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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-155388
Prospectus Supplement
Interests in
TERRITORIAL SAVINGS BANK
PROFIT SHARING AND 401(k) PLAN
Offering of Participation Interests in up to 939,221 Shares of
TERRITORIAL BANCORP INC.
Common Stock
In connection with the conversion of Territorial Mutual Holding Company from the mutual to the stock form of organization, Territorial Bancorp Inc. is allowing participants in the Territorial Savings Bank Profit Sharing and 401(k) Plan (the “Plan”) to invest all or a portion of their accounts in stock units representing an ownership interest in the common stock of Territorial Bancorp Inc. Based upon the value of the Plan assets at April 30, 2009 (i.e., $9,392,215) the trustee of the Plan could purchase up to 939,221 shares of Territorial Bancorp Inc. common stock, at the purchase price of $10.00 per share. This prospectus supplement relates to the initial election of Plan participants to direct the trustee of the Plan to invest all or a portion of their Plan accounts in stock units representing an ownership interest in the Territorial Bancorp Inc. Stock Fund at the time of the stock offering.
The prospectus of Territorial Bancorp Inc., dated May 15, 2009, accompanies this prospectus supplement. It contains detailed information regarding the conversion and stock offering of Territorial Bancorp Inc. common stock and the financial condition, results of operations and business of Territorial Mutual Holding Company and Territorial Savings Bank. This prospectus supplement provides information regarding the Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.
For a discussion of risks that you should consider, see the “Risk Factors” section of the prospectus.
The interests in the Plan and the offering of Territorial Bancorp Inc. common stock have not been approved or disapproved by the Office of Thrift Supervision, the Securities and Exchange Commission or any other federal or state agency. Any representation to the contrary is a criminal offense.
The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
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This prospectus supplement may be used only in connection with offers and sales by Territorial Bancorp Inc. of interests or shares of common stock pursuant to the Plan. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the Plan.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Territorial Bancorp Inc., Territorial Savings Bank and the Plan have not authorized anyone to provide you with information that is different.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock or stock units representing an ownership interest in Territorial Bancorp Inc. common stock shall under any circumstances imply that there has been no change in the affairs of Territorial Bancorp Inc. or any of its subsidiaries or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is May 15, 2009.
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| Election to Purchase Common Stock in the Offering: Priorities |
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| Direction to Purchase Territorial Bancorp Inc. Stock Fund Units after the Offering |
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| Securities and Exchange Commission Reporting and Short-Swing Profit Liability |
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Territorial Savings Bank originally adopted the Territorial Savings Bank Profit Sharing 401(k) Plan on January 1, 1973, and amended and restated it effective January 1, 2002 and January 1, 2009 (referred to as the “Plan”). The Plan is a tax-qualified plan with a cash or deferred compensation feature established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”).
Territorial Savings Bank intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. Territorial Savings Bank will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act of 1974 (“ERISA”). The Plan is an “individual account plan” other than a “money purchase pension plan” within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan.
Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan are available to all employees by filing a request with the Plan Administrator c/o Territorial Savings Bank, Attn: Karen J. Cox, Senior Vice President-Administration; telephone number: (808) 951-1244; fax: (808) 951-1250; email: Karen.Cox@TerritorialSavings.net. You are urged to read carefully the full text of the Plan.
As an employee of Territorial Savings Bank, you are eligible to become a participant in the Plan on the first day of the month after you have reached age 21 and completed 1,000 hours of service in a 12-consecutive-month period with Territorial Savings Bank. Union employees, nonresident aliens who receive no earned income from the U.S., leased employees and independent contractors are not eligible to participate in the Plan. Individuals who became employees as the result of an acquisition, merger or similar transaction will be excluded from participation only during the transition period. The Plan year is January 1 to December 31 (the “Plan Year”).
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As of April 30, 2009, there were approximately 228 employees, former employees and beneficiaries eligible to participate in the Plan.
Elective Deferrals. You are permitted to defer on a pre-tax basis up to 100% of your monthly salary (expressed in terms of whole percentages), subject to certain restrictions imposed by the Code, and to have that amount contributed to the Plan on your behalf. For purposes of the Plan, “salary” means your W-2 wages. In 2009, the annual salary of each participant taken into account under the Plan is limited to $245,000. (Limits established by the Internal Revenue Service are subject to increase pursuant to an annual cost-of-living adjustment, as permitted by the Code). You may elect to modify the amount contributed to the Plan by filing a new elective deferral agreement with the Plan administrator at the beginning of each pay period.
Employer Matching Contributions. Territorial Savings Bank may make discretionary matching contributions to the Plan, based on a percentage of compensation that each employee contributes to the Plan. The percentage of matching contributions will be determined by Territorial Savings Bank, in its sole discretion, from year to year.
Employer Profit Sharing Contributions. Territorial Savings Bank may make discretionary profit sharing contributions to the Plan.
Limitations on Employee Salary Deferrals. For the Plan Year beginning January 1, 2009, the amount of your before-tax contributions may not exceed $16,500 per calendar year. Contributions in excess of this limit are known as excess deferrals. If you defer amounts in excess of this limitation, your gross income for federal income tax purposes will include the excess in the year of the deferral. In addition, unless the excess deferral is distributed before April 15 of the following year, it will be taxed again in the year distributed. Income on the excess deferral distributed by April 15 of the immediately succeeding year will be treated, for federal income tax purposes, as earned and received by you in the tax year in which the contribution is made.
Catch-up Contributions. If you have made the maximum amount of regular before-tax contributions allowed by the Plan or other legal limits and you have attained at least age 50 (or will reach age 50 prior to the end of the plan year), you are also eligible to make an additional catch-up contribution. You may authorize your employer to withhold a specified dollar amount of your compensation for this purposes. For 2009, the maximum catch-up contribution is $5,500.
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Vesting. At all times, you have a fully vested, nonforfeitable interest in your elective deferral contributions and in the employer matching contributions and profit sharing contributions, if any, and in any earnings related thereto.
Investment of Contributions and Account Balances
All amounts credited to your accounts under the Plan are held in the Plan trust (the “Trust”), which is administered by the trustee appointed by Territorial Savings Bank’s Board of Directors.
Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one of the following funds:
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The following table provides performance data with respect to the investment funds available under the Plan through April 30, 2009 for average annual total returns and for year-to-date returns as of April 30, 2009:
| Fund Name |
Expense Ratio |
YTD Returns as of Apr 30, 2009 |
Average Annual Total Returns as of Apr 30, 2009 | |||||||||||||||
| 1 Year | 3 Year | 5 Year | 10 Year | |||||||||||||||
| Vanguard 500 Index Fund |
0.15 | % | -2.50 | % | -35.31 | % | -10.84 | % | -2.80 | % | -2.56 | % | ||||||
| Vanguard Growth Index Fund |
0.22 | % | 4.56 | % | -32.29 | % | -8.49 | % | -2.26 | % | -3.50 | % | ||||||
| Vanguard International Growth Fund |
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| Redemption Fee: 2% if held < 2 months |
0.51 | % | 1.07 | % | -42.19 | % | -10.89 | % | 1.67 | % | 1.05 | % | ||||||
| Vanguard LifeStrategy Conservative Growth Fund |
0.24 | % | 0.28 | % | -17.97 | % | -2.58 | % | 1.47 | % | 2.49 | % | ||||||
| Vanguard LifeStrategy Growth Fund |
0.23 | % | -1.44 | % | -32.62 | % | -8.91 | % | -0.68 | % | -0.01 | % | ||||||
| Vanguard LifeStrategy Moderate Growth Fund |
0.23 | % | -0.80 | % | -25.07 | % | -5.41 | % | 0.65 | % | 1.44 | % | ||||||
| Vanguard Prime Money Market Fund |
0.24 | % | 0.38 | % | 1.97 | % | 3.90 | % | 3.40 | % | 3.36 | % | ||||||
| Vanguard Small-Cap Index Fund |
0.22 | % | 2.30 | % | -31.73 | % | -11.99 | % | -0.60 | % | 3.27 | % | ||||||
| Vanguard Target Retirement 2005 Fund |
0.19 | % | 0.62 | % | -14.66 | % | -0.69 | % | 1.97 | % | — | |||||||
| Vanguard Target Retirement 2010 Fund |
0.20 | % | 0.23 | % | -19.23 | % | — | — | — | |||||||||
| Vanguard Target Retirement 2015 Fund |
0.19 | % | -0.10 | % | -22.41 | % | -4.15 | % | 0.71 | % | — | |||||||
| Vanguard Target Retirement 2020 Fund |
0.20 | % | -0.30 | % | -25.25 | — | — | — | ||||||||||
| Vanguard Target Retirement 2025 Fund |
0.19 | % | -0.54 | % | -28.12 | % | -6.66 | % | -0.41 | % | — | |||||||
| Vanguard Target Retirement 2030 |
0.21 | % | -0.71 | % | -30.86 | % | — | — | — | |||||||||
| Vanguard Target Retirement 2035 Fund |
0.19 | % | -0.86 | % | -32.60 | % | -8.85 | % | -1.03 | % | — | |||||||
| Vanguard Target Retirement 2040 Fund |
0.21 | % | -0.79 | % | -32.41 | % | — | — | — | |||||||||
| Vanguard Target Retirement 2045 Fund |
0.19 | % | -0.84 | % | -32.51 | % | -8.88 | % | -0.58 | % | — | |||||||
| Vanguard Target Retirement 2050 Fund |
0.21 | % | -0.72 | % | -32.43 | % | — | — | — | |||||||||
| Vanguard Target Retirement Income Fund |
0.19 | % | 1.04 | % | -10.25 | % | 1.05 | % | 2.67 | % | — | |||||||
| Vanguard Total Bond Market Index Fund |
0.19 | % | 0.71 | % | 3.85 | % | 5.99 | % | 4.71 | % | 5.44 | % | ||||||
| Vanguard Windsor II Fund |
0.33 | % | -4.55 | % | -35.67 | % | -11.77 | % | -2.19 | % | -0.35 | % | ||||||
Note: Performance data for periods of less than one year do not reflect the deduction of purchase and redemption fees. Some funds may have administrative expenses related to the cost of employer plan recordkeeping, which are not reflected in the figures. If these fees were included, the performance would be lower. All other performance data are adjusted for purchase and redemption fees where applicable.
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Description of the Investment Funds
The following is a description of each of the funds:
Vanguard 500 Index Fund. Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Vanguard Growth Index Fund. Vanguard Growth Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization growth stocks. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the MSCI US Prime Market Growth Index, a broadly diversified index predominantly made up of growth stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Vanguard International Growth Fund. Vanguard International Growth Fund seeks to provide long-term capital appreciation. The fund invests in the stocks of companies located outside the United States. In selecting stocks, the fund’s advisors evaluate foreign markets around the world and choose companies with above-average growth potential. The fund uses multiple investment advisors to manage its portfolio.
Vanguard LifeStrategy Conservative Growth Fund. Vanguard LifeStrategy Conservative Growth Fund seeks to provide current income and low to moderate capital appreciation. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 40% of the fund’s assets to bonds, 20% to short-term fixed income reserves, and 40% to common stocks. The percentages of the fund’s assets allocated to each of the underlying funds are: 30% Vanguard Total Bond Market Index Fund, 25% Vanguard Asset Allocation Fund, 20% Vanguard Short-Term Investment-Grade Fund, 20% Vanguard Total Stock Market Index Fund, and 5% Vanguard Total International Stock Index Fund.
The fund’s indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of large-capitalization U.S. stock and, to a lesser extent, mid- and small-cap U.S. stocks and foreign stocks.
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Vanguard LifeStrategy Growth Fund. Vanguard LifeStrategy Growth Fund seeks to provide capital appreciation and some current income. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 80% of the fund’s assets to common stocks and 20% to bonds. The percentages of the fund’s assets allocated to each of the underlying funds are: 50% Vanguard Total Stock Market Index Fund, 25% Vanguard Asset Allocation Fund, 15% Vanguard Total International Stock Index Fund, and 10% Vanguard Total Bond Market Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and foreign stocks. Its indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, as well as mortgage-backed securities.
Vanguard LifeStratey Moderate Growth Fund. Vanguard LifeStrategy Moderate Growth Fund seeks to provide capital appreciation and a low to moderate level of current income. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 60% of the fund’s assets to common stocks and 40% to bonds. The percentages of the fund’s assets allocated to each of the underlying funds are: 35% Vanguard Total Stock Market Index Fund, 30% Vanguard Total Bond Market Index Fund, 25% Vanguard Asset Allocation Fund, and 10% Vanguard Total International Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and foreign stocks. Its indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, as well as mortgage-backed and asset-backed securities.
Vanguard Prime Money Market Fund. Vanguard Prime Money Market Fund seeks to provide current income while maintaining liquidity and a stable share price of $1. The fund invests in high-quality, short-term money market instruments, including certificates of deposit, banker’s acceptances, commercial paper, and other money market securities. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security). If unrated, the security must be determined by Vanguard to be of quality equivalent to those in the two highest credit-quality categories. The fund will invest more than 25% of its assets in securities issued by companies in the financial services industry. The fund will maintain a dollar-weighted average maturity of 90 days or less.
Vanguard Small-Cap Index Fund. Vanguard Small-Cap Index Fund seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the MSCI US Small Cap 1750 Index, a broadly diversified index of stocks of smaller U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stock that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
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Vanguard Target Retirement 2005 Fund. Vanguard Target Retirement 2005 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire before 2008. The fund’s asset allocation will become more conservative over time. Within seven years after 2005, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, and Vanguard Prime Money Market Fund.
The fund’s indirect bond holdings are a diversified mix of short-, intermediate,-, and long-term investment-grade, taxable U.S. government, U.S. agency, and corporate bonds, inflation-indexed bonds issued by the U.S. government, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international funds. The fund’s indirect money market holdings consist of high-quality, short-term money market instruments.
Vanguard Target Retirement 2010 Fund. Vanguard Target Retirement 2010 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2008 and 2012. The fund’s asset allocation will become more conservative over time. Within seven years after 2010, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, and Vanguard Inflation-Protected Securities Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as inflation-protected and mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2015 Fund. Vanguard Target Retirement 2015 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2013 and 2017. The fund’s asset allocation will become more conservative over time. Within seven years after 2015, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
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The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2020 Fund. Vanguard Target Retirement 2020 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2018 and 2022. The fund’s asset allocation will become more conservative over time. Within seven years after 2020, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2025 Fund. Vanguard Target Retirement 2025 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2023 and 2027. The fund’s asset allocation will become more conservative over time. Within seven years after 2025, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
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Vanguard Target Retirement 2030 Fund. Vanguard Target Retirement 2030 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2028 and 2032. The fund’s asset allocation will become more conservative over time. Within seven years after 2030, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2035 Fund. Vanguard Target Retirement 2035 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2033 and 2037. The fund’s asset allocation will become more conservative over time. Within seven years after 2035, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2040 Fund. Vanguard Target Retirement 2040 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2038 and 2042. The fund’s asset allocation will become more conservative over time. Within seven years after 2040, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
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The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2045 Fund. Vanguard Target Retirement 2045 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2043 and 2047. The fund’s asset allocation will become more conservative over time. Within seven years after 2045, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2050 Fund. Vanguard Target Retirement 2050 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2048 and 2053. The fund’s asset allocation will become more conservative over time. Within seven years after 2050, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement Income Fund. Vanguard Target Retirement Income Fund seeks to provide current income and some capital appreciation. The fund invests in Vanguard mutual funds according to an assets allocation strategy designed for investors currently in retirement. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard Prime Money Market Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
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The fund’s indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, inflation-indexed bonds issued by the U.S. government, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international funds. The fund’s indirect money market holdings consist of high-quality, short-term money market instruments.
Vanguard Total Bond Market Index Fund. Vanguard Total Bond Market Index Fund seeks to track the performance of a broad, market-weighted bond index. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Lehman U.S. Aggregate Bond Index. This index measures a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, which currently ranges between 5 and 10 years.
Vanguard Windsor II Fund. Vanguard Windsor II Fund seeks to provide long-term capital appreciation and income. The fund invests mainly in large- and mid-capitalization companies whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The fund uses multiple investment advisors.
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Territorial Bancorp Inc. Stock Fund. In connection with the stock offering, the Plan now offers the Territorial Bancorp Inc. Stock Fund as an additional choice to the investment options described above. Territorial Bancorp Inc. Stock Fund invests primarily in the shares of common stock of Territorial Bancorp Inc. In connection with the stock offering, you may, in the manner described earlier, direct the trustee to invest up to 100% of your plan account in Territorial Bancorp Inc. Stock Fund as a one-time special election. Subsequent to the stock offering, you may elect to invest all or a portion of your elective deferral contributions or matching contributions in Territorial Bancorp Inc. Stock Fund; you may also elect to transfer into Territorial Bancorp Inc. Stock Fund all or a portion of your accounts currently invested in other funds under the Plan.
Territorial Bancorp Inc. Stock Fund consists primarily of investments in the shares of common stock of Territorial Bancorp Inc. After the stock offering, the trustee of the Plan will
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use all amounts held by it in Territorial Bancorp Inc. Stock Fund to purchase additional shares of common stock of Territorial Bancorp Inc.
As of the date of this prospectus supplement, there is no established market for Territorial Bancorp Inc. common stock. Accordingly, there is no record of the historical performance of Territorial Bancorp Inc. Stock Fund. Performance of Territorial Bancorp Inc. Stock Fund depends on a number of factors, including the financial condition and profitability of Territorial Bancorp Inc. and Territorial Savings Bank and market conditions for shares of Territorial Bancorp Inc. common stock generally.
Investments in Territorial Bancorp Inc. Stock Fund involve special risks common to investments in the shares of common stock of Territorial Bancorp Inc.
For a discussion of material risks you should consider, see “Risk Factors” section of the attached prospectus and the Section of the Prospectus Supplement called “Notice of Your Rights Concerning Employer Securities” (see below).
Withdrawals and Distributions from the Plan
Applicable federal law requires the Plan to impose substantial restrictions on the right of a Plan participant to withdraw amounts held for his or her benefit under the Plan prior to the participant’s termination of employment with Territorial Savings Bank. A substantial federal tax penalty may also be imposed on withdrawals made prior to the participant’s attainment of age 59 1/2, regardless of whether such a withdrawal occurs during his or her employment with Territorial Savings Bank or after termination of employment.
Time of Distribution. You may request a distribution from the Plan if you terminate employment before your normal retirement age (age 65), or in the event you incur a disability, or in the event you attain your normal retirement age but do not terminate employment.
In the event you have attained age 59 1/2 and are still employed by Territorial Savings Bank, you may request a distribution from your elective deferrals and from the portion of your account attributable to employer profit sharing contributions and employer matching contributions.
Hardship. In the event you incur a financial hardship, you may request an in-service withdrawal of the portion of your account attributable to your elective deferrals, including qualified nonelective contributions and qualified matching contributions that are treated as elective deferrals, and any earnings thereon.
Rollover Contributions and Transfer Contributions. You may request a distribution of your rollover contributions and transfer contributions at any time.
Loan. You may request a loan from your account pursuant to the procedures established in the Plan.
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Form of Distribution. Distribution of your benefit under the Plan will be made in a single lump sum payment. You may elect to have the distribution paid in a direct rollover to an individual retirement account or another employer plan or paid directly to you.
The Trustee and Custodian. The trustee of the Plan is RSGroup Trust Company. RSGroup Trust Company serves as trustee for all the investments funds under the Plan.
Plan Administrator. Pursuant to the terms of the Plan, the Plan is administered by the Plan administrator. The address of the Plan administrator is Territorial Savings Bank, Attention: Karen J. Cox, Senior Vice President-Administration, telephone number (808) 951-1244. The Plan administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Reports to Plan Participants. The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses (if any).
It is the intention of Territorial Savings Bank to continue the Plan indefinitely. Nevertheless, Territorial Savings Bank may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. Territorial Savings Bank reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that Territorial Savings Bank may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust assets to another plan, the Plan requires that you would, if either the Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the Plan had then terminated.
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Federal Income Tax Consequences
The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.
As a “tax-qualified retirement plan,” the Code affords the Plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year;
(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.
Territorial Savings Bank will administer the Plan to comply with the requirements of the Code as of the applicable effective date of any change in the law.
Lump-Sum Distribution. A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 1/2, and consists of the balance credited to participants under the Plan and all other profit sharing plans (and in some cases all other stock bonus plans), if any, maintained by Territorial Savings Bank. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum distribution, less the amount of after-tax contributions, if any, you have made to this Plan and any other profit sharing plans maintained by Territorial Savings Bank, which is included in the distribution.
Territorial Bancorp Inc. Common Stock Included in Lump-Sum Distribution. If a lump-sum distribution includes Territorial Bancorp Inc. common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to Territorial Bancorp Inc. common stock, that is, the excess of the value of Territorial Bancorp Inc. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Territorial Bancorp Inc. common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of Territorial Bancorp Inc. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Territorial Bancorp Inc. common stock, to the extent of the amount of net
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unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of Territorial Bancorp Inc. common stock. Any gain on a subsequent sale or other taxable disposition of Territorial Bancorp Inc. common stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account (IRA) in accordance with the terms of the other plan or account.
Notice of Your Rights Concerning Employer Securities.
There has been an important change in Federal law that provides specific rights concerning investments in employer securities, such as Territorial Bancorp Inc. common stock. Because you may in the future have investments in Territorial Bancorp Inc. Stock Fund under the Plan, you should take the time to read the following information carefully.
Your Rights Concerning Employer Securities. The Plan must allow you to elect to move any portion of your account that is invested in the Territorial Bancorp Inc. Stock Fund from that investment into other investment alternatives under the Plan. You may contact the Plan Administrator shown above for specific information regarding this new right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the information below that describes the importance of diversification. All of the investment options under the Plan are available to you if you decide to diversify out of the Territorial Bancorp Inc. Stock Fund.
The Importance of Diversifying Your Retirement Savings. To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.
In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights described here and how these rights affect the amount of money that you invest in Territorial Bancorp Inc. common stock through the Plan.
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It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.
Additional ERISA Considerations
As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plan’s assets by participants and beneficiaries. The Plan’s feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of Section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a “fiduciary” because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as Territorial Savings Bank, the Plan Administrator, or the Plan’s trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account balance in the Plan in Territorial Bancorp Inc. common stock, the regulations under Section 404(c) of ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as Territorial Bancorp Inc. Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of Territorial Bancorp Inc., a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within two business days after the change occurs, or annually on a Form 5 within 45 days after the close of Territorial Bancorp Inc.’s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Territorial Bancorp Inc. Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock of Territorial Bancorp Inc. generally must be reported to the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Territorial Bancorp Inc. of profits realized by an officer, director or any person beneficially owning more than 10% of Territorial Bancorp Inc.’s common stock resulting from non-exempt purchases and sales of Territorial Bancorp Inc. common stock within any six-month period.
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The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of Section 16(b) persons.
Except for distributions of common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases within the Territorial Bancorp Inc. Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial information representing the assets available for plan benefits at April 30, 2009, are available upon written request to the Plan Administrator at the address shown above.
The validity of the issuance of the common stock has been passed upon by Luse Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C., which firm acted as special counsel to Territorial Bancorp Inc. in connection with Territorial Bancorp Inc.’s stock offering.
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PROSPECTUS
(Proposed Holding Company for Territorial Savings Bank)
Up to 10,637,500 Shares of Common Stock
Territorial Bancorp Inc., a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Territorial Mutual Holding Company from the mutual to the stock form of organization. All shares of common stock are being offered for sale at a price of $10.00 per share. Depending on the number of shares we sell, we expect that our common stock will be traded on the Nasdaq Global Market or the Nasdaq Global Select Market, each under the symbol “TBNK,” upon conclusion of the stock offering. There is currently no public market for the shares of our common stock.
We are offering up to 10,637,500 shares of common stock for sale on a best efforts basis. We may sell up to 12,233,125 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. We must sell a minimum of 7,862,500 shares in order to complete the offering.
We are offering the shares of common stock in a “subscription offering.” Depositors of Territorial Savings Bank with aggregate account balances of at least $50 as of the close of business on September 30, 2007 will have first priority rights to buy our shares of common stock. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering.” We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” managed by Keefe, Bruyette & Woods, Inc.
The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered through a single qualifying account is 50,000 shares, and no person by himself or with an associate or group of persons acting in concert may purchase more than 100,000 shares. The offering is expected to expire at 3:00 p.m., Hawaii time, on June 22, 2009. We may extend this expiration date without notice to you until August 6, 2009, unless the Office of Thrift Supervision approves a later date, which may not be beyond June 26, 2011. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond August 6, 2009, or the number of shares of common stock to be sold is increased to more than 12,233,125 shares or decreased to fewer than 7,862,500 shares. If the offering is extended beyond August 6, 2009, or if the number of shares of common stock to be sold is increased to more than 12,233,125 shares or decreased to fewer than 7,862,500 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at Territorial Savings Bank, or, in our discretion, at another insured depository institution, and will earn interest at 1.19% (annual percentage yield of 1.20%), which is our current passbook savings rate.
Keefe, Bruyette & Woods, Inc. will assist us in selling our shares of common stock on a best efforts basis. Keefe, Bruyette & Woods, Inc. is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc. has advised us that it intends to make a market in the common stock, but is under no obligation to do so.
This investment involves a degree of risk, including the possible loss of your investment.
Please read “Risk Factors” beginning on page 17.
OFFERING SUMMARY
Price: $10.00 per Share
| Minimum | Maximum | Adjusted Maximum | |||||||
| Number of shares |
7,862,500 | 10,637,500 | 12,233,125 | ||||||
| Gross offering proceeds |
$ | 78,625,000 | $ | 106,375,000 | $ | 122,331,000 | |||
| Estimated offering expenses (excluding selling agent fees and expenses) |
$ | 2,110,000 | $ | 2,110,000 | $ | 2,110,000 | |||
| Estimated selling agent fees and expenses (1) |
$ | 811,000 | $ | 1,066,000 | $ | 1,213,000 | |||
| Estimated net proceeds |
$ | 75,704,000 | $ | 103,199,000 | $ | 119,008,000 | |||
| Estimated net proceeds per share |
$ | 9.63 | $ | 9.70 | $ | 9.73 | |||
| (1) | See “The Conversion; Plan of Distribution—Marketing and Distribution; Compensation” for a discussion of Keefe, Bruyette & Woods, Inc.’s compensation for this offering. |
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
For assistance, please call the Stock Information Center at 356-5108 (on Oahu only), or at (866) 922-1279 (toll free).
KEEFE, BRUYETTE & WOODS
The date of this prospectus is May 15, 2009.
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TERRITORIAL MUTUAL HOLDING COMPANY |
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The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including the Consolidated Financial Statements and the notes to the Consolidated Financial Statements.
In this prospectus, the terms “we, “our,” and “us” refer to Territorial Bancorp Inc. and Territorial Savings Bank unless the context indicates another meaning.
Territorial Savings Bank
Territorial Savings Bank is a federally chartered savings bank headquartered in Honolulu, Hawaii. Territorial Savings Bank was organized in 1921, and reorganized into the mutual holding company structure in 2002. Territorial Savings Bank is currently the wholly owned subsidiary of Territorial Savings Group, Inc., a federal corporation, which is the wholly owned subsidiary of Territorial Mutual Holding Company, a federal mutual holding company. On a consolidated basis, Territorial Mutual Holding Company had total assets of $1.2 billion, total loans of $642.1 million, total deposits of $923.9 million and equity of $99.4 million as of December 31, 2008. At that date, 51.9% of our assets were mortgage loans and lines of credit, and 42.7% were mortgage-backed securities. We provide financial services to individuals, families and businesses through our 24 banking offices located throughout the State of Hawaii.
Territorial Savings Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and investment securities. To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other non-residential real estate loans, consumer loans, multi-family mortgage loans and other loans. Territorial Savings Bank offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Through our subsidiary, Territorial Financial Services, Inc., we engage in insurance agency activities. We also offer various non-deposit investments to our customers, including annuities and mutual funds, through a third-party broker-dealer.
Territorial Savings Bank’s executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813. Our telephone number at this address is (808) 946-1400. Our website address is www.territorialsavings.net. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.
Territorial Bancorp Inc.
Territorial Bancorp Inc. is a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Territorial Savings Bank upon completion of the mutual-to-stock conversion and the offering. Territorial Bancorp Inc. has not engaged in any business to date.
Our executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813. Our telephone number at this address is (808) 946-1400.
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Our Organizational Structure
In September 2002, Territorial Savings Bank’s mutual predecessor reorganized into the mutual holding company form of organization by forming Territorial Mutual Holding Company. Territorial Mutual Holding Company owns 100% of the outstanding shares of common stock of Territorial Savings Group, Inc., a federal corporation. Territorial Mutual Holding Company is a mutual holding company that has no stockholders and is controlled by its members. Territorial Savings Group, Inc. owns 100% of the outstanding shares of common stock of Territorial Savings Bank. Territorial Savings Group, Inc. has not issued shares of stock to the public.
Pursuant to the terms of Territorial Mutual Holding Company’s plan of conversion and reorganization, Territorial Mutual Holding Company will convert from a mutual holding company to the stock holding company corporate structure. As part of the conversion, we are offering for sale in a subscription offering, and, if necessary, a community offering and a syndicated community offering, shares of common stock of Territorial Bancorp Inc. Upon the completion of the conversion and offering, Territorial Mutual Holding Company and Territorial Savings Group, Inc. will cease to exist, and Territorial Savings Bank will be a wholly owned subsidiary of Territorial Bancorp, Inc.
Business Strategy
Our business strategy is to grow and improve our profitability by:
| • | remaining a community-oriented financial institution; |
| • | increasing loan production while maintaining high asset quality; |
| • | emphasizing lower cost core deposits to maintain low funding costs; and |
| • | expanding our branch network. |
A full description of our products and services begins on page 91 of this prospectus under the heading “Business of Territorial Savings Bank.”
These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.
Reasons for the Conversion
Our primary reasons for converting and raising additional capital through the offering are:
| • | to support our internal growth through lending in communities we serve or may serve in the future and through the establishment of de novo branch offices. We currently intend to establish one new branch office per year over the next three years; |
| • | to assist us in the management of interest rate risk; |
| • | to repay trust preferred securities and short-term borrowings; |
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| • | to provide additional financial resources to pursue future acquisitions of banks, thrifts and other financial services companies, and branch offices, although we have no current arrangements or agreements with respect to any such acquisitions; |
| • | to provide better capital management tools, including the ability to pay dividends and to repurchase shares of our common stock, subject to market conditions; and |
| • | to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees. |
We believe that the additional capital raised in the offering may enable us to take advantage of business opportunities that may not otherwise be available to us. As of December 31, 2008, Territorial Savings Bank was considered “well capitalized” for regulatory purposes and is not subject to a directive or a recommendation from the Office of Thrift Supervision to raise capital.
Terms of the Conversion and the Offering
Under Territorial Mutual Holding Company’s plan of conversion and reorganization, our organization will convert to a fully public stock holding company structure. In connection with the conversion, we are offering between 7,862,500 and 10,637,500 shares of common stock to eligible depositors and borrowers of Territorial Savings Bank, to our employee benefit plans and, to the extent shares remain available, to the general public. The number of shares of common stock to be sold may be increased to up to 12,233,125 as a result of demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 12,233,125 or decreased to less than 7,862,500, or the offering is extended beyond August 6, 2009, subscribers will not have the opportunity to change or cancel their stock orders.
The purchase price of each share of common stock to be issued in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc., our marketing advisor in the offering, will use its best efforts to assist us in selling shares of our common stock. Keefe, Bruyette & Woods, Inc. is not obligated to purchase any shares of common stock in the offering.
Persons Who May Order Shares of Common Stock in the Offering
We are offering the shares of common stock in a “subscription offering” in the following descending order of priority:
| • | First, to depositors of Territorial Savings Bank with aggregate account balances of at least $50 as of the close of business on September 30, 2007. |
| • | Second, to Territorial Savings Bank’s tax-qualified employee benefit plans. |
| • | Third, to depositors of Territorial Savings Bank with aggregate account balances of at least $50 as of the close of business on March 31, 2009. |
| • | Fourth, to depositors of Territorial Savings Bank as of April 30, 2009 and to borrowers of Territorial Savings Bank as of September 18, 2002 whose borrowings remained outstanding as of April 30, 2009. |
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Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering,” with a preference given to natural persons residing in the State of Hawaii. The community offering may begin concurrently with, during or promptly after the subscription offering as we may determine at any time. If shares remain available for sale following the subscription offering or community offering, we also may offer for sale shares of common stock through a “syndicated community offering” managed by Keefe, Bruyette & Woods, Inc.
We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering. We have not established any set criteria for determining whether to accept or reject a purchase order in the community offering or the syndicated community offering, and, accordingly, any determination to accept or reject purchase orders in the community offering and the syndicated community offering will be based on the facts and circumstances known to us at the time.
To ensure a proper allocation of stock, each subscriber eligible to purchase stock in the subscription offering must list on his or her stock order and certification form all deposit accounts in which he or she had an ownership interest at September 30, 2007, March 31, 2009 or April 30, 2009, as applicable. Failure to list all accounts, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final.
If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first in the order of priority to subscribers in the subscription offering. A detailed description of share allocation procedures can be found in the section entitled “The Conversion; Plan of Distribution.”
How We Determined the Offering Range
The amount of common stock that we are offering is based on an independent appraisal of the estimated market value of Territorial Bancorp Inc., assuming the conversion and the offering are completed. FinPro, Inc., our independent appraiser, has estimated that, as of April 30, 2009, this market value ranged from $78.6 million to $106.4 million, with a midpoint of $92.5 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 7,862,500 shares to 10,637,500 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.
The appraisal is based in part on our financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering and an analysis of a peer group of 10 publicly traded savings bank and thrift holding companies that FinPro, Inc. considered comparable to us.
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The appraisal peer group consists of the following companies. Total assets are as of March 31, 2009 for all companies listed except for First Defiance Financial Corp., whose assets are as of December 31, 2008.
| Company Name and Ticker Symbol |
Exchange | Headquarters |
Total Assets | ||||
| (in thousands) | |||||||
| First Defiance Financial Corp. (FDEF) | Nasdaq | Defiance, OH | $ | 2,010,662 | |||
| First Financial Northwest, Inc. (FFNW) | Nasdaq | Renton, WA | 1,261,782 | ||||
| HF Financial Corp. (HFFC) | Nasdaq | Sioux Falls, SD | 1,171,991 | ||||
| Home Federal Bancorp, Inc. (HOME) | Nasdaq | Nampa, ID | 692,497 | ||||
| HopFed Bancorp, Inc. (HFBC) | Nasdaq | Hopkinsville, KY | 991,131 | ||||
| Meta Financial Group, Inc. (CASH) | Nasdaq | Storm Lake, IA | 859,125 | ||||
| MutualFirst Financial, Inc. (MFSF) | Nasdaq | Muncie, IN | 1,419,206 | ||||
| NASB Financial, Inc. (NASB) | Nasdaq | Grandview, MO | 1,549,748 | ||||
| Pulaski Financial Corp. (PULB) | Nasdaq | St. Louis, MO | 1,461,393 | ||||
| Timberland Bancorp, Inc. (TSBK) | Nasdaq | Hoquiam, WA | 693,004 | ||||
The following table presents a summary of selected pricing ratios for Territorial Bancorp Inc. and the peer group companies identified by FinPro, Inc. Our ratios are based on core earnings for the twelve months ended December 31, 2008 and book value as of December 31, 2008. Ratios for the peer group are based on the latest publicly available information (core earnings for the twelve months ended March 31, 2009 or December 31, 2008 and book value as of March 31, 2009 or December 31, 2008). Core earnings, for purposes of the appraisal, are defined as net earnings after taxes, excluding the after-tax portion of income from nonrecurring items. Tangible book value is total equity, less intangible assets. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 6.5% on a price-to-core-earnings basis, a discount of 16.3% on a price-to-book value basis and a discount of 22.2% on a price-to-tangible book value basis. The pricing ratios result from our generally having higher levels of equity but lower core earnings than the companies in the peer group on a pro forma basis. The price ratios also reflect recent volatile market conditions, particularly for stock of financial institution holding companies, and the effect of such conditions on the trading market for recent mutual-to-stock conversions. Our Board of Directors, in reviewing and approving the valuation, considered the range of price-to-core earnings multiples and the range of price-to-book value ratios and price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. The appraisal did not consider one valuation approach to be more important than the other.
| Price-to-core earnings multiple |
Price-to-book value ratio |
Price-to-tangible book value ratio |
||||||
| Territorial Bancorp Inc. (pro forma) |
||||||||
| Maximum, as adjusted |
13.33x | 60.13 | % | 60.20 | % | |||
| Maximum |
11.36x | 56.15 | % | 56.18 | % | |||
| Minimum |
8.55x | 47.53 | % | 47.57 | % | |||
| Valuation of peer group companies using stock prices as of April 30, 2009 |
||||||||
| Averages |
29.31x | 69.27 | % | 74.92 | % | |||
| Medians |
12.15x | 67.10 | % | 72.20 | % | |||
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Since December 31, 2007, the stock pricing of the peer group upon which the appraisal is based has declined. The median price to tangible book value was 116.8% at December 31, 2007 compared to 72.2% at April 30, 2009. The median price-to-core earnings per share was 13.1x at December 31, 2007 compared to 12.2x at April 30, 2009. In the absence of other factors, these changes would result in the appraisal for our offering being lower than if the appraisal were prepared as of December 31, 2007.
As of November 7, 2008, FinPro, Inc. estimated the market value of Territorial Bancorp Inc., assuming the conversion and the offering were completed, to be between $80.8 million and $109.3 million, with a midpoint of $95.0 million. As of that date, the median price to tangible book value of the peer group upon which the appraisal is based was 76.95%, and the median price-to-core earnings per share was 9.0x. As of February 27, 2009, FinPro, Inc. revised its estimate of the market value of Territorial Bancorp Inc., assuming the conversion and the offering were completed, to be between $64.6 million and $87.4 million, with a midpoint of $76.0 million. As of that date, the median price to tangible book value of the peer group upon which the appraisal is based was 59.35%, and the median price-to-core earnings per share was 8.3x. Based upon the changes in the valuation of the peer group companies, as well as recent disinterest in stock offerings of other converting thrift institutions (for which FinPro, Inc. provided a “Strong Downward” adjustment in the appraisal as of February 27, 2009), FinPro had reduced the estimated market value by 20% between November 7, 2008 and February 27, 2009.
Between February 27, 2009 and April 30, 2009, the pricing ratios of the appraisal peer group increased. This reflected improved market conditions for financial institutions between February 27, 2009 and April 30, 2009. For example, the NASDAQ Bank Index increased 13.61% from February 27, 2009 to April 30, 2009. Based upon the increase in peer group pricing ratios (set forth in the table above), improved market conditions for financial institutions and our recent operating results, FinPro, Inc. increased its estimate of the market value of Territorial Bancorp Inc. to the appraised value as of April 30, 2009. The current appraisal was prepared using the same appraisal methodology as that used as of November 7, 2008 and February 27, 2009.
FinPro, Inc. advised the Board of Directors that the appraisal was prepared in conformance with the regulatory appraisal methodology. That methodology requires a valuation based on an analysis of the trading prices of comparable public companies whose stocks have traded for at least one year prior to the valuation date, and as a result of this analysis, FinPro, Inc. determined that our pro forma price-to-core earnings ratios were higher than the peer group companies and our pro forma price-to-book and price-to-tangible book ratios were lower than the peer group companies. See “—How We Determined the Offering Range.”
Our Board of Directors carefully reviewed the information provided to it by FinPro, Inc. through the appraisal process, but did not make any determination regarding whether prior standard mutual-to-stock conversions have been undervalued, nor did the board draw any conclusions regarding how the historical data reflected above may affect Territorial Bancorp Inc.’s appraisal. Instead, we engaged FinPro, Inc. to help us understand the regulatory process as it applies to the appraisal and to advise the Board of Directors as to how much capital Territorial Bancorp Inc. would be required to raise under the regulatory appraisal guidelines.
The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of Territorial Bancorp Inc. as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by FinPro, Inc. to estimate our market value and not to compare the relative value of shares of our common stock with the
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value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.
The independent appraisal will be updated prior to the completion of the conversion. If the appraised value decreases below $78.6 million or increases above $122.3 million, subscribers may be resolicited with the approval of the Office of Thrift Supervision and be given the opportunity to change or cancel their orders. If you do not respond, we will cancel your stock order and return your subscription funds, with interest, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of shares of common stock. For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion; Plan of Distribution—Determination of Share Price and Number of Shares to be Issued.”
After-Market Stock Price Performance Provided by Independent Appraiser
The following table presents stock price appreciation information for all standard mutual-to-stock conversions completed between January 1, 2007 and April 30, 2009. These companies did not constitute the group of 10 comparable public companies utilized in FinPro, Inc.’s valuation analysis.
Mutual-to-Stock Conversion Offerings with Closing Dates
between January 1, 2007 and April 30, 2009
| Conversion Date |
Exchange | Percentage Price Appreciation (Depreciation) From Initial Trading Date |
||||||||||||||
| Company Name and Ticker Symbol |
One Day | One Week | One Month | Through April 30, 2009 |
||||||||||||
| St. Joseph Bancorp, Inc. (SJBA) |
2/2/2009 | OTCBB | 0.00 | 0.00 | 0.00 | 0.00 | %(1) | |||||||||
| Hibernia Homestead Bancorp, Inc. (HIBE) |
1/28/2009 | OTCBB | 0.00 | (2) | 5.00 | 5.00 | 40.00 | |||||||||
| First Savings Financial Group, Inc. (FSFG) |
10/7/2008 | Nasdaq | (1.00 | ) | (4.00 | ) | (8.00 | ) | (2.00 | ) | ||||||
| Home Bancorp, Inc. (HBCP) |
10/3/2008 | Nasdaq | 14.90 | 3.50 | 3.10 | 10.70 | ||||||||||
| Cape Bancorp, Inc. (CBNJ) |
2/1/2008 | Nasdaq | 0.50 | 0.10 | (2.00 | ) | (30.10 | ) | ||||||||
| Danvers Bancorp, Inc. (DNBK) |
1/10/2008 | Nasdaq | (2.60 | ) | (2.20 | ) | 2.60 | 45.10 | ||||||||
| First Advantage Bancorp (FABK) |
11/30/2007 | Nasdaq | 11.70 | 8.00 | 6.50 | (8.80 | ) | |||||||||
| First Financial Northwest, Inc. (FFNW) |
10/10/2007 | Nasdaq | 17.30 | 15.30 | 8.10 | (19.30 | ) | |||||||||
| Beacon Federal Bancorp, Inc. (BFED) |
10/2/2007 | Nasdaq | 16.00 | 19.00 | 7.50 | (12.60 | ) | |||||||||
| Louisiana Bancorp, Inc. (LABC) |
7/10/2007 | Nasdaq | 9.50 | 3.00 | 9.40 | 37.50 | ||||||||||
| Quaint Oak Bancorp, Inc. (QNTO) |
7/5/2007 | OTCBB | (2.00 | ) | (9.50 | ) | (11.00 | ) | (20.10 | ) | ||||||
| CMS Bancorp, Inc. (CMSB) |
7/5/2007 | Nasdaq | 5.70 | 5.20 | 3.20 | (25.00 | ) | |||||||||
| ESSA Bancorp, Inc. (ESSA) |
4/4/2007 | Nasdaq | 17.80 | 21.50 | 14.60 | 36.40 | ||||||||||
| Hampden Bancorp, Inc. (HBNK) |
1/17/2007 | Nasdaq | 29.20 | 24.50 | 23.40 | (2.90 | ) | |||||||||
| Average |
8.29 | 6.39 | 4.46 | 3.49 | ||||||||||||
| Median |
7.60 | 4.25 | 4.10 | (2.45 | ) | |||||||||||
| (1) | There were no reported trades in St. Joseph Bancorp, Inc. common stock through April 30, 2009. |
| (2) | There were no reported trades in Hibernia Homestead Bancorp, Inc. common stock until January 29, 2009. |
Stock price appreciation is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company’s assets, and the company’s market area. The companies listed in the table above may not be similar to Territorial Bancorp Inc., the pricing ratios for their stock offerings were in some cases different from the pricing ratios for Territorial Bancorp Inc.’s common stock and the market conditions in which these offerings were completed were, in some cases, different from current market conditions. Any or all of these differences may cause our stock to perform differently from these other offerings.
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There can be no assurance that our stock price will not trade below $10.00 per share, as has been the case for some mutual-to-stock conversions. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on page 17.
Limits on How Much Common Stock You May Purchase
The minimum number of shares of common stock that may be purchased is 25. Generally, no individual, or individuals exercising subscription rights through a single qualifying account held jointly, may purchase more than 50,000 shares ($500,000) of common stock. If any of the following persons purchases shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 100,000 shares ($1,000,000):
| • | your spouse or relatives of you or your spouse living in your house; |
| • | most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or |
| • | other persons who may be your associates or persons acting in concert with you. |
See the detailed descriptions of “acting in concert” and “associate” in “The Conversion; Plan of Distribution—Limitations on Common Stock Purchases.”
How You May Purchase Shares of Common Stock
In the subscription offering and community offering, you may pay for your shares only by:
| • | personal check, bank check or money order, made payable to Territorial Bancorp Inc.; or |
| • | authorizing us to withdraw funds from the types of Territorial Savings Bank deposit accounts permitted on the stock order and certification form. |
Territorial Savings Bank is not permitted to knowingly lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a check drawn on a Territorial Savings Bank line of credit, or use any other extension of credit from Territorial Savings Bank or a third-party check to pay for shares of common stock.
You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order and certification form, together with full payment or authorization to withdraw from one or more of your Territorial Savings Bank deposit accounts, so that it is received (not postmarked) before 3:00 p.m., Hawaii time, on June 22, 2009, which is the expiration of the offering period. For orders paid for by check or money order, the funds will be cashed promptly and held in a segregated account at Territorial Savings Bank, or in our discretion at another insured depository institution. We will pay interest on those funds calculated at Territorial Savings Bank’s current passbook savings rate from the date funds are received until completion or termination of the conversion and the offering. Withdrawals from certificates of deposit to purchase shares of common stock in the offering may be made without incurring an early withdrawal penalty; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will be transferred to a savings account and earn interest at our passbook savings rate subsequent to the withdrawal. All
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funds authorized for withdrawal from deposit accounts with Territorial Savings Bank must be in the accounts at the time the stock order is received. However, funds will not be withdrawn from the accounts until the completion of the conversion and offering and will earn interest at the applicable deposit account rate until that time. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. After we receive your order, your order cannot be changed or canceled unless the number of shares of common stock to be offered is increased to more than 12,233,125 shares or decreased to fewer than 7,862,500 shares, or the offering is extended beyond August 6, 2009.
By signing the stock order and certification form, you are acknowledging receipt of a prospectus and that the shares of common stock are not deposits or savings accounts that are federally insured or otherwise guaranteed by Territorial Savings Bank, the Federal Deposit Insurance Corporation or any other government agency.
You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. However, shares of common stock must be purchased through and held in a self-directed retirement account, such as those offered by a brokerage firm. By regulation, Territorial Savings Bank’s individual retirement accounts are not self-directed, so they cannot be used to purchase or hold shares of our common stock. If you wish to use some or all of the funds in your Territorial Savings Bank individual retirement account to purchase our common stock, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. It will take time to transfer your Territorial Savings Bank individual retirement account to an independent trustee, so please allow yourself sufficient time to take this action. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the June 22, 2009 expiration of the offering period, for assistance with purchases using your Territorial Savings Bank individual retirement account or any other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on time constraints and, possibly, limitations imposed by the brokerage firm or institution where the funds are held.
Delivery of Stock Certificates
Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled thereto at the certificate registration address noted by them on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. It is possible that, until certificates for the common stock are delivered, purchasers might not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading.
How We Intend to Use the Proceeds From the Offering
Assuming we sell 12,233,125 shares of common stock in the stock offering, and we have net proceeds of $119.0 million, we intend to distribute the net proceeds as follows:
| • | $59.5 million (50.0% of the net proceeds) will be invested in Territorial Savings Bank; |
| • | $9.8 million (8.2% of the net proceeds) will be loaned to our employee stock ownership plan to fund its purchase of our shares of common stock; |
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| • | $24.0 million (20.2% of the net proceeds) will be used to redeem trust preferred securities (although we intend to redeem less of our trust preferred securities if we sell less than the maximum number of shares in the offering); and |
| • | $25.7 million (21.6% of the net proceeds) will be retained by us. |
We may use the remaining funds we receive for investments, to pay cash dividends, to repurchase shares of common stock and for other general corporate purposes. Territorial Savings Bank may use the proceeds it receives to support increased lending and other products and services, and to repay short-term borrowings. The net proceeds retained by Territorial Bancorp Inc. and Territorial Savings Bank also may be used for future business expansion through acquisitions of banks, thrifts and other financial services companies, and opening or acquiring branch offices. We have no current arrangements or agreements with respect to any such acquisitions. Initially, a substantial portion of the net proceeds will be invested in short-term investments and mortgage-backed securities consistent with our investment policy.
Please see the section of this prospectus entitled “How We Intend to Use the Proceeds From the Offering” for more information on the proposed use of the proceeds from the offering.
You May Not Sell or Transfer Your Subscription Rights
Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. When completing your stock order and certification form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. In addition, the stock order and certification form requires that you list all deposit or loan accounts, giving all names on each account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation, if there is an oversubscription.
Deadline for Orders of Common Stock
If you wish to purchase shares of common stock in the offering, we must receive a properly completed original stock order and certification form, together with full payment for the shares of common stock, at the Stock Information Center or any of our branch offices no later than 3:00 p.m., Hawaii time, on June 22, 2009. A postmark prior to June 22, 2009 will not entitle you to purchase shares of common stock unless we receive the envelope by 3:00 p.m., Hawaii time, on June 22, 2009. You may submit your stock order and certification form by mail using the order reply envelope provided, by overnight courier to the indicated address on the order form, or by hand delivery to our Stock Information Center, located at 1132 Bishop Street, Suite 305, Honolulu, Hawaii, or to any of our branch offices. Once we receive it, your order is irrevocable unless the offering is terminated or extended beyond August 6, 2009 or the number of shares of common stock to be sold is decreased to less than 7,862,500 shares or increased to more than 12,233,125 shares. If the offering is extended beyond August 6, 2009, or if the number of shares of common stock to be sold is decreased to less than 7,862,500 shares or is increased to more than 12,233,125 shares, we will, with the approval of the Office of Thrift Supervision, resolicit subscribers, giving them the opportunity to confirm, cancel or change their stock orders during a specified resolicitation period.
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Although we will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 3:00 p.m., Hawaii time, on June 22, 2009, whether or not we have been able to locate each person entitled to subscription rights.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 7,862,500 shares of common stock, we may take steps to issue the minimum number of shares of common stock in the offering range. Specifically, we may:
| • | increase the purchase limitations; and/or |
| • | seek the approval of the Office of Thrift Supervision to extend the offering beyond August 6, 2009, so long as we resolicit subscriptions that we have previously received in the offering. |
If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.
Possible Change in the Offering Range
FinPro, Inc. will update its appraisal before we complete the offering. If, as a result of demand for the shares, or changes in market conditions, FinPro, Inc. determines that our pro forma market value has increased, we may sell up to 12,233,125 shares in the offering without further notice to you. If our pro forma market value at that time is either below $78.6 million or above $122.3 million, then, after consulting with the Office of Thrift Supervision, we may:
| • | terminate the stock offering and promptly return all funds; |
| • | set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of Territorial Bancorp Inc.’s common stock; or |
| • | take such other actions as may be permitted by the Office of Thrift Supervision and the Securities and Exchange Commission. |
Possible Termination of the Offering
We may terminate the offering at any time prior to the special meeting of members of Territorial Mutual Holding Company that is being called to vote upon the conversion, and at any time after member approval with the approval of the Office of Thrift Supervision.
We must sell a minimum of 7,862,500 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares or for any other reason, we will promptly return your funds with interest at our passbook savings rate and we will cancel deposit account withdrawal authorizations.
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Purchases by Officers and Directors
We expect our directors and executive officers, together with their associates, to subscribe for 374,000 shares of common stock in the offering, or 4.8% of the shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. The purchase price paid by our directors and executive officers for their subscribed shares will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Purchases by directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering.
Benefits to Management and Potential Dilution to Stockholders Following the Conversion
We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we sell in the offering, or 851,000 shares of common stock, assuming we sell the maximum of the shares proposed to be sold. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 8% of the total number of shares of common stock sold in the offering. This plan is a tax-qualified retirement plan for the benefit of all our employees. Purchases by the employee stock ownership plan will be included in determining whether the required minimum number of shares has been sold in the offering. Assuming the employee stock ownership plan purchases 851,000 shares in the offering, we will recognize additional pre-tax compensation expense of $8.5 million over a 20-year period, assuming the shares of common stock have a fair market value of $10.00 per share for the full 20-year period. If, in the future, the shares of common stock have a fair market value greater or less than $10.00, the compensation expense will increase or decrease accordingly.
We also intend to implement one or more stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable Office of Thrift Supervision regulations. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will reserve a number of shares of common stock equal to not more than 4% of the shares sold in the offering, or up to 425,500 shares of common stock at the maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will also reserve a number of stock options equal to not more than 10% of the shares of common stock sold in the offering, or up to 1,063,750 shares of common stock at the maximum of the offering range, for key employees and directors. If the stock-based benefit plans are adopted after one year from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply. We have not yet determined whether we will present these plans for stockholder approval within 12 months following the completion of the conversion or whether we will present these plans for stockholder approval more than 12 months after the completion of the conversion.
If 4% of the shares of common stock sold in the offering are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 3.8% in their ownership interest in Territorial Bancorp Inc. If 10% of the shares of common stock sold in the offering are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.1% in their ownership interest in Territorial Bancorp Inc.
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We intend to enter into employment agreements with certain of our executive officers. See “Management of Territorial Bancorp Inc.—Executive Officer Compensation” for a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements.
The following table summarizes the number of shares of common stock and aggregate dollar value of grants (valuing each share granted at the offering price of $10.00) that are available under one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all employees. A portion of the stock grants shown in the table below may be made to non-management employees.
| Number of Shares to be Granted or Purchased | Dilution | |||||||||||||||
| Resulting | Value of Grants (1) | |||||||||||||||
| At Minimum of Offering Range |
At Maximum of Offering Range |
As a Percentage of Common Stock to be Issued (2) |
From Issuance of Shares for Stock Benefit Plans |
At Minimum of Offering Range |
At Maximum of Offering Range | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Employee stock ownership plan |
629,000 | 851,000 | 8.00 | % | 7.41 | % | $ | 6,290 | $ | 8,510 | ||||||
| Stock awards |
314,500 | 425,500 | 4.00 | 3.85 | % | 3,145 | 4,255 | |||||||||
| Stock options |
786,250 | 1,063,750 | 10.00 | 9.09 | % | 2,390 | 3,234 | |||||||||
| Total |
1,729,750 | 2,340,250 | 22.00 | % | 18.03 | % | $ | 11,825 | $ | 15,999 | ||||||
| (1) | The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.04 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 6.5 years; a risk-free interest rate of 1.87%; and a volatility rate of 25.8% based on an index of publicly traded thrift institutions. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model. |
| (2) | The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion. |
The actual value of restricted stock grants will be determined based on their fair value (the closing market price of shares of common stock of Territorial Bancorp Inc.) as of the date grants are made. The following table presents the total value of all shares to be available for awards of restricted stock under the stock-based benefit plan, assuming the shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $16.00 per share at the time of the grant.
| Share Price |
314,500 Shares Awarded at Minimum of Offering Range |
370,000 Shares Awarded at Midpoint of Offering Range |
425,500 Shares Awarded at Maximum of Offering Range |
489,325 Shares Awarded at Maximum of Offering Range, As Adjusted | |||||||||
| (In thousands, except share price information) | |||||||||||||
| $ | 8.00 | $ | 2,516 | $ | 2,960 | $ | 3,404 | $ | 3,915 | ||||
| 10.00 | 3,145 | 3,700 | 4,255 | 4,893 | |||||||||
| 12.00 | 3,774 | 4,440 | 5,106 | 5,872 | |||||||||
| 14.00 | 4,403 | 5,180 | 5,957 | 6,851 | |||||||||
| 16.00 | 5,032 | 5,920 | 6,808 | 7,829 | |||||||||
The grant-date fair value of the stock options granted under the stock-based benefit plans will be based, in part, on the closing price of shares of common stock of Territorial Bancorp Inc. on the date the
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options are granted. The fair value will also depend on the various assumptions utilized in the option-pricing model ultimately adopted. The following table presents the total estimated value of the stock options to be available for grant under the stock-based benefit plans, assuming the range of market prices for the shares are $8.00 per share to $16.00 per share at the time of the grant.
| Exercise Price |
Grant-Date Fair Value Per Option |
786,250 Options at Minimum of Range |
925,000 Options at Midpoint of Range |
1,063,750 Options at Maximum of Range |
1,223,312 Options at Maximum of Range, As Adjusted | |||||||||||
| (In thousands, except share price information) | ||||||||||||||||
| $ | 8.00 | $ | 2.43 | $ | 1,911 | $ | 2,248 | $ | 2,585 | $ | 2,973 | |||||
| 10.00 | 3.04 | 2,390 | 2,812 | 3,234 | 3,719 | |||||||||||
| 12.00 | 3.65 | 2,870 | 3,376 | 3,883 | 4,465 | |||||||||||
| 14.00 | 4.26 | 3,349 | 3,941 | 4,532 | 5,211 | |||||||||||
| 16.00 | 4.87 | 3,829 | 4,505 | 5,180 | 5,958 | |||||||||||
The tables presented above are provided for informational purposes only. There can be no assurance that our stock price will not trade below $10.00 per share. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on page 17.
Market for Common Stock
Depending on the number of shares we sell, we expect that our common stock will be listed on the Nasdaq Global Market or the Nasdaq Global Select Market, each under the symbol “TBNK.” Keefe, Bruyette & Woods, Inc. currently intends to make a market in the shares of our common stock, but is under no obligation to do so. See “Market for the Common Stock.”
Our Policy Regarding Dividends
Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors, including the following:
| • | regulatory capital requirements; |
| • | our consolidated financial condition and results of operations; |
| • | tax considerations; |
| • | statutory and regulatory limitations; and |
| • | general economic conditions and forecasts. |
Recent Economic Downturn in Our Primary Market Area
Our success depends primarily on the general economic conditions in the State of Hawaii, as nearly all of our loans are to customers in the state. The island of Oahu is the primary real estate market in Hawaii. Based upon information provided by the Honolulu Board of REALTORS, resales of existing single-family homes in Oahu totaled 2,741 units during the year ended December 31, 2008, a decrease of
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24.4% compared to similar sales during the year ended December 31, 2007. The median single-family home resale price in Oahu decreased by 3.0% during the year ended December 31, 2008 compared to the year ended December 31, 2007. The number of condominium sales (which was greater than the number of single-family home resales) declined by 28.5% during the year ended December 31, 2008 compared to the year ended December 31, 2007, while the median price remained unchanged.
The island of Maui is the second largest real estate market in Hawaii. Based upon information provided by the REALTORS Association of Maui, Inc., sales of existing single-family homes in Maui totaled 907 units for 2008, a decrease of 20.6% compared to 2007, while the median price for the year ended December 31, 2008 declined by 8.3% compared to the median price for the year ended December 31, 2007. The number of condominium sales declined by 33.6% between 2007 and 2008, while the median price remained virtually unchanged.
The slowing Hawaiian economy has also resulted in a rise in delinquency and foreclosure rates. According to information provided by RealtyTrac, a real estate research firm, as reported by The Honolulu Advertiser, the number of foreclosures in the State of Hawaii has recently increased from an average of approximately 150 foreclosure filings per month for the seven months ended July 2008 to over 300 foreclosures per month during the months of August, September, October and November of 2008. Approximately one in 18 Hawaiian homeowners was more than one month behind in mortgage payments as of September 2008.
Tourism is one of the two largest components of Hawaii’s economy. The Hawaii Department of Business, Economic Development and Tourism reported a 24.2% decline in tourists from August 2007 to August 2008, representing the largest year-to-year reduction recorded in the state’s history. Tourism also declined 15.9% for the month of November 2008 compared to the month of November 2007, and 10.2% when comparing the first 11 months of 2008 to the first 11 months of 2007. Similarly, the unemployment rate in the State of Hawaii increased to 7.1% as of March 2009, compared to 5.5% as of December 2008, 4.2% as of August 2008 and 2.7% as of August 2007.
Recent Downturn in the Market for Stock of Financial Institutions and Their Holding Companies
Negative developments in the latter half of 2007 and during 2008 and 2009 in the global credit and securitization markets have resulted in significant uncertainty in the financial markets. Loan portfolio quality has deteriorated at many institutions. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. Specifically, the Federal Deposit Insurance Corporation Quarterly Banking Profile has reported that noncurrent assets plus other real estate owned as a percentage of assets rose to 1.88% as of December 31, 2008 compared to 0.94% as of December 31, 2007. For the year ended December 31, 2008, the Federal Deposit Insurance Corporation Quarterly Banking Profile has reported that return on average assets decreased to 0.12% compared to 0.81% for the year ended December 31, 2007. The NASDAQ Bank Index declined 23.92% between December 31, 2007 and December 31, 2008, and an additional 21.78% between December 31, 2008 and April 30, 2009. At December 31, 2008, our noncurrent assets plus other real estate owned as a percentage of assets was 0.02%, and our return on average assets was 0.60% for the year ended December 31, 2008.
Continued negative developments in the financial industry and the domestic and international credit markets may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. Further, continued
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declines in the stock market in general, or for stock of financial institutions and their holding companies, could affect our stock performance.
Tax Consequences
As a general matter, the conversion will not be a taxable transaction for federal or state income tax purposes to Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank, Territorial Bancorp Inc., or persons eligible to subscribe in the subscription offering. See the section of this prospectus under the heading “Taxation” for additional information.
Conditions to Completion of the Conversion and the Offering
We cannot complete the conversion and the offering unless:
| • | the plan of conversion and reorganization is approved by at least a majority of votes eligible to be cast by members of Territorial Mutual Holding Company. A special meeting of members to consider and vote upon the plan of conversion and reorganization has been set for June 26, 2009; |
| • | we have received orders to purchase at least the minimum number of shares of common stock offered; and |
| • | we receive final approval of the Office of Thrift Supervision to complete the conversion and the offering. |
How You Can Obtain Additional Information
Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or the offering, please call our Stock Information Center at 356-5108 (on Oahu only) or at (866) 922-1279 (toll free), Monday through Friday between 8:30 a.m. and 4:00 p.m., Hawaii time, or visit the Stock Information Center located at 1132 Bishop Street, Suite 305, Honolulu, Hawaii. The Stock Information Center will be closed on weekends and bank holidays.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF JUNE 22, 2009 IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO JUNE 22, 2009.
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You should consider carefully the following risk factors in evaluating an investment in our shares of common stock.
Risks Related to Our Business
Future changes in interest rates could reduce our profits.
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
| • | the interest income we earn on our interest-earning assets, such as loans and securities; and |
| • | the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. |
As a result of our focus on one- to four-family residential real estate loans and the low demand for adjustable rate loans in our market area, the interest rates we earn on our loans are generally fixed for a longer period of time. Additionally, many of our securities investments are of longer maturities with fixed interest rates. Like many savings institutions, our focus on deposit accounts as a source of funds, which have no stated maturity date or shorter contractual maturities than loans, results in our liabilities having a shorter duration than our assets. For example, as of December 31, 2008, 88.4% of our loans had maturities of 15 years or longer, while 93.0% of our certificates of deposits had maturities of one year or less. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets, such as loans and investments, may not increase as rapidly as the interest paid on our liabilities, such as deposits. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these cash flows at lower interest rates. Our vulnerability to rising interest rates in recent years caused our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) to decrease to 2.25% for the year ended December 31, 2007 from 2.60% for the year ended December 31, 2006 and 3.20% for the year ended December 31, 2005. This resulted in a corresponding decrease in net interest income (the difference between interest income and interest expense) to $28.6 million for the year ended December 31, 2007 from $33.1 million for the year ended December 31, 2006 and $39.4 million for the year ended December 31, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
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Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2008, the fair value of our investment and mortgage-backed securities, all classified as held to maturity, totaled $535.6 million. Net unrealized gains on these securities totaled $7.8 million at December 31, 2008.
At December 31, 2008, the Office of Thrift Supervision “rate shock” analysis indicated that our net portfolio value (the difference between the present value of our assets and the present value of our liabilities) would decrease by $40.4 million if there was an instantaneous 200 basis point increase in market interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
Our lending activities provide lower interest rates than financial institutions that originate more commercial loans.
Our principal lending activity consists of originating one- to four-family residential real estate mortgage loans. As of December 31, 2008, these loans totaled $581.3 million, or 90.5% of total loans as of that date. We originate our loans with a focus on limiting credit risk, and not to generate the highest return or create the greatest difference between our cost of funds and the yield on our interest-earning assets (interest rate spread). We intend to continue our focus on residential real estate lending and this lending strategy following the stock offering.
Residential real estate mortgage loans generally have lower interest rates than commercial business loans, commercial real estate loans and consumer loans. As a result, we may generate lower interest rate spreads and rates of return when compared to our competitors who originate more consumer or commercial loans than we do. For the year ended December 31, 2008, our net interest margin was 3.14%, compared to a median of 3.25% for a peer group of publicly traded savings institutions. This may reduce the value of our shares of common stock.
We could record future losses on our holdings of trust preferred securities that we purchased from issuer pools consisting primarily of financial institution holding companies. In addition, we may not receive full future interest payments on these securities.
We own shares of trust preferred securities with an adjusted cost basis of $4.5 million, and a fair value of $2.1 million at December 31, 2008. These securities had an adjusted cost basis of $4.1 million and a fair value of $1.3 million as of March 31, 2009. The trust preferred securities are debt obligations issued by two issuer pools (Preferred Term Securities XXIII, Ltd. co-marketed by Keefe, Bruyette & Woods, Inc. and FTN Financial Capital Markets (“PreTSL XXIII”) and Preferred Term Securities XXIV, Ltd. co-marketed by Keefe, Bruyette & Woods, Inc. and FTN Financial Capital Markets (“PreTSL XXIV”)), consisting primarily of holding companies for Federal Deposit Insurance Corporation-insured financial institutions. Each of these securities is a Class D security, and was originated with a credit rating of BBB. These securities were rated BBB Watch as of March 31, 2009. We recognized a pre-tax loss for other-than-temporary impairment of $2.5 million on one of these two securities (PreTSL XXIV) during the quarter ended December 31, 2008. With our adoption of Financial Accounting Standards Board Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP FAS 115-2 and FAS 124-2”), effective March 31, 2009, we reclassified $1.5 million of this impairment from retained earnings to accumulated other comprehensive loss. We also recognized further pre-tax loss of $298,000 and an increase in other comprehensive loss of $138,000 for the same security during the quarter ended March 31, 2009.
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The following table sets forth information with respect to these securities as of March 31, 2009.
| Pool Deal Name |
Book Value | Fair Value | Unrealized Gain (Loss) |
Credit Rating | Number of Financial Institutions in Pool |
Deferrals and Defaults as a % of Collateral |
Excess Subordination (1) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| PreTSL XXIII |
$ | 3,542 | $ | 699 | $ | (2,843 | ) | BBB Watch | 117 | 8.11 | % | $ | 33 | |||||||
| PreTSL XXIV |
$ | 562 | $ | 562 | $ | — | BBB Watch | 83 | 9.55 | % | $ | — | ||||||||
| (1) |
Estimated present value of future cash flows in excess of amortized cost basis, assuming that 50% of the security collateral is called in the 10th year following issuance. |
The amortized cost of these securities as of March 31, 2009 was $3.5 million for PreTSL XXIII and $3.1 million for PreTSL XXIV, respectively. These securities were downgraded to CC and C, respectively, as of April 9, 2009.
In reviewing our investment in PreTSL XXIII, as of March 31, 2009, we have assumed average deferrals and defaults of 0.63% per year through the remaining term of the security (through 2027). We believe that, as of March 31, 2009, we would have to assume deferrals and defaults of 1.66% per year for us to recognize an other-than-temporary impairment on PreTSL XXIII as of March 31, 2009.
A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an additional impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of the trust preferred securities could decline if the overall economy and the financial condition of some of the issuers continue to deteriorate and there remains limited liquidity for these securities.
For the quarters ended March 31, 2009 and December 31, 2008, we received interest payments totaling $0 and $66,000 on the trust preferred securities, respectively. The continued failure of the trust preferred issuers to make dividend payments for any quarter will reduce our earnings during that quarter.
Recent negative developments in the financial industry and the domestic and international credit markets may adversely affect our operations and results.
Negative developments in the latter half of 2007 and during 2008 and 2009 in the global credit and securitization markets have resulted in significant uncertainty in the financial markets. Loan portfolio quality has deteriorated at many institutions. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. Specifically, the Federal Deposit Insurance Corporation Quarterly Banking Profile has reported that noncurrent assets plus other real estate owned as a percentage of assets rose to 1.88% as of December 31, 2008 compared to 0.94% as of December 31, 2007. For the year ended December 31, 2008, the Federal Deposit Insurance Corporation Quarterly Banking Profile has reported that return on average assets decreased to 0.12% compared to 0.81% for the
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year ended December 31, 2007. The NASDAQ Bank Index declined 23.92% between December 31, 2007 and December 31, 2008, and an additional 21.78% between December 31, 2008 and April 30, 2009.
In response to these developments, Congress adopted the Emergency Economic Stabilization Act of 2008, under which the U.S. Department of the Treasury has the authority to expend up to $700 billion to assist in stabilizing and providing liquidity to the U.S. financial system. Although it was originally contemplated that these funds would be used primarily to purchase troubled assets under the Troubled Asset Relief Program, on October 14, 2008, the U.S. Department of the Treasury announced the Capital Purchase Program, under which it will purchase up to $250 billion of non-voting senior preferred shares of certain qualified financial institutions in an attempt to encourage financial institutions to build capital to increase the flow of credit to businesses and consumers and to support the economy. In addition, Congress has temporarily increased Federal Deposit Insurance Corporation deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The Federal Deposit Insurance Corporation has also announced the creation of the Temporary Liquidity Guarantee Program which is intended to strengthen confidence and encourage liquidity in financial institutions by temporarily guaranteeing newly issued senior unsecured debt of participating organizations and providing full coverage for noninterest-bearing transaction deposit accounts (such as business checking accounts, interest-bearing transaction accounts paying 50 basis points or less, and lawyers’ trust accounts), regardless of dollar amount until December 31, 2009.
The potential exists for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and limited credit availability currently being experienced. In addition, new laws, regulations, and other regulatory changes will increase our Federal Deposit Insurance Corporation insurance premiums and may also increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. Further, continued declines in the stock market in general, or for stock of financial institutions and their holding companies, could affect our stock performance.
The Federal Deposit Insurance Corporation is imposing an emergency assessment on financial institutions, which will decrease our earnings in 2009.
On February 27, 2009, the Federal Deposit Insurance Corporation announced a one-time special assessment of 20 basis points on all insured deposits regardless of the risk or size of the depository institution. This special assessment is payable by September 30, 2009 based on deposits as of June 30, 2009, and, if adopted as currently proposed, would result in additional non-interest expense of $1.9 million based on our deposits as of December 31, 2008. In addition, the Federal Deposit Insurance Corporation may assess additional special premiums in the future.
If our investment in the Federal Home Loan Bank of Seattle is classified as other-than-temporarily impaired or as permanently impaired, our earnings and stockholders’ equity could decrease.
We own common stock of the Federal Home Loan Bank of Seattle. We hold this stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the
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Federal Home Loan Bank of Seattle’s advance program. The aggregate cost and fair value of our Federal Home Loan Bank of Seattle common stock as of December 31, 2008 was $12.3 million based on its par value. There is no market for our Federal Home Loan Bank of Seattle common stock.
Recent published reports indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. Specifically, in January 2009, the Federal Home Loan Bank of Seattle announced that it anticipated that it would have a risk-based capital deficiency as of December 31, 2008. In an extreme situation, it is possible that the capital of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Seattle common stock could be impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the after-tax amount of the impairment charge.
The Federal Home Loan Bank of Seattle stopped paying dividends during the fourth quarter of 2008. This will negatively affect our earnings.
The Federal Home Loan Bank of Seattle stopped paying dividends during the fourth quarter of 2008, and would be prohibited from paying dividends in the future so long as it fails to meet any of its regulatory capital requirements. As a result of its expected risk-based capital deficiency as of December 31, 2008, we may not receive dividends from the Federal Home Loan Bank of Seattle in the near future. We received $117,000 in total dividends from the Federal Home Loan Bank of Seattle during the three quarters ended September 30, 2008, and the failure of the Federal Home Loan Bank of Seattle to pay dividends for any quarter will reduce our earnings during that quarter.
Lack of consumer confidence in financial institutions may decrease our level of deposits.
Deposits at Territorial Savings Bank are insured by the Federal Deposit Insurance Corporation up to certain levels. However, our level of deposits may be affected by a recent lack of consumer confidence in financial institutions, which has caused depositors at financial institutions to withdraw deposits in excess of the applicable insurance levels. Such depositors may determine to place their excess funds in other institutions or to invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Department of the Treasury. These consumer preferences may require us to pay higher interest rates to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.
There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
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Non-residential real estate loans increase our exposure to credit risks.
At December 31, 2008, our portfolio of commercial real estate, construction and other non-residential real estate loans totaled $21.0 million, or 3.3% of total loans, compared to $8.6 million, or 1.7% of total loans at December 31, 2005. These loans generally expose us to a greater risk of non-payment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans.
We target our business lending and marketing strategy towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and financial condition may be adversely affected.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Business of Territorial Savings Bank—Competition.”
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. While our allowance for loan losses was 0.14% of total loans at December 31, 2008, material additions to our allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
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Concentration of loans in our primary market area, which has recently experienced an economic downturn, may increase risk.
Our success depends primarily on the general economic conditions in the State of Hawaii, as nearly all of our loans are to customers in the state. Accordingly, the local economic conditions in the State of Hawaii have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect our financial results.
On the island of Oahu, the primary real estate market in Hawaii, resales of existing single-family homes totaled 2,741 units during the year ended December 31, 2008, a decrease of 24.4% compared to similar sales during the year ended December 31, 2007. The number of condominium sales (which was greater than the number of single-family home resales) declined by 28.5% during the year ended December 31, 2008 compared to the year ended December 31, 2007.
On the island of Maui, the second largest real estate market, sales of existing single-family homes totaled 907 units for 2008, a decrease of 20.6% compared to 2007, while the median price for the year ended December 31, 2008 declined by 8.3% compared to the median price for the year ended December 31, 2007. The number of condominium sales declined by 33.6% between 2007 and 2008.
The slowing Hawaiian economy has also resulted in a rise in delinquency and foreclosure rates. The number of foreclosures in the State of Hawaii has recently increased from an average of approximately 150 foreclosure filings per month for the seven months ended July 2008 to over 300 foreclosures per month during the months of August, September, October and November of 2008. Approximately one in 18 Hawaiian homeowners was more than one month behind in mortgage payments as of September 2008.
Our local economy relies heavily on the tourism industry. Continued downturns in this industry could affect our operations and results.
Tourism is one of the two largest components of Hawaii’s economy. The Hawaii Department of Business, Economic Development and Tourism reported a 24.2% decline in tourists from August 2007 to August 2008, representing the largest year-to-year reduction recorded in the state’s history. Tourism also declined 15.9% for the month of November 2008 compared to the month of November 2007, and 10.2% when comparing the first 11 months of 2008 to the first 11 months of 2007. Similarly, the unemployment rate in the State of Hawaii increased to 7.1% as of March 2009, compared to 5.5% as of December 2008, 4.2% as of August 2008 and 2.7% as of August 2007. Continued downturns in the tourism industry, and the related loss of jobs or operating income for businesses, could have a significant impact on our ability to originate loans, and the ability of borrowers to repay loans, either of which could adversely affect our financial condition and results of operations.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision, and examination by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have
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extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. There can be no assurance that proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
Severe weather, natural disasters and other external events could significantly affect our operations and results.
Because all of our office locations are located in the State of Hawaii, severe weather or natural disasters, such as tsunamis, hurricanes and earthquakes and other adverse external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Accordingly, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could adversely affect our financial condition and results of operations.
Risks Related to this Stock Offering
The future price of the shares of common stock may be less than the purchase price in the stock offering.
If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is determined by an independent, third-party appraisal, pursuant to federal banking regulations and subject to review and approval by the Office of Thrift Supervision. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Our aggregate pro forma market value as reflected in the final, approved independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.
The capital we raise in the stock offering will reduce our return on equity. This could negatively affect the trading price of our shares of common stock.
Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the year ended December 31, 2008, our return on average equity was 7.37%. Following the stock offering, we expect our consolidated equity to increase from $99.4 million to between $165.4 million at the minimum of the offering range and $203.4 million at the adjusted maximum of the offering range. Based upon our earnings for the year ended December 31, 2008, and these pro forma equity levels, our return on equity would be 4.32% and 3.51% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain lower until we are able to leverage the additional capital we receive from the stock offering. Although we will be able to increase net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plan we intend to adopt. Until we can increase our net interest income and
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non-interest income, we expect our return on equity to remain lower, which may reduce the value of our shares of common stock.
We will need to implement additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements.
Upon completion of the stock offering, we will become a public reporting company. The federal securities laws and regulations of the Securities and Exchange Commission require that we file annual, quarterly and current reports, and that we maintain effective disclosure controls and procedures and internal controls over financial reporting. We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. These obligations will increase our operating expenses and could divert management’s attention from our banking operations. Compliance with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission will require us to certify the adequacy of our internal controls and procedures, which could require us to upgrade our systems, and/or hire additional staff, which would increase our operating costs.
Our stock-based benefit plans will increase our costs, which will reduce our income.
We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock sold in the stock offering with funds borrowed from Territorial Bancorp Inc. The cost of acquiring the shares of common stock for the employee stock ownership plan will be between $6.3 million at the minimum of the offering range and $9.8 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
We also intend to adopt a stock-based benefit plan after the stock offering that would award participants shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10%, respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock offering. Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is 6.5 years; the risk free interest rate is 1.87% (based on the seven-year Treasury rate) and the volatility rate on the shares of common stock is 25.8% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis is $3.04 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $744,000 at the adjusted maximum. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with shares awarded under the stock-based benefit plan would be $979,000 at the adjusted maximum. However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.
The shares of restricted stock granted under the stock-based benefit plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued
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directly from authorized but unissued shares of Territorial Bancorp Inc.) and cost the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the plan would be between $3.1 million at the minimum of the offering range and $4.9 million at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.
The implementation of stock-based benefit plans may dilute your ownership interest. Historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.
We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) or options to purchase shares of our common stock, following the stock offering. These stock-based benefit plans will be funded through either open market purchases of shares of common stock, if permitted, or from the issuance of authorized but unissued shares of common stock. Stockholders would experience a reduction in ownership interest totaling 12.9% in the event newly issued shares are used to fund stock options or awards of shares of common stock under these plans in an amount equal to 10% and 4%, respectively, of the shares issued in the stock offering. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock offering.
Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.
We have not determined whether we will adopt stock-based benefit plans more than one year following the stock offering. Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs.
If we adopt stock-based benefit plans within one year following the completion of the stock offering, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the stock offering. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our Board of Directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.”
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We will enter into employment agreements that may increase our compensation costs.
We have entered into employment agreements with each of Allan S. Kitagawa, our Chairman of the Board, President and Chief Executive Officer, Vernon Hirata, our Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate Secretary and Ralph Y. Nakatsuka, our Vice Chairman, Co-Chief Operating Officer. In the event of involuntary or good reason termination of employment, or certain types of termination following a change in control, as set forth in the employment agreements, the employment agreements provide for cash severance benefits that would cost approximately $7.3 million in the aggregate based on information as of December 31, 2008. For additional information see “Management of Territorial Bancorp Inc.—Executive Officer Compensation.”
We have broad discretion in using the proceeds of the stock offering. Our failure to effectively use such proceeds could reduce our profits.
We will use a portion of the net proceeds to finance the purchase of shares of common stock in the stock offering by the employee stock ownership plan and to redeem up to $24.0 million of trust preferred securities that we have issued, and may use the remaining net proceeds to pay dividends to stockholders, repurchase shares of common stock, purchase investment securities, deposit funds in Territorial Savings Bank, acquire other financial services companies or for other general corporate purposes. Territorial Savings Bank may use the proceeds it receives to fund new loans, establish or acquire new branches, purchase investment securities, reduce a portion of our borrowings, or for general corporate purposes. We have not identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable for the effective deployment of the proceeds and we cannot predict how long we will require to effectively deploy the proceeds.
Our stock value may be negatively affected by federal regulations that restrict takeovers.
For three years following the stock offering, Office of Thrift Supervision regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. See “Restrictions on Acquisition of Territorial Bancorp Inc.” for a discussion of applicable Office of Thrift Supervision regulations regarding acquisitions.
The corporate governance provisions in our articles of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our board of directors and may impede takeovers of the company that our board might conclude are not in the best interest of Territorial Bancorp Inc. or its stockholders.
Provisions in our articles of incorporation and bylaws may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of Territorial Bancorp Inc. more difficult. For example, our Board of Directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Our articles of incorporation include a provision that no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us. In addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how
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directors may be removed from office. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors. See “Restrictions on Acquisition of Territorial Bancorp Inc.”
We have never issued common stock and there is no guarantee that a liquid market will develop.
We have never issued capital stock and there is no established market for our common stock. Depending on the number of shares we sell, we expect that our common stock will be traded on the Nasdaq Global Market or the Nasdaq Global Select Market, each under the symbol “TBNK,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Keefe Bruyette & Woods, Inc. has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.
We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.
If we do not sell enough shares to reach the minimum of the offering range through the subscription and community offerings, shares may be offered for sale to the general public in a syndicated community offering to be managed by Keefe Bruyette & Woods, Inc., acting as our agent. If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notifying all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted by the plan of conversion and reorganization and the Office of Thrift Supervision.
The distribution of subscription rights could have adverse income tax consequences.
If the subscription rights granted to certain depositors and borrowers of Territorial Savings Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial and other data of Territorial Mutual Holding Company and its subsidiaries for the years and at the dates indicated. The information at December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Territorial Mutual Holding Company beginning at page F-1 of this prospectus. The information at December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 is derived in part from audited consolidated financial statements that are not included in this prospectus.
| At December 31, | ||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
| (In thousands) | ||||||||||||||||
| Selected Financial Condition Data: |
||||||||||||||||
| Total assets |
$ | 1,224,446 | $ | 1,162,018 | $ | 1,299,783 | $ | 1,244,834 | $ | 1,210,930 | ||||||
| Cash |
11,216 | 19,755 | 88,512 | 15,085 | 48,274 | |||||||||||
| Investment securities held to maturity |
527,767 | 538,025 | 621,339 | 669,853 | 644,427 | |||||||||||
| Loans receivable, net |
633,160 | 554,795 | 546,201 | 516,090 | 480,079 | |||||||||||
| Bank owned life insurance |
27,107 | 26,068 | 20,026 | 19,301 | 18,588 | |||||||||||
| Federal Home Loan Bank of Seattle stock, at cost |
12,348 | 12,348 | 12,348 | 12,348 | 9,592 | |||||||||||
| Deposits |
923,914 | 892,316 | 981,354 | 1,016,051 | 1,024,836 | |||||||||||
| Federal Home Loan Bank of Seattle advances |
35,791 | 72,000 | 100,000 | 100,317 | 75,000 | |||||||||||
| Securities sold under agreements to repurchase |
115,200 | 55,200 | 60,545 | — | — | |||||||||||
| Subordinated debentures |
24,221 | 24,199 | 24,178 | 24,156 | — | |||||||||||
| Equity |
99,381 | 92,479 | 86,829 | 79,367 | 67,262 | |||||||||||
| Years Ended December 31, | ||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
| (In thousands) | ||||||||||||||||
| Selected Operating Data: |
||||||||||||||||
| Interest and dividend income |
$ | 61,220 | $ | 60,947 | $ | 61,887 | $ | 61,230 | $ | 56,049 | ||||||
| Interest expense |
25,247 | 32,368 | 28,836 | 21,842 | 17,993 | |||||||||||
| Net interest income |
35,973 | 28,579 | 33,051 | 39,388 | 38,056 | |||||||||||
| Provision (reversal of allowance) for loan losses |
149 | 25 | 6 | (15 | ) | 277 | ||||||||||
| Net interest and dividend income after provision (reversal of allowance) for loan losses |
35,824 | 28,554 | 33,045 | 39,403 | 37,779 | |||||||||||
| Non-interest income |
2,173 | 3,876 | 4,013 | 4,143 | 6,278 | |||||||||||
| Non-interest expense |
27,003 | 24,047 | 25,100 | 22,666 | 19,876 | |||||||||||
| Income before income taxes |
10,994 | 8,383 | 11,958 | 20,880 | 24,181 | |||||||||||
| Income taxes |
3,794 | 2,615 | 4,247 | 7,912 | 10,198 | |||||||||||
| Net income |
$ | 7,200 | $ | 5,768 | $ | 7,711 | $ | 12,968 | $ | 13,983 | ||||||
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| At or For the Years Ended December 31, | |||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||
| Selected Financial Ratios and Other Data: |
|||||||||||||||
| Performance Ratios: |
|||||||||||||||
| Return on average assets (ratio of net income to average total assets) |
0.60 | % | 0.48 | % | 0.62 | % | 1.04 | % | 1.24 | % | |||||
| Return on average equity (ratio of net income to average equity) |
7.37 | % | 6.35 | % | 8.93 | % | 17.42 | % | 22.96 | % | |||||
| Interest rate spread (1) |
2.95 | % | 2.25 | % | 2.60 | % | 3.20 | % | 3.43 | % | |||||
| Net interest margin (2) |
3.14 | % | 2.48 | % | 2.78 | % | 3.30 | % | 3.54 | % | |||||
| Efficiency ratio (3) |
70.79 | % | 74.09 | % | 67.72 | % | 52.07 | % | 44.83 | % | |||||
| Non-interest expense to average total assets |
2.25 | % | 2.01 | % | 2.03 | % | 1.82 | % | 1.76 | % | |||||
| Average interest-earning assets to average interest-bearing liabilities |
108.71 | % | 108.16 | % | 107.18 | % | 105.55 | % | 106.46 | % | |||||
| Average equity to average total assets |
8.15 | % | 7.58 | % | 6.99 | % | 5.99 | % | 5.41 | % | |||||
| Asset Quality Ratios: |
|||||||||||||||
| Non-performing assets to total assets |
0.02 | % | 0.01 | % | 0.05 | % | 0.01 | % | 0.00 | % | |||||
| Non-performing loans to total loans |
0.02 | % | 0.02 | % | 0.11 | % | 0.02 | % | 0.00 | % | |||||
| Allowance for loan losses to non-performing loans |
603.36 | % | 724.53 | % | 129.51 | % | 712.96 | % | 75,000.00 | % | |||||
| Allowance for loan losses to total loans |
0.14 | % | 0.14 | % | 0.14 | % | 0.15 | % | 0.16 | % | |||||
| Capital Ratios (bank-level only): |
|||||||||||||||
| Total capital (to risk-weighted assets) |
24.97 | % | 25.33 | % | 23.57 | % | 23.60 | % | 22.21 | % | |||||
| Tier I capital (to risk-weighted assets) |
24.82 | % | 25.17 | % | 23.41 | % | 23.43 | % | 22.02 | % | |||||
| Tier I capital (to total assets) |
9.89 | % | 9.83 | % | 8.39 | % | 8.11 | % | 7.41 | % | |||||
| Other Data: |
|||||||||||||||
| Number of full service offices |
24 | 24 | 24 | 22 | 20 | ||||||||||
| Full time equivalent employees |
250 | 244 | 226 | 220 | 200 | ||||||||||
| (1) | The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year. |
| (2) | The net interest margin represents net interest income as a percent of average interest-earning assets for the year. |
| (3) | The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. |
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The following tables set forth selected consolidated historical financial and other data of Territorial Mutual Holding Company and its subsidiaries for the periods and at the dates indicated. The information at December 31, 2008 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Territorial Mutual Holding Company beginning at page F-1 of this prospectus. The information at March 31, 2009 and for the three months ended March 31, 2009 and 2008 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be achieved for the remainder of 2009.
| At March 31, 2009 |
At December 31, 2008 | |||||
| (In thousands) | ||||||
| Selected Financial Condition Data: |
||||||
| Total assets |
$ | 1,223,823 | $ | 1,224,446 | ||
| Cash and cash equivalents |
32,925 | 11,216 | ||||
| Investment securities held to maturity |
506,865 | 527,767 | ||||
| Loans receivable, net |
630,787 | 633,160 | ||||
| Bank owned life insurance |
27,362 | 27,107 | ||||
| Federal Home Loan Bank of Seattle stock, at cost |
12,348 | 12,348 | ||||
| Deposits |
941,584 | 923,914 | ||||
| Federal Home Loan Bank of Seattle advances |
— | 35,791 | ||||
| Securities sold under agreements to repurchase |
130,200 | 115,200 | ||||
| Subordinated debentures |
24,226 | 24,221 | ||||
| Equity |
101,967 | 99,381 | ||||
| Three Months Ended March 31, | ||||||
| 2009 | 2008 | |||||
| (In thousands) | ||||||
| Selected Operating Data: |
||||||
| Interest and dividend income |
$ | 15,720 | $ | 14,940 | ||
| Interest expense |
5,342 | 7,031 | ||||
| Net interest income |
10,378 | 7,909 | ||||
| Provision for loan losses |
1,102 | 6 | ||||
| Net interest and dividend income after provision for loan losses |
9,276 | 7,903 | ||||
| Non-interest income |
1,497 | 1,160 | ||||
| Non-interest expense |
6,635 | 6,329 | ||||
| Income before income taxes |
4,138 | 2,734 | ||||
| Income taxes |
1,467 | 921 | ||||
| Net income |
$ | 2,671 | $ | 1,813 | ||
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| At or For the Three Months Ended March 31, |
||||||
| 2009 | 2008 | |||||
| Selected Financial Ratios and Other Data: |
||||||
| Performance Ratios: |
||||||
| Return on average assets (ratio of net income to average total assets) (1) |
0.87 | % | 0.62 | % | ||
| Return on average equity (ratio of net income to average equity) (1) |
10.55 | % | 7.71 | % | ||
| Interest rate spread (1)(2) |
3.39 | % | 2.61 | % | ||
| Net interest margin (1)(3) |
3.54 | % | 2.82 | % | ||
| Efficiency ratio (4) |
55.87 | % | 69.79 | % | ||
| Non-interest expense to average total assets (1) |
2.17 | % | 2.16 | % | ||
| Average interest-earning assets to average interest-bearing liabilities |
108.69 | % | 108.38 | % | ||
| Average equity to average total assets |
8.27 | % | 8.02 | % | ||
| Asset Quality Ratios: |
||||||
| Non-performing assets to total assets |
0.10 | % | 0.01 | % | ||
| Non-performing loans to total loans |
0.16 | % | 0.03 | % | ||
| Allowance for loan losses to non-performing loans |
193.43 | % | 483.65 | % | ||
| Allowance for loan losses to total loans |
0.32 | % | 0.13 | % | ||
| Capital Ratios (bank-level only): |
||||||
| Total capital (to risk-weighted assets) |
26.18 | % | 24.75 | % | ||
| Tier I capital (to risk-weighted assets) |
25.82 | % | 24.59 | % | ||
| Tier I capital (to total assets) |
10.20 | % | 9.77 | % | ||
| Other Data: |
||||||
| Number of full service offices |
24 | 24 | ||||
| Full time equivalent employees |
248 | 246 | ||||
|
|
||||||
| (1) | Annualized. |
| (2) | The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. |
| (3) | The net interest margin represents net interest income as a percent of average interest-earning assets for the period. |
| (4) | The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. |
Comparison of Financial Condition at March 31, 2009 and December 31, 2008
Assets. At March 31, 2009, our assets were $1.224 billion, a decrease of $623,000, or 0.1%, from $1.224 billion at December 31, 2008. The decrease was caused by decreases in investment securities and loans, partially offset by an increase in cash and cash equivalents.
Loans. At March 31, 2009, total loans (including loans held for sale of $14.4 million) were $640.3 million, or 52.3% of total assets. During the three months ended March 31, 2009, the loan portfolio decreased $1.8 million, or 0.3%. The decrease was caused primarily by a decrease in home equity loans and lines of credit of $3.6 million. One- to four-family residential real estate loans increased $2.5 million despite our selling $24.7 million of longer-term, one- to four-family residential real estate loans during the three months ended March 31, 2009.
Securities. At March 31, 2009, our securities portfolio totaled $506.9 million, or 41.4% of assets. At March 31, 2009, all of such securities were classified as held-to-maturity, and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full
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documentation) loans. At March 31, 2009, we held no common or preferred stock of Fannie Mae or Freddie Mac.
During the three months ended March 31, 2009, our securities portfolio decreased $20.9 million, or 4.0%, as repayments exceeded purchases of securities.
At March 31, 2009, we owned trust preferred securities with a carrying value of $4.1 million. This portfolio consists of two securities (PreTSL XXIII and PreTSL XXIV), which represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.
On April 9, 2009, the Financial Accounting Standards Board issued Financial Accounting Standards Board Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in a company’s financial statements. Before these recent staff positions, to conclude that an impairment was not other than temporary an entity was required, among other considerations, to assert that it had the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value in accordance with Securities and Exchange Commission Staff Accounting Bulletin Topic 5M, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities,” and other authoritative literature. As a result of these recent staff positions, an entity should assess whether the entity (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery (for example, if its cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before the forecasted recovery occurs). FSP FAS 115-2 and FAS 124-2 also changes the trigger used to assess the collectibility of cash flows from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, an other-than-temporary impairment shall have occurred. We adopted FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 for the quarter ended March 31, 2009.
In reviewing our investment in the trust preferred securities, we concluded that we did not have the intent to sell either trust preferred security, and it was not more likely than not that we would be required to sell either trust preferred security before the anticipated recovery.
The trust preferred securities market is considered to be inactive as only two sales transactions have occurred over the past nine months. In addition, there have been no new issues of pooled trust preferred securities since 2007. Because the trust preferred securities market is inactive, we use a discounted cash flow model to determine the estimated fair value of the trust preferred securities and to determine whether they are other-than-temporarily impaired.
We had previously considered our investment in PreTSL XXIV other-than-temporarily impaired as of December 31, 2008, and we recorded a $2.5 million impairment charge during the quarter ended December 31, 2008. Based on our continued review, we considered our investment in this security to have experienced additional other-than-temporary impairment as of March 31, 2009, and recorded an additional $436,000 impairment charge with respect to this security during the quarter ended March 31,
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2009, of which $298,000 was a credit loss recorded through our income statement as a debit to non-interest income, and $138,000 was recorded as an increase to other comprehensive loss. In addition, the cumulative effect of our adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2, effective March 31, 2009, resulted in the reclassification of $1.5 million of securities impairment from retained earnings to accumulated other comprehensive loss.
In reviewing our investment in the second trust preferred security (PreTSL XXIII), our discounted cash flow analysis indicated that we should be able to recover the entire amortized cost basis of the security. Accordingly, as of March 31, 2009, we did not consider our investment in the second trust preferred security to have experienced other-than-temporary impairment. Both of these securities were downgraded as of April 9, 2009. See “Risk Factors—We could record future losses on our holdings of trust preferred securities that we purchased from issuer pools consisting primarily of financial institution holding companies. In addition, we may not receive full future interest payments on these securities.”
We own common stock of the Federal Home Loan Bank of Seattle with an aggregate cost and fair value as of March 31, 2009 of $12.3 million based on its par value. There is no market for our Federal Home Loan Bank of Seattle common stock.
Recent published reports indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capital of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. In addition, the Federal Home Loan Bank of Seattle stopped paying dividends during the fourth quarter of 2008. See “Risk Factors—If our investment in the Federal Home Loan Bank of Seattle is classified as other-than-temporarily impaired or as permanently impaired, our earnings and stockholders’ equity could decrease” and “—The Federal Home Loan Bank of Seattle stopped paying dividends during the fourth quarter of 2008. This will negatively affect our earnings.”
Deposits. During the three months ended March 31, 2009, our deposits grew $17.7 million, or 1.9%. The increase was caused by our continuing to promote higher than market rates for our savings accounts (which increased $37.0 million during the quarter), offsetting a decrease of $14.5 million in certificates of deposit. We have lowered the rates we pay on certificates of deposit because of increased liquidity from other sources, such as loan and securities repayments, allowing these deposits to run off.
Borrowings. Historically, our borrowings consisted primarily of advances from the Federal Home Loan Bank of Seattle and funds borrowed under repurchase agreements. During the quarter ended March 31, 2009, our borrowings decreased $20.8 million, or 13.8%. During the quarter ended March 31, 2009, we repaid all of our outstanding Federal Home Loan Bank advances. Our reverse repurchase agreements increased $15.0 million, or 13.0%, as we did not require further borrowings to fund our operations. Instead, we funded our operations with additional deposits and principal repayments on loans and mortgage-backed securities.
Equity. At March 31, 2009, our equity was $102.0 million, an increase of $2.6 million, or 2.6%, from $99.4 million at December 31, 2008. The increase resulted from net income of $2.7 million for the quarter ended March 31, 2009.
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Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008
General. Net income increased $858,000, or 47.3%, to $2.7 million for the three months ended March 31, 2009 from $1.8 million for the three months ended March 31, 2008. The increase was primarily caused by a $2.5 million increase in net interest income, partially offset by an increase in the provision for loan losses of $1.1 million and an increase in non-interest expense of $306,000.
Net Interest Income. Net interest income increased $2.5 million, or 31.2%, to $10.4 million for the three months ended March 31, 2009 from $7.9 million for the three months ended March 31, 2008. Interest and dividend income increased $780,000, or 5.2%, as our average balance of loans increased by $66.2 million, or 11.6%. Interest expense decreased $1.7 million, or 24.0%, as declining market interest rates for certificates of deposits allowed us to reduce our deposit expense by $1.4 million. We also experienced a $278,000 decrease in interest expense on Federal Home Loan Bank advances. The interest rate spread and net interest margin were 3.39% and 3.54%, respectively, for the three months ended March 31, 2009, compared to 2.61% and 2.82% for the three months ended March 31, 2008. The improvement in the interest rate spread was the result of a decrease in the average cost of interest-bearing liabilities of 74 basis points, and an increase in the average yield on interest-earning assets of four basis points.
Interest and Dividend Income. Interest and dividend income increased $780,000 to $15.7 million for the three months ended March 31, 2009 from $14.9 million for the three months ended March 31, 2008. An increase in interest income on loans was partially offset by a decrease in interest income on investment securities. Interest income on loans increased $1.1 million, or 13.1%, to $9.4 million for the three months ended March 31, 2009 from $8.4 million for the three months ended March 31, 2008, as our average balance of loans increased $66.2 million, or 11.6%. Interest income on securities decreased $275,000, or 4.2%, to $6.3 million for the three months ended March 31, 2009 from $6.5 million for the three months ended March 31, 2008, as our average balance of investment securities decreased $17.5 million, or 3.3%. The reduction in our average securities portfolio was caused by repayments on mortgage-backed securities exceeding new purchases. There were no material changes in the rates we earned on loans or investment securities between the periods.
Interest Expense. Interest expense decreased $1.7 million, or 24.0%, to $5.3 million for the three months ended March 31, 2009 from $7.0 million for the three months ended March 31, 2008. Interest expense on deposits decreased $1.4 million, or 26.8%, caused by a decrease in interest expense on certificates of deposit of $1.7 million, or 44.7%. The rates we paid on certificates of deposit decreased 164 basis points, and we experienced a $10.2 million, or 2.6%, decrease in the average balance of certificates of deposit. We have lowered the rates we pay on certificates of deposit because of increased liquidity from other sources, such as loan and securities repayments, allowing these deposits to run off. In addition, interest expense on Federal Home Loan Bank advances decreased $278,000, or 89.4%. During the quarter ended March 31, 2009, we repaid all of our outstanding Federal Home Loan Bank advances.
Provision for Loan Losses. We recorded a provision for loan losses of $1.1 million for the three months ended March 31, 2009 compared to a provision of $6,000 for the three months ended March 31, 2008. The provisions made during 2009 were general reserves for one- to four-family residential real estate loans in recognition of increased non-performing loans and deteriorating environmental factors, in accordance with the methodology described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Allowance for Loan Losses.” Non-performing loans totaled $1.0 million at March 31, 2009, or 0.16% of total loans at that date, compared to $149,000 of non-performing
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loans at December 31, 2008, $159,000 of non-performing loans at March 31, 2008 and $106,000 of non-performing loans at December 31, 2007. Non-performing loans as of March 31, 2009 consisted primarily of one- to four-family residential real estate loans. We experienced net chargeoffs (recoveries) of $(1,000) and $5,000 for the three months ended March 31, 2009 and 2008, respectively. The allowance for loan losses to total loans was 0.32% and 0.13% at March 31, 2009 and 2008, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at March 31, 2009 and 2008.
Non-Interest Income. The following table summarizes changes in non-interest income between the three months ended March 31, 2009 and 2008.
| Three Months Ended March 31, |
Change | |||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
| Service fees on loan and deposit accounts |
$ | 667 | $ | 722 | $ | (55 | ) | (7.6 | )% | |||||
| Income on bank-owned life insurance |
255 | 261 | (6 | ) | (2.3 | )% | ||||||||
| Other-than-temporary impairment loss on investments |
(298 | ) | — | (298 | ) | N/A | ||||||||
| Gain on sale of investment securities |
— | 65 | (65 | ) | (100.0 | )% | ||||||||
| Gain on sale of loans |
799 | — | 799 | N/A | ||||||||||
| Other |
74 | 112 | (38 | ) | (33.9 | )% | ||||||||
| Total |
$ | 1,497 | $ | 1,160 | $ | 337 | 29.1 | % | ||||||
We sold $24.7 million and $0 of loans during the three months ended March 31, 2009 and 2008, respectively. We recognized a $298,000 loss for other-than-temporary impairment on our investments in trust preferred securities in the first quarter of 2009, as described in “—Comparison of Financial Condition at March 31, 2009 and December 31, 2008—Securities.”
Non-Interest Expense. The following table summarizes changes in non-interest expense between the three months ended March 31, 2009 and 2008.
| Three Months Ended March 31, |
Change | ||||||||||||
| 2009 | 2008 | $ Change | % Change | ||||||||||
| (In thousands) | |||||||||||||
| Salaries and employee benefits |
$ | 3,797 | $ | 3,563 | $ | 234 | 6.6 | % | |||||
| Occupancy |
1,130 | 1,018 | 112 | 11.0 | % | ||||||||
| Equipment |
704 | 701 | 3 | 0.4 | % | ||||||||
| Federal deposit insurance premiums |
134 | 295 | (161 | ) | (54.6 | )% | |||||||
| Other |
870 | 752 | 118 | 15.7 | % | ||||||||
| Total |
$ | 6,635 | $ | 6,329 | $ | 306 | 4.8 | % | |||||
Salaries and employee benefits expense increased as compensation expense, payroll tax expense and health insurance expense increased by $271,000, $56,000 and $25,000, respectively. The increase in compensation expense resulted primarily from increases in bonus accruals ($324,000 for the three months ended March 31, 2009 compared to $178,000 for the three months ended March 31, 2008) and loan agent commissions ($60,000 for the three months ended March 31, 2009 compared to $41,000 for the three
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months ended March 31, 2008). These increases were partially offset by a decrease of $136,000 in pension plan expense, resulting from our freezing our pension plan effective December 31, 2008.
Income Tax Expense. Income taxes were $1.5 million for the three months ended March 31, 2009, reflecting an effective tax rate of 35.5% compared to $921,000 for the three months ended March 31, 2008, reflecting an effective tax rate of 33.7%. The change in our effective tax rates was primarily attributable to a decline in tax-exempt interest earned on municipal securities.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
| • | statements of our goals, intentions and expectations; |
| • | statements regarding our business plans, prospects, growth and operating strategies; |
| • | statements regarding the asset quality of our loan and investment portfolios; and |
| • | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.
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 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; |
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| • | 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. Please see “Risk Factors” beginning on page 17.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $75.7 million and $103.2 million, or $119.0 million if the offering range is increased by 15%.
We intend to distribute the net proceeds from the stock offering as follows:
| Based Upon the Sale at $10.00 Per Share of | ||||||||||||||||||||||||||||
| 7,862,500 Shares | 9,250,000 Shares | 10,637,500 Shares | 12,233,125 Shares (1) | |||||||||||||||||||||||||
| Amount | Percent of Net Proceeds |
Amount | Percent of Net Proceeds |
Amount | Percent of Net Proceeds |
Amount | Percent of Net Proceeds |
|||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Stock offering proceeds |
$ | 78,625 | $ | 92,500 | $ | 106,375 | $ | 122,331 | ||||||||||||||||||||
| Less offering expenses |
(2,921 | ) | (3,049 | ) | (3,176 | ) | (3,323 | ) | ||||||||||||||||||||
| Net offering proceeds |
$ | 75,704 | 100.0 | % | $ | 89,451 | 100.0 | % | $ | 103,199 | 100.0 | % | $ | 119,008 | 100.0 | % | ||||||||||||
| Use of net proceeds: |
||||||||||||||||||||||||||||
| To Territorial Savings Bank |
$ | (37,852 | ) | 50.00 | % | $ | (44,726 | ) | 50.00 | % | $ | (51,600 | ) | 50.00 | % | $ | (59,504 | ) | 50.00 | |||||||||
| To redeem trust preferred securities |
(14,000 | ) | 18.49 | (20,000 | ) | 22.36 | (24,000 | ) | 23.26 | (24,000 | ) | 20.17 | ||||||||||||||||
| To fund loan to employee stock ownership plan |
(6,290 | ) | 8.31 | (7,400 | ) | 8.27 | (8,510 | ) | 8.25 | (9,787 | ) | 8.22 | ||||||||||||||||
| Retained by Territorial Bancorp Inc. |
$ | 17,562 | 23.20 | % | $ | 17,325 | 19.37 | % | $ | 19,089 | 18.49 | % | $ | 25,717 | 21.61 | % | ||||||||||||
| (1) | As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering. |
Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Territorial Savings Bank’s deposits. The net proceeds may vary because the total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.
Territorial Bancorp Inc. may use the proceeds it retains from the stock offering:
| • | to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering; |
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| • | to redeem up to $24.0 million of trust preferred securities, depending on how many shares of stock we sell in the offering; |
| • | to invest in mortgage-backed securities, collateralized mortgage obligations and debt securities issued by the United States Government and United States Government-sponsored agencies or entities; |
| • | to finance the acquisition of financial institutions or other financial service companies; |
| • | to pay cash dividends to stockholders; |
| • | to repurchase shares of our common stock; and |
| • | for other general corporate purposes. |
We intend to redeem between $14.0 million and $24.0 million of trust preferred securities we have issued, depending on how many shares of stock we sell in the offering. The redemption of the trust preferred securities is effected through the repayment of subordinated debentures that we have issued to the issuer of the actual trust preferred securities. Depending on how much of the trust preferred securities we redeem, we will also incur an expense of up to $522,000 for costs that are being amortized in future periods relating to the issuance of the trust preferred securities. The trust preferred securities have maturity dates and interest rates as follows:
| Amount |
Maturity Date |
Interest Rate as of December 31, 2008 |
|||
| (In thousands) | |||||
| $14,000 |
September 26, 2032 | 4.87 | % | ||
| $5,000 |
June 26, 2033 | 4.57 | % | ||
| $5,000 |
December 17, 2033 | 4.82 | % |
With the exception of the funding of the loan to the employee stock ownership plan and the redemption of the trust preferred securities, Territorial Bancorp Inc. has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in short-term investments, investment-grade debt obligations and mortgage-backed securities.
Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory approval.
Territorial Savings Bank may use the net proceeds it receives from the stock offering:
| • | to expand its banking franchise by establishing or acquiring new branches, or by acquiring other financial institutions or other financial services companies. We currently intend to open one new branch office per year over the next three years; |
| • | to fund new loans; |
| • | to repay short-term borrowings; |
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| • | to invest in mortgage-backed securities and collateralized mortgage obligations, and debt securities issued by the United States Government and United States Government-sponsored agencies or entities; and |
| • | for other general corporate purposes. |
Territorial Savings Bank has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Our short-term and long-term growth plans anticipate that, upon completion of the offering, we will experience growth through increased lending and investment activities and, possibly, acquisitions. We currently have no understandings or agreements to acquire other banks, thrifts, or other financial services companies. There can be no assurance that we will be able to consummate any acquisition. We intend to open a new branch office at a leased facility in Kihei, Hawaii during the second or third quarter of 2009, but we do not intend to use a material portion of the net proceeds with respect to this office. We expect that our capital expenditures will be approximately $600,000 per branch office that we establish.
Initially, the net proceeds we retain will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities.
OUR POLICY REGARDING DIVIDENDS
Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the Board of Directors is expected to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid, or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by Office of Thrift Supervision policy and regulations, may be paid in addition to, or in lieu of, regular cash dividends. We will file a consolidated tax return with Territorial Savings Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to Office of Thrift Supervision regulations, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
Pursuant to our Articles of Incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Territorial Savings Bank, because initially we will have no source of income other than dividends from Territorial Savings Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. A regulation of the Office of Thrift Supervision imposes limitations on “capital distributions” by savings institutions. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”
Any payment of dividends by Territorial Savings Bank to us that would be deemed to be drawn out of Territorial Savings Bank’s bad debt reserves would require a payment of taxes at the then-current
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tax rate by Territorial Savings Bank on the amount of earnings deemed to be removed from the reserves for such distribution. Territorial Savings Bank does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation—Federal Taxation” and “—State Taxation.”
We have never issued capital stock and there is no established market for our shares of common stock. We expect that, depending on the number of shares we sell, our shares of common stock will be traded on the Nasdaq Global Select Market or the Nasdaq Global Market under the symbol “TBNK,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Keefe Bruyette & Woods, Inc. has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.
The development and maintenance of a public market, having the desirable characteristics of depth, liquidity and orderliness, depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of shares of our common stock at any particular time may be limited, which may have an adverse effect on the price at which shares of our common stock can be sold. There can be no assurance that persons purchasing the shares of common stock will be able to sell their shares at or above the $10.00 offering purchase price per share. You should have a long-term investment intent if you purchase shares of our common stock and you should recognize that there may be a limited trading market in the shares of common stock.
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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At December 31, 2008, Territorial Savings Bank exceeded all of the applicable regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of Territorial Savings Bank at December 31, 2008, and the pro forma regulatory capital of Territorial Savings Bank, after giving effect to the sale of shares of common stock at a $10.00 per share purchase price. The table assumes the receipt by Territorial Savings Bank of at least 50% of the net offering proceeds. See “How we Intend to Use the Proceeds from the Offering.”
| Territorial Savings Bank Historical at |
Pro Forma at December 31, 2008, Based Upon the Sale in the Offering of | |||||||||||||||||||||||||||||||||
| December 31, 2008 | 7,862,500 Shares | 9,250,000 Shares | 10,637,500 Shares | 12,233,125 Shares (1) | ||||||||||||||||||||||||||||||
| Amount | Percent of Assets (2) |
Amount | Percent of Assets (2) |
Amount | Percent of Assets (2) |
Amount | Percent of Assets (2) |
Amount | Percent of Assets (2) |
|||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
| Equity |
$ | 119,587 | 9.78 | % | $ | 148,004 | 11.83 | % | $ | 153,213 | 12.20 | % | $ | 158,422 | 12.56 | % | $ | 164,411 | 12.97 | % | ||||||||||||||
| Tangible capital (3)(4) |
$ | 120,928 | 9.89 | % | $ | 149,345 | 11.94 | % | $ | 154,554 | 12.30 | % | $ | 159,763 | 12.67 | % | $ | 165,752 | 13.08 | % | ||||||||||||||
| Tangible requirement |
18,336 | 1.50 | 18,762 | 1.50 | 18,841 | 1.50 | 18,919 | 1.50 | 19,009 | 1.50 | ||||||||||||||||||||||||
| Excess |
$ | 102,592 | 8.39 | % | $ | 130,583 | 10.44 | % | $ | 135,713 | 10.80 | % | $ | 140,844 | 11.17 | % | $ | 146,743 | 11.58 | % | ||||||||||||||
| Core capital (3)(4) |
$ | 120,928 | 9.89 | % | $ | 149,345 | 11.94 | % | $ | 154,554 | 12.30 | % | $ | 159,763 | 12.67 | % | $ | 165,752 | 13.08 | % | ||||||||||||||
| Core requirement (5) |
48,896 | 4.00 | 50,033 | 4.00 | 50,241 | 4.00 | 50,450 | 4.00 | 50,689 | 4.00 | ||||||||||||||||||||||||
| Excess |
$ | 72,032 | 5.89 | % | $ | 99,312 | 7.94 | % | $ | 104,313 | 8.30 | % | $ | 109,313 | 8.67 | % | $ | 115,063 | 9.08 | % | ||||||||||||||
| Tier 1 risk-based capital |
$ | 120,928 | 24.82 | % | $ | 149,345 | 30.29 | % | $ | 154,554 | 31.28 | % | $ | 159,763 | 32.27 | % | $ | 165,752 | 33.40 | % | ||||||||||||||
| Risk-based requirement |
19,492 | 4.00 | 19,720 | 4.00 | 19,761 | 4.00 | 19,803 | 4.00 | 19,851 | 4.00 | ||||||||||||||||||||||||
| Excess |
$ | 101,436 | 20.82 | % | $ | 129,625 | 26.29 | % | $ | 134,793 | 27.28 | % | $ | 139,960 | 28.27 | % | $ | 145,901 | 29.40 | % | ||||||||||||||
| Total risk-based capital (3) |
$ | 121,678 | 24.97 | % | $ | 150,095 | 30.45 | % | $ | 155,304 | 31.44 | % | $ | 160,513 | 32.42 | % | $ | 166,502 | 33.55 | % | ||||||||||||||
| Risk-based requirement |
38,985 | 8.00 | 39,440 | 8.00 | 39,523 | 8.00 | 39,606 | 8.00 | 39,702 | 8.00 | ||||||||||||||||||||||||
| Excess |
$ | 82,693 | 16.97 | % | $ | 110,655 | 22.45 | % | $ | 115,781 | 23.44 | % | $ | 120,907 | 24.42 | % | $ | 126,800 | 25.55 | % | ||||||||||||||
| Reconciliation of capital infused into Territorial Savings Bank: |
||||||||||||||||||||||||||||||||||
| Net proceeds |
$ | 37,852 | $ | 44,726 | $ | 51,600 | $ | 59,504 | ||||||||||||||||||||||||||
| Less: Common stock acquired by employee stock ownership plan |
(6,290 | ) | (7,400 | ) | (8,510 | ) | (9,787 | ) | ||||||||||||||||||||||||||
| Less: Common stock acquired by stock-based benefit plans |
(3,145 | ) | (3,700 | ) | (4,255 | ) | (4,893 | ) | ||||||||||||||||||||||||||
| Pro forma increase |
$ | 28,417 | $ | 33,626 | $ | 38,835 | $ | 44,824 | ||||||||||||||||||||||||||
| (1) | As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering. |
| (2) | The current Office of Thrift Supervision core capital requirement for financial institutions is 3% of total adjusted assets for financial institutions that receive the highest supervisory rating for safety and soundness and a 4% to 5% core capital ratio requirement for all other financial institutions. |
| (3) | Tangible and core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. |
| (4) | Pro forma capital levels assume that we fund the stock-based benefit plans with purchases in the open market of 4% of the outstanding shares of common stock following the stock offering at a price equal to the price for which the shares of common stock are sold in the stock offering, and that the employee stock ownership plan purchases 8% of the shares of common stock to be outstanding immediately following the stock offering with funds we lend. Pro forma GAAP and regulatory capital have been reduced by the amount required to fund both of these plans. See “Management of Territorial Bancorp Inc.” for a discussion of the stock-based benefit plans and employee stock ownership plan. We may award shares of common stock under one or more stock-based benefit plans in excess of 4% of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. Accordingly, we may increase the awards beyond current regulatory restrictions and beyond the amounts reflected in this table. |
| (5) | Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting. |
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The following table presents the historical consolidated capitalization of Territorial Mutual Holding Company at December 31, 2008 and the pro forma consolidated capitalization of Territorial Bancorp Inc., after giving effect to the conversion and the offering, based upon the assumptions set forth in “Pro Forma Data.”
| Territorial Mutual Holding Company Historical at |
Territorial Bancorp Inc. Pro Forma, Based Upon the Sale in the Offering at $10.00 per Share of |
|||||||||||||||||||
| December 31, 2008 |
7,862,500 Shares |
9,250,000 Shares |
10,637,500 Shares |
12,233,125 Shares (1) |
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Deposits (2) |
$ | 923,914 | $ | 923,914 | $ | 923,914 | $ | 923,914 | $ | 923,914 | ||||||||||
| Borrowings and subordinated debentures |
175,212 | 161,212 | 155,212 | 151,212 | 151,212 | |||||||||||||||
| Total deposits, borrowed funds and subordinated debentures |
$ | 1,099,126 | $ | 1,085,126 | $ | 1,079,126 | $ | 1,075,126 | $ | 1,075,126 | ||||||||||
| Stockholders’ equity: |
||||||||||||||||||||
| Preferred stock $0.01 par value, 50,000,000 shares authorized; none issued or outstanding |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Common stock $0.01 par value, 100,000,000 shares authorized; assuming shares outstanding as shown (3) |
— | 79 | 93 | 106 | 122 | |||||||||||||||
| Additional paid-in capital (4) |
— | 75,625 | 89,358 | 103,093 | 118,886 | |||||||||||||||
| Retained earnings (5) |
100,897 | 100,897 | 100,897 | 100,897 | 100,897 | |||||||||||||||
| Less: |
||||||||||||||||||||
| Accumulated other comprehensive loss |
(1,516 | ) | (1,516 | ) | (1,516 | ) | (1,516 | ) | (1,516 | ) | ||||||||||
| Amortized expense recognized on repayment of trust preferred securities |
— | (203 | ) | (282 | ) | (318 | ) | (318 | ) | |||||||||||
| Common stock to be acquired by employee stock ownership plan (6) |
— | (6,290 | ) | (7,400 | ) | (8,510 | ) | (9,787 | ) | |||||||||||
| Common stock to be acquired by stock-based benefit plans (7) |
— | (3,145 | ) | (3,700 | ) | (4,255 | ) | (4,893 | ) | |||||||||||
| Total stockholders’ equity |
$ | 99,381 | $ | 165,447 | $ | 177,450 | $ | 189,497 | $ | 203,391 | ||||||||||
| Total stockholders’ equity as a percentage of total assets (2) |
8.12 | % | 12.96 | % | 13.83 | % | 14.68 | % | 15.59 | % | ||||||||||
| (1) | As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the offering. |
| (2) | Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals. |
| (3) | No effect has been given to the issuance of additional shares of Territorial Bancorp Inc. common stock pursuant to one or more stock-based benefit plans. If these plans are implemented within 12 months following the completion of the stock offering, an amount up to 10% and 4% of the shares of Territorial Bancorp Inc. common stock sold in the offering will be reserved for issuance upon the exercise of stock options and for issuance as restricted stock awards, respectively. See “Management of Territorial Bancorp Inc.” |
| (4) | The sum of the par value of the total shares outstanding and additional paid-in capital equals the net stock offering proceeds at the offering price of $10.00 per share. |
| (5) | The retained earnings of Territorial Savings Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion; Plan of Distribution—Liquidation Rights” and “Supervision and Regulation.” |
(footnotes continue on following page)
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(continued from previous page)
| (6) | Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Territorial Bancorp Inc. The loan will be repaid principally from Territorial Savings Bank’s contributions to the employee stock ownership plan. Since Territorial Bancorp Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no asset or liability will be reflected on Territorial Bancorp Inc.’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity. |
| (7) | Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Territorial Bancorp Inc. accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock stock-based benefit plans will require stockholder approval. The funds to be used by the stock-based benefit plans will be provided by Territorial Bancorp Inc. |
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The following tables summarize historical data of Territorial Savings Bank and pro forma data of Territorial Bancorp Inc. at and for the year ended December 31, 2008. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.
The net proceeds in the tables are based upon the following assumptions:
| • | all shares of common stock will be sold in the subscription and community offerings; |
| • | 374,000 shares of common stock will be purchased by our executive officers and directors, and their associates; |
| • | our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Territorial Bancorp Inc. The loan will be repaid in substantially equal payments of principal and interest over a period of 20 years; |
| • | Keefe Bruyette & Woods, Inc. will receive a fee equal to 1.0% of the dollar amount of the shares of common stock sold in the stock offering. Shares purchased by our employee benefit plans or by our officers, directors and employees, and their immediate families will not be included in calculating the shares of common stock sold for this purpose; and |
| • | expenses of the stock offering, other than fees and expenses to be paid to Keefe Bruyette & Woods, Inc., will be $2.1 million. |
We calculated pro forma consolidated net income for the year ended December 31, 2008 as if the estimated net proceeds we received had been invested at an assumed interest rate of 1.00% (0.61% on an after-tax basis). This represents the three-year United States Treasury Note for the week ended December 31, 2008, which, in light of current market interests rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by Office of Thrift Supervisions regulations.
We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.
The pro forma tables give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.
We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the tables below,
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we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.04 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 25.8% for the shares of common stock, a dividend yield of 0.0%, an expected option life of 6.5 years and a risk-free interest rate of 1.87%.
We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.
As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute at least 50% of the net proceeds from the stock offering to Territorial Savings Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
| • | withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering; |
| • | our results of operations after the stock offering; or |
| • | changes in the market price of the shares of common stock after the stock offering. |
The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets, the liquidation account we will establish in the conversion or tax bad debt reserves in the unlikely event we are liquidated.
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| At or For the Year Ended December 31, 2008 Based Upon the Sale at $10.00 Per Share of |
||||||||||||||||
| 7,862,500 Shares |
9,250,000 Shares |
10,637,500 Shares |
12,233,125 Shares (1) |
|||||||||||||
| (Dollars in thousands, except per share amounts) | ||||||||||||||||
| Gross Proceeds of Offering |
$ | 78,625 | $ | 92,500 | $ | 106,375 | $ | 122,331 | ||||||||
| Less: expenses |
(2,921 | ) | (3,049 | ) | (3,176 | ) | (3,323 | ) | ||||||||
| Estimated net proceeds |
75,704 | 89,451 | 103,199 | 119,008 | ||||||||||||
| Less: Repayment of trust preferred securities |
(14,000 | ) | (20,000 | ) | (24,000 | ) | (24,000 | ) | ||||||||
| Less: Common stock purchased by ESOP (2) |
(6,290 | ) | (7,400 | ) | (8,510 | ) | (9,787 | ) | ||||||||
| Less: Common stock awarded under stock-based benefit plans (3) |
(3,145 | ) | (3,700 | ) | (4,255 | ) | (4,893 | ) | ||||||||
| Estimated net cash proceeds |
$ | 52,269 | $ | 58,351 | $ | 66,434 | $ | 80,328 | ||||||||
| For the Year Ended December 31, 2008 | ||||||||||||||||
| Consolidated net income: |
||||||||||||||||
| Historical |
$ | 7,200 | $ | 7,200 | $ | 7,200 | $ | 7,200 | ||||||||
| Pro forma income on net proceeds |
319 | 356 | 405 | 490 | ||||||||||||
| Pro forma interest savings on trust preferred securities |
615 | 864 | 1,024 | 1,024 | ||||||||||||
| Pro forma ESOP adjustment (2) |
(192 | ) | (226 | ) | (260 | ) | (298 | ) | ||||||||
| Pro forma stock award adjustment (3) |
(384 | ) | (451 | ) | (519 | ) | (597 | ) | ||||||||
| Pro forma stock option adjustment (4) |
(478 | ) | (562 | ) | (647 | ) | (744 | ) | ||||||||
| Pro forma net income |
$ | 7,080 | $ | 7,181 | $ | 7,203 | $ | 7,075 | ||||||||
| Per share net income: |
||||||||||||||||
| Historical |
$ | 0.99 | $ | 0.85 | $ | 0.73 | $ | 0.64 | ||||||||
| Pro forma income on net proceeds |
0.04 | 0.04 | 0.04 | 0.05 | ||||||||||||
| Pro forma interest savings on trust preferred securities |
0.09 | 0.10 | 0.11 | 0.09 | ||||||||||||
| Pro forma ESOP adjustment (2) |
(0.03 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | ||||||||
| Pro forma stock award adjustment (3) |
(0.05 | ) | (0.05 | ) | (0.05 | ) | (0.05 | ) | ||||||||
| Pro forma stock option adjustment (4) |
(0.07 | ) | (0.07 | ) | (0.07 | ) | (0.07 | ) | ||||||||
| Pro forma net income per share (5) |
$ | 0.97 | $ | 0.84 | $ | 0.73 | $ | 0.63 | ||||||||
| Offering price as a multiple of pro forma net earnings per share |
10.31 | x | 11.90 | x | 13.70 | x | 15.87 | x | ||||||||
| Number of shares outstanding for pro forma net income per share calculations (5) |
7,264,950 | 8,547,000 | 9,829,050 | 11,303,408 | ||||||||||||
| At December 31, 2008 | ||||||||||||||||
| Stockholders’ equity: |
||||||||||||||||
| Historical |
$ | 99,381 | $ | 99,381 | $ | 99,381 | $ | 99,381 | ||||||||
| Estimated net proceeds |
75,704 | 89,451 | 103,199 | 119,008 | ||||||||||||
| Less: Amortized expense recognized on repayment of trust preferred securities (after tax) |
(203 | ) | (282 | ) | (318 | ) | (318 | ) | ||||||||
| Less: Common stock acquired by ESOP (2) |
(6,290 | ) | (7,400 | ) | (8,510 | ) | (9,787 | ) | ||||||||
| Less: Common stock awarded under stock-based benefit plans (3) (4) |
(3,145 | ) | (3,700 | ) | (4,255 | ) | (4,893 | ) | ||||||||
| Pro forma stockholders’ equity |
$ | 165,447 | $ | 177,450 | $ | 189,497 | $ | 203,391 | ||||||||
| Stockholders’ equity per share: |
||||||||||||||||
| Historical |
$ | 12.64 | $ | 10.74 | $ | 9.34 | $ | 8.13 | ||||||||
| Estimated net proceeds |
9.63 | 9.67 | 9.70 | 9.73 | ||||||||||||
| Less: Amortized expense recognized on repayment of trust preferred securities (after tax) |
(0.03 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | ||||||||
| Less: Common stock acquired by ESOP (2) |
(0.80 | ) | (0.80 | ) | (0.80 | ) | (0.80 | ) | ||||||||
| Less: Common stock awarded under stock-based benefit plans (3) (4) |
(0.40 | ) | (0.40 | ) | (0.40 | ) | (0.40 | ) | ||||||||
| Pro forma stockholders’ equity per share (6) |
$ | 21.04 | $ | 19.18 | $ | 17.81 | $ | 16.63 | ||||||||
| Offering price as percentage of pro forma stockholders’ equity per share |
47.53 | % | 52.14 | % | 56.15 | % | 60.13 | % | ||||||||
| Number of shares outstanding for pro forma book value per share calculations |
7,862,500 | 9,250,000 | 10,637,500 | 12,233,125 | ||||||||||||
(footnotes begin on following page)
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(Footnotes from previous page)
| (1) | As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering. |
| (2) | Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Territorial Bancorp Inc. Territorial Savings Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Territorial Savings Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” (“SOP 93-6”), requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Territorial Savings Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 39.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 31,450, 37,000, 42,550 and 48,933 shares were committed to be released during the period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with SOP 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations. |
| (3) | If approved by Territorial Bancorp Inc.’s stockholders, one or more stock-based benefit plans plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Territorial Bancorp Inc. or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Territorial Bancorp Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the year ended December 31, 2008 and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 39%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.9%. |
The following table shows pro forma earnings per share and stockholders’ equity per share, assuming all the shares to fund the stock awards are obtained from authorized but unissued shares, based on the sale of shares as indicated.
| For the Year Ended December 31, 2008 |
7,862,500 Shares |
9,250,000 Shares |
10,637,500 Shares |
12,233,125 Shares | ||||||||
| Pro forma earnings per share |
$ | 0.94 | $ | 0.81 | $ | 0.70 | $ | 0.60 | ||||
| Stockholders’ equity per share |
$ | 20.62 | $ | 18.83 | $ | 17.51 | $ | 16.37 | ||||
| (4) | If approved by Territorial Bancorp Inc.’s stockholders, one of more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.04 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 9.1%. |
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| (5) | Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with SOP 93-6, subtracting the employee stock ownership plan shares that have not been committed for release during the period and subtracting non-vested stock awards granted under one or more stock-based benefit plans. See note 2, above. |
| (6) | The retained earnings of Territorial Savings Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion; Plan of Distribution—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our financial condition at December 31, 2008 and 2007, and our consolidated results of operations for the years ended December 31, 2008, 2007 and 2006. This section should be read in conjunction with the Consolidated Financial Statements and notes to the consolidated financial statements that appear elsewhere in this prospectus. Territorial Bancorp Inc. had not engaged in any significant activities at December 31, 2008; therefore, the information reflected in this section reflects the financial performance of Territorial Mutual Holding Company and its subsidiaries.
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, reverse repurchase agreements 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. As a result, our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) decreased to 2.25% for the year ended December 31, 2007 from 2.60% for the year ended December 31, 2006. This resulted in a corresponding decrease in net interest income (the difference between interest income and interest expense) to $28.6 million for the year ended December 31, 2007 from $33.1 million for the year ended December 31, 2006. However, during the year ended December 31, 2008, our net interest income increased to $36.0 million and our net interest rate spread increased to 2.95%, as interest rates decreased.
Our operations in 2008 and 2007 have been affected by our efforts to manage our interest rate risk position. Specifically, in 2007, we sold $43.0 million of 10-, 15- and 20-year fixed-rate mortgage loans and $21.7 million of fixed-rate mortgage-backed securities classified as held to maturity where we had already received a substantial portion (at least 85%) of the principal outstanding at the acquisition date due to prepayments or scheduled repayments (as permitted by paragraph 11.b. of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”), and used the net proceeds of the sales to repay short-term borrowings. The loan sales resulted in a loss on loan sales during 2007 of $1.1 million, while the securities sales resulted in gains on securities sales during 2007 of $731,000. We continued our efforts to reduce interest rate risk in 2008 by obtaining an additional $60.0 million of long-term, fixed-rate reverse repurchase agreements and through the purchase of $36.8 million of shorter-duration mortgage-backed securities. See “—Management of Market Risk” for a discussion of all of the actions we took in 2007 and 2008 in managing interest rate risk.
We have continued our focus on originating one- to four-family residential real estate loans, and intend to continue this strategy following the conversion. Our emphasis on conservative loan underwriting has resulted in low levels of non-performing assets at a time when many financial institutions are experiencing significant asset quality issues. Our non-performing assets totaled $280,000 or 0.02% of total assets at December 31, 2008, compared to $106,000 or 0.01% of total assets at December 31, 2007, and $593,000 or 0.05% of total assets at December 31, 2006. As of December 31, 2008, we had $131,000 of real estate owned and three delinquent mortgage loans totaling $871,000. Total loan delinquencies as of December 31, 2008 were $874,000. Our non-performing loans and loss experience has enabled us to maintain a relatively low allowance for loan losses in relation to other peer
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institutions and correspondingly resulted in low levels of provisions for loan losses. Our provision for loan losses was $149,000, $25,000 and $6,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
Other than our loans for the construction of one- to four-family residential mortgage loans, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). 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 loans having less than full documentation). Although we participate in Fannie Mae’s Expanded Approval program and Freddie Mac’s A Minus program, which previously did not require income verification, we still verified income for these types of loans. 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.
All of the Bank’s mortgage-backed securities have been issued by Freddie Mac, Fannie Mae or Ginnie Mae, U.S. government-sponsored enterprises. These agencies guarantee the payment of principal and interest on Bank’s mortgage-backed securities. We do not own any preferred stock issued by Fannie Mae or Freddie Mac. As of December 31, 2008, our available credit lines and other sources of liquidity had not been reduced compared to levels from December 31, 2007 or 2006.
We own shares of trust preferred securities with an adjusted cost basis of $4.5 million, and a fair value of $2.1 million at December 31, 2008. The trust preferred securities were issued by two issuer pools consisting primarily of financial institution holding companies. We recognized a pre-tax loss for other-than-temporary impairment of $2.5 million on one of these two securities during the quarter ended December 31, 2008. A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an additional impairment that is other than temporary. Any such loss may be material to our statement of condition and results of operations. These factors include, but are not limited to, continued failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of the trust preferred securities could decline if the overall economy and the financial condition of some of the issuers continue to deteriorate and there remains limited liquidity for these securities.
Business Strategy
Our primary objective is to operate as a profitable, community-oriented financial institution serving customers in our primary market areas. We have sought to accomplish this objective through the adoption of a business strategy designed to maintain a strong capital position and high asset quality. This business strategy includes the following elements:
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| • | Remaining a community-oriented financial institution. We were established in 1921 and have been operating continuously since that time. We are committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers. We provide a broad range of consumer and business financial services from our 24 branch offices. |
| • | Increasing loan production while maintaining high asset quality. We have grown our loan portfolio to $642.1 million at December 31, 2008 from $486.1 million at December 31, 2004. In growing the loan portfolio, we have emphasized maintaining strong asset quality by following conservative underwriting guidelines, and primarily originating loans secured by residential real estate. We also underwrite all of our loans in our main office in Honolulu to ensure uniformity and consistency in underwriting decisions. Our non-performing assets at December 31, 2008 were $280,000, or 0.02% of total assets, compared to $106,000, or 0.01% of total assets at December 31, 2007, and $593,000, or 0.05% of total assets at December 31, 2006. |
| • | Emphasizing lower cost core deposits to maintain low funding costs. We believe that it is easier to increase net income by controlling the cost of funds instead of trying to maximize asset yields, as loans with high yields often involve greater credit risk or may be repaid during periods of decreasing market interest rates. We promote passbook and statement savings accounts, regular and commercial checking accounts and Super NOW accounts, which generally are lower-cost sources of funds than certificates of deposits, and are less sensitive to withdrawal when interest rates fluctuate. We intend to grow our core deposit base through branch expansion. In addition, we attract and retain deposits by offering competitive products and interest rates and by emphasizing quality customer service, and through our convenient locations and our advertising program. |
| • | Expanding our branch network. We currently operate from 24 banking offices. We intend to evaluate additional branch expansion opportunities, through acquisitions and de novo branching, to expand our presence in the State of Hawaii. In addition, we intend to evaluate acquisitions of other financial institutions, as opportunities present themselves. We would like to expand our branch office network by at least three de novo branch offices over the next three years with a focus on areas of the State of Hawaii that we do not currently serve. We plan to open a new branch office in Kihei, Maui in 2009. |
Anticipated Increase in Non-Interest Expense
Following the completion of the conversion and offering, we anticipate that our non-interest expense will increase as a result of the increased costs associated with managing a public company, increased compensation expenses associated with the purchases of shares of common stock by our employee stock ownership plan, and the adoption of one or more stock-based benefit plans, if approved by Territorial Bancorp Inc.’s stockholders.
Assuming that the adjusted maximum number of shares are sold in the offering (12,233,125 shares):
| • | our employee stock ownership plan would acquire 978,650 shares of common stock with a $9.8 million loan that is expected to be repaid over 20 years, resulting in an annual pre- |
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| tax expense of approximately $489,000 (assuming that the common stock maintains a value of $10.00 per share); |
| • | our stock-based benefit plans would grant stock options to purchase shares equal to 10% of the total shares issued in the offering, or 1,223,312 shares, to eligible participants, which would result in compensation expense over the vesting period of the options. Assuming the market price of the common stock is $10.00 per share; all stock options are granted with an exercise price of $10.00 per share and have a term of 6.5 years; the dividend yield on the stock is 0%; the risk free interest rate is 1.87%; and the volatility rate on the common stock is 25.8%, the estimated grant-date fair value of the stock options utilizing a Black-Scholes option pricing analysis is $3.04 per option granted. Assuming this value is amortized over the five-year vesting period, the corresponding annual pre-tax expense associated with stock options granted under the stock-based benefit plans would be approximately $744,000; and |
| • | our stock-based benefit plans would award a number of shares equal to 4% of the shares issued in the offering, or 489,325 shares, to eligible participants, which would be expensed as the awards vest. Assuming that all shares are awarded under the stock-based benefit plans at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with shares awarded under the stock-based benefit plans would be approximately $979,000. |
The actual expense that will be recorded for the employee stock ownership plan will be determined by the market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan would increase the annual employee stock ownership plan expense. Additionally, the actual expense of shares awarded under one or more stock-based benefit plans will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. Further, the actual expense of stock options granted under one or more stock-based benefit plans would be determined by the grant-date fair value of the options, which would depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately used.
We may award shares of common stock and grant options in excess of 4% and 10%, respectively, of our shares of stock sold in the stock offering if our stock-based benefit plans are adopted more than one year following the stock offering. This would further increase our expenses associated with stock-based benefit plans.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:
Allowance for Loan Losses. We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. We establish specific allowances for impaired loans, and general allowances for the remaining loans in our loan portfolio. To estimate credit losses on impaired loans (in accordance with
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Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures), we evaluate numerous factors, as described below in “—Allowance for Loan Losses.” Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses to maintain the allowance for loan losses at an appropriate level.
Since we cannot predict with certainty the amount of loan charge-offs that will be incurred and because the eventual level of loan charge-offs is affected by numerous conditions beyond our control, a range of loss estimates can reasonably be used to determine the allowance for loan losses and the related provisions for loan losses. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.
Deterioration in the Hawaii real estate market could result in an increase in loan delinquencies, additional increases in our allowance for loan losses and provision for loan losses, as well as an increase in loan charge-offs.
Securities Impairment. We periodically perform analyses to determine whether there has been an other-than-temporary decline in the value of one or more of our securities. Our securities, all of which are classified as held to maturity, consist primarily of debt securities for which we have a positive intent and ability to hold to maturity, and are carried at amortized cost. We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, we would adjust the cost basis of the security by writing down the security to estimated fair market value through a charge to current period operations. The market values of our securities are affected by changes in interest rates as well as shifts in the market’s perception of the issuers. The fair value of investment securities is usually based on quoted market prices or dealer quotes. However, if there are no observable market inputs (for securities such as trust preferred securities), we estimate the fair value using unobservable inputs. We obtain estimates of the fair value of trust preferred securities from pricing services and by discounting projected cash flows using a risk-adjusted discount rate in accordance with FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” As discussed in greater detail below, the fair value of the trust preferred securities for disclosure purposes is estimated by considering the reasonableness of the range of fair value estimates provided by a pricing service and the discounted cash values.
At March 31, 2009, we owned trust preferred securities with a carrying value of $4.1 million. This portfolio consists of two securities (PreTSL XXIII and PreTSL XXIV), which represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.
On April 9, 2009, the Financial Accounting Standards Board issued Financial Accounting Standards Board Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”) and FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for U.S. GAAP for debt
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securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in a company’s financial statements. Before these recent staff positions, to conclude that an impairment was not other than temporary an entity was required, among other considerations, to assert that it had the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value in accordance with Securities and Exchange Commission Staff Accounting Bulletin Topic 5M, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities,” and other authoritative literature. As a result of these recent staff positions, an entity should assess whether the entity (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery (for example, if its cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before the forecasted recovery occurs). FSP FAS 115-2 and FAS 124-2 also changes the trigger used to assess the collectibility of cash flows from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, an other-than-temporary impairment shall have occurred. We adopted FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 for the quarter ended March 31, 2009.
In reviewing our investment in the trust preferred securities, we concluded that we did not have the intent to sell either trust preferred security, and it was not more likely than not that we would be required to sell either trust preferred security before the anticipated recovery.
The trust preferred securities market is considered to be inactive as only two sales transactions have occurred over the past nine months. In addition, there have been no new issues of pooled trust preferred securities since 2007. Because the trust preferred securities market is inactive, we use a discounted cash flow model to determine the estimated fair value of the trust preferred securities and to determine whether they are other-than-temporarily impaired.
We had previously considered our investment in one of the trust preferred securities (PreTSL XXIV) other-than-temporarily impaired as of December 31, 2008, and we recorded a $2.5 million impairment charge during the quarter ended December 31, 2008. Based on our continued review, we considered our investment in this security to have experienced additional other-than-temporary impairment as of March 31, 2009, and recorded an additional $436,000 impairment charge with respect to this security during the quarter ended March 31, 2009, of which $298,000 was a credit loss recorded through our income statement as a debit to non-interest income, and $138,000 was recorded as an increase to other comprehensive loss. In addition, the cumulative effect of our adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2, effective March 31, 2009, resulted in the reclassification of $1.5 million of securities impairment from retained earnings to accumulated other comprehensive loss.
As stated above, the fair value of the trust preferred securities for disclosure purposes is estimated by considering the reasonableness of the range of fair value estimates provided by a pricing service and the discounted cash values. The primary difference between the fair value estimates prepared by our pricing service and our estimates is the discount rate assumption. As of March 31, 2009, we utilized a yield on corporate bonds plus a 1% liquidity premium to arrive at a risk-adjusted discount rate of 13.11%. Our pricing service uses a discount rate of 20.97%. These discount rates would result in fair market values for PreTSL XXIII of $27.50 and $16.42, respectively.
Management considered the range of values and decided that our pricing service’s estimate of value should be assigned a 70% weight and our discounted cash flow estimate should be assigned a 30% weight, which, as of March 31, 2009, resulted in a fair value estimate for PreTSL XXIII of $19.74. We
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give a greater weighting to the value established by the pricing service because of its experience in these matters as an independent third-party service provider.
In reviewing our investment in the second trust preferred security, our discounted cash flow analysis indicated that we should be able to recover the entire amortized cost basis of the security. Both of these securities were downgraded as of April 9, 2009. See “Risk Factors—We could record future losses on our holdings of trust preferred securities that we purchased from issuer pools consisting primarily of financial institution holding companies. In addition, we may not receive full future interest payments on these securities.”
Deferred Tax Assets. Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance may be required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under current tax laws, as well as estimates of future taxable income and tax planning strategies that could be implemented to accelerate taxable income if necessary. If our estimates of future taxable income were materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our deferred tax assets may not be realized, which would result in a charge to earnings.
Defined Benefit Retirement Plan. Defined benefit plan obligations and related assets of our defined benefit retirement plan are presented in Note 13 to the Consolidated Financial Statements. Effective December 31, 2008, the defined benefit retirement plan was frozen and all plan benefits were fixed as of that date. Plan assets, which consist primarily of marketable equity and debt securities, are typically valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate and the expected long-term rate of return on plan assets. In determining the discount rate, we utilize a yield that reflects the top 50% of the universe of bonds, ranked in the order of the highest yield. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans.
At December 31, 2008, we used weighted-average discount rates of 6.0% and 6.30% for calculating annual pension expense and projected plan liabilities, respectively, and an expected long-term rate of return on plan assets of 8.0% for calculating annual pension expense. At December 31, 2007, we used a weighted-average discount rate of 6.0% for calculating each of annual pension expense and projected plan liabilities and an expected long-term rate of return on plan assets of 8.0% for calculating annual pension expense. For both the discount rate and the asset return rate, a range of estimates could reasonably have been used, which would affect the amount of pension expense and pension liability recorded.
An increase in the discount rate or asset return rate would reduce pension expense in 2008, while a decrease in the discount rate or asset return rate would have the opposite effect. A 25 basis points decrease in the discount rate assumptions would increase 2008 pension expense by $57,166 and year-end 2008 pension liability by $317,849, while a 25 basis points decrease in the asset return rate would increase 2008 pension expense by $22,063.
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Balance Sheet Analysis
Assets. At December 31, 2008, our assets were $1.224 billion, an increase of $62.4 million, or 5.4%, from $1.162 billion at December 31, 2007. The increase was caused by an increase in total loans of $80.8 million, or 14.4%, which increase we funded with increased deposits, and increased securities sold under agreements to repurchase.
Loans. At December 31, 2008, total loans were $642.1 million, or 52.4% of total assets. During the year ended December 31, 2008, the loan portfolio grew $80.8 million, or 14.4%. The increase was caused primarily by an increase in one- to four-family residential real estate loans of $74.8 million, or 14.8%.
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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated. There were no loans held for sale at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.
| At December 31, | |||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Real estate loans: |
|||||||||||||||||||||||||||||||||||
| First mortgage: |
|||||||||||||||||||||||||||||||||||
| One- to four-family residential |
$ | 581,251 | 90.52 | % | $ | 506,410 | 90.21 | % | $ | 516,554 | 93.26 | % | $ | 498,809 | 95.69 | % | $ | 463,851 | 95.43 | % | |||||||||||||||
| Multi-family residential |
3,756 | 0.58 | 4,488 | 0.80 | 4,983 | 0.90 | 4,759 | 0.91 | 6,592 | 1.36 | |||||||||||||||||||||||||
| Construction, commercial and other |
21,042 | 3.28 | 17,041 | 3.04 | 14,784 | 2.67 | 8,625 | 1.65 | 10,588 | 2.18 | |||||||||||||||||||||||||
| Home equity loans and lines of credit |
29,956 | 4.67 | 26,828 | 4.78 | 12,763 | 2.30 | 5,879 | 1.13 | 2,206 | 0.45 | |||||||||||||||||||||||||
| Other loans |
6,097 | 0.95 | 6,579 | 1.17 | 4,830 | 0.87 | 3,232 | 0.62 | 2,823 | 0.58 | |||||||||||||||||||||||||
| Total loans |
642,102 | 100.00 | % | 561,346 | 100.00 | % | 553,914 | 100.00 | % | 521,304 | 100.00 | % | 486,060 | 100.00 | % | ||||||||||||||||||||
| Other items: | |||||||||||||||||||||||||||||||||||
| Unearned fees and discounts, net |
(5,100 | ) | (4,375 | ) | (4,415 | ) | (4,095 | ) | (3,719 | ) | |||||||||||||||||||||||||
| Undisbursed loan funds |
(2,943 | ) | (1,408 | ) | (2,530 | ) | (349 | ) | (1,512 | ) | |||||||||||||||||||||||||
| Allowance for loan losses |
(899 | ) | (768 | ) | (768 | ) | (770 | ) | (750 | ) | |||||||||||||||||||||||||
| Loans receivable, net |
$ | 633,160 | $ | 554,795 | $ | 546,201 | $ | 516,090 | $ | 480,079 | |||||||||||||||||||||||||
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Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2008. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
| One- to four-family residential real estate |
Multi-family residential real estate |
Construction, commercial and other real estate |
||||||||||||||||
| Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Due During the Years Ending December 31, | ||||||||||||||||||
| 2009 |
$ | 49 | 6.88 | % | $ | — | — | % | $ | 3,479 | 7.66 | % | ||||||
| 2010 |
— | — | — | — | 387 | 6.50 | ||||||||||||
| 2011 |
15 | 6.00 | 58 | 7.25 | 726 | 6.50 | ||||||||||||
| 2012 to 2013 |
587 | 6.23 | 320 | 7.00 | 1,001 | 6.39 | ||||||||||||
| 2014 to 2018 |
11,719 | 5.11 | 984 | 7.36 | 5,032 | 6.78 | ||||||||||||
| 2019 to 2023 |
33,366 | 5.46 | 672 | 6.81 | 217 | 7.00 | ||||||||||||
| 2024 and beyond |
535,515 | 5.61 | 1,722 | 7.15 | 10,200 | 6.41 | ||||||||||||
| Total |
$ | 581,251 | 5.59 | % | $ | 3,756 | 7.14 | % | $ | 21,042 | 6.71 | % | ||||||
| Home equity loans and lines of credit |
Other loans | Total | ||||||||||||||||
| Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Due During the Years Ending December 31, | ||||||||||||||||||
| 2009 |
$ | 262 | 7.12 | % | $ | 1,741 | 6.01 | % | $ | 5,531 | 7.11 | % | ||||||
| 2010 |
1,628 | 7.01 | 312 | 6.43 | 2,327 | 6.85 | ||||||||||||
| 2011 |
2,050 | 7.30 | 130 | 8.70 | 2,979 | 7.16 | ||||||||||||
| 2012 to 2013 |
1,406 | 7.80 | 1,433 | 7.15 | 4,747 | 7.06 | ||||||||||||
| 2014 to 2018 |
3,265 | 7.22 | 1,086 | 6.13 | 22,086 | 5.95 | ||||||||||||
| 2019 to 2023 |
950 | 6.93 | 1,395 | 7.00 | 36,600 | 5.59 | ||||||||||||
| 2024 and beyond |
20,395 | 6.76 | — | — | 567,832 | 5.67 | ||||||||||||
| Total |
$ | 29,956 | 6.92 | % | $ | 6,097 | 6.60 | % | $ | 642,102 | 5.71 | % | ||||||
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2008 that are contractually due after December 31, 2009.
| Due After December 31, 2009 | |||||||||
| Fixed | Adjustable | Total | |||||||
| (In thousands) | |||||||||
| Real estate loans: |
|||||||||
| First mortgage: |
|||||||||
| One- to four-family residential |
$ | 571,560 | $ | 9,642 | $ | 581,202 | |||
| Multi-family residential |
3,581 | 175 | 3,756 | ||||||
| Construction, commercial and other |
13,926 | 3,637 | 17,563 | ||||||
| Home equity loans and lines of credit |
21,444 | 8,250 | 29,694 | ||||||
| Other loans |
4,303 | 53 | 4,356 | ||||||
| Total loans |
$ | 614,814 | $ | 21,757 | $ | 636,571 | |||
Securities. At December 31, 2008, our securities portfolio totaled $527.8 million, or 43.1% of assets. At that date, our securities portfolio consisted primarily of securities with the following amortized cost: $411.8 million of mortgage-backed securities issued by Fannie Mae or Freddie Mac; $111.3 million of collateralized mortgage obligations (all of which are issued by government agencies or government
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sponsored enterprises) and $4.5 million of trust preferred securities. At December 31, 2008, all of such securities were classified as held-to-maturity, and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full documentation) loans. At December 31, 2008, we held no common or preferred stock of Fannie Mae or Freddie Mac.
During the year ended December 31, 2008, our securities portfolio decreased $10.3 million, or 1.9%, as we used excess cash to fund loan originations instead of purchasing securities. The decrease reflected the sale of all $10.5 million of the municipal bonds we held at December 31, 2007.
The following table sets forth the amortized cost and estimated fair value of our securities portfolios (excluding Federal Home Loan Bank of Seattle common stock) at the dates indicated. All of such securities were classified as held to maturity at the dates indicated.
| At December 31, | ||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||
| Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||||
| U.S. government sponsored mortgage-backed securities: |
||||||||||||||||||
| Fannie Mae |
$ | 103,313 | $ | 105,272 | $ | 115,004 | $ | 113,040 | $ | 146,090 | $ | 142,205 | ||||||
| Freddie Mac |
308,522 | 315,823 | 316,546 | 310,614 | 354,458 | 342,186 | ||||||||||||
| Collateralized mortgage obligations |
111,328 | 112,358 | 88,779 | 88,481 | 100,645 | 97,882 | ||||||||||||
| Other |
65 | 61 | 83 | 80 | 2,498 | 2,576 | ||||||||||||
| Total U.S. government sponsored mortgage-backed securities |
523,228 | 533,514 | 520,412 | 512,215 | 603,691 | 584,849 | ||||||||||||
| Municipal bonds |
— | — | 10,539 | 10,592 | 10,548 | 10,489 | ||||||||||||
| Trust preferred securities |
4,539 | 2,076 | 7,074 | 6,500 | 7,100 | 7,121 | ||||||||||||
| Total |
$ | 527,767 | $ | 535,590 | $ | 538,025 | $ | 529,307 | $ | 621,339 | $ | 602,459 | ||||||
Unrealized losses on individual mortgage-backed securities as of December 31, 2008, 2007 and 2006 were caused by increases in current market interest rates. All of our mortgage-backed securities are guaranteed by U.S. government-sponsored enterprises. Since the decline in market value had been attributable to changes in interest rates and not credit quality, and we have had, and continue to have, the intent and ability to hold these investments to maturity, we have not considered these investments to be other-than-temporarily impaired as of December 31, 2008, 2007 or 2006.
We sold our municipal bonds in 2008 because $5.5 million of these securities had experienced a credit downgrade and because of the possibility of a potential downgrade of both the issuers of and the insurers on the remaining bonds. The unrealized losses on our investment in municipal bonds at December 31, 2007 and December 31, 2006 were caused by increases in current market interest rates. All of the municipal bonds were rated AA or better by S&P and/or Moody’s and insured. Prior to sale, we expected full repayment at maturity, and had the ability to hold these investments to maturity. Therefore, we did not consider these investments to be other-than-temporarily impaired as of December 31, 2007 or 2006.
At December 31, 2008, we owned trust preferred securities with a carrying value of $4.5 million. This portfolio consists of two securities, which represent investments in a pool of debt obligations issued by Federal Deposit Insurance Corporation-insured financial institutions, insurance companies and real estate investment trusts.
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The trust preferred securities market is considered to be inactive as no transactions have occurred over the past three months. We use a discounted cash flow model to determine the estimated fair value of the trust preferred securities and whether they are other-than-temporarily impaired. Based on our review, we considered our investment in one of the trust preferred securities other-than-temporarily impaired as of December 31, 2008, for which we recorded a $2.5 million impairment charge. The second security had not been downgraded as of December 31, 2008, and we continued to receive full interest payments. We also reviewed a stress test of this security that indicated it could absorb additional deferrals or defaults in the collateral pool in excess of what we believe is likely before the interest payments on this security are negatively impacted. We have had, and continue to have, the ability and intent to hold this second security to maturity, and we did not consider this investment to be other-than-temporarily impaired as of December 31, 2008.
As of December 31, 2007 and 2006, we had continued to receive full interest payments on each of the trust preferred securities, and they had not been downgraded. The cash flows indicated that the trust preferred securities were performing in accordance with their original contractual terms. As of December 31, 2007 and 2006, we had, and continued to have, the ability and intent to hold these securities to maturity, and we did not consider these two investments to be other-than-temporarily impaired as of December 31, 2007 or December 31, 2006.
At December 31, 2008, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our consolidated equity.
Bank Owned Life Insurance. We invest in bank owned life insurance to provide us with a funding source for our benefit plan obligations. Bank owned life insurance also generally provides us non-interest income that is non-taxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2008, this limit was $30.4 million, and we had invested $27.1 million in bank owned life insurance at that date.
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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2008 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent adjustments have been made, as we did not hold any tax-free investment securities at December 31, 2008.
| One Year or Less | More than One Year through Five Years |
More than Five Years through Ten Years |
More than Ten Years | Total Securities | |||||||||||||||||||||||||||||
| Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Fair Value | Weighted Average Yield |
|||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||
| U.S. government sponsored mortgage-backed securities |
|||||||||||||||||||||||||||||||||
| Fannie Mae |
$ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 103,313 | 5.10 | % | $ | 103,313 | $ | 105,272 | 5.10 | % | |||||||||||
| Freddie Mac |
— | — | — | — | — | — | 308,522 | 4.97 | 308,522 | 315,823 | 4.97 | ||||||||||||||||||||||
| Collateralized mortgage obligations |
— | — | 7,431 | 5.50 | 28,189 | 4.40 | 75,708 | 5.11 | 111,328 | 112,358 | 4.96 | ||||||||||||||||||||||
| Other |
— | — | — | — | — | — | 65 | 4.97 | 65 | 61 | 4.97 | ||||||||||||||||||||||
| Total U.S. government sponsored mortgage-backed securities |
— | — | 7,431 | 5.50 | 28,189 | 4.40 | 487,608 | 5.02 | 523,228 | 533,514 | 4.99 | ||||||||||||||||||||||
| Trust preferred securities |
— | — | — | — | — | — | 4,539 | 4.07 | 4,539 | 2,076 | 4.07 | ||||||||||||||||||||||
| Total |
$ | — | — | % | $ | 7,431 | 5.50 | % | $ | 28,189 | 4.40 | % | $ | 492,147 | 5.01 | % | $ | 527,767 | $ | 535,590 | 4.99 | % | |||||||||||
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Deposits. We accept deposits primarily from the areas in which our offices are located. We rely on our competitive pricing, convenient locations and customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Historically, we have not accepted brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals.
During the year ended December 31, 2008, our deposits grew $31.6 million, or 3.5% (although average deposits decreased from 2007 to 2008). The increase was caused by our promoting higher than market rates for our passbook and statement savings accounts and our advertising certificates of deposit at market rates.
At December 31, 2008, we had a total of $397.2 million in certificates of deposit, of which $369.4 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.
The following tables set forth the distribution of our average total deposit accounts (including interest-bearing and non-interest bearing deposits), by account type, for the periods indicated.
| For the Years Ended December 31, | ||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||
| Average Balance |
Percent | Weighted Average Rate |
Average Balance |
Percent | Weighted Average Rate |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Deposit type: |
||||||||||||||||||
| Noninterest bearing |
$ | 13,303 | 1.4 | % | — | % | $ | 12,319 | 1.4 | % | — | % | ||||||
| Savings accounts |
392,041 | 43.0 | 1.53 | % | 396,209 | 42.5 | 1.40 | % | ||||||||||
| Certificates of deposit |
403,405 | 44.3 | 3.09 | % | 422,173 | 45.3 | 4.32 | % | ||||||||||
| Money market |
81,691 | 9.0 | 0.06 | % | 80,283 | 8.6 | 0.07 | % | ||||||||||
| Checking and Super NOW |
20,530 | 2.3 | 0.05 | % | 20,799 | 2.2 | 0.07 | % | ||||||||||
| Total deposits |
$ | 910,970 | 100.0 | % | 2.03 | % | $ | 931,783 | 100.0 | % | 2.56 | % | ||||||
| For the Year Ended December 31, 2006 |
|||||||||
| Average Balance |
Percent | Weighted Average Rate |
|||||||
| (Dollars in thousands) | |||||||||
| Deposit type: |
|||||||||
| Noninterest bearing |
$ | 10,873 | 1.1 | % | — | % | |||
| Savings accounts |
520,476 | 53.2 | 1.55 | % | |||||
| Certificates of deposit |
347,852 | 35.6 | 3.88 | % | |||||
| Money market |
78,160 | 8.0 | 0.11 | % | |||||
| Checking and Super NOW |
20,223 | 2.1 | 0.10 | % | |||||
| Total deposits |
$ | 977,584 | 100.0 | % | 2.22 | % | |||
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The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
| At December 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
| (In thousands) | |||||||||
| Interest Rate: |
|||||||||
| Less than 2.00% |
$ | 130,699 | $ | — | $ | 193 | |||
| 2.00% to 2.99% |
161,221 | 30,116 | 14,802 | ||||||
| 3.00% to 3.99% |
101,307 | 81,918 | 50,119 | ||||||
| 4.00% to 4.99% |
3,942 | 285,906 | 319,123 | ||||||
| 5.00% to 5.99% |
— | 100 | 34,049 | ||||||
| Total |
$ | 397,169 | $ | 398,040 | $ | 418,286 | |||
The following table sets forth, by interest rate ranges, information concerning our certificates of deposit.
| At December 31, 2008 | ||||||||||||||||||
| Period to Maturity | ||||||||||||||||||
| Less Than or Equal to One Year |
More Than One to Two Years |
More Than Two to Three Years |
More Than Three Years |
Total | Percent of Total |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Interest Rate Range: |
||||||||||||||||||
| 2.99% and below |
$ | 287,195 | $ | 3,628 | $ | 1,097</ | ||||||||||||