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, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number 001-34403
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock
TBNK
The Nasdaq Stock Market LLC
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: 9,324,060 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2021.
Form 10-Q Quarterly Report
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
43
ITEM 4.
CONTROLS AND PROCEDURES
44
PART II
LEGAL PROCEEDINGS
46
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
SIGNATURES
48
ITEM 1. FINANCIAL STATEMENTS
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
September 30,
December 31,
2021
2020
ASSETS
Cash and cash equivalents
$
101,386
363,543
Investment securities available for sale, at fair value
—
3,562
Investment securities held to maturity, at amortized cost (fair value of $623,406 and $262,841 at September 30, 2021 and December 31, 2020, respectively)
621,417
247,642
Loans held for sale
488
2,195
Loans receivable, net
1,303,969
1,406,995
Federal Home Loan Bank stock, at cost
8,173
8,144
Federal Reserve Bank stock, at cost
3,158
3,145
Accrued interest receivable
6,070
6,515
Premises and equipment, net
4,262
4,855
Right-of-use asset, net
13,302
12,333
Bank-owned life insurance
46,214
45,644
Deferred income tax assets, net
3,304
3,382
Prepaid expenses and other assets
5,325
2,844
Total assets
2,117,068
2,110,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits
1,664,963
1,659,800
Advances from the Federal Home Loan Bank
141,000
Securities sold under agreements to repurchase
10,000
Accounts payable and accrued expenses
29,374
29,221
Lease liability
14,119
13,119
Income taxes payable
2,196
2,161
Advance payments by borrowers for taxes and insurance
3,727
6,790
Total liabilities
1,865,379
1,862,091
Commitments and contingencies
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 9,342,162 and 9,513,867 shares at September 30, 2021 and December 31, 2020, respectively
93
95
Additional paid-in capital
57,104
61,153
Unearned ESOP shares
(3,548)
(3,915)
Retained earnings
207,007
200,066
Accumulated other comprehensive loss
(8,967)
(8,691)
Total stockholders’ equity
251,689
248,708
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
Nine Months Ended
Interest income:
Loans
11,836
14,628
37,019
45,310
Investment securities
3,251
2,264
7,470
7,654
Other investments
188
239
647
753
Total interest income
15,275
17,131
45,136
53,717
Interest expense:
844
1,897
7,385
522
724
1,595
2,448
137
Total interest expense
1,412
2,667
4,983
9,970
Net interest income
13,863
14,464
40,153
43,747
(Reversal of provision) provision for loan losses
(167)
692
(1,452)
2,304
Net interest income after (reversal of provision) provision for loan losses
14,030
13,772
41,605
41,443
Noninterest income:
Service and other fees
433
728
1,958
1,716
Income on bank-owned life insurance
192
204
570
607
Gain on sale of investment securities
403
261
1,840
858
Gain on sale of loans
138
321
584
987
Other
57
63
237
171
Total noninterest income
1,223
1,577
5,189
4,339
Noninterest expense:
Salaries and employee benefits
5,493
5,346
16,576
16,294
Occupancy
1,636
1,701
4,972
Equipment
1,079
1,155
3,273
3,439
Federal deposit insurance premiums
141
424
212
Other general and administrative expenses
1,215
1,046
3,602
2,978
Total noninterest expense
9,564
9,386
28,730
27,895
Income before income taxes
5,689
5,963
18,064
17,887
Income taxes
1,527
1,645
4,831
4,805
Net income
4,162
4,318
13,233
13,082
Basic earnings per share
0.46
0.47
1.45
1.43
Diluted earnings per share
1.44
1.42
Cash dividends declared per common share
0.23
0.69
Basic weighted-average shares outstanding
9,012,398
9,104,079
9,086,447
9,144,463
Diluted weighted-average shares outstanding
9,056,569
9,134,089
9,131,069
9,201,882
2
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Unrealized (loss) gain on securities, net of tax
(4)
(3)
22
Amount reclassified from other comprehensive income, net of tax
(273)
(221)
Other comprehensive loss, net of tax
(276)
(199)
Comprehensive income
4,314
12,957
12,883
3
Consolidated Statements of Stockholders’ Equity (Unaudited)
Accumulated
Common
Additional
Unearned
Total
Shares
Paid-in
ESOP
Retained
Comprehensive
Stockholders’
Outstanding
Stock
Capital
Earnings
Loss
Equity
Balance at June 30, 2020
9,513,867
60,606
(4,159)
195,348
(7,863)
244,027
Other comprehensive loss
Cash dividends declared ($0.23 per share)
(2,104)
Share-based compensation
157
Allocation of 12,233 ESOP shares
142
122
264
Balances at September 30, 2020
60,905
(4,037)
197,562
(7,867)
246,658
Balances at December 31, 2019
9,681,493
97
65,057
(4,404)
190,808
(7,668)
243,890
Cash dividends declared ($0.69 per share)
(6,328)
18,875
523
Allocation of 36,699 ESOP shares
538
367
905
Repurchase of shares of common stock
(268,328)
(6,633)
(6,636)
Exercise of options for common stock
81,827
1,420
1,421
4
Balance at June 30, 2021
9,421,560
94
58,860
(3,670)
204,928
251,245
(2,083)
36
310
(79,398)
(1)
(1,980)
(1,981)
Balances at September 30, 2021
9,342,162
Balances at December 31, 2020
(6,292)
20,437
241
Allocation of 36,700 ESOP shares
575
942
(192,142)
(2)
(4,865)
(4,867)
5
Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
870
899
Deferred income tax expense (benefit)
179
(599)
Amortization of fees, discounts, and premiums, net
(311)
(228)
Amortization of right-of-use asset
2,316
2,238
Origination of loans held for sale
(24,304)
(22,605)
Proceeds from sales of loans held for sale
26,595
22,822
Gain on sale of loans, net
(584)
(987)
Gain on sale of investment securities available for sale
(339)
(290)
Gain on sale of investment securities held to maturity
(1,501)
(568)
Net loss (gain) on disposal of premises and equipment
ESOP expense
Share-based compensation expense
Decrease (increase) in accrued interest receivable
445
(1,805)
Net increase in bank-owned life insurance
(570)
(607)
Net increase in prepaid expenses and other assets
(2,481)
(96)
Net increase in accounts payable and accrued expenses
814
2,080
Net decrease in lease liability
(2,285)
(2,146)
Net decrease in advance payments by borrowers for taxes and insurance
(3,063)
(2,856)
Net increase in income taxes payable
35
106
Net cash from operating activities
8,782
12,168
Cash flows from investing activities:
Purchases of investment securities held to maturity
(474,439)
Principal repayments on investment securities held to maturity
78,547
71,118
Principal repayments on investment securities available for sale
198
1,013
Proceeds from sale of investment securities held to maturity
23,570
10,429
Proceeds from sale of investment securities available for sale
3,330
3,668
Principal repayments on loans receivable, net of loan originations
104,832
90,780
Purchases of Federal Home Loan Bank stock
(29)
(21)
Proceeds from redemption of Federal Home Loan Bank stock
600
Purchases of Federal Reserve Bank stock
(13)
(17)
Purchases of premises and equipment
(279)
(1,466)
Proceeds from disposals of premises and equipment
Net cash from investing activities
(264,283)
176,108
(Continued)
6
Cash flows from financing activities:
Net increase in deposits
5,163
30,773
Repayments of advances from the Federal Home Loan Bank
(15,000)
Proceeds from securities sold under agreements to repurchase
5,000
Repayments of securities sold under agreements to repurchase
(5,000)
Purchases of Fed Funds
10
Sales of Fed Funds
(10)
Repurchases of common stock
(4,547)
Cash dividends paid
(7,272)
(6,357)
Net cash from financing activities
(6,656)
4,416
Net (decrease) increase in cash and cash equivalents
(262,157)
192,692
Cash and cash equivalents at beginning of the period
44,806
Cash and cash equivalents at end of the period
237,498
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings
4,966
10,268
4,617
6,208
Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement transactions
Company stock repurchased through stock swap and net settlement transactions
320
Loans securitized into investment securities
9,431
Establishment of right-of-use asset, net of incentives
3,285
4,033
Establishment of lease liability
4,093
7
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization
Territorial Bancorp Inc. (the Company) is a Maryland corporation and is the holding company for Territorial Savings Bank (the Bank). Territorial Savings Bank is a Hawaii state-chartered bank headquartered in Honolulu, Hawaii and is a member of the Federal Reserve System. Territorial Savings Bank has an inactive subsidiary, Territorial Financial Services, Inc. During the three months ended September 30, 2021, another inactive subsidiary, Territorial Real Estate Co., was dissolved.
