Edgar Filing: Territorial Bancorp Inc.

tbnk_Current folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended September 30, 2018

☐ 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 every Interactive Data File required to be submitted 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 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 ☐		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: 9,653,455 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2018.

Table of Contents

TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

Table of Contents

PART I

ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	45

PART II

ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	46

SIGNATURES		48

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)


	September 30,		December 31,
	2018		2017
ASSETS
Cash and cash equivalents	$	24,101	$	32,089
Investment securities available for sale		2,565		2,851
Investment securities held to maturity, at amortized cost (fair value of $368,237 and $406,663 at September 30, 2018 and December 31, 2017, respectively)		381,159		404,792
Loans held for sale		—		403
Loans receivable, net		1,546,734		1,488,971
Federal Home Loan Bank stock, at cost		6,045		6,541
Federal Reserve Bank stock, at cost		3,106		3,103
Accrued interest receivable		5,410		5,142
Premises and equipment, net		5,005		5,721
Bank-owned life insurance		44,848		44,201
Income taxes receivable		713		1,571
Deferred income tax assets, net		3,727		4,609
Prepaid expenses and other assets		2,639		3,852
Total assets	$	2,026,052	$	2,003,846

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,643,393	$	1,597,295
Advances from the Federal Home Loan Bank		91,000		107,200
Securities sold under agreements to repurchase		30,000		30,000
Accounts payable and accrued expenses		20,371		26,390
Income taxes payable		1,415		1,483
Advance payments by borrowers for taxes and insurance		4,038		6,624
Total liabilities		1,790,217		1,768,992

Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 50,000,000 shares, no shares issued or outstanding		—		—
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 9,681,579 and 9,915,058 shares at September 30, 2018 and December 31, 2017, respectively		97		99
Additional paid-in capital		65,863		73,050
Unearned ESOP shares		(5,016)		(5,383)
Retained earnings		181,799		172,782
Accumulated other comprehensive loss		(6,908)		(5,694)
Total stockholders’ equity		235,835		234,854
Total liabilities and stockholders’ equity	$	2,026,052	$	2,003,846

See accompanying notes to consolidated financial statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Interest income:
Loans	$	15,038	$	13,837	$	44,829	$	40,877
Investment securities		3,032		3,169		9,283		9,328
Other investments		208		171		582		530
Total interest income		18,278		17,177		54,694		50,735

Interest expense:
Deposits		2,899		2,033		8,040		5,459
Advances from the Federal Home Loan Bank		493		264		1,371		779
Securities sold under agreements to repurchase		125		221		376		654
Total interest expense		3,517		2,518		9,787		6,892

Net interest income		14,761		14,659		44,907		43,843
Provision (reversal of provision) for loan losses		(50)		54		19		2

Net interest income after provision (reversal of provision) for loan losses		14,811		14,605		44,888		43,841

Noninterest income:
Service fees on loan and deposit accounts		470		427		1,372		1,490
Income on bank-owned life insurance		216		228		647		681
Gain on sale of investment securities		—		150		45		431
Gain on sale of loans		8		28		61		154
Other		52		76		200		234
Total noninterest income		746		909		2,325		2,990

Noninterest expense:
Salaries and employee benefits		5,655		5,169		16,798		15,152
Occupancy		1,599		1,529		4,689		4,439
Equipment		1,061		882		3,000		2,630
Federal deposit insurance premiums		150		152		457		448
Other general and administrative expenses		1,038		1,029		3,326		3,553
Total noninterest expense		9,503		8,761		28,270		26,222

Income before income taxes		6,054		6,753		18,943		20,609
Income taxes		1,268		2,580		4,374		7,814
Net income	$	4,786	$	4,173	$	14,569	$	12,795

Basic earnings per share	$	0.52	$	0.45	$	1.57	$	1.38
Diluted earnings per share	$	0.51	$	0.44	$	1.54	$	1.34
Cash dividends declared per common share	$	0.22	$	0.30	$	0.72	$	0.70
Basic weighted-average shares outstanding		9,212,913		9,280,018		9,238,827		9,250,537
Diluted weighted-average shares outstanding		9,377,403		9,521,201		9,424,992		9,535,875

