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 March 31, 2015

 

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.

 

9,719,600 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of April 30, 2015.

 

 

 



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

39

ITEM 4.

CONTROLS AND PROCEDURES

40

 

 

 

PART II

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

41

ITEM 1A.

RISK FACTORS

41

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

41

ITEM 4.

MINE SAFETY DISCLOSURES

42

ITEM 5.

OTHER INFORMATION

42

ITEM 6.

EXHIBITS

42

 

 

SIGNATURES

43

 



Table of Contents

 

PART I

 

ITEM 1.          FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

45,774

 

$

75,060

 

Investment securities held to maturity, at amortized cost (fair value of $569,832 and $586,710 at March 31, 2015 and December 31, 2014, respectively)

 

552,461

 

572,922

 

Federal Home Loan Bank stock, at cost

 

11,112

 

11,234

 

Federal Reserve Bank stock, at cost

 

2,949

 

2,925

 

Loans held for sale

 

2,910

 

1,048

 

Loans receivable, net

 

1,038,922

 

968,212

 

Accrued interest receivable

 

4,583

 

4,436

 

Premises and equipment, net

 

5,445

 

5,629

 

Bank-owned life insurance

 

41,558

 

41,303

 

Deferred income taxes receivable

 

7,486

 

7,254

 

Prepaid expenses and other assets

 

2,190

 

1,874

 

 

 

 

 

 

 

Total assets

 

$

1,715,390

 

$

1,691,897

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,381,461

 

$

1,359,679

 

Advances from the Federal Home Loan Bank

 

27,000

 

15,000

 

Securities sold under agreements to repurchase

 

60,000

 

72,000

 

Accounts payable and accrued expenses

 

26,857

 

24,098

 

Investment purchases pending settlement

 

1,166

 

 

Current income taxes payable

 

1,051

 

826

 

Advance payments by borrowers for taxes and insurance

 

2,710

 

3,916

 

 

 

 

 

 

 

Total liabilities

 

1,500,245

 

1,475,519

 

 

 

 

 

 

 

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 9,720,959 and 9,919,064 shares at March 31, 2015 and December 31, 2014, respectively

 

97

 

99

 

Additional paid-in capital

 

71,806

 

75,229

 

Unearned ESOP shares

 

(6,728

)

(6,851

)

Retained earnings

 

155,318

 

153,289

 

Accumulated other comprehensive loss

 

(5,348

)

(5,388

)

 

 

 

 

 

 

Total stockholders’ equity

 

215,145

 

216,378

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,715,390

 

$

1,691,897

 

 

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
March 31,

 

 

 

2015

 

2014

 

Interest and dividend income:

 

 

 

 

 

Investment securities

 

$

4,523

 

$

5,074

 

Loans

 

10,686

 

9,540

 

Dividends on FHLB stock

 

3

 

3

 

Other investments

 

76

 

40

 

Total interest and dividend income

 

15,288

 

14,657

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

1,134

 

1,091

 

Advances from the Federal Home Loan Bank

 

70

 

66

 

Securities sold under agreements to repurchase

 

312

 

343

 

Total interest expense

 

1,516

 

1,500

 

 

 

 

 

 

 

Net interest income

 

13,772

 

13,157

 

Provision for loan losses

 

194

 

9

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

13,578

 

13,148

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Service fees on loan and deposit accounts

 

460

 

499

 

Income on bank-owned life insurance

 

255

 

268

 

Gain on sale of investment securities

 

236

 

346

 

Gain on sale of loans

 

129

 

79

 

Other

 

166

 

166

 

Total noninterest income

 

1,246

 

1,358

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

5,099

 

5,363

 

Occupancy

 

1,437

 

1,422

 

Equipment

 

945

 

914

 

Federal deposit insurance premiums

 

209

 

199

 

Other general and administrative expenses

 

1,214

 

966

 

Total noninterest expense

 

8,904

 

8,864

 

 

 

 

 

 

 

Income before income taxes

 

5,920

 

5,642

 

Income taxes

 

2,394

 

2,180

 

Net income

 

$

3,526

 

$

3,462

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.38

 

Diluted earnings per share

 

$

0.38

 

$

0.37

 

Cash dividends declared per common share

 

$

0.16

 

$

0.14

 

Basic weighted-average shares outstanding

 

9,120,720

 

9,187,540

 

Diluted weighted-average shares outstanding

 

9,319,814

 

9,380,160

 

 

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
March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

3,526

 

$

3,462

 

 

 

 

 

 

 

Change in unrealized loss on securities

 

9

 

3

 

Noncredit related gains on securities not expected to be sold

 

31

 

72

 

Other comprehensive income, net of tax

 

40

 

75

 

 

 

 

 

 

 

Comprehensive income

 

$

3,566

 

$

3,537

 

 

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, 2013

 

$

101

 

$

77,340

 

$

(7,340

)

$

145,826

 

$

(3,787

)

$

212,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,462

 

 

3,462

 

Other comprehensive income

 

 

 

 

 

75

 

75

 

Cash dividends declared ($0.14 per share)

 

 

 

 

(1,329

)

 

(1,329

)

Share-based compensation

 

 

660

 

 

 

 

660

 

Allocation of 12,233 ESOP shares

 

 

151

 

122

 

 

 

273

 

Repurchase of 170,994 shares of company common stock

 

(2

)

(3,885

)

 

 

 

(3,887

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2014

 

$

99

 

$

74,266

 

$

(7,218

)

$

147,959

 

$

(3,712

)

$

211,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

$

99

 

$

75,229

 

$

(6,851

)

$

153,289

 

$

(5,388

)

$

216,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,526

 

 

3,526

 

Other comprehensive income

 

 

 

 

 

40

 

40

 

Cash dividends declared ($0.16 per share)

 

 

 

 

(1,497

)

 

(1,497

)

Share-based compensation

 

 

738

 

 

 

 

738

 

Allocation of 12,233 ESOP shares

 

 

145

 

123

 

 

 

268

 

Repurchase of 198,105 shares of company common stock

 

(2

)

(4,306

)

 

 

 

(4,308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2015

 

$

97

 

$

71,806

 

$

(6,728

)

$

155,318

 

$

(5,348

)

$

215,145

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,526

 

$

3,462

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

194

 

9

 

Depreciation and amortization

 

339

 

328

 

Deferred income tax benefit

 

(258

)

(707

)

Amortization of fees, discounts, and premiums

 

(73

)

(106

)

Origination of loans held for sale

 

(15,324

)

(8,590

)

Proceeds from sales of loans held for sale

 

13,335

 

9,862

 

Gain on sale of loans, net

 

(129

)

(79

)

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

 

(236

)

(316

)

ESOP expense

 

268

 

273

 