(2) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Territorial Bancorp Inc. 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 annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited 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, 2020. 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.
.
(3) Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) amended various sections of the FASB Accounting Standards Codification (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. In November 2019, the FASB issued an update that delays the effective date of the amendment for smaller reporting companies, as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022. The Company is a smaller reporting company. 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 has formed a team that is working on an implementation plan to adopt the amendment. The implementation plan will include developing policies, procedures and internal controls over the model. The Company is also working with a software vendor to measure expected losses required by the amendment. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. Eligible loan modifications under the CARES Act must be related to the COVID-19 pandemic and the borrower must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must be executed during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after the end of the national emergency. On
8
December 21, 2020, legislation extended the troubled debt restructuring relief provisions of the CARES Act to January 1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 loan modification should not be considered a troubled debt restructuring if the borrower was not more than 30 days past due on payments at the time the loan modification program was implemented and the modification is considered short-term (not to exceed six months).
(4) Cash and Cash Equivalents
The table below presents the balances of cash and cash equivalents:
Cash and due from banks
11,361
14,355
Interest-earning deposits in other banks
90,025
349,188
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
Cost
Gains
Losses
Fair Value
September 30, 2021:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities
7,682
(5,693)
623,406
December 31, 2020:
Available-for-sale:
3,185
377
15,200
262,841
The amortized cost and estimated fair value of investment securities by maturity date at September 30, 2021 are shown below. Incorporated in the maturity schedule are mortgage-backed securities, which are allocated using the contractual maturity as a basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due within 5 years
17
Due after 5 years through 10 years
30
Due after 10 years
621,370
623,359
9
Realized gains and losses and the proceeds from sales of held-to-maturity and available-for-sale securities are shown in the table below.
Proceeds from sales
7,539
5,737
26,900
14,097
Gross gains
Gross losses
During the nine months ended September 30, 2021 and 2020, the Company sold $22.1 million and $9.9 million, respectively, of held-to-maturity mortgage-backed securities and recorded gains of $1.5 million and $568,000, respectively. The sale of the mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.
During the nine months ended September 30, 2021 and 2020, the Company sold $3.0 million and $3.4 million, respectively, of available-for-sale mortgage-backed securities and recorded gains of $339,000 and $290,000, respectively.
Investment securities with amortized costs of $148.4 million and $192.7 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure deposits made by state and local governments, 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 September 30, 2021 and December 31, 2020. The Company does not intend to sell held-to-maturity securities until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.
Less Than 12 Months
12 Months or Longer
Unrealized
Number of
Description of securities
Securities
439,788
(5,692)
42
32
439,830
678
682
Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates subsequent to purchase. All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. Since the decline in market value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell these investments until maturity and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2021 and December 31, 2020.
During the nine months ended September 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million into Freddie Mac mortgage-backed securities to increase liquidity. The securitization transaction increased investment securities and lowered loans receivable. The securitization transaction was accounted
for by recording the mortgage-backed securities at a fair value of $9.8 million. A net gain of $377,000 was recognized on the securitization transaction and recorded in gain on sale of loans in the Consolidated Statements of Income. There were no securitization transactions during the nine months ended September 30, 2021.
(6) Loans Receivable and Allowance for Loan Losses
The components of loans receivable are as follows:
Real estate loans:
First mortgages:
One- to four-family residential
1,266,739
1,366,507
Multi-family residential
6,577
7,245
Construction, commercial and other
19,281
19,074
Home equity loans and lines of credit
7,091
9,376
Total real estate loans
1,299,688
1,402,202
Other loans:
Loans on deposit accounts
290
235
Consumer and other loans
8,293
10,086
Total other loans
8,583
10,321
Less:
Net unearned fees and discounts
(1,503)
(1,266)
Allowance for loan losses
(2,799)
(4,262)
Total unearned fees, discounts and allowance for loan losses
(4,302)
(5,528)
The table below presents the activity in the allowance for loan losses by portfolio segment:
Construction,
Home
Commercial
and Other
Loans and
Residential
Mortgage
Lines of
Consumer
Credit
Unallocated
Totals
Three months ended September 30, 2021:
Balance, beginning of period
2,021
434
133
380
2,969
(132)
11
(19)
(27)
1,889
114
353
2,802
Charge-offs
Recoveries
Net charge-offs
Balance, end of period
111
2,799
Nine months ended September 30, 2021:
3,102
406
146
(1,213)
39
(24)
(254)
2,810
(11)
Three months ended September 30, 2020:
3,020
459
197
579
4,256
Provision (reversal of provision) for loan losses
988
4,008
457
176
306
4,948
(6)
170
4,942
Nine months ended September 30, 2020:
1,741
511
54
405
2,712
2,267
(54)
200
(99)
(9)
254
5,016
(86)
12
Net recoveries (charge-offs)
(84)
(74)
Management considers the allowance for loan losses at September 30, 2021 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.
The table below presents the balance in the allowance for loan losses and the recorded investment in loans, net of unearned fees and discounts, by portfolio segment and based on impairment method:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Ending loan balance:
4,785
19
4,804
1,267,080
19,223
7,077
8,584
1,301,964
Total ending loan balance
1,271,865
7,096
1,306,768
4,947
23
4,970
1,367,576
19,024
9,353
10,334
1,406,287
1,372,523
1,411,257
The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:
Unpaid
Recorded
Principal
Investment
Balance
With no related allowance recorded:
One- to four-family residential mortgages
5,358
31
5,389
5,425
5,457
13
The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:
For the Three Months Ended
For the Nine Months Ended
Average
Interest
Income
Recognized
2021:
4,816
4,866
28
20
21
4,836
4,887
2020:
2,745
2,770
25
24
2,769
2,795
There were no loans individually evaluated for impairment with a related allowance for loan loss as of September 30, 2021 or December 31, 2020. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment.
The Company had 12 nonaccrual loans with a book value of $4.2 million as of September 30, 2021 and a book value of $4.4 million as of December 31, 2020. The Company collected interest on nonaccrual loans of $102,000 and $40,000 during the nine months ended September 30, 2021 and 2020, respectively, but due to accounting and regulatory requirements, the Company recorded the interest payments as a reduction of principal. The Company would have recognized additional interest income of $194,000 and $68,000 during the nine months ended September 30, 2021 and 2020, respectively, had the loans been accruing interest. The Company did not have any loans 90 days or more past due and still accruing interest as of September 30, 2021 and December 31, 2020.
14
The table below presents the aging of loans and accrual status by class of loans, net of unearned fees and discounts. Loans with a formal loan payment deferral plan in place are not considered contractually past due or delinquent if the borrower is in compliance with the loan payment deferral plan.
