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, 2023
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.)
1003 Bishop Street, Pauahi Tower Suite 500, 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, a 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: 8,826,613 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2023.
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
45
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
SIGNATURES
47
ITEM 1. FINANCIAL STATEMENTS
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
September 30,
December 31,
2023
2022
ASSETS
Cash and cash equivalents
$
89,122
40,553
Investment securities available for sale, at fair value
19,143
20,821
Investment securities held to maturity, at amortized cost (fair value of $536,534 and $591,084 at September 30, 2023 and December 31, 2022, respectively)
695,641
717,773
Loans receivable
1,311,421
1,296,796
Allowance for credit/loan losses
(5,003)
(2,032)
Loans receivable, net of allowance for credit/loan losses
1,306,418
1,294,764
Federal Home Loan Bank stock, at cost
12,844
8,197
Federal Reserve Bank stock, at cost
3,177
3,170
Accrued interest receivable
6,131
6,115
Premises and equipment, net
7,347
7,599
Right-of-use asset, net
12,964
14,498
Bank-owned life insurance
48,412
47,783
Deferred income tax assets, net
3,252
1,643
Prepaid expenses and other assets
6,776
6,676
Total assets
2,211,227
2,169,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits
1,651,013
1,716,152
Advances from the Federal Home Loan Bank
256,000
141,000
Securities sold under agreements to repurchase
10,000
Accounts payable and accrued expenses
24,349
24,180
Lease liability
17,385
15,295
Income taxes payable
479
838
Advance payments by borrowers for taxes and insurance
3,251
5,577
Total liabilities
1,962,477
1,913,042
Commitments and contingencies: (Note 15)
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 8,826,613 and 9,071,076 shares at September 30, 2023 and December 31, 2022, respectively
88
91
Additional paid-in capital
47,991
51,825
Unearned ESOP shares
(2,569)
(2,936)
Retained earnings
211,741
215,314
Accumulated other comprehensive loss
(8,501)
(7,744)
Total stockholders’ equity
248,750
256,550
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
11,886
11,376
35,037
33,909
Investment securities
4,447
4,402
13,512
11,753
Other investments
1,051
373
2,848
816
Total interest income
17,384
16,151
51,397
46,478
Interest expense:
5,408
1,242
13,261
2,577
1,896
522
4,782
1,549
46
137
Total interest expense
7,350
1,810
18,180
4,263
Net interest income
10,034
14,341
33,217
42,215
Reversal of provision for credit/loan losses
(259)
(109)
(147)
(603)
Net interest income after reversal of provision for credit/loan losses
10,293
14,450
33,364
42,818
Noninterest income:
Service and other fees
298
339
1,022
1,092
Income on bank-owned life insurance
218
200
628
591
Net gain (loss) on sale of loans
10
(3)
Other
73
76
208
1,359
Total noninterest income
589
615
1,868
3,039
Noninterest expense:
Salaries and employee benefits
5,176
5,513
15,723
16,518
Occupancy
1,819
1,682
5,201
4,924
Equipment
1,263
1,317
3,878
3,749
Federal deposit insurance premiums
246
145
737
429
Other general and administrative expenses
1,163
1,112
3,291
Total noninterest expense
9,667
9,769
28,790
28,911
Income before income taxes
1,215
5,296
6,442
16,946
Income taxes
335
1,405
1,749
4,235
Net income
880
3,891
4,693
12,711
Basic earnings per share
0.10
0.44
0.54
1.42
Diluted earnings per share
0.53
1.41
Cash dividends declared per common share
0.23
0.69
Basic weighted-average shares outstanding
8,577,632
8,802,010
8,656,915
8,885,626
Diluted weighted-average shares outstanding
8,610,289
8,846,611
8,705,784
8,938,808
2
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Other comprehensive loss, net of tax:
Unrealized loss on securities
(780)
(1,114)
(757)
(1,991)
Total other comprehensive loss, net of tax
Comprehensive income
100
2,777
3,936
10,720
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, 2023
8,848,511
48,110
(2,691)
212,848
(7,721)
250,634
Other comprehensive loss
Cash dividends declared ($0.23 per share)
(1,987)
Share-based compensation
Allocation of 12,233 ESOP shares
14
122
136
Repurchase of shares of common stock
(21,898)
(221)
Balances at September 30, 2023
8,826,613
Balances at December 31, 2022
9,071,076
Cumulative change in accounting principle (1)
(2,319)
Cash dividends declared ($0.69 per share)
(5,947)
12,729
90
Allocation of 36,700 ESOP shares
221
367
588
(257,192)
(4,145)
(4,148)
(1) Represents the impact of the adoption of Accounting Standards Update 2016-13. See Note 6 to the consolidated financial statements for additional information.
4
Balance at June 30, 2022
9,120,458
52,464
(3,181)
212,932
(6,401)
255,905
(2,036)
(18)
135
123
258
(6,790)
(141)
Balances at September 30, 2022
9,113,668
52,440
(3,058)
214,787
(7,515)
256,745
Balances at December 31, 2021
9,324,060
93
56,951
(3,425)
208,227
(5,524)
256,322
(6,151)
19,227
256
467
834
(229,619)
(2)
(5,234)
(5,236)
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
839
916
Deferred income tax (benefit) expense
(492)
314
Accretion of fees, discounts, and premiums, net
(267)
Amortization of right-of-use asset
2,124
2,166
Origination of loans held for sale
(813)
(5,302)
Proceeds from sales of loans held for sale
823
5,299
(Gain) loss on sale of loans, net
(10)
Net loss on disposal of premises and equipment
Gain on bank-owned life insurance
(1,138)
ESOP expense
Share-based compensation expense
Net increase in accrued interest receivable
(62)
(275)
Net increase in bank-owned life insurance
(629)
(591)
Net (increase) decrease in prepaid expenses and other assets
(103)
156
Net increase in accounts payable and accrued expenses
1,258
Net increase (decrease) in lease liability
1,500
(2,181)
Net decrease in advance payments by borrowers for taxes and insurance
(2,326)
(3,167)
Net (decrease) increase in income taxes payable
(359)
821
Net cash from operating activities
5,591
11,368
Cash flows from investing activities:
Purchases of investment securities held to maturity
(6,693)
(132,612)
Purchases of investment securities available for sale
(24,760)
Principal repayments on investment securities held to maturity
28,900
51,609
Principal repayments on investment securities available for sale
686
948
Principal repayments on loans receivable, net of loan originations
(14,516)
8,459
Purchases of Federal Home Loan Bank stock
(5,887)
(24)
Proceeds from redemption of Federal Home Loan Bank stock
1,240
Purchases of Federal Reserve Bank stock
(8)
(13)
Proceeds from redemption of Federal Reserve Bank stock
Proceeds from bank-owned life insurance
5,569
Purchases of premises and equipment
(592)
(2,965)
Net cash provided by (used in) investing activities
3,131
(93,789)
(Continued)
6
Cash flows from financing activities:
Net (decrease) increase in deposits
(65,139)
30,025
Proceeds from advances from the Federal Home Loan Bank
146,000
Repayments of advances from the Federal Home Loan Bank
(31,000)
Purchases of Fed Funds
20
Sales of Fed Funds
(20)
Repurchases of common stock
(4,026)
(4,999)
Cash dividends paid
(5,988)
(6,178)
Net cash from financing activities
39,847
18,848
Net change in cash and cash equivalents
48,569
(63,573)
Cash and cash equivalents at beginning of the period
99,859
Cash and cash equivalents at end of the period
36,286
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings
17,405
3,947
2,600
3,100
Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased through stock swap and net settlement transactions
237
Establishment of right-of-use asset, net of incentives and modifications
590
6,833
Establishment of lease liability, net of modifications
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.