Share-based compensation expense

 

738

 

660

 

Increase in accrued interest receivable

 

(147

)

(109

)

Net increase in bank-owned life insurance

 

(255

)

(267

)

Net increase in prepaid expenses and other assets

 

(316

)

(325

)

Net increase (decrease) in accounts payable and accrued expenses

 

3,125

 

(2,326

)

Net decrease in advance payments by borrowers for taxes and insurance

 

(1,206

)

(1,291

)

Net increase (decrease) in income taxes payable

 

225

 

(608

)

Net cash from operating activities

 

3,806

 

(130

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(1,204

)

(27,926

)

Principal repayments on investment securities held to maturity

 

20,510

 

14,419

 

Proceeds from sale of investment securities held to maturity

 

2,580

 

3,724

 

Loan originations, net of principal repayments on loans receivable

 

(70,532

)

(15,943

)

Proceeds from redemption of Federal Home Loan Bank stock

 

122

 

110

 

Purchases of Federal Reserve Bank stock

 

(24

)

 

Purchases of premises and equipment

 

(155

)

(330

)

Net cash from investing activities

 

(48,703

)

(25,946

)

 

(Continued)

 

5



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

$

21,782

 

$

28,599

 

Proceeds from advances from the Federal Home Loan Bank

 

22,000

 

 

Repayments of advances from the Federal Home Loan Bank

 

(10,000

)

 

Proceeds from securities sold under agreements to repurchase

 

25,000

 

 

Repayments of securities sold under agreements to repurchase

 

(37,000

)

 

Repurchases of common stock

 

(4,674

)

(4,412

)

Cash dividends paid

 

(1,497

)

(1,329

)

Net cash from financing activities

 

15,611

 

22,858

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(29,286

)

(3,218

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

75,060

 

75,365

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

45,774

 

$

72,147

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

1,532

 

$

1,467

 

Income taxes

 

2,350

 

3,495

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Investments purchased, not yet settled

 

$

1,166

 

 

Company stock repurchased, not yet settled

 

366

 

 

 

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, 2014.  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.

 

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 balance of the liquidation account at December 31, 2014 was $15.2 million.

 

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.  On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.

 

(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 was effective for interim and annual periods beginning after December 15, 2014.  The Company adopted this amendment on January 1, 2015, and the adoption did not have a material effect on its consolidated financial statements.

 

7



Table of Contents

 

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 was effective for interim and annual periods beginning after December 15, 2014, with early adoption prohibited.  The Company adopted this amendment on January 1, 2015, and the adoption did not have a material effect on its consolidated financial statements.  See Footnote 8, Securities Sold Under Agreements to Repurchase.

 

In August 2014, the FASB amended the Receivables topic of the FASB ASC.  The amendment seeks to clarify the classification of foreclosed mortgage loans that are either fully or partially guaranteed under government programs, such as from the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).  The amendment was effective for interim and annual periods beginning after December 15, 2014.  The Company adopted this amendment on January 1, 2015, and the adoption did not have any effect on its consolidated financial statements.

 

In April 2015, the FASB amended the Intangibles — Goodwill and Other topic of the FASB ASC.  The amendment adds guidance to help entities evaluate the accounting for fees paid in cloud computing arrangements.  The amendment is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  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:

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Cash and due from banks

 

$

10,388

 

$

10,803

 

Interest-earning deposits in other banks

 

35,386

 

64,257

 

Cash and cash equivalents

 

$

45,774

 

$

75,060

 

 

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

 

8



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(5)                     Investment Securities

 

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

 

 

 

Amortized

 

Gross Unrealized

 

Estimated

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

551,720

 

$

19,718

 

$

(2,347

)

$

569,091

 

Trust preferred securities

 

741

 

 

 

741

 

Total

 

$

552,461

 

$

19,718

 

$

(2,347

)

$

569,832

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

572,232

 

$

18,078

 

$

(4,290

)

$

586,020

 

Trust preferred securities

 

690

 

 

 

690

 

Total

 

$

572,922

 

$

18,078

 

$

(4,290

)

$

586,710

 

 

The amortized cost and estimated fair value of investment securities at March 31, 2015 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.

 

 

 

Amortized

 

Estimated

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Held to maturity:

 

 

 

 

 

Due within 5 years

 

$

46

 

$

48

 

Due after 5 years through 10 years

 

9

 

10

 

Due after 10 years

 

552,406

 

569,774

 

Total

 

$

552,461

 

$

569,832

 

 

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

 

 

 

For the Three Months Ended
March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Proceeds from sales

 

$

2,580

 

$

8,795

 

Gross gains

 

236

 

346

 

Gross losses

 

 

 

 

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Table of Contents

 

During the three months ended March 31, 2015, the Company received proceeds of $2.6 million from the sale of $2.3 million of held-to-maturity debt securities, resulting in gross realized gains of $236,000.  During the three months ended March 31, 2014, the Company received proceeds of $3.7 million from the sale of $3.4 million of held-to-maturity debt securities, resulting in gross realized gains of $316,000.  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 Investments - Debt and Equity Securities 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 amortized costs of $264.0 million and $270.2 million at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

120,990

 

$

1,030

 

$

57,955

 

$

1,317

 

33

 

$

178,945

 

$

2,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

12,717

 

$

65

 

$

183,349

 

$

4,225

 

37

 

$

196,066

 

$

4,290

 

 

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 cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of March 31, 2015 and December 31, 2014.

 

In March 2015, the Company purchased a $1.2 million Ginnie Mae mortgage-backed security for settlement in April 2015.  This security purchase was recorded on the trade date at the expected settlement amount.

 

Trust Preferred Securities.  At March 31, 2015, 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 Company’s held-to-maturity investment portfolio.

 

The trust preferred securities market is considered to be inactive as only five transactions have occurred over the past 39 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

 

10



Table of Contents

 

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 March 31, 2015.

 

PreTSL XXIV has an amortized cost of $0 at March 31, 2015.  PreTSL XXIII has an amortized cost of $741,000 at March 31, 2015.  The difference between the amortized cost of $741,000 and the remaining cost basis of $1.1 million is reported as other comprehensive loss and is related to noncredit factors.

 

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 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)

 

2015

 

2014

 

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 March 31,

 

$

5,885

 

$

5,885

 

 

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

 

 

 

March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

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

 

$

253

 

$

304

 

 

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(6)                     Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Real estate loans:

 

 

 

 

 

First mortgages:

 

 

 

 

 

One- to four-family residential

 

$

995,241

 

$

926,074

 

Multi-family residential

 

9,826

 

8,920

 

Construction, commercial, and other

 

19,092

 

18,415

 

Home equity loans and lines of credit

 

16,225

 

15,992

 

Total real estate loans

 

1,040,384

 

969,401

 

Other loans:

 

 

 

 

 

Loans on deposit accounts

 

245

 

441

 

Consumer and other loans

 

4,166

 

4,173

 

Total other loans

 

4,411

 

4,614

 

Less:

 

 

 

 

 

Net unearned fees and discounts

 

(4,001

)

(4,112

)

Allowance for loan losses

 

(1,872

)

(1,691

)

Total unearned fees, discounts and allowance for loan losses

 

(5,873

)

(5,803

)

Loans receivable, net

 

$

1,038,922

 

$

968,212

 

 

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Table of Contents

 

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 March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

413

 

$

977

 

$

5

 

$

263

 

$

33

 

$

1,691

 

Provision (reversal of allowance) for loan losses

 

698

 

(435

)

(2

)

(99

)

32

 

194

 

 

 

1,111

 

542

 

3

 

164

 

65

 

1,885

 

Charge-offs

 

 

 

 

(19

)

 

(19

)

Recoveries

 

 

1

 

1

 

4

 

 

6

 

Net charge-offs

 

 

1

 

1

 

(15

)

 

(13

)

Balance, end of period

 

$

1,111

 

$

543

 

$

4

 

$

149

 

$

65

 

$

1,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

Provision (reversal of allowance) for loan losses

 

58

 

24

 

(4

)

(65

)

(4

)

9

 

 

 

434

 

823

 

6

 

164

 

68

 

1,495

 

Charge-offs

 

 

 

 

(17

)

 

(17

)

Recoveries

 

 

 

1

 

6

 

 

7

 

Net charge-offs

 

 

 

1

 

(11

)

 

(10

)

Balance, end of period

 

$

434

 

$

823

 

$

7

 

$

153

 

$

68

 

$

1,485

 

 

During the three months ended March 31, 2015, the Company increased the loan loss provisions for residential mortgage loans based on the growth of this segment of the loan portfolio and the concentration of loans in Hawaii.  The Company also reduced the loan loss provisions on construction, commercial and other mortgage loans and consumer and other loans based on a continued limited loss experience.  The allocation of a portion of the allowance from one category of loans does not preclude its availability to absorb losses in other loan categories.

 

Management considers the allowance for loan losses at March 31, 2015 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 regulators and the Hawaii Department of Financial Institutions 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.

 

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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

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,111

 

543

 

4

 

149

 

65

 

1,872

 

Total ending allowance balance

 

$

1,111

 

$

543

 

$

4

 

$

149

 

$

65

 

$

1,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,179

 

$

 

$

132

 

$

 

$

 

$

6,311

 

Collectively evaluated for impairment

 

994,906

 

19,063

 

16,099

 

4,415

 

 

1,034,483

 

Total ending loan balance

 

$

1,001,085

 

$

19,063

 

$

16,231

 

$

4,415

 

$

 

$

1,040,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

413

 

977

 

5

 

263

 

33

 

1,691

 

Total ending allowance balance

 

$

413

 

$

977

 

$

5

 

$

263

 

$

33

 

$

1,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,158

 

$

 

$

296

 

$

4

 

$

 

$

6,458

 

Collectively evaluated for impairment

 

924,732

 

18,399

 

15,702

 

4,612

 

 

963,445

 

Total ending loan balance

 

$

930,890

 

$

18,399

 

$

15,998

 

$

4,616

 

$

 

$

969,903

 

 

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

 

March 31, 2015:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,179

 

$

6,845

 

Home equity loans and lines of credit

 

132

 

162

 

Total

 

$

6,311

 

$

7,007

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,158

 

$

6,775

 

Home equity loans and lines of credit

 

296

 

324

 

Consumer and other

 

4

 

4

 

Total

 

$

6,458

 

$

7,103

 

 

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

 

 

 

For the Three Months Ended
March 31,

 

(Dollars in thousands)

 

Average
Recorded

Investment

 

Interest

Income
Recognized

 

2015:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,216

 

$

30

 

Home equity loans and lines of credit

 

134

 

 

Total

 

$

6,350

 

$

30

 

 

 

 

 

 

 

2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,248

 

$

32

 

Home equity loans and lines of credit

 

158

 

 

Total

 

$

7,406

 

$

32

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of March 31, 2015 or December 31, 2014.  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

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

894

 

$

580

 

$

842

 

$

2,316

 

$

988,974

 

$

991,290

 

$

4,183

 

$

 

Multi-family residential mortgages

 

 

 

 

 

9,795

 

9,795

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

19,063

 

19,063

 

 

 

Home equity loans and lines of credit

 

83

 

 

 

83

 

16,148

 

16,231

 

132

 

 

Loans on deposit accounts

 

 

 

 

 

245

 

245

 

 

 

Consumer and other

 

2

 

 

 

2

 

4,168

 

4,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

979

 

$

580

 

$

842

 

$

2,401

 

$

1,038,393

 

$

1,040,794

 

$

4,315

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

1,040

 

$

736

 

$

593

 

$

2,369

 

$

919,624

 

$

921,993

 

$

4,153

 

$

 

Multi-family residential mortgages

 

 

 

 

 

8,897

 

8,897

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

18,399

 

18,399

 

 

 

Home equity loans and lines of credit

 

 

 

161

 

161

 

15,837

 

15,998

 

296

 

 

Loans on deposit accounts

 

 

 

 

 

440

 

440

 

 

 

Consumer and other

 

7

 

1

 

4

 

12

 

4,164

 

4,176

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,047

 

$

737

 

$

758

 

$

2,542

 

$

967,361

 

$

969,903

 

$

4,453

 

$

 

 

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 17 nonaccrual loans with a book value of $4.3 million at March 31, 2015 and 18 nonaccrual loans with a book value of $4.5 million as of December 31, 2014.  The Company collected interest on nonaccrual loans of $50,000 and $52,000 during the three months ended March 31, 2015 and 2014, respectively, but due to regulatory requirements, the Company recorded the interest as a reduction

 

16



Table of Contents

 

of principal.  The Company would have recognized additional interest income of $66,000 and $70,000 during the three months ended March 31, 2015 and 2014, 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 March 31, 2015 or December 31, 2014.

 

There were no loans modified in a troubled debt restructuring during the three months ended March 31, 2015 or 2014. There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.