90 Days
or More
30 - 59
60 - 89
90 Days or
Past Due
Days Past
More
Total Past
Loans Not
Nonaccrual
and Still
Due
Accruing
99
1,265,201
1,265,300
4,230
Multi-family residential mortgages
6,565
Construction, commercial and other mortgages
Consumer and other
8,266
8,294
127
1,306,641
4,249
376
152
240
768
1,364,527
1,365,295
4,382
7,228
10,098
10,099
175
792
1,410,465
4,405
The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio. When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent. The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs. Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.
There were no loans modified in a troubled debt restructuring during the nine months ended September 30, 2021 or 2020. There were no new troubled debt restructurings within the nine months ended September 30, 2021 or 2020 that subsequently defaulted. Loan modifications under the CARES Act and the Interagency Statements issued by bank regulators in 2020 are discussed below.
15
The table below summarizes outstanding troubled debt restructurings by class of loans:
Accrual
Status
554
425
979
565
467
1,032
There were no delinquent troubled debt restructurings as of September 30, 2021 or December 31, 2020. Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers. At September 30, 2021, we had no commitments to lend any additional funds to these borrowers.
The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. Eligible loan modifications under the CARES Act must be related to the COVID-19 pandemic and the borrower must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must be executed during the period from March 1, 2020 to the earlier of 60 days after the end of the national emergency or January 1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 related loan modification should not be considered a troubled debt restructuring if the borrower was not more than 30 days past due on payments at the time the loan modification program was implemented and the modification is considered short-term (not to exceed six months). The Company uses the provisions of the CARES Act and the Interagency Statements to account for the eligible loans receiving modifications.
The Company has granted loan payment deferrals to borrowers who have been affected by the COVID-19 pandemic. At September 30, 2021, the Company had outstanding loan payment deferrals on $90.4 million of loans, which represented 6.9% of total loans receivable.
The table below summarizes loans in the loan payment deferral program by class of loan:
September 30, 2021
Loans in the Loan Payment Deferral Program
Percent of Total Loans
One- to- four family residential mortgage
86,538
6.6
%
Non-residential mortgage
3,857
0.3
90,395
6.9
The loans on which the Company has granted loan payment deferrals are included in the ALLL calculation. However, loans performing under a loan payment deferral agreement are not considered contractually past due and are excluded from the past due statistics above.
The ratio of the current loan balance to the current tax-assessed value of the property securing the mortgage loans in the payment deferral program averaged 55.9% at September 30, 2021. At September 30, 2021, one- to four-family residential mortgage loans represented 97.1% of the Company’s total loan portfolio balance with a ratio of the current loan balance to the current tax assessed value of the property securing these loans averaging 45.2%. All of the Company’s residential mortgage loans are secured by real estate in Hawaii.
As of September 30, 2021, of the $86.5 million total one- to four-family mortgage loans in the loan payment deferral program, $66.5 million, or 76.9%, had resumed making full principal and interest payments. The interest on these loans that accrued during the deferral period will be repaid over subsequent years. $20.0 million, or 23.1%, of the
16
total mortgage loans in the loan payment deferral program were making interest-only payments. There are no loans which have had their deferral period end and not resumed their loan payments.
As of September 30, 2021, $3.4 million of the $3.9 million commercial mortgage, commercial and industrial and home equity lines of credit in the loan payment deferral program had resumed making full principal and interest payments. A $478,000 home equity line of credit was making interest-only payments.
Since the beginning of the year, we have not seen a significant increase in loan delinquencies, significant changes in deposits or significant drawdowns on any lines of credit. Loan delinquencies do not include loans requesting payment deferral because of the COVID-19 pandemic. We do not have any commercial loans to hotels, businesses in the transportation industry, restaurants or retail establishments.
The Company had no real estate owned as of September 30, 2021 or December 31, 2020. There was a one- to four-family residential mortgage loan for $99,000 in the process of foreclosure at September 30, 2021. There were two one- to four-family residential mortgage loans totaling $251,000 in the process of foreclosure at December 31, 2020.
Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.
During the nine months ended September 30, 2021 and 2020, the Company sold mortgage loans held for sale with principal balances of $26.2 million and $22.3 million, respectively, and recognized gains of $584,000 and $610,000, respectively. The Company had one loan held for sale for $488,000 at September 30, 2021 and five loans held for sale totaling $2.2 million at December 31, 2020.
During the nine months ended September 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. The Company retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000. A net gain of $377,000 was recognized on the transaction. There were no securitization transactions in the nine months ended September 30, 2021.
The Company serviced loans for others with principal balances of $44.7 million at September 30, 2021 and $56.7 million at December 31, 2020. Of these amounts, $26.6 million and $35.5 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at September 30, 2021 and December 31, 2020, respectively. The amount of contractually specified servicing fees earned for the nine months ended September 30, 2021 and 2020 was $99,000 and $134,000, respectively. The amount of contractually specified servicing fees earned for the three months ended September 30, 2021 and 2020 was $31,000 and $43,000, respectively. The fees are reported in service and other fees in the Consolidated Statements of Income.
(7) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset. Securities sold under agreements to repurchase are summarized as follows:
December 31, 2020
Weighted
Repurchase
Liability
Rate
Maturing:
Over 3 years to 4 years
1.81
1.88
Over 4 years to 5 years
1.73
Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at September 30, 2021. The amount at risk is the greater of
the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement. All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government-sponsored enterprises. The repurchase liability cannot exceed 90% of the fair value of securities pledged. In the event of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.
Carrying
Fair
Value of
Amount
Months to
at Risk
Maturity
Over 90 days
11,990
12,402
2,402
(8) Offsetting of Financial Liabilities
The following table presents our securities sold under agreements to repurchase that are subject to a right of offset in the event of default. See Note 7, Securities Sold Under Agreements to Repurchase, for additional information.
Net Amount of
Gross Amount Not Offset in the
Gross Amount
Liabilities
Balance Sheet
of Recognized
Offset in the
Presented in the
Financial
Cash Collateral
Instruments
Pledged
Net Amount
(9) Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers most employees with at least one year of service. Effective December 31, 2008, under approved changes to the Pension Plan, there were no further accruals of benefits for any participants and benefits will not increase with any additional years of service. Net periodic benefit cost, subsequent to December 31, 2008, has not been significant and is not disclosed in the table below.
The Company also sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.
18
The components of net periodic benefit cost were as follows:
SERP
Net periodic benefit cost for the period:
Service cost
66
Interest cost
45
135
130
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Recognized curtailment loss
Net periodic benefit cost
47
65
196
The service cost component of net periodic benefit cost is included with salaries and employee benefits in the consolidated statements of income. The other components of net periodic benefit cost are included in other general and administrative expenses.
(10) Employee Stock Ownership Plan
Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares. The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.
Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity. The shares committed to be released are considered outstanding for earnings per share computations. Compensation expense recognized for the three months ended September 30, 2021 and 2020 amounted to $310,000 and $264,000, respectively. Compensation expense recognized for the nine months ended September 30, 2021 and 2020 amounted to $942,000 and $905,000, respectively.
Shares held by the ESOP trust were as follows:
Allocated shares
528,636
507,304
Unearned shares
354,764
391,464
Total ESOP shares
883,400
898,768
Fair value of unearned shares, in thousands
9,004
9,407
The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits. For the three months ended September 30, 2021 and 2020 we accrued $41,000
and $5,000, respectively, for the ESOP restoration plan. For the nine months ended September 30, 2021 and 2020, we accrued $94,000 and $79,000, respectively, for the ESOP restoration plan.
(11) Share-Based Compensation
The shareholders of Territorial Bancorp Inc. have adopted the 2010 Equity Incentive Plan and the 2019 Equity Incentive Plan. These plans provide for the award of stock options and restricted stock to key officers and directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the equity incentive plans is based on the fair value of the awards on the grant date. The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term. These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision. The cost of the awards will be recognized on a straight-line basis over the three, five- or six-year vesting period during which participants are required to provide services in exchange for the awards. No new awards can be made under the 2010 Equity Plan, but awards previously made can continue to vest. There are 146,347 shares remaining available for new awards under the 2019 Equity Plan.