(2) Summary of Significant Accounting Policies
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, 2022. 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.
The current expected credit losses (CECL) accounting standard requires an estimate of the credit losses expected over the life of the financial instrument. CECL replaces the incurred loss approach that delayed the recognition of a credit loss until it was probable that a loss event occurred. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL during the period when management deems the loan to be uncollectible and all interest previously accrued but not collected is reversed against the current period ACL.
The estimate of expected credit losses is based on information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of financial instruments. Historical loss experience is generally the starting point for estimating expected credit losses. The Company considers whether the historical loss experience should be adjusted for asset specific risk characteristics or current conditions at the reporting date that did not exist over the historical reporting period. These qualitative adjustments can include changes in the economy, loan underwriting standards, and delinquency trends. The Company then considers future economic conditions as part of the one year reasonable and supportable forecast period.
The Bank’s loan portfolio is segmented into three pools: real estate, commercial and consumer loans. Only three pools are used to segment the Bank’s loan portfolio because loans within the pools share similar risk characteristics and were originated using similar underwriting standards. Loans that do not share similar risk characteristics would be evaluated on an individual basis and excluded from the collective evaluation. Collateral dependent loans are not considered to share the same risk characteristics. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For loans which are considered to be collateral dependent, the Company has elected to estimate the expected credit loss based on the fair value of the collateral less selling costs. If the fair value of the collateral less selling costs is less than the loan’s amortized cost basis, the Company records a partial charge-off to reduce the loan’s amortized cost basis for the difference between the collateral fair value less selling costs and the amortized cost basis.
8
The real estate pool consists primarily of residential and commercial mortgage loans secured by real estate in Hawaii, with fixed interest rates, loan terms of up to 30 years, and were originated using similar loan terms. The consumer loan pool consists primarily of home equity lines of credit secured by real estate in Hawaii, personal loans, and unsecured personal lines of credit. The primary credit risk characteristics inherent in the residential mortgage loan and consumer loan portfolios are a decline in economic conditions, such as elevated levels of unemployment, and declines in Hawaii residential real estate values. The commercial loan pool consists of business loans. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain cash flows from business operations, the ability to control operational expenses to satisfy contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the operational cash flows are not sufficient.
The ACL on loans and accrued interest is calculated on a loan by loan basis. If the loan’s amortized cost basis is less than the total present value of cash flows calculated using a discounted cash flow approach, the ACL is equal to the amortized cost basis minus the total present value of cash flows on the loan discounted by the loan’s effective interest rate. The expected cash flows include estimates of loan charge-offs, recoveries, and prepayments. The expected cash flows on the loans are adjusted using forecasts of economic variables which have a strong correlation with loan charge-offs, recoveries, and prepayments during the one year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the historical reversion rate is used to calculate loan charge-offs, recoveries, and prepayments for the remaining expected life of the loan. The reversion rate is based on historical averages and applied on a straight-line basis. Qualitative adjustments may be made to account for current conditions and forward looking events not captured in the quantitative calculation.
Loans receivable are stated at amortized cost which includes the principal amount outstanding, less the allowance for credit/loan losses, deferred loan origination fees and costs, commitment fees, and cumulative net charge-offs. Interest income on loans receivable is accrued as earned. Accrued interest receivable on loans was $4.5 million as of September 30, 2023, and is included in accrued interest receivable on the Consolidated Balance Sheet.
The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The Company has a policy of placing loans on a nonaccrual basis when 90 days or more contractually delinquent or when, in the opinion of management, collection of all or part of the principal balance appears doubtful, unless the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued and not collected is reversed against current period provision for credit losses. For nonaccrual loans, the Company records payments received as a reduction in principal. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current and full payment of principal and interest is expected.
The Company’s off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate loans that are not conditionally cancellable by the Company. Expected credit losses on these amounts are calculated using a forecasted estimate of the likelihood that funding of the unfunded amount/commitment will occur and the historical reversion rate. Changes to the reserve for off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the Consolidated Statements of Income. There were no reserves for off-balance sheet credit exposures at September 30, 2023 or December 31, 2022.
While management utilizes its best judgment and information available, the adequacy of the ACL and the reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates and loan prepayments, and the view of the regulatory authorities toward classification of assets and the level of ACL and the reserve for off-balance sheet credit exposures. Additionally, the level of ACL and the reserve for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio, changes in loan prepayments and off-balance sheet credit exposures, changes in charge-off rates, and changes in forecasted economic conditions. If actual results differ significantly from our assumptions, our ACL and the reserve for off-balance sheet credit exposures may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.
9
The Company is required to utilize the CECL methodology to estimate expected credit losses with respect to held-to-maturity (HTM) investment securities. Since all of the Company’s HTM investment securities were issued by U.S. government agencies or U.S. government-sponsored enterprises, which include the explicit and/or implicit guarantee of the U.S. government and have a long history of no credit losses, the Company has not recorded a credit loss on these securities. The unrealized losses on these securities were due to changes in interest rates, relative to when the securities were purchased, and are not due to decreases in the credit quality of the securities.