See accompanying notes to consolidated financial statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Net income	$	4,786	$	4,173	$	14,569	$	12,795

Change in unrealized loss on securities, net of tax		(19)		12		(79)		(1)
Other comprehensive income (loss), net of tax		(19)		12		(79)		(1)
Comprehensive income	$	4,767	$	4,185	$	14,490	$	12,794

See accompanying notes to consolidated financial statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


									Accumulated
			Additional		Unearned				Other		Total
	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Stock		Capital		Shares		Earnings		Loss		Equity
Balances at December 31, 2016	$	98	$	71,914	$	(5,872)	$	168,962	$	(5,316)	$	229,786

Net income		—		—		—		12,795		—		12,795
Other comprehensive loss		—		—		—		—		(1)		(1)
Cash dividends declared ($0.70 per share)		—		—		—		(6,471)		—		(6,471)
Share-based compensation		—		48		—		—		—		48
Allocation of 36,699 ESOP shares		—		777		367		—		—		1,144
Repurchase of 91,456 shares of common stock		(1)		(2,905)		—		—		—		(2,906)
Exercise of 166,837 options for common stock		2		2,895		—		—		—		2,897

Balances at September 30, 2017	$	99	$	72,729	$	(5,505)	$	175,286	$	(5,317)	$	237,292

Balances at December 31, 2017	$	99	$	73,050	$	(5,383)	$	172,782	$	(5,694)	$	234,854

Net income		—		—		—		14,569		—		14,569
Other comprehensive loss		—		—		—		—		(79)		(79)
Reclassification of deferred taxes		—		—		—		1,135		(1,135)		—
Cash dividends declared ($0.72 per share)		—		—		—		(6,687)		—		(6,687)
Share-based compensation		—		256		—		—		—		256
Allocation of 36,699 ESOP shares		—		751		367		—		—		1,118
Repurchase of 306,888 shares of common stock		(3)		(9,391)		—		—		—		(9,394)
Exercise of 69,008 options for common stock		1		1,197		—		—		—		1,198

Balances at September 30, 2018	$	97	$	65,863	$	(5,016)	$	181,799	$	(6,908)	$	235,835

See accompanying notes to consolidated financial statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2018		2017
Cash flows from operating activities:
Net income	$	14,569	$	12,795
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		19		2
Depreciation and amortization		946		816
Deferred income tax expense		911		733
Amortization of fees, discounts, and premiums, net		(324)		(339)
Origination of loans held for sale		(7,996)		(19,023)
Proceeds from sales of loans held for sale		8,460		20,284
Gain on sale of loans, net		(61)		(154)
Net gain on sale of real estate owned		(4)		—
Gain on sale of investment securities held to maturity		(45)		(431)
Net loss on disposal of premises and equipment		3		25
ESOP expense		1,118		1,144
Share-based compensation expense		256		48
Increase in accrued interest receivable		(268)		(253)
Net increase in bank-owned life insurance		(647)		(682)
Net (increase) decrease in prepaid expenses and other assets		1,213		(1,722)
Net increase (decrease) in accounts payable and accrued expenses		(6,044)		1,083
Net decrease in advance payments by borrowers for taxes and insurance		(2,586)		(1,938)
Net decrease in income taxes receivable		858		119
Net increase (decrease) in income taxes payable		(68)		77

Net cash from operating activities		10,310		12,584

Cash flows from investing activities:
Purchases of investment securities held to maturity		(14,983)		(51,894)
Purchases of investment securities available for sale		—		(2,970)
Principal repayments on investment securities held to maturity		34,270		40,925
Principal repayments on investment securities available for sale		171		50
Proceeds from sale of investment securities held to maturity		4,462		7,446
Loan originations, net of principal repayments on loans receivable		(57,568)		(98,468)
Purchases of Federal Home Loan Bank stock		(4,192)		(1,609)
Proceeds from redemption of Federal Home Loan Bank stock		4,688		1,541
Purchases of Federal Reserve Bank stock		(3)		(8)
Proceeds from sale of real estate owned		50		—
Purchases of premises and equipment		(233)		(2,172)