The Company recognized compensation expense, measured as the fair value of the share-based award on the date of grant, on a straight-line basis over the vesting period. Share-based compensation is recorded in the Consolidated Statements of Income as a component of salaries and employee benefits with a corresponding increase in stockholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:
(In thousands)
Compensation expense
Income tax benefit
143
Stock Options
The table below presents the stock option activity for the nine months ended September 30, 2021 and 2020:
Aggregate
Remaining
Intrinsic
Exercise
Contractual
Value
Options
Price
Life (years)
(in thousands)
Options outstanding at December 31, 2020
3,085
23.62
1.67
Granted
Exercised
Forfeited
Expired
Options outstanding at September 30, 2021
0.92
Options outstanding at December 31, 2019
116,409
17.53
0.72
1,562
17.36
725
31,497
Options outstanding at September 30, 2020
1.92
Options vested and exercisable at September 30, 2021
The following summarizes certain stock option activity of the Company:
Intrinsic value of stock options exercised
Proceeds received from stock options exercised
Tax benefits realized from stock options exercised
158
Total fair value of stock options that vested
As of September 30, 2021, the Company had no unrecognized compensation costs related to the stock option plans.
Restricted Stock
Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock may not be disposed of or transferred during the vesting period. Restricted stock carries the right to receive dividends, although dividends attributable to restricted stock are retained by the Company until the shares vest, at which time they are paid to the award recipient. Unvested restricted stock that is time-based contain nonforfeitable dividend rights. Accrued dividends on restricted stock that do not vest based on performance or market conditions are forfeited.
The table below presents the time-based restricted stock activity:
Time-Based
Average Grant
Restricted
Date Fair
Unvested at December 31, 2020
23,695
24.24
10,849
26.67
Vested
11,336
25.81
Unvested at September 30, 2021
23,208
24.61
Unvested at December 31, 2019
20,249
28.78
13,444
21.05
9,998
29.16
Unvested at September 30, 2020
During the nine months ended September 30, 2021, the Company issued 10,849 shares of restricted stock to certain members of executive management under the 2019 Equity Incentive Plan. The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant. Restricted stock will vest over three years from the date of the grant.
As of September 30, 2021, the Company had $418,000 of unrecognized compensation costs related to restricted stock.
The table below presents the performance-based restricted stock units (PRSUs) that will vest on a performance condition:
Performance-
Based Restricted
Stock Units
Based on a
Performance
Condition
40,585
25.83
13,016
7,473
30.73
4,545
41,583
24.68
35,976
16,129
7,680
29.53
3,840
During the nine months ended September 30, 2021, the Company issued 13,016 PRSUs to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest three years after they are granted after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved. Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award. For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.
The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of September 30, 2021, the Company had $99,000 of unrecognized compensation costs related to these PRSUs. Performance will be measured over a three-year performance period and will be cliff vested.
The table below presents the PRSUs that will vest on a market condition:
Monte Carlo
Valuation of
the Company's
Market Condition
10,147
24.69
3,254
25.94
1,628
28.32
1,377
10,396
24.03
8,994
25.74
4,032
22.16
1,197
24.44
1,682
22.44
During the nine months ended September 30, 2021, the Company also issued 3,254 PRSUs to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest three years after they are granted
after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved. The number of shares that will be expensed will not be adjusted for performance. The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The assumptions which were used in the Monte Carlo valuation of the PRSUs are:
Grant date: April 5, 2021
Performance period: January 1, 2021 to December 31, 2023
2.74 year risk-free rate on grant date: 0.32%
December 31, 2020 closing price: $24.03
Closing stock price on the date of grant: $26.77
Annualized volatility (based on 2.74 year historical volatility as of the grant date): 38.5%
As of September 30, 2021, the Company had $85,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. Performance will be measured over a three-year performance period and will be cliff vested.
(12) Earnings Per Share
Holders of unvested restricted stock accrue dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Unvested restricted stock awards that are time-based contain nonforfeitable rights to dividends or dividend equivalents and are considered to be participating securities in the earnings per share computation using the two-class method. Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings. Unvested restricted stock awards that vest based on performance or market conditions are not considered to be participating securities in the earnings per share calculation because accrued dividends on shares that do not vest are forfeited.
The table below presents the information used to compute basic and diluted earnings per share:
Income allocated to participating securities
(23)
(47)
Net income available to common shareholders
4,139
4,295
13,186
13,035
Weighted-average number of shares used in:
Dilutive common stock equivalents:
Stock options and restricted stock units
44,171
30,010
44,622
57,419
Net income per common share, basic
Net income per common share, diluted
(13) Other Comprehensive Income and Loss
The table below presents the changes in the components of accumulated other comprehensive income and loss, net of taxes:
Unfunded
Pension
(Gain)/Loss on
Three months ended September 30, 2021
Balances at beginning of period
8,967
Net current period other comprehensive loss
Balances at end of period
Three months ended September 30, 2020
8,178
(315)
7,863
Other comprehensive loss, net of taxes
7,867
Nine months ended September 30, 2021
8,691
Amounts reclassified from other comprehensive income, net of taxes
273
276
Nine months ended September 30, 2020
(510)
7,668
Other comprehensive income, net of taxes
(22)
221
199
The table below presents the tax effect on each component of accumulated other comprehensive income and loss:
Three Months Ended September 30,
Pretax
After Tax
Tax
Unrealized loss on securities
Nine Months Ended September 30,
Unrealized loss (gain) on securities
(30)
Amount reclassified from other comprehensive income
373
(100)
301
(80)
(101)
271
(72)
(14) Revenue Recognition
The Company’s contracts with customers are generally short-term in nature, with cycles of one year or less. These can range from an immediate term for services such as wire transfers, foreign currency exchanges and cashier’s
check purchases, to several days for services such as processing annuity and mutual fund sales. Some contracts may be gof an ongoing nature, such as providing deposit account services, including ATM access, check processing, account analysis and check ordering. However, provision of an assessable service and payment for such service is usually concurrent or closely timed. Contracts related to financial instruments, such as loans, investments and debt, are excluded from the scope of this reporting requirement.
After analyzing the Company’s revenue sources, including the amount of revenue received, the timing of services rendered and the timing of payment for these services, the Company has determined that the rendering of services and the payment for such services are generally closely matched. Any differences are not material to the Company’s consolidated financial statements. Accordingly, the Company generally records income when payment for services is received.
Revenue from contracts with customers is reported in service and other fees in other noninterest income in the consolidated statements of income. The table below reconciles the revenue from contracts with customers and other revenue reported in those line items:
Service and
Other Fees
Revenue from contracts with customers
399
429
Other revenue
34
27
61
490
715
750
41
791
1,855
154
2,009
103
83
186
1,639
88
1,727
77
160
1,887
(15) Leases
The table below presents lease costs and other information for the periods indicated:
Lease costs:
Operating lease costs
843
878
2,552
2,509
Short-term lease costs
Variable lease costs
38
113
115
Total lease costs
889
921
2,697
2,641
Cash paid for amounts included in measurement of lease liabilities
836
808
2,520
2,414
ROU assets obtained in exchange for new operating lease liabilities
444
2,247
At September 30, 2021, future minimum rental commitments under noncancellable operating leases are as follows:
801
2022
3,048
2023
2024
2,441
2025
1,740
Thereafter
4,264
14,991
Less present value discount
(872)
Present value of leases
The table below presents other lease related information:
Weighted-average remaining lease term (years)
5.95
6.00
Weighted-average discount rate
2.18
2.45
(16) Fair Value
In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities measured or disclosed at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:
In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.