Available for sale (AFS) investment securities in an unrealized loss position are evaluated for impairment. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the investment securities amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. The Company has not recorded an ACL related to our AFS investment securities.
Changes in the ACL are recorded as a provision (or reversal of provision) for credit losses. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
(3) Recently Issued and Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU 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 standard 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 was 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 delayed 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 adopted the standard on January 1, 2023, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as of January 1, 2023. Upon adoption of the standard, the Company recorded a $3.2 million increase to the reserve for credit losses, which resulted in a $2.3 million after-tax decrease to retained earnings as of January 1, 2023. The tax effect resulted in an increase to deferred tax assets.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for loans modified as troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13. The Company adopted the standard on January 1, 2023, and it did not have a material effect on the Company’s consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to clarify that contractual sale restrictions should not be considered in the measurement of the fair value of an equity security. The Company owns stock in the Federal Reserve Bank (FRB) and in the Federal Home Loan Bank (FHLB) which is valued at historical cost which approximates fair value. Ownership of stock is a condition for services the Company receives from the FRB and FHLB. The stock is not publicly traded and can only be issued, exchanged, redeemed or repurchased by the FRB and the FHLB. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.
(4) Cash and Cash Equivalents
The table below presents the balances of cash and cash equivalents:
Cash and due from banks
9,479
9,722
Interest-earning deposits in other banks
79,643
30,831
Interest-earning deposits in other banks consist primarily of deposits at the Federal Reserve Bank of San Francisco.
(5) Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and related ACL of investment securities are as follows:
Amortized
Gross Unrealized
Estimated
Cost
Gains
Losses
Fair Value
ACL
September 30, 2023:
Available-for-sale:
Mortgage-backed securities issued by U.S. government-sponsored enterprises
22,898
(3,755)
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises
(159,107)
536,534
718,539
(162,862)
555,677
December 31, 2022:
23,544
(2,723)
62
(126,751)
591,084
741,317
(129,474)
611,905
11
The amortized cost and estimated fair value of investment securities by maturity date at September 30, 2023 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 after 10 years
Due within 5 years
9,302
8,156
Due after 5 years through 10 years
101,494
84,455
584,845
443,923
The Company did not sell any held-to-maturity or available-for-sale securities during the nine months ended September 30, 2023 and 2022.
Investment securities with amortized costs of $562.7 million and $272.8 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure deposits made by state and local governments, securities sold under agreements to repurchase, transaction clearing accounts, and Federal Reserve Bank borrowings. Included in these amounts were $74.8 million and $5.4 million pledged to the Federal Reserve Bank’s discount window at September 30, 2023 and December 31, 2022, respectively, and $204.3 million pledged to the Federal Reserve Bank’s Bank Term Funding Program at September 30, 2023. While the Company pledged securities to the Federal Reserve Bank as a contingent funding source, the Company did not have any outstanding borrowings as of September 30, 2023 or December 31, 2022.
12
Provided below is a summary of investment securities which were in an unrealized loss position at September 30, 2023 and December 31, 2022. The Company does not intend to sell 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
15,701
(820)
520,833
(158,287)
155
539,976
(162,042)
159
Mortgage-backed securities issued by U.S. government sponsored enterprises
210,128
(22,209)
377,418
(104,542)
148
587,546
230,949
(24,932)
152
608,367
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, 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 impaired as of September 30, 2023 and December 31, 2022. Therefore, no allowance for credit losses was recorded for these securities as of September 30, 2023.
13
(6) Loans Receivable and Allowance for Credit/Loan Losses
The components of loans receivable, net of allowance for credit losses (ACL) under ASC 326 as of September 30, 2023 and net of allowance for loan losses under ASC 310 as of December 31, 2022 are as follows:
Real estate loans:
First mortgages:
One- to four-family residential
1,276,549
1,253,558
Multi-family residential
5,985
6,448
Construction, commercial, and other
15,185
23,903
Home equity loans and lines of credit
7,002
6,426
Total real estate loans
1,304,721
1,290,335
Other loans:
Loans on deposit accounts
270
216
Consumer and other loans
8,369
8,381
Total other loans
8,639
8,597
Total loans
1,313,360
1,298,932
Net unearned fees and discounts
(1,939)
(2,136)
Total loans, net of unearned fees and discounts
The table below presents the activity in the allowance for credit losses by portfolio segment:
Real
Commercial
Consumer
Estate
Unallocated
Totals
Three months ended September 30, 2023:
Balance, beginning of period
4,734
426
102
5,262
(Reversal of provision) provision for credit losses
(291)
18
4,443
440
120
5,003
Charge-offs
(5)
(22)
(27)
Recoveries
25
27
Net recoveries (charge-offs)
Balance, end of period
4,463
Nine months ended September 30, 2023:
434
259
2,032
Adoption of ASU No. 2016-13
3,393
71
3,209
(146)
(65)
64
4,510
144
5,094
(72)
(52)
(124)
33
Net charge-offs
(47)
(44)
(91)
We recorded a reversal of credit loss provision of $259,000 under ASC 326 for the three months ended September 30, 2023 that was primarily due to a decrease in our real estate portfolio’s forecasted charge-offs that was partially offset by a decrease in its forecasted prepayments.
Construction,
Home
Commercial,
and Other
Loans and
Residential
Mortgage
Lines of
Credit
Three months ended September 30, 2022:
1,350
445
82
253
2,131
(Reversal of provision) provision for loan losses
(87)
442
83
233
2,022
(7)
2,015
Nine months ended September 30, 2022:
1,814
435
89
330
2,669
(551)
38
(97)
127
2,066
(51)
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 as of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment
Collectively evaluated for impairment
75
Total ending allowance balance
Loans:
Ending loan balance:
2,693
16
2,715
1,255,300
23,775
6,411
8,595
1,294,081
Total ending loan balance
1,257,993
6,427
15
The table below presents the balance of impaired loans individually evaluated for impairment by class of loans as of December 31, 2022, in accordance with ASC 310 prior to the adoption of ASU 2016-13:
Unpaid
Recorded
Principal
Investment
Balance
With no related allowance recorded:
One- to four-family residential mortgages
30
Consumer Loans
3,245
The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans as of September 30, 2022, in accordance with ASC 310 prior to the adoption of ASU 2016-13:
For the Three Months Ended
For the Nine Months Ended
September 30, 2022
Average
Interest
Income
Recognized
2,431
2,465
17
2,448
2,483
There were no loans individually evaluated for impairment with a related allowance for loan loss as of December 31, 2022. At December 31, 2022, loans individually evaluated for impairment do not have an allocated allowance for loan losses because they are written down to fair value at the time of impairment. At December 31, 2022, an impaired loan would also not have an allocated allowance if the value of the property securing the loan, less the cost to sell the property, is greater than the loan balance.
