Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended June 30, 2014

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from               to               

 

Commission File Number  1-34403

 

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

 

Maryland

 

26-4674701

(State or Other Jurisdiction of Incorporation)

 

(I.R.S. Employer Identification No.)

 

1132 Bishop Street, Suite 2200, Honolulu, Hawaii

 

96813

(Address of Principal Executive Offices)

 

(Zip Code)

 

(808) 946-1400

Registrant’s telephone number, including area code

 

Not Applicable

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x.

 

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

 

9,880,383 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2014.

 

 

 



Table of Contents

 

TERRITORIAL BANCORP INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

PART I

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

ITEM 4.

CONTROLS AND PROCEDURES

43

 

PART II

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

45

ITEM 1A.

RISK FACTORS

45

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

45

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

45

ITEM 4.

MINE SAFETY DISCLOSURES

45

ITEM 5.

OTHER INFORMATION

45

ITEM 6.

EXHIBITS

45

 

 

 

SIGNATURES

 

46

 



Table of Contents

 

PART I

 

ITEM 1.                                                FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

58,686

 

$

75,365

 

Investment securities held to maturity, at amortized cost (fair value of $619,843 and $598,007 at June 30, 2014 and December 31, 2013, respectively)

 

613,247

 

613,436

 

Federal Home Loan Bank stock, at cost

 

11,467

 

11,689

 

Loans held for sale

 

1,504

 

2,210

 

Loans receivable, net

 

902,991

 

856,542

 

Accrued interest receivable

 

4,447

 

4,310

 

Premises and equipment, net

 

5,939

 

6,056

 

Bank-owned life insurance

 

40,774

 

40,243

 

Deferred income taxes receivable

 

6,482

 

5,075

 

Prepaid expenses and other assets

 

2,281

 

1,978

 

 

 

 

 

 

 

Total assets

 

$

1,647,818

 

$

1,616,904

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,317,947

 

$

1,288,709

 

Advances from the Federal Home Loan Bank

 

15,000

 

15,000

 

Securities sold under agreements to repurchase

 

72,000

 

72,000

 

Accounts payable and accrued expenses

 

22,448

 

23,933

 

Current income taxes payable

 

2,093

 

1,414

 

Advance payments by borrowers for taxes and insurance

 

3,718

 

3,708

 

 

 

 

 

 

 

Total liabilities

 

1,433,206

 

1,404,764

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value; authorized 50,000,000 shares, no shares issued or outstanding

 

 

 

Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 9,880,383 and 10,051,377 shares at June 30, 2014 and December 31, 2013, respectively

 

99

 

101

 

Additional paid-in capital

 

75,064

 

77,340

 

Unearned ESOP shares

 

(7,095

)

(7,340

)

Retained earnings

 

150,255

 

145,826

 

Accumulated other comprehensive loss

 

(3,711

)

(3,787

)

 

 

 

 

 

 

Total stockholders’ equity

 

214,612

 

212,140

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,647,818

 

$

1,616,904

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Investment securities

 

$

5,086

 

$

4,518

 

$

10,160

 

$

9,072

 

Loans

 

9,760

 

9,199

 

19,300

 

18,429

 

Other investments

 

35

 

66

 

78

 

164

 

Total interest and dividend income

 

14,881

 

13,783

 

29,538

 

27,665

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,103

 

1,074

 

2,194

 

2,194

 

Advances from the Federal Home Loan Bank

 

66

 

65

 

132

 

168

 

Securities sold under agreements to repurchase

 

343

 

471

 

686

 

948

 

Total interest expense

 

1,512

 

1,610

 

3,012

 

3,310

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

13,369

 

12,173

 

26,526

 

24,355

 

Provision (reversal of allowance) for loan losses

 

156

 

(16

)

165

 

2

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision (reversal of allowance) for loan losses

 

13,213

 

12,189

 

26,361

 

24,353

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

524

 

568

 

1,023

 

1,069

 

Income on bank-owned life insurance

 

264

 

258

 

532

 

479

 

Gain on sale of investment securities

 

309

 

1,024

 

655

 

1,912

 

Gain on sale of loans

 

86

 

380

 

165

 

1,025

 

Other

 

96

 

81

 

262

 

186

 

Total noninterest income

 

1,279

 

2,311

 

2,637

 

4,671

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,297

 

5,012

 

10,660

 

10,364

 

Occupancy

 

1,409

 

1,333

 

2,831

 

2,584

 

Equipment

 

905

 

851

 

1,819

 

1,723

 

Federal deposit insurance premiums

 

201

 

191

 

400

 

381

 

Other general and administrative expenses

 

935

 

1,208

 

1,901

 

2,259

 

Total noninterest expense

 

8,747

 

8,595

 

17,611

 

17,311

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5,745

 

5,905

 

11,387

 

11,713

 

Income taxes

 

2,026

 

2,244

 

4,206

 

4,411

 

Net income

 

$

3,719

 

$

3,661

 

$

7,181

 

$

7,302

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.41

 

$

0.37

 

$

0.78

 

$

0.74

 

Diluted earnings per share

 

$

0.40

 

$

0.36

 

$

0.77

 

$

0.72

 

Cash dividends declared per common share

 

$

0.15

 

$

0.13

 

$

0.29

 

$

0.25

 

Basic weighted-average shares outstanding

 

9,164,801

 

9,841,162

 

9,176,108

 

9,879,050

 

Diluted weighted-average shares outstanding

 

9,346,872

 

10,070,604

 

9,363,631

 

10,093,690

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,719

 

$

3,661

 

$

7,181

 

$

7,302

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on securities

 

1

 

10

 

4

 

18

 

Noncredit related gains on securities not expected to be sold

 

 

47

 

72

 

69

 

Other comprehensive income

 

1

 

57

 

76

 

87

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

3,720

 

$

3,718

 

$

7,257

 

$

7,389

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Unearned
ESOP
Shares

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss)/Income

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012

 

$

108

 

$

93,616

 

$

(7,829

)

$

137,410

 

$

(4,333

)

$

218,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,302

 

 

7,302

 

Other comprehensive income

 

 

 

 

 

87

 

87

 

Cash dividends declared ($0.25 per share)

 

 

 

 

(2,577

)

 

(2,577

)

Share-based compensation

 

 

1,327

 

 

 

 

1,327

 

Allocation of 24,466 ESOP shares

 

 

326

 

244

 

 

 

570

 

Repurchase of 332,018 shares of company common stock

 

(3

)

(7,651

)

 

 

 

(7,654

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2013

 

$

105

 

$

87,618

 

$

(7,585

)

$

142,135

 

$

(4,246

)

$

218,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

$

101

 

$

77,340

 

$

(7,340

)

$

145,826

 

$

(3,787

)

$

212,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,181

 

 

7,181

 

Other comprehensive income

 

 

 

 

 

76

 

76

 

Cash dividends declared ($0.29 per share)

 

 

 

 

(2,752

)

 

(2,752

)

Share-based compensation

 

 

1,327

 

 

 

 

1,327

 

Allocation of 24,466 ESOP shares

 

 

282

 

245

 

 

 

527

 

Repurchase of 170,994 shares of company common stock

 

(2

)

(3,885

)

 

 

 

(3,887

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

$

99

 

$

75,064

 

$

(7,095

)

$

150,255

 

$

(3,711

)

$

214,612

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

7,181

 

$

7,302

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

165

 

2

 

Depreciation and amortization

 

677

 

567

 

Deferred income tax benefit

 

(1,457

)

(1,339

)

Amortization of fees, discounts, and premiums

 

(208

)

401

 

Origination of loans held for sale

 

(16,086

)

(47,607

)

Proceeds from sales of loans held for sale

 

16,957

 

47,861

 

Gain on sale of loans, net

 

(165

)

(1,025

)

Purchases of investment securities held for trading

 

(5,041

)

 

Proceeds from sale of investment securities held for trading

 

5,071

 

 

Gain on sale of investment securities held for trading

 

(30

)

 

Gain on sale of investment securities held to maturity

 

(625

)

(1,912

)

ESOP expense

 

527

 

570

 

Share-based compensation expense

 

1,327

 

1,327

 

Increase in accrued interest receivable

 

(137

)

(3

)

Net increase in bank-owned life insurance

 

(531

)

(479

)

Net (increase) decrease in prepaid expenses and other assets

 

(303

)

1,512

 

Net increase (decrease) in accounts payable and accrued expenses

 

(960

)

483

 

Net increase (decrease) in advance payments by borrowers for taxes and insurance

 

10

 

(64

)

Net increase in income taxes payable

 

679

 

705

 

Net cash provided by operating activities

 

7,051

 

8,301

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(34,831

)

(167,189

)

Principal repayments on investment securities held to maturity

 

28,479

 

110,983

 

Proceeds from sale of investment securities held to maturity

 

7,199

 

29,188

 

Loan originations, net of principal repayments on loans receivable

 

(46,313

)

(46,218

)

Proceeds from redemption of Federal Home Loan Bank stock

 

222

 

220

 

Purchases of bank-owned life insurance

 

 

(8,000

)

Purchases of premises and equipment

 

(560

)

(310

)

Net cash used in investing activities

 

(45,804

)

(81,326

)

 

(Continued)

 

5



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

$

29,238

 

$

(2,391

)

Proceeds from advances from the Federal Home Loan Bank

 

 

5,000

 

Repayments of advances from the Federal Home Loan Bank

 

 

(10,000

)

Repayments of securities sold under agreements to repurchase

 

 

(5,000

)

Purchases of Company stock

 

(4,412

)

(7,654

)

Cash dividends paid

 

(2,752

)

(2,577

)

Net cash provided by (used in) financing activities

 

22,074

 

(22,622

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(16,679

)

(95,647

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

75,365

 

182,818

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

58,686

 

$

87,171

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

2,953

 

$

3,305

 

Income taxes

 

4,984

 

5,045

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                     Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with 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 in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  These interim condensed consolidated financial statements and notes should be read in conjunction with Territorial Bancorp Inc.’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2013.  In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.