The Company uses fair value measurements to determine fair value disclosures. Investment securities held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
Investment Securities Available for Sale. The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.
26
Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. The fair value inputs are considered Level 2 inputs. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the Consolidated Balance Sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.
The estimated fair values of the Company’s financial instruments are as follows:
Fair Value Measurements Using
Level 1
Level 2
Level 3
Assets
Investment securities held to maturity
489
1,362,554
FHLB stock
FRB stock
1,159
4,893
Interest rate contracts
209
1,666,163
1,429,153
237,010
143,498
10,279
Accrued interest payable
52
50
Investment securities available for sale
2,274
1,433,489
627
5,872
1,663,226
1,338,022
325,204
145,441
10,466
33
At September 30, 2021 and December 31, 2020, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.
The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:
Interest rate contracts — assets
Interest rate contracts — liabilities
(209)
(38)
The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31, 2020 and the related losses for the year ended December 31, 2020. There were no assets measured at fair value on a nonrecurring basis as of September 30, 2021. There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.
Adjustment Date
Total Losses
Mortgage servicing assets
12/31/2020
407
(73)
Mortgage servicing assets are valued using a discounted cash flow model. Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing. Losses on mortgage servicing assets are included in service and other fees in the consolidated statements of income.
The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements. The discount rates and prepayment speeds have been weighted by the relative notional amounts.
Unobservable
Range
Valuation Technique
Input
(Weighted Average)
Discounted cash flow
Discount rate
9.25% - 11.25% (10.25%)
Prepayment speed (CPR)
10.42 - 19.61 (13.57)
Annual cost to service (per loan, in dollars)
75
(17) Subsequent Events
On October 28, 2021, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.23 per share of common stock. The dividend is expected to be paid on November 24, 2021 to stockholders of record as of November 11, 2021.
On March 12, 2021, the Company filed with the SEC a Current Report on Form 8-K, disclosing that the Company had received a subpoena from the SEC in respect to the Company’s earnings per share calculations. On October 1, 2021, the Company received a letter from the SEC’s Division of Enforcement indicating that it had concluded the investigation of the Company with no enforcement action recommended.
On October 28, 2021, the Board of Directors of Territorial Bancorp Inc. announced the completion of its tenth repurchase program. Under this repurchase program, the Company was authorized to repurchase up to $5,000,000 of the Company’s outstanding shares.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “continue” and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. You should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
In addition, given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and how the economy will continue to be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Overview
We have historically operated as a traditional thrift institution. The significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, our capital, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. As a result, we may be vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.
We have continued our focus on originating one- to four-family residential real estate loans. Our emphasis on conservative loan underwriting has resulted in continued low levels of nonperforming assets. Our nonperforming assets, which can include nonaccrual loans and real estate owned, totaled $4.2 million or 0.20% of total assets at September 30, 2021, compared to $4.4 million, or 0.21% of total assets at December 31, 2020. We recorded a $1.5 million reversal of loan loss provisions for the nine months ended September 30, 2021 and $2.3 million of loan loss provisions for the nine months ended September 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic.
Other than our loans for the construction of one- to four-family residential homes, we do not offer “interest only” mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as nonconforming loans having less than full documentation). We also do not own any private label mortgage-backed securities that are collateralized by Alt-A, low or no documentation or subprime mortgage loans.
We sold fixed-rate mortgage loans held for sale with principal balances of $26.2 million and $22.3 million during the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2020, we also securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed
securities with a fair market value of $9.8 million. Federal Home Loan Bank advances remained constant at $141.0 million for the nine months ended September 30, 2021 and decreased by $15.0 million for the nine months ended September 30, 2020. Securities sold under agreements to repurchase remained constant at $10.0 million for the nine months ended September 30, 2021 and 2020.
Our investments in mortgage-backed securities have been issued by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. These entities guarantee the payment of principal and interest on our mortgage-backed securities. As of September 30, 2021 and December 31, 2020, we owned $621.4 million and $251.2 million, respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020.
Comparison of Financial Condition at September 30, 2021 and December 31, 2020
Assets. Our total assets increased by $6.3 million, or 0.3%, to $2.1 billion at September 30, 2021. The increase in assets was primarily due to a $370.2 million increase in total investment securities, which was partially offset by a $262.2 million decrease in cash and a $104.7 million decrease in total loans.
Cash and Cash Equivalents. Cash and cash equivalents were $101.4 million at September 30, 2021, a decrease of $262.2 million since December 31, 2020. The decrease in cash and cash equivalents was primarily caused by a $370.2 million increase in total investment securities, which was partially offset by a $104.7 million decrease in total loans.
Loans. Total loans, including $488,000 of loans held for sale, were $1.3 billion at September 30, 2021, or 61.6% of total assets. During the nine months ended September 30, 2021, the loan portfolio, including loans held for sale, decreased by $104.7 million, or 7.4%. The decrease in the loan portfolio primarily occurred as principal repayments and loan sales exceeded the origination of new loans.
Securities. At September 30, 2021, our securities portfolio totaled $621.4 million, or 29.4% of total assets. During the nine months ended September 30, 2021, the securities portfolio increased by $370.2 million. The increase in the securities balance occurred as purchases exceeded the principal repayments and sales of securities. Mortgage-backed securities were purchased during the year to offset the decrease in interest income that occurred because of the decrease in our loan portfolio.
At September 30, 2021, none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.
Deposits. Deposits were $1.7 billion at September 30, 2021, an increase of $5.2 million, or 0.3%, since December 31, 2020. The growth in deposits was primarily due to increases of $66.8 million in savings accounts and $25.5 million in checking accounts. These increases were partially offset by a $86.0 million decrease in certificates of deposit during the nine months ended September 30, 2021.
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank and funds borrowed under securities sold under agreements to repurchase. During the nine months ending September 30, 2021 total borrowings remained constant at $151.0 million.
Stockholders’ Equity. Total stockholders’ equity was $251.7 million at September 30, 2021, an increase of $3.0 million, or 1.2%, from December 31, 2020. The increase in stockholders’ equity occurred primarily due to net income of $13.2 million, which was partially offset by the declaration of $6.3 million of dividends and the repurchase of $4.9 million of common stock.
Average Balances and Yields
The following tables set forth average balance sheets, yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as we did not hold any tax-free investments. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances and are included with accrual loans in the tables. However, no interest income was attributed to nonaccrual loans. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.