 

The Company had 17 troubled debt restructurings totaling $4.5 million as of March 31, 2015 that were considered to be impaired.  This total included 16 one- to four-family residential mortgage loans totaling $4.4 million and one home equity loan for $132,000.  Six of the loans, totaling $2.0 million, were performing in accordance with their restructured terms and accruing interest at March 31, 2015.  Nine of the loans, totaling $2.2 million, were performing in accordance with their restructured terms but not accruing interest at March 31, 2015.  Two of the loans, totaling $342,000, are delinquent and not accruing interest at March 31, 2015.  The Company had 17 troubled debt restructurings totaling $4.6 million as of December 31, 2014 that were considered to be impaired.  This total included 16 one- to four-family residential mortgage loans totaling $4.4 million and one home equity loan for $135,000.  Six of the loans, totaling $2.0 million, were performing in accordance with their restructured terms and accruing interest at December 31, 2014.  Nine of the loans, totaling $2.2 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2014.  Two of the loans, totaling $343,000, are delinquent and not accruing interest at December 31, 2014.  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.

 

The Company had no real estate owned as of March 31, 2015 and 2014.  There were three one- to four-family residential mortgage loans totaling $691,000 in process of foreclosure as of March 31, 2015, and three one- to four-family residential mortgage loans totaling $1.0 million in process of foreclosure as of March 31, 2014.

 

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 three months ended March 31, 2015 and 2014, the Company sold $13.3 million and $9.9 million, respectively, of mortgage loans held for sale and recognized gains of $129,000 and $79,000, respectively.  The Company had nine loans held for sale totaling $2.9 million at March 31, 2015 and six loans held for sale totaling $1.0 million at December 31, 2014.

 

The Company serviced loans for others of $59.0 million at March 31, 2015 and $60.5 million at December 31, 2014. Of these amounts, $2.9 million and $3.0 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at March 31, 2015 and December 31, 2014, respectively.  The amount of contractually specified servicing fees earned for the three-month periods ended March 31, 2015 and 2014 was $41,000 and $47,000, 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)                     Advances from the Federal Home Loan Bank

 

The FHLB advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. At March 31, 2015 and 2014, the Company had available additional unused FHLB advances of approximately $396.0 million and $389.2 million, respectively.

 

Advances outstanding consisted of the following:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

(Dollars in thousands)

 

Amount

 

Rate

 

Amount

 

Rate

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

 

—%

 

$

10,000

 

2.06%

 

Due over 3 years to 4 years

 

27,000

 

1.57

 

5,000

 

1.20

 

Total

 

$

27,000

 

1.57%

 

$

15,000

 

1.77%

 

 

(8)                                 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:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Repurchase

 

Average

 

Repurchase

 

Average

 

(Dollars in thousands)

 

Liability

 

Rate

 

Liability

 

Rate

 

Maturing:

 

 

 

 

 

 

 

 

 

1 year or less

 

$

10,000

 

1.94%

 

$

47,000

 

2.11%

 

Over 2 years to 3 years

 

25,000

 

1.46

 

25,000

 

1.46

 

Over 3 years to 4 years

 

20,000

 

1.66

 

 

 

Over 4 years to 5 years

 

5,000

 

1.65

 

 

 

Total

 

$

60,000

 

1.62%

 

$

72,000

 

1.88%

 

 

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Table of Contents

 

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 March 31, 2015.  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 mortgage-backed securities issued and guaranteed by U.S. government-sponsored enterprises.  The repurchase liability cannot exceed 90% of the fair value of securities pledged.  In the event of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.

 

 

 

 

 

 

 

 

 

 

 

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

 

$

76,542

 

$

78,232

 

$

60,000

 

$

18,232

 

34

 

 

(9)                                 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 8, 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

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

60,000

 

$

 

$

60,000

 

$

60,000

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

72,000

 

$

 

$

72,000

 

$

72,000

 

$

 

$

 

 

(10)                          Employee Benefit Plans

 

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers most 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.

 

The Company also 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.

 

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Table of Contents

 

The components of net periodic benefit cost were as follows:

 

 

 

SERP

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Net periodic benefit cost for the period

 

 

 

 

 

Service cost

 

$

21

 

$

25

 

Interest cost

 

31

 

30

 

Expected return on plan assets

 

 

 

Amortization of prior service cost

 

 

 

Recognized actuarial loss

 

 

 

Recognized curtailment loss

 

 

 

Net periodic benefit cost

 

$

52

 

$

55

 

 

(11)                          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’ equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the three months ended March 31, 2015 and 2014 amounted to $222,000 and $240,000, respectively.

 

Shares held by the ESOP trust were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Allocated shares

 

295,614

 

283,381

 

Unearned shares

 

672,824

 

685,057

 

Total ESOP shares

 

968,438

 

968,438

 

Fair value of unearned shares, in thousands

 

$

15,986

 

$

14,763

 

 

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Table of Contents

 

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 March 31, 2015 and 2014, we accrued $64,000 and $74,000, respectively, for the ESOP restoration plan.

 

(12)                          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 is being recognized on a straight-line basis over the five- or six-year vesting period during which participants are required to provide services in exchange for the awards.

 

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
March 31,

 

(In thousands)

 

2015

 

2014

 

Compensation expense

 

$

660

 

$

660

 

Income tax benefit

 

265

 

313

 

 

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.

 

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Table of Contents

 

Stock Options

 

The table below presents the stock option activity for the three months ended March 31, 2015 and 2014:

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Remaining
Contractual
Life (Years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

Options outstanding at December 31, 2014

 

832,954

 

$

17.38

 

5.68

 

$

3,471

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Options outstanding at March 31, 2015

 

832,954

 

$

17.38

 

5.43

 

$

5,312

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at December 31, 2013

 

832,954

 

$

17.38

 

6.68

 

$

4,845

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Options outstanding at March 31, 2014

 

832,954

 

$

17.38

 

6.43

 

$

3,512

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable at March 31, 2015

 

555,097

 

$

17.38

 

5.43

 

$

3,541

 

 

No stock options vested during the three months ended March 31, 2015 or 2014.

 

As of March 31, 2015, the Company had $1.0 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.

 

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.

 

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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, 2014

 

226,733

 

$

17.39

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at March 31, 2015

 

226,733

 

$

17.39

 

 

 

 

 

 

 

Nonvested at December 31, 2013

 

340,065

 

$

17.39

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at March 31, 2014

 

340,065

 

$

17.39

 

 

As of March 31, 2015, the Company had $2.8 million of unrecognized compensation cost related to restricted stock awards.  The cost of the restricted stock awards is being amortized over the five- or six-year vesting period.

 

(13)                          Earnings Per Share

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands, except share data)

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

3,526

 

$

3,462

 

 

 

 

 

 

 

Weighted-average number of shares used in:

 

 

 

 

 

Basic earnings per share

 

9,120,720

 

9,187,540

 

Dilutive common stock equivalents:

 

 

 

 

 

Stock options and restricted stock units

 

199,094

 

192,620

 

Diluted earnings per share

 

9,319,814

 

9,380,160

 

Net income per common share, basic

 

$

0.39

 

$

0.38

 

Net income per common share, diluted

 

$

0.38

 

$

0.37

 

 

We have two forms of our outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. The computed basic and diluted earnings per share presented are substantially equivalent using both the two-class and the treasury stock methods of calculating earnings per share.

 

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Table of Contents

 

(14)                          Accumulated Other Comprehensive Loss

 

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

 

(Dollars in thousands)

 

Unfunded
Pension
Liability

 

Noncredit

Related
Losses on
Securities
Not
Expected to
Be Sold

 

Unrealized
Loss on
Securities

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

$

5,032

 

284

 

72

 

$

5,388

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

(31

)

(9

)

(40

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

(31

)

(9

)

(40

)

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2015

 

$

5,032

 

253

 

63

 

$

5,348

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

$

3,338

 

376

 

73

 

$

3,787

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

(72

)

(3

)

(75

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

Net current period other comprehensive income

 

 

(72

)

(3

)

(75

)

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2014

 

$

3,338

 

304

 

70

 

$

3,712

 

 

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

 

 

 

March 31,

 

 

 

2015

 

2014

 

(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

 

(51

)

20

 

(31

)

(118

)

46

 

(72

)

Unrealized loss on securities

 

(15

)

6

 

(9

)

(5

)

2

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(66

)

$

26

 

$

(40

)

$

(123

)

$

48

 

$

(75

)

 

(15)                          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:

 

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Table of Contents

 

·                               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.

 

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, Investment Purchases Pending Settlement, 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 five transactions have occurred over the past 39 months in the same tranche of securities we own and no new issues of pooled trust preferred securities have occurred since 2007.  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 $20.93 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.

 

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

 

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Table of Contents

 

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 Value Measurements Using

 

(Dollars in thousands)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,774

 

$

45,774

 

$

45,774

 

$

 

$

 

Investment securities held to maturity

 

552,461

 

569,832

 

 

569,091

 

741

 

FHLB stock

 

11,112

 

11,112

 

 

11,112

 

 

FRB stock

 

2,949

 

2,949

 

 

2,949

 

 

Loans held for sale

 

2,910

 

2,978

 

 

2,978

 

 

Loans receivable, net

 

1,038,922

 

1,070,980

 

 

 

1,070,980

 

Accrued interest receivable

 

4,583

 

4,583

 

4,583

 

 

 

Interest rate contracts

 

113

 

113

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,381,461

 

1,382,097

 

1,158,355

 

 

223,742

 

Advances from the Federal Home Loan Bank

 

27,000

 

27,312

 

 

27,312

 

 

Securities sold under agreements to repurchase

 

60,000

 

60,607

 

 

60,607

 

 

Accounts payable and accrued expenses (excluding interest rate contracts)

 

26,756

 

26,756

 

26,756

 

 

 

Interest rate contracts

 

101

 

101

 

 

101

 

 

Investment purchases pending settlement

 

1,116

 

1,116

 

1,116

 

 

 

Current income taxes payable

 

1,051

 

1,051

 

1,051

 

 

 

Advance payments by borrowers for taxes and insurance

 

2,710

 

2,710

 

2,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,060

 

$

75,060

 

$

75,060

 

$

 

$

 

Investment securities held to maturity

 

572,922

 

586,710

 

 

586,020

 

690

 

FHLB stock

 

11,234

 

11,234

 

 

11,234

 

 

FRB stock

 

2,925

 

2,925

 

 

2,925

 

 

Loans held for sale

 

1,048

 

1,079

 

 

1,079

 

 

Loans receivable, net

 

968,212

 

998,183

 

 

 

998,183

 

Accrued interest receivable

 

4,436

 

4,436

 

4,436

 

 

 

Interest rate contracts

 

62

 

62

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,359,679

 

1,360,074

 

1,137,942

 

 

222,132

 

Advances from the Federal Home Loan Bank

 

15,000

 

14,977

 

 

 

14,977

 

Securities sold under agreements to repurchase

 

72,000

 

72,334

 

 

 

72,334

 

Accounts payable and accrued expenses (excluding interest rate contracts)

 

24,044

 

24,044

 

24,044

 

 

 

Interest rate contracts

 

54

 

54

 

 

54

 

 

Current income taxes payable

 

826

 

826

 

826

 

 

 

Advance payments by borrowers for taxes and insurance

 

3,916

 

3,916

 

3,916

 

 

 

 

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Table of Contents

 

At March 31, 2015 and December 31, 2014, 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.

 

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 

$

113

 

$

 

$

113

 

Interest rate contracts — liabilities

 

 

(101

)

 

(101

)

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 

$

62

 

$

 

$

62

 

Interest rate contracts — liabilities

 

 

(54

)

 

(54

)

 

The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for similar contracts.

 

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014 and the related gains and losses for the three months ended March 31, 2015 and the year ended December 31, 2014:

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Total
Gains
(Losses)

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

$

 

$

 

$

741

 

$

741

 

$

51

 

Mortgage servicing assets

 

 

 

479

 

479

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

327

 

$

327

 

$

(4

)

Trust preferred securities

 

 

 

690

 

690

 

153

 

Mortgage servicing assets

 

 

 

505

 

505

 

(15

)

 

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.  Changes in the measurement of 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.  Mortgage servicing assets are valued using a discounted cash flow model.  Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing.  Losses on

 

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mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

$

741

 

Discounted cash flow

 

Discount rate

 

Three-month LIBOR plus 20%

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing assets

 

479

 

Discounted cash flow

 

Discount rate

 

10.00%

 

 

 

 

 

 

 

Prepayment speed (PSA)

 

169.8 – 299.3

 

 

 

 

 

 

 

Annual cost to service (per loan)

 

$60

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans — non-collateral dependent

 

$

327

 

Discounted cash flow

 

Discount rate (1)

 

6.10%

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

690

 

Discounted cash flow

 

Discount rate

 

Three-month LIBOR plus 20%

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing assets

 

505

 

Discounted cash flow

 

Discount rate

 

10.50%

 

 

 

 

 

 

 

Prepayment speed (PSA)

 

164.8 – 262.5

 

 

 

 

 

 

 

Annual cost to service (per loan)

 

$55

 

 


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

 

(16)              Subsequent Events

 

On April 30, 2015, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.16 per share of common stock.  The dividend is expected to be paid on May 28, 2015 to stockholders of record as of May 14, 2015.

 

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

 

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·                                          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.

 

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, 2014.

 

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Comparison of Financial Condition at March 31, 2015 and December 31, 2014

 

Assets.  At March 31, 2015, our assets were $1.715 billion, an increase of $23.5 million, or 1.4%, from $1.692 billion at December 31, 2014.  The increase in assets was primarily the result of a $72.6 million increase in total loans that was partially offset by a $29.3 million decrease in cash and a $20.5 million decrease in investment securities.