The Company primarily uses the aging of loans to monitor the credit quality of its loan portfolio. The table below presents by credit quality indicator, loan class and year of origination, the amortized cost basis of the Company’s loans as of September 30, 2023.
Revolving Loans
Amortized Cost of Term Loans by Origination Year
2021
2020
2019
Prior
Cost Basis
30 - 59 days past due
60 - 89 days past due
90 days or more past due
Loans not past due
382
368
4,876
211
1,056
1,246
8,139
Total Commercial
115
24
85
19
6,211
6,588
Total Consumer
117
6,590
Real Estate
140
138
278
75,289
130,283
286,398
185,292
92,627
525,704
1,295,593
Total Real Estate
92,767
526,663
1,296,692
75,788
130,742
291,298
185,377
92,997
527,762
7,457
The Company did not have any revolving loans that converted to term loans during the nine months ended September 30, 2023.
The following table presents by loan class and year of origination, the gross charge-offs recorded during the three and nine months ended September 30, 2023.
21
Consumer and other
22
61
72
48
49
124
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
1,099
1,273,578
1,274,677
2,129
Multi-family residential mortgages
5,977
Construction, commercial, and other mortgages
15,117
7,004
8,374
8,376
172
822
1,101
1,310,320
2,314
409
559
968
1,250,586
1,251,554
2,279
6,439
217
8,372
8,384
565
980
1,295,816
2,301
The table below presents the amortized cost basis of loans on nonaccrual status as of September 30, 2023 and December 31, 2022.
September 30, 2023
December 31, 2022
Nonaccrual Loans With a Related ACL
Nonaccrual Loans Without a Related ACL
Total Nonaccrual Loans
1,078
Total Nonaccrual Loans and Leases
1,236
All payments received while on nonaccrual status are applied against the principal balance of the loan.
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. The amortized cost basis of collateral-dependent loans, excluding accrued interest receivable, was $279,000 and $559,000 at September 30, 2023 and December 31, 2022, respectively. These loans were collateralized by residential real estate in Hawaii. As of September 30, 2023 and December 31, 2022, the fair value of the collateral less selling costs of these collateral-dependent loans exceeded the amortized cost basis. There was no ACL on collateral-dependent loans.
In August 2023, wildfires on Maui partially or completely destroyed 11 homes which were collateral for $3.1 million of mortgage loans held by the Company. In September, a $164,000 mortgage loan on one of the homes was paid off. At September 30, 2023, the Company had $2.9 million of mortgage loans which were collateralized by homes partially or completely destroyed in the Maui wildfires and all of these loans were current. All of the homes which were destroyed are insured and the Company does not expect to incur a loss on these loans. The Company also has $18.8 million of mortgage loans on Maui at September 30, 2023 which were not affected by the wildfires. As of September 30, 2023, all of these loans were current.
There were no loans modified during the nine months ended September 30, 2023 or 2022.
Since the beginning of the year, there has not been a significant increase in loan delinquencies, significant changes in deposits or significant drawdowns on any lines of credit. 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, 2023 or December 31, 2022. There were three one- to four-family residential mortgage loans totaling $279,000 in the process of foreclosure at September 30, 2023. There were two one- to four-family residential mortgage loans totaling $227,000 in the process of foreclosure at December 31, 2022.
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, 2023 and 2022, the Company sold mortgage loans held for sale with principal balances of $827,000 and $5.4 million, respectively, and recognized a gain of $10,000 and a loss of $3,000, respectively. The Company had no loans held for sale at September 30, 2023 or 2022.
The Company serviced loans for others with principal balances of $34.1 million at September 30, 2023 and $36.0 million at December 31, 2022. Of these amounts, $19.6 million and $20.7 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at September 30, 2023 and December 31, 2022, respectively. The amount of contractually specified servicing fees earned for the nine months ended September 30, 2023 and 2022 was $69,000 and $77,000, respectively. The amount of contractually specified servicing fees earned for the three months ended September 30, 2023 and 2022 was $23,000 and $24,000, respectively. The fees are reported in service and other fees in the Consolidated Statements of Income.
(7)Advances from the Federal Home Loan Bank
Federal Home Loan Bank advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. At September 30, 2023 and December 31, 2022, our credit limit with the FHLB of Des Moines was equal to 45% of Territorial Savings Bank’s total assets and we had the capacity to borrow an additional $593.9 million and $769.1 million, respectively.
Advances outstanding consisted of the following:
Weighted
Amount
Rate
Due within one year
79,000
1.48
%
24,000
1.27
Due over 1 year to 2 years
52,000
1.99
82,000
1.40
Due over 2 years to 3 years
30,000
3.64
25,000
1.58
Due over 3 years to 4 years
4.24
1.97
Due over 4 years to 5 years
60,000
4.32
Due over 5 years to 6 years
5,000
4.38
2.88
1.45
(8) 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:
Repurchase
Liability
Maturing:
Over 1 year to 2 years
1.81
1.88
Over 2 years to 3 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, 2023. 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 agencies or U.S. government-sponsored enterprises. The fair value of the securities pledged must exceed the repurchase liability by 5.00%. 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
Months to
at Risk
Maturity
Over 90 days
13,329
10,655
3,329
(9) Offsetting of Financial Liabilities
Securities sold under agreements to repurchase are subject to a right of offset in the event of default. See Note 8, 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
(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, 2023 and 2022 amounted to $136,000 and $258,000, respectively. Compensation expense recognized for the nine months ended September 30, 2023 and 2022 amounted to $588,000 and $834,000, respectively.