For the Three Months Ended September 30,
Yield/Rate
Interest-earning assets:
First mortgage:
One- to four-family residential (2)
1,268,878
11,383
3.59
1,468,756
14,041
3.82
6,726
4.46
8,943
101
4.52
18,599
201
4.32
21,922
245
4.47
7,291
92
5.05
9,777
119
4.87
Other loans
8,851
85
3.84
11,294
Total loans
1,310,345
3.61
1,520,692
3.85
Investment securities:
U.S. government sponsored mortgage-backed securities (2)
612,385
2.12
318,158
2.85
Total securities
117,643
0.64
166,191
0.58
Total interest-earning assets
2,040,373
2.99
2,005,041
3.42
Non-interest-earning assets
85,751
79,273
2,126,124
2,084,314
Interest-bearing liabilities:
Savings accounts
1,072,155
234
0.09
962,882
536
0.22
Certificates of deposit
246,522
593
0.96
377,256
1,342
Money market accounts
0.28
5,855
0.41
Checking and Super NOW accounts
277,579
0.02
233,128
Total interest-bearing deposits
1,600,520
0.21
1,579,121
0.48
Federal Home Loan Bank advances
1.48
141,001
2.05
1.84
Total interest-bearing liabilities
1,751,520
0.32
1,730,122
0.62
Non-interest-bearing liabilities
121,885
106,925
1,873,405
1,837,047
Stockholders’ equity
252,719
247,267
Net interest rate spread (3)
2.67
2.80
Net interest-earning assets (4)
288,853
274,919
Net interest margin (5)
2.72
2.89
Interest-earning assets to interest-bearing liabilities
116.49
115.89
For the Nine Months Ended September 30,
1,296,870
35,612
3.66
1,499,486
43,400
3.86
6,740
231
4.57
9,297
318
4.56
18,387
4.40
22,262
765
4.58
8,072
300
4.96
10,024
461
6.13
9,268
269
3.87
10,560
366
4.62
1,339,337
3.69
1,551,629
3.89
433,541
2.30
346,095
2.95
269,148
115,354
0.87
2,042,026
2,013,078
3.56
85,470
78,856
2,127,496
2,091,934
1,053,634
872
0.11
930,607
2,048
0.29
276,635
2,329
1.12
430,356
5,284
1.64
5,712
5,147
0.44
267,567
217,887
1,603,548
0.27
1,583,997
1.51
146,712
2.22
1.83
1,754,548
0.38
1,740,709
0.76
120,394
105,026
1,874,942
1,845,735
252,554
246,199
2.57
287,478
272,369
2.62
2.90
116.38
115.65
Comparison of Operating Results for the Three Months Ended September 30, 2021 and 2020
General. Net income decreased by $156,000, or 3.6%, to $4.2 million for the three months ended September 30, 2021 from $4.3 million for the three months ended September 30, 2020. The decrease in net income was primarily due to a $601,000 decrease in net interest income, a $354,000 decrease in non-interest income and a $178,000 increase in non-interest expense. These decreases to net income were partially offset by an $859,000 decrease in loan loss provisions and a $118,000 decrease in income taxes.
Net Interest Income. Net interest income decreased by $601,000, or 4.2%, to $13.9 million for the three months ended September 30, 2021 from $14.5 million for the three months ended September 30, 2020. Interest income decreased by $1.9 million, or 10.8%, primarily due to a 43 basis point decrease in the yield on average interest-earning assets, which was partially offset by a $35.3 million increase in the average balance of interest-earning assets. Interest expense decreased by $1.3 million, or 47.1%, due to a 30 basis point decrease in the cost of average interest-bearing liabilities, which was partially offset by a $21.4 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 2.67% and 2.72%, respectively, for the three months ended September 30, 2021, compared to 2.80% and 2.89%, respectively, for the three months ended September 30, 2020. The decrease in the interest rate spread and in the net interest margin are attributable to a 43 basis point decrease in the yield of average interest-bearing assets that was partially offset by a 30 basis point decrease in the cost of average interest-earning liabilities.
Interest Income. Interest income decreased by $1.9 million, or 10.8%, to $15.3 million for the three months ended September 30, 2021 from $17.1 million for the three months ended September 30, 2020. Interest income on loans decreased by $2.8 million, or 19.1%, to $11.8 million for the three months ended September 30, 2021 from $14.6 million for the three months ended September 30, 2020. The decrease in interest income on loans occurred because of a $210.3 million, or 13.8%, decrease in the average balance of loans and a 24 basis point decrease in the yield. The decrease in the average balance of loans occurred as loan repayments and loan sales exceeded new loan originations. The decrease in the yield occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the loan portfolio. Interest income on securities increased by $987,000, or 43.6%, to $3.3 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020. The increase in interest income on securities occurred because the average balance of securities increased by $294.2 million, or 92.5%, to $612.4 million for the three months ended September 30, 2021 from $318.2 million for the three months ended September 30, 2020. The increase in the average balance of securities occurred as mortgage-backed securities were purchased during the year to offset the decrease in interest income that occurred because of the decrease in our loan portfolio. This increase in the investment securities portfolio was partially offset by a 73 basis point decline in the yield, which occurred as higher yielding securities were paid off or sold and securities with lower interest rates were purchased.
Interest Expense. Interest expense decreased by $1.3 million, or 47.1%, to $1.4 million for the three months ended September 30, 2021 from $2.7 million for the three months ended September 30, 2020. The decrease in interest expense occurred because interest expense on interest-bearing deposits decreased by $1.1 million, or 55.5%, to $844,000 for the three months ended September 30, 2021 from $1.9 million for the three months ended September 30, 2020. The decrease in interest expense on interest-bearing deposits was due to a 27 basis point decrease in the rate on average interest-bearing deposits, which was partially offset by a $21.4 million, or 1.4%, increase in the average interest-bearing deposit balance. The rate paid on average interest-bearing deposits decreased to 0.21% for the three months ended September 30, 2021 from 0.48% for the three months ended September 30, 2020. The decrease in the rate paid on average interest-bearing deposits was primarily due to lower interest rates offered on savings accounts and certificates of deposit. The rate paid on average savings accounts decreased to 0.09% for the three months ended September 30, 2021 from 0.22% for the three months ended September 30, 2020. The rate paid on average certificates of deposit decreased to 0.96% for the three months ended September 30, 2021 from 1.42% for the three months ended September 30, 2020. Interest expense on FHLB advances decreased by $202,000, or 27.9%, to $522,000 for the three months ended September 30, 2021 from $724,000 for the three months ended September 30, 2020. The decrease in interest expense on FHLB advances occurred because of a 57 basis point decrease in the cost of average advances. The decrease in the cost of average advances occurred as we restructured $102.0 million of FHLB advances at lower interest rates.
Provision for Loan Losses. We recorded a $167,000 reversal of loan loss provisions for the three months ended September 30, 2021 and $692,000 of loan loss provisions for the three months ended September 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.21% and 0.33% at September 30, 2021 and 2020, respectively. Nonaccrual loans totaled $4.2 million at September 30, 2021, or 0.32% of total loans at that date, compared to $2.2 million of nonaccrual loans at September 30, 2020, or 0.15% of total loans at that date. Nonaccrual loans as of September 30, 2021 and 2020 consisted primarily of one- to four-family residential real estate loans. We have provided for all losses that can be reasonably estimated based on general and specific conditions at September 30, 2021 and 2020. For additional information see Note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.
Noninterest Income. The following table summarizes changes in noninterest income between the three months ended September 30, 2021 and 2020.
Change
$ Change
% Change
(295)
(40.5)
(12)
(5.9)
54.4
(183)
(57.0)
(9.5)
(354)
(22.4)
Noninterest income decreased by $354,000 for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Service and other fees decreased by $295,000, primarily due to a reduction in the amount of mortgage loans referred to other financial institutions and mortgage brokers. During the three months ended September 30, 2021 and 2020, we sold mortgage loans held for sale with principal balances of $11.7 million and $10.0 million, respectively, and recognized gains of $138,000 and $321,000, respectively. During the three months ended September 30, 2021 and 2020, we sold held-to-maturity mortgage-backed securities with book values of $7.1 million and $5.5 million, respectively, and recorded gains of $403,000 and $261,000, respectively. The sale of the held-to-maturity mortgage-backed securities for which we had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.
Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended September 30, 2021 and 2020.
147
2.7
(65)
(3.8)
(76)
(6.6)
2.2
169
16.2
178
1.9
Noninterest expense increased by $178,000 for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in other general and administrative expenses was primarily due to an
37
increase in marketing expenses. The increase in salaries and employee benefits was primarily due to an increase in health insurance, employee stock ownership plan contributions and payroll taxes and a decrease in deferred salary expense for originating new loans. As new loans are originated, salary expense is reduced due to the capitalization of the cost of new loans. The deferred salary expense for originating new loans decreased due to a decrease in the cost deferred for each loan originated that was partially offset by an increase in the number of loans closed. These increases to salaries and employee benefits were partially offset by a decrease in the expense for our equity incentive plan and a decrease in loan agent commissions. The decrease in equipment expense was primarily due to a decrease in service bureau expense. The decrease in occupancy expenses was primarily due to a decrease in leasehold improvement depreciation expense.
