Edgar Filing: Territorial Bancorp Inc.

tbnk_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2017

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

For transition period from to

Commission File Number 1-34403

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

Maryland		26-4674701
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

1132 Bishop Street, Suite 2200, Honolulu, Hawaii		96813
(Address of Principal Executive Offices)		(Zip Code)

(808) 946-1400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and formal fiscal year, if changed since last report)

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

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

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

Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		(Do not check if a smaller reporting company)
Smaller reporting company ☐		Emerging growth company ☐

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

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

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

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TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

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PART I

ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 4.	CONTROLS AND PROCEDURES	43

PART II

ITEM 1.	LEGAL PROCEEDINGS	44
ITEM 1A.	RISK FACTORS	44
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 5.	OTHER INFORMATION	44
ITEM 6.	EXHIBITS	44

SIGNATURES		45

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PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)


	June 30,		December 31,
	2017		2016
ASSETS
Cash and cash equivalents	$	47,888	$	61,273
Investment securities available for sale		2,943		—
Investment securities held to maturity, at amortized cost (fair value of $397,933 and $407,922 at June 30, 2017 and December 31, 2016, respectively)		395,556		407,656
Loans held for sale		1,166		1,601
Loans receivable, net		1,404,472		1,335,987
Federal Home Loan Bank stock, at cost		5,013		4,945
Federal Reserve Bank stock, at cost		3,103		3,095
Accrued interest receivable		4,769		4,732
Premises and equipment, net		5,127		4,327
Bank-owned life insurance		43,747		43,294
Income taxes receivable		—		122
Deferred income tax assets, net		7,535		7,905
Prepaid expenses and other assets		2,796		2,625
Total assets	$	1,924,115	$	1,877,562

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,532,557	$	1,493,200
Advances from the Federal Home Loan Bank		69,000		69,000
Securities sold under agreements to repurchase		55,000		55,000
Accounts payable and accrued expenses		23,924		23,258
Income taxes payable		2,208		1,616
Advance payments by borrowers for taxes and insurance		5,959		5,702
Total liabilities		1,688,648		1,647,776

Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 50,000,000 shares, no shares issued or outstanding		—		—
Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 9,830,438 and 9,778,974 shares at June 30, 2017 and December 31, 2016, respectively		98		98
Additional paid-in capital		72,433		71,914
Unearned ESOP shares		(5,627)		(5,872)
Retained earnings		173,892		168,962
Accumulated other comprehensive loss		(5,329)		(5,316)
Total stockholders’ equity		235,467		229,786
Total liabilities and stockholders’ equity	$	1,924,115	$	1,877,562

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Interest income:
Loans	$	13,527	$	12,647	$	27,040	$	25,008
Investment securities		3,078		3,750		6,159		7,625
Other investments		172		146		359		290
Total interest income		16,777		16,543		33,558		32,923

Interest expense:
Deposits		1,775		1,470		3,426		2,878
Advances from the Federal Home Loan Bank		261		256		515		513
Securities sold under agreements to repurchase		217		218		433		436
Total interest expense		2,253		1,944		4,374		3,827

Net interest income		14,524		14,599		29,184		29,096
Provision (reversal of provision) for loan losses		(123)		84		(52)		112

Net interest income after provision (reversal of provision) for loan losses		14,647		14,515		29,236		28,984

Noninterest income:
Service fees on loan and deposit accounts		507		473		1,063		929
Income on bank-owned life insurance		227		240		453		487
Gain on sale of investment securities		186		190		281		190
Gain on sale of loans		63		129		126		190
Other		76		102		158		224
Total noninterest income		1,059		1,134		2,081		2,020

Noninterest expense:
Salaries and employee benefits		4,935		5,256		10,053		10,682
Occupancy		1,461		1,433		2,910		2,853
Equipment		882		912		1,748		1,818
Federal deposit insurance premiums		148		227		296		452
Other general and administrative expenses		1,328		1,160		2,454		2,242
Total noninterest expense		8,754		8,988		17,461		18,047

Income before income taxes		6,952		6,661		13,856		12,957
Income taxes		2,651		2,624		5,234		5,136
Net income	$	4,301	$	4,037	$	8,622	$	7,821

Basic earnings per share	$	0.46	$	0.44	$	0.93	$	0.85
Diluted earnings per share	$	0.45	$	0.43	$	0.90	$	0.83
Cash dividends paid per common share	$	0.20	$	0.18	$	0.40	$	0.36
Basic weighted-average shares outstanding		9,255,739		9,059,515		9,235,553		9,047,217
Diluted weighted-average shares outstanding		9,539,757		9,345,262		9,539,543		9,323,432

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net income	$	4,301	$	4,037	$	8,622	$	7,821

Change in unfunded pension liability		—		—		—		(21)
Change in unrealized loss on securities		(15)		4		(13)		6
Change in noncredit related loss on trust preferred securities		—		44		—		46
Other comprehensive income (loss), net of tax		(15)		48		(13)		31
Comprehensive income	$	4,286	$	4,085	$	8,609	$	7,852

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


									Accumulated
			Additional		Unearned				Other		Total
	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Stock		Capital		Shares		Earnings		Income (Loss)		Equity
Balances at December 31, 2015	$	96	$	70,118	$	(6,361)	$	161,024	$	(5,236)	$	219,641

Net income		—		—		—		7,821		—		7,821
Other comprehensive income		—		—		—		—		31		31
Cash dividends paid ($0.36 per share)		—		—		—		(3,292)		—		(3,292)
Share-based compensation		—		1,323		—		—		—		1,323
Allocation of 24,466 ESOP shares		—		393		244		—		—		637
Repurchase of 57,903 shares of company common stock		(1)		(1,509)		—		—		—		(1,510)
Exercise of 61,340 options for common stock		1		1,064		—		—		—		1,065

Balances at June 30, 2016	$	96	$	71,389	$	(6,117)	$	165,553	$	(5,205)	$	225,716

Balances at December 31, 2016	$	98	$	71,914	$	(5,872)	$	168,962	$	(5,316)	$	229,786

Net income		—		—		—		8,622		—		8,622
Other comprehensive loss		—		—		—		—		(13)		(13)
Cash dividends paid ($0.40 per share)		—		—		—		(3,692)		—		(3,692)
Share-based compensation		—		(11)		—		—		—		(11)
Allocation of 24,466 ESOP shares		—		530		245		—		—		775
Repurchase of 59,430 shares of company common stock		(1)		(1,924)		—		—		—		(1,925)
Exercise of 110,894 options for common stock		1		1,924		—		—		—		1,925

Balances at June 30, 2017	$	98	$	72,433	$	(5,627)	$	173,892	$	(5,329)	$	235,467

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Six Months Ended
	June 30,
	2017		2016
Cash flows from operating activities:
Net income	$	8,622	$	7,821
Adjustments to reconcile net income to net cash from operating activities:
Provision (reversal of provision) for loan losses		(52)		112
Depreciation and amortization		513		595
Deferred income tax expense		379		349
Amortization of fees, discounts, and premiums		(235)		(397)
Origination of loans held for sale		(16,006)		(23,084)
Proceeds from sales of loans held for sale		16,568		24,173
Gain on sale of loans, net		(126)		(190)
Gain on sale of investment securities held to maturity		(281)		(190)
ESOP expense		775		637
Share-based compensation (benefit) expense		(11)		1,323
Increase in accrued interest receivable		(37)		(128)
Net increase in bank-owned life insurance		(453)		(487)
Net increase in prepaid expenses and other assets		(171)		(134)
Net increase in accounts payable and accrued expenses		666		9
Net increase in advance payments by borrowers for taxes and insurance		257		191
Net decrease in income taxes receivable		122		—
Net increase (decrease) in income taxes payable		592		(135)

Net cash from operating activities		11,122		10,465

Cash flows from investing activities:
Purchases of investment securities held to maturity		(19,908)		(2,523)
Purchases of investment securities available for sale		(2,970)		—
Principal repayments on investment securities held to maturity		27,245		35,608
Proceeds from sale of investment securities held to maturity		5,053		3,122
Loan originations, net of principal repayments on loans receivable		(68,203)		(69,581)
Purchases of Federal Home Loan Bank stock		(483)		(155)
Proceeds from redemption of Federal Home Loan Bank stock		415		—
Purchases of Federal Reserve Bank stock		(8)		(40)
Purchases of premises and equipment		(1,313)		(91)

Net cash from investing activities		(60,172)		(33,660)

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Six Months Ended
	June 30,
	2017		2016
Cash flows from financing activities:
Net increase in deposits	$	39,357	$	24,651
Proceeds from advances from the Federal Home Loan Bank		10,375		—
Repayments of advances from the Federal Home Loan Bank		(10,375)		—
Proceeds from exercise of stock options		—		566
Repurchases of common stock		—		(771)
Cash dividends paid		(3,692)		(3,292)

Net cash from financing activities		35,665		21,154

Net decrease in cash and cash equivalents		(13,385)		(2,041)

Cash and cash equivalents at beginning of the period		61,273		65,919

Cash and cash equivalents at end of the period	$	47,888	$	63,878

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	4,308	$	3,819
Income taxes		4,212		4,922

Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased, not settled	$	—	$	240
Company stock acquired through swap and net settlement transactions		1,925		499

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

(2) Organization

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company. As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008. The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion. The balance of the liquidation account at December 31, 2016 was $12.2 million.

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

(3) Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) amended the Revenue Recognition topic of the FASB Accounting Standards Codification (ASC). The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB deferred the effective date of the amendment by one year. However, entities may still choose to adopt the amendment as of the original effective date. The Company plans to adopt this amendment effective January 1, 2018. The Company does not expect the adoption of this amendment to have an effect on most items of income, including interest income and most categories of noninterest income. The Company is still studying the effects that this amendment will have on certain items of noninterest income, such as commissions earned from insurance and investment sales. However, the Company does not expect that there will be a material effect on its consolidated financial statements.

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

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

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

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

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

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

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(4) Cash and Cash Equivalents

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


	June 30,		December 31,
(Dollars in thousands)	2017		2016
Cash and due from banks	$	9,820	$	9,043
Interest-earning deposits in other banks		38,068		52,230
Cash and cash equivalents	$	47,888	$	61,273

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

(5) Investment Securities

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


	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
June 30, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,970	$	—	$	(27)	$	2,943
Total	$	2,970	$	—	$	(27)	$	2,943

Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	394,800	$	7,061	$	(4,937)	$	396,924
Trust preferred securities		756		253		—		1,009
Total	$	395,556	$	7,314	$	(4,937)	$	397,933

December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	406,498	$	7,285	$	(7,024)	$	406,759
Trust preferred securities		1,158		5		—		1,163
Total	$	407,656	$	7,290	$	(7,024)	$	407,922

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

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contractual maturity as a basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Available-for-sale:
Due within 5 years	$	—	$	—
Due after 5 years through 10 years		—		—
Due after 10 years		2,970		2,943
Total	$	2,970	$	2,943

Held-to-maturity:
Due within 5 years	$	15	$	15
Due after 5 years through 10 years		41		41
Due after 10 years		395,500		397,877
Total	$	395,556	$	397,933

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2017		2016		2017		2016
Proceeds from sales	$	3,464	$	3,122	$	5,053	$	3,122
Gross gains		186		190		281		190
Gross losses		—		—		—		—

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

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

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