Shares held by the ESOP trust were as follows:
Allocated shares
607,705
583,474
Unearned shares
256,898
293,598
Total ESOP shares
864,603
877,072
Fair value of unearned shares, in thousands
2,335
7,049
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 and nine months ended September 30, 2023, we accrued $9,000 and reversed $12,000, respectively, and for the three and nine months ended September 30, 2022, we accrued $23,000 and $73,000, respectively, for the ESOP restoration plan.
(11) Share-Based Compensation
The shareholders of Territorial Bancorp Inc. 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 time-based restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of performance-based stock that will vest based on a performance condition is based on the closing price of the Company’s stock on the date of grant. The fair value of performance-based restricted stock that will vest on a market condition is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The cost of the awards will be recognized on a straight-line basis over the three-year vesting period during which participants are required to provide services in exchange for the awards. There are 42,680 remaining shares 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:
Compensation expense
Income tax benefit
70
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
Value
Unvested at December 31, 2022
23,664
24.15
Granted
14,803
19.29
Vested
23.64
Forfeited
Unvested at September 30, 2023
25,738
21.61
Unvested at December 31, 2021
23,208
24.61
12,013
23.77
11,557
24.68
Unvested at September 30, 2022
As of September 30, 2023, the Company had $431,000 of unrecognized compensation costs related to time-based 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
43,557
23.63
17,758
16,348
21.05
44,967
22.85
41,583
14,412
7,670
27.30
4,768
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, 2023, the Company had no unrecognized compensation costs related to these PRSUs since meeting the performance condition is not probable. Compensation expense up to $685,000 may be recognized in the future if achievement of the performance condition becomes probable. Performance will be measured over a three-year performance period and will be cliff vested. The performance condition is measured quarterly by comparing the Company’s three-year return on average equity to a peer group of banks. The Company’s percentile ranking in the peer group is used to adjust the number of PRSUs that are expected to vest.
The table below presents the PRSUs that will vest on a market condition:
Monte Carlo
Valuation of
the Company's
Market Condition
10,889
24.04
17.95
4,087
22.16
11,245
22.31
10,396
24.03
3,603
24.42
3,110
24.45
As of September 30, 2023, the Company had $75,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. The market value of PRSUs that will vest on a market condition is determined by a Monte Carlo valuation of the Company’s stock as of the grant date. Performance will be measured over a three-year performance period and will be cliff vested. The market condition is measured quarterly by comparing the Company’s three-year average total stock return to a peer group of other banks. The Company’s percentile ranking in the peer group determines how many PRSUs will vest.
23
(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
(15)
(23)
(70)
Net income available to common shareholders
865
3,868
4,649
12,641
Weighted-average number of shares used in:
Dilutive common stock equivalents:
Stock options and restricted stock units
32,657
44,601
48,869
53,182
Net income per common share, basic
Net income per common share, diluted
(13) Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes:
Unfunded
Pension
Loss/(Gain) on
Three months ended September 30, 2023
Balances at beginning of period
5,746
1,975
7,721
Other comprehensive loss, net of taxes
780
Net current period other comprehensive loss
Balances at end of period
2,755
8,501
Three months ended September 30, 2022
5,524
877
6,401
1,114
1,991
7,515
Nine months ended September 30, 2023
1,998
7,744
757
Nine months ended September 30, 2022
The table below presents the tax effect on each component of accumulated other comprehensive loss:
Three Months Ended September 30,
Pretax
After Tax
Tax
1,063
(283)
1,519
(405)
Nine Months Ended September 30,
1,032
2,714
(723)
(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 of 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
265
281
Other revenue
57
371
304
342
35
415
917
1,002
105
228
1,230
989
1,127
103
1,221
1,324
2,451
(15) Leases
The table below presents lease costs and other information for the periods indicated:
Lease costs:
Operating lease costs
689
712
2,084
2,211
Short-term lease costs
160
107
375
199
Variable lease costs
Total lease costs
894
868
2,581
2,537
Cash paid for amounts included in measurement of lease liabilities
(1,901)
854
(1,271)
2,381
ROU assets obtained in exchange for new operating lease liabilities
84
2,003
26
Future minimum rental commitments under noncancellable operating leases are as follows:
725
2024
2,818
2025
2,199
2026
2,038
2027
1,961
Thereafter
11,028
20,769
Less lease incentives to be received in 2023
(1,273)
Less present value discount
(2,111)
Present value of leases
The table below presents additional lease-related information:
Weighted-average remaining lease term (years)
9.72
9.03
Weighted-average discount rate
2.14
2.04
(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 available 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, individually evaluated 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 mortgage-backed securities issued by U.S. government-sponsored enterprises 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.
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
89,112
Investment securities available for sale
Investment securities held to maturity
Loans receivable, net
1,037,090
FHLB stock
FRB stock
110
1,509
4,512
1,645,726
1,124,546
521,180
247,722
9,568
Accrued interest payable
1,476
41
1,435
1,180,840
1,497
4,595
1,708,612
1,286,465
422,147
133,145
9,440
701
668
At September 30, 2023 and December 31, 2022, 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.
28
The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:
Interest rate contracts
There were no assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2023 or December 31, 2022.
(17) Subsequent Events
On October 27, 2023, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.05 per share of common stock. The dividend is expected to be paid on November 24, 2023 to stockholders of record as of November 9, 2023.
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:
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.
Recent Developments
In August 2023, wildfires on Maui partially or completely destroyed 11 homes which were collateral for $3.1 million of mortgage loans held by the Company. In September, a $164,000 mortgage loan on one of the homes was paid off. At September 30, 2023, the Company had $2.9 million of mortgage loans which were collateralized by homes partially or completely destroyed in the Maui wildfires and all of these loans were current. All of the homes which were destroyed are insured and the Company does not expect to incur a loss on these loans. The Company also has $18.8 million of mortgage loans on Maui at September 30, 2023 which were not affected by the wildfires. As of September 30, 2023, all of these loans were current. Our Lahaina Branch was destroyed in the Maui wildfire. Our Branch was leased and the leasehold improvements and furniture and fixtures had a book value of $5,000, which was written off in the quarter ending September 30, 2023.
Recent bank failures have led to uncertainty and volatility in the financial services industry. In response to these events, we took a series of precautionary measures, which included enhanced monitoring of deposit and funding flows, evaluating other sources of liquidity and our securities portfolio to improve our liquidity and mitigate other potential risks that were highlighted by these events.
As a result of these procedures, we obtained $125.0 million of new advances during the nine months ended September 30, 2023 from the Federal Home Loan Bank. The proceeds of these advances were used to enhance our liquidity and to fund the decrease in deposits. These actions resulted in a stronger liquidity position and a reduction in our interest rate risk. We continue to monitor these events and the impact they may have in future periods, and will respond accordingly. Refer to the “Liquidity and Capital Resources” section for further information regarding liquidity.
Additionally, the U.S. government, particularly the Federal Deposit Insurance Company (“FDIC”), U.S Department of Treasury, and the Board of Governors of the Federal Reserve System, have taken measures designed to restore confidence in the financial markets.
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, 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 $2.3 million, or 0.10% of total assets at September 30, 2023 compared to $2.3 million, or 0.11% of total assets at December 31, 2022. We recorded a reversal of credit loss provisions of $147,000 under ASC 326 and a reversal of loan loss provisions of $603,000 under ASC 310 during the nine months ended September 30, 2023 and 2022, respectively. ASC 326 requires organizations to measure all expected credit losses for financial instruments based on historical experience, current conditions, and reasonable and supportable forecasts. We did not record a provision for credit losses on investment securities during the nine months ended September 30, 2023 or 2022. The reversal of credit loss provisions in the nine months ended September 30, 2023 was primarily due to a decrease in our real estate portfolio’s forecasted charge-offs that was partially offset by a decrease in its forecasted prepayments. The reversal of loan loss provisions in the nine months ended September 30, 2022 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.
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We sold fixed-rate mortgage loans held for sale with principal balances of $827,000 and $5.4 million during the nine months ended September 30, 2023 and 2022, respectively. Federal Home Loan Bank advances had a net increase of $115.0 million to $256.0 million during the nine months ended September 30, 2023 and remained constant at $141.0 million during the nine months ended September 30, 2022. Securities sold under agreements to repurchase remained constant at $10.0 million during the nine months ended September 30, 2023 and 2022.
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, 2023 and December 31, 2022, we owned $714.8 million and $738.6 million, respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae, and Ginnie Mae.
Critical Accounting Policies
On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to our critical accounting policies that existed at December 31, 2022. This standard replaces the “incurred loss” model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an “expected loss” model known as CECL, which estimates a loss based on losses expected to be recorded over the life of the loan portfolio.
The estimate of the ACL under CECL is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of cash flows. Refer to Note (2) Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements in this report for further discussions on the risk factors considered by management in establishing the ACL.
Comparison of Financial Condition at September 30, 2023 and December 31, 2022
Assets. Our total assets increased by $41.6 million, or 1.9%, to $2.2 billion at September 30, 2023. The increase in assets was primarily due to a $48.6 million increase in cash and an $11.7 million increase in total loans, which were partially offset by a $23.8 million decrease in total investment securities.
Cash and Cash Equivalents. Cash and cash equivalents were $89.1 million at September 30, 2023, an increase of $48.6 million, or 119.8%, since December 31, 2022. The increase in cash and cash equivalents was primarily caused by a $115.0 million increase in borrowings, which was partially offset by a $65.1 million decrease in deposits, each as described below.
Loans. Total loans were $1.3 billion at September 30, 2023, or 59.1% of total assets. During the nine months ended September 30, 2023, the loan portfolio increased by $11.7 million, or 0.9%. The increase in the loan portfolio primarily occurred as the origination of new loans exceeded principal repayments and loan sales.
Securities. Total investment securities, including $19.1 million of investment securities available for sale, were $714.8 million at September 30, 2023, or 32.3% of total assets. During the nine months ended September 30, 2023, the investment securities portfolio decreased by $23.8 million, or 3.2%. The decrease in the investment securities balance occurred as principal repayments exceeded purchases.
At September 30, 2023, none of the underlying collateral for the securities 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, 2023, a decrease of $65.1 million, or 3.8%, since December 31, 2022. The decrease in deposits was primarily due to decreases of $146.4 million in passbook savings accounts and $13.2 million in checking accounts that was partially offset by a $96.8 million increase in certificates of deposit. The changes in deposits occurred primarily as customers transferred funds from savings and checking accounts for higher interest rates paid on our certificates of deposit or sought higher interest rates on their deposits than what we offer.
32
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank (FHLB) and funds borrowed under securities sold under agreements to repurchase. At September 30, 2023, total borrowings were $266.0 million, an increase of $115.0 million, or 76.2%, from $151.0 million at December 31, 2022. The increase in borrowings was used to enhance liquidity and fund the decrease in deposits.
Stockholders’ Equity. Total stockholders’ equity was $248.8 million at September 30, 2023, a decrease of $7.8 million, or 3.0%, from $256.6 million at December 31, 2022. The decrease in stockholders’ equity was primarily due to dividends declared, shares repurchased, and the reduction in retained earnings from the adoption of the CECL accounting standard exceeding net income.
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 of $51,000 and $153,000 for the three and nine months ended September 30, 2023, respectively, and $53,000 and $76,000 for the three and nine months ended September 30, 2022, respectively.
For the Three Months Ended September 30,
Yield/Rate
(1)
Interest-earning assets:
First mortgage:
One- to four-family residential (2)
1,271,467
11,423
3.59
1,248,670
10,918
3.50
6,027
4.78
4,268
4.40
17,333
173
3.99
22,678
235
4.14
7,276
126
6.93
6,204
5.74
Other loans
8,327
92
4.42
8,655
87
4.02
1,310,430
3.63
1,290,475
3.53
Investment securities:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises (2)
721,619
2.47
739,633
2.38
Total securities
80,405
5.23
57,331
2.60
Total interest-earning assets
2,112,454
3.29
2,087,439
3.09
Non-interest-earning assets
88,387
90,162
2,200,841
2,177,601
Interest-bearing liabilities:
Savings accounts
775,092
672
0.35
1,021,685
223
0.09
Certificates of deposit
499,188
4,720
3.78
324,489
1,003
1.24
Money market accounts
4,486
0.18
5,538
0.07
Checking and Super NOW accounts
284,272
0.02
302,515
Total interest-bearing deposits
1,563,038
1.38
1,654,227
0.30
Federal Home Loan Bank advances
260,620
2.91
1.84
Total interest-bearing liabilities
1,833,658
1.60
1,805,227
0.40
Non-interest-bearing liabilities
115,744
114,391
1,949,402
1,919,618
Stockholders’ equity
251,439
257,983
Net interest rate spread (3)
1.69
2.69
Net interest-earning assets (4)
278,796
282,212
Net interest margin (5)
1.90
2.75
Interest-earning assets to interest-bearing liabilities
115.20
115.63
34
For the Nine Months Ended September 30,
1,259,987
33,559
3.55
1,253,679
32,585
3.47
5,655
205
4.83
21,071
647
4.09
21,492
665
4.13
6,920
355
6.84
6,438
257
5.32
8,353
271
4.33
8,641
247
3.81
1,301,986
1,294,943
3.49
731,495
2.46
700,482
2.24
79,150
4.80
66,965
1.62
2,112,631
3.24
2,062,390
3.00
88,584
90,203
2,201,215
2,152,593
820,324
1,498
0.24
1,053,112
624
0.08
467,487
11,715
3.34
265,635
1,903
0.96
4,966
0.11
5,530
290,682
304,718
1,583,459
1.12
1,628,995
0.21
238,363
2.67
1.46
1.83
1,831,822
1.32
1,779,995
0.32
116,027
114,487
1,947,849
1,894,482
253,366
258,111
1.92
2.68
280,809
282,395
2.10
2.73
115.33
115.86
Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022
General. Net income decreased by $3.0 million, or 77.4%, to $880,000 for the three months ended September 30, 2023 from $3.9 million for the three months ended September 30, 2022. The decrease in net income was primarily due to a $4.3 million decrease in net interest income which was partially offset by a $1.1 million decrease in income tax expense.
Net Interest Income. Net interest income decreased by $4.3 million, or 30.0%, to $10.0 million for the three months ended September 30, 2023 from $14.3 million for the three months ended September 30, 2022. Interest expense increased by $5.5 million, or 306.1%, due to a 120 basis point increase in the cost of average interest-bearing liabilities and a $28.4 million increase in the average balance of interest-bearing liabilities. Interest income increased by $1.2 million, or 7.6%, due to a 20 basis point increase in the yield on average interest-earning assets and a $25.0 million increase in the average balance of interest-earning assets. Since the significant majority of our loan and securities portfolios have fixed interest rates, the average rates on these assets have not repriced as quickly as our interest-bearing liabilities during this period of rising market interest rates. The net interest rate spread and net interest margin were 1.69% and 1.90%, respectively, for the three months ended September 30, 2023, compared to 2.69% and 2.75%, respectively, for the three months ended September 30, 2022. The decrease in the net interest rate spread and in the net interest margin are attributable to the 120 basis point increase in the cost of average interest-bearing liabilities, which was partially offset by the 20 basis point increase in the yield of average interest-earning assets.
Interest Income. Interest income increased by $1.2 million, or 7.6%, to $17.4 million for the three months ended September 30, 2023 from $16.2 million for the three months ended September 30, 2022. Interest income on other interest earning assets increased by $678,000, or 181.8%, to $1.1 million for the three months ended September 30, 2023 from $373,000 for the three months ended September 30, 2022. The increase in interest income on other interest earning assets was primarily due to an increase in the yield on our average cash balance at the Federal Reserve Bank (FRB) from 1.86% for the three months ended September 30, 2022 to 4.84% for the three months ended September 30, 2023 due to an increase in the FRB’s interest rate and an $18.2 million increase in the average cash balance held at the FRB. Interest income on loans increased by $510,000, or 4.5%, from $11.4 million for the three months ended September 30, 2022 to $11.9 million for the three months ended September 30, 2023. The increase in interest income on loans occurred because of a 10 basis point increase in the yield and a $20.0 million, or 1.5%, increase in the average balance of loans which occurred as new loan originations exceeded loan repayments and loan sales.
Interest Expense. Interest expense increased by $5.5 million, or 306.1%, to $7.4 million for the three months ended September 30, 2023 from $1.8 million for the three months ended September 30, 2022. Interest expense on interest-bearing deposits increased by $4.2 million, or 335.4%, to $5.4 million for the three months ended September 30, 2023 from $1.2 million for the three months ended September 30, 2022. The increase in interest expense on interest-bearing deposits was primarily due to a 254 basis point increase in the rate paid on certificates of deposit and a $174.7 million, or 53.8%, increase in the average balance of certificates of deposit. The rate paid on certificates of deposit increased to 3.78% for the three months ended September 30, 2023 from 1.24% for the three months ended September 30, 2022, primarily due to increases in market interest rates. Interest expense on savings accounts increased by $449,000, or 201.3%, to $672,000 for the three months ended September 30, 2023 from $223,000 for the three months ended September 30, 2022. The increase in interest expense on savings accounts occurred primarily because of a 26 basis point increase in the rate which was partially offset by a $246.6 million, or 24.1%, decrease in the average balance of savings accounts. The changes in the average balance of savings accounts and certificates of deposit occurred primarily as customers transferred funds from savings and checking accounts for higher interest rates paid on our certificates of deposit or sought higher interest rates on their deposits than what we offer. Interest expense on FHLB advances rose by $1.4 million, or 263.2%, from $522,000 for the three months ended September 30, 2022 to $1.9 million for the three months ended September 30, 2023. The increase in interest expense occurred because of a 143 basis point increase in the rate and a $119.6 million, or 84.8%, increase in the average balance of FHLB advances. The increase in the rate and the average balance of FHLB advances was primarily due to $125.0 million of new additional FHLB advances obtained in 2023 in the higher interest rate environment to enhance our liquidity and to fund the decrease in deposits.
36
Provision for Credit/Loan Losses. We recorded a reversal of credit loss provision of $259,000 under ASC 326 and a reversal of loan loss provision of $109,000 under ASC 310 for the three months ended September 30, 2023 and 2022, respectively. The reversal of credit loss provisions in the three months ended September 30, 2023 was primarily due to a decrease in our real estate portfolio’s forecasted charge-offs that was partially offset by a decrease in its forecasted prepayments. The reversal of the loan loss provision for the three months ended September 30, 2022 was 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 the ratios of the allowance for credit/loan losses to total loans of 0.38% and 0.16% at September 30, 2023 and 2022, respectively. Nonaccrual loans totaled $2.3 million at September 30, 2023, or 0.18% of total loans at that date, compared to $2.0 million of nonaccrual loans at September 30, 2022, or 0.15% of total loans at that date. Nonaccrual loans as of September 30, 2023 and 2022 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, 2023 and 2022. For additional information see Note (6), “Loans Receivable and Allowance for Credit/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, 2023 and 2022.
