI.
The value of such BOLI is and has been fairly and accuratelyreflected in the
most recent balance sheet included in Company Reports in accordance with GAAP.
3.27
Subordinated Indebtedness
. The Company has performed, or has caused its applicable Subsidiary to
perform, all of the obligations required to be performed by it and its
Subsidiaries and is not in default under the terms of the indebtedness orother
instruments related thereto set forth on
Section
3.2
of the Company Disclosure Schedule, including any indentures, junior
subordinated debentures or trust preferred securities or any agreements
related thereto.
3.28
Trust Business
. Except as set forth on
Section
3.28
of the CompanyDisclosure Schedule, neither the Company nor any of its
Subsidiaries has administered any account for which it acts as a fiduciary,
including accounts for which it serves as trustee, agent, custodian, personal
representative, guardian, conservator,or investment advisor.
3.29
Mortgage Banking Activities
. Since January 1, 2021, all MortgageLoans have been originated, processed,
underwritten, closed, funded, insured, sold or acquired, serviced and
subserviced (including all loan application, loss mitigation, loan
modification, foreclosure and real property administration activities),and all
disclosures required by applicable law made by the Company or any Company
Subsidiary in connection with the Mortgage Loans have been provided to the
borrowers thereof, in each case, in accordance with all applicable law in all
materialrespects; (ii) no Mortgage Loans were originated by any person other
than the Company or one of its Subsidiaries; (iii) no fraud or material error,
material omission, material misrepresentation, material mistake or similar
occurrence hasoccurred on the part of the Company or its Subsidiaries or, to
the knowledge of the Company, any third-party servicer in connection with the
origination or servicing of any of the Mortgage Loans; and (iv) other than
obligations to repurchasethat are customary for the mortgage business, neither
the Company nor any of its Subsidiaries has any obligation or potential
obligation to, repurchase or
re-acquire
from any person any Mortgage Loan or anycollateral securing any Mortgage Loan,
whether by Contract or otherwise. "Mortgage Loan" means any and all Loans
secured by one (1) to four (4) family residential properties, mixed use
properties (but only to the extent subjectto the United States Department of
Housing and Urban Development's 203(k) program), Loans secured by interests in
cooperatives, condominium units and units in planned unit developments owned,
originated (or in the process of origination), made,entered into, serviced or
subserviced by the Company or its Subsidiaries at any time, including and real
property acquired in connection with the default of any mortgage loan.
3.30
Regulatory Approvability
. To the knowledge of the Company, there is no reason which would
preventobtaining all Requisite Regulatory Approvals required to consummate the
transactions contemplated by this Agreement, including the Merger and the Bank
Merger.
3.31
No Other Representations or Warranties
.
(a) Except for the representations and warranties made by the Company in this
Article
III
, neither the Company norany other person makes any express or implied
representation or warranty with respect to the Company, its Subsidiaries, or
their respective businesses, operations, assets, liabilities, conditions
(financial or otherwise) or prospects, and theCompany hereby disclaims any
such other representations or warranties. In particular, without limiting the
foregoing disclaimer, neither the Company nor any other person makes or has
made any representation or warranty to Parent or any of itsaffiliates or
representatives with respect to (i) any financial projection, forecast,
estimate, budget or prospective information relating to the Company, any of its
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Subsidiaries or their respective businesses, or (ii) except for the
representations and warranties made by the Company in this
Article
III
, any oral or writteninformation presented to Parent or any of its affiliates
or representatives in the course of their due diligence investigation of the
Company, the negotiation of this Agreement or in the course of the
transactions contemplated hereby.
(b) The Company acknowledges and agrees that neither Parent nor any other
person has made or is making any express or implied representationor warranty
with respect to the Parent, its Subsidiaries or their respective businesses,
operations, assets, liabilities, conditions (financial or otherwise) or
prospects, other than those contained in
Article
IV
.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Except (a) as disclosed in the disclosure schedule delivered by Parent to the
Company concurrently herewith (the "
ParentDisclosure Schedule
");
provided
that (i) no such item is required to be set forth as an exception to a
representation or warranty if its absence would not result in the related
representation or warranty being deemed untrue orincorrect, (ii) the mere
inclusion of an item in the Parent Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by Parent that
such item represents a material exception or fact, event orcircumstance or
that such item would reasonably be expected to result in a Material Adverse
Effect, and (iii) any disclosures made with respect to a section of this
Article
IV
shall be deemed to qualify (1) anyother section of this
Article
IV
specifically referenced or cross-referenced and (2) other sections of this
Article
IV
to the extent it is reasonably apparent on its face (notwithstanding
theabsence of a specific cross-reference) from a reading of the disclosure
that such disclosure applies to such other sections, or (b) as disclosed in
any Parent Reports publicly filed with or furnished to the SEC by Parent after
January 1,2023 and prior to the date hereof (but disregarding risk factor
disclosures contained under the heading "Risk Factors," or disclosures of
risks set forth in any "forward-looking statements" disclaimer or any other
statements thatare similarly
non-specific
or cautionary, predictive or forward-looking in nature), Parent hereby
represents and warrants to the Company as follows:
4.1
Corporate Organization.
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is a bankholding company
duly registered with the Federal Reserve Board under the BHC Act. Parent has
the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted. Parent is
dulylicensed or qualified to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing, qualification orstanding necessary, except where the failure
to be so licensed or qualified or to be in good standing would not, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent. True and complete copies ofthe Parent Certificate
and the Parent Bylaws, as in effect as of the date of this Agreement, have
previously been made available by Parent to the Company.
(b) Parent Bank is a California state-chartered nonmember bank, validly
existing and in good standing under the laws of the State ofCalifornia. The
deposit accounts of each Subsidiary of the Parent that is an insured
depository institution are insured by the FDIC through the DIF to the fullest
extent permitted by law, all premiums and assessments required to be paid
inconnection therewith have been paid when due and no proceedings for the
termination of such insurance are pending or threatened.
(c) EachSubsidiary of Parent (a "
Parent Subsidiary
") (i) is duly organized and validly existing under the laws of its
jurisdiction of organization, (ii) is duly qualified to do business and, where
such concept is recognized underapplicable law, in good standing in all
jurisdictions (whether federal, state, local or foreign)
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where its ownership or leasing of property or the conduct of its business
requires it to be so qualified and in which the failure to be so qualified
would reasonably be expected to have aMaterial Adverse Effect on the Parent,
and (iii) has all requisite corporate power and authority to own or lease its
properties and assets and to carry on its business as now conducted. There are
no restrictions on the ability of any Subsidiaryof the Parent to pay dividends
or distributions except, in the case of a Subsidiary that is a regulated
entity, for restrictions on dividends or distributions generally applicable to
all such regulated entities. There are no Subsidiaries of theParent other than
Parent Bank that have or are required to have deposit insurance.
Section
4.1(c)
of the Parent Disclosure Schedule sets forth a true and complete list of all
Subsidiaries of the Parent as of the datehereof. True and complete copies of
the organizational documents of each Parent Subsidiary as in effect as of the
date of this Agreement have previously been made available by the Parent to
the Company. There is no person whose results ofoperations, cash flows,
changes in stockholders' equity or financial position are consolidated in the
financial statements of the Parent other than the Parent Subsidiaries.
4.2
Capitalization
.
(a) As of the date of this Agreement, the authorized capital stock of Parent
consists of 150,000,000 shares of Parent Common Stock. As of thedate hereof,
there are (i) 120,611,359 shares of Parent Common Stock issued and
outstanding, including approximately 1,234,311 shares granted in respect of
outstanding awards of restricted Parent Common Stock, and (ii) approximately
246,233shares of Parent Common Stock issued or reserved for issuance and
future grants under Parent equity incentive plans. As of the date of this
Agreement, except as set forth in the immediately preceding sentence, there
are no other shares of capitalstock or other equity securities of Parent
issued, reserved for issuance or outstanding.
(b) All of the issued and outstanding shares ofParent Common Stock have been
duly authorized and validly issued and are fully paid, nonassessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof. There are no bonds, debentures, notes or otherindebtedness that have
the right to vote on any matters on which stockholders of Parent may vote.
Except as set forth on
Section
4.2(a)
of the Parent Disclosure Schedule, no trust preferred or subordinated debt
securitiesof Parent are issued or outstanding. As of the date of this
Agreement there are no outstanding subscriptions, options, warrants, stock
appreciation rights, phantom units, scrip, rights to subscribe to, preemptive
rights, anti-dilutive rights, rightsof first refusal or similar rights, puts,
calls, commitments or agreements of any character relating to, or securities
or rights convertible or exchangeable into or exercisable for, or valued by
reference to, shares of capital stock or other equityor voting securities of
or ownership interest in Parent, or contracts, commitments, understandings or
arrangements by which Parent may become bound to issue additional shares of
its capital stock or other equity or voting securities of or ownershipinterests
in Parent, or that otherwise obligate Parent to issue, transfer, sell,
purchase, redeem or otherwise acquire, any of the foregoing. There are no
voting trusts, stockholder agreements, proxies or other agreements in effect
with respect tothe voting or transfer of the Parent Common Stock or other
equity interests of Parent.
(c) Parent owns, directly or indirectly, all ofthe issued and outstanding
shares of capital stock or other equity ownership interests of each of the
Parent Subsidiaries, free and clear of any Liens, and all of such shares or
equity ownership interests are duly authorized and validly issued andare fully
paid, nonassessable (except, with respect to bank Subsidiaries, as provided
under 12 U.S.C. (s) 55 or any comparable provision of applicable federal or
state law) and free of preemptive rights, with no personal liability attaching
tothe ownership thereof. No Parent Subsidiary has or is bound by any
outstanding subscriptions, options, warrants, calls, rights, commitments or
agreements of any character calling for the purchase or issuance of any shares
of capital stock or anyother equity security of such Subsidiary or any
securities representing the right to purchase or otherwise receive any shares
of capital stock or any other equity security of such Subsidiary.
4.3
Authority; No Violation
.
(a) Parent has full corporate power and authority to execute and deliver this
Agreement and, subject to the stockholder and other actionsdescribed below, to
consummate the transactions contemplated hereby. The
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execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the Merger and the Bank Merger)
have been duly and validly approved by the Boardof Directors of Parent. Except
for the adoption and approval of the Bank Merger Agreement by Parent as Parent
Bank's sole shareholder (the "
Parent Approval
"), no other corporate proceedings on the part of Parent (including anyvote of
the stockholders of Parent) are necessary to approve this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Parent and (assuming due authorization,
executionand delivery by the Company) constitutes a valid and binding
obligation of Parent, enforceable against Parent in accordance with its terms
(except in all cases as such enforceability may be limited by the
Enforceability Exceptions). The shares ofParent Common Stock to be issued in
the Merger have been validly authorized and, when issued, will be validly
issued, fully paid and nonassessable, and no current or past stockholder of
Parent will have any preemptive right or similar rights inrespect thereof.
(b) Neither the execution and delivery of this Agreement by Parent, nor the
consummation by Parent of the transactionscontemplated hereby, including the
Merger and the Bank Merger, nor compliance by Parent with any of the terms or
provisions hereof, will (i) violate any provision of the Parent Certificate,
the Parent Bylaws, or (ii) assuming that theconsents and approvals referred to
in
Section
4.4
and the Parent Approval is duly obtained, (x) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Parent,any of its Subsidiaries or any of their respective
properties or assets or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an
event which, with notice or lapse oftime, or both, would constitute a default)
under, result in the termination of or a right of termination or cancellation
under, accelerate the performance required by, or result in the creation of
any Lien upon any of the respective properties orassets of Parent or any
Parent Subsidiary under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Parent or any Parent Subsidiaryis a
party, or by which they or any of their respective properties or assets may be
bound, except (in the case of clause (ii) above) for such violations,
conflicts, breaches or defaults which, either individually or in the
aggregate, would notreasonably be expected to have a Material Adverse Effect
on Parent.
(c) The Board of Directors of Parent Bank has approved the BankMerger
Agreement. The Parent, as the sole shareholder of Parent Bank, has approved
the Bank Merger Agreement, and the Bank Merger Agreement has been duly
executed by Parent Bank and (assuming due authorization, execution and
delivery by the CompanyBank) constitutes a valid and binding obligation of
Parent Bank, enforceable against Parent Bank in accordance with its terms
(except in all cases as may be limited by the Enforceability Exceptions).
4.4
Consents and Approvals
. Except for (a) the filing of applications, filings and notices with
theNasdaq Stock Exchange, (b) the filing of applications, filings and notices,
as applicable, with any Governmental Entity and approval of such applications,
filings and notices, including the Requisite Regulatory Approvals, (c) the
filingwith the SEC of the Proxy Statement and the S-4 in which the Proxy
Statement will be included as a prospectus, and declaration by the SEC of the
effectiveness of the S-4, (d) the filing of the Maryland Articles of Merger
with the MarylandSecretary pursuant to the MGCL and the Delaware Certificate
of Merger with the Delaware Secretary pursuant to the DGCL, and the filing of
the Bank Merger Certificates, (e) such filings and approvals as are required
to be made or obtained underthe securities or "Blue Sky" laws of various
states in connection with the issuance of the shares of Parent Common Stock
pursuant to this Agreement and (f) the approval of the listing of such Parent
Common Stock on the Nasdaq StockExchange, no consents or approvals of or
filings or registrations with any Governmental Entity are necessary in
connection with (i) the execution and delivery by Parent of this Agreement,
(ii) the consummation by Parent of the Merger andthe other transactions
contemplated hereby (including the Bank Merger), (iii) the execution and
delivery by the Parent Bank of the Bank Merger Agreement or (iv) the
consummation by the Parent Bank of the Bank Merger. As of the date
hereof,Parent is not aware of any reason why the necessary approvals and
consents from the applicable Governmental Entities will not be received in
order to permit consummation of the Merger and the Bank Merger on a timely
basis.
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4.5
Reports
.
(a) Parent and each of its Subsidiaries have timely filed all reports,
registrations and statements, together with any amendments required tobe made
with respect thereto, that they were required to file since January 1, 2021
with any Governmental Entities, including, without limitation, any report,
registration or statement required to be filed pursuant to the laws, rules
orregulations of the United States, any state, any foreign entity, or any
Governmental Entities, and have paid all fees and assessments due and payable
in connection therewith, except where the failure to file such report,
registration or statement orto pay such fees and assessments, either
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on Parent. Subject to
Section
9.14
, (i) other than normal examinations conductedby a Governmental Entity in the
ordinary course of business of Parent and its Subsidiaries, no Governmental
Entity has initiated or has pending any proceeding or, to the knowledge of
Parent, investigation into the business or operations of Parent orany Parent
Subsidiary since January 1, 2021, (ii) there is no unresolved violation,
criticism, or exception by any Governmental Entity with respect to any report
or statement relating to any examinations or inspections of Parent or any
ParentSubsidiary, and (iii) there have been no formal or informal inquiries
by, or disagreements or disputes with, any Governmental Entity with respect to
the business, operations, policies or procedures of Parent or any Parent
Subsidiary sinceJanuary 1, 2021, in the case of each of clauses (i) through
(iii), which is or would reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect on Parent.
(b) An accurate copy of each final registration statement, prospectus, report,
schedule and definitive proxy statement filed with or furnishedto the SEC
since January 1, 2021 by Parent pursuant to the Securities Act or the Exchange
Act (the "
Parent Reports
") is publicly available. Since January 1, 2021, no such Parent Report as of
the date thereof (and, in thecase of registration statements and proxy
statements, on the dates of effectiveness and the dates of the relevant
meetings, respectively), contained any untrue statement of a material fact or
omitted to state any material fact required to be statedtherein or necessary
in order to make the statements therein, in light of the circumstances in
which they were made, not misleading, except that information filed or
furnished as of a later date (but before the date of this Agreement) shall
bedeemed to modify information as of an earlier date. As of their respective
dates, since January 1, 2021, all Parent Reports filed under the Securities
Act and the Exchange Act complied in all material respects with the published
rules andregulations of the SEC with respect thereto. As of the date of this
Agreement, no executive officer of Parent has failed in any respect to make
the certifications required of him or her under Section 302 or 906 of the
Sarbanes-Oxley Act. As ofthe date of this Agreement, there are no outstanding
comments from or unresolved issues raised by the SEC with respect to any of
the Parent Reports.
4.6
Financial Statements
.
(a) The financial statements of Parent and its Subsidiaries included (or
incorporated by reference) in the Parent Reports (including therelated notes,
where applicable) (i) have been prepared from, and are in accordance with, the
books and records of Parent and its Subsidiaries, (ii) fairly present in all
material respects the consolidated results of operations, cashflows, changes
in stockholders' equity and consolidated financial position of Parent and its
Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth (subject in the case of unaudited statements to
year-end
audit adjustments normal in nature and amount), (iii) complied, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the publishedrules and regulations
of the SEC with respect thereto, and (iv) have been prepared in accordance
with GAAP consistently applied during the periods involved, except, in each
case, as indicated in such statements or in the notes thereto. Thebooks and
records of Parent and its Subsidiaries have been, and are being, maintained in
all material respects in accordance with GAAP and any other applicable legal
and accounting requirements and reflect only actual transactions. SinceJanuary
1, 2021, no independent public accounting firm of Parent has resigned (or
informed Parent that it intends to resign) or been dismissed as independent
public accountants of Parent as a result of, or in connection with, any
disagreementswith Parent on a matter of accounting principles or practices,
financial statement disclosure or auditing scope or
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procedure. The financial statements of Parent Bank included in the
consolidated reports of condition and income (call reports) of Parent Bank
complied, as of their respective dates of filing withthe FDIC, in all material
respects with applicable accounting requirements and with the published
instructions of the Federal Financial Institutions Examination Council with
respect thereto.
(b) Except as would not reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect on Parent, neitherParent nor any
of its Subsidiaries has any liability (whether absolute, accrued, contingent
or otherwise and whether due or to become due), except for those liabilities
that are reflected or reserved against on the consolidated balance sheet
ofParent included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2023 (including any notes thereto) and for liabilities incurred
in the ordinary course of business since December 31, 2023, or in connection
with thisAgreement and the transactions contemplated hereby.
(c) The records, systems, controls, data and information of Parent and
itsSubsidiaries are recorded, stored, maintained and operated under means
(including any electronic, mechanical or photographic process, whether
computerized or not) that are under the exclusive ownership and direct control
of Parent or itsSubsidiaries or accountants (including all means of access
thereto and therefrom), except for any
non-exclusive
ownership and
non-direct
control that would notreasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect on Parent. Parent (i) has
implemented and maintains disclosure controls and procedures (as defined in
Rule
13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "
Exchange Act
")) to ensure that material information relating to Parent, including its
Subsidiaries, is madeknown to the chief executive officer and the chief
financial officer of Parent by others within those entities as appropriate to
allow timely decisions regarding required disclosures and to make the
certifications required by the Exchange Act andSections 302 and 906 of the
Sarbanes-Oxley Act, and (ii) has disclosed, based on its most recent
evaluation prior to the date hereof, to Parent's outside auditors and the
audit committee of Parent's Board of Directors(A) any significant deficiencies
and material weaknesses in the design or operation of internal control over
financial reporting (as defined in Rule
13a-15(f)
promulgated under the Exchange Act) whichwould reasonably be expected to
adversely affect Parent's ability to record, process, summarize and report
financial information, and (B) any fraud, whether or not material, that
involves management or other employees who have asignificant role in Parent's
internal controls over financial reporting. Any such disclosures were made in
writing by management to Parent's auditor and audit committee and true,
correct and complete copies of such disclosures have beenmade available to the
Parent. To the knowledge of Parent, there is no reason to believe that
Parent's chief executive officer and chief financial officer will not be able
to give the certifications required pursuant to the rules and regulationsadopted
pursuant to Section 404 of the Sarbanes-Oxley Act, without qualification,
when next due and for as long as this Agreement continues in existence.
(d) Since January 1, 2021, (i) neither Parent nor any Parent Subsidiary, nor,
to the knowledge of Parent, any director, officer, auditor,accountant, or
representative of Parent or any Parent Subsidiary, has received or otherwise
had or obtained knowledge of any material complaint, allegation, assertion or
claim, whether written or oral, regarding the accounting or auditing
practices,procedures, methodologies or methods (including with respect to loan
loss reserves, write-downs, charge-offs and accruals) of Parent or any Parent
Subsidiary or their respective internal accounting controls, including any
material complaint,allegation, assertion or claim that Parent or any Parent
Subsidiary has engaged in questionable accounting or auditing practices, and
(ii) no attorney representing Parent or any Parent Subsidiary, whether or not
employed by Parent or any ParentSubsidiary, has reported evidence of a
material violation of securities laws, breach of fiduciary duty or similar
violation by Parent or any of its officers, directors, employees or agents to
the Board of Directors of Parent or any committee thereofor to the knowledge
of Parent, to any director or officer of Parent.
4.7
Broker's Fees
. With theexception of the engagement of D.A. Davidson & Co. ("
Davidson
"), neither the Parent nor any Subsidiary nor any of their respective officers
or directors has employed any broker, finder or financial advisor or incurred
anyliability for any broker's fees, commissions or finder's fees in connection
with the Merger or the other transactions contemplated by this Agreement.
Parent has disclosed to the Company as of
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the date hereof the aggregate fees provided for in connection with the
engagement by Parent of Davidson related to the Merger and the other
transactions contemplated hereby.
4.8
Absence of Certain Changes or Events
.
(a) Since December 31, 2023, no event or events have occurred that have had or
would reasonably be expected to have, either individuallyor in the aggregate,
a Material Adverse Effect on Parent.
(b) Except as set forth on
Section
4.8(b)
of theParent Disclosure Schedule and in connection with the transactions
contemplated by this Agreement, since December 31, 2023, Parent and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinary courseof business.
4.9
Legal Proceedings
.
(a) Except as disclosed on
Section
4.9(a)
of the Parent Disclosure Schedule, neither Parent nor any of itsSubsidiaries
is a party to any, and there are no pending or, to the knowledge of Parent,
threatened, legal, administrative, arbitral or other proceedings, claims,
actions or governmental or regulatory investigations of any nature against
Parent orany Parent Subsidiary or any of their current or former directors or
executive officers or challenging the validity or propriety of the
transactions contemplated by this Agreement.
(b) There is no injunction, order, judgment, decree, or regulatory restriction
imposed upon Parent, any of its Subsidiaries or the assets ofParent or any
Parent Subsidiary (or that, upon consummation of the Merger, would apply to
Parent or any of its affiliates) that would reasonably be expected to be
material to Parent and its Subsidiaries, taken as a whole.
(c) No claims are outstanding under any of Parent or its Subsidiaries'
insurance policies that would reasonably be expected to have,either
individually or in the aggregate, a Material Adverse Effect on Parent.
(d) No claims are outstanding against Parent and itsSubsidiaries for
indemnification that would reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect on Parent.
4.10
Taxes, Tax Returns, and Employee Benefits
.
(a) All material Taxes of Parent and its Subsidiaries that are due have been
fully and timely paid or adequate reserves therefor have beenmade on the
financial statements of Parent and its Subsidiaries included (or incorporated
by reference) in the Parent Reports (including the related notes, where
applicable). Neither Parent nor any of its Subsidiaries has received written
notice ofassessment or proposed assessment in connection with any material
amount of Taxes, and there are no threatened in writing or pending proceedings
regarding any material Tax of Parent and its Subsidiaries or the assets of
Parent and its Subsidiarieswhich have not been paid, settled or withdrawn or
for which adequate reserves have not been established.
(b) Except as would notreasonably be expected to have a Material Adverse
Effect on Parent, each Parent Benefit Plan has been established, operated and
administered in accordance with its terms and the requirements of all
applicable laws, including ERISA and the Code. Forpurposes of this Agreement, "
Parent Benefit Plans
" means all employee benefit plans (as defined in Section 3(3) of ERISA),
whether or not subject to ERISA, and all stock option, stock purchase,
restricted stock, incentive,deferred compensation, retiree medical or life
insurance, retirement, savings, supplemental retirement, restoration,
retention, bonus, employment, change in control, termination or severance
plans, programs, agreements or arrangements that aremaintained, contributed to
or sponsored by, or required to be contributed to, Parent or any Parent
Subsidiary for the benefit of any current or former employee, officer,
director or individual independent contractor of Parent or any ParentSubsidiary
or any of their respective dependents or beneficiaries.
(c) Except as would not reasonably be expected to have a MaterialAdverse
Effect on Parent, (i) the IRS has issued a favorable determination letter,
with respect to each Parent Benefit Plan that is intended to be
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qualified under Section 401(a) of the Code (the "
Parent Qualified Plans
") and the related trust, or such Parent Qualified Plan is entitled to rely on
an IRS opinion oradvisory letter, (ii), no such determination or opinion or
advisory letter has been revoked (nor to the knowledge of Parent has
revocation been threatened), and, (iii) to the knowledge of Parent, there are
no existing circumstances and noevents have occurred that would reasonably be
expected to adversely affect the qualified status of any Parent Qualified Plan
or the related trust.
(d) Except as would not reasonably be expected to have a Material Adverse
Effect on Parent, (i) with respect to any defined benefitpension plan of the
Parent (the "
Parent Defined Benefit Pension Plan
"), there has been no event or condition which presents a material risk of
termination of the Parent Defined Benefit Pension Plan by the Pension Benefit
GuarantyCorporation, and no circumstances exist that constitute grounds under
Section 4042 of ERISA entitling the Pension Benefit Guaranty Corporation to
institute any such proceeding, and (ii) no accumulated funding deficiency (as
defined inSection 302 of ERISA and Section 412 of the Code), whether or not
waived, exists with respect to the Parent Defined Benefit Pension Plan, nor
has there been any lien imposed under Section 412(n) of the Code with respect
to the ParentDefined Benefit Pension Plan.
4.11
Compliance with Applicable Law
. Parent and each of itsSubsidiaries hold, and have held at all times since
January 1, 2021, all charters, licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses and ownership
of their respective properties,rights and assets under and pursuant to each
(and have paid all fees and assessments due and payable in connection
therewith), except where neither the cost of failure to hold nor the cost of
obtaining and holding such license, franchise, permit orauthorization (nor the
failure to pay any fees or assessments) would, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on Parent,
and, to the knowledge of the Parent, no suspension or cancellation ofany such
necessary license, franchise, permit or authorization is threatened. Parent
and each of its Subsidiaries have complied in all material respects with and
are not in material default or violation under any applicable Law of any
GovernmentalEntity relating to Parent or any Parent Subsidiary, including,
without limitation, all Laws related to data protection or privacy, the USA
PATRIOT Act, the Bank Secrecy Act, the Equal Credit Opportunity Act and
Regulation B, the Fair Housing Act,the CRA, the Fair Credit Reporting Act, the
Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the
Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the
Dodd-Frank Wall Street Reform and Consumer ProtectionAct, any regulations
promulgated by the Consumer Financial Protection Bureau, the Interagency
Policy Statement on Retail Sales of Nondeposit Investment Products, the SAFE
Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act
andRegulation X, and any other Law relating to bank secrecy, discriminatory
lending, financing or leasing practices, money laundering prevention, Sections
23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, the Federal
DepositInsurance Corporation Improvement Act, and all agency requirements
relating to the origination, funding, sale and servicing of mortgage,
installment and consumer loans, except for violations or defaults that have
not had, and would not have, eitherindividually or in the aggregate, a
Material Adverse Effect on Parent. Each of Parent's Subsidiaries that is an
insured depository institution is "well-capitalized" (as that term is defined
in the relevant regulation of theinstitution's primary federal bank regulator)
and has a CRA rating of "satisfactory" and there are no facts or circumstances
(and such Subsidiary has not been advised of any such facts or circumstances)
that exist that would causesuch Subsidiary to be deemed: (i) not to be in
satisfactory compliance in any material respect with CRA, and the regulations
promulgated thereunder; or (ii) not to be in satisfactory compliance in any
material respect with the applicableprivacy of customer information
requirements contained in any federal and state privacy laws and regulations,
including without limitation, in Title V of the Gramm-Leach-Bliley Act of 1999
and the regulations promulgated thereunder. Neither Parentnor any Subsidiary
has been informed that its status as "well-capitalized" or "satisfactory" for
CRA purposes, as applicable, will change within one year. Without limitation,
none of Parent or any of its Subsidiaries, or to theknowledge of the Parent,
no director, officer, employee, agent or other person acting on behalf of
Parent or any Parent Subsidiary has, since January 1, 2019, directly or
indirectly, (a) used any funds of Parent or any Parent Subsidiaryfor unlawful
contributions, unlawful gifts, unlawful entertainment or other expenses
relating to political activity, (b) made any unlawful payment to foreign
domestic governmental officials or employees or to foreign or domestic
politicalparties or campaigns from funds of Parent or any Parent Subsidiary,
(c) violated any provision that would result in the violation of the Foreign
Corrupt Practices Act of
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1977, as amended, or any similar law, (d) established or maintained any
unlawful fund of monies or other assets of Parent or any Parent Subsidiary,
(e) made any fraudulent entry on thebooks or records of Parent or any Parent
Subsidiary, or (f) made any unlawful bribe, unlawful rebate, unlawful payoff,
unlawful influence payment, unlawful kickback or other unlawful payment to any
person, private or public, regardless of form,whether in money, property or
services, to obtain favorable treatment in securing business to obtain special
concessions for Parent or any Parent Subsidiary, to pay for favorable
treatment for business secured or to pay for special concessionsalready
obtained for Parent or any Parent Subsidiary, or is currently subject to any
United States sanctions administered by the Office of Foreign Assets Control
of the United States Treasury Department. Except as would not, either
individually orin the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent: since January 1, 2019, (i) Parent and each of its
Subsidiaries have properly administered all accounts for which it acts as a
fiduciary, including accountsfor which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment
advisor, in accordance with the terms of the governing documents and
applicable state, federal and foreign law; and (ii) none ofParent, any of its
Subsidiaries, or any of its or its Subsidiaries' directors, officers or
employees, has committed any breach of trust or fiduciary duty with respect to
any such fiduciary account, and the accountings for each such fiduciaryaccount
are true, correct and complete and accurately reflect the assets and results
of such fiduciary account.
4.12
Agreements with Governmental Entities
. Subject to
Section
9.14
, neitherParent nor any of its Subsidiaries is subject to any
cease-and-desist
or other order or enforcement action issued by, or is a party to any written
agreement, supervisoryagreement, consent agreement or memorandum of
understanding or similar agreement in effect with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or has been ordered to pay any civil moneypenalty by, or has
been since January 1, 2021, a recipient of any supervisory letter from, or
since January 1, 2021, has adopted any policies, procedures or board
resolutions at the request or suggestion of any Governmental Entity
thatcurrently restricts in any material respect or would reasonably be
expected to restrict in any material respect the conduct of its business or
that in any material manner relates to its capital adequacy, its ability to
pay dividends, its credit orrisk management policies, its management or its
business (each, whether or not set forth in the Parent Disclosure Schedule, a "
Parent Regulatory Agreement
"), nor has Parent or any Parent Subsidiary been advised in writing or, to
theknowledge of Parent, orally, since January 1, 2021, by any Governmental
Entity that it is considering issuing, initiating, ordering or requesting any
such Parent Regulatory Agreement, nor does Parent believe that any such Parent
RegulatoryAgreement is likely to be initiated, ordered or requested. Parent
and its Subsidiaries are in compliance in all material respects with each
Parent Regulatory Agreement to which it is a party or is subject. Parent and
its Subsidiaries have notreceived any notice from any Governmental Entity
indicating that Parent or its Subsidiaries is not in compliance in any
material respect with any Parent Regulatory Agreement.
4.13
Reorganization
. Parent has not taken any action and is not aware of any fact or circumstance
thatcould reasonably be expected to prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
4.14
Parent Information
. The information relating to Parent and its Subsidiaries to be contained in
theProxy Statement and the S-4, and the information relating to Parent and its
Subsidiaries that is provided by Parent or its representatives for inclusion
in any other document filed with any other Governmental Entity in connection
herewith, will notcontain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of
the circumstances in which they are made, not misleading. The Proxy Statement
(except for such portions thereofthat relate only to the Company or any
Company Subsidiary) will comply in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. The S-4 (except
for such portions thereof that relate only to theCompany or any Company
Subsidiary) will comply in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
4.15
Regulatory Approvability
. To the knowledge of Parent, there is no reason which would preventobtaining
all Requisite Regulatory Approvals required to consummate the transactions
contemplated by this Agreement, including the Merger and the Bank Merger.
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4.16
No Other Representations or Warranties
.
(a) Except for the representations and warranties made by Parent in this
Article
IV
, neither Parent nor any otherperson makes any express or implied
representation or warranty with respect to Parent, its Subsidiaries, or their
respective businesses, operations, assets, liabilities, conditions (financial
or otherwise) or prospects, and Parent hereby disclaimsany such other
representations or warranties. In particular, without limiting the foregoing
disclaimer, neither Parent nor any other person makes or has made any
representation or warranty to the Company or any of its affiliates or
representativeswith respect to (i) any financial projection, forecast,
estimate, budget or prospective information relating to Parent, any of its
Subsidiaries or their respective businesses, or (ii) except for the
representations and warranties made byParent in this
Article
IV
, any oral or written information presented to the Company or any of its
affiliates or representatives in the course of their due diligence
investigation of Parent, the negotiation of this Agreementor in the course of
the transactions contemplated hereby.
Parent acknowledges and agrees that neither the Company nor any other
personhas made or is making any express or implied representation or warranty
with respect to the Company, its Subsidiaries or their respective businesses,
operations, assets, liabilities, conditions (financial and otherwise) or
prospects, other thanthose contained in
Article
III
.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1
Conduct of Business Prior to the Effective Time
. During the period from the date of this Agreement tothe Effective Time or
earlier termination of this Agreement, except as expressly contemplated or
permitted by this Agreement, required by law or any Governmental Entity or as
consented to in writing by the other party (such consent not to beunreasonably
withheld, conditioned or delayed), each party shall, and shall cause each of
its Subsidiaries to, (a) use commercially reasonable efforts to conduct its
respective businesses in the ordinary course in all material respectsconsistent
with past practices and maintain and preserve intact its business
organization, employees and advantageous business relationships, and (b) take
no action that would reasonably be expected to adversely affect or materially
delay theability to obtain any necessary approvals of any Governmental Entity
required for the transactions contemplated hereby or to consummate the
transactions contemplated hereby on a timely basis.
5.2
Company Forbearances
. During the period from the date of this Agreement to the Effective Time
orearlier termination of this Agreement, except as set forth in
Section
5.2
of the Company Disclosure Schedule, except as expressly contemplated or
permitted by this Agreement or as required by Law or required or requested
byany Governmental Entity, the Company shall not, and shall not permit any of
its Subsidiaries to, without the prior written consent of Parent (such consent
not to be unreasonably withheld, conditioned or delayed):
(a) incur any indebtedness for borrowed money (other than indebtedness of the
Company or any of its wholly owned Subsidiaries to the Company orany Company
Subsidiary) or assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other individual, corporation or
other entity;
provided
, however, the following business activities shall notbe prohibited by this
Section
5.2
so long as they are undertaken in the ordinary course of the Company's
business: (i) the creation of deposit liabilities, issuances of letters of
credit, and sales of certificatesof deposit, and (ii) purchases of federal
funds or borrowings from either the Federal Reserve Bank of San Francisco or
the Federal Home Loan Bank, in each case with a maturity not in excess of six
(6) months;
(b) (i) adjust, split, combine or reclassify any capital stock, or (ii) make,
declare or pay any dividend, or make any otherdistribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its
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capital stock or any securities or obligations convertible (whether currently
convertible or convertible only after the passage of time or the occurrence of
certain events) into or exchangeablefor any shares of its capital stock
(except (A) dividends paid by any of the Subsidiaries of the Company to the
Company or any of its wholly owned Subsidiaries, (B) regular quarterly cash
dividends on shares of Company Common Stock of$0.01 per share, or (C) the
acceptance of shares of Company Common Stock as payment for the exercise price
or withholding Taxes incurred in connection with the exercise, vesting or
settlement of Company RSU Awards);
(c) grant any stock options, stock appreciation rights, performance shares,
restricted stock units, restricted shares or other equity-basedawards or
interests, or grant any individual, corporation or other entity any right to
acquire any shares of its capital stock; or
(d)issue, sell or otherwise permit to become outstanding any additional shares
of capital stock, voting securities or equity interests or securities
convertible (whether currently convertible or convertible only after the
passage of time or theoccurrence of certain events) or exchangeable into, or
exercisable for, any shares of its capital stock, voting securities or equity
interests, including any securities of the Company or any Company Subsidiary,
or any options, warrants, or otherrights of any kind to acquire any shares of
capital stock, voting securities or equity interest, including any securities
of the Company or any Company Subsidiary, except pursuant to the settlement of
Company RSU Awards in accordance with theirterms;
(e) sell, transfer, mortgage, encumber or otherwise dispose of any of its
material properties, deposits or assets or any businessto any individual,
corporation or other entity other than a wholly owned Subsidiary, or cancel,
release or assign any indebtedness of any such person or any claims against
any such person, in each case other than in the ordinary course of
business,including any debt collection or foreclosure transactions, or
pursuant to contracts or agreements in force at the date of this Agreement;
(f) except for foreclosure or acquisitions of control in a fiduciary or
similar capacity or in satisfaction of debts previously contracted ingood
faith in the ordinary course of business, or except securities investments in
the ordinary course of business, make any material investment in or
acquisition of (whether by purchase of stock or securities, contributions to
capital, propertytransfers, purchase of any property or assets of any person
merger or consolidation, or formation of a joint venture or otherwise) any
other person or the property, deposits or assets of any other person, in each
case other than a wholly ownedSubsidiary of the Company;
(g) except in the ordinary course of business (i) terminate, materially amend,
or waive any materialprovision of, any Company Contract; make any change in
any instrument or agreement governing the terms of any of its securities, or
material lease or contract, other than normal renewals of contracts and leases
without material adverse changes ofterms to the Company, (ii) or enter into
any contract that would constitute a Company Contract if it were in effect on
the date of this Agreement;
(h) except as required by the terms of any Company Benefit Plan, (i) enter
into, adopt, or terminate any Company Benefit Plan orarrangement that would be
a Company Benefit Plan if in effect on the date hereof, (ii) increase the
compensation payable to any employee, officer, director, or independent
contractor, except with respect to employees who are not officers andwhose
target total annual compensation is not in excess of $100,000, for annual base
salary or wage increases in the ordinary course of business (including in
connection with a promotion or change in responsibilities and to a level
consistent withsimilarly situated peer employees), that do not exceed, with
respect to any individual, four percent (4%) of such individual's base salary
or wage rate in effect as of the date hereof, (iv) pay or award, or commit to
pay or award, anybonuses or incentive compensation, (v) grant or accelerate
the vesting of any equity or equity-based awards or other compensation, (vi)
negotiate or enter into any new, or amend any existing, employment, severance,
change in control,retention, bonus guarantee, collective bargaining agreement
or similar agreement or arrangement, (vii) fund any rabbi trust or similar
arrangement, (viii) terminate the employment or services of any officer or any
employee whose targettotal annual compensation is greater than $50,000, other
than for cause (as determined in the ordinary course of business and
consistent with past practice), (ix) hire or promote any officer or any
employee, independent
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contractor or consultant who has target total annual compensation greater than
$100,000, (x) waive, release or limit any Restrictive Covenant obligation of
any current or former employee orcontractor of Company or any Company
Subsidiary, or (xi) extend the term of any employment agreement, other than in
the ordinary course of business consistent with past practice;
(i) settle any material claim, suit, action or proceeding, except (i) in the
ordinary course of business in an amount and forconsideration not in excess of
$100,000 individually or in the aggregate, and that would not impose any
material restriction on the business of Company or its Subsidiaries of, after
the Effective Time, the Surviving Corporation or (ii) suchmaterial claim,
suit, action or proceeding where Company or its Subsidiaries is the plaintiff;
(j) take any action or knowingly fail totake any action where such action or
failure to act could reasonably be expected to prevent or impede the Merger
from qualifying as a "reorganization" within the meaning of Section 368(a) of
the Code;
(k) amend the Company Charter or Company Bylaws or comparable governing
documents of its Subsidiaries;
(l) merge or consolidate itself or any of its Subsidiaries with any other
person, or restructure, reorganize or completely or partiallyliquidate or
dissolve it or any such Subsidiaries;
(m) materially restructure or materially change its investment securities,deriva
tives, wholesale funding or BOLI portfolio or its interest rate exposure,
through purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported or purchase any security rated below investment grade,
except asmay be required by GAAP or by applicable laws, regulations,
guidelines or policies imposed by any Governmental Entity or requested by a
Governmental Entity;
(n) take any action that is intended or expected to result in any of the
conditions to the Merger set forth in
Section
7.1
or
Section
7.2
not being satisfied or be a material violation of any provision of this
Agreement;
(o) implement or adopt any material change in its accounting principles,
practices or methods, other than as may be required by GAAP or byapplicable
laws, regulations, guidelines or policies imposed by any Governmental Entity;
(p) (i) enter into any new line of business or(ii) make, renegotiate, renew,
increase, extend, modify or purchase any Loan, other than in accordance with
Company Bank's loan policies and procedures in effect as of the date hereof,
provided however, that the prior notification andapproval of Parent is
required for any loan made pursuant to this
Section
5.2(p)
that is $2.0 million or greater;
(q) make any material changes in policies and practices with respect to (i)
underwriting, pricing, originating, acquiring, sellingservicing, buying or
selling rights to service Loans, (ii) investment, deposit pricing, risk and
asset liability management or other banking and operating matters (including
any change in the maximum ratio or similar limits as a percentage ofcapital
exposure applicable with respect to the loan portfolio or any segment thereof)
or (iii) hedging, in each case, except as required by Law or requested by a
Governmental Entity;
(r) make, or commit to make, any capital expenditures (other than those set
forth in the Company's capital budget which has been madeavailable to Parent)
in excess of $75,000 individually or $250,000 in the aggregate;
(s) make, change or revoke any material Taxelection, change an annual Tax
accounting period, adopt or change any material Tax accounting method, file
any amended material Tax Return, settle or compromise any
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Tax liability, audit, dispute, claim or assessment or agree to an extension or
waiver of the limitation period to any material Tax audit, dispute, claim or
assessment, grant any power of attorneywith respect to material Taxes,
surrender any right to claim a refund of material Taxes, or enter into any
closing agreement with respect to Taxes;
(t) schedule, make application for the opening, relocation or closing of any,
or open, relocate or close any, branch office, loan productionoffice or other
significant office or operations facility;
(u) materially reduce the amount of insurance coverage or fail to renew
anymaterial existing insurance policy, in each case, with respect to the key
employees, properties or assets;
(v) without providingconcurrent notice to Parent, undertake any response,
action, or customer or public communication with regard to (i) any event
resulting in unauthorized access to or the disruption or misuse of an
information system or information stored on aninformation system, including
but not limited to such information pertaining to the Company's or its
Subsidiaries' customers, or (ii) any ransomware event;
(w) other than in consultation with Parent, schedule, conduct, or participate
in any earnings calls or analyst meetings; or
(x) agree to take, make any commitment to take, or adopt any resolutions of
its board of directors or similar governing body in support of,any of the
actions prohibited by this
Section
5.2
.
5.3
ParentForbearances
. During the period from the date of this Agreement to the Effective Time or
earlier termination of this Agreement, except as set forth in
Section
5.3
of the Parent Disclosure Schedule, as expresslycontemplated or permitted by
this Agreement or as required by Law or requested or required by any
Governmental Entity, Parent shall not, and shall not permit any of its
Subsidiaries (to the extent applicable below) to, without the prior
writtenconsent of Company (such consent not to be unreasonably withheld,
conditioned or delayed):
(a) amend the Parent Certificate or the ParentBylaws in a manner that would
materially and adversely affect the holders of Company Common Stock, or
adversely affect the holders of Company Common Stock relative to other holders
of Parent Common Stock;
(b) (i) adjust, split, combine or reclassify any capital stock of Parent, or
(ii) make, declare or pay any extraordinary dividend, ormake any other
extraordinary distribution on, any shares of Parent Common Stock;
(c) merge or consolidate itself or any of itsSubsidiaries that are
"significant subsidiaries" within the meaning of Rule 1-02 of Regulation
S-X
of the SEC with any other person, or restructure, reorganize or completely or
partially liquidate ordissolve itself or any such Subsidiaries;
(d) enter into agreements with respect to, or consummate, any mergers or
business combinations,or any acquisition of any other person or business, that
would reasonably be expected to prevent, impede or materially delay the
consummation of the Merger;
(e) take any action that is intended or expected to result in any of the
conditions to the Merger set forth in
Section
7.1
or
Section
7.3
not being satisfied or be a violation of any provision of this Agreement;
(f) take any action or knowingly fail to take any action where such action or
failure to act could reasonably be expected to prevent or impedethe Merger
from qualifying as a "reorganization" within the meaning of Section 368(a) of
the Code; or
(g) agree to take,make any commitment to take, or adopt any resolutions of its
board of directors or similar governing body in support of, any of the actions
prohibited by this
Section
5.3
.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1
Regulatory Matters
.
(a) Promptly after the date of this Agreement, Parent and Company shall
prepare and file with the SECthe Proxy Statement and Parent shall prepare and
file with the SEC the S-4, in which the Proxy Statement will be included as a
prospectus. The parties shall use reasonable best efforts to make such filings
are made within forty-five(45) calendar days of the date of this Agreement.
Prior to filing with the SEC, Parent will make available to Company drafts of
the Proxy Statement, the S-4 and any other documents to be filed with the SEC,
both preliminary and final, anddrafts of any amendment or supplement to the
Proxy Statement, the S-4 or such other documents and will provide Company with
a reasonable opportunity to comment on such drafts and shall consider such
comments in good faith. The parties shallcooperate to promptly respond to any
comments of the SEC on the Proxy Statement or the
S-4.
Each of Parent and the Company shall use its reasonable best efforts to have
the S-4 declared effective under theSecurities Act as promptly as practicable
after such filing and to keep the S-4 effective for so long as necessary to
consummate the transactions contemplated by this Agreement, and the Company
shall thereafter as promptly as practicable mail ordeliver the Proxy Statement
to its stockholders. Parent shall also use its reasonable best efforts to
obtain all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by thisAgreement, and the
Company shall furnish all information concerning the Company and the holders
of Company Common Stock as may be reasonably requested in connection with any
such action.
(b) The parties hereto shall, and shall cause its Subsidiaries to, cooperate
with each other and use their reasonable best efforts to take allactions
necessary, proper or advisable to promptly prepare and file, or cause to be
prepared and filed, all necessary documentation, to effect all applications,
notices, petitions and filings, to obtain as promptly as practicable (i)
allpermits, consents, approvals and authorizations of all third parties, (ii)
all Requisite Regulatory Approvals of the Governmental Entities, which are
necessary or advisable to consummate the transactions contemplated by this
Agreement(including the Merger and the Bank Merger), and to comply with the
terms and conditions of all such Requisite Regulatory Approvals of all such
Governmental Entities. Without limiting the generality of the foregoing, as
soon as practicable and in noevent later than forty-five (45) business days
after the date of this Agreement (the "
Regulatory Filing Period
"), Parent and the Company shall, and shall cause their respective
Subsidiaries to, each prepare and file anyapplications, notices and filings
required to be filed with the Governmental Entities in order to obtain the
Requisite Regulatory Approvals;
provided
, however
that either party has the right to extend this Regulatory FilingPeriod for an
additional fifteen (15) business days if it believes in good faith that the
applications, notices and filings required to obtain Requisite Regulatory
Approvals are likely to be completed and filed during such fifteen(15)
business day period. Parent and the Company shall each use, and shall each
cause their applicable Subsidiaries to, use commercially reasonable best
efforts to obtain each such Requisite Regulatory Approval as promptly as
reasonablypracticable. Parent and the Company shall have the right to review
in advance and, to the extent practicable, each will consult the other on, in
each case subject to applicable laws relating to the exchange of information,
all the informationrelating to the Company or Parent, as the case may be, and
any of their respective Subsidiaries, which appears in any filing made with,
or written materials submitted to, any third party, or Governmental Entity in
connection with the transactionscontemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hereto agree that they will keep the
other apprised of the status of matters relating tocompletion of the
transactions contemplated hereby. As used in this Agreement, the "
Requisite Regulatory Approvals
" shall mean all regulatory authorizations, permits, consents, orders or
approvals (and the expiration or terminationof all statutory waiting periods
in respect thereof) required to consummate the transactions contemplated by
this Agreement, including the Merger and the Bank Merger, from (i) the
Governmental Entities, including, without limitation, theFederal Reserve
Board, the FDIC, the Division of Financial Institutions, Department of
Commerce and Consumer Affairs, State of Hawaii, and the California Department
of Financial Protection and Innovation, and (ii) any other approvals set
forthin
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Sections
3.4
and
4.4
that are necessary to consummate the transactions contemplated by this
Agreement, including the Merger and the Bank Merger, or those otherauthorization
s, consents, orders or approvals the failure of which to be obtained would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect on the Surviving Corporation.
(c) Each of Parent and the Company shall use its reasonable best efforts to
respond to any request for information from a Governmental Entityand resolve
any objection that may be asserted by any Governmental Entity with respect to
this Agreement or the transactions contemplated hereby. Notwithstanding the
foregoing, nothing contained in this Agreement shall be deemed to require
Parent orthe Company or any of their respective Subsidiaries, and none of
Parent, the Company or any of their respective Subsidiaries shall be permitted
(without the prior written consent of the other party), to take any action, or
commit to take any action,or agree to any condition or restriction that would
reasonably be expected to have a Material Adverse Effect on the Parent and its
Subsidiaries, taken as a whole, or the Surviving Corporation and its
Subsidiaries, taken as a whole, after givingeffect to the Merger and the Bank
Merger (a "
Materially Burdensome Regulatory Condition
").
(d) To the extent permittedby applicable law and subject to the terms of
Section
9.14
of this Agreement, Parent and the Company shall, upon request, furnish each
other with all information concerning themselves, their Subsidiaries,
directors,officers and stockholders and such other matters as may be
reasonably necessary or advisable in connection with the Proxy Statement, the
S-4 and any other statement, filing, notice or application made by or on
behalf of Parent, the Company or any oftheir respective Subsidiaries to any
Governmental Entity in connection with the Merger, the Bank Merger and the
other transactions contemplated by this Agreement.
(e) To the extent permitted by applicable law, Parent and the Company shall
promptly advise each other upon receiving any communication fromany
Governmental Entity whose consent or approval is required for consummation of
the transactions contemplated by this Agreement that causes such party to
believe that there is a reasonable likelihood that any Requisite Regulatory
Approval will notbe obtained or that the receipt of any such approval will be
materially delayed.
(f) Each party shall consult with the other in advanceof any meeting or
conference with any Governmental Entity in connection with the transactions
contemplated by this Agreement and to the extent permitted by such
Governmental Entity, give the other party and/or its counsel the opportunity
to attendand participate in such meetings and conferences and provided that
each party shall promptly advise the other party with respect to substantive
matters that are addressed in any meeting or conference with any Governmental
Entity which the otherparty does not attend or participate in, to the extent
permitted by such Governmental Entity and applicable law.
6.2
Access to Information
.
(a) Upon reasonable notice and subject to applicable Law, for the purposes of
verifying therepresentations and warranties of the Company and preparing for
the Merger and the other matters contemplated by this Agreement, the Company
shall, and shall cause each of its Subsidiaries to, afford to the officers,
employees, accountants, counsel,advisors and other representatives of the
Parent, access, during normal business hours during the period prior to the
Effective Time, to all of its properties, books, contracts, commitments,
personnel, information technology systems, and records,and each party shall
cooperate with the other party in preparing to execute after the Effective
Time conversion or consolidation of systems and business operations generally,
and, during the period prior to the Effective Time, the Company shall,
andshall cause its Subsidiaries to, make available to Parent (i) a copy of
each report, schedule, registration statement, comment letter and other
document filed or received by it during such period pursuant to the
requirements of federalsecurities laws or federal or state banking laws (other
than reports or documents that the Company is not permitted to disclose under
applicable law), and (ii) all other information concerning its business,
properties and personnel as Parentmay reasonably request. Notwithstanding the
foregoing, the Company and its respective Subsidiaries shall not be
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required to provide access to or to disclose information where such access or
disclosure would violate or prejudice the rights of the Company's, customers,
jeopardize the attorney-clientprivilege of the institution in possession or
control of such information (after giving due consideration to the existence
of any common interest, joint defense or similar agreement between the
parties) or contravene any law, rule, regulation,order, judgment, decree,
fiduciary duty or binding agreement entered into prior to the date of this
Agreement. The parties hereto will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the
precedingsentence apply.
(b) Each of Parent and the Company shall hold all information furnished by or
on behalf of the other party or any of suchparty's Subsidiaries or
representatives pursuant to
Section
6.2(a)
in confidence to the extent required by, and in accordance with, the
provisions of the confidentiality agreement, executed as of September 26,2023,
between Parent and the Company (the "
Confidentiality Agreement
").
(c) No investigation by either of the parties ortheir respective representatives
shall affect or be deemed to modify or waive the representations and
warranties of the other set forth herein.
6.3
Approvals of Company Stockholders
.
(a) The Company shall call, give notice of, establish a record date, convene
and hold a meeting of its stockholders ("
CompanyMeeting
") as soon as reasonably practicable, but in no event later than sixty (60)
days, after the S-4 is declared effective for the purpose of obtaining the
Requisite Company Vote required in connection with this Agreement and
theMerger and, if so desired and mutually agreed, upon other matters of the
type customarily brought before an annual or special meeting of stockholders
to approve a merger agreement.
(b) The Company shall use its reasonable best efforts to obtain from its
stockholders the Requisite Company Vote, including by communicatingto its
stockholders the recommendation of its Board of Directors (and including such
recommendation in the Proxy Statement) that they approve and declare advisable
this Agreement and the transactions contemplated hereby (the "
BoardRecommendation
") and soliciting proxies from the Company's stockholders in favor of the
Company Merger. Subject to
Section
6.3(c)
, the Company and its Boards of Directors shall not (i) withhold,
withdraw,modify or qualify in a manner adverse to Parent the Board
Recommendation, (ii) fail to make the Board Recommendation in the Proxy
Statement, (iii) adopt, approve, recommend or endorse an Acquisition Proposal
or publicly announce anintention to adopt, approve, recommend or endorse an
Acquisition Proposal, (iv) fail to publicly and without qualification (A)
recommend against any Acquisition Proposal, or (B) reaffirm the Board
Recommendation in each case withinten (10) business days (or such fewer number
of days as remains prior to the stockholder meeting, after an Acquisition
Proposal is made public or any request by the other party to do so), or (v)
publicly propose to do any of the foregoing(any of the foregoing, a "
Recommendation Change
").
(c) Subject to
Section
8.1
and
Section
8.2
, if the Board of Directors of the Company, after receiving the advice of its
outside legal counsel and, with respect to financial matters, its outside
financial advisors, determines in good faith that it wouldmore likely than not
result in a violation of its fiduciary duties under applicable law to make or
continue to make the Board Recommendation, the Board of Directors of the
Company may, prior to the receipt of the Requisite Company Vote, submit
thisAgreement to its stockholders without recommendation (which, for the
avoidance of doubt, shall constitute a Recommendation Change) (although the
resolutions approving this Agreement as of the date hereof may not be
rescinded or amended), in whichevent such Board of Directors may communicate
the basis for its lack of a recommendation to its stockholders in the Proxy
Statement or an appropriate amendment or supplement thereto to the extent
required by law;
provided
, that the Board ofDirectors of the company may not take any actions under
this sentence unless (i) such action is taken in response to an Acquisition
Proposal that is not withdrawn as of the time of taking such action and such
Acquisition Proposal which theBoard of Directors concludes in good faith,
after consultation with its financial and legal advisors, constitutes a
Superior Proposal and did not result from a breach of
Section
6.11
, and (ii) the Board of Directors ofthe Company (A) gives the Parent at least
five (5) business days' prior written notice of its intention
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to take such action and a reasonable description of the events or
circumstances giving rise to its determination to take such action (including
its basis for determining that such AcquisitionProposal constitutes a Superior
Proposal and the latest material terms and conditions of, and the identity of
the third party making, any such Acquisition Proposal, or any amendment or
modification thereof), (B) during such five (5) businessday period, considers
and negotiates (and has caused its Representatives to consider and negotiate)
with Parent in good faith (to the extent that Parent desires to so negotiate)
regarding any adjustments or modifications to the terms and conditionsof this
Agreement, and (C) at the end of such notice period, takes into account any
amendment or modification to this Agreement proposed by the other party (if
applicable) and, after receiving the advice of its outside legal counsel and,
withrespect to financial matters, its outside financial advisors, determines
in good faith that (x) it would nevertheless more likely than not result in a
violation of its fiduciary duties under applicable law to make or continue to
make the BoardRecommendation, as the case may be, and (y) such Acquisition
Proposal continues to constitute a Superior Proposal. Any material amendment
to any Acquisition Proposal will be deemed to be a new Acquisition Proposal
for purposes of this
Section
6.3(c)
and will require a new determination and notice period as referred to in this
Section
6.3(c)
.
(d) The Company shall adjourn or postpone the Company Meeting if, as of the
time for which such meeting is originally scheduled, there areinsufficient
shares of Company Common Stock represented (either in person or by proxy) to
constitute a quorum necessary to conduct the business of such meeting or if on
the date of such meeting the Company has not received proxies representing
asufficient number of shares necessary to obtain the Requisite Company Vote;
provided
, however, that the Company shall not be required to adjourn or postpone the
Company Meeting more than two (2) times, for aggregate adjournments
orpostponements exceeding sixty (60) calendar days. During the period that the
Company Meeting has been adjourned or postponed, and subject to the terms and
conditions of this Agreement, the Company shall continue to use reasonable
best effortsto solicit proxies from its stockholders in order to obtain the
Requisite Company Vote. Notwithstanding anything to the contrary herein, but
subject to the obligation to adjourn or postpone such meeting as set forth in
the immediately precedingsentence, unless this Agreement has been terminated
in accordance with its terms, the Company Meeting shall be convened and this
Agreement shall be submitted to the stockholders of Company at the Company
Meeting, and nothing contained herein shallbe deemed to relieve the Company of
such obligation.
6.4
Legal Conditions to Merger
. Subject in allrespects to
Section
6.1
of this Agreement, each of Parent and the Company shall, and shall cause its
Subsidiaries to, use their reasonable best efforts (a) to take, or cause to be
taken, all actions necessary, properor advisable to comply promptly with all
legal and regulatory requirements that may be imposed on such party or its
Subsidiaries with respect to the Merger and the Bank Merger and, subject to
the conditions set forth in
Article
VII
, to consummate the transactions contemplated by this Agreement, including the
Merger and the Bank Merger, and (b) to obtain (and to cooperate with the other
party to obtain) any material consent,authorization, order or approval of, or
any exemption by, any Governmental Entity and any other third party that is
required to be obtained by the Company or Parent or any of their respective
Subsidiaries in connection with the Merger, the BankMerger and the other
transactions contemplated by this Agreement.
6.5
Stock Exchange Listing
.
(a) Parent shall cause the shares of Parent Common Stock to be issued in the
Merger to be approved for listing on the Nasdaq Stock Exchange,subject to
official notice of issuance, prior to the Effective Time.
(b) Prior to the Closing Date, the Company shall cooperate withParent and use
reasonable best efforts to take, or cause to be taken, all actions, and do or
cause to be done all things, reasonably necessary, proper or advisable on its
part under applicable laws and rules and policies of the Nasdaq Stock
Exchangeto enable the delisting by the Surviving Corporation of Company Common
Stock from the Nasdaq Stock Exchange and the deregistration of Company Common
Stock under the Exchange Act as promptly as practicable after the Effective
Time.
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6.6
401(k) Plan
. Prior to the Closing Date, the Companyshall (i) amend the 401(k) Plan to
eliminate the right to invest in employer securities no later than the day
before the Closing Date and (ii) provide written notice to employees of the
same (including any notice required by applicablelaw), in each case the form
and substance of which shall be subject to the prior written approval of
Parent, which will not be unreasonably withheld If Parent requests in writing
at least twenty (20) business days prior to the Closing, theCompany shall (i)
terminate the 401(k) Plan effective as of the date immediately preceding the
Closing Date and (ii) prior to the Effective Time, provide Parent with
resolutions adopted by the Company's Board of Directors terminatingthe 401(k)
Plan, the form and substance of which shall be subject to the prior written
approval of Parent, which will not be unreasonably withheld.
6.7
ESOP Matters
.
(a) As soon as practicable after notice of the Company Meeting is delivered to
the Company's stockholders, the Company will request thatthe trustees of the
ESOP and the 401(k) Plan take all necessary action required by the respective
plan documents, and for the ESOP in accordance with Section 409(e)(2) of the
Code, to conduct a pass-through vote of the participants andbeneficiaries to
direct the respective trustee as to the manner in which the Company Common
Stock and are allocated to the account of such participant or beneficiary are
to be voted. In no event will Parent or the Company be entitled to receive
anyinformation identifying how any individual participant directed the
trustees to vote the shares allocated to such participant's account. The
Company will further request the trustee of the ESOP and the 401(k) Plan to
provide to Parent forreview and comment, reasonably in advance of the
pass-through votes, but in any event at least ten (10) business days prior to
distribution thereof to the plan participants, all materials (including the
information statement and any similardisclosure materials) prepared by the
Company and approved by the plan trustees proposed to be disclosed to the
participants in connection with the pass-through votes, and the Company shall
incorporate any comments reasonably proposed by Parentthereto. and the plan
trustees shall take all actions necessary to comply with voting requirements
of the ESOP, the 401(k) Plan, the Code and applicable law for the required
approvals of the consummation of the transactions contemplated by
thisAgreement in advance of the Company Meeting.
(b) Prior to the Effective Time, the Company shall amend the ESOP, as
reasonably acceptableto Parent, to permanently discontinue contributions to
and terminate the ESOP, contingent upon the occurrence of the Closing and
effective as of the date immediately preceding the Closing Date (the "
ESOP Amendment
"). The ESOPAmendment shall provide that the accounts of all participants in
the ESOP shall become fully vested upon termination of the ESOP, and that each
share of Company Common Stock held in the ESOP shall be converted into the
right to receive, withoutinterest, the Merger Consideration. Notwithstanding
anything herein to the contrary, the Company may continue to accrue and make
contributions to the ESOP, subject to applicable deduction and annual
allocation limitations, from the date of thisAgreement through the termination
date of the ESOP in an amount sufficient to cover (but not to exceed) the loan
payments which become due in the ordinary course on the outstanding ESOP Loan
to the ESOP prior to the termination of the ESOP and, atthe discretion of the
Company, may make a
pro-rated
payment on the ESOP Loan for the plan year during with the Closing occurs
through and including the end of the calendar month immediately preceding
theClosing, prior to the termination of the ESOP.
(c) To the extent not filed by the Company before the Closing Date, as soon
asadministratively practicable following the Closing Date, Parent shall submit
an application to the IRS requesting a favorable determination with respect to
the amendment and termination of the ESOP (the "ESOP Determination Letter").
TheESOP Amendment shall provide that participants have the right to receive
partial distributions of up to 50% of the account balances credited to the
ESOP participants as of the Closing Date, taking into account the Merger
Consideration received bythe ESOP, as soon as administratively practicable
after the Closing Date, with the remaining portion to be distributed as soon
as administratively practicable after receipt by Parent of the ESOP
Determination Letter.
(d) Immediately prior to the Effective Time, a portion of the ESOP Unallocated
Shares, having an aggregate value of outstanding balance of theESOP Loan as of
the Effective Time, shall be exchanged in
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satisfaction of the ESOP Loan. In the event that the aggregate value of the
ESOP Unallocated Shares is less than outstanding balance of the ESOP Loan at
the Effective Time, all ESOP UnallocatedShares will be transferred to the
Company in satisfaction of the ESOP Loan which shall be deemed to have been
paid in full. All remaining shares of Company Common Stock owned by the ESOP
shall be eligible to be converted into the right to receivethe Merger
Consideration pursuant to
Article
I
and allocated in accordance with the terms of the ESOP and the ESOP Amendment.
(e) Following the Closing, all costs and expenses of the ESOP, including the
ESOP Trustee's fees and the legal, accounting andrecordkeeping (and including
any fees and costs related to post-Closing audits and any liabilities imposed
as a result thereof) and other administrative fees and expenses of the ESOP,
resulting from the liquidation of the ESOP and the distributionof funds from
the ESOP, will be paid by the ESOP to the extent permissible.
(f) As soon as administratively practicable following receiptof the ESOP
Determination Letter, the Parent, in its capacity as plan sponsor, shall cause
the trustee of the ESOP to make, and the trustee of the ESOP shall make,
distributions from the ESOP until all remaining account balances of the
ESOPparticipants and beneficiaries have been distributed and the ESOP shall be
liquidated.
6.8
Indemnification; Directors
'
and Officers
'
Insurance
.
(a) From and after the Effective Time,the Surviving Corporation shall
indemnify and hold harmless, to the extent (subject to applicable law) such
persons are indemnified as of the date of this Agreement by the Company
pursuant to the Company Charter, Company Bylaws, the governing ororganizational
documents of any Subsidiary of the Company, or any indemnification agreements
in existence as of the date hereof that have been disclosed to Parent, each
present and former director or officer of the Company and its Subsidiaries
(ineach case, when acting in such capacity) (collectively, the "
Company Indemnified Parties
") against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, damages or liabilities incurred inconnection with
any threatened or actual claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, whether arising
before or after the Effective Time, arising out of the fact that such person
is orwas a director or officer of the Company or any Company Subsidiary and
pertaining to matters, acts or omissions existing or occurring at or prior to
the Effective Time, including matters, acts or omissions occurring in
connection with the approvalof this Agreement and the transactions
contemplated by this Agreement and Parent shall also advance expenses as
incurred by such Company Indemnified Party to the fullest extent permitted by
applicable law;
provided
that to the extent anyexpenses are advanced to a Company Indemnified Party,
such party provides an undertaking to repay such advances if it is ultimately
determined that such Company Indemnified Party is not entitled to
indemnification. Parent shall reasonably cooperatewith the Company Indemnified
Party, and the Company Indemnified Party shall reasonably cooperate with
Parent, in the defense of any such claim, action, suit, proceeding or
investigation.
(b) For a period of six (6) years after the Effective Time, the Surviving
Corporation shall maintain in effect the current policies ofdirectors' and
officers' liability insurance maintained by the Company (
provided
that the Surviving Corporation may substitute therefor policies with a
substantially comparable insurer of at least the same coverage and
amountscontaining terms and conditions which are no less advantageous to the
insured) with respect to claims against the present and former officers and
directors of the Company or any Company Subsidiary arising from facts or
events which occurred at orbefore the Effective Time;
provided
that Parent shall not be obligated to expend, on an annual basis, an amount in
excess of 250% of the current annual premium paid as of the date hereof by the
Company for such insurance (the "
PremiumCap
"), and if such premiums for such insurance would at any time exceed the
Premium Cap, then Surviving Corporation shall cause to be maintained policies
of insurance which, in the Surviving Corporation's good faith determination,prov
ide the maximum coverage available at an annual premium equal to the Premium
Cap. In lieu of the foregoing, the Company, in consultation with, but only
upon obtaining the consent of, Parent, may (and at the request of Parent, the
Company shalluse its reasonable best efforts to) obtain at or prior to the
Effective Time a
six-year
pre-paid
"tail" policy
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under the Company's existing directors and officers insurance policy providing
equivalent coverage to that described in the preceding sentence if and to the
extent that the same may beobtained for an amount that, in the aggregate, does
not exceed the Premium Cap. If Parent or the Company purchases such a "tail
policy," Parent shall not have any further obligations under this
Section
6.8(b)
other than to maintain such
pre-paid
"tail policy" in full force and effect and continue to honor its obligations
thereunder.
(c) The obligations of Parent and the Company under this
Section
6.8
shall not be terminated or modified after theEffective Time in a manner so as
to adversely affect any Company Indemnified Party or any other person entitled
to the benefit of this
Section
6.8
without the prior written consent of the affected Company IndemnifiedParty or
affected person.
(d) The provisions of this
Section
6.8
shall survive the Effective Time and areintended to be for the benefit of, and
shall be enforceable by, each Company Indemnified Party and his or her heirs
and representatives. If the Surviving Corporation or any of its successors or
assigns will consolidate with or merge into any otherentity and not be the
continuing or surviving entity of such consolidation or merger, transfer all
or substantially all of its assets or deposits to any other entity or engage
in any similar transaction, then in each case to the extent theobligations set
forth in this
Section
6.8
are not otherwise transferred and assumed by such successors and assigns by
operation of law or otherwise, the Surviving Corporation will cause proper
provision to be made so thatthe successors and assigns of the Surviving
Corporation will expressly assume the obligations set forth in this
Section
6.8
.
6.9
Additional Agreements
. In case at any time after the Effective Time any further action is necessary
ordesirable to carry out the purposes of this Agreement (including any merger
between a Subsidiary of Parent, on the one hand, and a Subsidiary of the
Company, on the other) or to vest Parent or the Surviving Corporation with
full title to allproperties, assets, rights, approvals, immunities and
franchises of any of the parties to the Merger or the Bank Merger, the proper
officers and directors of each party to this Agreement and their respective
Subsidiaries shall take all suchnecessary action as may be reasonably
requested by Parent.
6.10
Advice of Changes
. Parent and theCompany (in such capacity, the "
Notifying Party
") shall each promptly advise the other party of any change, circumstance,
condition, occurrence, development, or event (i) that has had or would
reasonably be expected to have aMaterial Adverse Effect on the Notifying Party
or (ii) which the Notifying Party believes would or would reasonably be
expected to cause or constitute a material breach of any of the Notifying
Party's representations, warranties orcovenants contained herein that
reasonably could be expected to give rise, either individually or in the
aggregate, to the failure of a condition set forth in, if Parent is the
Notifying Party,
Section
7.1
or
Section
7.3
, or if the Company is the Notifying Party,
Section
7.1
or
Section
7.2
;
provided
that any failure to give notice in accordance with the foregoingwith respect
to any breach shall not be deemed to constitute a violation of this
Section
6.10
or the failure of any condition set forth in
Section
7.2
or
Section
7.3
to be satisfied, or otherwise constitute a breach of this Agreement by the
party failing to give such notice, in each case unless the underlying breach
would independently result in a failure of the conditionsset forth in
Section
7.2
or
Section
7.3
to be satisfied; and provided, further, that the delivery of any notice
pursuant to this
Section
6.10
shall not cure anybreach of, or noncompliance with, any other provision of
this Agreement or limit the remedies available to the party receiving such
notice.
6.11
Acquisition Proposals
.
(a) The Company agrees that it will not, and will cause its Subsidiaries and
use its reasonable best efforts to cause its and their officers,directors,
employees, agents, advisors and representatives (collectively, "
Representatives
") not to, directly or indirectly, (i) initiate, solicit, knowingly encourage
or knowingly facilitate inquiries or proposals with respectto any Acquisition
Proposal, (ii) engage or participate in any negotiations with any person
concerning any Acquisition Proposal, (iii) provide any confidential or
nonpublic information or data to, or have or participate in any discussionswith,
any person relating to any Acquisition Proposal (other than the parties to
this Agreement and their Representatives) or (iv) unless this Agreement has
been terminated in
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accordance with its terms, approve or enter into any term sheet, letter of
intent, commitment, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement orother agreement (whether written or
oral, binding or nonbinding) (other than a confidentiality agreement referred
to and entered into in accordance with this
Section
6.11
) in connection with or relating to any AcquisitionProposal. Notwithstanding
the foregoing, in the event that after the date of this Agreement and prior to
the receipt of the Requisite Company Vote, the Company receives an unsolicited
bona fide written Acquisition Proposal that did not result from abreach of this
Section
6.11
, the Company may, and may permit its Subsidiaries and its and its
Subsidiaries' Representatives to, furnish or cause to be furnished
confidential or nonpublic information or data andparticipate in such
negotiations or discussions with the person making the Acquisition Proposal
but only to the extent that, prior to doing so, the Board of Directors of the
Company concludes in good faith (after receiving the advice of its
outsidelegal counsel, and with respect to financial matters, its outside
financial advisors) that (A) such Acquisition Proposal constitutes or is
reasonably likely to lead to a Superior Proposal and (B) failure to take such
actions would be morelikely than not to result in a violation of its fiduciary
duties under applicable law;
provided
, that, prior to furnishing any confidential or nonpublic information
permitted to be provided pursuant to this sentence, such party shall
haveprovided such information to the other party to this Agreement and shall
have entered into a confidentiality agreement with the person making such
Acquisition Proposal on terms no less favorable to the Company than the
Confidentiality Agreement (an"
Acceptable Confidentiality Agreement
"), which confidentiality agreement shall not provide such person with any
exclusive right to negotiate with the Company. The Company will, and will
cause its Subsidiaries and Representatives to,immediately cease and cause to
be terminated any activities, discussions or negotiations conducted before the
date of this Agreement with any person other than Parent with respect to any
Acquisition Proposal. The Company shall provide three(3) business days written
notice to Parent prior to entering into any Acceptable Confidentiality
Agreement. The Company will promptly (within twenty-four (24) hours) advise
Parent following receipt of any Acquisition Proposal or anyinquiry which could
reasonably be expected to lead to an Acquisition Proposal, and the substance
thereof (including the terms and conditions of and the identity of the person
making such inquiry or Acquisition Proposal), will provide Parent with
anunredacted copy of any such Acquisition Proposal and any draft agreements,
proposals or other materials received from or on behalf of the person making
such inquiry or Acquisition Proposal in connection with such inquiry or
Acquisition Proposal, andwill keep Parent apprised of any related
developments, discussions and negotiations on a current basis, including any
amendments to or revisions of the terms of such inquiry or Acquisition
Proposal. The Company shall withdraw and terminate accessthat was granted to
any person (other than the parties to this Agreement and their respective
affiliates and Representatives) to any "data room" (virtual or physical) that
was established in connection with an Acquisition Proposal. Inconnection with
any Acquisition Proposal (whether prior to or after the date of this
Agreement), the Company shall use its reasonable best efforts to (x) enforce
any existing confidentiality or standstill agreements to which it or any of
itsSubsidiaries is a party in accordance with the terms thereof and (y) within
five (5) business days after the date hereof, request and confirm the return
or destruction of any confidential information provided to any person (other
than theparties to this Agreement and their Representatives in their capacity
as such) pursuant to any such agreement.
(b) The Company shall not,and none of the Board of Directors of the Company or
any committee thereof shall cause or permit the Company to, enter into any
letter of intent, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement or otheragreement (other than an
Acceptable Confidentiality Agreement) relating to any Acquisition Proposal
made to the Company.
(c) As used inthis Agreement, "
Acquisition Proposal
" means, other than the transactions contemplated by this Agreement, any
offer, proposal or inquiry relating to, or any third party indication of
interest in, (i) any acquisition orpurchase, direct or indirect, of 25% or
more of the consolidated assets of the Company and its Subsidiaries or 25% or
more of any class of equity or voting securities of the Company or its
Subsidiaries whose assets, individually or in the aggregate,constitute 25% or
more of the consolidated assets of the Company, (ii) any tender offer
(including a self-tender offer) or exchange offer that, if consummated, would
result in such third party beneficially owning 25% or more of any class
ofequity or voting securities of the Company or its Subsidiaries whose assets,
individually or in the aggregate, constitute 25% or more of the consolidated
assets of
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the Company, or (iii) a merger, consolidation, share exchange, business
combination, reorganization, recapitalization, liquidation, dissolution or
other similar transaction involving theCompany or its Subsidiaries whose
assets, individually or in the aggregate, constitute 25% or more of the
consolidated assets of the Company.
(d) As used in this Agreement, "
Superior Proposal
" means any unsolicited bona fide written offer or proposal made by a
thirdparty to consummate an Acquisition Proposal that the Board of Directors
of the Company determines in good faith (after receiving the advice of its
outside legal counsel and, with respect to financial matters, its outside
financial advisors) (i)would, if consummated, result in the acquisition of
all, but not less than all, of the issued and outstanding shares of Company
Common Stock or all, or substantially all, of the assets of the Company; (ii)
would result in a transaction that,(A) involves consideration to the holders
of the shares of Company Common Stock that is, after accounting for payment of
the Termination Fee that may be required hereunder, more favorable, from a
financial point of view, than the considerationto be paid to the holders of
shares of Company Common Stock pursuant to this Agreement, considering, among
other things, the nature of the consideration being offered, and any material
regulatory approvals or other risks associated with the timingof the proposed
transaction beyond, or in addition to, those specifically contemplated hereby,
and which proposal is not conditioned upon obtaining financing is, and (B) is,
in light of the other terms of such proposal, more favorable toholders of the
shares of Company Common Stock than the Merger and the other transactions
contemplated by this Agreement; and (iii) is reasonably likely to be completed
on the terms proposed, in each case, taking into account all legal,financial,
regulatory and other aspects of the Acquisition Proposal.
(e) Nothing contained in this Agreement shall prevent the Company orits Board
of Directors from: (i) complying with Rules 14d-9 and 14e-2 under the Exchange
Act with respect to an Acquisition Proposal;
provided
that such Rules will in no way eliminate or modify the effect that any action
pursuant to suchRules would otherwise have under this Agreement; (ii) making
any disclosure to the Company's stockholders if, after consultation with its
outside legal counsel, the Company determines that such disclosure is required
by applicable Law; or(iii) informing any person or entity of the existence of
the provisions contained in this
Section
6.11
.
6.12
Public Announcements
. Parent and the Company agree that the initial press release withrespect to
the execution and delivery of this Agreement shall be a release that is
mutually agreed to by the parties. Thereafter, each of the parties agrees that
no public release or announcement or statement concerning this Agreement or
thetransactions contemplated hereby shall be issued by any party without the
prior written consent of the other party (which consent shall not be
unreasonably withheld, conditioned or delayed), except (i) as required by
applicable law or the rulesor regulations of any applicable Governmental
Entity or stock exchange to which the relevant party is subject, in which case
the party required to make the release or announcement shall consult with the
other party about, and allow the other partyreasonable time to comment on,
such release or announcement in advance of such issuance or (ii) for such
releases, announcements or statements that are consistent with other such
releases, announcement or statements made after the date of thisAgreement in
compliance with this
Section
6.12
.
6.13
Change of Method
.Parent and the Company shall be empowered, upon their mutual agreement, at
any time prior to the Effective Time, to change the method or structure of
effecting the combination of the Company and Parent (including the provisions
of
Article
I
), if and to the extent they both deem such change to be necessary,
appropriate or desirable;
provided
that no such change shall (a) alter or change the Exchange Ratio, (b)
adversely affect the Taxtreatment of the Company's stockholders or Parent's
stockholders pursuant to this Agreement, (c) prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code,(d) adversely affect the Tax treatment of the Company or Parent pursuant
to this Agreement or (e) materially impede or delay the consummation of the
transactions contemplated by this Agreement in a timely manner. The parties
agree toreflect any such change in an appropriate amendment to this Agreement
executed by both parties in accordance with
Section
9.2
.
6.14
Takeover Statutes
. Neither the Company nor its Boards of Directors shall take any action that
wouldcause any Takeover Statute to become applicable to this Agreement, the
Merger, or any of the other transactions
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contemplated hereby, and each shall take all necessary steps to exempt (or
ensure the continued exemption of) the Merger and the other transactions
contemplated hereby from any applicableTakeover Statute now or hereafter in
effect. If any Takeover Statute may become, or may purport to be, applicable
to the transactions contemplated hereby, the Company and the members of its
Boards of Directors will grant such approvals and take suchactions as are
necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of any Takeover Statute on
any ofthe transactions contemplated by this Agreement, including, if
necessary, challenging the validity or applicability of any such Takeover
Statute.
6.15
Operating Functions
. To the extent permitted by Law and upon Parent's request, the Company
shall(and shall cause its Subsidiaries to) regularly discuss and reasonably
cooperate with Parent and its Subsidiaries in connection with (a) planning for
the efficient and orderly combination of the Company and Parent (including the
combination ofthe Company Bank and Parent Bank) and the operation of the
Surviving Corporation and its Subsidiaries, and (b) preparing for the
consolidation of appropriate operating functions to be effective at the
Effective Time or such later date as Parentmay decide. Each party shall
cooperate with the other party in preparing to execute conversion or
consolidation of systems and business operations generally (including by
entering into customary confidentiality,
non-disclosure
and similar agreements with related service providers and other parties).
Prior to the Effective Time, each party shall exercise, consistent with the
terms and conditions of this Agreement,including this
Article
VI
, complete control and supervision over its and its Subsidiaries' respective
operations.
6.16
Exemption from Liability under
Section
16(b)
. The Company and Parent agreethat, in order to most effectively compensate
and retain those officers and directors of the Company subject to the
reporting requirements of Section 16(a) of the Exchange Act (the "
Company Insiders
"), both prior to and afterthe Effective Time, it is desirable that Company
Insiders not be subject to a risk of liability under Section 16(b) of the
Exchange Act to the fullest extent permitted by applicable law in connection
with the conversion of shares of CompanyCommon Stock and Company RSU Awards in
the Merger, and for that compensatory and retentive purpose agree to the
provisions of this
Section
6.16
. The Board of Directors of Parent and of the Company, or a committee of
non-employee
directors thereof (as such term is defined for purposes of Rule
16b-3(d)
under the Exchange Act), shall prior to the Effective Time take all such steps
as may berequired to cause (in the case of the Company) any dispositions of
Company Common Stock or Company RSU Awards by the Company Insiders, and (in
the case of Parent) any acquisitions of Parent Common Stock by any Company
Insiders who, immediatelyfollowing the Merger, will be officers or directors
of the Surviving Corporation subject to the reporting requirements of Section
16(a) of the Exchange Act, in each case pursuant to the transactions
contemplated by this Agreement, to be exemptfrom liability pursuant to Rule
16b-3 under the Exchange Act to the fullest extent permitted by applicable Law.
6.17
Stockholder Litigation
. Each of Parent and the Company shall promptly notify the other party
inwriting of any action, arbitration, audit, hearing, investigation,
litigation, suit, subpoena or summons issued, commenced, brought, conducted or
heard by or before, or otherwise involving, any Governmental Entity or
arbitrator pending or, to theknowledge of Parent or the Company, as
applicable, threatened against Parent, the Company or any of their respective
Subsidiaries that (a) questions or would reasonably be expected to question
the validity of this Agreement or the otheragreements contemplated hereby or
thereby or any actions taken or to be taken by Parent, the Company, or their
respective Subsidiaries with respect hereto or thereto, or (b) seeks to enjoin
or otherwise restrain the transactions contemplatedhereby or thereby. The
Company shall give Parent the opportunity to participate at its own expense in
the defense or settlement of any stockholder litigation against the Company
and/or its directors or affiliates relating to the transactionscontemplated by
this Agreement, and no such settlement shall be agreed without Parent's prior
written consent (such consent not to be unreasonably withheld, conditioned or
delayed).
6.18
Assumption of Company Debt
. Parent agrees to execute and deliver, or cause to be executed anddelivered,
by or on behalf of Parent or Parent Bank (as the case may be), at or prior to
the Effective Time, one or
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more supplemental indentures, guarantees, and other instruments required for
the due assumption of the Company's obligations in respect of its outstanding
debt, guarantees, securities, andother agreements to the extent required by
the terms of such debt, guarantees, securities, and other agreements.
6.19
Transfer Agent Certificate
. The Company shall provide a customary certificate to Parent from the
Company's transfer agent certifying the number of shares of Company Common
Stock outstanding as of a date that is no earlier thanthree (3) business days
before the Closing Date.
6.20
280G Matters
. Prior to the Effective Time,the Company shall (a) work in good faith to
minimize any potential lost Tax deduction resulting from Section 280G of the
Code, to the extent applicable, and any mitigation strategies shall be subject
to the approval of Parent and(b) promptly provide Parent with a copy of each
iteration of calculations performed under Section 280G of the Code.
6.21
Employee Matters
.
(a) During the period commencing on the Closing Date and ending on the first
anniversary thereof (or an earlier termination of employment),Parent shall
provide each employee of the Company or any of its Subsidiaries as of
immediately prior to the Effective Time and who continues in employment with
the Company or any of its Subsidiaries following the Effective Time (each, a"
Continuing Employee
"), with employee benefits (excluding equity and equity based compensation,
incentive compensation, defined benefit pensions, deferred compensation,
retention benefits, change in control benefits and employeestock ownership
plan benefits (collectively, "
Excluded Benefits
")) that are substantially similar in the aggregate to the employee benefits
(excluding Excluded Benefits) provided to similarly situated employees of
Parent; providedthat Parent may satisfy its obligation under this Section
6.21(a) by providing such Continuing Employees with employee benefits
(excluding Excluded Benefits) that are substantially comparable in the
aggregate to the employee benefits (excludingExcluded Benefits) provided by
the Company to such Continuing Employees immediately prior to the Effective
Time. Within a reasonable period of time following the Effective Time, each
Continuing Employee shall be eligible to participate in any 401(k)plan now or
hereafter established and maintained by Parent on the same terms and
conditions as apply to Parent employees generally, with credit for prior
service with the Company and its Subsidiaries (and their respective
predecessors) for purposesof eligibility and vesting (but not benefit
accrual), as permitted under the respective plans and applicable Law; provided
that the foregoing shall not apply to the extent it would result in
duplication of benefits.
(b) Parent shall provide, or cause a Subsidiary of Parent to provide, the
Continuing Employees, from the Effective Time and ending on thefirst
anniversary of the Closing Date (or an earlier termination of employment),
health insurance coverage either under the Company's group health insurance
plans as available to similar situated employees of Parent or by continuingCompa
ny's group health insurance plans so that no Continuing Employee incurs a gap
in coverage; provided that such coverage provided by Parent or a Subsidiary of
Parent will include
"in-network"
coverage for the geographic locations covered by the Company's group health
insurance plans immediately prior to the Closing Date.
(c) With respect to any welfare benefit plans of Parent in which any
Continuing Employees become eligible to participate on or after theEffective
Time (the "
New Plans
"), Parent shall use commercially reasonable efforts to: (i) waive all
exclusions and waiting periods with respect to participation and coverage
requirements applicable to such Continuing Employeesand their eligible
dependents under any New Plans, except to the extent such
pre-existing
conditions, exclusions or waiting periods would apply under the analogous
Company Benefit Plan, (ii) provide eachsuch Continuing Employee and their
eligible dependents with credit for any
co-payments
and deductibles paid during the year in which the Closing Date occurs prior to
the Effective Time under a Company BenefitPlan (to the same extent that such
credit was given under the analogous Company Benefit Plan prior to the
Effective Time) in satisfying any applicable deductible or
out-of-pocket
requirements under any New Plans, and (iii) recognize all service of such
Continuing Employees with the Company and its Subsidiaries (and theirrespective
predecessors, if applicable) for all purposes in any New Plan to the same
extent that such service
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was taken into account under the analogous Company Benefit Plan prior to the
Effective Time; provided that the foregoing service recognition shall not
apply (A) to the extent it would resultin duplication of benefits for the same
period of services, (B) for purposes of any defined benefit pension plan or
benefit plan that provides retiree welfare benefits, or (C) to any benefit
plan that is a frozen plan or providesgrandfathered benefits.
(d) In the event that Parent requests the Company to terminate the Company's
401(k) Plan prior to Closing,Parent agrees to take all commercially reasonable
steps necessary or appropriate, including adopting any necessary amendments,
with respect to Parent's 401(k) Plan (i) to provide that Continuing Employees
will be eligible to participate inParent's 401(k) Plan within a reasonable
period of time following the Closing Date, and (ii) thereafter to accept
roll-overs of benefits from the Company 401(k) Plan to Parent's 401(k) Plan
for Continuing Employees (excluding loanrollovers if Parent's 401(k) plan does
not allow loan rollovers).
(e) For the avoidance of doubt, immediately after the EffectiveTime, Parent,
by virtue of the Merger, shall, by operation of Law, be bound by all
employment and change in control agreements and/or supplemental retirement
plans that the Company has with its current and former officers, directors and
employees aslisted in
Section
6.21(e)
of the Company Disclosure Schedule, except to the extent any such agreement
has been terminated or superseded by agreement of any such officer, director
or employee and Parent or its Subsidiaries.For the avoidance of doubt,
immediately after the Bank Merger, Parent Bank, by virtue of the Bank Merger,
shall, by operation of Law, be bound by all employment and change in control
agreements and/or supplemental retirement plans that the CompanyBank has with
its current and former officers, directors and employees as listed in
Section
6.21(e)
of the Company Disclosure Schedule, except to the extent any such agreement
has been terminated or superseded by agreementof any such officer, director or
employee and Parent or its Subsidiaries.
(f) As of the Effective Time, Parent or one of its Subsidiariesshall (i) honor
any vacation or personal time off (other than sick leave) ("
PTO
") that has accrued but is unused under the applicable policies of the Company
(including any PTO carried over from a prior year in accordance withthe
Company's policies) and (ii) recognize all service of any Continuing Employee
with the Company and its Subsidiaries for purposes of determining PTO in
accordance with the policy in effect for Continuing Employees after the
ClosingDate.
(g) For any Continuing Employee whose employment is terminated by Parent and
its Subsidiaries within the two (2)-year periodfollowing the Closing Date
under certain circumstances which would entitle the Continuing Employee to
severance benefits under the Territorial Savings Bank Separation Pay Plan as
in effect as of the date hereof (the "
Separation PayPlan
"), Parent shall, or shall cause a Subsidiary of Parent to, provide such
Continuing Employee with the severance benefits determined in accordance with
the Separation Pay Plan (for the avoidance of doubt, subject to the
releaserequirement in the Separation Pay Plan).
(h) The Company will be permitted to establish a retention pool/stay bonus of
up to $150,000,providing for retention/stay bonuses to be paid to employees of
Company or Company Bank who remain employed with the Company or Company Bank
until the date that is six (6) months after the Closing Date (or such earlier
date as may be mutuallyagreed upon by the Company and Parent in writing)
(other than employees who are subject to employment contracts or other
individual contracts providing for severance), such bonuses to be paid
reasonably promptly following such date. The employeeswho will receive a
retention/stay bonus and the amount of the retention/stay bonus for each such
employee will be determined by a mutual written agreement of the Company and
Parent. As a condition to receiving any payment pursuant to an arrangementimplem
ented pursuant to this
Section
6.21(h)
, the employee shall be required to execute a general release of claims and
covenant not to sue, in a form mutually agreed upon by the Company and Parent,
within the time framerequired by such release and shall not revoke such
release.
(i) Nothing in this Section 6.21 shall create any third-party beneficiaryrights
in any individual, require Parent, the Company or any of their perspective
Subsidiaries to continue the employment of any individual for any particular
period of time or constitute or be construed to an amendment to, or be
construed toprohibit the amendment or termination of, any employee benefit
plan.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1
Conditions to Each Party
'
s Obligation to Effect the Merger
. The respective obligations of the parties to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the
followingconditions:
(a)
Stockholder Approval
. This Agreement shall have been approved by the stockholders of the Company
by the RequisiteCompany Vote.
(b)
Stock Exchange Listing
. The shares of Parent Common Stock that shall be issuable pursuant to this
Agreementshall have been approved for listing on the Nasdaq Stock Exchange,
subject to official notice of issuance.
(c)
RegulatoryApprovals
. All Requisite Regulatory Approvals shall have been obtained and shall remain
in full force and effect and all statutory waiting periods in respect thereof
shall have expired or been terminated, and no such Requisite RegulatoryApproval
shall have resulted in the imposition of any Materially Burdensome Regulatory
Condition.
(d)
S-4
. The S-4 shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the S-4 shall have been issued and no
proceedings for that purpose shall have beeninitiated or threatened by the SEC
and not withdrawn.
(e)
No Injunctions or Restraints; Illegality
. No order, injunction or decreeissued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger, the Bank Merger or any of the other transactions
contemplated by this Agreement shall be in effect. Nostatute, rule,
regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits or makes
illegal consummation of the Merger, the Bank Merger or the other transactionscon
templated hereby.
7.2
Conditions to Obligations of Parent
. The obligation of Parent to effect theMerger is also subject to the
satisfaction, or waiver by Parent, at or prior to the Effective Time, of the
following conditions:
(a)
Representations and Warranties
. The representations and warranties of the Company set forth in
Sections
3.2(a)
,
3.8(a)
and
3.21
(in each case after giving effect to the
lead-in
to
Article
III
) shall be true and correct (other than, in the case of
Section
3.2(a)
, such failures to be true and correct as are
de minimis
)in each case as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date and the representations and
warranties ofthe Company set forth in
Sections
3.1
,
3.2(b)
,
3.2(c)
,
3.3(a)
,
3.3(b)
(i) and
3.7 (in each case read without giving effect to any qualification as to
materiality or Material AdverseEffect on the Company set forth in such
representations or warranties) shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) asof the Closing
Date as though made on and as of the Closing Date. All other representations
and warranties of the Company set forth in this Agreement (read without giving
effect to any qualification as to materiality or Material Adverse Effect onthe
Company set forth in such representations or warranties) shall be true and
correct in all respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Dateas though made on and as of the Closing Date;
provided
that, for purposes of this sentence, such representations and warranties shall
be deemed to be true and correct unless the failure or failures of such
representations and warranties to beso true and correct, either individually
or in the aggregate, and without giving effect to any qualification as to
materiality or Material Adverse Effect set forth in such representations or
warranties, has had or would reasonably be expected tohave a Material Adverse
Effect on the Company or the Surviving Corporation. Parent shall have received
a certificate dated as of the Closing Date signed on behalf of the Company by
the Chief Executive Officer and the Chief Financial Officer of theCompany to
the foregoing effect.
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(b)
Performance of Obligations of the Company
. The Company shall have performed inall material respects the obligations
required to be performed by it under this Agreement at or prior to the Closing
Date, and Parent shall have received a certificate dated as of the Closing
Date signed on behalf of the Company by the ChiefExecutive Officer and the
Chief Financial Officer of the Company to such effect.
(c)
Material Adverse Effect
. Since the date ofthis Agreement, a Material Adverse Effect with respect to
the Company shall not have occurred, and Parent shall have received a
certificate dated as of the Closing Date and signed by the President and Chief
Executive Officer of the Company to thateffect.
(d)
Federal Tax Opinion
. Parent shall have received a written opinion of Greenberg Traurig LLP, in
form and substancereasonably satisfactory to Parent, dated as of the Closing
Date, to the effect that, on the basis of facts, representations and
assumptions set forth or referred to in such opinion, the Merger shall qualify
as a "reorganization" within themeaning of Section 368(a) of the Code. In
rendering such opinion, counsel may require and rely upon representations
contained in certificates of officers of Parent and the Company, reasonably
satisfactory in form and substance to such counsel.
(e)
FIRPTA Certification; IRS
W-9
. The Company shall deliver to Parent (i) a properlyexecuted certification
that shares of Company Common Stock are not "United States real property
interests" in accordance with the Treasury Regulations under Sections 897 and
1445 of the Code, together with a notice to the IRS in accordancewith the
provisions of Section 1.897-2(h)(2) of the Treasury Regulations, and (ii) a
duly completed and executed Internal Revenue Service Form W-9 for the Company,
in each case dated as of the Closing Date and in form and substancereasonably
acceptable to Parent.
7.3
Conditions to Obligations of the Company
. The obligation of theCompany to effect the Merger is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:
(a)
Representations and Warranties
. The representations and warranties of Parent set forth in
Sections
4.2(a)
and
4.7
shall be true and correct (other than, in the case of
Section
4.2(a)
, such failures to be true and correct as are
de minimis
)in each case as of the date of this Agreement and (except to the extent
suchrepresentations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date and the
representations and warranties of Parent set forth in
Sections
4.1
,
4.2(b)
,
4.2(c)
, and
4.3(a)
(in each case read without giving effect to any qualification as to
materiality or Material Adverse Effect on the Parent set forth in such
representations or warranties) shall be true and correct in all materialrespects
as of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date. All other representations and warranties
ofParent set forth in this Agreement (read without giving effect to any
qualification as to materiality or Material Adverse Effect on Parent set forth
in such representations or warranties) shall be true and correct in all
respects as of the date ofthis Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date,
provided
that, for purposes of this sentence, such representationsand warranties shall
be deemed to be true and correct unless the failure or failures of such
representations and warranties to be so true and correct, either individually
or in the aggregate, and without giving effect to any qualification as
tomateriality or Material Adverse Effect on Parent set forth in such
representations or warranties, has had or would reasonably be expected to have
a Material Adverse Effect on Parent. The Company shall have received a
certificate dated as of theClosing Date signed on behalf of Parent by the
Chief Executive Officer and the Chief Financial Officer of Parent to the
foregoing effect.
(b)
Performance of Obligations of Parent.
Parent shall have performed in all material respects the obligations required
to be performedby it under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate dated as of the Closing Date
signed on behalf of Parent by the Chief Executive Officer and the Chief
Financial Officer of Parent to sucheffect.
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(c)
Material Adverse Effect
. Since the date of this Agreement, a Material AdverseEffect with respect to
Parent shall not have occurred, and the Company shall have received a
certificate dated as of the Closing Date and signed by the Chief Executive
Officer and the Chief Financial Officer of Parent to such effect.
(d)
Federal Tax Opinion.
The Company shall have received a written opinion of Luse Gorman, PC in form
and substance reasonablysatisfactory to the Company, dated as of the Closing
Date, to the effect that, on the basis of facts, representations and
assumptions set forth or referred to in such opinion, the Merger shall qualify
as a "reorganization" within themeaning of Section 368(a) of the Code. In
rendering such opinion, counsel may require and rely upon representations
contained in certificates of officers of Parent and the Company, reasonably
satisfactory in form and substance to such counsel.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1
Termination
. This Agreement may be terminated at any time prior to the Effective Time,
whether beforeor after approval of this Agreement by the stockholders of the
Company:
(a) by mutual consent of Parent and the Company in a writteninstrument;
(b) by either Parent or the Company if any Governmental Entity that must grant
a Requisite Regulatory Approval has deniedapproval of the Merger or the Bank
Merger and such denial has become final and
non-appealable
or any Governmental Entity of competent jurisdiction shall have issued a final
and nonappealable order, injunction,decree or other legal restraint or
prohibition permanently enjoining or otherwise prohibiting or making illegal
the consummation of the Merger or the Bank Merger, unless the failure to
obtain a Requisite Regulatory Approval shall be due to thefailure of the party
seeking to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein;
(c) by either Parent or the Company if the Merger shall not have been
consummated on or before the date which is twelve (12) months afterthe date of
this Agreement (the "
Termination Date
");
provided
, however, that the right to terminate this Agreement under this Section
8.1(c) shall not be available to any party whose failure to fulfill any
obligationunder this Agreement shall have been the cause of, or shall have
resulted in, the failure of the Closing to occur by such date. Notwithstanding
the above, either party has the right to extend this Agreement for two (2)
additional three(3) month periods after the Termination Date if it believes in
good faith that the Requisite Regulatory Approvals are likely to be obtained
during any such three-month period;
(d) by either Parent or the Company if the Requisite Company Vote shall not
have been obtained at the Company Meeting duly convened thereforor at any
adjournment or postponement thereof;
(e) by either Parent or the Company (
provided
that the terminating party is notthen in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have
been a breach of any of the covenants or agreements or any of the
representations or warranties (or any such representation orwarranty shall
cease to be true) set forth in this Agreement on the part of the Company, in
the case of a termination by Parent, or Parent, in the case of a termination
by the Company, which breach or failure to be true, either individually or
inthe aggregate with all other breaches by such party (or failures of such
representations or warranties to be true), would constitute, if occurring or
continuing on the Closing Date, the failure of a condition set forth in
Section
7.2
, in the case of a termination by Parent, or
Section
7.3
, in the case of a termination by the Company, and which is not cured within
forty-five (45) days following written notice tothe Company (or such fewer
days as remain prior to the Termination Date), in the case of a termination by
Parent, or Parent, in the case of a termination by the Company, or by its
nature or timing cannot be cured during such period; or
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(f) by Parent prior to such time as the Requisite Company Vote is obtained, if
(i) theBoard of Directors of the Company shall have made a Recommendation
Change, or (ii) the Company or its Board of Directors has breached its
obligations under
Section
6.3
or
Section
6.11
.
8.2
Effect of Termination
.
(a) In the event of termination of this Agreement by either Parent or the
Company as provided in
Section
8.1
, thisAgreement shall forthwith become void and have no effect, and none of
Parent, the Company, any of their respective Subsidiaries or any of the
officers or directors of any of them shall have any liability of any nature
whatsoever hereunder, or inconnection with the transactions contemplated
hereby, except that:
(i)
Sections
6.2(b)
and this
Section
8.2
and
Article
IX
shall survive any termination of this Agreement, and
(ii) notwithstanding anything to the contrary contained in this Agreement,
neither Parent nor the Company shall be relieved orreleased from any
liabilities or damages arising out of its actual and intentional fraud or
willful and material breach of any provision of this Agreement occurring prior
to termination.
(b) (i) In the event that after the date of this Agreement and prior to the
termination of this Agreement, a bona fide Acquisition Proposalshall have been
communicated to or made known to senior management or the Board of Directors
of the Company or has been made directly to its stockholders generally or any
person shall have publicly announced (and not withdrawn) an AcquisitionProposal
with respect to the Company and (A) thereafter this Agreement is terminated by
either Parent or the Company pursuant to
Section
8.1(c)
without the Requisite Company Vote having been obtained (and all otherconditions
set forth in
Section
7.1
and
Section
7.3
had been satisfied or were capable of being satisfied at a time prior to such
termination), (B) thereafter this Agreement is terminated by eitherParent or
the Company pursuant to
Section
8.1(d)
, or (C) thereafter this Agreement is terminated by Parent pursuant to
Section
8.1(e)
as a result of a willful breach, and (D) prior to thedate that is twelve (12)
months after the date of such termination, the Company enters into a
definitive agreement for, or consummates, a transaction with respect to an
Acquisition Proposal (whether or not the same Acquisition Proposal as
thatreferred to above), then the Company shall on the date of consummation of
such transaction pay Parent, by wire transfer of same day funds, a fee equal
to $3,000,000 (the "
Termination Fee
");
provided
that for purposes of this
Section
8.2(b)
, all references in the definition of Acquisition Proposal to "25%" shall
instead refer to "50%."
(ii) In the event that this Agreement is terminated by Parent pursuant to
Section
8.1(f)
, then theCompany shall pay Parent, by wire transfer of same day funds, the
Termination Fee no later than two (2) business days after such termination.
(c) Notwithstanding anything to the contrary herein, but without limiting the
right of Parent to recover liabilities or damages arising out ofthe Company's
fraud or willful and material breach of any provision of this Agreement, in no
event shall the Company be required to pay the Termination Fee on more than
one occasion.
(d) Each of Parent and the Company acknowledges that the agreements contained
in this
Section
8.2
are an integralpart of the transactions contemplated by this Agreement, and
that, without these agreements, the other party would not enter into this
Agreement; accordingly, if the Company fails promptly to pay the amount due
pursuant to this
Section
8.2
, and, in order to obtain such payment, Parent commences a suit which results
in a judgment against the Company for the Termination Fee, the Company shall
pay the
out-of-pocket
costs and expenses of Parent (including
out-of-pocket
attorneys' fees and expenses) in connection with suchsuit. In addition, if the
Company fails to pay the amounts payable pursuant to this
Section
8.2
, then the Company shall pay interest on such overdue amounts (for the period
commencing as of the date that such overdue amountwas originally required to
be paid and ending on the date that such overdue amount is actually paid in
full) at a rate per annum equal to the "prime rate" published in the
Wall Street Journal
on the date on which such payment was
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required to be made for the period commencing as of the date that such overdue
amount was originally required to be paid and ending on the date that such
overdue amount is actually paid in full.The amounts payable by the Company
pursuant to
Section
8.2(b)
shall constitute liquidated damages and not a penalty, and, except in the case
of fraud or willful and material breach of this Agreement, shall be (together
withthe amounts specified in this
Section
8.2(d)
) the sole monetary remedy of Parent in the event of a termination of this
Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1
Nonsurvival of Representations, Warranties and Agreements
. None of the representations, warranties, covenants or agreements in this
Agreement or in any instrument delivered pursuant to this Agreement (other
than the ConfidentialityAgreement, which shall survive in accordance with its
terms) shall survive the Effective Time, except for
Section
6.8
, and for those other covenants and agreements contained herein and therein
which by their terms apply orare to be performed in whole or in part after the
Effective Time.
9.2
Amendment
. Subject tocompliance with applicable law, this Agreement may be amended by
the parties hereto, by action taken or authorized by their respective Boards
of Directors, at any time before or after receipt of the Requisite Company
Vote;
provided
that afterreceipt of the Requisite Company Vote, there may not be, without
further approval of the Company's stockholders, any amendment of this
Agreement that requires further approval of such stockholders under applicable
law. This Agreement may not beamended, modified or supplemented in any manner,
whether by course of conduct or otherwise, except by an instrument in writing
specifically designated as an amendment hereto, signed on behalf of the
parties hereto.
9.3
Extension; Waiver
. At any time prior to the Effective Time, either of the parties hereto may,
to theextent legally allowed, (a) extend the time for the performance of any
of the obligations or other acts of the other party hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
documentdelivered pursuant hereto, and (c) waive compliance with any of the
agreements or satisfaction of any conditions contained herein;
provided
that, after approval of this Agreement by the stockholders of the Company,
there may not be,without further approval of such stockholders, any extension
or waiver of this Agreement or any portion thereof that requires further
approval of such stockholders under applicable law. Any agreement on the part
of a party hereto to any suchextension or waiver shall be valid only if set
forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall notoperate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
9.4
Expenses
.Except as otherwise provided in
Section
8.2
, all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense;
provided
thatthe costs and expenses of printing and mailing the Proxy Statement and all
filing and other fees paid to the SEC or any other Governmental Entity in
connection with the Merger or the Bank Mergers shall be borne equally by the
Company and Parent.
9.5
Notices
. All notices, requests, instructions or other communications or documents to
be given ormade hereunder by one party to the other party shall be in writing
and shall be deemed to have been given (a) when delivered by hand (with
written confirmation of receipt); (b) when received by the addressee if sent
by a nationally recognizedovernight courier (receipt requested); (c) on the
date sent by
e-mail
of a PDF document (with
non-automated
confirmation of receipt) if sent at or prior to 5:00 p.m.local time of the
recipient, and on the next business day if sent after 5:00 p.m. local time of
the recipient (in each case except in the event of any "bounce back" or similar
non-transmittal
message); or (d) on the day after the date mailed, by certified or registered
mail, return receipt requested, postage prepaid. Such communications must be
sent to the respective
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parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this
Section
9.5
)
:
(a) if to the Company, to:
Territorial Bancorp Inc.
1003Bishop Street, Suite 500
Honolulu, Hawaii 96813
Attention: Allan Kitagawa, Chairman, President and CEO;
Vernon Hirata, Vice Chairman,
Co-Chief
Operating Officer
and Corporate Secretary
Email:Gwen.Shimabukuro@terriorialsavings.net;
Vernon.Hirata@territorialsavings.net
With a copy (which shall not constitute notice) to:
Luse Gorman PC
5335 WisconsinAve., NW
Washington, DC 20015
Attention: Lawrence Spaccasi
Email: lspaccasi@luselaw.com
and
(b) if to Parent, to:
Hope Bancorp, Inc.
3200Wilshire Boulevard, Suite 1400
Los Angeles, California 90010
Attention: Kevin S. Kim, Chairman, President and CEO;
Angelee Harris, Executive Vice President and General
Counsel
Email:kevin.kim@bankofhope.com;
angelee.harris@bankofhope.com;
With a copy (which shall not constitute notice) to:
Greenberg Traurig, LLP
1840Century Park East, Suite 1900
Los Angeles, California 90067
Attention: Mark Kelson
Email:Mark.Kelson@gtlaw.com
9.6
Interpretation
. The parties have participated jointly in negotiating anddrafting this
Agreement. In the event that an ambiguity or a question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties, and no presumption or burden of proof shall arise favoring
ordisfavoring any party by virtue of the authorship of any provision of this
Agreement. When a reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to an Article or Section of or
Exhibit or Scheduleto this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words"include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." References to "
the date hereof
" shall mean the date ofthis Agreement. As used in this Agreement, the "
knowledge
" of the Company means the actual knowledge of any of the officers of the
Company listed on
Section
9.6
of the Company Disclosure Schedule, includingany such knowledge they would
have obtained after reasonable inquiry of their direct reports, and the "
knowledge
" of Parent means the actual knowledge of the officers of Parent listed on
Section
9.6
of theParent Disclosure
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Schedule including any such knowledge they would have obtained after
reasonable inquiry of their direct reports. As used herein, (a) "
business day
" means any day other than aSaturday, a Sunday or a day on which banks in New
York, New York are authorized by law or executive order to be closed, (b) "
person
" means any individual, corporation (including
not-for-profit),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, Governmental Entity or other entity
of any kind or nature, (c) an"
affiliate
" of a specified person is any person that directly or indirectly controls, is
controlled by, or is under common control with, such specified person, (d) "
made available
" means any document or otherinformation that was (i) provided by one party or
its representatives to the other party and its representatives prior to the
date hereof, (ii) included in the virtual data room of a party prior to the
date hereof or (iii) filed by aparty with the SEC and publicly available on
EDGAR prior to the date hereof, (e) the "
transactions contemplated hereby
" and "
transactions contemplated by this Agreement
" shall include the Merger and the BankMerger and (f) "
ordinary course
" and "
ordinary course of business
" means the ordinary course of business consistent with past practice of the
applicable person. The Company Disclosure Schedule and the ParentDisclosure
Schedule, as well as all other schedules and all exhibits hereto, shall be
deemed part of this Agreement and included in any reference to this Agreement.
All references to "
dollars
" or "
$
" in thisAgreement are to United States dollars. This Agreement shall not be
interpreted or construed to require any person to take any action, or fail to
take any action, if to do so would violate any applicable law. References to
any statute or regulationrefer to such statute or regulation, as amended,
modified, supplemented or replaced from time to time (and, in the case of
statutes, include any rules and regulations promulgated under the statute) and
references to any section of any statute orregulation include any successor to
such section.
9.7
Counterparts
. This Agreement may be executedin two or more counterparts (including by
electronic means such as DocuSign or a ".pdf" format data file transmitted by
e-mail
or other means), all of which shall be considered one and the sameagreement
and shall become effective when counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.8
Entire Agreement
. This Agreement (including the documents and the instruments referred to
herein),together with the Confidentiality Agreement, constitutes the entire
agreement among the parties and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
9.9
Governing Law; Jurisdiction
.
(a) This Agreement shall be governed and construed in accordance with the laws
of the State of Delaware without regard to any applicableconflicts of law,
except the Articles of Merger shall be governed by the laws of the State of
Maryland and the Delaware Certificate of Merger shall be governed by the laws
of the State of Delaware.
(b) Each of the parties hereby irrevocably and unconditionally submits, for
itself and its property, to the exclusive jurisdiction of theCourt of Chancery
of the State of Delaware, or, if (and only if) such court finds it lacks
jurisdiction, the State or Federal courts of the United States of America
sitting in Delaware, and any appellate court from any thereof, in any action
orproceeding arising out of or relating to this Agreement or the agreements
delivered in connection herewith or the transactions contemplated hereby or
thereby or for recognition or enforcement of any judgment relating thereto,
and each of the partieshereby irrevocably and unconditionally (i) agrees not
to commence any such action or proceeding, except in the Court of Chancery of
the State of Delaware, or, if (and only if) such court finds it lacks
jurisdiction, the other State or Federalcourts of the United States of America
sitting in Delaware, and any appellate court from any thereof, (ii) agrees
that any claim in respect of any such action or proceeding may be heard and
determined in the Court of Chancery of the State ofDelaware, or, if (and only
if) such court finds it lacks jurisdiction, the other State courts or the
Federal courts of the United States of America sitting in Delaware, and any
appellate court from any thereof, (iii) waives, to the fullestextent it may
legally and effectively do so, any objection that it may now or hereafter have
to the laying of
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venue of any such action or proceeding in such courts, and (iv) waives, to the
fullest extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action orproceeding in such courts. Each of the parties
agrees that a final,
non-appealable
judgment or determination of the courts described in this
9.9(b)
shall be conclusive and may be enforced in otherjurisdictions and any court of
competent jurisdiction by suit on the judgment or in any other manner provided
by applicable Law. Each party irrevocably consents to service of process in
the manner provided for notices in
Section
9.5
. Nothing in this Agreement will affect the right of any party to serve
process in any other manner permitted by applicable Law.
9.10
Waiver of Jury Trial
. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDERTHIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO
THE EXTENT PERMITTED BY LAW AT THE TIME OF INSTITUTION OF THE APPLICABLE
LITIGATION, ANY RIGHT SUCHPARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT: (A) NOREPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THEIMPLICATIONS OF THIS WAIVER, (C) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (D) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS
SECTION
9.10
.
9.11
Assignment; Third-Party Beneficiaries
. Neither thisAgreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other party. Any
purported assignment incontravention hereof shall be null and void. Subject to
the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors
and assigns. Except as otherwisespecifically provided in
Section
6.8
, which is intended to benefit each Company Indemnified Party and his or her
heirs and representatives, this Agreement (including the documents and
instruments referred to herein) is notintended to, and does not, confer upon
any person other than the parties hereto any rights or remedies hereunder,
including the right to rely upon the representations and warranties set forth
herein. The representations and warranties in thisAgreement are the product of
negotiations among the parties hereto and are for the sole benefit of the
parties. Any inaccuracies in such representations and warranties are subject
to waiver by the parties hereto in accordance herewith without noticeor
liability to any other person. In some instances, the representations and
warranties in this Agreement may represent an allocation among the parties
hereto of risks associated with particular matters regardless of the knowledge
of any of theparties hereto. Consequently, persons other than the parties may
not rely upon the representations and warranties in this Agreement as
characterizations of actual facts or circumstances as of the date of this
Agreement or as of any other date.
9.12
Specific Performance
. The parties hereto agree that irreparable damage would occur if any
provisionof this Agreement were not performed in accordance with its specific
terms or otherwise breached. Accordingly, the parties shall be entitled to
specific performance of the terms hereof, including an injunction or
injunctions to prevent breaches orthreatened breaches of this Agreement or to
enforce specifically the performance of the terms and provisions hereof
(including the parties' obligation to consummate the Merger), in addition to
any other remedy to which they are entitled at lawor in equity. Each of the
parties hereby further waives (a) any defense in any action for specific
performance that a remedy at law would be adequate and (b) any requirement
under any law to post security or a bond as a prerequisite toobtaining
equitable relief.
9.13
Severability
. Whenever possible, each provision or portion of anyprovision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision or portion of any provision of this
Agreement is held to be invalid, illegal or unenforceable in any respectunder
any applicable
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law or rule in any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision or portion of any provision in such
jurisdiction, and this Agreement shall bereformed, construed and enforced in
such jurisdiction such that the invalid, illegal or unenforceable provision or
portion thereof shall be interpreted to be only so broad as is enforceable.
9.14
Confidential Supervisory Information
. Notwithstanding any other provision of this Agreement, nodisclosure,
representation or warranty shall be made (or other action taken) pursuant to
this Agreement that would involve the disclosure of confidential supervisory
information (including confidential supervisory information as defined
oridentified in 12 C.F.R. (s) 261.2(b) and 12 C.F.R. (s) 309.5(g)(8)) of a
Governmental Entity by any party to this Agreement to the extent prohibited by
applicable law. To the extent legally permissible, appropriate substitute
disclosures oractions shall be made or taken under circumstances in which the
limitations of the preceding sentence apply.
9.15
Delivery by Electronic Transmission
. This Agreement and any signed agreement or instrument enteredinto in
connection with this Agreement, and any amendments or waivers hereto or
thereto, to the extent signed and delivered by email delivery of a ".pdf"
format data file or other electronic means, shall be treated in all manner
andrespects as an original agreement or instrument and shall be considered to
have the same binding legal effect as if it were the original signed version
thereof delivered in person. No party hereto or to any such agreement or
instrument shall raisethe use of email delivery of a ".pdf" format data file
or other electronic means to deliver a signature to this Agreement or any
amendment hereto or the fact that any signature or agreement or instrument was
transmitted or communicatedthrough email delivery of a ".pdf" format data file
or other electronic means as a defense to the formation of a contract and each
party hereto forever waives any such defense.
[
Signature Pages Follow
]
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IN WITNESS WHEREOF
, the Company and Parent have caused this Agreement to be executedby their
respective officers thereunto duly authorized as of the date first above
written.
PARENT:
HOPE BANCORP, INC.
By: /s/ Kevin S. Kim
Name: Kevin S. Kim
Title: Chairman, President and CEO
[
Signature Page toAgreement and Plan of Merger
]
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COMPANY:
TERRITORIAL BANCORP INC.
By: /s/ Allan S. Kitagawa
Name: Allan S. Kitagawa
Title: Chairman, President and CEO
[
Signature Page toAgreement and Plan of Merger
]
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Table of Contents
Annex A
List of Directors and Company Insiders Entering into Voting Agreements
. Allan S. Kitagawa
. John M. Ohama
. Kirk W. Caldwell
. Jennifer Isobe
. Howard Y. Ikeda
. Jan M. Sam
. Vernon Hirata
. Ralph Y. Nakatsuka
. Melvin M. Miyamoto
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Table of Contents
Annex B
Execution Version
VOTING AND SUPPORT AGREEMENT
T
HIS
V
OTING
AND
S
UPPORT
A
GREEMENT
(this"
Agreement
") is made and entered into as of April 26, 2024, by and among Hope Bancorp,
Inc.,
a Delaware corporation ("
Parent
"), and each of the persons set forth on
Schedule A
hereto (each, a"
Stockholder,
" and collectively, the "
Stockholders
"). Parent and the Stockholders are each sometimes referred to herein as a "
Party
" and collectively as the "
Parties
".
RECITALS
WHEREAS,concurrently with the execution hereof, Parent and Territorial Bancorp
Inc.,
a Maryland corporation (the "
Company
"), are entering into an Agreement and Plan of Merger (as the same may be
amended from time to time, the"
Merger Agreement
"), pursuant to which the Company will be merged with and into the Parent (the "
Merger
"), with the Parent being the surviving corporation;
WHEREAS, as of the date hereof, each Stockholder is the record and beneficial
owner (as defined in Rule
13d-3
under the Exchange Act) of the number of shares of common stock, par value
$0.01 per share, of the Company ("
Company Common Stock
"), set forth opposite such Stockholder's name on
Schedule A
(all such shares of Company Common Stock, together with any shares of Company
Common Stock or other voting equity securities of the Company that are
hereafter issued to or otherwise directly or indirectly acquired or
beneficiallyowned by such Stockholder prior to the Expiration Time (the "
After-Acquired Shares
"), being referred to herein as such Stockholder's "
Covered Shares
"); and
WHEREAS, as a condition to the willingness of Parent to enter into the Merger
Agreement, and as a material inducement and in considerationtherefor, each
Stockholder has entered into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the representations,warran
ties, covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
Parties, intending to be legally bound, agree as follows:
AGREEMENT
1.
Definitions
.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Merger Agreement. As used in
this Agreement, the following terms have the meanings set forthbelow:
"
Adjustment
" means any stock split, reverse stock split, stock dividend (including any
dividend or distribution ofequity interests convertible into or exchangeable
for shares of Company Common Stock), recapitalization, reclassification,
combination, exchange of shares or other similar event with respect to the
capital stock of the Company.
"
Adverse Proposal
" means: (i) any Acquisition Proposal; (ii) any change in the present
capitalization of theCompany or any amendment or other change to the Company
Charter or the Company Bylaws; (iii) any action, proposal or transaction that
would reasonably be expected to result in a breach of any covenant, agreement,
representation or warranty orany other obligation of the Company set forth in
the Merger Agreement or of any Stockholder contained in this Agreement; (iv)
any other action, proposal or transaction that is intended, or would
reasonably be expected, to impede, interferewith, delay, postpone, discourage
or prevent the consummation of, or otherwise adversely affect, the Merger, the
other transactions contemplated hereby or thereby; or (v) any change in the
composition (as of the date hereof) of the Board ofDirectors of the Company.
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"
Controlled Affiliate
" means, with respect to any person, any other personthat, directly or
indirectly, through one or more intermediaries, controls such person. As used
in this definition, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of themanagement and
policies of an entity, whether through ownership of voting securities, by
contract or otherwise. Ownership of more than fifty percent (50%) of the
beneficial interests of an entity shall be conclusive evidence that control
exists.
"
Transfer
" means any direct or indirect (i) sale, tender, exchange, assignment,
encumbrance, gift, hedge,pledge, hypothecation, disposition or other transfer
(by operation of Law or otherwise), voluntarily or involuntarily, or entry
into any contract, option or other arrangement or understanding with respect
to any sale, tender, exchange, assignment,encumbrance, gift, hedge, pledge,
hypothecation, disposition or other transfer (by operation of Law or
otherwise), of any Covered Shares (excluding, for the avoidance of doubt, any
sale, tender, exchange, assignment, encumbrance, gift, hedge,pledge,
hypothecation, disposition or other transfer pursuant to this Agreement or the
Merger Agreement) or any right, title or interest therein; (ii) (x) deposit of
any Covered Shares into a voting trust, (y) entry into a voting agreementwith
respect to any Covered Shares (other than this Agreement) or (z) grant of any
irrevocable or revocable proxy, corporate representative appointment or power
of attorney (or other consent or authorization) with respect to any Covered
Shares;or (iii) entry into an agreement, arrangement, understanding or
commitment (whether or not in writing) to take any of the actions referred to
in the foregoing
sub-paragraphs
(i) or (ii);
provided
,
however
, that Transfer shall not include, with respect to any Company RSUs granted to
a Stockholder, (a) any transfer for the net settlement of such Company RSUs
settled in Covered Shares (to pay any tax withholdingobligations) or (b) any
transfer for receipt upon settlement of such Company RSUs, and the sale of a
sufficient number of Covered Shares acquired upon settlement of such
securities as would generate sales proceeds sufficient to pay theaggregate
taxes payable by the Stockholder as a result of such settlement.
2.
No Transfer; No Inconsistent Arrangements
.
2.1 Each Stockholder agrees not to Transfer any of such Stockholder's Covered
Shares;
provided
,
however
, (i) that suchStockholder may, if such Stockholder is an individual, (a)
Transfer any Covered Shares to any members of such Stockholder's immediate
family, or to a trust solely for the benefit of such Stockholder or any member
of such Stockholder'simmediate family, (b) Transfer any Covered Shares by will
or under the laws of intestacy upon the death of such Stockholder, and (c)
make any such other Transfers as Parent may otherwise permit in its sole
discretion, subject to anyrestrictions or conditions imposed by Parent in its
sole discretion, but in the case of each of the foregoing clauses (a) and (b),
only if all of the representations and warranties of such Stockholder would be
true and correct upon suchTransfer and the transferees agree in writing, in a
form reasonably satisfactory to Parent, to be bound by the obligations set
forth herein with respect to such Covered Shares as if they were a Stockholder
hereunder, with Parent named as anexpress third-party beneficiary of such
agreements (any such Transfer, a "
Permitted Transfer
"); and (ii) if any involuntary Transfer of any of such Stockholder's Covered
Shares shall occur (including a sale by suchStockholder's trustee in any
bankruptcy, or a sale to a purchaser at any creditor's or court sale), the
transferee (which term, as used herein, shall include any and all transferees
and subsequent transferees of the initial transferee)shall, subject to
applicable Law, take and hold such Covered Shares subject to all of the
restrictions, obligations, liabilities and rights under this Agreement, which
shall continue in full force and effect until the Expiration Time. Any
actiontaken in violation of the immediately preceding sentence shall, to the
fullest extent permitted by Law, be null and void
ab
initio
.
2.2 Each Stockholder hereby authorizes and instructs the Company to cause the
Company's transfer agent or other registrar to enter stoptransfer instructions
and implement stop transfer procedures with respect to all of the Covered
Shares or other capital stock or any securities convertible into or
exercisable or exchangeable for Covered Shares or other capital stock of the
Companyowned or held (of record or beneficially) by such Stockholder during
the term of this Agreement. In the event that a Stockholder intends to
undertake a Permitted Transfer during the term of this Agreement of any of the
Covered Shares, suchStockholder shall provide prior notice thereof to the
Company and Parent and shall authorize the Company to, or authorize the
Company to instruct its transfer agent to, (i) lift any stop transfer order in
respect of the Covered Shares to be soTransferred
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in order to effect such Permitted Transfer only upon receipt of certification
by Parent and the Company that the written agreement to be entered into by the
transferee agreeing to be bound bythis Agreement pursuant to
Section
2.1
hereof is satisfactory to Parent and
(ii) re-enter
any stop transfer order in respect of the Covered Shares to be so Transferred
uponcompletion of the Permitted Transfer.
2.3 Each Stockholder shall not, directly or indirectly, take any action that
would make anyrepresentation or warranty of such Stockholder contained herein
untrue or incorrect or have the effect of preventing, impairing or materially
delaying such Stockholder from performing any of its obligations under this
Agreement or that would, orwould reasonably be expected to, have the effect of
preventing, impairing or materially delaying, the consummation of the Merger
or the other transactions or the performance by the Company of its obligations
under the Merger Agreement.
3.
Agreement to Vote
.
Each Stockholder irrevocably and unconditionally agrees that, at every meeting
of the Company Stockholders,however called, including any adjournment or
postponement thereof, and in connection with any action proposed to be taken
by written consent of the Company Stockholders, such Stockholder shall, in
each case, to the fullest extent that suchStockholder's Covered Shares are
entitled to vote thereon: (a) appear at each such meeting or otherwise cause
all such Covered Shares to be counted as present thereat for the purpose of
determining a quorum; and (b) be present (inperson or by proxy) and vote (or
cause to be voted), or deliver (or cause to be delivered) a written consent
with respect to, all such Covered Shares (i) in favor of (A) the adoption of
the Merger Agreement and approval of the Merger andthe other transactions
contemplated by the Merger Agreement, and (B) any other matters that would
reasonably be expected to facilitate the Merger, including any proposal to
adjourn or postpone any meeting of the Company Stockholders to a laterdate;
and (ii) against any Adverse Proposal. Such Stockholder shall retain at all
times the right to vote such Stockholder's Covered Shares in such
Stockholder's sole discretion, and without any other limitation, on any
matters otherthan those expressly set forth in this
Section
3
that are at any time or from time to time presented for consideration to the
Stockholders generally. For the avoidance of doubt, the foregoing commitments
in this
Section
3
apply to any Covered Shares held by any trust, limited partnership or other
entity directly or indirectly holding Covered Shares over which the applicable
Stockholder exercises direct or indirect voting control(if any).
4.
Additional Covenants
.
4.1
No Solicitation
. From the date hereof until the Expiration Time, each Stockholder shall not,
and shall cause its ControlledAffiliates not to, and its and their respective
officers, agents and other representatives not to, directly or indirectly: (i)
initiate, solicit, knowingly encourage or knowingly facilitate inquiries or
proposals with respect to any AcquisitionProposal; (ii) engage or participate
in any negotiations with any person concerning any Acquisition Proposal; (iii)
provide any confidential or nonpublic information or data to, or have or
participate in any discussions with, any personrelating to any Acquisition
Proposal (other than the parties to the Merger Agreement and their
Representatives); (iv) approve or enter into any term sheet, letter of intent,
commitment, memorandum of understanding, agreement in principle,acquisition
agreement, merger agreement, voting or support agreement, or other agreement
(whether written or oral, binding or nonbinding) in connection with or
relating to any Acquisition Proposal; or (v) become a member of a "group"(as
defined in Section 13(d)(3) under the Exchange Act) with respect to any voting
securities of the Company for the purpose of opposing, discouraging or
competing with or taking any actions inconsistent with the transactions
contemplated bythis Agreement or the Merger Agreement. Each Stockholder shall,
and shall cause its Controlled Affiliates to, and shall cause its and their
respective officer, agents and other representatives to, immediately cease and
cause to be terminated anyexisting solicitations of, or discussions or
negotiations with, any third party relating to any Acquisition Proposal. For
purposes of this
Section
4.1
, "Acquisition Proposal" shall have the meaning ascribed tosuch term in the
Merger Agreement but shall also include any Transfer of any of such
Stockholder's Covered Shares other than a Permitted Transfer.
4.2
Appraisal Rights
. Each Stockholder irrevocably waives and agrees not to exercise any rights of
appraisal or rights to dissent fromthe Merger or the adoption of the Merger
Agreement that such Stockholder may have
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under the Maryland General Corporation Law and shall not permit any such
rights of appraisal or rights of dissent to be exercised with respect to any
of such Stockholder's Covered Shares.
4.3
Waiver of Certain Actions
. Each Stockholder agrees not to commence or participate in, and to take all
actions necessary to optout of any class in any class action with respect to,
any claim, derivative or otherwise, against Parent, the Company, any of their
respective affiliates or successors or any of their respective directors,
managers or officers (a) challengingthe validity of, or seeking to enjoin or
delay the operation of, any provision of this Agreement or the Merger
Agreement (including any claim seeking to enjoin or delay the consummation of
the Merger) or (b) alleging a breach of any duty of theBoard of Directors of
the Company in connection with the Merger Agreement, this Agreement, the
transactions contemplated hereby or thereby.
4.4
Notice of Certain Events
. Each Stockholder agrees to notify Parent of any development occurring after
the date hereof that causes,or that would reasonably be expected to cause, any
material breach of any of the representations and warranties of such
Stockholder set forth in
Section
5
. Promptly upon the acquisition of any After-Acquired Shares, suchStockholder
shall notify Parent of the number of After-Acquired Shares so acquired; it
being understood that any such shares shall be subject to the terms of this
Agreement as though owned by such Stockholder on the date hereof and
therepresentation and warranties in
Section
5
below shall be true and correct as of the date that such After-Acquired Shares
are acquired.
4.5
Documentation and Information
. Each Stockholder shall not, and shall cause such Stockholder's Controlled
Affiliates and suchStockholder's and such Stockholder's Controlled Affiliates'
respective officers, agents and other representatives not to, make any public
announcement or other communication to a third party regarding this Agreement,
the MergerAgreement, or the transactions contemplated thereby or hereby
without the prior written consent of Parent except in accordance with Section
6.12 of the Merger Agreement. Each Stockholder consents to and authorizes the
Company and Parent topublish and disclose in all documents and schedules filed
with the SEC or any other Governmental Entity or applicable securities
exchange, and any press release or other disclosure document that the Company
or Parent reasonably determines to benecessary or advisable in connection with
the Merger, the other transactions contemplated by the Merger Agreement or any
other transactions contemplated by this Agreement, such Stockholder's identity
and ownership of such Stockholder'sCovered Shares, the existence of this
Agreement and the nature of such Stockholder's commitments and obligations
under this Agreement, and such Stockholder acknowledges that the Company and
Parent may file this Agreement or a form hereof withthe SEC or any other
Governmental Entity or securities exchange. Each Stockholder agrees to
promptly give Parent any information that is in such Stockholder's possession
that Parent may reasonably request for the preparation of any suchdisclosure
documents, and such Stockholder agrees to promptly notify Parent of any
required corrections with respect to any written information supplied by such
Stockholder specifically for use in any such disclosure document, if and to
the extentthat such Stockholder shall become aware that any such information
shall have become false or misleading in any material respect.
5.
Representations and Warranties of Each Stockholder
.
Each Stockholder represents and warrants to Parent, as to such Stockholder
with respect to such Stockholder's Covered Shares, on a several basis, that:
5.1
Due Organization; Authority
.
(a) If such Stockholder is not an individual, (i) such Stockholder is duly
organized, validly existing and in good standing under the Lawof its
jurisdiction of incorporation or organization, as applicable, (ii) such
Stockholder has the requisite power and authority to enter into and to perform
its obligations under this Agreement, (iii) the execution and delivery of
thisAgreement by such Stockholder and the performance of its obligations
hereunder and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of such Stockholder,
and (iv) no otherproceedings on the part of such Stockholder are necessary to
authorize the execution, delivery and performance of this Agreement by such
Stockholder or to consummate the transactions contemplated hereby. If such
Stockholder is an individual, such
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Stockholder has the requisite legal capacity, right and authority to execute,
deliver and perform such Stockholder's obligations under this Agreement and to
consummate the transactionscontemplated hereby.
(b) This Agreement has been duly and validly executed and delivered by such
Stockholder and, assuming the dueauthorization, execution and delivery by
Parent, constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms, except as
limited by Laws affecting the enforcement ofcreditors' rights generally, by
general equitable principles or by the discretion of any Governmental Entity
before which any Proceeding seeking enforcement may be brought.