 

(2)                     Organization

 

On November 4, 2008, the Board of Directors of Territorial Mutual Holding Company (MHC) approved a plan of conversion and reorganization under which MHC would convert from a mutual holding company to a stock holding company.  The conversion to a stock holding company was approved by the depositors and borrowers of Territorial Savings Bank and the Office of Thrift Supervision (OTS) and included the filing of a registration statement with the U.S. Securities and Exchange Commission.  Upon the completion of the conversion and reorganization on July 10, 2009, Territorial Mutual Holding Company and Territorial Savings Group, Inc. ceased to exist as separate legal entities and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. A total of 12,233,125 shares were issued in the conversion at $10 per share, raising $122.3 million of gross proceeds.  Approximately $3.7 million of conversion expenses were offset against the gross proceeds.  Territorial Bancorp Inc.’s common stock began trading on the NASDAQ Global Select Market under the symbol “TBNK” on July 13, 2009.

 

Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008.  The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion.  The liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits.  Subsequent increases will not restore an eligible account holder’s or supplemental eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of Territorial Savings Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The balance of the liquidation account at December 31, 2013 was $17.6 million.

 

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.

 

7



Table of Contents

 

(3)                     Recently Adopted Accounting Pronouncements

 

In January 2014, the Financial Accounting Standards Board (FASB) amended the Receivables topic of the FASB Accounting Standards Codification (ASC).  The amendment clarifies when an in substance repossession or foreclosure occurs and when a mortgage loan should be derecognized and the related real property recognized.  The amendment also requires disclosures about the amount of foreclosed residential real property held and the recorded investment in mortgage loans collateralized by residential real property in the process of foreclosure.  The amendment is effective for interim and annual periods beginning after December 15, 2014, with early adoption allowed.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC.  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

In June 2014, the FASB amended the Transfers and Servicing topic of the FASB ASC.  The amendment modifies the accounting for certain types of repurchase transactions as well as adds new disclosure requirements for repurchase transactions.  The amendment is effective for interim and annual periods beginning after December 15, 2014, with early adoption prohibited.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

(4)                     Cash and Cash Equivalents

 

The table below presents the balances of cash and cash equivalents:

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,741

 

$

9,962

 

Interest-earning deposits in other banks

 

49,945

 

65,403

 

Cash and cash equivalents

 

$

58,686

 

$

75,365

 

 

Interest-earning deposits in other banks consist primarily of deposits at the Federal Reserve Bank.

 

8



Table of Contents

 

(5)                     Investment Securities

 

The amortized cost and fair values of investment securities are as follows:

 

 

 

Carrying

 

Gross unrealized

 

Estimated

 

(Dollars in thousands)

 

Value

 

Gains

 

Losses

 

Fair Value

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

612,590

 

$

16,130

 

$

(9,534

)

$

619,186

 

Trust preferred securities

 

657

 

 

 

657

 

Total

 

$

613,247

 

$

16,130

 

$

(9,534

)

$

619,843

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

612,899

 

$

7,979

 

$

(23,408

)

$

597,470

 

Trust preferred securities

 

537

 

 

 

537

 

Total

 

$

613,436

 

$

7,979

 

$

(23,408

)

$

598,007

 

 

The carrying and estimated fair value of investment securities at June 30, 2014 are shown below.  Incorporated in the maturity schedule are mortgage-backed and trust preferred securities, which are allocated using the contractual maturity as a basis.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Carrying

 

Estimated

 

(Dollars in thousands)

 

Value

 

Fair Value

 

Held to maturity:

 

 

 

 

 

Due within 5 years

 

$

167

 

$

167

 

Due after 5 years through 10 years

 

74

 

79

 

Due after 10 years

 

613,006

 

619,597

 

Total

 

$

613,247

 

$

619,843

 

 

Realized gains and losses and the proceeds from sales of securities available for sale, held to maturity and trading are shown in the table below.  All sales of securities were U.S. government-sponsored mortgage-backed securities.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Proceeds from sales

 

$

3,475

 

$

15,558

 

$

12,270

 

$

29,188

 

Gross gains

 

309

 

1,024

 

655

 

1,912

 

Gross losses

 

 

 

 

 

 

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Table of Contents

 

During the three months ended June 30, 2014 and 2013, the Company received proceeds of $3.5 million and $15.6 million, respectively, from the sale of $3.2 million and $14.5 million, respectively, of held-to-maturity debt securities, resulting in gross realized gains of $309,000 and $1.0 million, respectively.  During the six months ended June 30, 2014 and 2013, the Company received proceeds of $7.2 million and $29.2 million, respectively, from the sale of $6.6 million and $27.3 million, respectively, of held-to-maturity debt securities, resulting in gross realized gains of $625,000 and $1.9 million, respectively.  The sale of these securities, for which the Company had already collected a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio.

 

Investment securities with carrying values of $268.5 million and $273.2 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

 

Provided below is a summary of investment securities which were in an unrealized loss position at June 30, 2014 and December 31, 2013.  The Company does not intend to sell these 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

 

12 Months or Longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

Number of

 

 

 

Unrealized

 

Description of Securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

3,644

 

$

14

 

$

236,464

 

$

9,520

 

49

 

$

240,108

 

$

9,534

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

361,445

 

$

21,678

 

$

22,010

 

$

1,730

 

69

 

$

383,455

 

$

23,408

 

 

Mortgage-Backed Securities.  The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates.  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, and the Company does not intend to sell these investments until maturity and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its amortized cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2014 and December 31, 2013.

 

Trust Preferred Securities.  At June 30, 2014, the Company owns two trust preferred securities, PreTSL XXIII and XXIV.  The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  Both of these securities are classified in the Bank’s held-to-maturity investment portfolio.

 

The trust preferred securities market is considered to be inactive as only three transactions have occurred over the past 30 months in the same tranche of securities owned by the Company.  The Company used a discounted cash flow model to determine whether these securities are other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

 

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending June 30, 2014.

 

10



Table of Contents

 

PreTSL XXIV has a book value of $0 at June 30, 2014.  PreTSL XXIII has a book value of $657,000 at June 30, 2014.  The difference between the book value of $657,000 and the remaining amortized cost basis of $1.1 million is reported as other comprehensive loss and is related to noncredit factors such as the trust preferred securities market being inactive.

 

It is reasonably possible that the fair values of the trust preferred securities could decline in the near term if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low.  As a result, there is a risk that the Company’s remaining amortized cost basis of $1.1 million on its trust preferred securities could be credit-related other-than-temporarily impaired in the near term.  The impairment could be material to the Company’s consolidated statements of income.

 

The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

 

(Dollars in thousands)

 

2014

 

2013

 

Balance at January 1,

 

$

5,885

 

$

5,885

 

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

 

 

Balance at June 30,

 

$

5,885

 

$

5,885

 

 

The table below shows the components of accumulated other comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities:

 

 

 

June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

Noncredit losses on other-than-temporarily impaired securities, net of taxes

 

$

304

 

$

376

 

 

(6)                     Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Real estate loans:

 

 

 

 

 

First mortgages:

 

 

 

 

 

One- to four-family residential

 

$

864,827

 

$

823,273

 

Multi-family residential

 

5,086

 

4,877

 

Construction, commercial, and other

 

18,830

 

13,554

 

Home equity loans and lines of credit

 

15,356

 

16,524

 

Total real estate loans

 

904,099

 

858,228

 

Other loans:

 

 

 

 

 

Loans on deposit accounts

 

476

 

342

 

Consumer and other loans

 

4,427

 

4,307

 

Total other loans

 

4,903

 

4,649

 

Less:

 

 

 

 

 

Net unearned fees and discounts

 

(4,501

)

(4,849

)

Allowance for loan losses

 

(1,510

)

(1,486

)

Total unearned fees, discounts and allowance for loan losses

 

(6,011

)

(6,335

)

Loans receivable, net

 

$

902,991

 

$

856,542

 

 

11



Table of Contents

 

The activity in the allowance for loan losses on loans receivable is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Balance, beginning of period

 

$

1,485

 

$

1,667

 

$

1,486

 

$

1,672

 

Provision (reversal of allowance) for loan losses

 

156

 

(16

)

165

 

2

 

 

 

1,641

 

1,651

 

1,651

 

1,674

 

Charge-offs

 

(136

)

(85

)

(153

)

(137

)

Recoveries

 

5

 

56

 

12

 

85

 

Net charge-offs

 

(131

)

(29

)

(141

)

(52

)

Balance, end of period

 

$

1,510

 

$

1,622

 

$

1,510

 

$

1,622

 

 

The table below presents the activity in the allowance for loan losses by portfolio segment:

 

(Dollars in thousands)

 

Residential
Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

Three months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

434

 

$

823

 

$

7

 

$

153

 

$

68

 

$

1,485

 

Provision for loan losses

 

28

 

109

 

9

 

10

 

 

156

 

 

 

462

 

932

 

16

 

163

 

68

 

1,641

 

Charge-offs

 

(118

)

 

(10

)

(8

)

 

(136

)

Recoveries

 

 

 

1

 

4

 

 

5

 

Net charge-offs

 

(118

)

 

(9

)

(4

)

 

(131

)

Balance, end of period

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

Provision (reversal of allowance) for loan losses

 

86

 

133

 

5

 

(55

)

(4

)

165

 

 

 

462

 

932

 

15

 

174

 

68

 

1,651

 

Charge-offs

 

(118

)

 

(10

)

(25

)

 

(153

)

Recoveries

 

 

 

2

 

10

 

 

12

 

Net charge-offs

 

(118

)

 

(8

)

(15

)

 

(141

)

Balance, end of period

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

12



Table of Contents

 

(Dollars in thousands)

 

Residential
Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

Three months ended June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

585

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,667

 

Provision (reversal of allowance) for loan losses

 

(42

)

(5

)

(3

)

20

 

14

 

(16

)

 

 

543

 

813

 

32

 

127

 

136

 

1,651

 

Charge-offs

 

(80

)

 

 

(5

)

 

(85

)

Recoveries

 

50

 

 

3

 

3

 

 

56

 

Net charge-offs

 

(30

)

 

3

 

(2

)

 

(29

)

Balance, end of period

 

$

513

 

$

813

 

$

35

 

$

125

 

$

136

 

$

1,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

590

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,672

 

Provision (reversal of allowance) for loan losses

 

(68

)

(5

)

(6

)

67

 

14

 

2

 

 

 

522

 

813

 

29

 

174

 

136

 

1,674

 

Charge-offs

 

(81

)

 

 

(56

)

 

(137

)