Net cash from investing activities		(33,338)		(107,159)

(Continued)

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2018		2017
Cash flows from financing activities:
Net increase in deposits	$	46,098	$	78,167
Proceeds from advances from the Federal Home Loan Bank		91,000		38,525
Repayments of advances from the Federal Home Loan Bank		(107,200)		(38,525)
Purchases of Fed Funds		10		10
Sales of Fed Funds		(10)		(10)
Repurchases of common stock		(8,196)		(9)
Cash dividends paid		(6,662)		(6,471)

Net cash from financing activities		15,040		71,687

Net decrease in cash and cash equivalents		(7,988)		(22,888)

Cash and cash equivalents at beginning of the period		32,089		61,273

Cash and cash equivalents at end of the period	$	24,101	$	38,385

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	10,122	$	6,698
Income taxes		2,673		6,956

Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement transactions	$	1,198	$	2,897
Loans transferred to real estate owned		46		—
Dividends declared, not yet paid		25		—

See accompanying notes to consolidated financial statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with 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, 2017. 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

In 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.

In 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank and 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 Company reviewed all revenue sources to determine if the sources are in scope for this guidance. Net interest income from financial assets and liabilities are explicitly excluded from the scope of the amendment. The Company’s overall assessment of key in-scope revenue sources include service charges on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity sales. Based on the Company’s analysis of these revenue sources, including the amount of revenue, the timing of services rendered and timing of payment for these services, there is no material change in the timing of revenue recognition under the amendment. The Company adopted this amendment as of January 1, 2018, using the modified retrospective approach. Since there was no material impact on the timing of revenue recognition, no adjustment to beginning retained earnings was deemed necessary. See Note 14, Revenue Recognition, for further information.

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 of 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 Company adopted this amendment as of January 1, 2018, and there was no material effect on its consolidated financial statements.

Table of Contents

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 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 Company adopted this amendment as of January 1, 2018, and there was no material effect on its consolidated financial statements.

In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of the FASB ASC. Prior to the adoption of the amendment, deferred taxes previously included in accumulated other comprehensive income were not allowed to be adjusted for changes in tax rates. This amendment allows the reclassification of the tax effects resulting from the change in the federal corporate tax rate in the Tax Cuts and Jobs Act, which was passed in December 2017, from accumulated other comprehensive income to retained earnings. The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period for which financial statements have not yet been issued. The Company adopted this amendment during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes from accumulated other comprehensive income to retained earnings.

In August 2018, the FASB amended the Fair Value Measurement topic of the FASB ASC. The amendment affects disclosures only, and includes additions, deletions and modifications of the disclosures of assets and liabilities reported in the fair value hierarchy. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Entities are allowed to early adopt any removed or modified disclosures while delaying adoption of any added disclosures until the effective date. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

In August 2018, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC. The amendment affects disclosures related to defined benefit pension or other post retirement plans and includes additions, deletions and clarifications of disclosures. The amendment is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

Table of Contents

(4) Cash and Cash Equivalents

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


	September 30,		December 31,
(Dollars in thousands)	2018		2017
Cash and due from banks	$	9,421	$	9,114
Interest-earning deposits in other banks		14,680		22,975
Cash and cash equivalents	$	24,101	$	32,089

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
September 30, 2018:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,698	$	—	$	(133)	$	2,565
Total	$	2,698	$	—	$	(133)	$	2,565

Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	381,084	$	1,231	$	(14,820)	$	367,495
Trust preferred securities		75		667		—		742
Total	$	381,159	$	1,898	$	(14,820)	$	368,237

December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	2,870	$	—	$	(19)	$	2,851
Total	$	2,870	$	—	$	(19)	$	2,851

Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	404,365	$	6,056	$	(4,603)	$	405,818
Trust preferred securities		427		418