Income Tax Expense. Income taxes were $1.5 million for the three months ended September 30, 2021, reflecting an effective tax rate of 26.8%, compared to $1.6 million for the three months ended September 30, 2020, reflecting an effective tax rate of 27.6%.
Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020
General. Net income increased by $151,000, or 1.2%, from $13.1 million for the nine months ended September 30, 2020 to $13.2 million for the nine months ended September 30, 2021. The increase in net income was due to a $3.8 million decrease in loan loss provisions and an $850,000 increase in non-interest income. These increases to net income were partially offset by a $3.6 million decrease in net interest income and an $835,000 increase to non-interest expense.
Net Interest Income. Net interest income decreased by $3.6 million, or 8.2%, to $40.2 million for the nine months ended September 30, 2021 from $43.7 million for the nine months ended September 30, 2020. Interest income decreased by $8.6 million, or 16.0%, due to a 61 basis point decrease in the yield of average interest-earning assets, which was partially offset by a $28.9 million increase in the average balance of interest-earning assets. Interest expense decreased by $5.0 million, or 50.0%, due to a 38 basis point decrease in the cost of average interest-bearing liabilities, which was partially offset by a $13.8 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 2.57% and 2.62% respectively, for the nine months ended September 30, 2021, compared to 2.80% and 2.90%, respectively, for the nine months ended September 30, 2020. The decreases in the interest rate spread and in the net interest margin are attributable to the 61 basis point decrease in the yield on average interest-bearing assets that was partially offset by the 38 basis point decrease in the cost of average interest-earning liabilities.
Interest Income. Interest income decreased by $8.6 million, or 16.0%, to $45.1 million for the nine months ended September 30, 2021 from $53.7 million for the nine months ended September 30, 2020. Interest income on loans decreased by $8.3 million, or 18.3%, to $37.0 million for the nine months ended September 30, 2021 from $45.3 million for the nine months ended September 30, 2020. The decrease in interest income on loans occurred because the average balance of loans decreased by $212.3 million, or 13.7%, and the yield on average loans decreased by 20 basis points. The decrease in the average balance of loans occurred as loan repayments and loan sales exceeded new loan originations. The decrease in the yield on average loans occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the loan portfolio. Interest income on securities decreased by $184,000, or 2.4%, to $7.5 million for the nine months ended September 30, 2021 from $7.7 million for the nine months ended September 30, 2020. The decrease in interest income on securities occurred primarily because of a 65 basis point decrease in the yield on average securities, which occurred as higher yielding securities were paid off or sold and securities with lower interest rates were purchased. This decrease was partially offset by an increase in the average balance of securities by $87.4 million, or 25.3%, as security purchases exceeded security repayments and sales.
Interest Expense. Interest expense decreased by $5.0 million, or 50.0%, to $5.0 million for the nine months ended September 30, 2021 from $10.0 million for the nine months ended September 30, 2020. Interest expense on interest-bearing deposits decreased by $4.1 million, or 56.0%, from $7.4 million for the nine months ended September 30, 2020 to $3.3 million for the nine months ended September 30, 2021. The decrease in interest expense on interest-bearing deposits was primarily due to a 35 basis point decrease in the rate paid on average interest-bearing deposits. The decrease in the rate paid on average interest bearing deposits was primarily due to lower interest rates offered on certificates of deposit and savings accounts. During the nine months ended September 30, 2021, the rate paid on
average certificates of deposit decreased by 52 basis points as average rates dropped from 1.64% to 1.12% as higher rate certificates of deposit matured. The rate paid on savings accounts decreased by 18 basis points as average rates dropped from 0.29% to 0.11%. The decrease in the average rates on certificates of deposit and savings accounts occurred because of a decline in market interest rates. Interest expense on FHLB advances decreased by $853,000, or 34.8%, from $2.4 million for the nine months ended September 30, 2020 to $1.6 million for the nine months ended September 30, 2021. The decrease in interest expense on FHLB advances was primarily due to a 71 basis point decrease in the rate paid and a $5.7 million decrease in the average balance of FHLB advances. The decrease in the rate paid on FHLB advances was primarily due to restructuring $102.0 million of FHLB advances at lower interest rates.
Provision for Loan Losses. We recorded a $1.5 million reversal of loan loss provisions for the nine months ended September 30, 2021 and $2.3 million of loan loss provisions for the nine months ended September 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.21% and 0.33% at September 30, 2021 and 2020, respectively. Nonaccrual loans totaled $4.2 million at September 30, 2021, or 0.32% of total loans at that date, compared to $2.2 million of nonaccrual loans at September 30, 2020, or 0.15% of total loans at that date. Nonaccrual loans as of September 30, 2021 and 2020 consisted primarily of one- to four-family residential real estate loans. We have provided for all losses that can be reasonably estimated based on general and specific conditions at September 30, 2021 and 2020. For additional information see Note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.
Noninterest Income. The following table summarizes changes in noninterest income between the nine months ended September 30, 2021 and 2020.
242
14.1
(37)
(6.1)
982
114.5
(403)
(40.8)
38.6
850
19.6
Noninterest income increased by $850,000 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. During the nine months ended September 30, 2021, we sold available-for-sale and held-to-maturity mortgage-backed securities with book values of $3.0 million and $22.1 million, respectively, and recorded gains of $339,000 and $1.5 million, respectively. During the nine months ended September 30, 2020, we sold available-for-sale and held-to-maturity mortgage-backed securities with book values of $3.4 million and $9.9 million, respectively, and recorded gains of $290,000 and $568,000, respectively. The sale of the held-to-maturity mortgage-backed securities, for which we had already collected a substantial portion of the outstanding purchased principal (at least 85%), was in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity. Service and other fees increased due to an increase in fees earned for referring mortgage loans to other financial institutions and mortgage brokers. During the nine months ended September 30, 2021 and 2020, we sold mortgage loans held for sale with principal balances of $26.2 million and $22.3 million, respectively, and recognized gains of $584,000 and $610,000, respectively. During the nine months ended September 30, 2020, we securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. We retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000 and recognized a gain of $377,000. There were no securitization transactions during the nine months ended September 30, 2021.
Noninterest Expense. The following table summarizes changes in noninterest expense between the nine months ended September 30, 2021 and 2020.
282
1.7
(117)
(2.4)
(166)
(4.8)
100.0
624
21.0
835
3.0
Noninterest expense increased by $835,000 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in other general and administrative expenses was primarily due to increases in legal expenses, marketing expenses and other loan expenses. The increase in salaries and employee benefits was primarily due to an increase in compensation, health insurance and payroll taxes. These increases were offset by a decrease in the expense for our equity incentive plan and an increase in the deferred salary expense for originating new loans. As new loans are originated, salary expense is reduced due to the capitalization of the cost of new loans. The deferred salary expense for originating new loans increased due to an increase in the number of loans closed that was partially offset by a decrease in the cost deferred for each loan originated. The increase in federal deposit insurance premiums occurred as we received credits in the nine months ended September 30, 2020 because the FDIC insurance fund was overcapitalized. The decrease in equipment expense was primarily due to a decrease in service bureau expense. The decrease in occupancy was primarily due to a decrease in leasehold improvement depreciation expense.