 

Cash and Cash Equivalents.  Cash and cash equivalents were $45.8 million at March 31, 2015, a decrease of $29.3 million since December 31, 2014.  During the three months ended March 31, 2015, the $29.3 million of cash, along with a $21.8 million increase in deposits and $20.5 million of repayments on investment securities, was used to fund a $72.6 million increase in total loans, repurchase $4.3 million of common stock and pay $1.5 million of common stock dividends.

 

Loans.  Total loans, including $2.9 million of loans held for sale, were $1.042 billion at March 31, 2015, or 60.7% of total assets.  During the three months ended March 31, 2015, the loan portfolio increased by $72.6 million, or 7.5%.  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 March 31, 2015, our securities portfolio totaled $552.5 million, or 32.2% of total assets.  During the three months ended March 31, 2015, the securities portfolio decreased by $20.5 million, or 3.6%.  The decrease in the securities portfolio occurred as repayments and the amount of securities sold exceeded the amount of securities purchased.

 

At March 31, 2015, 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 March 31, 2015, we owned trust preferred securities with an amortized cost of $741,000.  This portfolio consists of two securities, which represent investments in a pool of debt obligations primarily issued by holding companies of Federal Deposit Insurance Corporation-insured financial institutions.

 

The trust preferred securities market is considered to be inactive as only five transactions have occurred over the past 39 months in the same tranche of securities that we own and no new issues of pooled trust preferred securities have occurred since 2007.  We 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.  We used a discount rate equal to three-month LIBOR plus 20.00% and provided a fair value estimate of $20.93 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 three months ended March 31, 2015.

 

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 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.

 

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Deposits. Deposits were $1.381 billion at March 31, 2015, an increase of $21.8 million, or 1.6%, since December 31, 2014.  The growth in deposits occurred primarily in savings accounts, which increased by $18.0 million during the three months ended March 31, 2015.

 

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 three months ended March 31, 2015, total borrowing remained constant at $87.0 million as Federal Home Loan Bank of Seattle advances rose by $12.0 million while securities sold under agreements to repurchase decreased by $12.0 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.

 

Average Balances and Yields

 

The following table sets 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.

 

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For the Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

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)

 

$

952,157

 

$

10,100

 

4.24%

 

$

822,891

 

$

9,010

 

4.38%

 

Multi-family residential

 

9,170

 

112

 

4.89

 

4,852

 

68

 

5.61

 

Construction, commercial and other

 

19,351

 

224

 

4.63

 

15,325

 

196

 

5.12

 

Home equity loans and lines of credit

 

15,910

 

191

 

4.80

 

16,350

 

199

 

4.87

 

Other loans

 

4,399

 

59

 

5.36

 

4,601

 

67

 

5.82

 

Total loans

 

1,000,987

 

10,686

 

4.27

 

864,019

 

9,540

 

4.42

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

563,322

 

4,523

 

3.21

 

617,715

 

5,074

 

3.29

 

Trust preferred securities

 

690

 

 

 

538

 

 

 

Total securities

 

564,012

 

4,523

 

3.21

 

618,253

 

5,074

 

3.28

 

Other

 

74,328

 

79

 

0.43

 

83,402

 

43

 

0.21

 

Total interest-earning assets

 

1,639,327

 

15,288

 

3.73

 

1,565,674

 

14,657

 

3.74

 

Non-interest-earning assets

 

66,686

 

 

 

 

 

65,449

 

 

 

 

 

Total assets

 

$

1,706,013

 

 

 

 

 

$

1,631,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

953,528

 

$

866

 

0.36%

 

$

915,607

 

$

805

 

0.35%

 

Certificates of deposit

 

222,194

 

260

 

0.47

 

213,494

 

278

 

0.52

 

Money market accounts

 

836

 

0

 

0.00

 

826

 

1

 

0.48

 

Checking and Super NOW accounts

 

149,140

 

8

 

0.02

 

138,350

 

7

 

0.02

 

Total interest-bearing deposits

 

1,325,698

 

1,134

 

0.34

 

1,268,277

 

1,091

 

0.34

 

Federal Home Loan Bank advances

 

18,467

 

70

 

1.52

 

15,000

 

66

 

1.76

 

Securities sold under agreements to repurchase

 

69,944

 

312

 

1.78

 

72,000

 

343

 

1.91

 

Total interest-bearing liabilities

 

1,414,109

 

1,516

 

0.43

 

1,355,277

 

1,500

 

0.44

 

Non-interest-bearing liabilities

 

74,944

 

 

 

 

 

64,218

 

 

 

 

 

Total liabilities

 

1,489,053

 

 

 

 

 

1,419,495

 

 

 

 

 

Stockholders’ equity

 

216,960

 

 

 

 

 

211,628

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,706,013

 

 

 

 

 

$

1,631,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

13,772

 

 

 

 

 

$

13,157

 

 

 

Net interest rate spread (3)

 

 

 

 

 

3.30%

 

 

 

 

 

3.30%

 

Net interest-earning assets (4)

 

$

225,218

 

 

 

 

 

$

210,397

 

 

 

 

 

Net interest margin (5)

 

 

 

 

 

3.36%

 

 

 

 

 

3.36%

 

Interest-earning assets to interest-bearing liabilities

 

115.93%

 

 

 

 

 

115.52%

 

 

 

 

 

 


(1)         Annualized

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

(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.

 

Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014

 

General.  Net income increased by $64,000, or 1.8%, from $3.46 million for the three months ended March 31, 2014 to $3.53 million for the three months ended March 31, 2015.  The increase in net income was primarily due to a $631,000 increase in interest and dividend income.  This was partially offset by a $214,000 increase in income taxes, a $185,000 increase in the provision for loan losses, a

 

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$112,000 decrease in noninterest income, a $40,000 increase in noninterest expense and a $16,000 increase in interest expense.

 

Net Interest Income.  Net interest income increased by $615,000, or 4.7%, to $13.8 million for the three months ended March 31, 2015 compared to $13.2 million for the three months ended March 31, 2014.  Interest and dividend income increased by $631,000, or 4.3%, due primarily to a $73.7 million increase in the average balance of interest-earning assets.  Interest expense increased by $16,000, or 1.1%, due to a $58.8 million increase in the average balance of interest-bearing liabilities that was partially offset by a one basis point decrease in the average cost of interest-bearing liabilities.  The interest rate spread and net interest margin were 3.30% and 3.36%, respectively, for the three months ended March 31, 2015 and 2014.

 

Interest and Dividend Income.  Interest and dividend income increased by $631,000, or 4.3%, to $15.3 million for the three months ended March 31, 2015 from $14.7 million for the three months ended March 31, 2014.  Interest income on loans increased by $1.1 million, or 12.0%, to $10.7 million for the three months ended March 31, 2015 from $9.5 million for the three months ended March 31, 2014.  The increase in interest income on loans occurred because the average balance of loans grew by $137.0 million, or 15.9%, 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 15 basis point decline in the average loan yield to 4.27% for the three months ended March 31, 2015.  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 income on investment securities decreased by $551,000, or 10.9%, to $4.5 million for the three months ended March 31, 2015 from $5.1 million for the three months ended March 31, 2014.  The decrease in interest income on securities occurred because of a $54.2 million decrease in the average securities balance and a seven basis point decrease in the average securities yield.

 

Interest Expense.  Interest expense increased by $16,000, or 1.1% from $1.50 million for the three months ended March 31, 2014 to $1.52 million for the three months ended March 31, 2015.  Interest expense on deposits increased by $43,000, or 3.9%, from $1.09 million for the three months ended March 31, 2014 to $1.13 million for the three months ended March 31, 2015. The average outstanding balance of deposits increased by $57.4 million, or 4.5%, to $1.326 billion for the three months ended March 31, 2015 compared to $1.268 billion for the three months ended March 31, 2014.  The average interest rate on deposits remained constant at 0.34% during the three months ended March 31, 2015 and 2014.  Interest expense on FHLB advances increased by $4,000, or 6.1%, during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  The increase in interest expense was primarily due to a $3.5 million, or 23.1%, increase in the average balance of FHLB advances.  This was partially offset by a 24 basis point decrease in the average interest rate to 1.52% for the three months ended March 31, 2015 compared to 1.76% for the three months ended March 31, 2014.  Interest expense on securities sold under agreements to repurchase decreased by $31,000, or 9.0%, during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  The decrease in interest expense was caused by a $2.1 million, or 2.9%, decrease in the average outstanding balance of securities sold under agreements to repurchase.  The decrease in the average balance was augmented by a 13 basis point decrease in the interest rate to 1.78% for the three months ended March 31, 2015 from 1.91% for the three months ended March 31, 2014.

 

Provision for Loan Losses.  We recorded provisions for loan losses of $194,000 and $9,000 for the three months ended March 31, 2015 and 2014, respectively.  The provisions for loan losses included net charge-offs of $13,000 and $10,000 for the three months ended March 31, 2015 and 2014,

 

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respectively.  The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.18% and 0.17% at March 31, 2015 and 2014, respectively.  Nonaccrual loans totaled $4.3 million at March 31, 2015, or 0.41% of total loans at that date, compared to $5.1 million of nonaccrual loans at March 31, 2014, or 0.58% of total loans at that date.  Nonaccrual loans as of March 31, 2015 and 2014 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 March 31, 2015 and 2014.  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 March 31, 2015 and 2014.

 

 

 

Three Months Ended
March 31,

 

Change

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

$

460

 

$

499

 

$

(39

)

(7.8)%

 

Income on bank-owned life insurance

 

255

 

268

 

(13

)

(4.9)%

 

Gain on sale of investment securities

 

236

 

346

 

(110

)

(31.8)%

 

Gain on sale of loans

 

129

 

79

 

50

 

63.3%

 

Other

 

166

 

166

 

 

—%

 

Total

 

$

1,246

 

$

1,358

 

$

(112

)

(8.2)%

 

 

Noninterest income decreased by $112,000 for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  During the three months ended March 31, 2015, we sold $2.3 million of held-to-maturity investment securities and recognized a gain of $236,000.  During the three months ended March 31, 2014, we sold $8.4 million of held-to-maturity and trading investment securities and recognized a gain of $346,000.  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 Investments - Debt and Equity Securities 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.

 

Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended March 31, 2015 and 2014.

 

 

 

Three Months Ended
March 31,

 

Change

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

5,099

 

$

5,363

 

$

(264

)

(4.9)%

 

Occupancy

 

1,437

 

1,422

 

15

 

1.1%

 

Equipment

 

945

 

914

 

31

 

3.4%

 

Federal deposit insurance premiums

 

209

 

199

 

10

 

5.0%

 

Other general and administrative expenses

 

1,214

 

966

 

248

 

25.7%

 

Total

 

$

8,904

 

$

8,864

 

$

40

 

0.5%

 

 

Noninterest expense rose by $40,000 for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  Other general and administrative expenses increased by $248,000 to $1.2 million for the three months ended March 31, 2015 from $966,000 for the three months ended March 31, 2014.  The increase was due to higher audit service and other professional fees, advertising expenses and other loan expenses.  Salaries and employee benefits expense decreased by $264,000 to $5.1 million for the three months ended March 31, 2015 from $5.4 million for the three months ended March 31, 2014.  The Company recognized a $474,000 increase in the credit to compensation expense

 

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for the cost of originating new mortgage loans because of an increase 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.  This was partially offset by a bank-wide budgeted salary increase of approximately 2.0%, which was effective July 1, 2014, and higher bonuses and commissions that occurred primarily because of the increase in new loan originations.

 

Income Tax Expense.  Income taxes were $2.4 million for the three months ended March 31, 2015, reflecting an effective tax rate of 40.4%, compared to $2.2 million for the three months ended March 31, 2014, reflecting an effective tax rate of 38.6%.  The increase in the effective tax rate is primarily due to a decrease in permanent tax benefits related to our share-based compensation plans.

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations.  Territorial Savings Bank’s 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 March 31, 2015.

 

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

 

(i)                                     expected loan demand;

 

(ii)                                  purchases and sales of investment securities;

 

(iii)                               expected deposit flows and borrowing maturities;

 

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

 

(v)           the objectives of 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 March 31, 2015, Territorial Savings Bank’s cash and cash equivalents totaled $45.8 million. On that date, we had $60.0 million in securities sold under agreements to repurchase outstanding and $27.0 million of Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $396.0 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 March 31, 2015, we had $45.0 million in loan commitments outstanding, most of which were for fixed-rate loans, and had $25.4 million in unused lines of credit to borrowers.  Certificates of deposit due within one year of March 31, 2015 totaled $177.6 million, or 12.9% 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 March 31, 2016.  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 three months ended March 31, 2015 and 2014, we originated $120.3 million and $45.2 million of loans, respectively, and purchased $2.4 million and $27.9 million of securities, respectively.

 

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, securities sold under agreements to repurchase, stock repurchases and dividend payments.  We experienced net increases in deposits of $21.8 million and $28.6 million for the three months ended March 31, 2015 and 2014, respectively.  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 increased by $12.0 million during the three months ended March 31, 2015 to $27.0 million and remained constant at $15.0 million during the three months ended March 31, 2014.  We had the ability to borrow up to an additional $396.0 million and $389.2 million from the Federal Home Loan Bank of Seattle as of March 31, 2015 and 2014, respectively.  We also utilize securities sold under agreements to repurchase as another borrowing source.  Securities sold under agreements to repurchase decreased by $12.0 million for the three months ended March 31, 2015 to $60.0 million and remained constant at $72.0 million for the three months ended March 31, 2014.

 

Territorial Savings Bank and the Company are 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.  On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System.  The Federal Reserve requires that Territorial Savings Bank maintain a Tier 1 Leverage Capital ratio of 9.0% for the next three years as a condition of membership.  Effective January 1, 2015, the well capitalized threshold for Tier 1 risk-based capital requirement was increased from 6.0% to 8.0% and a new capital standard, common equity tier 1 risk-based capital, was implemented with a 6.5% ratio requirement for a financial institution to be considered well capitalized.  Additionally, effective January 1, 2015, consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions became applicable to savings and loan holding companies over $1.0 billion in assets, such as the Company.  At March 31, 2015, Territorial Savings Bank and the Company exceeded all regulatory capital requirements and are considered to be “well capitalized” under regulatory guidelines.  The tables below present the capital required to be considered “well-capitalized” as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for both Territorial Savings Bank and the Company at March 31, 2015 and December 31, 2014 for Territorial Savings Bank:

 

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As of March 31, 2015

(Dollars in Thousands)

 

 

 

Required Ratio

 

Actual Amount

 

Actual Ratio

 

Tier 1 Leverage Capital

 

 

 

 

 

 

 

Territorial Savings Bank (1)

 

9.00%

 

$

208,169

 

12.23%

 

Territorial Bancorp Inc.

 

5.00%

 

$

220,493

 

12.96%

 

Common Equity Tier 1 Risk- Based Capital (2)

 

 

 

 

 

 

 

Territorial Savings Bank

 

9.00%

 

$

208,169

 

28.00%

 

Territorial Bancorp Inc.

 

9.00%

 

$

220,493

 

29.65%

 

Tier 1 Risk-Based Capital (2)

 

 

 

 

 

 

 

Territorial Savings Bank

 

10.50%

 

$

208,169

 

28.00%

 

Territorial Bancorp Inc.

 

10.50%

 

$

220,493

 

29.65%

 

Total Risk-Based Capital (2)

 

 

 

 

 

 

 

Territorial Savings Bank

 

12.50%

 

$

210,044

 

28.25%

 

Territorial Bancorp Inc.

 

12.50%

 

$

222,368

 

29.90%

 

 


(1)         As a condition of membership in the Federal Reserve System, Territorial Savings Bank is required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years beginning on July 10, 2014.

(2)         The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50 % capital conservation buffer that becomes effective on January 1, 2019.

 

As of December 31, 2014

(Dollars in Thousands)

 

 

 

Required Ratio

 

Actual Amount

 

Actual Ratio

 

Tier 1 Leverage Capital

 

 

 

 

 

 

 

Territorial Savings Bank (1)

 

9.00%

 

$

203,708

 

12.10%

 

Tier 1 Risk-Based Capital

 

 

 

 

 

 

 

Territorial Savings Bank

 

4.00%

 

$

203,708

 

29.68%

 

Total Risk-Based Capital

 

 

 

 

 

 

 

Territorial Savings Bank

 

8.00%

 

$

205,403

 

29.93%

 

 


(1)         As a condition of membership in the Federal Reserve System, Territorial Savings Bank is required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years beginning on July 10, 2014.

 

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

 

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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 an increase of $1.4 million in certificates of deposit and an increase of $26.9 million in loan commitments between December 31, 2014 and March 31, 2015, there have not been any material changes in contractual obligations and funding needs since December 31, 2014.

 

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 December 31, 2014 that would result from the designated instantaneous changes in the interest rate yield curve.

 

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Table of Contents

 

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

 

$

207,934

 

$

(57,572

)

(21.68)%

 

12.30%

 

(2.79)%

 

+300

 

$

232,214

 

$

(33,292

)

(12.54)%

 

13.52%

 

(1.57)%

 

+200

 

$

254,417

 

$

(11,089

)

(4.18)%

 

14.60%

 

(0.49)%

 

+100

 

$

268,599

 

$

3,094

 

1.17%

 

15.26%

 

0.17%

 

0

 

$

265,506

 

$

 

—%

 

15.09%

 

—%

 

(100)

 

$

230,610

 

$

(34,896

)

(13.14)%

 

13.35%

 

(1.74)%

 

 


(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.

 

Interest rates on mortgage-backed securities declined by approximately 20 basis points between December 31, 2014 and March 31, 2015.  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 March 31, 2015. Based on that evaluation, 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 effective.

 

During the quarter ended March 31, 2015, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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, 2014.

 

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

 

(a)                                 Not applicable.

 

(b)                                 Not applicable.

 

(c)                                  Stock Repurchases.  The following table sets forth information in connection with repurchases of our shares of common stock during the first quarter of 2015:

 

Period

 

Total Number
of Shares
Purchased

 

Average Price
Paid per
Share

 

Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs

 

Maximum
Number of
Shares That May
Yet be Purchased
Under the Plans
or Programs
(1)

 

 

 

 

 

 

 

 

 

 

 

January 1, 2015 through January 31, 2015

 

92,100

 

$

21.60

 

92,100

 

107,364

 

 

 

 

 

 

 

 

 

 

 

February 1, 2015 through February 28, 2015

 

70,145

 

$

21.78

 

70,145

 

37,219

 

 

 

 

 

 

 

 

 

 

 

March 1, 2015 through March 31, 2015

 

35,860

 

$

22.05

 

35,860

 

1,359

 

 

 

 

 

 

 

 

 

 

 

Total

 

198,105

 

$

21.74

 

198,105

 

1,359

 

 


(1)         On December 4, 2014, our Board of Directors authorized the repurchase of up to 400,000 shares of our common stock.  The Company may initially repurchase up to a total of 250,000 shares.  Further repurchases would be subject to the receipt of regulatory approvals or non-objections for the employee stock ownership plan to own 10% or more of the Company’s outstanding shares of common stock.  In accordance with this authorization, we had repurchased 248,641 shares of our common stock as of March 31, 2015 and 250,000 shares as of April 30, 2015.  This repurchase authorization expires on February 17, 2016.  We have entered into a Rule 10b5-1 plan with respect to our stock repurchase plan.

 

ITEM 3.                        DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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Table of Contents

 

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: May 8, 2015

/s/ Allan S. Kitagawa

 

Allan S. Kitagawa

 

Chairman of the Board, President and

 

Chief Executive Officer

 

 

 

 

Date: May 8, 2015

/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

 

44