Recoveries

 

72

 

 

6

 

7

 

 

85

 

Net charge-offs

 

(9

)

 

6

 

(49

)

 

(52

)

Balance, end of period

 

$

513

 

$

813

 

$

35

 

$

125

 

$

136

 

$

1,622

 

 

Management considers the allowance for loan losses at June 30, 2014 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the bank regulatory agencies periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

 

13



Table of Contents

 

The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

 

(Dollars in thousands)

 

Residential
Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

344

 

932

 

7

 

159

 

68

 

1,510

 

Total ending allowance balance

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,995

 

$

 

$

142

 

$

 

$

 

$

7,137

 

Collectively evaluated for impairment

 

858,411

 

18,830

 

15,221

 

4,902

 

 

897,364

 

Total ending loan balance

 

$

865,406

 

$

18,830

 

$

15,363

 

$

4,902

 

$

 

$

904,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

376

 

799

 

10

 

229

 

72

 

1,486

 

Total ending allowance balance

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

8,373

 

$

 

$

160

 

$

 

$

 

$

8,533

 

Collectively evaluated for impairment

 

814,960

 

13,514

 

16,372

 

4,649

 

 

849,495

 

Total ending loan balance

 

$

823,333

 

$

13,514

 

$

16,532

 

$

4,649

 

$

 

$

858,028

 

 

The table below presents the balance of impaired loans and the related amount of allocated loan loss allowances:

 

(Dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

Loans with no allocated allowance for loan losses

 

$

7,137

 

$

8,533

 

Loans with allocated allowance for loan losses

 

 

 

Total impaired loans

 

$

7,137

 

$

8,533

 

 

 

 

 

 

 

Amount of allocated loan loss allowance

 

$

 

$

 

 

14



Table of Contents

 

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:

 

(Dollars in thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

June 30, 2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,995

 

$

7,527

 

Home equity loans and lines of credit

 

142

 

164

 

 

 

 

 

 

 

Total

 

$

7,137

 

$

7,691

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

8,373

 

$

8,716

 

Home equity loans and lines of credit

 

160

 

165

 

 

 

 

 

 

 

Total

 

$

8,533

 

$

8,881

 

 

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(Dollars in thousands)

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

2014:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,106

 

$

29

 

$

7,141

 

$

60

 

Home equity loans and lines of credit

 

149

 

 

151

 

 

Total

 

$

7,255

 

$

29

 

$

7,292

 

$

60

 

 

 

 

 

 

 

 

 

 

 

2013:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,793

 

$

34

 

$

7,806

 

$

68

 

Home equity loans and lines of credit

 

161

 

 

161

 

 

Total

 

$

7,954

 

$

34

 

$

7,967

 

$

68

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2014 or December 31, 2013.  Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value.

 

15



Table of Contents

 

The table below presents the aging of loans and accrual status by class of loans:

 

(Dollars in thousands)

 

30 – 59
Days Past
Due

 

60 – 89
Days Past
Due

 

90 Days or
Greater
Past Due

 

Total Past
Due

 

Loans Not
Past Due

 

Total
Loans

 

Nonaccrual
Loans

 

Loans
More
Than 90
Days Past
Due and
Still
Accruing

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

881

 

$

852

 

$

795

 

$

2,528

 

$

857,813

 

$

860,341

 

$

4,974

 

$

 

Multi-family residential mortgages

 

 

 

 

 

5,065

 

5,065

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

18,830

 

18,830

 

 

 

Home equity loans and lines of credit

 

 

37

 

 

37

 

15,326

 

15,363

 

142

 

 

Loans on deposit accounts

 

 

 

 

 

476

 

476

 

 

 

Consumer and other

 

5

 

1

 

 

6

 

4,420

 

4,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

886

 

$

890

 

$

795

 

$

2,571

 

$

901,930

 

$

904,501

 

$

5,116

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

376

 

$

612

 

$

1,577

 

$

2,565

 

$

815,917

 

$

818,482

 

$

5,840

 

$

 

Multi-family residential mortgages

 

 

 

 

 

4,851

 

4,851

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

13,514

 

13,514

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

16,532

 

16,532

 

160

 

 

Loans on deposit accounts

 

 

 

 

 

342

 

342

 

 

 

Consumer and other

 

11

 

4

 

 

15

 

4,292

 

4,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

387

 

$

616

 

$

1,577

 

$

2,580

 

$

855,448

 

$

858,028

 

$

6,000

 

$

 

 

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio.  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 only from the sale or operation of the collateral and not from borrower repayments.  Generally, appraisals are obtained after a loan becomes collateral-dependent or is five 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 loan that 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 Company had 18 nonaccrual loans with a book value of $5.1 million at June 30, 2014 and 19 nonaccrual loans with a book value of $6.0 million as of December 31, 2013.  The Company collected interest on nonaccrual loans of $135,000 and $77,000 during the six months ended June 30, 2014 and 2013, respectively, but due to regulatory requirements, we recorded it as a reduction of principal.  The Company would have recognized additional interest income of $96,000 and $141,000 during the six months ended June 30, 2014 and 2013, respectively, had the loans been accruing interest.  The Company did not have any loans more than 90 days past due and still accruing interest as of June 30, 2014 and December 31, 2013.

 

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Table of Contents

 

The table below presents information related to loans modified in a troubled debt restructuring during the three and six months ended June 30, 2014 and 2013:

 

 

 

2014

 

2013

 

(Dollars in thousands)

 

Number
of Loans

 

Pre-
Modification
Recorded
Investment

 

Post-
Modification
Recorded
Investment

 

Number
of Loans

 

Pre-
Modification
Recorded
Investment

 

Post-
Modification
Recorded
Investment

 

Three months ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

$

 

$

 

1

 

$

700

 

$

700

 

Total

 

 

$

 

$

 

1

 

$

700

 

$

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

$

 

$

 

1

 

$

700

 

$

700

 

Total

 

 

$

 

$

 

1

 

$

700

 

$

700

 

 

There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.

 

The Company had 18 troubled debt restructurings totaling $5.0 million as of June 30, 2014 that were considered to be impaired.  This total included 17 one- to four-family residential mortgage loans totaling $4.9 million and one home equity loan for $142,000.  Six of the loans, totaling $2.0 million, are performing in accordance with their restructured terms and accruing interest at June 30, 2014.  Eleven of the loans, totaling $2.8 million, are performing in accordance with their restructured terms but not accruing interest at June 30, 2014.  One of the loans, for $191,000, is more than 149 days delinquent and not accruing interest as of June 30, 2014.  The Company had 20 troubled debt restructurings totaling $5.8 million as of December 31, 2013 that were considered to be impaired.  This total included 19 one- to four-family residential mortgage loans totaling $5.6 million and one home equity loan for $160,000.  Eight of the loans, totaling $2.5 million, were performing in accordance with their restructured terms and accruing interest at December 31, 2013.  Twelve of the loans, totaling $3.3 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2013.  Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers.  We have no commitments to lend any additional funds to these borrowers.

 

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii.  Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

 

During the six months ended June 30, 2014 and 2013, the Company sold $16.9 million and $47.1 million, respectively, of mortgage loans held for sale and recognized gains of $165,000 and $1.0 million, respectively.  During the three months ended June 30, 2014 and 2013, the Company sold $7.0 million and $22.3 million, respectively, of mortgage loans held for sale and recognized gains of $86,000 and $380,000, respectively.  The Company had six loans held for sale totaling $1.5 million at June 30, 2014 and six loans held for sale totaling $2.2 million at December 31, 2013.

 

The Company serviced loans for others of $65.2 million at June 30, 2014 and $68.4 million at December 31, 2013. Of these amounts, $2.6 million and $3.1 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at June 30, 2014 and December 31, 2013, respectively.  The amount of contractually specified servicing fees earned for the six-month periods ended June 30, 2014 and 2013 was $93,000 and $113,000, respectively.  The amount of contractually specified servicing fees earned for the three-month periods ended June 30, 2014 and 2013 was $46,000 and $55,000, respectively.  The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

 

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Table of Contents

 

(7)                       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 are reflected as a liability with the dollar amount of securities underlying the agreements remaining in the asset accounts.  Securities sold under agreements to repurchase are summarized as follows:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Repurchase

 

Average

 

Repurchase

 

Average

 

(Dollars in thousands)

 

Liability

 

Rate

 

Liability

 

Rate

 

Maturing:

 

 

 

 

 

 

 

 

 

1 year or less

 

$

42,000

 

2.13%

 

$

 

—%

 

Over 1 year to 2 years

 

5,000

 

1.90

 

47,000

 

2.11

 

Over 3 years to 4 years

 

25,000

 

1.46

 

25,000

 

1.46

 

Total

 

$

72,000

 

1.88%

 

$

72,000

 

1.88%

 

 

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at June 30, 2014.  The amount at risk is the greater of the carrying value or fair value over the repurchase liability.  All the agreements to repurchase are with JP Morgan Securities and the securities pledged are issued and guaranteed by U.S. government-sponsored enterprises.

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Carrying

 

Fair

 

 

 

 

 

Average

 

 

 

Value of

 

Value of

 

Repurchase

 

Amount

 

Months to

 

(Dollars in thousands)

 

Securities

 

Securities

 

Liability

 

at Risk

 

Maturity

 

Maturing:

 

 

 

 

 

 

 

 

 

 

 

Over 90 days

 

$

79,692

 

$

79,858

 

$

72,000

 

$

7,858

 

19

 

 

(8)                       Offsetting of Financial Liabilities

 

Securities sold under agreements to repurchase are subject to a conditional right of offset in the event of default.  See Footnote 7, Securities Sold Under Agreements to Repurchase, for additional information.

 

 

 

Gross Amount

 

Gross Amount

 

Net Amount of
Liabilities

 

Gross Amount Not Offset in the
Balance Sheet

 

 

 

(Dollars in thousands)

 

of Recognized
Liabilities

 

Offset in the
Balance Sheet

 

Presented in the
Balance Sheet

 

Financial
Instruments

 

Cash Collateral
Pledged

 

Net Amount

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

72,000

 

$

 

$

72,000

 

$

72,000

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

72,000

 

$

 

$

72,000

 

$

72,000

 

$

 

$

 

 

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Table of Contents

 

(9)                       Employee Benefit Plans

 

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers substantially all employees with at least one year of service.  Effective December 31, 2008, under approved changes to the Pension Plan, there were no further accruals of benefits for any participants and benefits will not increase with any additional years of service.  Net periodic benefit cost, subsequent to December 31, 2008, has not been significant and is not disclosed in the table below.

 

In addition, the Company sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.

 

The components of net periodic benefit cost were as follows:

 

 

 

SERP

 

SERP

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Net periodic benefit cost for the period

 

 

 

 

 

 

 

 

 

Service cost

 

$

25

 

$

42

 

$

50

 

$

83

 

Interest cost

 

29

 

27

 

59

 

55

 

Expected return on plan assets

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized actuarial loss

 

 

 

 

 

Recognized curtailment loss

 

 

 

 

 

Net periodic benefit cost

 

$

54

 

$

69

 

$

109

 

$

138

 

 

(10)                Employee Stock Ownership Plan

 

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees.  The ESOP borrowed $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 funds from 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 adjusts annually 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 in an 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 on the 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 fair value of shares released with a corresponding credit to stockholders’

 

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Table of Contents

 

equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the three months ended June 30, 2014 and 2013 amounted to $217,000 and $261,000, respectively.  Compensation expense recognized for the six months ended June 30, 2014 and 2013 amounted to $458,000 and $523,000, respectively.

 

Shares held by the ESOP trust were as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Allocated shares

 

259,693

 

239,241

 

Unearned shares

 

709,523

 

733,989

 

Total ESOP shares

 

969,216

 

973,230

 

Fair value of unearned shares, in thousands

 

$

14,815

 

$

17,029

 

 

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the employee stock ownership plan’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 limitations imposed 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 June 30, 2014 and 2013, we accrued $19,000 and $31,000, respectively, for the ESOP restoration plan.  For the six months ended June 30, 2014 and 2013, we accrued $93,000 and $120,000, respectively, for the ESOP restoration plan.

 

(11)                Share-Based Compensation

 

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors.  In accordance with the Compensation — Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date.  The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date.  The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term.  These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision.  The cost of the awards will be recognized on a straight-line basis over the five- to six-year vesting period during which participants are required to provide services in exchange for the awards.

 

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Table of Contents

 

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 statement of income as a component of salaries and employee benefits with a corresponding increase in shareholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Compensation expense

 

$

667

 

$

667

 

$

1,327

 

$

1,327

 

Income tax benefit

 

299

 

314

 

612

 

652

 

 

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized but unissued shares.  The maximum number of shares that will be awarded under the plan will be 1,712,637 shares.

 

Stock Options

 

The table below presents the stock option activity for the six months ended June 30, 2014 and 2013:

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Remaining
Contractual
Life (Years)

 

Aggregate
Intrinsic Value
(in Thousands)

 

Options outstanding at December 31, 2013

 

832,954

 

$

17.38

 

6.68

 

$

4,845

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Options outstanding at June 30, 2014

 

832,954

 

$

17.38

 

6.18

 

$

2,913

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at December 31, 2012

 

832,954

 

$

17.38

 

7.67

 

$

4,554

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Options outstanding at June 30, 2013

 

832,954

 

$

17.38

 

7.18

 

$

4,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable at June 30, 2014

 

416,169

 

$

17.38

 

6.18

 

$

1,457

 

 

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Table of Contents

 

There were no stock options exercised or vested during the three and six months ended June 30, 2014 and 2013.

 

As of June 30, 2014, the Company had $1.5 million of unrecognized compensation costs related to the stock option plan. The cost of the stock option plan is being amortized over the five- to six-year vesting period.

 

There were no options granted in the three or six months ended June 30, 2014 and 2013.

 

Restricted Stock Awards

 

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant.  Unvested restricted stock awards may not be disposed of or transferred during the vesting period.  Restricted stock awards carry with them the right to receive dividends.

 

22



Table of Contents

 

The table below presents the restricted stock award activity:

 

 

 

Restricted
Stock
Awards

 

Weighted
Average

Grant
Date Fair

Value

 

Nonvested at December 31, 2013

 

340,065

 

$

17.39

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at June 30, 2014

 

340,065

 

$

17.39

 

 

 

 

 

 

 

Nonvested at December 31, 2012

 

453,397

 

$

17.39

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at June 30, 2013

 

453,397

 

$

17.39

 

 

As of June 30, 2014, the Company had $4.3 million of unrecognized compensation costs related to restricted stock awards.  The cost of the restricted stock awards is being amortized over the five- or six-year vesting period.

 

(12)                Earnings Per Share

 

The table below presents the information used to compute basic and diluted earnings per share:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands, except share data)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,719

 

$

3,661

 

$

7,181

 

$

7,302

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

9,164,801

 

9,841,162

 

9,176,108

 

9,879,050

 

Dilutive common stock equivalents:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

182,071

 

229,442

 

187,523

 

214,640

 

Diluted earnings per share

 

9,346,872

 

10,070,604

 

9,363,631

 

10,093,690

 

Net income per common share, basic

 

$

0.41

 

$

0.37

 

$

0.78

 

$

0.74

 

Net income per common share, diluted

 

$

0.40

 

$

0.36

 

$

0.77

 

$

0.72

 

 

23



Table of Contents

 

(13)                Other Comprehensive Loss

 

The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes:

 

(Dollars in thousands)

 

Unfunded
Pension
Liability

 

Noncredit
Related
Losses on
Securities
Not
Expected to
Be Sold

 

Unrealized
Loss on
Securities

 

Total

 

Three months ended June 30, 2014

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

3,338

 

$

304

 

$

70

 

$

3,712

 

Other comprehensive income before reclassifications

 

 

 

(1

)

(1

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

 

(1

)

(1

)

Balances at end of period

 

$

3,338

 

$

304

 

$

69

 

$

3,711

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2013

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

3,792

 

$

423

 

$

88

 

$

4,303

 

Other comprehensive income before reclassifications

 

 

(47

)

(10

)

(57

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

(47

)

(10

)

(57

)

Balances at end of period

 

$

3,792

 

$

376

 

$

78

 

$

4,246

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

3,338

 

$

376

 

$

73

 

$

3,787

 

Other comprehensive income before reclassifications

 

 

(72

)

(4

)

(76

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

(72

)

(4

)

(76

)

Balances at end of period

 

$

3,338

 

$

304

 

$

69

 

$

3,711

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2013

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

3,792

 

$

445

 

$

96

 

$

4,333

 

Other comprehensive income before reclassifications

 

 

(69

)

(18

)

(87

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

(69

)

(18

)

(87

)

Balances at end of period

 

$

3,792

 

$

376

 

$

78

 

$

4,246

 

 

24



Table of Contents

 

The table below presents the tax effect on each component of accumulated other comprehensive loss:

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

(Dollars in thousands)

 

Pretax
Amount

 

Tax

 

After Tax
Amount

 

Pretax
Amount

 

Tax

 

After Tax
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfunded pension liability

 

$

 

$

 

$

 

$

 

$

 

$

 

Noncredit related losses on securities not expected to be sold

 

(1

)

1

 

 

(79

)

32

 

(47

)

Unrealized loss on securities

 

(2

)

1

 

(1

)

(16

)

6

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(3

)

$

2

 

$

(1

)

$

(95

)

$

38

 

$

(57

)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

(Dollars in thousands)

 

Pretax
Amount

 

Tax

 

After Tax
Amount

 

Pretax
Amount

 

Tax

 

After Tax
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfunded pension liability

 

$

 

$

 

$

 

$

 

$

 

$

 

Noncredit related losses on securities not expected to be sold

 

(119

)

47

 

(72

)

(115

)

46

 

(69

)

Unrealized loss on securities

 

(7

)

3

 

(4

)

(29

)

11

 

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(126

)

$

50

 

$

(76

)

$

(144

)

$

57

 

$

(87

)

 

(14)                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 liabilities 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 traded in 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, quoted prices 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 not observable 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 and similar techniques that require the use of significant judgment or estimation.

 

In accordance with the Fair Value Measurements 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 market participants 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.

 

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Table of Contents

 

The Company uses fair value measurements to determine fair value disclosures.  Investment securities held for sale and derivatives are recorded 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 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.

 

Cash and Cash Equivalents, Accrued Interest Receivable, Accounts Payable and Accrued Expenses, Current Income Taxes Payable, and Advance Payments by Borrowers for Taxes and Insurance. The carrying amount approximates fair value because of the short maturity of these instruments.

 

Investment Securities.  The estimated fair values of U.S. government-sponsored mortgage-backed securities 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.

 

The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  The trust preferred securities market is considered to be inactive as only three transactions have occurred over the past 30 months in the same tranche of securities owned by the Company.  The fair value of our trust preferred securities was determined using a discounted cash flow model.  Our model used a discount rate equal to three-month LIBOR plus 20.00% and provided a fair value estimate of $18.54 per $100 of par value for PreTSL XXIII.

 

The discounted cash flow analysis included a review of all issuers within the pool.  The fair value of the trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow models.

 

FHLB Stock. FHLB stock, which is redeemable for cash at par value, is reported at its par value.

 

Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  The fair value of loans is not based on the concept of exit price.

 

Loans Held for Sale. The fair value of loans held for sale is determined based on the prices quoted in the secondary market for similar loans.

 

Deposits. The fair value of checking and Super NOW savings accounts, passbook accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits with similar remaining maturities.

 

Advances from the FHLB and Securities Sold Under Agreements to Repurchase. Fair value is estimated by discounting future cash flows using the rates currently offered to the Company for debt with similar remaining maturities.

 

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 value determined by referring to prices quoted in the secondary market for similar contracts.  Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

 

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Table of Contents

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

 

Carrying

 

Fair

 

Fair Value Measurements Using

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

58,686

 

$

58,686

 

$

58,686

 

$

 

$

 

Investment securities held to maturity

 

613,247

 

619,843

 

 

619,186

 

657

 

FHLB stock

 

11,467

 

11,467

 

 

 

11,467

 

 

Loans held for sale

 

1,504

 

1,541

 

 

1,541

 

 

Loans receivable, net

 

902,991

 

934,153

 

 

 

934,153

 

Accrued interest receivable

 

4,447

 

4,447

 

4,447

 

 

 

Interest rate contracts

 

61

 

61

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,317,947

 

1,318,341

 

1,109,112

 

 

209,229

 

Advances from the Federal Home Loan Bank

 

15,000

 

15,078

 

 

 

15,078

 

Securities sold under agreements to repurchase

 

72,000

 

72,876

 

 

 

72,876

 

Accounts payable and accrued expenses (excluding interest rate contracts)

 

22,394

 

22,394

 

22,394

 

 

 

Interest rate contracts

 

54

 

54

 

 

54

 

 

Current income taxes payable

 

2,093

 

2,093

 

2,093

 

 

 

Advance payments by borrowers for taxes and insurance

 

3,718

 

3,718

 

3,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,365

 

$

75,365

 

$

75,365

 

$

 

$

 

Investment securities held to maturity

 

613,436

 

598,007

 

 

597,470

 

537

 

FHLB stock

 

11,689

 

11,689

 

 

11,689

 

 

Loans held for sale

 

2,210

 

2,252

 

 

2,252

 

 

Loans receivable, net

 

856,542

 

880,852

 

 

 

880,852

 

Accrued interest receivable

 

4,310

 

4,310

 

4,310

 

 

 

Interest rate contracts

 

25

 

25

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,288,709

 

1,289,348

 

1,078,712

 

 

210,636

 

Advances from the Federal Home Loan Bank

 

15,000

 

15,110

 

 

 

15,110

 

Securities sold under agreements to repurchase

 

72,000

 

73,151

 

 

 

73,151

 

Accounts payable and accrued expenses (excluding interest rate contracts)

 

23,905

 

23,905

 

23,905

 

 

 

Interest rate contracts

 

28

 

28

 

 

28

 

 

Current income taxes payable

 

1,414

 

1,414

 

1,414

 

 

 

Advance payments by borrowers for taxes and insurance

 

3,708

 

3,708

 

3,708

 

 

 

 

At June 30, 2014 and December 31, 2013, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

 

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The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 

$

61

 

$

 

$

61

 

Interest rate contracts — liabilities

 

 

(54

)

 

(54

)

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 

$

25

 

$

 

$

25

 

Interest rate contracts — liabilities

 

 

(28

)

 

(28

)

 

The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for similar contracts. Gains and losses are included in gain on sale of loans in the consolidated statements of income.

 

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013 and the related gains and losses for the six months ended June 30, 2014 and the year ended December 31, 2013:

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Total
Gains/

(Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

326

 

$

326

 

$

(4

)

Trust preferred securities

 

 

 

657

 

657

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

5,456

 

$

5,456

 

$

76

 

Trust preferred securities

 

 

 

537

 

537

 

116

 

 

The fair value of impaired loans that are considered to be collateral-dependent is determined using the value of collateral less estimated selling costs. The fair value of impaired loans not considered to be collateral-dependent is determined using a discounted cash flow analysis.  Assumptions used in the analysis include the discount rate and projected cash flows.  Gains and losses on impaired loans are included in the provision for loan losses in the consolidated statements of income.  The fair value of trust preferred securities is determined using a discounted cash flow model.  The assumptions used in the discounted cash flow model are discussed above.  Gains and losses on trust preferred securities that are credit related are included in net other-than-temporary impairment losses in the consolidated statements of income.  Gains and losses on trust preferred securities that are not credit related are included in other comprehensive income in the consolidated statements of comprehensive income.

 

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Table of Contents

 

The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements:

 

(Dollars in thousands)

 

Fair Value

 

Valuation Technique

 

Unobservable
Input

 

Value

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

Impaired loans — non-collateral dependent

 

$

326

 

Discounted cash flow

 

Discount rate (1)

 

6.10%

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

657

 

Discounted cash flow

 

Discount rate

 

Three-month LIBOR plus 20%

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Impaired loans — non-collateral dependent

 

$

5,456

 

Discounted cash flow

 

Discount rate (1)

 

3.15% - 6.94%

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

537

 

Discounted cash flow

 

Discount rate

 

Three-month LIBOR plus 20%

 

 


(1) Represents the yield on contractual cash flows prior to modification in troubled debt restructurings.

 

(15)              Subsequent Events

 

Effective July 10, 2014, the Bank became a member bank of the Federal Reserve Bank of San Francisco.

 

On July 31, 2014, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.15 per share of common stock.  The dividend is expected to be paid on August 28, 2014 to stockholders of record as of August 14, 2014.

 

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Information

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

 

·                                          statements of our goals, intentions and expectations;

 

·                                          statements regarding our business plans, prospects, growth and operating strategies;

 

·                                          statements regarding the asset quality of our loan and investment portfolios; and

 

·                                          estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

 

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Table of Contents

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·                                          general economic conditions, either internationally, nationally or in our market areas, that are worse than expected;

 

·                                          competition among depository and other financial institutions;

 

·                                          inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

·                                          adverse changes in the securities markets;

 

·                                          changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·                                          our ability to enter new markets successfully and capitalize on growth opportunities;

 

·                                          our ability to successfully integrate acquired entities, if any;

 

·                                          changes in consumer spending, borrowing and savings habits;

 

·                                          changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·                                          changes in our organization, compensation and benefit plans;

 

·                                          changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

·                                          changes in the financial condition or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

 

Assets.  At June 30, 2014, our assets were $1.648 billion, an increase of $30.9 million, or 1.9%, from $1.617 billion at December 31, 2013.  The increase in assets was primarily the result of an increase in loans receivable that was partially offset by a decrease in cash.

 

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Table of Contents

 

Cash and Cash Equivalents.  Cash and cash equivalents were $58.7 million at June 30, 2014, a decrease of $16.7 million since December 31, 2013.  During the six months ended June 30, 2014, cash was used to fund a $45.7 million increase in total loans.  In addition, the Company repurchased $3.9 million of common stock and paid $2.8 million of common stock dividends.  This was partially offset by a $29.2 million increase in deposits.

 

Loans.  Total loans, including $1.5 million of loans held for sale, were $904.5 million at June 30, 2014, or 54.9% of total assets.  During the six months ended June 30, 2014, the loan portfolio increased by $45.7 million, or 5.3%.  The increase in the loan portfolio primarily occurred as the production of new one- to four-family residential loans exceeded principal repayments and loan sales.

 

Securities.  At June 30, 2014, our securities portfolio totaled $613.2 million, or 37.2% of total assets.  At June 30, 2014, all of such securities were classified as held-to-maturity and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.

 

At June 30, 2014, we owned trust preferred securities with a carrying value of $657,000.  This portfolio consists of two securities, which represent investments in a pool of debt obligations issued by Federal Deposit Insurance Corporation-insured financial institutions, insurance companies and real estate investment trusts.

 

The trust preferred securities market is considered to be inactive as only three transactions have occurred over the past 30 months in the same tranche of securities that we own.  We used a discounted cash flow model to determine whether these securities were other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.  We used a discount rate equal to three-month LIBOR plus 20.00% and provided a fair value estimate of $18.54 per $100 of par value for PreTSL XXIII.

 

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending June 30, 2014.

 

It is reasonably possible that the fair values of the trust preferred securities could decline in the near term if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low.  As a result, there is a risk that the Company’s remaining amortized cost basis of $1.1 million on its trust preferred securities could be credit-related other-than-temporarily impaired in the near term.  The impairment could be material to the Company’s consolidated statements of income.

 

Deposits. Deposits were $1.318 billion at June 30, 2014, an increase of $29.2 million, or 2.3%, since December 31, 2013.  The growth in deposits occurred in savings and checking accounts.

 

Borrowings.  Our borrowings consist of advances from the Federal Home Loan Bank of Seattle and funds borrowed under securities sold under agreements to repurchase.  During the six months ended June 30, 2014, our borrowings remained constant at $87.0 million.  We have not required any other borrowings to fund our operations.  Instead, we have primarily funded our operations with additional deposits, proceeds from loan and security sales and principal repayments on loans and mortgage-backed securities.

 

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Table of Contents

 

Average Balances and Yields

 

The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated.  No tax-equivalent yield adjustments were made, as the effect thereof was not material.  All average balances are daily average balances.  Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

 

 

 

For the Three Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

Average
Outstanding
Balance

 

Interest

 

Yield/
Rate (1)

 

Average
Outstanding
Balance

 

Interest

 

Yield/
Rate (1)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential (2)

 

$

844,303

 

$

9,208

 

4.36%

 

$

773,771

 

$

8,691

 

4.49%

 

Multi-family residential

 

4,739

 

67

 

5.66

 

5,702

 

83

 

5.82

 

Construction, commercial and other

 

17,895

 

226

 

5.05

 

12,963

 

152

 

4.69

 

Home equity loans and lines of credit

 

15,588

 

192

 

4.93

 

14,976

 

202

 

5.40

 

Other loans

 

4,691

 

67

 

5.71

 

4,673

 

71

 

6.08

 

Total loans

 

887,216

 

9,760

 

4.40

 

812,085

 

9,199

 

4.53

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored mortgage-backed securities (2)

 

620,848

 

5,086

 

3.28

 

567,134

 

4,518

 

3.19

 

Trust preferred securities

 

655

 

 

 

458

 

 

 

Total securities

 

621,503

 

5,086

 

3.27

 

567,592

 

4,518

 

3.18

 

Other

 

70,428

 

35

 

0.20

 

127,222

 

66

 

0.21

 

Total interest-earning assets

 

1,579,147

 

14,881

 

3.77

 

1,506,899

 

13,783

 

3.66

 

Non-interest-earning assets

 

64,470

 

 

 

 

 

60,197

 

 

 

 

 

Total assets

 

$

1,643,617

 

 

 

 

 

$

1,567,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

923,491

 

$

834

 

0.36%

 

$

887,430

 

$

756

 

0.34%

 

Certificates of deposit

 

209,269

 

261

 

0.50

 

190,265

 

311

 

0.65

 

Money market accounts

 

850

 

 

 

774

 

1

 

0.52

 

Checking and Super NOW accounts

 

143,120

 

8

 

0.02

 

127,346

 

6

 

0.02

 

Total interest-bearing deposits

 

1,276,730

 

1,103

 

0.35

 

1,205,815

 

1,074

 

0.36

 

Federal Home Loan Bank advances

 

15,000

 

66

 

1.76

 

13,406

 

65

 

1.94

 

Securities sold under agreements to repurchase

 

72,000

 

343

 

1.91

 

65,000

 

471

 

2.90

 

Total interest-bearing liabilities

 

1,363,730

 

1,512

 

0.44

 

1,284,221

 

1,610

 

0.50

 

Non-interest-bearing liabilities

 

65,964

 

 

 

 

 

62,209

 

 

 

 

 

Total liabilities

 

1,429,694

 

 

 

 

 

1,346,430

 

 

 

 

 

Stockholders’ equity

 

213,923

 

 

 

 

 

220,666

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,643,617

 

 

 

 

 

$

1,567,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

13,369

 

 

 

 

 

$

12,173

 

 

 

Net interest rate spread (3)

 

 

 

 

 

3.33%

 

 

 

 

 

3.16%

 

Net interest-earning assets (4)

 

$

215,417

 

 

 

 

 

$

222,678

 

 

 

 

 

Net interest margin (5)

 

 

 

 

 

3.39%

 

 

 

 

 

3.23%

 

Interest-earning assets to interest-bearing liabilities

 

115.80%

 

 

 

 

 

117.34%

 

 

 

 

 

 


(1)         Annualized

(2)         Average balance includes loans or investments available for sale.

(3)         Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost 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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Table of Contents

 

 

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

Average
Outstanding
Balance

 

Interest

 

Yield/
Rate (1)

 

Average
Outstanding
Balance

 

Interest

 

Yield/
Rate (1)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential (2)

 

$

833,656

 

$

18,218

 

4.37%

 

$

761,986

 

$

17,371

 

4.56%

 

Multi-family residential

 

4,795

 

135

 

5.63

 

6,273

 

182

 

5.80

 

Construction, commercial and other

 

16,617

 

422

 

5.08

 

13,363

 

329

 

4.92

 

Home equity loans and lines of credit

 

15,967

 

391

 

4.90

 

14,910

 

406

 

5.45

 

Other loans

 

4,646

 

134

 

5.77

 

4,705

 

141

 

5.99

 

Total loans

 

875,681

 

19,300

 

4.41

 

801,237

 

18,429

 

4.60

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored mortgage-backed securities (2)

 

619,290

 

10,160

 

3.28

 

556,132

 

9,072

 

3.26

 

Trust preferred securities

 

597

 

 

 

440

 

 

 

Total securities

 

619,887

 

10,160

 

3.28

 

556,572

 

9,072

 

3.26

 

Other

 

76,879

 

78

 

0.20

 

152,971

 

164

 

0.21

 

Total interest-earning assets

 

1,572,447

 

29,538

 

3.76

 

1,510,780

 

27,665

 

3.66

 

Non-interest-earning assets

 

64,958

 

 

 

 

 

58,283

 

 

 

 

 

Total assets

 

$

1,637,405

 

 

 

 

 

$

1,569,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

919,571

 

$

1,639

 

0.36%

 

$

885,111

 

$

1,544

 

0.35%

 

Certificates of deposit

 

211,370

 

539

 

0.51

 

194,026

 

635

 

0.65

 

Money market accounts

 

838

 

1

 

0.24

 

710

 

1

 

0.28

 

Checking and Super NOW accounts

 

140,748

 

15

 

0.02

 

124,945

 

14

 

0.02

 

Total interest-bearing deposits

 

1,272,527

 

2,194

 

0.34

 

1,204,792

 

2,194

 

0.36

 

Federal Home Loan Bank advances

 

15,000

 

132

 

1.76

 

16,685

 

168

 

2.01

 

Securities sold under agreements to repurchase

 

72,000

 

686

 

1.91

 

65,746

 

948

 

2.88

 

Total interest-bearing liabilities

 

1,359,527

 

3,012

 

0.44

 

1,287,223

 

3,310

 

0.51

 

Non-interest-bearing liabilities

 

65,096

 

 

 

 

 

61,890

 

 

 

 

 

Total liabilities

 

1,424,623

 

 

 

 

 

1,349,113

 

 

 

 

 

Stockholders’ equity

 

212,782

 

 

 

 

 

219,950

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,637,405

 

 

 

 

 

$

1,569,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

26,526

 

 

 

 

 

$

24,355

 

 

 

Net interest rate spread (3)

 

 

 

 

 

3.32%

 

 

 

 

 

3.15%

 

Net interest-earning assets (4)

 

$

212,920

 

 

 

 

 

$

223,557

 

 

 

 

 

Net interest margin (5)

 

 

 

 

 

3.37%

 

 

 

 

 

3.22%

 

Interest-earning assets to interest-bearing liabilities

 

115.66%

 

 

 

 

 

117.37%

 

 

 

 

 

 


(1)         Annualized

(2)         Average balance includes loans or investments available for sale.

(3)         Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost 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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Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

 

General.  Net income increased by $58,000, or 1.6%, to $3.7 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  The increase in net income was primarily caused by a $1.1 million increase in interest and dividend income, a $98,000 decrease in interest expense and a $218,000 decrease in income taxes.  This was partially offset by a $1.0 million decrease in noninterest income, a $172,000 increase in the provision for loan losses and a $152,000 increase in noninterest expense.

 

Net Interest Income.  Net interest income increased by $1.2 million, or 9.8%, to $13.4 million for the three months ended June 30, 2014 compared to $12.2 million for the three months ended June 30, 2013.  Interest and dividend income increased by $1.1 million, or 8.0%, due primarily to an 11 basis point increase in the average yield on interest-earning assets and a $72.2 million increase in the average balance of interest-earning assets.  Interest expense decreased by $98,000, or 6.1%, due to a six basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a $79.5 million increase in the average balance of interest-bearing liabilities.  The interest rate spread and net interest margin were 3.33% and 3.39%, respectively, for the three months ended June 30, 2014, compared to 3.16% and 3.23%, respectively, for the three months ended June 30, 2013.

 

Interest and Dividend Income. Interest and dividend income increased by $1.1 million, or 8.0%, to $14.9 million for the three months ended June 30, 2014 from $13.8 million for the three months ended June 30, 2013.  Interest income on investment securities increased by $568,000, or 12.6%, to $5.1 million for the three months ended June 30, 2014 from $4.5 million for the three months ended June 30, 2013.  The increase in interest income on securities occurred primarily because of a $53.9 million increase in the average securities balance and a nine basis point increase in the average securities yield.  The increase in the average securities balance occurred as the purchase of securities exceeded repayments and the amount of securities sold.  The increase in the yield on securities occurred as we added higher- yielding securities to our investment portfolio and a decline in the amortization of premiums paid for securities.  Interest income on loans increased by $561,000, or 6.1%, to $9.8 million for the three months ended June 30, 2014 from $9.2 million for the three months ended June 30, 2013.  The increase in interest income on loans occurred because the average balance of loans grew by $75.1 million, or 9.3%, as new loan originations exceeded loan repayments and loan sales. The increase in interest income that occurred because of growth in the loan portfolio was partially offset by a 13 basis point decline in the average loan yield to 4.40% for the three months ended June 30, 2014.  The decline in the average yield on loans occurred because of repayments on higher-yielding loans and additions of new loans with lower yields to the loan portfolio.

 

Interest Expense. Interest expense decreased by $98,000, or 6.1%, to $1.5 million for the three months ended June 30, 2014 compared to $1.6 million for the three months ended June 30, 2013.  Interest expense on securities sold under agreements to repurchase decreased by $128,000, or 27.2%, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  The decrease in interest expense on securities sold under agreements to repurchase was caused by a 99 basis point decrease in the average interest rate to 1.91% for the three months ended June 30, 2014 compared to 2.90% for the three months ended June 30, 2013.  The decrease in the average rate on securities sold under agreements to repurchase was partially offset by a $7.0 million, or 10.8%, increase in the average outstanding balance.  The decrease in the average interest rate on securities sold under agreements to repurchase occurred as higher costing agreements matured and were refinanced at lower interest rates.  Interest expense on FHLB advances increased by $1,000, or 1.5%, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  The increase was caused by a $1.6 million,

 

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or 11.9% increase in the average outstanding balance that was partially offset by an 18 basis point decrease in the average interest rate to 1.76% for the three months ended June 30, 2014 compared to 1.94% for the three months ended June 30, 2013.  The decrease in the average interest rate on FHLB advances occurred as higher costing advances matured and were refinanced at lower interest rates.  Interest expense on deposits increased by $29,000, or 2.7%, to $1.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  The increase in interest expense on deposits occurred primarily because the average outstanding balance of deposits increased by $70.9 million, or 5.9%, to $1.277 billion during the three months ended June 30, 2014 compared to $1.206 billion during the three months ended June 30, 2013.  This was partially offset by the decrease in average interest rate by one basis point to 0.35% during the three months ended June 30, 2014 compared to 0.36% for the three months ended June 30, 2013.  We lowered the rates we paid on deposits due to declining market interest rates and increased liquidity from principal repayments on loans and mortgage-backed securities. However, the interest rates on our savings accounts were still higher than market interest rates in Hawaii.

 

Provision for Loan Losses.  We recorded a provision for loan losses of $156,000 for the three months ended June 30, 2014 and a reversal of provision for loan losses of $16,000 for the three months ended June 30, 2013.  The net charge-offs for the three months ended June 30, 2014 and 2013 were $131,000 and $29,000, respectively.  The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.20% at June 30, 2014 and 2013, respectively.  Nonaccrual loans totaled $5.1 million at June 30, 2014, or 0.56% of total loans at that date, compared to $5.4 million of nonaccrual loans at June 30, 2013, or 0.65% of total loans at that date.  Nonaccrual loans as of June 30, 2014 and 2013 consisted primarily of one- to four-family residential real estate loans.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2014 and 2013.  For additional information see footnote (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.

 

Noninterest Income.  The following table summarizes changes in noninterest income between the three months ended June 30, 2014 and 2013.

 

 

 

Three Months Ended
June 30,

 

Change

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

$

524

 

$

568

 

$

(44

)

(7.7)%

 

Income on bank-owned life insurance

 

264

 

258

 

6

 

2.3%

 

Gain on sale of investment securities

 

309

 

1,024

 

(715

)

(69.8)%

 

Gain on sale of loans

 

86

 

380

 

(294

)

(77.4)%

 

Other

 

96

 

81

 

15

 

18.5%

 

Total

 

$

1,279

 

$

2,311

 

$

(1,032

)

(44.7)%

 

 

Noninterest income decreased by $1.0 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  During the three months ended June 30, 2014 and 2013, we sold $3.2 million and $14.5 million, respectively, of held-to-maturity investment securities and recognized gains of $309,000 and $1.0 million, respectively.  The sale of held-to-maturity securities, for which the Company had already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio.  During the three months ended June 30, 2014 and 2013, we also sold $7.0 million and $22.3 million, respectively, of mortgage loans held for sale to reduce interest rate risk and recognized gains of $86,000 and $380,000, respectively.

 

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Noninterest Expense.  The following table summarizes changes in noninterest expense between the three months ended June 30, 2014 and 2013.

 

 

 

Three Months Ended
June 30,

 

Change

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

5,297

 

$

5,012

 

$

285

 

5.7%

 

Occupancy

 

1,409

 

1,333

 

76

 

5.7%

 

Equipment

 

905

 

851

 

54

 

6.3%

 

Federal deposit insurance premiums

 

201

 

191

 

10

 

5.2%

 

Other general and administrative expenses

 

935

 

1,208

 

(273

)

(22.6)%

 

Total

 

$

8,747

 

$

8,595

 

$

152

 

1.8%

 

 

Noninterest expense rose by $152,000 for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  Salaries and employee benefits increased by $285,000 to $5.3 million for the three months ended June 30, 2014 from $5.0 million for the three months ended June 30, 2013.  The increase in salaries and employee benefits expense was primarily due to a $273,000 decrease in the credit to compensation expense for the cost of originating new mortgage loans because of a decrease in new loan originations.  The Receivables topic of the FASB ASC allows financial institutions to take a credit against compensation expense for the direct cost of originating loans.  The increase in salaries and employee benefits was partially offset by a $273,000 decrease in other general and administrative expenses due to lower legal costs in the current quarter and a loss on a deposit account recognized during the three months ended June 30, 2013.

 

Income Tax Expense.  Income taxes were $2.0 million for the three months ended June 30, 2014, reflecting an effective tax rate of 35.3% compared to $2.2 million for the three months ended June 30, 2013, reflecting an effective tax rate of 38.0%.  The decrease in the effective tax rate is primarily attributed to an increase in tax-exempt income on bank-owned life insurance and changes in permanent tax benefits related to compensation and share-based compensation plans.

 

Comparison of Operating Results for the Six Months Ended June 30, 2014 and 2013

 

General.  Net income decreased by $121,000, or 1.7%, to $7.2 million for the six months ended June 30, 2014 from $7.3 million for the six months ended June 30, 2013.  The decrease in net income was primarily caused by a $2.0 million decrease in noninterest income, a $300,000 increase in noninterest expense and a $163,000 increase in the provision for loan losses.  This was partially offset by a $1.9 million increase in interest and dividend income, a $298,000 decrease in interest expense and a $205,000 decrease in income taxes.

 

Net Interest Income.  Net interest income increased by $2.2 million, or 8.9%, to $26.5 million for the six months ended June 30, 2014 compared to $24.4 million for the six months ended June 30, 2013.  Interest and dividend income increased by $1.9 million, or 6.8%, due primarily to a 10 basis point increase in the average yield on interest-earning assets and a $61.7 million increase in the average balance of interest-earning assets.  Interest expense decreased by $298,000, or 9.0%, due to a seven basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a $72.3 million increase in the average balance of interest-bearing liabilities.  The interest rate spread and net interest margin were 3.32% and 3.37%, respectively, for the six months ended June 30, 2014, compared to 3.15% and 3.22%, respectively, for the six months ended June 30, 2013.

 

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Interest and Dividend Income. Interest and dividend income increased by $1.9 million, or 6.8%, to $29.5 million for the six months ended June 30, 2014 from $27.7 million for the six months ended June 30, 2013.  Interest income on investment securities increased by $1.1 million, or 12.0%, to $10.2 million for the six months ended June 30, 2014 from $9.1 million for the six months ended June 30, 2013.  The increase in interest income on securities occurred primarily because of a $63.3 million increase in the average securities balance and a two basis point increase in the average securities yield.  The increase in average securities balance occurred as the purchase of securities exceeded repayments and the amount of securities sold.  Interest income on loans increased by $871,000, or 4.7%, to $19.3 million for the six months ended June 30, 2014 from $18.4 million for the six months ended June 30, 2013.  The increase in interest income on loans occurred because the average balance of loans grew by $74.4 million, or 9.3%, as new loan originations exceeded loan repayments and loan sales. The increase in interest income that occurred because of growth in the loan portfolio was partially offset by a 19 basis point decline in the average loan yield to 4.41% for the six months ended June 30, 2014.  The decline in the average yield on loans occurred because of repayments on higher-yielding loans and additions of new loans with lower yields to the loan portfolio.

 

Interest Expense. Interest expense decreased by $298,000, or 9.0%, to $3.0 million for the six months ended June 30, 2014 compared to $3.3 million for the six months ended June 30, 2013.  Interest expense on securities sold under agreements to repurchase decreased by $262,000, or 27.6%, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.  The decrease in interest expense on securities sold under agreements to repurchase was caused by a 97 basis point decrease in the average interest rate to 1.91% for the six months ended June 30, 2014 compared to 2.88% for the six months ended June 30, 2013.  The decrease in the average rate on securities sold under agreements to repurchase was partially offset by a $6.3 million, or 9.5%, increase in the average outstanding balance.  The decrease in the average interest rate on securities sold under agreements to repurchase occurred as higher costing agreements matured and were refinanced at lower interest rates.  Interest expense on FHLB advances decreased by $36,000, or 21.4%, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.  The decrease was caused by a $1.7 million, or 10.1%, decrease in the average outstanding balance and a 25 basis point decrease in the average interest rate to 1.76% for the six months ended June 30, 2014 compared to 2.01% for the six months ended June 30, 2013.  The decrease in the average interest rate on FHLB advances occurred as higher costing advances matured and were refinanced at lower interest rates. Interest expense on deposits remained constant at $2.2 million for the six months ended June 30, 2014 and 2013.  The average outstanding balance of deposits increased by $67.7 million, or 5.6%, to $1.273 billion during the six months ended June 30, 2014 compared to $1.205 billion during the six months ended June 30, 2013.  This was offset by the decrease in average interest rate by two basis points to 0.34% during the six months ended June 30, 2014 compared to 0.36% for the six months ended June 30, 2013.  We lowered the rates we paid on deposits due to declining market interest rates and increased liquidity from principal repayments on loans and mortgage-backed securities. However, the interest rates on our savings accounts were still higher than market interest rates in Hawaii.

 

Provision for Loan Losses.  We recorded provisions for loan losses of $165,000 and $2,000 for the six months ended June 30, 2014 and 2013.  The net charge-offs for the six months ended June 30, 2014 and 2013 were $141,000 and $52,000, respectively.  The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.20% at June 30, 2014 and 2013, respectively.  Nonaccrual loans totaled $5.1 million at June 30, 2014, or 0.56% of total loans at that date, compared to

 

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$5.4 million of nonaccrual loans at June 30, 2013, or 0.65% of total loans at that date.  Nonaccrual loans as of June 30, 2014 and 2013 consisted primarily of one- to four-family residential real estate loans.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2014 and 2013.  For additional information see footnote (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.

 

Noninterest Income.  The following table summarizes changes in noninterest income between the six months ended June 30, 2014 and 2013.

 

 

 

Six Months Ended
June 30,

 

Change

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

$

1,023

 

$

1,069

 

$

(46

)

(4.3)%

 

Income on bank-owned life insurance

 

532

 

479

 

53

 

11.1%

 

Gain on sale of investment securities

 

655

 

1,912

 

(1,257

)

(65.7)%

 

Gain on sale of loans

 

165

 

1,025

 

(860

)

(83.9)%

 

Other

 

262

 

186

 

76

 

40.9%

 

Total

 

$

2,637

 

$

4,671

 

$

(2,034

)

(43.5)%

 

 

Noninterest income decreased by $2.0 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.  During the six months ended June 30, 2014 and 2013, we sold $11.6 million and $27.3 million, respectively, of held-to-maturity and trading investment securities and recognized gains of $655,000 and $1.9 million, respectively.  The sale of held-to-maturity securities, for which the Company had already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio.  During the six months ended June 30, 2014 and 2013, we also sold $16.9 million and $47.1 million, respectively, of mortgage loans held for sale to reduce interest rate risk and recognized gains of $165,000 and $1.0 million, respectively.

 

Noninterest Expense.  The following table summarizes changes in noninterest expense between the six months ended June 30, 2014 and 2013.

 

 

 

Six Months Ended
June 30,

 

Change

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

10,660

 

$

10,364

 

$

296

 

2.9%

 

Occupancy

 

2,831

 

2,584

 

247

 

9.6%

 

Equipment

 

1,819

 

1,723

 

96

 

5.6%

 

Federal deposit insurance premiums

 

400

 

381

 

19

 

5.0%

 

Other general and administrative expenses

 

1,901

 

2,259

 

(358

)

(15.8)%

 

Total

 

$

17,611

 

$

17,311

 

$

300

 

1.7%

 

 

Noninterest expense rose by $300,000 for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.  Salaries and employee benefits increased by $296,000 to $10.7 million for the six months ended June 30, 2014 from $10.4 million for the six months ended June 30, 2013.  The increase in salaries and employee benefits expense was primarily due to a $419,000 decrease in the credit to compensation expense for the cost of originating new mortgage loans because of a decrease in new loan originations.  The Receivables topic of the FASB ASC allows financial institutions to take a credit

 

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against compensation expense for the direct cost of originating loans.  In addition, occupancy expense increased by $247,000 to $2.8 million for the six months ended June 30, 2014 from $2.6 million for the six months ended June 30, 2013.  The increase in occupancy expense was due to higher repair and maintenance costs, depreciation and rent expense.  The increase in salaries and employee benefits and occupancy expense was partially offset by a $358,000 decrease in other general and administrative expense due to lower legal and audit costs during the current quarter and a loss on a deposit account recognized during the six months ended June 30, 2013.

 

Income Tax Expense.  Income taxes were $4.2 million for the six months ended June 30, 2014, reflecting an effective tax rate of 36.9% compared to $4.4 million for the six months ended June 30, 2013, reflecting an effective tax rate of 37.7%.  The decrease in the effective tax rate is primarily attributed to an increase in tax-exempt income on bank-owned life insurance and changes in permanent tax benefits related to compensation and share-based compensation plans.

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations.  Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments, advances from the Federal Home Loan Bank of Seattle, securities sold under agreements to repurchase, proceeds from loan and security sales and principal repayments on securities.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.  We have established an Asset/Liability Management Committee, consisting of our President and Chief Executive Officer, our Vice Chairman and Co-Chief Operating Officer, our Senior Vice President and Treasurer and our Vice President and Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies.  We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2014.

 

We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

 

(i)                                     expected loan demand;

 

(ii)                                  expected deposit flows and borrowing maturities;

 

(iii)                               yields available on interest-earning deposits and securities; and

 

(iv)                              the objectives of our 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.

 

Our most liquid asset is cash.  The amount of this asset is dependent on our operating, financing, lending and investing activities during any given period.  At June 30, 2014, cash and cash equivalents totaled $58.7 million. On that date, we had $72.0 million in securities sold under agreements to repurchase outstanding and $15.0 million of Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $395.0 million under Federal Home Loan Bank advances.

 

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

 

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At June 30, 2014, we had $17.1 million in loan commitments outstanding, most of which were for fixed-rate loans, and had $24.2 million in unused lines of credit to borrowers.  Certificates of deposit due within one year at June 30, 2014 totaled $168.2 million, or 12.8% of total deposits.  If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2015.  We believe, however, based on past experience that a significant portion of such deposits will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are originating loans and purchasing mortgage-backed securities. During the six months ended June 30, 2014 and 2013, we originated $106.6 million and $174.7 million of loans, respectively, and purchased $39.9 million and $167.2 million of securities, respectively.

 

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances and securities sold under agreements to repurchase.  We experienced a net increase in deposits of $29.2 million for the six months ended June 30, 2014 and a net decrease in deposits of $2.4 million for the six months ended June 30, 2013.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

 

Liquidity management is both a daily and long-term function of business management.  If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Seattle, which provide an additional source of funds.  Federal Home Loan Bank advances remained constant at $15.0 million during the six months ended June 30, 2014 and decreased by $5.0 million during the six months ended June 30, 2013.  We had the ability to borrow up to an additional $395.0 million and $376.4 million from the Federal Home Loan Bank of Seattle as of June 30, 2014 and 2013, respectively.  We also utilize securities sold under agreements to repurchase as another borrowing source.  Securities sold under agreements to repurchase remained constant at $72.0 million for the six months ended June 30, 2014 and decreased by $5.0 million for the six months ended June 30, 2013.

 

Territorial Savings Bank is subject to various regulatory capital 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 June 30, 2014, Territorial Savings Bank exceeded all regulatory capital requirements.  Territorial Savings Bank is considered “well capitalized” under regulatory guidelines.  The tables below present the capital required as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained at June 30, 2014 and December 31, 2013.

 

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As of June 30, 2014

(Dollars in thousands)

 

 

 

Required

 

Territorial Savings Bank

 

Tier 1 Capital

 

4%

 

$

208,818

 

12.65%

 

Total Risk-Based Capital

 

8%

 

$

210,334

 

32.10%

 

Tier 1 Risk-Based Capital

 

4%

 

$

208,818

 

31.87%

 

 

As of December 31, 2013

(Dollars in thousands)

 

 

 

Required

 

Territorial Savings Bank

 

Tier 1 Capital

 

4%

 

$

200,074

 

12.35%

 

Total Risk-Based Capital

 

8%

 

$

201,566

 

31.99%

 

Tier 1 Risk-Based Capital

 

4%

 

$

200,074

 

31.75%

 

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments.  As a financial services provider, we routinely are 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 our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.  Such commitments are subject to the same credit policies and approval process accorded to loans we make.  In addition, we enter into commitments to sell mortgage loans.

 

Contractual Obligations.  In the ordinary course of our operations, we enter into certain contractual obligations.  Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.  Except for a decrease of $1.2 million in certificates of deposit between December 31, 2013 and June 30, 2014, there have not been any material changes in contractual obligations and funding needs since December 31, 2013.

 

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ITEM 3.                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

General.  Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.  Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates.  Our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

 

Because we have historically operated as a traditional thrift institution, the significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with checking and savings accounts and short-term borrowings.  In addition, there is little demand for adjustable-rate mortgage loans in the Hawaii market area.  This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.

 

Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

 

Economic Value of Equity. We use an interest rate sensitivity analysis that computes changes in the economic value of equity (EVE) of our 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 a 100 basis point decrease in market interest rates with no effect given to any steps that we 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 one percent. 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. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

 

The following table presents our internal calculations of the estimated changes in our EVE as of March 31, 2014 that would result from the designated instantaneous changes in the interest rate yield curve.

 

Change in
Interest Rates
(bp) (1)

 

Estimated EVE
(2)

 

Estimated
Increase
(Decrease) in
EVE

 

Percentage
Change in EVE

 

EVE Ratio as a
Percent of
Present Value
of Assets (3)(4)

 

Increase
(Decrease) in
EVE Ratio as a
Percent of
Present Value of
Assets (3)(4)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

+400

 

$

125,367

 

$

(119,473

)

(48.80)%

 

8.07%

 

(6.46)%

 

+300

 

$

152,583

 

$

(92,257

)

(37.68)%

 

9.64%

 

(4.89)%

 

+200

 

$

186,287

 

$

(58,553

)

(23.91)%

 

11.50%

 

(3.03)%

 

+100

 

$

219,127

 

$

(25,713

)

(10.50)%

 

13.23%

 

(1.30)%

 

0

 

$

244,840

 

$

 

—%

 

14.53%

 

—%

 

(100)

 

$

253,732

 

$

8,892

 

3.63%

 

14.96%

 

0.43%

 

 


(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-earning assets.

(4)                     EVE Ratio represents EVE divided by the present value of assets.

 

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Interest rates on mortgage-backed securities declined by approximately 21 basis points between March 31, 2014 and June 30, 2014.  The decrease in interest rates has likely increased our EVE.  However, we do not believe that the increase in EVE is material.

 

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE.  Modeling changes in EVE requires 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 our interest-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 the duration or repricing of specific assets and liabilities.  Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and net interest income and will differ from actual results.

 

ITEM 4.                        CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2014. Based on that evaluation, because of the material weaknesses in internal control over financial reporting described in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2013, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Treasurer, concluded that the Company’s disclosure controls and procedures were not effective.

 

Except as set forth below, there have been no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Following management’s conclusion as to material weaknesses in internal controls over financial reporting as of December 31, 2013, management has taken the following remedial actions.

 

·    The Company has signed a contract with a consultant to assist with the risk assessment for the effective identification of financial reporting risks and controls.

 

·    The Company is in the process of implementing the following controls relative to the deficiencies in investment securities policies and processes:

 

·   The Company established controls in April 2014 over the completeness and accuracy of vendor pricing used to value the held to maturity securities portfolio.  The Company uses two sources to price its investment securities.  There are controls on both of these sources for the reliable collection and transmission of investment pricing data.

 

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·   Additional controls were added in April 2014 to provide for an independent review of information entered into the securities system.

 

·   A review by a qualified person not involved in preparing the initial evaluation of the Company’s evaluation of the impairment of Federal Home Loan Bank stock was established in April 2014.

 

·   In April 2014, the Company adjusted the design of the control over the reconciliation of the investment system to the reports from the securities custodian such that the reconciliation is performed by an individual who is not responsible for entry of information into the investment system.  This change provided for appropriate segregation of duties.

 

·    The Company is in the process of implementing the following controls related to income tax policies and procedures:

 

·   The income tax provision since April 2014 was prepared by the Controller and reviewed by the Treasurer.  The Treasurer’s review of the income tax provision included a detailed verification of inputs and calculations as well as detailed documentation on how the provision was reviewed.

 

·   The reconciliation of the income tax return to the tax provision is performed annually in the fourth quarter of each year.  The next reconciliation will be performed in the fourth quarter of 2014.  This reconciliation will be prepared by one person and reviewed by a second party.

 

·   The effective tax calculation since April 2014 was prepared by the Controller and reviewed by the Treasurer.  The Treasurer’s review of the effective tax calculation included a verification of inputs and calculations as well as detailed documentation on how the calculation was reviewed.

 

Management anticipates that these remedial actions will strengthen the Company’s internal controls over financial reporting and will, over time, address the material weaknesses that were identified as of December 31, 2013.  Since some of these remedial actions will take place on a quarterly basis, their successful implementation may need to be evaluated over several quarters before management is able to conclude that the underlying material weakness has been remediated.

 

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Table of Contents

 

PART II

 

ITEM 1.                        LEGAL PROCEEDINGS

 

The Company and its subsidiaries are subject to various legal actions that are considered ordinary, routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets.  In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

 

ITEM 1A.               RISK FACTORS

 

There have been no material changes from Risk Factors as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2013.

 

ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)                                 Not applicable.

 

(b)                                 Not applicable.

 

(c)                                  Stock Repurchases.  There were no repurchases of common shares during the three months ended June 30, 2014.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                        MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.                        OTHER INFORMATION

 

None.

 

ITEM 6.                        EXHIBITS

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

TERRITORIAL BANCORP INC.

 

(Registrant)

 

 

 

 

 

Date: August 8, 2014

 

/s/ Allan S. Kitagawa

 

 

Allan S. Kitagawa

 

 

Chairman of the Board, President and

 

 

Chief Executive Officer

 

 

 

 

 

 

Date: August 8, 2014

 

/s/ Melvin M. Miyamoto

 

 

Melvin M. Miyamoto

 

 

Senior Vice President and Treasurer

 

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Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

31.1

 

Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

31.2

 

Certification of Melvin M. Miyamoto, Senior Vice President and Treasurer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

32

 

Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, and Melvin M. Miyamoto, Senior Vice President and Treasurer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

101.INS

 

Interactive datafile

 

XBRL Instance Document

101.SCH

 

Interactive datafile

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

Interactive datafile

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Interactive datafile

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Interactive datafile

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

Interactive datafile

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

47