Income Tax Expense. Income taxes were $4.8 million for the nine months ended September 30, 2021, reflecting an effective tax rate of 26.7%, compared to $4.8 million for the nine months ended September 30, 2020, reflecting an effective tax rate of 26.9%.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. We have established an Asset/Liability Management Committee, consisting of our President and Chief Executive Officer, our Vice Chairman and Co-Chief Operating Officer, our Senior Vice President and Chief Financial Officer and our Vice President and Senior Treasury Analyst, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2021.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
40
Excess liquid assets are invested generally in interest-earning deposits or securities and may also be used to pay off short-term borrowings.
Our most liquid asset is cash. The amount of this asset is dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2021, our cash and cash equivalents totaled $101.4 million. On that date, we had $10.0 million in securities sold under agreements to repurchase outstanding and $141.0 million of Federal Home Loan Bank advances outstanding with the ability to borrow an additional $808.0 million under Federal Home Loan Bank advances. We have securities with a market value of $8.5 million pledged to the Federal Reserve Bank and have the ability to borrow up to $8.0 million using these securities as collateral.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At September 30, 2021, we had $22.1 million in loan commitments outstanding for fixed-rate loans and had $16.5 million in unused lines of credit to borrowers. Certificates of deposit due within one year at September 30, 2021 totaled $179.5 million, or 10.8% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and security sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2022. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating loans and purchasing mortgage-backed securities. During the nine months ended September 30, 2021 and 2020 we originated $264.9 million and $190.9 million of loans, respectively. During the nine months ended September 30, 2021 we purchased securities with principal balances of $474.4 million. During the nine months ended September 30, 2020 we did not purchase any investment securities.
Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, securities sold under agreements to repurchase, stock repurchases and dividend payments. We experienced a net increase in deposits of $5.2 million and $30.8 million for the nine months ended September 30, 2021 and 2020, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank, which provide an additional source of funds. FHLB advances were $141.0 million at September 30, 2021 and December 31, 2020. We had the ability to borrow up to an additional $808.0 million and $807.2 million from the FHLB as of September 30, 2021 and December 31, 2020, respectively. We also utilize securities sold under agreements to repurchase as another borrowing source. Securities sold under agreements to repurchase were $10.0 million at September 30, 2021 and December 31, 2020.
Territorial Bancorp Inc. is a separate legal entity from Territorial Savings Bank and must provide for its own liquidity to pay dividends, repurchase shares of its common stock and for other corporate purposes. Territorial Bancorp Inc.’s primary source of liquidity is dividend payments from Territorial Savings Bank. The ability of Territorial Savings Bank to pay dividends to Territorial Bancorp Inc. is subject to regulatory requirements. At September 30, 2021, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of $16.0 million.
Territorial Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Territorial Bancorp Inc. is not subject to regulatory capital requirements because its total assets are less than $3.0 billion. At September 30, 2021, Territorial Savings Bank exceeded all of its regulatory capital requirements and is considered to be “well capitalized” under regulatory guidelines.
The tables below present the fully-phased in capital required to be considered “well-capitalized” and meet the regulatory capital conservation buffer requirement as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for Territorial Savings Bank and the Company at September 30, 2021 and December 31, 2020:
Required Ratio
Actual Amount
Actual Ratio
Tier 1 Leverage Capital
Territorial Savings Bank
5.00
243,377
11.47
Territorial Bancorp Inc.
260,657
12.28
Common Equity Tier 1 Risk-Based Capital (1)
9.00
27.26
29.18
Tier 1 Risk-Based Capital (1)
10.50
Total Risk-Based Capital (1)
12.50
246,235
27.58
263,515
29.50
239,256
11.38
257,399
12.24
27.49
29.57
243,608
27.99
261,751
30.07
Prompt Corrective Action provisions define specific capital categories based on an institution’s capital ratios. However, the regulators may impose higher minimum capital standards on individual institutions or may downgrade an institution from one capital category to a lower category because of safety and soundness concerns. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements.
Prompt Corrective Action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “undercapitalized” to “critically undercapitalized.”
At September 30, 2021 and December 31, 2020, the Bank’s capital ratios exceeded the minimum capital thresholds for a “well-capitalized” institution. There are no conditions or events that have changed the institution’s category under the capital guidelines.
Depending on the amount of dividends to be paid, the Bank is required to either notify or make application to the Federal Reserve Bank before dividends are paid to the Company.
Legislation enacted in 2018 requires the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” between 8% to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk based requirements. The federal regulators have adopted 9% as the applicable ratio, effective March 31, 2020, and temporarily reduced the ratio to 8% as a result of the CARES Act, transitioning back to 9% by year-end 2021. We have not elected to follow the alternative framework.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. Except for a decrease of $86.0 million in certificates of deposit and an increase of $808,000 in loan commitments between December 31, 2020 and September 30, 2021, there have not been any material changes in our contractual obligations and funding needs since December 31, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Because we have historically operated as a traditional thrift institution, the significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, our capital, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. In addition, there is little demand for adjustable-rate mortgage loans in the Hawaii market area. This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. We sold $26.2 million and $22.3 million of fixed-rate mortgage loans during the nine months ended September 30, 2021 and 2020, respectively, to reduce our interest rate risk.
Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Economic Value of Equity. We use an interest rate sensitivity analysis that computes changes in the economic value of equity (EVE) of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE represents the market value of portfolio equity and is equal to the present
value of assets minus the present value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market-risk-sensitive instruments in the event of an instantaneous and sustained 100 to 400 basis point increase or a 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.
The following table presents our internal calculations of the estimated changes in our EVE as of June 30, 2021 (the latest date for which we have available information) that would result from the designated instantaneous changes in the interest rate yield curve.
Increase
(Decrease) in
EVE Ratio as a
Change in
Percent of
Interest Rates
Estimated EVE
Percentage
Present Value
Present Value of
(bp) (1)
EVE
Change in EVE
of Assets (3)(4)
Assets (3)(4)
+400
226,632
(130,500)
(36.54)
13.06
(3.19)
+300
265,925
(91,207)
(25.54)
14.41
(1.84)
+200
312,703
(44,429)
(12.44)
15.86
(0.39)
+100
349,534
(7,598)
(2.13)
16.69
0
357,132
16.25
-100
297,210
(59,922)
(16.78)
13.28
(2.97)
Interest rates on Freddie Mac mortgage-backed securities have increased by 10 basis points between June 30, 2021 and September 30, 2021. The increase in mortgage interest rates is not expected to have a significant effect on estimated EVE.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE. Modeling changes in EVE requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and net interest income and will differ from actual results.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2021. Based on that evaluation, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2021, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions that are considered ordinary, routine litigation incidental to the business of the Company. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations, and no claim for money damages exceeds ten percent of the Company’s consolidated assets.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the period ended December 31, 2020 filed with the Securities and Exchange Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Stock Repurchases. The following table sets forth information in connection with repurchases of our shares of common stock during the three months ended September 30, 2021:
Total Number of
Maximum Approximate
Shares Purchased as
Dollar Value of Shares
Total Number
Average Price
Part of Publicly
That May Yet be
of Shares
Paid per
Announced Plans or
Purchased Under the
Period
Purchased
Share
Programs
Plans or Programs (1)
July 1, 2021 through July 31, 2021
50,616
24.92
1,171,931
August 1, 2021 through August 31, 2021
September 1, 2021 through September 30, 2021
28,782
24.99
452,760
79,398
24.95
______________________________________
On May 5, 2021, the Company announced its tenth repurchase program. Under this stock repurchase program, the Company is authorized to repurchase up to $5,000,000 of our common stock based on certain price assumptions. We have entered into a Rule 10b5-1 plan with respect to our stock repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Quarterly Report on Form 10-Q and are listed below.
INDEX TO EXHIBITS
Exhibit
Number
Description
31.1
Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2
Certification of Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, and Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Territorial Bancorp Inc.’s Form 10-Q report for the quarter ended September 30, 2021, formatted in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL document and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 12, 2021
/s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer