tbnk_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period ended June 30, 2017

 

or

 

  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, former address and formal fiscal year, 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 ☒  No ☐.

 

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 ☒  No ☐.

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

(Do not check if a smaller reporting company)

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 9,830,438 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2017.

 

 

 


 

Table of Contents

TERRITORIAL BANCORP INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I 

 

 

 

ITEM 1. 

FINANCIAL STATEMENTS

1

ITEM 2. 

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

29

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

ITEM 4. 

CONTROLS AND PROCEDURES

43

 

 

 

PART II 

 

ITEM 1. 

LEGAL PROCEEDINGS

44

ITEM 1A. 

RISK FACTORS

44

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

44

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

44

ITEM 4. 

MINE SAFETY DISCLOSURES

44

ITEM 5. 

OTHER INFORMATION

44

ITEM 6. 

EXHIBITS

44

 

 

 

SIGNATURES 

45

 

 

 


 

Table of Contents

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,888

 

$

61,273

 

Investment securities available for sale

 

 

2,943

 

 

 —

 

Investment securities held to maturity, at amortized cost (fair value of $397,933 and $407,922 at June 30, 2017 and December 31, 2016, respectively)

 

 

395,556

 

 

407,656

 

Loans held for sale

 

 

1,166

 

 

1,601

 

Loans receivable, net

 

 

1,404,472

 

 

1,335,987

 

Federal Home Loan Bank stock, at cost

 

 

5,013

 

 

4,945

 

Federal Reserve Bank stock, at cost

 

 

3,103

 

 

3,095

 

Accrued interest receivable

 

 

4,769

 

 

4,732

 

Premises and equipment, net

 

 

5,127

 

 

4,327

 

Bank-owned life insurance

 

 

43,747

 

 

43,294

 

Income taxes receivable

 

 

 —

 

 

122

 

Deferred income tax assets, net

 

 

7,535

 

 

7,905

 

Prepaid expenses and other assets

 

 

2,796

 

 

2,625

 

Total assets

 

$

1,924,115

 

$

1,877,562

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits

 

$

1,532,557

 

$

1,493,200

 

Advances from the Federal Home Loan Bank

 

 

69,000

 

 

69,000

 

Securities sold under agreements to repurchase

 

 

55,000

 

 

55,000

 

Accounts payable and accrued expenses

 

 

23,924

 

 

23,258

 

Income taxes payable

 

 

2,208

 

 

1,616

 

Advance payments by borrowers for taxes and insurance

 

 

5,959

 

 

5,702

 

  Total liabilities

 

 

1,688,648

 

 

1,647,776

 

 

 

 

 

 

 

 

 

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 9,830,438 and 9,778,974 shares at June 30, 2017 and December 31, 2016, respectively

 

 

98

 

 

98

 

Additional paid-in capital

 

 

72,433

 

 

71,914

 

Unearned ESOP shares

 

 

(5,627)

 

 

(5,872)

 

Retained earnings

 

 

173,892

 

 

168,962

 

Accumulated other comprehensive loss

 

 

(5,329)

 

 

(5,316)

 

  Total stockholders’ equity

 

 

235,467

 

 

229,786

 

  Total liabilities and stockholders’ equity

 

$

1,924,115

 

$

1,877,562

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

13,527

 

$

12,647

 

$

27,040

 

$

25,008

 

Investment securities

 

 

3,078

 

 

3,750

 

 

6,159

 

 

7,625

 

Other investments

 

 

172

 

 

146

 

 

359

 

 

290

 

Total interest income

 

 

16,777

 

 

16,543

 

 

33,558

 

 

32,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,775

 

 

1,470

 

 

3,426

 

 

2,878

 

Advances from the Federal Home Loan Bank

 

 

261

 

 

256

 

 

515

 

 

513

 

Securities sold under agreements to repurchase

 

 

217

 

 

218

 

 

433

 

 

436

 

Total interest expense

 

 

2,253

 

 

1,944

 

 

4,374

 

 

3,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

14,524

 

 

14,599

 

 

29,184

 

 

29,096

 

Provision (reversal of provision) for loan losses

 

 

(123)

 

 

84

 

 

(52)

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14,647

 

 

14,515

 

 

29,236

 

 

28,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

 

507

 

 

473

 

 

1,063

 

 

929

 

Income on bank-owned life insurance

 

 

227

 

 

240

 

 

453

 

 

487

 

Gain on sale of investment securities

 

 

186

 

 

190

 

 

281

 

 

190

 

Gain on sale of loans

 

 

63

 

 

129

 

 

126

 

 

190

 

Other

 

 

76

 

 

102

 

 

158

 

 

224

 

Total noninterest income

 

 

1,059

 

 

1,134

 

 

2,081

 

 

2,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,935

 

 

5,256

 

 

10,053

 

 

10,682

 

Occupancy

 

 

1,461

 

 

1,433

 

 

2,910

 

 

2,853

 

Equipment

 

 

882

 

 

912

 

 

1,748

 

 

1,818

 

Federal deposit insurance premiums

 

 

148

 

 

227

 

 

296

 

 

452

 

Other general and administrative expenses

 

 

1,328

 

 

1,160

 

 

2,454

 

 

2,242

 

Total noninterest expense

 

 

8,754

 

 

8,988

 

 

17,461

 

 

18,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

6,952

 

 

6,661

 

 

13,856

 

 

12,957

 

Income taxes

 

 

2,651

 

 

2,624

 

 

5,234

 

 

5,136

 

Net income

 

$

4,301

 

$

4,037

 

$

8,622

 

$

7,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.46

 

$

0.44

 

$

0.93

 

$

0.85

 

Diluted earnings per share

 

$

0.45

 

$

0.43

 

$

0.90

 

$

0.83

 

Cash dividends paid per common share

 

$

0.20

 

$

0.18

 

$

0.40

 

$

0.36

 

Basic weighted-average shares outstanding

 

 

9,255,739

 

 

9,059,515

 

 

9,235,553

 

 

9,047,217

 

Diluted weighted-average shares outstanding

 

 

9,539,757

 

 

9,345,262

 

 

9,539,543

 

 

9,323,432

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

    

2016

 

2017

 

2016

 

Net income

 

$

4,301

 

$

4,037

 

$

8,622

 

$

7,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unfunded pension liability

 

 

 —

 

 

 —

 

 

 —

 

 

(21)

 

Change in unrealized loss on securities

 

 

(15)

 

 

 4

 

 

(13)

 

 

 6

 

Change in noncredit related loss on trust preferred securities

 

 

 —

 

 

44

 

 

 —

 

 

46

 

Other comprehensive income (loss), net of tax

 

 

(15)

 

 

48

 

 

(13)

 

 

31

 

Comprehensive income

 

$

4,286

 

$

4,085

 

$

8,609

 

$

7,852

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Capital

 

Shares

 

Earnings

 

Income (Loss)

 

Equity

 

Balances at December 31, 2015

 

$

96

 

$

70,118

 

$

(6,361)

 

$

161,024

 

$

(5,236)

 

$

219,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

7,821

 

 

 —

 

 

7,821

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

31

 

 

31

 

Cash dividends paid ($0.36 per share)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,292)

 

 

 —

 

 

(3,292)

 

Share-based compensation

 

 

 —

 

 

1,323

 

 

 —

 

 

 —

 

 

 —

 

 

1,323

 

Allocation of 24,466 ESOP shares

 

 

 —

 

 

393

 

 

244

 

 

 —

 

 

 —

 

 

637

 

Repurchase of 57,903 shares of company common stock

 

 

(1)

 

 

(1,509)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,510)

 

Exercise of 61,340 options for common stock

 

 

 1

 

 

1,064

 

 

 —

 

 

 —

 

 

 —

 

 

1,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2016

 

$

96

 

$

71,389

 

$

(6,117)

 

$

165,553

 

$

(5,205)

 

$

225,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

$

98

 

$

71,914

 

$

(5,872)

 

$

168,962

 

$

(5,316)

 

$

229,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

8,622

 

 

 —

 

 

8,622

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

 

(13)

 

Cash dividends paid ($0.40 per share)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,692)

 

 

 —

 

 

(3,692)

 

Share-based compensation

 

 

 —

 

 

(11)

 

 

 —

 

 

 —

 

 

 —

 

 

(11)

 

Allocation of 24,466 ESOP shares

 

 

 —

 

 

530

 

 

245

 

 

 —

 

 

 —

 

 

775

 

Repurchase of 59,430 shares of company common stock

 

 

(1)

 

 

(1,924)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,925)

 

Exercise of 110,894 options for common stock

 

 

 1

 

 

1,924

 

 

 —

 

 

 —

 

 

 —

 

 

1,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2017

 

$

98

 

$

72,433

 

$

(5,627)

 

$

173,892

 

$

(5,329)

 

$

235,467

 

 

See accompanying notes to consolidated financial statements.

4


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,622

 

$

7,821

 

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

 

 

 

 

 

 

 

Provision (reversal of provision) for loan losses

 

 

(52)

 

 

112

 

Depreciation and amortization

 

 

513

 

 

595

 

Deferred income tax expense

 

 

379

 

 

349

 

Amortization of fees, discounts, and premiums

 

 

(235)

 

 

(397)

 

Origination of loans held for sale

 

 

(16,006)

 

 

(23,084)

 

Proceeds from sales of loans held for sale

 

 

16,568

 

 

24,173

 

Gain on sale of loans, net

 

 

(126)

 

 

(190)

 

Gain on sale of investment securities held to maturity

 

 

(281)

 

 

(190)

 

ESOP expense

 

 

775

 

 

637

 

Share-based compensation (benefit) expense

 

 

(11)

 

 

1,323

 

Increase in accrued interest receivable

 

 

(37)

 

 

(128)

 

Net increase in bank-owned life insurance

 

 

(453)

 

 

(487)

 

Net increase in prepaid expenses and other assets

 

 

(171)

 

 

(134)

 

Net increase in accounts payable and accrued expenses

 

 

666

 

 

 9

 

Net increase in advance payments by borrowers for taxes and insurance

 

 

257

 

 

191

 

Net decrease in income taxes receivable

 

 

122

 

 

 —

 

Net increase (decrease) in income taxes payable

 

 

592

 

 

(135)

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

11,122

 

 

10,465

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investment securities held to maturity

 

 

(19,908)

 

 

(2,523)

 

Purchases of investment securities available for sale

 

 

(2,970)

 

 

 —

 

Principal repayments on investment securities held to maturity

 

 

27,245

 

 

35,608

 

Proceeds from sale of investment securities held to maturity

 

 

5,053

 

 

3,122

 

Loan originations, net of principal repayments on loans receivable

 

 

(68,203)

 

 

(69,581)

 

Purchases of Federal Home Loan Bank stock

 

 

(483)

 

 

(155)

 

Proceeds from redemption of Federal Home Loan Bank stock

 

 

415

 

 

 —

 

Purchases of Federal Reserve Bank stock

 

 

(8)

 

 

(40)

 

Purchases of premises and equipment

 

 

(1,313)

 

 

(91)

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

(60,172)

 

 

(33,660)

 

 

(Continued)

 

5


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

2016

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

$

39,357

 

$

24,651

 

Proceeds from advances from the Federal Home Loan Bank

 

 

10,375

 

 

 —

 

Repayments of advances from the Federal Home Loan Bank

 

 

(10,375)

 

 

 —

 

Proceeds from exercise of stock options

 

 

 —

 

 

566

 

Repurchases of common stock

 

 

 —

 

 

(771)

 

Cash dividends paid

 

 

(3,692)

 

 

(3,292)

 

 

 

 

 

 

 

 

 

Net cash from financing activities

 

 

35,665

 

 

21,154

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(13,385)

 

 

(2,041)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

 

61,273

 

 

65,919

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

47,888

 

$

63,878

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest on deposits and borrowings

 

$

4,308

 

$

3,819

 

Income taxes

 

 

4,212

 

 

4,922

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Company stock repurchased, not settled

 

$

 —

 

$

240

 

Company stock acquired through swap and net settlement transactions

 

 

1,925

 

 

499

 

 

See accompanying notes to consolidated financial statements.

 

6


 

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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 the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2016.  In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.

.

 

(2)      Organization

 

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company.  As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, 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, 2016 was $12.2 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 Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) amended the Revenue Recognition topic of the FASB Accounting Standards Codification (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.  In August 2015, the FASB deferred the effective date of the amendment by one year.  However, entities may still choose to adopt the amendment as of the original effective date.  The Company plans to adopt this amendment effective January 1, 2018.  The Company does not expect the adoption of this amendment to have an effect on most items of income, including interest income and most categories of noninterest income.  The Company is still studying the effects that this amendment will have on certain items of noninterest income, such as commissions earned from insurance and investment sales.  However, the Company does not expect that there will be a material effect on its consolidated financial statements.

 

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.  The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments.  Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.   The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The

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Company will continue to evaluate the effects that the adoption of this amendment will have on its consolidated financial statements.

 

In February 2016, the FASB amended the Leases topic of the FASB ASC.  The primary effects of the amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose certain information about leasing arrangements.  The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company has several lease agreements for branch locations and equipment that will require recognition on the consolidated balance sheets upon adoption of the amendment.  The Company will continue to evaluate the effects that the adoption of this amendment will have on its consolidated financial statements.

 

In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC.  The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  Some of the key provisions of the amendment require companies to record all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement rather than as an adjustment to additional paid-in capital.  In addition, the amendments requires that excess tax benefits should be reported as an operating activity on the statement of cash flows and increases the amount an employer can withhold for taxes for share-based compensation awards.  The amendment is effective for annual periods beginning after December 15, 2016.  The Company adopted this amendment effective January 1, 2017.  The adoption of this amendment has resulted in increased volatility to income tax expense related to excess tax benefits and tax deficiencies for share-based compensation.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.  For the six months ended June 30, 2017, the Company recognized $392,000 of tax benefits related to the exercise of stock options.

 

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments.  The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model.  The new model is referred to as the current expected credit loss model and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.  The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.  The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements by gathering the information that is necessary to make the calculations required by the amendment.  This may result in increased credit losses on financial instruments recorded in the consolidated financial statements.

 

In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC.  The amendment requires the service cost component of net benefit cost to be reported in the same line item as other compensation costs arising from employee services.  It also requires the other components of net benefit cost to be reported in the income statement separately from the service cost component.  The amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The Company has performed a preliminary evaluation and does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

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(4)      Cash and Cash Equivalents

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2017

 

2016

 

Cash and due from banks

 

$

9,820

 

$

9,043

 

Interest-earning deposits in other banks

 

 

38,068

 

 

52,230

 

  Cash and cash equivalents

 

$

47,888

 

$

61,273

 

 

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

 

(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

 

June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

2,970

 

$

 —

 

$

(27)

 

$

2,943

 

Total

 

$

2,970

 

$

 —

 

$

(27)

 

$

2,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

394,800

 

$

7,061

 

$

(4,937)

 

$

396,924

 

Trust preferred securities

 

 

756

 

 

253

 

 

 —

 

 

1,009

 

Total

 

$

395,556

 

$

7,314

 

$

(4,937)

 

$

397,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

406,498

 

$

7,285

 

$

(7,024)

 

$

406,759

 

Trust preferred securities

 

 

1,158

 

 

 5

 

 

 —

 

 

1,163

 

Total

 

$

407,656

 

$

7,290

 

$

(7,024)

 

$

407,922

 

 

The amortized cost and estimated fair value of investment securities at June 30, 2017 are shown below.  Incorporated in the maturity schedule are mortgage-backed and trust preferred securities, which are allocated using the

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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

 

Available-for-sale:

 

 

 

 

 

 

 

Due within 5 years

 

$

 —

 

$

 —

 

Due after 5 years through 10 years

 

 

 —

 

 

 —

 

Due after 10 years

 

 

2,970

 

 

2,943

 

Total

 

$

2,970

 

$

2,943

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

Due within 5 years

 

$

15

 

$

15

 

Due after 5 years through 10 years

 

 

41

 

 

41

 

Due after 10 years

 

 

395,500

 

 

397,877

 

Total

 

$

395,556

 

$

397,933

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2017

 

2016

 

2017

 

2016

 

Proceeds from sales

 

$

3,464

 

$

3,122

 

$

5,053

 

$

3,122

 

Gross gains

 

 

186

 

 

190

 

 

281

 

 

190

 

Gross losses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

The sale of these mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), is in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.

 

Investment securities with amortized costs of $264.3 million and $239.9 million at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

 

Provided below is a summary of investment securities which were in an unrealized loss position at June 30, 2017 and December 31, 2016.  The Company does not intend to sell held-to-maturity securities until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

Number of

    

 

 

    

Unrealized

 

Description of securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

147,913

 

$

3,853

 

$

22,097

 

$

1,111

 

49

 

$

170,010

 

$

4,964

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

179,741

 

$

5,599

 

$

23,402

 

$

1,425

 

50

 

$

203,143

 

$

7,024

 

 

Mortgage-Backed Securities.  The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates subsequent to purchase.  All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, 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

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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 June 30, 2017 and December 31, 2016.

 

Trust Preferred Securities.  At June 30, 2017, the Company owned one trust preferred security, PreTSL XXIII.  PreTSL XXIII has an amortized cost and a remaining cost basis of $756,000 at June 30, 2017.  The trust preferred security represents an investment in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions. This security is classified in the Company’s held-to-maturity investment portfolio.

 

The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 66 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 this security is 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 PreTSL XXIII did not incur additional impairment during the six months ended June 30, 2017 and there is no accumulated other comprehensive loss related to noncredit factors.

 

It is reasonably possible that the fair value of the trust preferred security could decline in the near term if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of this security remains low.  As a result, there is a risk that the Company’s remaining cost basis of $756,000 on the trust preferred security could be credit-related other-than-temporarily impaired in the near term.  The impairment, if any, 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:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

    

2017

    

2016

 

Balance at the beginning of the period

 

$

2,403

 

$

2,403

 

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

 

 

 —

 

 

 —

 

Credit losses on debt securities which were sold

 

 

 —

 

 

 —

 

Balance at the end of the period

 

$

2,403

 

$

2,403

 

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

(Dollars in thousands)

    

2017

    

2016

 

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

 

$

 —

 

$

101

 

 

 

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(6)      Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

    

2017

    

2016

 

Real estate loans:

 

 

 

 

 

 

 

First mortgages:

 

 

 

 

 

 

 

One- to four-family residential

 

$

1,359,149

 

$

1,289,364

 

Multi-family residential

 

 

9,399

 

 

9,551

 

Construction, commercial and other

 

 

22,693

 

 

23,346

 

Home equity loans and lines of credit

 

 

13,846

 

 

14,805

 

Total real estate loans

 

 

1,405,087

 

 

1,337,066

 

Other loans:

 

 

 

 

 

 

 

Loans on deposit accounts

 

 

303

 

 

204

 

Consumer and other loans

 

 

4,752

 

 

4,360

 

Total other loans

 

 

5,055

 

 

4,564

 

Less:

 

 

 

 

 

 

 

Net unearned fees and discounts

 

 

(3,213)

 

 

(3,191)

 

Allowance for loan losses

 

 

(2,457)

 

 

(2,452)

 

Total unearned fees, discounts and allowance for loan losses

 

 

(5,670)

 

 

(5,643)

 

Loans receivable, net

 

$

1,404,472

 

$

1,335,987

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

Home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Other

 

Loans and

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Mortgage

 

Lines of

 

Consumer

 

 

 

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Loans

 

Credit

 

and Other

 

Unallocated

 

Totals

 

Three months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,603

 

$

564

 

$

 1

 

$

135

 

$

237

 

$

2,540

 

Provision (reversal of provision) for loan losses

 

 

(45)

 

 

(8)

 

 

 —

 

 

(78)

 

 

 8

 

 

(123)

 

 

 

 

1,558

 

 

556

 

 

 1

 

 

57

 

 

245

 

 

2,417

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(7)

 

 

 —

 

 

(7)

 

Recoveries

 

 

44

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

47

 

Net recoveries (charge-offs)

 

 

44

 

 

 —

 

 

 —

 

 

(4)

 

 

 —

 

 

40

 

Balance, end of period

 

$

1,602

 

$

556

 

$

 1

 

$

53

 

$

245

 

$

2,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,594

 

$

519

 

$

 2

 

$

115

 

$

222

 

$

2,452

 

Provision (reversal of provision) for loan losses

 

 

(56)

 

 

37

 

 

(1)

 

 

(55)

 

 

23

 

 

(52)

 

 

 

 

1,538

 

 

556

 

 

 1

 

 

60

 

 

245

 

 

2,400

 

Charge-offs

 

 

(11)

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

 

(23)

 

Recoveries

 

 

75

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

 

80

 

Net recoveries (charge-offs)

 

 

64

 

 

 —

 

 

 —

 

 

(7)

 

 

 —

 

 

57

 

Balance, end of period

 

$

1,602

 

$

556

 

$

 1

 

$

53

 

$

245

 

$

2,457

 

 

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Construction,

 

Home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Other

 

Loans and

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Mortgage

 

Lines of

 

Consumer

 

 

 

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Loans

 

Credit

 

and Other

 

Unallocated

 

Totals

 

Three months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,398

 

$

509

 

$

 3

 

$

75

 

$

198

 

$

2,183

 

Provision (reversal of provision) for loan losses

 

 

39

 

 

58

 

 

 —

 

 

(21)

 

 

 8

 

 

84

 

 

 

 

1,437

 

 

567

 

 

 3

 

 

54

 

 

206

 

 

2,267

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

 

 —

 

 

(4)

 

Recoveries

 

 

 7

 

 

 —

 

 

 —

 

 

 6

 

 

 —

 

 

13

 

Net recoveries

 

 

 7

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

 9

 

Balance, end of period

 

$

1,444

 

$

567

 

$

 3

 

$

56

 

$

206

 

$

2,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,380

 

$

517

 

$

 3

 

$

72

 

$

194

 

$

2,166

 

Provision (reversal of provision) for loan losses

 

 

57

 

 

50

 

 

 —

 

 

(7)

 

 

12

 

 

112

 

 

 

 

1,437

 

 

567

 

 

 3

 

 

65

 

 

206

 

 

2,278

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(18)

 

 

 —

 

 

(18)

 

Recoveries

 

 

 7

 

 

 —

 

 

 —

 

 

 9

 

 

 —

 

 

16

 

Net recoveries (charge-offs)

 

 

 7

 

 

 —

 

 

 —

 

 

(9)

 

 

 —

 

 

(2)

 

Balance, end of period

 

$

1,444

 

$

567

 

$

 3

 

$

56

 

$

206

 

$

2,276

 

 

During the three and six months ended June 30, 2017, there were reversals of loan loss provisions of $123,000 and $52,000, respectively, due to the improving credit quality of the loan portfolio and a reduction in loan losses.

 

In 2016, the Company changed the look-back period that is used to calculate the historical loss rates from five to seven years.  The look-back period was extended to seven years because the longer look-back period is considered to be more representative of an entire economic cycle.  The seven year look-back period includes loan charge-offs and recoveries from the recession and the subsequent economic recovery.  The change in the look-back period did not have a material effect on the allowance for loan losses.

 

Management considers the allowance for loan losses at June 30, 2017 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 periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

 

13


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Construction,

    

Home

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Commercial

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Other

 

Loans and

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Mortgage

 

Lines of

 

Consumer

 

 

 

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Loans

 

Credit

 

and Other

 

Unallocated

 

Totals

 

June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Collectively evaluated for impairment

 

 

1,602

 

 

556

 

 

 1

 

 

53

 

 

245

 

 

2,457

 

Total ending allowance balance

 

$

1,602

 

$

556

 

$

 1

 

$

53

 

$

245

 

$

2,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

4,171

 

$

 —

 

$

175

 

$

 —

 

$

 —

 

$

4,346

 

Collectively evaluated for impairment

 

 

1,361,239

 

 

22,601

 

 

13,676

 

 

5,067

 

 

 —

 

 

1,402,583

 

Total ending loan balance

 

$

1,365,410

 

$

22,601

 

$

13,851

 

$

5,067

 

$

 —

 

$

1,406,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Collectively evaluated for impairment

 

 

1,594

 

 

519

 

 

 2

 

 

115

 

 

222

 

 

2,452

 

Total ending allowance balance

 

$

1,594

 

$

519

 

$

 2

 

$

115

 

$

222

 

$

2,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

5,587

 

$

 —

 

$

156

 

$

 1

 

$

 —

 

$

5,744

 

Collectively evaluated for impairment

 

 

1,290,209

 

 

23,256

 

 

14,656

 

 

4,574

 

 

 —

 

 

1,332,695

 

Total ending loan balance

 

$

1,295,796

 

$

23,256

 

$

14,812

 

$

4,575

 

$

 —

 

$

1,338,439

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

Recorded

 

Principal

 

(Dollars in thousands)

 

Investment

 

Balance

 

June 30, 2017:

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

4,171

 

$

5,002

 

Home equity loans and lines of credit

 

 

175

 

 

230

 

Total

 

$

4,346

 

$

5,232

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

5,587

 

$

6,469

 

Home equity loans and lines of credit

 

 

156

 

 

204

 

Consumer and other

 

 

 1

 

 

 1

 

Total

 

$

5,744

 

$

6,674

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

 Income

 

Recorded

 

Income

 

(Dollars in thousands)

 

Investment

 

Recognized

 

Investment

 

Recognized

 

2017:

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

4,205

 

$

18

 

$

4,239

 

$

31

 

Home equity loans and lines of credit

 

 

178

 

 

 —

 

 

180

 

 

 —

 

Total

 

$

4,383

 

$

18

 

$

4,419

 

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,123

 

$

18

 

$

6,157

 

$

38

 

Home equity loans and lines of credit

 

 

165

 

 

 —

 

 

165

 

 

 —

 

Total

 

$

6,288

 

$

18

 

$

6,322

 

$

38

 

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2017 or December 31, 2016.  Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they were written down to fair value at the time of impairment.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More Than

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days

 

 

 

30 - 59

 

60 - 89

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due

 

 

 

Days Past

 

Days Past

 

Greater

 

Total Past

 

Loans Not

 

Total

 

Nonaccrual

 

and Still

 

(Dollars in thousands)

 

Due

 

Due

 

Past Due

 

Due

 

Past Due

 

Loans

 

Loans

 

Accruing

 

June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

212

 

$

 —

 

$

788

 

$

1,000

 

$

1,355,030

 

$

1,356,030

 

$

3,247

 

$

 —

 

Multi-family residential mortgages

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,380

 

 

9,380

 

 

 —

 

 

 —

 

Construction, commercial and other mortgages

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

22,601

 

 

22,601

 

 

 —

 

 

 —

 

Home equity loans and lines of credit

 

 

 —

 

 

 —

 

 

41

 

 

41

 

 

13,810

 

 

13,851

 

 

175

 

 

 —

 

Loans on deposit accounts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

303

 

 

303

 

 

 —

 

 

 —

 

Consumer and other

 

 

 1

 

 

 3

 

 

 —

 

 

 4

 

 

4,760

 

 

4,764

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

213

 

$

 3

 

$

829

 

$

1,045

 

$

1,405,884

 

$

1,406,929

 

$

3,422

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

185

 

$

133

 

$

1,358

 

$

1,676

 

$

1,284,590

 

$

1,286,266

 

$

4,402

 

$

 —

 

Multi-family residential mortgages

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,530

 

 

9,530

 

 

 —

 

 

 —

 

Construction, commercial and other mortgages

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

23,256

 

 

23,256

 

 

 —

 

 

 —

 

Home equity loans and lines of credit

 

 

16

 

 

35

 

 

49

 

 

100

 

 

14,712

 

 

14,812

 

 

156

 

 

 —

 

Loans on deposit accounts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

204

 

 

204

 

 

 —

 

 

 —

 

Consumer and other

 

 

 3

 

 

 —

 

 

 1

 

 

 4

 

 

4,367

 

 

4,371

 

 

 1

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

204

 

$

168

 

$

1,408

 

$

1,780

 

$

1,336,659

 

$

1,338,439

 

$

4,559

 

$

 —

 

 

 

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 four months

15


 

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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 16 nonaccrual loans with a book value of $3.4 million at June 30, 2017 and 19 nonaccrual loans with a book value of $4.6 million as of December 31, 2016.  The Company collected interest on nonaccrual loans of $87,000 and $106,000 during the six months ended June 30, 2017 and 2016, respectively, but due to regulatory requirements, the Company recorded the interest as a reduction of principal.  The Company would have recognized additional interest income of $114,000 and $151,000 during the six months ended June 30, 2017 and 2016, had the loans been accruing interest.  The Company did not have any loans more than 90 days past due and still accruing interest as of June 30, 2017 and December 31, 2016.

 

There were no loans modified in a troubled debt restructuring during the six months ended June 30, 2017 or 2016.  There were no new troubled debt restructurings within the past 12 months that subsequently defaulted. 

 

The Company had 10 troubled debt restructurings totaling $2.1 million as of June 30, 2017 that were considered to be impaired.  This total included nine one- to four-family residential mortgage loans totaling $2.0 million and one home equity loan for $100,000.  Four of the loans, totaling $924,000, are performing in accordance with their restructured terms and accruing interest at June 30, 2017.  Five of the loans, totaling $1.1 million, are performing in accordance with their restructured terms but not accruing interest at June 30, 2017. One of the loans, for $149,000, was more than 149 days delinquent and not accruing interest as of June 30, 2017.  The Company had 13 troubled debt restructurings totaling $2.9 million as of December 31, 2016 that were considered to be impaired.  This total included 12 one- to four-family residential mortgage loans totaling $2.8 million and one home equity loan for $107,000.  Five of the loans, totaling $1.2 million, were performing in accordance with their restructured terms and accruing interest at December 31, 2016.  Seven of the loans, totaling $1.6 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2016.  One of the loans, for $149,000, was more than 149 days delinquent and not accruing interest as of December 31, 2016.  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.  At June 30, 2017, we had no commitments to lend any additional funds to these borrowers.

 

The Company had no real estate owned as of June 30, 2017 or December 31, 2016.  There were three one- to four-family residential mortgage loans totaling $346,000 in the process of foreclosure as of June 30, 2017, and four one- to four-family residential mortgage loans totaling $702,000 in the process of foreclosure as of December 31, 2016. 

 

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

 

During the six months ended June 30, 2017 and 2016, the Company sold $16.6 million and $24.1 million, respectively, of mortgage loans held for sale and recognized gains of $126,000 and $190,000, respectively.  The Company had two loans held for sale totaling $1.2 million at June 30, 2017 and five loans held for sale totaling $1.6 million at December 31, 2016.

 

The Company serviced loans for others of $38.8 million at June 30, 2017 and $41.5 million at December 31, 2016. Of these amounts, $2.0 million and $2.2 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at June 30, 2017 and December 31, 2016, respectively.  The amount of contractually specified servicing fees earned for the six-month periods ended June 30, 2017 and 2016 was $54,000 and $67,000, respectively.  The amount of contractually specified servicing fees earned for the three-month periods ended June 30, 2017 and 2016 was $26,000 and $33,000, respectively.  The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

 

 

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Table of Contents

(7)      Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset.  Securities sold under agreements to repurchase are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

Repurchase

 

Average

 

Repurchase

 

Average

 

 

(Dollars in thousands)

 

Liability

 

Rate

 

Liability

 

Rate

 

 

Maturing:

 

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

25,000

 

1.46

%  

$

25,000

 

1.46

%

 

Over 1 year to 2 years

 

 

20,000

 

1.66

 

 

 —

 

 —

 

 

Over 2 years to 3 years

 

 

10,000

 

1.65

 

 

25,000

 

1.66

 

 

Over 3 years to 4 years

 

 

 —

 

 —

 

 

5,000

 

1.65

 

 

Total

 

$

55,000

 

1.57

%  

$

55,000

 

1.57

%

 

 

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at June 30, 2017.  The amount at risk is the greater of the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement.  All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. 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

 

$

58,513

 

$

58,591

 

$

55,000

 

$

3,591

 

14

 

 

 

(8)    Offsetting of Financial Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Amount of

 

Gross Amount Not Offset in the

 

 

 

 

 

 

Gross Amount

 

Gross Amount

 

Liabilities

 

Balance Sheet

 

 

 

 

 

    

of Recognized

    

Offset in the

    

Presented in the

    

Financial

    

Cash Collateral

    

 

 

 

(Dollars in thousands)

 

Liabilities

 

Balance Sheet

 

Balance Sheet

 

Instruments

 

Pledged

 

Net Amount

 

June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

55,000

 

$

 —

 

$

55,000

 

$

55,000

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

55,000

 

$

 —

 

$

55,000

 

$

55,000

 

$

 —

 

$

 —

 

 

 

(9)    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.

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Table of Contents

 

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.

 

The components of net periodic benefit cost were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SERP

 

SERP

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2017

 

2016

 

2017

 

2016

 

Net periodic benefit cost for the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

10

 

$

15

 

$

20

 

$

29

 

Interest cost

 

 

35

 

 

33

 

 

70

 

 

66

 

Expected return on plan assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Amortization of prior service cost

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recognized actuarial loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recognized curtailment loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net periodic benefit cost

 

$

45

 

$

48

 

$

90

 

$

95

 

 

 

 

(10)    Employee Stock Ownership Plan

 

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees.  The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering.  The shares were acquired at a price of $10.00 per share.

 

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares.  The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal.  The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

 

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company.  The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants.  As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the three months ended June 30, 2017 and 2016 amounted to $305,000 and $259,000, respectively.  Compensation expense recognized for the six months ended June 30, 2017 and 2016 amounted to $626,000 and $521,000, respectively.

 

Shares held by the ESOP trust were as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Allocated shares

 

 

397,463

 

 

372,997

 

Unearned shares

 

 

562,727

 

 

587,193

 

Total ESOP shares

 

 

960,190

 

 

960,190

 

Fair value of unearned shares, in thousands

 

$

17,551

 

$

19,283

 

 

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 ESOP’s benefit formula.  The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS

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limitations imposed on tax-qualified plans.  We accrue for these benefits over the period during which employees provide services to earn these benefits.  For the three months ended June 30, 2017 we reversed $53,000 for the ESOP restoration plan and for the three months ended June 30, 2016 we accrued $45,000 for the ESOP restoration plan.  For the six months ended June 30, 2017 and 2016, we accrued $64,000 and $121,000, respectively, for the ESOP restoration plan.

 

(11)    Share-Based Compensation

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

Compensation expense

 

$

28

 

$

661

 

$

37

 

$

1,323

 

Income tax benefit

 

 

11

 

 

266

 

 

15

 

 

531

 

 

Shares of our common stock issued under the 2010 Equity Incentive Plan shall come from authorized shares.  The maximum number of shares that will be awarded under the plan will be 1,862,637 shares.

 

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Stock Options

 

The table below presents the stock option activity for the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

 

    

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual

 

Value

 

 

 

Options

 

Price

 

Life (years)

 

(in thousands)

 

Options outstanding at December 31, 2016

 

706,430

 

$

17.43

 

3.70

 

$

10,884

 

Granted

 

 —

 

 

 —

 

 —

 

 

 —

 

Exercised

 

110,894

 

 

17.36

 

 —

 

 

1,670

 

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

 

Expired

 

 —

 

 

 —

 

 —

 

 

 —

 

Options outstanding at June 30, 2017

 

595,536

 

$

17.45

 

3.21

 

$

8,185

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at December 31, 2015

 

832,300

 

$

17.42

 

4.70

 

$

8,588

 

Granted

 

 —

 

 

 —

 

 —

 

 

 —

 

Exercised

 

61,340

 

 

17.36

 

 —

 

 

539

 

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

 

Expired

 

 —

 

 

 —

 

 —

 

 

 —

 

Options outstanding at June 30, 2016

 

770,960

 

$

17.43

 

4.20

 

$

6,972

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable at June 30, 2017

 

593,136

 

$

17.41

 

3.19

 

$

8,173

 

 

There were no options that vested in the three or six months ended June 30, 2017 or 2016.

 

The following summarizes certain stock option activity of the Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

Intrinsic value of stock options exercised

 

$

797

 

$

400

 

$

1,670

 

$

539

 

Proceeds received from stock options exercised

 

 

971

 

 

782

 

 

1,925

 

 

1,065

 

Tax benefits realized from stock options exercised

 

 

287

 

 

57

 

 

594

 

 

95

 

Total fair value of stock options that vested

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

During the six months ended June 30, 2017, we issued 51,464 shares of common stock, net, in exchange for 110,894 stock options and 59,430 shares of common stock.  Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of our common stock they own in a stock swap transaction or net settlement to pay the exercise price of stock options.

 

As of June 30, 2017, the Company had $5,000 of unrecognized compensation costs related to the stock option plan that will be amortized over a three-year vesting period.

 

Restricted Stock

 

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

 

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The table below presents the restricted stock activity:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Grant

 

 

 

Restricted

 

Date Fair

 

 

 

Stock Awards

 

Value

 

Nonvested at December 31, 2016

 

2,400

 

$

26.23

 

Granted

 

9,604

 

 

29.53

 

Vested

 

 —

 

 

 —

 

Forfeited

 

 —

 

 

 —

 

Nonvested at June 30, 2017

 

12,004

 

$

28.87

 

 

 

 

 

 

 

 

Nonvested at December 31, 2015

 

114,542

 

$

17.67

 

Granted

 

 —

 

 

 —

 

Vested

 

 —

 

 

 —

 

Forfeited

 

 —

 

 

 —

 

Nonvested at June 30, 2016

 

114,542

 

$

17.67

 

 

During the three months ended June 30, 2017, the Company issued 9,604 shares of restricted stock to certain members of executive management under the 2010 Equity Incentive Plan.  The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant.  Restricted stock will vest over three years from the date of grant.

    

As of June 30, 2017, the Company had $310,000 of unrecognized compensation costs related to restricted stock.

 

During the three months ended June 30, 2017, the Company issued 11,525 of performance-based restricted stock units (PRSUs) to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved.  Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award.  For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized.  This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.        

    

The table below presents the PRSUs that will vest on a performance condition:

 

 

 

 

 

 

 

 

 

Restricted

 

 

 

 

Stock Units

 

Weighted

 

 

Based on a

 

Average Grant

 

 

Performance

 

Date Fair

 

 

Condition

 

Value

Nonvested at December 31, 2016

 

 —

 

$

 —

Granted

 

11,525

 

 

29.53

Vested

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

Nonvested at June 30, 2017

 

11,525

 

$

29.53

 

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant.  As of June 30, 2017, the Company had $219,000 of unrecognized compensation costs related to these PRSUs.  Performance will be measured over a three-year performance period and will be cliff vested.

 

During the three months ended June 30, 2017, the Company issued 2,881 of PRSUs to certain members of executive management under the 2010 Equity Incentive Plan.  These PRSUs will vest in the first quarter of 2020 after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved.  The number of shares that will be expensed will not be adjusted for performance.  The

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fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant.  The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

 

Grant date: May 25, 2017

Performance period: January 1, 2017 to December 31, 2019

2.60 year risk-free rate on grant date: 1.40%

December 31, 2016 closing price: $32.84

Closing stock price on the date of grant: $29.53

Annualized volatility (based on 2.60 year historical volatility as of the grant date): 15.7%

Annual dividend preceding the grant date: $0.80

 

The table below presents the PRSUs that will vest on a market condition:

 

 

 

 

 

 

 

 

 

Restricted

 

Monte Carlo

 

 

Stock Units

 

Valuation of

 

 

Based on a Market

 

the Company's

 

 

Condition

 

Stock

Nonvested at December 31, 2016

 

 —

 

$

 —

Granted

 

2,881

 

 

24.44

Vested

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

Nonvested at June 30, 2017

 

2,881

 

$

24.44

 

As of June 30, 2017, the Company had $45,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition.  Performance will be measured over a three-year performance period and will be cliff vested.

 

(12)    Earnings Per Share

 

Holders of unvested restricted stock receive nonforfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.  Unvested restricted stock awards that contain nonforfeitable rights to dividends or dividend equivalents are considered to be participating securities in the earnings per share computation using the two-class method.  Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands, except per share data)

 

2017

 

2016

 

2017

 

2016

 

Net income

 

$

4,301

 

$

4,037

 

$

8,622

 

$

7,821

 

Income allocated to participating securities

 

 

(4)

 

 

(50)

 

 

(7)

 

 

(98)

 

Net income available to common shareholders

 

$

4,297

 

$

3,987

 

$

8,615

 

$

7,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

9,255,739

 

 

9,059,515

 

 

9,235,553

 

 

9,047,217

 

Dilutive common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

284,018

 

 

285,747

 

 

303,990

 

 

276,215

 

Diluted earnings per share

 

 

9,539,757

 

 

9,345,262

 

 

9,539,543

 

 

9,323,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share, basic

 

$

0.46

 

$

0.44

 

$

0.93

 

$

0.85

 

Net income per common share, diluted

 

$

0.45

 

$

0.43

 

$

0.90

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(13)    Other Comprehensive Income and Loss

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncredit

 

 

 

 

 

 

 

 

 

 

 

 

Related

 

 

 

 

 

 

 

 

 

 

 

 

Loss on

 

 

 

 

 

 

 

 

 

Unfunded

 

Trust

 

Unrealized

 

 

 

 

 

 

Pension

 

Preferred

 

Loss on

 

 

 

 

(Dollars in thousands)

 

Liability

 

Securities

 

Securities

 

Total

 

Three months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

5,284

 

$

 —

 

$

30

 

$

5,314

 

Other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

 

15

 

 

15

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net current period other comprehensive loss

 

 

 —

 

 

 —

 

 

15

 

 

15

 

Balances at end of period

 

$

5,284

 

$

 —

 

$

45

 

$

5,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

5,065

 

$

145

 

$

43

 

$

5,253

 

Other comprehensive income, net of taxes

 

 

 —

 

 

(44)

 

 

(4)

 

 

(48)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net current period other comprehensive income

 

 

 —

 

 

(44)

 

 

(4)

 

 

(48)

 

Balances at end of period

 

$

5,065

 

$

101

 

$

39

 

$

5,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

5,284

 

$

 —

 

$

32

 

$

5,316

 

Other comprehensive loss, net of taxes

 

 

 —

 

 

 —

 

 

13

 

 

13

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net current period other comprehensive loss

 

 

 —

 

 

 —

 

 

13

 

 

13

 

Balances at end of period

 

$

5,284

 

$

 —

 

$

45

 

$

5,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

5,044

 

$

147

 

$

45

 

$

5,236

 

Other comprehensive loss (income), net of taxes

 

 

21

 

 

(46)

 

 

(6)

 

 

(31)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net current period other comprehensive loss (income)

 

 

21

 

 

(46)

 

 

(6)

 

 

(31)

 

Balances at end of period

 

$

5,065

 

$

101

 

$

39

 

$

5,205

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2017

 

2016

 

 

 

Pretax

 

 

 

 

After Tax

 

Pretax

 

 

 

 

After Tax

 

(Dollars in thousands)

 

Amount

 

Tax

 

Amount

 

Amount

 

Tax

 

Amount

 

Unfunded pension liability

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Noncredit related loss on trust preferred securities

 

 

 —

 

 

 —

 

 

 —

 

 

(73)

 

 

29

 

 

(44)

 

Unrealized loss on securities

 

 

25

 

 

(10)

 

 

15

 

 

(6)

 

 

 2

 

 

(4)

 

Total

 

$

25

 

$

(10)

 

$

15

 

$

(79)

 

$

31

 

$

(48)

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

 

 

Pretax

 

 

 

 

After Tax

 

Pretax

 

 

 

 

After Tax

 

(Dollars in thousands)

 

Amount

 

Tax

 

Amount

 

Amount

 

Tax

 

Amount

 

Unfunded pension liability

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

21

 

$

21

 

Noncredit related loss on trust preferred securities

 

 

 —

 

 

 —

 

 

 —

 

 

(76)

 

 

30

 

 

(46)

 

Unrealized loss on securities

 

 

22

 

 

(9)

 

 

13

 

 

(10)

 

 

 4

 

 

(6)

 

Total

 

$

22

 

$

(9)

 

$

13

 

$

(86)

 

$

55

 

$

(31)

 

 

 

 

 

(14)    Fair Value of Financial Instruments

 

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities valued at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

 

· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 

· Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

· Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

 

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date.  Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

 

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 and Accrued Interest Payable. 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 six transactions have occurred over the past 66 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%.

 

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The discounted cash flow analysis includes 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.

 

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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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

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,888

 

$

47,888

 

$

47,888

 

$

 —

 

$

 —

 

Investment securities available for sale

 

 

2,943

 

 

2,943

 

 

 —

 

 

2,943

 

 

 —

 

Investment securities held to maturity

 

 

395,556

 

 

397,933

 

 

 —

 

 

396,924

 

 

1,009

 

Loans held for sale

 

 

1,166

 

 

1,180

 

 

 —

 

 

1,180

 

 

 —

 

Loans receivable, net

 

 

1,404,472

 

 

1,418,793

 

 

 —

 

 

 —

 

 

1,418,793

 

FHLB stock

 

 

5,013

 

 

5,013

 

 

 —

 

 

5,013

 

 

 —

 

FRB stock

 

 

3,103

 

 

3,103

 

 

 —

 

 

3,103

 

 

 —

 

Accrued interest receivable

 

 

4,769

 

 

4,769

 

 

 8

 

 

1,031

 

 

3,730

 

Interest rate contracts

 

 

 5

 

 

 5

 

 

 —

 

 

 5

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,532,557

 

 

1,532,299

 

 

 —

 

 

1,270,810

 

 

261,489

 

Advances from the Federal Home Loan Bank

 

 

69,000

 

 

68,949

 

 

 —

 

 

68,949

 

 

 —

 

Securities sold under agreements to repurchase

 

 

55,000

 

 

55,007

 

 

 —

 

 

55,007

 

 

 —

 

Accrued interest payable

 

 

284

 

 

284

 

 

 —

 

 

172

 

 

112

 

Interest rate contracts

 

 

 5

 

 

 5

 

 

 —

 

 

 5

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,273

 

$

61,273

 

$

61,273

 

$

 —

 

$

 —

 

Investment securities held to maturity

 

 

407,656

 

 

407,922

 

 

 —

 

 

406,759

 

 

1,163

 

Loans held for sale

 

 

1,601

 

 

1,601

 

 

 —

 

 

1,601

 

 

 —

 

Loans receivable, net

 

 

1,335,987

 

 

1,352,137

 

 

 —

 

 

 —

 

 

1,352,137

 

FHLB stock

 

 

4,945

 

 

4,945

 

 

 —

 

 

4,945

 

 

 —

 

FRB stock

 

 

3,095

 

 

3,095

 

 

 —

 

 

3,095

 

 

 —

 

Accrued interest receivable

 

 

4,732

 

 

4,732

 

 

10

 

 

1,064

 

 

3,658

 

Interest rate contracts

 

 

104

 

 

104

 

 

 —

 

 

104

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,493,200

 

 

1,493,094

 

 

 —

 

 

1,257,157

 

 

235,937

 

Advances from the Federal Home Loan Bank

 

 

69,000

 

 

69,068

 

 

 —

 

 

69,068

 

 

 —

 

Securities sold under agreements to repurchase

 

 

55,000

 

 

55,123

 

 

 —

 

 

55,123

 

 

 —

 

Accrued interest payable

 

 

218

 

 

218

 

 

 —

 

 

172

 

 

46

 

Interest rate contracts

 

 

104

 

 

104

 

 

 —

 

 

104

 

 

 —

 

 

At June 30, 2017 and December 31, 2016, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 —

 

$

 5

 

$

 —

 

$

 5

 

Interest rate contracts — liabilities

 

 

 —

 

 

(5)

 

 

 —

 

 

(5)

 

Available-for-sale investments

 

 

2,943

 

 

 —

 

 

 —

 

 

2,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts — assets

 

$

 —

 

$

104

 

$

 —

 

$

104

 

Interest rate contracts — liabilities

 

 

 —

 

 

(104)

 

 

 —

 

 

(104)

 

 

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

 

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016 and the related gains and losses for the six months ended June 30, 2017 and the year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Adjustment Date

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

Total Gains (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

3/31/2017

 

$

 —

 

$

87

 

$

 —

 

$

87

 

$

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

9/30/2016

 

$

 —

 

$

 —

 

$

1,066

 

$

1,066

 

$

242

 

Mortgage servicing assets

 

6/30/2016

 

 

 —

 

 

 —

 

 

341

 

 

341

 

 

(49)

 

Impaired loans

 

8/31/2016

 

 

 —

 

 

64

 

 

 —

 

 

64

 

 

(33)

 

Loans held for sale

 

12/31/2016

 

 

 —

 

 

1,601

 

 

 —

 

 

1,601

 

 

(1)

 

 

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 mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.  The fair value of impaired loans is determined using the value of collateral less estimated selling costs.  Gains and losses on impaired loans are included in the provision for loan losses in the consolidated statements of income.  The fair value of loans held for sale is determined based on the prices quoted in the secondary market for similar loans.  Losses on loans held for sale are included in gain on sale of loans in the consolidated statements of income.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable

 

 

 

 

(Dollars in thousands)

 

Fair Value

 

Valuation Technique

 

Input

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

$

1,066

 

Discounted cash flow

 

Discount rate

 

 

Three-month LIBOR plus 20.00%

 

Mortgage servicing assets

 

 

341

 

Discounted cash flow

 

Discount rate

 

 

10.50%

 

 

 

 

 

 

 

 

Prepayment speed (PSA)

 

 

158.4 - 203.5

 

 

 

 

 

 

 

 

Annual cost to service (per loan)

 

$

65

 

 

 

 

 

 

(15)    Subsequent Events

 

On June 28, 2017, the Board of Directors of Territorial Bancorp Inc. announced a special cash dividend of $0.10 per share of common stock.  The dividend was paid on July 26, 2017 to stockholders of record as of July 12, 2017.

 

On July 27, 2017, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.20 per share of common stock.  The dividend is expected to be paid on August 24, 2017 to stockholders of record as of August 10, 2017.

 

 

 

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

 

Cautionary Statement Regarding Forward-Looking Information

 

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

 

·

statements of our goals, intentions and expectations;

 

·

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

 

·

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

 

·

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  You should not place undue reliance on such statements.  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;

 

·

fluctuations in the demand for loans;

 

·

significant increases in loan losses;

 

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·

success in introducing new products and services;

 

·

failure or breaches of IT security systems;

 

·

ability to retain management team;

 

·

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.

 

Overview

 

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 deposit accounts, securities sold under agreements to repurchase and Federal Home Loan Bank advances.  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.

 

We have continued our focus on originating one- to four-family residential real estate loans.  Our emphasis on conservative loan underwriting has resulted in continued low levels of nonperforming assets. Our nonperforming assets, which can include nonaccrual loans and real estate owned, totaled $3.4 million, or 0.18% of total assets at June 30, 2017, compared to $4.6 million, or 0.24% of total assets at December 31, 2016.  As of June 30, 2017, nonperforming assets consisted of 16 mortgage loans totaling $3.4 million.  Our nonperforming loans and loss experience has enabled us to maintain a relatively low allowance for loan losses in relation to other peer institutions and correspondingly resulted in low levels of provisions for loan losses.  We reversed $52,000 of loan loss provisions for the six months ended June 30, 2017 and recorded a $112,000 loss provision for the six months ended June 30, 2016.

 

Other than our loans for the construction of one- to four-family residential homes, we do not offer “interest only” mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties.  We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan.  We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as nonconforming loans having less than full documentation).  We also do not own any private label mortgage-backed securities that are collateralized by Alt-A, low or no documentation or subprime mortgage loans.

 

We sold $16.6 million and $24.1 million of fixed-rate mortgage loans for the six months ended June 30, 2017 and 2016, respectively.  Long-term, fixed-rate borrowings remained constant for the six months ended June 30, 2017 and 2016.

 

Our investments in mortgage-backed securities have been issued by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency.  These agencies guarantee the payment of principal and interest on our mortgage-backed securities.  We do not own any preferred stock issued by Fannie Mae or Freddie Mac.  As of June 30, 2017 and December 31, 2016, we owned $397.8 million and $406.5 million, respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. 

 

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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, 2016.

 

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

 

Assets.  At June 30, 2017, our assets were $1.924 billion, an increase of $46.6 million, or 2.5%, from $1.878 billion at December 31, 2016.  The increase in assets was primarily the result of a $68.5 million increase in total loans receivable, which was partially offset by a $13.4 million decrease in cash and cash equivalents and a $9.2 million decrease in investment securities.

 

Cash and Cash Equivalents.  Cash and cash equivalents were $47.9 million at June 30, 2017, a decrease of $13.4 million since December 31, 2016.  The decrease in cash and cash equivalents was primarily caused by a $68.1 million increase in total loans, which was offset by a $39.4 million increase in deposits and a $9.2 million decrease in investment securities.

 

Loans.  Total loans, including $1.2 million of loans held for sale, were $1.406 billion at June 30, 2017, or 73.1% of total assets.  During the six months ended June 30, 2017, the loan portfolio, including loans held for sale, increased by $68.1 million, or 5.1%.  The increase in the loan portfolio primarily occurred as the production of new one- to four-family residential loans exceeded principal repayments and loan sales.

 

Securities.  At June 30, 2017, our securities portfolio totaled $398.5 million, or 20.7% of total assets.  During the six months ended June 30, 2017, the securities portfolio decreased by $9.2 million, or 2.2%.  The decrease in the securities portfolio is due to repayments and sales.  During the six months ended June 30, 2017, $20.0 million and $2.9 million of securities were purchased for the held-to-maturity and available-for-sale portfolios, respectively.

 

At June 30, 2017, none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.

 

At June 30, 2017, we owned a trust preferred security with an amortized cost of $756,000.  This security represents an investment 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 six transactions have occurred over the past 66 months in the same tranche of securities we own and no new issues of pooled trust preferred securities have occurred since 2007.  We use a discounted cash flow model to determine whether this security is 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 our review, our investment in the trust preferred security did not incur additional impairment during the six months ended June 30, 2017.

 

It is reasonably possible that the fair value of the trust preferred security could decline in the near term if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of this security remains low.  As a result, there is a risk that our remaining cost basis of $756,000 on the trust preferred security could be credit-related other-than-temporarily impaired in the near term.  The impairment, if any, could be material to our consolidated statements of income.

 

Deposits.  Deposits were $1.533 billion at June 30, 2017, an increase of $39.4 million, or 2.6%, since December 31, 2016.  The growth in deposits was primarily due to an increase of $25.7 million in certificates of deposit and an increase of $14.0 million in savings accounts during the six months ended June 30, 2017.  The increase in certificates of deposit is primarily due to an $11.2 million increase in public deposits and $7.0 million in new accounts at the new Keeaumoku branch.

 

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Borrowings.  Our borrowings consist of advances from the Federal Home Loan Bank and funds borrowed under securities sold under agreements to repurchase.  During the six months ended June 30, 2017, total borrowings remained constant at $124.0 million.  We have not required any additional borrowings to fund our operations.  Instead, we have primarily funded our operations with additional deposits, proceeds from loan sales and principal repayments on loans and mortgage-backed securities.

 

Stockholders’ Equity.  Total stockholders’ equity increased to $235.5 million at June 30, 2017 from $229.8 million at December 31, 2016.  The increase in stockholders’ equity occurred as our net income for the year exceeded dividends paid to stockholders.

 

Average Balances and Yields

 

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

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

 

 

2017

 

 

2016

 

 

 

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

Yield/Rate

 

 

Outstanding

 

 

 

 

Yield/Rate

 

 

 

 

Balance

 

Interest

 

(1)

 

 

Balance

 

Interest

 

(1)

 

 

 

 

(Dollars in thousands)

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage:

    

 

 

    

 

 

    

 

    

 

 

 

    

 

 

    

 

 

 

One- to four-family residential (2)

 

$

1,334,585

 

$

12,931

 

3.88

 %

 

$

1,187,545

 

$

12,027

 

4.05

%

 

Multi-family residential

 

 

9,429

 

 

111

 

4.71

 

 

 

9,720

 

 

113

 

4.65

 

 

Construction, commercial and other

 

 

22,438

 

 

251

 

4.47

 

 

 

23,971

 

 

275

 

4.59

 

 

Home equity loans and lines of credit

 

 

14,163

 

 

168

 

4.74

 

 

 

15,798

 

 

171

 

4.33

 

 

Other loans

 

 

5,159

 

 

66

 

5.12

 

 

 

4,445

 

 

61

 

5.49

 

 

Total loans

 

 

1,385,774

 

 

13,527

 

3.90

 

 

 

1,241,479

 

 

12,647

 

4.07

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

395,081

 

 

3,078

 

3.12

 

 

 

468,948

 

 

3,750

 

3.20

 

 

Trust preferred securities

 

 

1,016

 

 

 —

 

 —

 

 

 

920

 

 

 —

 

 —

 

 

Total securities

 

 

396,097

 

 

3,078

 

3.11

 

 

 

469,868

 

 

3,750

 

3.19

 

 

Other

 

 

53,779

 

 

172

 

1.28

 

 

 

75,154

 

 

146

 

0.78

 

 

Total interest-earning assets

 

 

1,835,650

 

 

16,777

 

3.66

 

 

 

1,786,501

 

 

16,543

 

3.70

 

 

Non-interest-earning assets

 

 

69,133

 

 

 

 

 

 

 

 

68,708

 

 

 

 

 

 

 

Total assets

 

$

1,904,783

 

 

 

 

 

 

 

$

1,855,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

1,030,240

 

 

1,077

 

0.42

% 

 

$

1,016,115

 

 

1,033

 

0.41

%

 

Certificates of deposit

 

 

244,801

 

 

683

 

1.12

 

 

 

231,944

 

 

426

 

0.73

 

 

Money market accounts

 

 

5,038

 

 

 5

 

0.40

 

 

 

2,208

 

 

 2

 

0.36

 

 

Checking and Super NOW accounts

 

 

181,037

 

 

10

 

0.02

 

 

 

172,785

 

 

 9

 

0.02

 

 

Total interest-bearing deposits

 

 

1,461,116

 

 

1,775

 

0.49

 

 

 

1,423,052

 

 

1,470

 

0.41

 

 

Federal Home Loan Bank advances

 

 

70,424

 

 

261

 

1.48

 

 

 

69,000

 

 

256

 

1.48

 

 

Securities sold under agreements to repurchase

 

 

55,000

 

 

217

 

1.58

 

 

 

55,000

 

 

218

 

1.59

 

 

Total interest-bearing liabilities

 

 

1,586,540

 

 

2,253

 

0.57

 

 

 

1,547,052

 

 

1,944

 

0.50

 

 

Non-interest-bearing liabilities

 

 

82,697

 

 

 

 

 

 

 

 

82,089

 

 

 

 

 

 

 

Total liabilities

 

 

1,669,237

 

 

 

 

 

 

 

 

1,629,141

 

 

 

 

 

 

 

Stockholders’ equity

 

 

235,546

 

 

 

 

 

 

 

 

226,068

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,904,783

 

 

 

 

 

 

 

$

1,855,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

14,524

 

 

 

 

 

 

 

$

14,599

 

 

 

 

Net interest rate spread (3)

 

 

 

 

 

 

 

3.09

% 

 

 

 

 

 

 

 

3.20

%

 

Net interest-earning assets (4)

 

$

249,110

 

 

 

 

 

 

 

$

239,449

 

 

 

 

 

 

 

Net interest margin (5)

 

 

 

 

 

 

 

3.16

% 

 

 

 

 

 

 

 

3.27

%

 

Interest-earning assets to interest-bearing liabilities

 

 

115.70

%  

 

 

 

 

 

 

 

115.48

%  

 

 

 

 

 

 


(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.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

 

2017

 

 

2016

 

 

 

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

    

 

 

Outstanding

 

 

 

 

Yield/Rate

 

 

Outstanding

 

 

 

 

Yield/Rate

 

 

 

 

Balance

 

Interest

 

(1)

 

 

Balance

 

Interest

 

(1)

 

 

 

 

(Dollars in thousands)

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential (2)

 

$

1,319,137

 

$

25,831

 

3.92

%  

 

$

1,171,385

 

$

23,807

 

4.06

%

 

Multi-family residential

 

 

9,467

 

 

222

 

4.69

 

 

 

9,754

 

 

228

 

4.68

 

 

Construction, commercial and other

 

 

22,981

 

 

522

 

4.54

 

 

 

22,354

 

 

517

 

4.63

 

 

Home equity loans and lines of credit

 

 

14,530

 

 

337

 

4.64

 

 

 

15,657

 

 

335

 

4.28

 

 

Other loans

 

 

4,960

 

 

128

 

5.16

 

 

 

4,488

 

 

121

 

5.39

 

 

Total loans

 

 

1,371,075

 

 

27,040

 

3.94

 

 

 

1,223,638

 

 

25,008

 

4.09

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

396,651

 

 

6,159

 

3.11

 

 

 

477,638

 

 

7,625

 

3.19

 

 

Trust preferred securities

 

 

1,080

 

 

 —

 

 —

 

 

 

918

 

 

 —

 

 —

 

 

Total securities

 

 

397,731

 

 

6,159

 

3.10

 

 

 

478,556

 

 

7,625

 

3.19

 

 

Other

 

 

63,663

 

 

359

 

1.13

 

 

 

74,183

 

 

290

 

0.78

 

 

Total interest-earning assets

 

 

1,832,469

 

 

33,558

 

3.66

 

 

 

1,776,377

 

 

32,923

 

3.71

 

 

Non-interest-earning assets

 

 

68,936

 

 

 

 

 

 

 

 

68,608

 

 

 

 

 

 

 

Total assets

 

$

1,901,405

 

 

 

 

 

 

 

$

1,844,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

1,029,066

 

 

2,115

 

0.41

%  

 

$

1,012,577

 

 

2,057

 

0.41

%

 

Certificates of deposit

 

 

246,247

 

 

1,282

 

1.04

 

 

 

231,192

 

 

799

 

0.69

 

 

Money market accounts

 

 

4,538

 

 

10

 

0.44

 

 

 

1,978

 

 

 4

 

0.40

 

 

Checking and Super NOW accounts

 

 

180,370

 

 

19

 

0.02

 

 

 

169,855

 

 

18

 

0.02

 

 

Total interest-bearing deposits

 

 

1,460,221

 

 

3,426

 

0.47

 

 

 

1,415,602

 

 

2,878

 

0.41

 

 

Federal Home Loan Bank advances

 

 

69,716

 

 

515

 

1.48

 

 

 

69,000

 

 

513

 

1.49

 

 

Securities sold under agreements to repurchase

 

 

55,000

 

 

433

 

1.57

 

 

 

55,000

 

 

436

 

1.59

 

 

Total interest-bearing liabilities

 

 

1,584,937

 

 

4,374

 

0.55

 

 

 

1,539,602

 

 

3,827

 

0.50

 

 

Non-interest-bearing liabilities

 

 

82,290

 

 

 

 

 

 

 

 

81,072

 

 

 

 

 

 

 

Total liabilities

 

 

1,667,227

 

 

 

 

 

 

 

 

1,620,674

 

 

 

 

 

 

 

Stockholders’ equity

 

 

234,178

 

 

 

 

 

 

 

 

224,311

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,901,405

 

 

 

 

 

 

 

$

1,844,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

29,184

 

 

 

 

 

 

 

$

29,096

 

 

 

 

Net interest rate spread (3)

 

 

 

 

 

 

 

3.11

%  

 

 

 

 

 

 

 

3.21

%

 

Net interest-earning assets (4)

 

$

247,532

 

 

 

 

 

 

 

$

236,775

 

 

 

 

 

 

 

Net interest margin (5)

 

 

 

 

 

 

 

3.19

%  

 

 

 

 

 

 

 

3.28

%

 

Interest-earning assets to interest-bearing liabilities

 

 

115.62

%  

 

 

 

 

 

 

 

115.38

%  

 

 

 

 

 

 


(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.

 

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Comparison of Operating Results for the Three months Ended June 30, 2017 and 2016

 

General.  Net income increased by $264,000, or 6.5%, from $4.0 million for the three months ended June 30, 2016 to $4.3 million for the three months ended June 30, 2017.  The increase in net income was due to a $207,000 decrease in loan loss provisions and a $234,000 decrease in noninterest expense.  These were partially offset by a $75,000 decrease in net interest income, a $75,000 decrease in noninterest income and a $27,000 increase in income taxes.

 

Net Interest Income.  Net interest income decreased by $75,000, or 0.5%, to $14.5 million for the three months ended June 30, 2017 compared to $14.6 million for the three months ended June 30, 2016.  Interest income increased by $234,000, or 1.4%, due to a $49.1 million increase in the average balance of interest-earning assets.  This was offset by a four basis point decrease in the yield of average interest-earning assets.  Interest expense increased by $309,000, or 15.9%, due to a $39.5 million increase in the average balance of interest-bearing liabilities and a seven basis point increase in the cost of average interest-bearing liabilities. The interest rate spread and net interest margin were 3.09% and 3.16%, respectively, for the three months ended June 30, 2017, compared to 3.20% and 3.27% respectively, for the three months ended June 30, 2016.  The decreases in the interest rate spread and in the net interest margin are attributed to a four basis point decrease in the yield of average interest-earning assets and a seven basis point increase in the cost of average interest-bearing liabilities.  The decrease in the yield on average interest-earning assets was primarily due to the principal repayments on higher-yielding mortgage loans and securities and the addition of new mortgage loans and securities with lower rates.  The increase in the cost of average interest-bearing liabilities was primarily due to a 39 basis point increase in the cost of certificates of deposit, primarily public deposits, as new certificates of deposit with higher interest rates were opened.

 

Interest Income.  Interest income increased by $234,000, or 1.4%, to $16.8 million for the three months ended June 30, 2017 from $16.5 million for the three months ended June 30, 2016.  Interest income on loans increased by $880,000, or 7.0%, to $13.5 million for the three months ended June 30, 2017 from $12.6 million for the three months ended June 30, 2016.  The increase in interest income on loans occurred primarily because the average balance of loans grew by $144.3 million, or 11.6%, 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 17 basis point decline in the average loan yield to 3.90% for the three months ended June 30, 2017 from 4.07% for the three months ended June 30, 2016.  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 $672,000, or 17.9%, to $3.1 million for the three months ended June 30, 2017 from $3.8 million for the three months ended June 30, 2016.  The decrease in interest income on securities occurred because of a $73.8 million decrease in the average securities balance, primarily due to principal repayments, and an eight basis point decrease in the average securities yield. The decline in the average yield on securities occurred because of repayments on higher-yielding securities and additions of new securities with lower yields to the securities portfolio.

 

Interest Expense.  Interest expense increased by $309,000, or 15.9%, to $2.3 million for the three months ended June 30, 2017.  Interest expense on deposits increased by $305,000, or 20.7%, from $1.5 million for the three months ended June 30, 2016 to $1.8 million for the three months ended June 30, 2017.  The increase in interest expense on deposits was due to an increase in the average outstanding balance and the average rate paid on deposits.  The average outstanding balance of deposits increased by $38.1 million, or 2.7%, to $1.461 billion for the three months ended June 30, 2017 compared to $1.423 billion for the three months ended June 30, 2016.  The growth in deposits is primarily due to a $22.4 million increase in the average balance of savings and checking accounts and a $12.9 million increase in the average balance of certificates of deposit.  The average rate paid on deposits increased by eight basis points from 0.41% for the three months ended June 30, 2016 to 0.49% for the three months ended June 30, 2017, primarily due to a 39 basis point increase in certificate of deposit rates.  The increase in the average rate paid on certificates of deposit is primarily due to higher interest rates paid on newly opened public deposits.  Because our public deposits carry higher rates than retail deposits, any increase in current interest rates or in our level of public deposits may continue to increase our interest expense.

 

Provision for Loan Losses.  We reversed provisions for loan losses of $123,000 for the three months ended June 30, 2017 and recorded a provision for loan losses of $84,000 for the three months ended June 30, 2016.  The

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reversal/provision for loan losses included net recoveries of $40,000 and $9,000 for the three months ended June 30, 2017 and 2016, respectively.  The reversal of loan loss provisions in the three months ended June 30, 2017 occurred as a result of improving credit quality of the loan portfolio and a reduction in loan losses. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.18% at June 30, 2017 and 2016, respectively.  Nonaccrual loans totaled $3.4 million at June 30, 2017, or 0.24% of total loans at that date, compared to $5.1 million of nonaccrual loans at June 30, 2016, or 0.40% of total loans at that date.  Nonaccrual loans as of June 30, 2017 and 2016 consisted primarily of one- to four-family residential real estate loans.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2017 and 2016.  For additional information see note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.

 

Noninterest Income.  The following table summarizes changes in noninterest income between the three months ended June 30, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Service fees on loan and deposit accounts

 

$

507

 

$

473

 

$

34

 

7.2

%  

 

Income on bank-owned life insurance

 

 

227

 

 

240

 

 

(13)

 

(5.4)

%

 

Gain on sale of investment securities

 

 

186

 

 

190

 

 

(4)

 

(2.1)

%

 

Gain on sale of loans

 

 

63

 

 

129

 

 

(66)

 

(51.2)

%  

 

Other

 

 

76

 

 

102

 

 

(26)

 

(25.5)

%  

 

Total

 

$

1,059

 

$

1,134

 

$

(75)

 

(6.6)

%

 

 

Noninterest income decreased by $75,000 for the three months ended June 30, 2017 compared to the three months ended June 30, 2016.  During the three months ended June 30, 2017 and 2016, $8.6 million and $13.2 million, respectively, of mortgage loans held for sale were sold and gains of $63,000 and $129,000, respectively, were recognized.  During the three months ended June 30, 2017, service fees on loan and deposit accounts increased by $34,000, primarily due to an increase in fee income from brokering loans to other financial institutions and a decrease in the amortization of premiums on loans sold.  Other income decreased by $26,000 primarily due to a decrease in commissions earned on annuity sales.

 

Noninterest Expense.  The following table summarizes changes in noninterest expense between the three months ended June 30, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

June 30,

 

 

Change

 

 

 

2017

 

2016

 

$ Change

    

% Change

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Salaries and employee benefits

 

$

4,935

 

$

5,256

 

$

(321)

 

(6.1)

%  

 

Occupancy

 

 

1,461

 

 

1,433

 

 

28

 

2.0

%  

 

Equipment

 

 

882

 

 

912

 

 

(30)

 

(3.3)

%  

 

Federal deposit insurance premiums

 

 

148

 

 

227

 

 

(79)

 

(34.8)

%  

 

Other general and administrative expenses

 

 

1,328

 

 

1,160

 

 

168

 

14.5

%  

 

Total

 

$

8,754

 

$

8,988

 

$

(234)

 

(2.6)

%  

 

 

Noninterest expense decreased by $234,000 for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. Salaries and employee benefits expense decreased by $321,000 to $4.9 million for the three months ended June 30, 2017 from $5.3 million for the three months ended June 30, 2016 primarily due to a decrease in share-based compensation.  The reduction in the cost of share-based compensation plans occurred as the majority of awards under our 2010 equity incentive plan became fully vested in 2016. The decrease in share-based compensation expense was partially offset by an annual salary increase and a decrease in the capitalized cost of new loan originations. The decrease in the capitalized cost of new loan originations in 2017 occurred as we closed fewer loans

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during the three months ended June 30, 2017 compared to the three months ended June 30, 2016.  The increase in other general and administrative expenses was mainly due to increases in legal, audit, consulting, marketing and other miscellaneous expenses.  Federal deposit insurance premiums declined because of a decrease in the insurance premium rate on deposits.  The decrease in equipment expense was primarily due to decreases in equipment depreciation expense and repairs and maintenance on equipment, which were partially offset by an increase in data processing expense.

 

Income Tax Expense.  Income taxes were $2.7 million for the three months ended June 30, 2017, reflecting an effective tax rate of 38.1%, compared to $2.6 million for the three months ended June 30, 2016, reflecting an effective tax rate of 39.4%.

 

Income tax expense in the second quarter of 2017 included a $183,000 tax benefit related to the exercise of stock options.  Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the exercise of stock options be recognized in income tax expense.  Prior to the adoption of the new standard, the excess tax benefits were recorded as additional paid-in-capital.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.

 

 

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

 

General.  Net income increased by $801,000, or 10.2%, from $7.8 million for the six months ended June 30, 2016 to $8.6 million for the six months ended June 30, 2017.  The increase in net income was due to a $586,000 decrease in noninterest expense, a $164,000 decrease in loan loss provisions, an $88,000 increase in net interest income and a $61,000 increase in noninterest income.  These were partially offset by a $98,000 increase in income taxes.

 

Net Interest Income.  Net interest income increased by $88,000, or 0.3%, to $29.2 million for the six months ended June 30, 2017 compared to $29.1 million for the six months ended June 30, 2016.  Interest income increased by $635,000, or 1.9%, due to a $56.1 million increase in the average balance of interest-earning assets.  This was offset by a five basis point decrease in the yield of average interest-earning assets.  Interest expense increased by $547,000, or 14.3%, due to a $45.3 million increase in the average balance of interest-bearing liabilities and a five basis point increase in the cost of average interest-bearing liabilities. The interest rate spread and net interest margin were 3.11% and 3.19%, respectively, for the six months ended June 30, 2017, compared to 3.21% and 3.28% respectively, for the six months ended June 30, 2016.  The decreases in the interest rate spread and in the net interest margin are attributed to a five basis point decrease in the yield of average interest-earning assets and a five basis point increase in the cost of average interest-bearing liabilities.  The decrease in the yield of average interest-earning assets was primarily due to the principal repayments on higher-yielding mortgage loans and securities and the addition of new mortgage loans and securities with lower rates.  The increase in the cost of average interest-bearing liabilities was primarily due to a 35 basis point increase in the cost of certificates of deposit, primarily public deposits, as new certificates of deposit with higher interest rates were opened.

 

Interest Income.  Interest income increased by $635,000, or 1.9%, to $33.6 million for the six months ended June 30, 2017 from $32.9 million for the six months ended June 30, 2016.  Interest income on loans increased by $2.0 million, or 8.1%, to $27.0 million for the six months ended June 30, 2017 from $25.0 million for the six months ended June 30, 2016.  The increase in interest income on loans occurred primarily because the average balance of loans grew by $147.4 million, or 12.0%, 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 3.94% for the six months ended June 30, 2017 from 4.09% for the six months ended June 30, 2016.  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 $1.5 million, or 19.2%, to $6.2 million for the six months ended June 30, 2017 from $7.6 million for the six months ended June 30, 2016.  The decrease in interest income on securities occurred because of an $80.8 million decrease in the average securities balance and a nine basis point decrease in the average securities yield.  The decline in the average yield on securities occurred because of repayments on higher-yielding securities and additions of new securities with lower yields to the securities portfolio.

 

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Interest Expense.  Interest expense increased by $547,000, or 14.3%, to $4.4 million for the six months ended June 30, 2017.  Interest expense on deposits increased by $548,000, or 19.0%, from $2.9 million for the six months ended June 30, 2016 to $3.4 million for the six months ended June 30, 2017. The increase in interest expense on deposits was due to an increase in the average outstanding balance and the average rate paid on deposits. The average outstanding balance of deposits increased by $44.6 million, or 3.2%, to $1.460 billion for the six months ended June 30, 2017 compared to $1.416 billion for the six months ended June 30, 2016.  The growth in deposits is primarily due to a $16.5 million increase in the average balance of savings accounts, a $15.1 million increase in the average balance of certificates of deposit and a $10.5 million increase in the average balance of checking accounts.  The average rate paid on deposits increased by six basis points from 0.41% for the six months ended June 30, 2016 to 0.47% for the six months ended June 30, 2017, primarily due to a 35 basis point increase in certificate of deposit rates.  The increase in the average rate paid on certificates of deposit is primarily due to higher interest rates paid on public deposits.  Because our public deposits carry higher rates than retail deposits, any increase in current interest rates or in our level of public deposits may continue to increase our interest expense.

 

Provision for Loan Losses.  We reversed provisions for loan losses of $52,000 for the six months ended June 30, 2017 and recorded a provision for loan losses of $112,000 for the six months ended June 30, 2016.  The reversal/provision for loan losses included net recoveries of $57,000 for the six months ended June 30, 2017 and net charge-offs of $2,000 for the six months ended June 30, 2016.  The reversal of loan loss provisions in the six months ended June 30, 2017 occurred as a result of improving credit quality of the loan portfolio and a reduction in loan losses.  The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.18% at June 30, 2017 and 2016, respectively.  Nonaccrual loans totaled $3.4 million at June 30, 2017, or 0.24% of total loans at that date, compared to $5.1 million of nonaccrual loans at June 30, 2016, or 0.40% of total loans at that date.  Nonaccrual loans as of June 30, 2017 and 2016 consisted primarily of one- to four-family residential real estate loans.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2017 and 2016.  For additional information see note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.

 

Noninterest Income.  The following table summarizes changes in noninterest income between the six months ended June 30, 2017 and 2016. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

 

2017

 

2016

 

$ Change

    

% Change

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Service fees on loan and deposit accounts

 

$

1,063

 

$

929

 

$

134

 

14.4

%  

 

Income on bank-owned life insurance

 

 

453

 

 

487

 

 

(34)

 

(7.0)

%

 

Gain on sale of investment securities

 

 

281

 

 

190

 

 

91

 

47.9

%

 

Gain on sale of loans

 

 

126

 

 

190

 

 

(64)

 

(33.7)

%  

 

Other

 

 

158

 

 

224

 

 

(66)

 

(29.5)

%  

 

Total

 

$

2,081

 

$

2,020

 

$

61

 

3.0

%

 

 

Noninterest income increased by $61,000 for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.  During the six months ended June 30, 2017, service fees on loan and deposit accounts increased by $134,000, primarily due to incentives received on a new debit card agreement and a decrease in the amortization of premiums on loans sold.  During the six months ended June 30, 2017 and 2016, we received proceeds of $5.1 million and $3.1 million, respectively, from the sale of $4.8 million and $2.9 million, respectively, of held-to-maturity mortgage-backed securities, resulting in gross realized gains of $281,000 and $190,000, respectively. The sale of these mortgage-backed securities, for which we had already collected a substantial portion of the original purchased principal (at least 85%), is in accordance with the Investments — Debt and Equity Securities topic of the FASB ASC and does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.  Other income decreased by $66,000 primarily due to a decrease in commissions earned on annuity sales.  During the six months ended June 30, 2017 and 2016, the Company sold $16.6 million and $24.1 million, respectively, of mortgage loans held for sale and recognized gains of $126,000 and $190,000, respectively. 

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Noninterest Expense.  The following table summarizes changes in noninterest expense between the six months ended June 30, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30,

 

Change

    

 

 

 

2017

    

2016

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Salaries and employee benefits

 

$

10,053

 

$

10,682

 

$

(629)

 

(5.9)

%  

 

Occupancy

 

 

2,910

 

 

2,853

 

 

57

 

2.0

%  

 

Equipment

 

 

1,748

 

 

1,818

 

 

(70)

 

(3.9)

%  

 

Federal deposit insurance premiums

 

 

296

 

 

452

 

 

(156)

 

(34.5)

%  

 

Other general and administrative expenses

 

 

2,454

 

 

2,242

 

 

212

 

9.5

%  

 

Total

 

$

17,461

 

$

18,047

 

$

(586)

 

(3.2)

%  

 

 

Noninterest expense decreased by $586,000 for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Salaries and employee benefits expense decreased by $629,000 to $10.1 million for the six months ended June 30, 2017 from $10.7 million for the six months ended June 30, 2016 primarily due to a decrease in share-based compensation. The reduction in the cost of share-based compensation plans occurred as the majority of awards under our 2010 equity incentive plan became fully vested in 2016.  The decrease in share-based compensation expense was partially offset by an annual salary increase, an increase in accruals for incentive compensation and a decrease in the capitalized cost of new loan originations.  The decrease in capitalized cost of new loan originations occurred as we closed fewer loans in the six months ended June 30, 2017 compared to the six months ended June 30, 2016.  Federal deposit insurance premiums declined because of a decrease in the insurance premium rate on deposits.  The decrease in equipment expense was primarily due to a decrease in equipment depreciation expense and service bureau expense.  The increase in other general and administrative expenses was mainly due to increases in legal, audit, consulting and other miscellaneous expenses.  The increase in occupancy expense was due to an increase in rent expense.

 

Income Tax Expense.  Income taxes were $5.2 million for the six months ended June 30, 2017, reflecting an effective tax rate of 37.8%, compared to $5.1 million for the six months ended June 30, 2016, reflecting an effective tax rate of 39.6%.

 

Income tax expense through the second quarter of 2017 included a $392,000 tax benefit related to the exercise of stock options.  Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the exercise of stock options be recognized in income tax expense.  Prior to the adoption of the new standard, the excess tax benefits were recorded as additional paid-in-capital.  The amount of tax benefits or deficiencies recognized in income tax expense depends on the number of options exercised and the difference in the stock prices at the exercise and grant dates.

 

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations.  Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments, advances from the Federal Home Loan Bank, securities sold under agreements to repurchase, proceeds from loan 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 Chief Financial Officer and our Vice President and Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies.  We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2017.

 

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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 June 30, 2017, our cash and cash equivalents totaled $47.9 million. On that date, we had $55.0 million in securities sold under agreements to repurchase outstanding and $69.0 million of Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $608.5 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.

 

At June 30, 2017, we had $29.0 million in loan commitments outstanding, most of which were for fixed-rate loans, and had $26.9 million in unused lines of credit to borrowers.  Certificates of deposit due within one year at June 30, 2017 totaled $115.6 million, or 7.5% of total deposits.  If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2018.  We believe, however, based on past experience, that a significant portion of such deposits will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are originating loans and purchasing mortgage-backed securities.  During the six months ended June 30, 2017 and 2016 we originated $171.1 million and $166.5 million of loans, respectively and purchased $22.9 million and $1.2 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 $39.4 million and $24.7 million for the six months ended June 30, 2017 and 2016, 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, which provide an additional source of funds.  Federal Home Loan Bank advances remained constant at $69.0 million during the six months ended June 30, 2017 and 2016.  We had the ability to borrow up to an additional $608.5 million and $577.9 million from the Federal Home Loan Bank as of June 30, 2017 and December 31, 2016, respectively.  We also utilize securities sold under agreements to repurchase as another borrowing source.  Securities sold under agreements to repurchase remained constant at $55.0 million for the six months ended June 30, 2017 and 2016.

 

Territorial Bancorp Inc. is a separate legal entity from Territorial Savings Bank and must provide for its own liquidity to pay dividends, repurchase shares of its common stock and for other corporate purposes.  Territorial Bancorp Inc.’s primary source of liquidity is dividend payments from Territorial Savings Bank.  The ability of Territorial Savings

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Bank to pay dividends to Territorial Bancorp Inc. is subject to regulatory requirements.  At June 30, 2017, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of $19.1 million.

 

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 three years as a condition of membership.  Effective January 1, 2015, the well capitalized threshold for Tier 1 risk-based capital 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.  The capital requirements become fully-phased in on January 1, 2019.  At June 30, 2017, Territorial Savings Bank and the Company exceeded all of the fully-phased in regulatory capital requirements and are considered to be “well capitalized” under regulatory guidelines.  The tables below present the fully-phased in 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 Territorial Savings Bank and the Company at June 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Required Ratio

    

 

Actual Amount

    

Actual Ratio

 

June 30, 2017:

 

 

 

 

 

 

 

 

 Tier 1 Leverage Capital

 

 

 

 

 

 

 

 

Territorial Savings Bank (1)

 

9.00

%

$

220,452

 

11.60

%

Territorial Bancorp Inc.

 

5.00

%

$

240,798

 

12.67

%

 Common Equity Tier 1 Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

9.00

%

$

220,452

 

24.76

%

Territorial Bancorp Inc.

 

9.00

%

$

240,798

 

27.03

%

 Tier 1 Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

10.50

%

$

220,452

 

24.76

%

Territorial Bancorp Inc.

 

10.50

%

$

240,798

 

27.03

%

 Total Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

12.50

%

$

222,996

 

25.05

%

Territorial Bancorp Inc.

 

12.50

%

$

243,342

 

27.32

%

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 Tier 1 Leverage Capital

 

 

 

 

 

 

 

 

Territorial Savings Bank (1)

 

9.00

%

$

219,365

 

11.76

%

Territorial Bancorp Inc.

 

5.00

%

$

235,102

 

12.60

%

 Common Equity Tier 1 Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

9.00

%

$

219,365

 

25.30

%

Territorial Bancorp Inc.

 

9.00

%

$

235,102

 

27.11

%

 Tier 1 Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

10.50

%

$

219,365

 

25.30

%

Territorial Bancorp Inc.

 

10.50

%

$

235,102

 

27.11

%

 Total Risk-Based Capital (2)

 

 

 

 

 

 

 

 

Territorial Savings Bank

 

12.50

%

$

221,912

 

25.59

%

Territorial Bancorp Inc.

 

12.50

%

$

237,649

 

27.41

%


(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.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments.  As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.  Such commitments are subject to the same credit policies and approval process accorded to loans we make.  In addition, we enter into commitments to sell mortgage loans.

 

Contractual Obligations.  In the ordinary course of our operations, we enter into certain contractual obligations.  Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.  Except for an increase of $25.7 million in certificates of deposit and a decrease of $21.5 million in loan commitments between December 31, 2016 and June 30, 2017, there have not been any material changes in contractual obligations and funding needs since December 31, 2016.

 

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 deposit accounts, securities sold under agreements to repurchase and Federal Home Loan Bank advances.  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.  We sold $16.6 million and $24.1 million of fixed-rate mortgage loans for the six months ended June 30, 2017 and 2016, respectively, to reduce our interest rate risk. 

 

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.

 

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The following table presents our internal calculations of the estimated changes in our EVE as of March 31, 2017 (the latest date for which we have available information) that would result from the designated instantaneous changes in the interest rate yield curve.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease) in

 

 

 

 

 

 

 

Estimated 

 

 

 

EVE Ratio as a

 

EVE Ratio as a

 

 

Change in

 

 

 

 

Increase 

 

 

 

Percent of

 

Percent of

 

 

Interest Rates

 

Estimated EVE

 

(Decrease) in 

 

Percentage

 

Present Value

 

Present Value of

 

 

(bp) (1)

 

(2)

 

EVE

 

 Change in EVE

 

of Assets (3)(4)

 

Assets (3)(4)

 

 

(Dollars in thousands)

 

 

+400

 

$

180,695

 

$

(67,107)

 

(27.08)

%  

11.46

%  

(1.43)

%

 

+300

 

$

203,608

 

$

(44,194)

 

(17.83)

%  

12.26

%  

(0.63)

%

 

+200

 

$

226,516

 

$

(21,286)

 

(8.59)

%  

12.95

%  

0.06

%

 

+100

 

$

244,893

 

$

(2,909)

 

(1.17)

%  

13.31

%  

0.42

%

 

0

 

$

247,802

 

$

 —

 

 —

%  

12.89

%  

 —

%

 

-100

 

$

221,830

 

$

(25,972)

 

(10.48)

%  

11.18

%  

(1.71)

%

 


(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 Freddie Mac mortgage-backed securities have declined by eight basis points between March 31, 2017 and June 30, 2017.  The decrease in interest rates has not likely had a material effect on estimated EVE.

 

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 Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2017. 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 Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2017, 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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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 to the risk factors as disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2016.

 

 

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 three months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number of

 

 

 

 

 

 

 

 

Shares Purchased as

 

Shares That May Yet

 

 

 

 

 

Average Price

 

Part of Publicly

 

be Purchased Under

 

 

 

Total Number of

 

Paid per

 

Announced Plans or

 

the Plans or

 

Period

 

Shares Purchased (1)

 

Share

 

Programs

 

Programs (2)

 

April 1, 2017 through April 30, 2017

 

30,728

 

$

31.59

 

 —

 

217,300

 

May 1, 2017 through May 31, 2017

 

 —

 

 

 —

 

 

217,300

 

June 1, 2017 through June 30, 2017

 

 —

 

 

 —

 

 —

 

217,300

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

30,728

 

$

31.59

 

 —

 

217,300

 

______________________________

(1)

Includes shares repurchased by the Company to pay the exercise price in connection with stock swap or net settlement transactions related to the exercise of stock options.

(2)

On or about March 7, 2016, our Board of Directors authorized the repurchase of up to 275,000 shares of our common stock.  We have entered into a Rule 10b5-1 plan with respect to our stock repurchase plan.  The repurchase plan has no expiration date.

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.      OTHER INFORMATION

 

None.

 

ITEM 6.      EXHIBITS

 

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

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SIGNATURES

 

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

 

 

 

 

TERRITORIAL BANCORP INC.

 

(Registrant)

 

 

 

 

Date: August 8, 2017

/s/ Allan S. Kitagawa

 

Allan S. Kitagawa

 

Chairman of the Board, President and

 

Chief Executive Officer

 

 

 

 

Date: August 8, 2017

/s/ Melvin M. Miyamoto

 

Melvin M. Miyamoto

 

Senior Vice President and Chief Financial Officer

 

 

45


 

Table of Contents

INDEX TO EXHIBITS

 

 

 

 

Exhibit

 

 

Number

 

Description

10.1

 

Territorial Bancorp Inc. 2010 Equity Incentive Plan, as amended and restated (incorporated by reference to Appendix A to the proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 24, 2017 (File No. 001-34403))

 

 

 

10.2

 

Territorial Bancorp Inc. Annual Incentive Plan, as amended (incorporated by reference to Appendix B to the proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 24, 2017 (File No. 001-34403))

 

 

 

10.3

 

Form of Restricted Stock Unit Award Agreement (performance-based vesting) (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8, filed with the Securities and Exchange Commission on June 14, 2017 (File No. 333-218723))

 

 

 

10.4

 

Form of Restricted Stock Unit Award Agreement (time-based vesting) (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8, filed with the Securities and Exchange Commission on June 14, 2017 (File No. 333-218723))

 

 

 

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 Chief Financial Officer, 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 Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from Territorial Bancorp, Inc’s Form 10-Q report for the quarter ended March 31, 2017, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

 

 

 

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

 

 

46