(c) If such Stockholder is married, and any of such Stockholder's Covered
Shares constitute community property or otherwise need spousalor other
approval for this Agreement to be legal, valid and binding, this Agreement has
been duly and validly executed and delivered by such Stockholder's spouse and,
assuming the due authorization, execution and delivery hereof by Parent,constitu
tes a legal, valid and binding obligation of such Stockholder's spouse,
enforceable against such Stockholder's spouse in accordance with its terms,
except as limited by Laws affecting the enforcement of creditors'
rightsgenerally, by general equitable principles or by the discretion of any
Governmental Entity before which any Proceeding seeking enforcement may be
brought.
5.2
Ownership of the Covered Shares; Voting Power
. Such Stockholder is the record and beneficial owner (as defined in Rule
13d-3
under the Exchange Act) of all of such Stockholder's Covered Shares and has
good and marketable title to all of such Stockholder's Covered Shares free and
clear of any Liens in respect of suchCovered Shares, other than those created
by this Agreement or those imposed by applicable securities Law (collectively,
"
Permitted Liens
"). The Covered Shares listed on
Schedule A
opposite such Stockholder's nameconstitute all of the shares of capital stock
of the Company or any other securities of the Company beneficially owned by
such Stockholder as of the date hereof. As of the date hereof, such
Stockholder has not entered into any agreement to Transferany such Covered
Shares. Such Stockholder has full voting power with respect to all of such
Stockholder's Covered Shares, and full power of disposition with respect to
such Covered Shares, full power to issue instructions with respect to
thematters set forth herein and full power to agree to all of the matters set
forth in this Agreement, in each case with respect to all such Stockholder's
Covered Shares. None of such Stockholder's Covered Shares are subject to
anystockholders' agreement, proxy, voting trust or other agreement,
arrangement or Lien with respect to the voting of such Covered Shares, except
as expressly provided herein (including Permitted Liens).
5.3
Non-Contravention;
Consents
. Neither the execution and delivery of this Agreement by suchStockholder (or
if applicable, such Stockholder's spouse) nor the consummation of the
transactions contemplated hereby nor compliance by such Stockholder (or if
applicable, such Stockholder's spouse) with any provisions herein will(a) if
such Stockholder is not an individual, violate, contravene or conflict with or
result in any breach of any provision of the certificate of incorporation or
bylaws or equivalent organizational documents of such Stockholder,(b) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity on the part of such Stockholder (or
if applicable, such Stockholder's spouse), except for compliance with
theapplicable requirements of the Securities Act, the Exchange Act or any
other securities laws and the rules and regulations promulgated thereunder,
(c) violate, conflict with, or result in a breach of or default under any
provisions of, orrequire any consent, waiver or approval under any of the
terms, conditions or provisions of, any Contract to which such Stockholder (or
if applicable, such Stockholder's spouse) is a party or by which such
Stockholder (or if applicable, suchStockholder's spouse) or any of such
Stockholder's Covered Shares may be bound, (d) result in the creation or
imposition of any Lien (other than any Permitted Liens or Lien created by
Parent) on any of such Stockholder's CoveredShares or (e) violate any Law
applicable to such Stockholder (or if applicable, such Stockholder's spouse)
or by which any of such Stockholder's Covered Shares are bound, except, in the
case of each of clauses (c), (d) and (e), aswould not, individually or in the
aggregate, reasonably be expected to prevent, impair or delay the consummation
by such Stockholder of the transactions contemplated by this Agreement or
otherwise prevent, impair or delay such Stockholder'sability to perform such
Stockholder's obligations hereunder.
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5.4
No Legal Proceedings
. There are no legal, administrative, arbitral or otherproceedings, claims,
actions or governmental or regulatory investigations of any nature pending
against or, to the knowledge of such Stockholder, threatened against or
affecting such Stockholder or any of such Stockholder's properties or
assets(including any of such Stockholder's Covered Shares) that would,
individually or in the aggregate, reasonably be expected to prevent, impair or
delay the consummation by such Stockholder of the transactions contemplated by
this Agreement orotherwise prevent, impair or delay such Stockholder's ability
to perform its obligations hereunder.
5.5
Opportunity to Review;Reliance
. Such Stockholder has had the opportunity to review the Merger Agreement and
this Agreement with counsel of such Stockholder's own choosing. Such
Stockholder understands and acknowledges that Parent and the Company are
enteringinto the Merger Agreement in reliance upon such Stockholder's
execution, delivery and performance of this Agreement.
6.
Termination
.
Unless earlier terminated by the written consent of Parent (in its sole and
absolute discretion), this Agreement shall terminate automatically and shall
have no further force or effect as of the earliest to occur ofthe following
(the "
Expiration Time
"): (a) the Effective Time; (b) the date and time that the Merger Agreement is
validly terminated in accordance with the terms and provisions thereof; or (c)
upon the entry by the Companywithout the prior written consent of such
Stockholder into any amendment, waiver or modification to the Merger Agreement
that results in (i) a change to the form of consideration to be paid
thereunder or (ii) a decrease in the MergerConsideration; provided, however,
that the transfer restrictions in Section 2 shall be automatically terminated
upon the receipt of the Requisite Company Vote. Upon termination of this
Agreement, no Party shall have any further obligations orliabilities under
this Agreement;
provided
,
however
, that (x) nothing set forth in this
Section
6
shall relieve any Party from liability for fraud or any intentional breach of
this Agreement prior totermination hereof and (y) the provisions of
Section
7
shall survive any termination of this Agreement.
7.
Miscellaneous
.
7.1
Severability
. If any term or other provision of this Agreement is invalid, illegal or
incapable ofbeing enforced by rule of Law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the
transactions contemplated hereby is notaffected in any manner adverse to any
Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties shall negotiate in good
faith to modify this Agreement so as to effect the originalintent of the
Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
7.2
Assignment
. This Agreement shall not be assigned by any of the Parties (whether by
operation of Law or otherwise) without the priorwritten consent of the other
Parties. Subject to the preceding sentence, but without relieving any Party of
any obligation hereunder, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the Parties and their respectivesuccessors
and assigns.
7.3
Amendment and Modification; Waiver
. Any provision of this Agreement may be amended, modified,supplemented or
waived if, but only if, such amendment, modification, supplement or waiver is
in writing and is signed, in the case of an amendment, modification or
supplement by each Party or, in the case of a waiver, by each Party against
whom thewaiver is to be effective. No failure or delay by any Party to assert
any of its rights under this Agreement or otherwise shall constitute a waiver
of such rights.
7.4
Enforcement Remedies.
(a) Except as otherwise expressly provided herein, any remedies herein
expressly conferred upon a Party will be deemed cumulative with and
notexclusive of any other remedy conferred hereby, or by Law or equity upon
such Party, and the exercise by a Party of any one remedy will not preclude
the exercise of any other remedy.
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(b) The Parties agree that irreparable injury will occur in the event that any
of theprovisions of this Agreement is not performed in accordance with its
specific terms or is otherwise breached. It is agreed that prior to the valid
termination of this Agreement pursuant to
Section
6
, each Party shall beentitled to an injunction or injunctions to prevent or
remedy any breaches or threatened breaches of this Agreement by any other
Party, to a decree or order of specific performance specifically enforcing the
terms and provisions of this Agreementand to any further equitable relief. The
Parties hereby waive any requirement for the securing or posting of any bond
in connection with the obtaining of any specific performance or injunctive
relief and, in any action for specific performance, thedefense of adequacy of
a remedy at Law.
7.5
Notices
. All notices, consents and other communications hereunder shall be in
writingand shall be given in the manner described in Section
9.5 of the Merger Agreement, addressed as follows: (i) if to Parent, to the
email addresses set forth in Section 9.5 of the Merger Agreement, and (ii) if
to aStockholder, to such Stockholder's email address set forth on a signature
page hereto, or to such other email address as such Party may hereafter
specify for the purpose by notice to each other Party.
7.6
Governing Law; Jurisdiction
.
(a) This Agreement and any dispute, controversy or claim arising out of,
relating to or in connection with this Agreement, the negotiation,execution,
existence, validity, enforceability or performance of this Agreement, or for
the breach or alleged breach hereof (whether in contract, in tort or
otherwise) shall be governed by and construed and enforced in accordance with
the Laws ofthe State of Delaware, without giving effect to any choice of law
or conflict of law provision or rule (whether of the State of Delaware or
otherwise) that would cause the application of the Laws of any other
jurisdiction.
(b) Each of the Parties hereby irrevocably and unconditionally submits, for
such Party and such Party's property, to the exclusivejurisdiction of the
Court of Chancery of the State of Delaware, or, if (and only if) such court
finds it lacks jurisdiction, the Federal court of the United States of America
sitting in Delaware, and any appellate court from any thereof, in anyaction or
proceeding arising out of or relating to this Agreement or the agreements
delivered in connection herewith or the transactions contemplated hereby or
thereby or for recognition or enforcement of any judgment relating thereto,
and each ofthe Parties hereby irrevocably and unconditionally (i) agrees not
to commence any such action or proceeding, except in the Court of Chancery of
the State of Delaware, or, if (and only if) such court finds it lacks
jurisdiction, the Federalcourt of the United States of America sitting in
Delaware, and any appellate court from any thereof, (ii)
agrees that any claim in respect of any such action or proceeding may be heard
and determined in the Court of Chancery of the Stateof Delaware, or, if (and
only if) such court finds it lacks jurisdiction, the Federal court of the
United States of America sitting in Delaware, and any appellate court from any
thereof, (iii)
waives, to the fullest extent such Party maylegally and effectively do so, any
objection that such Party may now or hereafter have to the laying of venue of
any such action or proceeding in such courts, and (iv)
waives, to the fullest extent permitted by Law, the defense of aninconvenient
forum to the maintenance of such action or proceeding in such courts. Each of
the Parties agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on
thejudgment or in any other manner provided by applicable Law. Each Party
irrevocably consents to service of process inside or outside the territorial
jurisdiction of the courts referred to in this Section
7.6(b) in the manner provided fornotices in
Section 7.6(b)
. Nothing in this Agreement will affect the right of any Party to serve
process in any other manner permitted by applicable Law.
7.7
Waiver of Jury Trial
. EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH
PARTY MAY HAVE TO A TRIAL BY JURY INRESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE
AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE OTHER TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGESTHAT (A)
NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
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THE EVENT OF LITIGATION, SEEK TO ENFORCE SUCH WAIVERS, (B) SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) SUCH
PARTY MAKES SUCH WAIVERS VOLUNTARILY AND(D) SUCH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS
SECTION 7.7
.
7.8
Release
. Except for any rights or obligations under this Agreement, the Merger
Agreement or in connection with an employment orconsultant relationship with
the Company, effective as of the Effective Time, such Stockholder, on behalf
of such Stockholder and each of such Stockholder's Subsidiaries (other than
the Company and the Company Subsidiaries) and controlledaffiliates, and each
of their respective current and former officers, directors, employees,
shareholders, partners, members, advisors, successors and assigns
(collectively, the "
Releasing Parties
"), hereby irrevocably andunconditionally releases and forever discharges
Parent, the Company, each of the Company Subsidiaries and each of their
respective current and former officers, directors, employees, shareholders,
partners, managers, members, advisors, successors andassigns (collectively,
the "
Released Parties
") of and from any and all actions, causes of action, suits, proceedings,
executions, judgments, duties, debts, dues, accounts, bonds, contracts and
covenants (whether express or implied),and claims and demands whatsoever
whether in law or in equity (whether based upon contract, tort or otherwise)
which the Releasing Parties may have against any of the Released Parties
(collectively, the "
Released Claims
") in respectof (i) the ownership of the Covered Shares or as an equity holder
of the Company or the Company Subsidiaries, and (ii) any operations of the
Company and the Company Subsidiaries prior to the Effective Time. The
Releasing Parties herebyirrevocably covenant to refrain from, directly or
indirectly, asserting any Released Claim against any Released Party.
7.9
EntireAgreement; Third Party Beneficiaries
.
(a) This Agreement, together with the Merger Agreement (together with the
Exhibits, CompanyDisclosure Schedule and the other documents delivered
pursuant thereto) and the Confidentiality Agreement constitute the entire
agreement among the Parties with respect to the subject matter hereof and
thereof and supersede all other prioragreements and understandings, both
written and oral, among the Parties or any of them with respect to the subject
matter hereof and thereof.
(b) Nothing in this Agreement, express or implied, is intended to confer upon
any person (other than the Parties) any rights or remedieshereunder.
7.10
Counterparts
. This Agreement may be executed in multiple counterparts (including by an
electronic signature,electronic scan or electronic transmission in portable
document format (.pdf), including (but not limited to) DocuSign, delivered by
electronic mail), each of which will be deemed an original but all of which
together will be considered one and thesame agreement and will become
effective when counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that all Parties need not
sign the same counterpart.
7.11
Mutual Drafting; Interpretation
.
(a) Each Party has participated in the drafting of this Agreement, which each
Party acknowledges is the result of extensive negotiationsbetween the Parties.
If an ambiguity or question of intent or interpretation arises, this Agreement
shall be construed as if drafted jointly by the Parties, and no presumption or
burden of proof shall arise favoring or disfavoring any Party byvirtue of the
authorship of any provision.
(b) Headings of the articles and sections of this Agreement are for
convenience of the Partiesonly and shall be given no substantive or
interpretative effect whatsoever. Except as otherwise indicated, all
references in this Agreement to "Sections," are intended to refer to Sections
of this Agreement. The schedule attached to thisAgreement constitutes a part
of this Agreement and is incorporated in this Agreement for all purposes.
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(c) For purposes of this Agreement, whenever the context requires: the
singular number shallinclude the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders. The words"include," "includes" or "including"
mean "including without limitation," and the words "hereof," "hereby,"
"herein," "hereunder" and similar terms refer to thisAgreement as a whole and
not any particular section in which such words appear. The words "shall" and
"will" have the same meaning. The phrase "to the extent" shall mean the degree
to which a subject or other thingextends, and such phrase shall not mean
simply "if." All references in this Agreement to "$" are intended to refer to
U.S. dollars. Unless otherwise specifically provided for herein, the term "or"
shall not be deemed tobe exclusive, and shall be interpreted as "and/or". The
term "affiliates" shall have the meaning set forth in Rule
12b-2
of the Exchange Act.
7.12
Capacity as Stockholder
. No person executing this Agreement who is or becomes an officer or director
of the Company makes anyagreement or understanding herein in his or her
capacity as such officer or director. Each Stockholder signs solely in his,
her or its capacity as the record and beneficial owner of such Stockholder's
Covered Shares. Nothing herein shall limitor affect any omissions or actions
taken by a Stockholder or any officer, director, employee, affiliate or
Representative of a Stockholder solely in his or her capacity as an officer or
director of the Company (including, for the avoidance of doubt,exercising his
or her fiduciary duties).
7.13
Expenses
. All costs and expenses incurred in connection with this Agreement shall
bepaid by the Party incurring such cost or expense. For avoidance of doubt,
nothing in this
Section
7.13
shall be interpreted as in any way limiting Parent's right to the Termination
Fee in circumstances in which Parentis entitled to receive the Termination Fee
pursuant to the Merger Agreement.
7.14
Further Assurances
. Each Stockholder willexecute and deliver, or cause to be executed and
delivered, all further documents and instruments and use such Stockholder's
reasonable best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all thingsnecessary, proper or advisable under applicable
Law, to perform such Stockholder's obligations under this Agreement.
7.15
Stockholder Obligations Several and Not Joint
. Except if a Stockholder is an affiliate of another Stockholder, the
obligations of each Stockholder under this Agreement shall be several and not
joint, and no Stockholder shall be liable for anybreach of the terms of this
Agreement by any other Stockholder.
[
Signature Page Follows
]
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first abovewritten.
HOPE BANCORP, INC.
By:
Name:
Title:
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KIRK W. CALDWELL HOWARD Y. IKEDA
By: By:
Name: Name:
E-mail: E-mail:
JENNIFER ISOBE ALLAN S. KITAGAWA
By: By:
Name: Name:
E-mail: E-mail:
JOHN M. OHAMA JAN M. SAM
By: By:
Name: Name:
E-mail: E-mail:
VERNON HIRATA MELVIN M. MIYAMOTO
By: By:
Name: Name:
E-mail: E-mail:
RALPH Y. NAKATSUKA
By:
Name:
E-mail:
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Annex C
April 26, 2024
The Board of Directors
Territorial Bancorp Inc.
Pauahi Tower, Suite 500
1003 Bishop Street
Honolulu, HI 96813
Members of the Board:
You have requested theopinion of Keefe, Bruyette & Woods, Inc. ("KBW" or "we")
as investment bankers as to the fairness, from a financial point of view, to
the common stockholders of Territorial Bancorp Inc. ("Territorial") of
theExchange Ratio (as defined below) in the proposed merger (the "Merger") of
Territorial with and into Hope Bancorp, Inc. ("Hope"), pursuant to the
Agreement and Plan of Merger (the "Agreement") to be entered into by
andbetween Territorial and Hope. Pursuant to the Agreement and subject to the
terms, conditions and limitations set forth therein, at the Effective Time (as
defined in the Agreement), by virtue of the Merger and without any action on
the part of Hope,Territorial or any stockholder of Territorial, each share of
common stock, par value $0.01 per share, of Territorial ("Territorial Common
Stock") issued and outstanding immediately prior to the Effective Time (other
than shares ofTerritorial Common Stock that are owned by Territorial as
treasury stock or owned by Territorial or Hope (except for shares of
Territorial Common Stock (i) held in trust accounts, managed accounts, mutual
funds and the like, or otherwise heldin a fiduciary or agency capacity that
are beneficially owned by third parties or (ii) held, directly or indirectly,
by Territorial or Hope in respect of debts previously contracted)) shall be
converted into the right to receive 0.8048 of ashare of common stock, par
value $0.001 per share, of Hope ("Hope Common Stock"). The ratio of 0.8048 of
a share of Hope Common Stock for one share of Territorial Common Stock is
referred to herein as the "Exchange Ratio." Theterms and conditions of the
Merger are more fully set forth in the Agreement.
The Agreement further provides that, following the Mergeror at such later time
as Hope may determine, Territorial Savings Bank, a wholly-owned subsidiary of
Territorial, will merge with and into Bank of Hope, a wholly-owned subsidiary
of Hope, pursuant to a separate agreement and plan of merger (the"Bank
Merger").
KBW has acted as financial advisor to Territorial and not as an advisor to or
agent of any other person. Aspart of our investment banking business, we are
continually engaged in the valuation of bank and bank holding company
securities in connection with acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities,private placements
and valuations for various other purposes. As specialists in the securities of
banking companies, we have experience in, and knowledge of, the valuation of
banking enterprises. We and our affiliates, in the ordinary course of ourand
their broker-dealer businesses (and further to existing sales and trading
relationships between Territorial and KBW broker-dealer affiliates), may from
time to time purchase securities from, and sell securities to, Territorial and
Hope. Inaddition, as a market maker in securities, we and our affiliates may
from time to time have a long or short position in, and buy or sell, debt or
equity securities of Territorial or Hope for our and their own respective
accounts and for the accountsof our and their
Keefe, Bruyette& Woods, A Stifel Company
787 Seventh Avenue New York, New York 10019
212.887.7777 www.kbw.com
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The Board of Directors - Territorial Bancorp Inc.
April 26, 2024
Page 2 of 5
respective customers and clients. KBW employees may also from time to time
maintain individual positions in Territorial. As Territorial has previously
been informed by KBW, such positionscurrently include an individual position
in shares of Territorial Common Stock held by a senior member of the KBW
advisory team providing services to Territorial in connection with the
proposed Merger. We have acted exclusively for the board ofdirectors of
Territorial (the "Board") in rendering this opinion and will receive a fee
from Territorial for our services. A portion of our fee is payable upon the
rendering of this opinion, and a significant portion is contingent upon
thesuccessful completion of the Merger. In addition, Territorial has agreed to
indemnify us for certain liabilities arising out of our engagement.
Other than in connection with this present engagement, in the past two years,
KBW has not provided investment banking or financial advisoryservices to
Territorial. In the past two years, KBW has not provided investment banking or
financial advisory services to Hope. We may in the future provide investment
banking and financial advisory services to Territorial or Hope and
receivecompensation for such services.
In connection with this opinion, we have reviewed, analyzed and relied upon
material bearing upon thefinancial and operating condition of Territorial and
Hope and bearing upon the Merger, including among other things, the following:
(i) a draft of the Agreement dated April 25, 2024 (the most recent draft made
available to us); (ii) theaudited financial statements and Annual Reports on
Form
10-K
for the three fiscal years ended December 31, 2023 of Territorial; (iii) the
audited financial statements and Annual Reports on Form
10-K
for the three fiscal years ended December 31, 2023 of Hope; (iv) certain
regulatory filings of Territorial and Hope and their respective subsidiaries,
including as applicable, the quarterly reports onForm FR
Y-9C
and the quarterly call reports required to be filed (as the case may be) with
respect to each quarter during the three-year period ended December 31, 2023;
(v) certain other interim reportsand other communications of Territorial and
Hope to their respective stockholders; and (vi) other financial information
concerning the businesses and operations of Territorial and Hope furnished to
us by Territorial and Hope or that we wereotherwise directed to use for
purposes of our analyses. Our consideration of financial information and other
factors that we deemed appropriate under the circumstances or relevant to our
analyses included, among others, the following: (i) thehistorical and current
financial position and results of operations of Territorial and Hope; (ii) the
assets and liabilities of Territorial and Hope; (iii) a comparison of certain
financial and stock market information for Territorial andHope with similar
information for certain other companies the securities of which are publicly
traded; (iv) financial and operating forecasts and projections of Territorial
that were prepared by Territorial management, provided to and discussedwith us
by such management, and used and relied upon by us at the direction of such
management and with the consent of the Board; (v) publicly available consensus
"street estimates" of Hope, as well as assumed long-term Hope growthrates
provided to us by Hope management, all of which information was discussed with
us by Hope management and used and relied upon by us based on such
discussions, at the direction of Territorial management and with the consent
of the Board; and(vi) estimates regarding certain pro forma financial effects
of the Merger on Hope (including, without limitation, the cost savings
expected to result or be derived from the Merger) that were prepared by Hope
management, provided to anddiscussed with us by such management and used and
relied upon by us based on such discussions, at the direction of Territorial
management and with the consent of the Board. We have also performed such
other studies and analyses as we consideredappropriate and have taken into
account our assessment of general economic, market and financial conditions
and our experience in other transactions, as well as our experience in
securities valuation and knowledge of the banking industry generally.We have
also participated in discussions held by the managements of Territorial and
Hope regarding the past and current business operations, regulatory relations,
financial condition and future prospects of their respective companies and
such othermatters as we have deemed relevant to our inquiry. In addition, we
have considered the results of the efforts undertaken
Keefe, Bruyette& Woods, A Stifel Company
787 Seventh Avenue New York, New York 10019
212.887.7777 www.kbw.com
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The Board of Directors - Territorial Bancorp Inc.
April 26, 2024
Page 3 of 5
by Territorial, with our assistance, to solicit indications of interest from
third parties regarding a potential transaction with Territorial.
In conducting our review and arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of all of the financialand other
information that was provided to or discussed with us or that was publicly
available and we have not independently verified the accuracy or completeness
of any such information or assumed any responsibility or liability for
suchverification, accuracy or completeness. We have relied upon the management
of Territorial as to the reasonableness and achievability of the financial and
operating forecasts and projections of Territorial referred to above (and the
assumptions andbases therefor), and we have assumed that such forecasts and
projections represent the best currently available estimates and judgments of
such management and that such forecasts and projections will be realized in
the amounts and in the timeperiods currently estimated by such management. We
have further relied, with the consent of Territorial, upon Hope management as
to the reasonableness and achievability of the publicly available consensus
"street estimates" of Hope, theassumed long-term Hope growth rates, and the
estimates regarding certain pro forma financial effects of the Merger on Hope
(including, without limitation, the cost savings expected to result or be
derived from the Merger), all as referred to above(and the assumptions and
bases for all such information), and we have assumed that all such information
represents, or in the case of the Hope "street estimates" referred to above
that such estimates are consistent with, the best currentlyavailable estimates
and judgments of Hope management and that the forecasts, projections and
estimates reflected in such information will be realized in the amounts and in
the time periods currently estimated.
It is understood that the portion of the foregoing financial information of
Territorial and Hope that was provided to us was not prepared withthe
expectation of public disclosure and that all of the foregoing financial
information, including the publicly available consensus "street estimates" of
Hope referred to above, is based on numerous variables and assumptions that
areinherently uncertain (including, without limitation, factors related to
general economic and competitive conditions and, in particular, the widespread
disruption, extraordinary uncertainty and unusual volatility arising from
global tensions andpolitical unrest, economic uncertainty, inflation, rising
interest rates, the
COVID-19
pandemic and, in the case of the banking industry, recent actual or threatened
regional bank failures, including theeffect of evolving governmental
interventions and
non-interventions)
and, accordingly, actual results could vary significantly from those set forth
in such information. We have assumed, based on discussionswith the respective
managements of Territorial and Hope and with the consent of the Board, that
all such information provides a reasonable basis upon which we can form our
opinion and we express no view as to any such information or the assumptionsor
bases therefor. We have relied on all such information without independent
verification or analysis and do not in any respect assume any responsibility
or liability for the accuracy or completeness thereof. We also assumed that
there were nomaterial changes in the assets, liabilities, financial condition,
results of operations, business or prospects of either Territorial or Hope
since the date of the last financial statements of each such entity that were
made available to us. We arenot experts in the independent verification of the
adequacy of allowances for loan and lease losses and we have assumed, without
independent verification and with your consent, that the aggregate allowances
for loan and lease losses for each ofTerritorial and Hope are adequate to
cover such losses. In rendering our opinion, we have not made or obtained any
evaluations or appraisals or physical inspection of the property, assets or
liabilities (contingent or otherwise) of Territorial orHope, the collateral
securing any of such assets or liabilities, or the collectability of any such
assets, nor have we examined any individual loan or credit files, nor did we
evaluate the solvency, financial capability or fair value of Territorialor
Hope under any state or federal laws,
Keefe, Bruyette& Woods, A Stifel Company
787 Seventh Avenue New York, New York 10019
212.887.7777 www.kbw.com
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The Board of Directors - Territorial Bancorp Inc.
April 26, 2024
Page 4 of 5
including those relating to bankruptcy, insolvency or other matters. We have
made note of the classification by each of Territorial and Hope of its loans
and owned securities as either held tomaturity or held for investment, on the
one hand, or held for sale or available for sale, on the other hand, and have
also reviewed reported fair value
marks-to-market
and other reported valuation information, if any, relating to such loans or
owned securities contained in the respective financial statements of
Territorial and Hope, but we express no view as to any such matters. Estimates
of values of companiesand assets do not purport to be appraisals or
necessarily reflect the prices at which companies or assets may actually be
sold. Such estimates are inherently subject to uncertainty and should not be
taken as our view of the actual value of anycompanies or assets.
We have assumed, in all respects material to our analyses, the following: (i)
that the Merger and any relatedtransactions (including, without limitation,
the Bank Merger) will be completed substantially in accordance with the terms
set forth in the Agreement (the final terms of which we have assumed will not
differ in any respect material to our analysesfrom the draft reviewed by us
and referred to above), with no adjustments to the Exchange Ratio and with no
other consideration or payments in respect of Territorial Common Stock; (ii)
that the representations and warranties of each party inthe Agreement and in
all related documents and instruments referred to in the Agreement are true
and correct; (iii) that each party to the Agreement and all related documents
will perform all of the covenants and agreements required to beperformed by
such party under such documents; (iv) that there are no factors that would
delay or subject to any adverse conditions, any necessary regulatory or
governmental approval for the Merger or any related transactions and that
allconditions to the completion of the Merger and any related transactions
will be satisfied without any waivers or modifications to the Agreement or any
of the related documents; and (v) that in the course of obtaining the
necessary regulatory,contractual, or other consents or approvals for the
Merger and any related transactions, no restrictions, including any
divestiture requirements, termination or other payments or amendments or
modifications, will be imposed that will have a materialadverse effect on the
future results of operations or financial condition of Territorial, Hope or
the pro forma entity, or the contemplated benefits of the Merger, including
without limitation the cost savings expected to result or be derived fromthe
Merger. We have assumed that the Merger will be consummated in a manner that
complies with the applicable provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and all other
applicable federal andstate statutes, rules and regulations. We have further
been advised by representatives of Territorial that Territorial has relied
upon advice from its advisors (other than KBW) or other appropriate sources as
to all legal, financial reporting, tax,accounting and regulatory matters with
respect to Territorial, Hope, the Merger and any related transaction, and the
Agreement. KBW has not provided advice with respect to any such matters.
This opinion addresses only the fairness, from a financial point of view, as
of the date hereof, of the Exchange Ratio in the Merger to theholders of
Territorial Common Stock. We express no view or opinion as to any other terms
or aspects of the Merger or any term or aspect of any related transactions
(including the Bank Merger and the actions relating to The Territorial Savings
BankAmended and Restated Employee Stock Ownership Plan to be taken in
connection with the Merger), including without limitation, the form or
structure of the Merger or any such related transaction, any consequences of
the Merger or any such relatedtransaction to Territorial, its stockholders,
creditors or otherwise, or any terms, aspects, merits or implications of any
employment, consulting, retention, voting, support, stockholder or other
agreements, arrangements or understandingscontemplated or entered into in
connection with the Merger or otherwise. Our opinion is necessarily based upon
conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof. Thereis currently
significant volatility in the stock and other financial markets arising from
global tensions and political unrest, economic uncertainty, inflation, rising
interest rates, the
Keefe, Bruyette& Woods, A Stifel Company
787 Seventh Avenue New York, New York 10019
212.887.7777 www.kbw.com
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The Board of Directors - Territorial Bancorp Inc.
April 26, 2024
Page 5 of 5
COVID-19
pandemic and, in the case of the banking industry, recent actual or threatened
regional bank failures, including the effect of evolvinggovernmental
interventions and
non-interventions.
It is understood that subsequent developments may affect the conclusion
reached in this opinion and that KBW does not have an obligation to update,
revise orreaffirm this opinion. Our opinion does not address, and we express
no view or opinion with respect to, (i) the underlying business decision of
Territorial to engage in the Merger or enter into the Agreement; (ii) the
relative merits ofthe Merger as compared to any strategic alternatives that
are, have been or may be available to or contemplated by Territorial or the
Board; (iii) the fairness of the amount or nature of any compensation to any
of Territorial's officers,directors or employees, or any class of such
persons, relative to the compensation to the holders of Territorial Common
Stock; (iv) the effect of the Merger or any related transaction on, or the
fairness of the consideration to be received by,holders of any class of
securities of Territorial (other than the holders of Territorial Common Stock,
solely with respect to the Exchange Ratio as described herein and not relative
to the consideration to be received by holders of any other classof
securities) or holders of any class of securities of Hope or any other party
to any transaction contemplated by the Agreement; (v) the actual value of Hope
Common Stock to be issued in the Merger; (vi) the prices, trading range
orvolume at which Territorial Common Stock or Hope Common Stock will trade
following the public announcement of the Merger or the prices, trading range
or volume at which Hope Common Stock will trade following the consummation of
the Merger;(vii) any advice or opinions provided by any other advisor to any
of the parties to the Merger or any other transaction contemplated by the
Agreement; or (viii) any legal, regulatory, accounting, tax or similar matters
relating toTerritorial, Hope, their respective stockholders, or relating to or
arising out of or as a consequence of the Merger or any related transactions
(including the Bank Merger), including whether or not the Merger would qualify
as a
tax-free
reorganization for United States federal income tax purposes.
This opinion is for theinformation of, and is directed to, the Board (in its
capacity as such) in connection with its consideration of the financial terms
of the Merger. This opinion does not constitute a recommendation to the Board
as to how it should vote on the Merger,or to any holder of Territorial Common
Stock or any stockholder of any other entity as to how to vote in connection
with the Merger or any other matter, nor does it constitute a recommendation
regarding whether or not any such stockholder shouldenter into a voting,
stockholders', or affiliates' agreement with respect to the Merger or exercise
any dissenters' or appraisal rights that may be available to such stockholder.
This opinion has been reviewed and approved by our Fairness Opinion Committee
in conformity with our policies and procedures established underthe
requirements of Rule 5150 of the Financial Industry Regulatory Authority.
Based upon and subject to the foregoing, it is our opinionthat, as of the date
hereof, the Exchange Ratio in the Merger is fair, from a financial point of
view, to the holders of Territorial Common Stock.
Very truly yours,
Keefe, Bruyette & Woods, Inc.
Keefe, Bruyette& Woods, A Stifel Company
787 Seventh Avenue New York, New York 10019
212.887.7777 www.kbw.com
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Hope Bancorp, Inc. ("Hope") is a Delaware corporation and its officers and
directors are and will be indemnified pursuant to thebelow provisions of
Delaware law, the second amended and restated certificate of incorporation of
Hope (the "Certificate of Incorporation") and the amended and restated bylaws
of Hope (the "Bylaws") against certain liabilities.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") permits a
corporation to provide in its certificate ofincorporation that a director of
the corporation will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such a provision may not eliminate or limit theliability of (i)
a director or officer for any breach of the director's or officer's duty of
loyalty to the corporation or its stockholders, (ii) a director or officer for
acts or omissions not in good faith or which involveintentional misconduct or
a knowing violation of law, (iii) a director under Section 174 of the DGCL
regarding liability for unlawful dividends or stock repurchases and
redemptions, (iv) a director or officer for any transaction fromwhich the
director or officer derived an improper personal benefit or (v) an officer in
any action by or in the right of the corporation. Hope's Certificate of
Incorporation provides that its directors and officers shall not be liableto
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director or officer to the fullest extent permitted by
Delaware law, as it may be amended and supplemented from time to time.
Section 145(a) of the DGCL provides, in general, that a corporation will have
the power to indemnify any person who was or is a party oris threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other
than an action by or in the right of the corporation, because the person is or
was adirector or directors of the corporation. Such indemnity may be against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit orproceeding, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and if, with respect to any criminal action or
proceeding, the person did not havereasonable cause to believe the person's
conduct was unlawful.
Section 145(b) of the DGCL provides, in general, that acorporation will have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor becausethe
person is or was a director or officer of the corporation, against any
expenses (including attorneys' fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such action or suit if
the personacted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, except that
no indemnification will be made in respect of any claim, issue or matter as to
which such person willhave been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought will determine upon application that, despite
the adjudication of liability but in viewof all the circumstances of the case,
such person is fairly and reasonably entitled to be indemnified for such
expenses that the Court of Chancery or such other court will deem proper.
Section 145(g) of the DGCL provides, in general, that a corporation will have
the power to purchase and maintain insurance on behalf ofany person who is or
was a director or officer of the corporation against any liability asserted
against the person in any such capacity, or arising out of the person's status
as such, whether or not the corporation would have the power toindemnify the
person against such liability under the provisions of the law.
Hope's Certificate of Incorporation provides that itshall indemnify each of
its officers and directors to the fullest extent permitted by Section 145 of
the DGCL, and Hope's Bylaws provides for similar indemnification.
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The directors and officers of Hope are also covered by policies of insurance
under which they are insured, within limits and subject to limitations,
against certain expenses not indemnifiable byHope in connection with the
defense of actions, suits or proceedings, and certain liabilities not
indemnifiable by Hope that might be imposed as a result of such actions, suits
or proceedings, in which they are parties by reason of being or havingbeen
directors or officers.
Item 21. Exhibits and Financial Statement Schedules
Exhibit Description
Number
2.1 Agreement and Plan of Merger, dated as of April 26, 2024, by and between Hope Bancorp, Inc. and Territorial
# Bancorp Inc. (included as Annex A to the proxy statement/prospectus contained in this registration statement)
3.1 Second Amended and Restated Certificate of Incorporation of Hope Bancorp, Inc. (incorporated herein
by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on May 29, 2024)
3.2 Amended and Restated Bylaws of Hope Bancorp, Inc. (incorporated herein by reference
to Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on May 29, 2024)
5.1* Opinion of Greenberg Traurig, LLP
8.1* Opinion of Greenberg Traurig, LLP,
regarding certain tax matters
8.2* Opinion of Luse Gorman, PC,
regarding certain tax matters
21.1 Subsidiary of the Registrant (incorporated by reference to the Annual Report on Form 10-K,
Exhibit 21.1, for the year ended December 31, 2023, filed with the SEC on February 28, 2024)
23.1 Consent of Crowe LLP
23.2 Consent of Moss Adams LLP
23.3* Consents of Greenberg Traurig, LLP
(included in Exhibits 5.1 and 8.1)
23.4* Consent of Luse Gorman, PC
(included in Exhibit 8.2)
24.1 Power of Attorney (contained on the signature
page of this registration statement)
99.1 Consent of Keefe, Bruyette & Woods, Inc.
99.2* Form of Proxy Card of
Territorial Bancorp Inc.
107 Filing Fee Table
* To be filed by amendment.
# Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Hope Bancorp
hereby undertakesto furnish supplemental copies of any of the omitted schedules
upon request by the SEC; provided, that Hope Bancorp may request confidential
treatment pursuant to Rule 24b-2 of the Exchange Act for any schedules so furnished.
Item 22. Undertakings
Theundersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to thisregistration statement: (i)
to include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the registration statement
(or themost recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
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Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the
total dollar value of securities offered would not exceed that which was registered) and anydeviation
from the low or high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to
include any material information with respect to the plan ofdistribution not previously disclosed in
the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each
such post-effective amendmentshall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the
securities being registered whichremain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities
Act to any purchaser, each prospectus filedpursuant to Rule
424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall
be deemed to be part of and included in theregistration statement
as of the date it is first used after effectiveness; provided,
however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made
in a document incorporated or deemedincorporated by reference
into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify
any statement that was made inthe registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the
Securities Act to any purchaser inthe initial distribution of securities,
the undersigned registrant undertakes that in a primary offering of securities
of the registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities tothe purchaser,
if the securities are offered or sold to such purchaser by means of any
of the following communications, the registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:(i) any preliminary prospectus or prospectus of the registrant
relating to the offering required to be filed pursuant to Rule 424; (ii)
any free writing prospectus relating to the offering prepared by or on
behalf of the registrant or usedor referred to by the registrant; (iii) the
portion of any other free writing prospectus relating to the offering
containing material information about the registrant or its securities provided
by or on behalf of the registrant; and(iv) any other communication that
is an offer in the offering made by the registrant to the purchaser.
(6) That, for purposes of determining any liability under the Securities Act,
each filing of the registrant'sannual report pursuant to Section 13(a)
or 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference inthis registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(7) That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which isa part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the registrant undertakes
that such reoffering prospectus will contain the information called
for by the applicableregistration form with respect to reofferings
by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
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(8) That every prospectus (i) that is filed pursuant to the paragraph immediately preceding,
or (ii) thatpurports to meet the requirements of Section 10(a)(3) of the Securities Act
and is used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be useduntil
such amendment is effective, and that, for the purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof.
(9) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items4,
10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes information contained in documents filed
subsequent to theeffective date of the registration statement through the date of responding to the request.
(10) To supply by means of a post-effective amendment all information concerning a transaction, and the companybeing acquired
involved therein, that was not the subject of, and included in, this registration statement when it became effective.
(11) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy
asexpressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by
a director, officer, or controllingperson of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
itscounsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the finaladjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf bythe
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on June 21, 2024.
HOPE BANCORP, INC.
By: /s/ Kevin S. Kim
Kevin S. Kim
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kevin S. Kim as his or her trueand lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in their name, place and stead, in any and all capacities,
to sign any and all amendments (including post-effective amendments), and
tofile the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thingrequisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement hasbeen signed by the following persons in the capacities indicated
on June 21, 2024.
/s/ Kevin S. Kim /s/ Julianna Balicka
Kevin S. Kim Executive Vice President and Chief Financial Officer
Chairman, President and ChiefExecutive Officer (Principal Financial and Accounting Officer)
(Principal Executive Officer)
/s/ Donald Byun /s/ William J. Lewis
Donald Byun, Director William J. Lewis, Director
/s/ Jinho Doo /s/ David P. Malone
Jinho Doo, Director David P. Malone, Director
/s/ Daisy Y. Ha /s/ Lisa K. Pai
Daisy Y. Ha, Director Lisa K. Pai, Director
/s/ Joon Kyung Kim /s/ Scott Yoon-Suk Whang
Joon Kyung Kim, Director Scott Yoon-Suk Whang, Director
/s/ Steven S. Koh /s/ Dale S. Zuehls
Steven S. Koh, Director Dale S. Zuehls, Director
/s/ Rachel H. Lee
Rachel H. Lee, Director
II-5
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement on
Form S-4
of Hope Bancorp, Inc. ofour report dated February 28, 2024 relating to the
consolidated financial statements and effectiveness of internal control over
financial reporting appearing in the Annual Report on
Form 10-K
of HopeBancorp, Inc. for the year ended December 31, 2023, and to the
reference to us under the heading "Experts" in the proxy statement/prospectus.
/s/ Crowe LLP
Crowe LLP
Los Angeles, California
June 21, 2024
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the use in this Registration Statement on
Form S-4
of Hope Bancorp, Inc. of our report datedMarch 15, 2024, relating to the
consolidated financial statements of Territorial Bancorp Inc. (which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to a change in the method of accounting for theallowance for credit
losses on loans). We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ Moss Adams LLP
Portland, Oregon
June 21, 2024
Exhibit 99.1
CONSENT OF KEEFE, BRUYETTE & WOODS, INC.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Territorial Bancorp Inc. ("Territorial"), as Annex C to theproxy
statement/prospectus which forms a part of the Registration Statement on Form
S-4
filed on the date hereof (the "Registration Statement") relating to the
proposed merger of Territorial with andinto Hope Bancorp, Inc. and to the
references to such opinion and the quotation or summarization of such opinion
contained therein.
In giving suchconsent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended (the "Securities Act"), or the rules and regulations of the
Securities andExchange Commission thereunder, nor do we hereby admit that we
are experts with respect to any part of the Registration Statement within the
meaning of the term "experts" as used in the Securities Act or the rules and
regulations of theSecurities and Exchange Commission thereunder.
/s/ Keefe, Bruyette & Woods, Inc.
KEEFE, BRUYETTE & WOODS, INC.
Dated:June 21, 2024
Exhibit 107
Calculation of Filing Fee Table
_______________
Form
S-4
__________________
(Form Type)
___________________
Hope Bancorp Inc.
_____________________
(Exact Name of Registrant as Specified in its Charter)
Table 1: Newly Registered Securities
Security Security Fee Amount Proposed Maximum Fee Amount
Type Class Calculation Registered Maximum Aggregate Rate of
Title Rule Offering Offering Registration
Price Price Fee
Per
Unit
Fees to Equity Common stock, Rule 7,174,137 N/A $68,639,224.50 0.00014760 $10,131.15
Be Paid par value 457(c) and (1) (2) (3)
$0.001 per Rule
share 457(f)
(1)
Fees Previously --
Paid
Total Offering $10,131.15
Amounts
Total Fees --
Previously Paid
Total Fee --
Offsets
Net Fee Due $10,131.15
(1)
Represents the estimated maximum number of shares of commonstock, par value
$0.001 per share (the "Hope common stock"), of Hope Bancorp, Inc. ("Hope")
that may be issued to holders of Territorial Bancorp Inc. ("Territorial")
common stock, par value $0.01 per share("Territorial common stock"), upon the
completion of the Merger described in this Registration Statement on
Form S-4.
The number of Hope common stock being registered is based on the product of(x)
0.8048, the Exchange Ratio for the Merger and (y) 8,914,185, the estimated
maximum number of shares of Territorial common stock that may be issued and
outstanding as of immediately prior to the Merger.
(2)
Estimated solely for the purpose of calculating the registration fee required
bySection 6(b) of the Securities Act of 1933, as amended (the "Securities
Act"), and computed pursuant to Rules 457(c) and 457(f) thereunder. The
proposed maximum aggregate offering price is solely for thepurpose of
calculating the registration fee and was calculated based upon the market
value of shares of Territorial common stock (the securities to be exchanged
and cancelled in the Merger) as the product of (A) $7.70, the average ofthe
high and low prices per share of Territorial common stock as reported on the
Nasdaq Global Select Market on June 17, 2024, which is within five business
days prior to the filing of this Registration Statement on
Form S-4 by
(B) 8,914,185, the estimated maximum number of shares of Territorial common
stock to be cancelled and exchanged for shares of Hope common stock upon
consummation of the Merger.
(3)
Determined in accordance with Section 6(b) of the Securities Act at a rate
equal to$147.60 per $1,000,000 of the proposed maximum aggregate offering.
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