Change
$ Change
% Change
(41)
(12.1)
9.0
(3.9)
(26)
(4.2)
Noninterest income decreased by $26,000 for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Service and other fees decreased primarily due to a decrease in broker fee income.
Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended September 30, 2023 and 2022.
(337)
(6.1)
8.1
(54)
(4.1)
101
69.7
51
4.6
(102)
(1.0)
Noninterest expense decreased by $102,000 for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in salaries and employee benefits was primarily due to a decrease in bonus accruals, salary expense and employee stock ownership program expenses which was partially offset by an increase in stock benefit plan expenses. Occupancy expense increased primarily due to an increase in office repairs and maintenance expense. The increase in federal deposit insurance premiums was primarily due to an increase in the Federal Deposit Insurance Corporation (FDIC) premium rate beginning January 1, 2023.
37
Income Tax Expense. Income taxes were $335,000 for the three months ended September 30, 2023, reflecting an effective tax rate of 27.6%, compared to $1.4 million for the three months ended September 30, 2022, reflecting an effective tax rate of 26.5%.
Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022
General. Net income decreased by $8.0 million, or 63.1%, to $4.7 million for the nine months ended September 30, 2023 from $12.7 million for the nine months ended September 30, 2022. The decrease in net income was primarily due to a $9.0 million decrease in net interest income, a $1.2 million decrease in non-interest income, and a $456,000 decrease in the reversal of credit/loan loss provisions. These decreases to net income were partially offset by a $2.5 million decrease in income taxes.
Net Interest Income. Net interest income decreased by $9.0 million, or 21.3%, to $33.2 million for the nine months ended September 30, 2023 from $42.2 million for the nine months ended September 30, 2022. Interest expense increased by $13.9 million or 326.5%, due to a 100 basis point increase in the cost of average interest-bearing liabilities and a $51.8 million increase in the average balance of interest-bearing liabilities. Interest income increased by $4.9 million, or 10.6%, due to a 24 basis point increase in the yield on average interest-earning assets and a $50.2 million increase in the average balance of interest-earning assets. Since the significant majority of our loan and securities portfolios have fixed interest rates, the average rates on these assets have not repriced as quickly as our interest-bearing liabilities during this period of rising market interest rates. The net interest rate spread and net interest margin were 1.92% and 2.10%, respectively, for the nine months ended September 30, 2023, compared to 2.68% and 2.73% respectively, for the nine months ended September 30, 2022. The decreases in the net interest rate spread and in the net interest margin are attributable to the 100 basis point increase in the cost of average interest-bearing liabilities, which was partially offset by the 24 basis point increase in the yield on average interest-earning assets.
Interest Income. Interest income increased by $4.9 million, or 10.6%, to $51.4 million for the nine months ended September 30, 2023 from $46.5 million for the nine months ended September 30, 2022. Interest income on other interest earning assets increased by $2.0 million, or 249.0%, to $2.8 million for the nine months ended September 30, 2023 from $816,000 for the nine months ended September 30, 2022. The increase in interest income on other interest earning assets was primarily due to an increase in the yield on our average cash balance at the FRB from 0.85% for the nine months ended September 30, 2022 to 4.55% for the nine months ended September 30, 2023 due to an increase in the FRB’s interest rate and an $8.9 million increase in the average cash balance held at the FRB. Interest income on securities increased by $1.8 million, or 15.0%, to $13.5 million for the nine months ended September 30, 2023 from $11.8 million for the nine months ended September 30, 2022. The increase in interest income on securities occurred primarily because of a 22 basis point increase in the yield on average securities, which occurred as higher yielding securities were purchased. This increase was augmented by a $31.0 million, or 4.4%, increase in the average balance of securities as security purchases exceeded security repayments. Interest income on loans increased by $1.1 million, or 3.3%, to $35.0 million for the nine months ended September 30, 2023 from $33.9 million for the nine months ended September 30, 2022. The increase in interest income on loans occurred because the average loan yield increased by 10 basis points, or 2.9%, which was primarily due to an increase in market rates. This increase was augmented by a $7.0 million, or 0.5% increase in the average balance of loans which occurred as new loan originations exceeded loan repayments and loan sales.
Interest Expense. Interest expense increased by $13.9 million, or 326.5%, to $18.2 million for the nine months ended September 30, 2023 from $4.3 million for the nine months ended September 30, 2022. Interest expense on interest-bearing deposits increased by $10.7 million, or 414.6%, to $13.3 million for the nine months ended September 30, 2023 from $2.6 million for the nine months ended September 30, 2022. The increase in interest expense on interest-bearing deposits was primarily due to a 238 basis point increase in the rate paid on certificates of deposit and a $201.9 million increase in the average balance of certificates of deposit. The average rate paid on certificates of deposit increased to 3.34% for the nine months ended September 30, 2023, from 0.96% for the nine months ended September 30, 2022, primarily due to an increase in market interest rates. Interest expense on savings accounts increased by $875,000, or 140.2%, to $1.5 million for the nine months ended September 30, 2023 from $624,000 for the nine months ended September 30, 2022. The increase in interest expense on savings accounts occurred primarily because of a 16 basis point increase in the rate which was partially offset by a $232.8 million, or 22.1%, decrease in the average balance
of savings accounts. The increase in the rates on certificates of deposit and savings accounts were primarily due to increases in market interest rates. The changes in the average balance of savings accounts and certificates of deposit occurred primarily as customers transferred funds from savings and checking accounts for higher interest rates paid on our certificates of deposit or sought higher interest rates on their deposits than what we offer. Interest expense on FHLB advances rose by $3.2 million, or 208.7%, from $1.5 million for the nine months ended September 30, 2022 to $4.8 million for the nine months ended September 30, 2023. The increase in interest expense occurred because of a 121 basis point increase in the cost of FHLB advances. This increase to interest expense was augmented by a $97.4 million, or 69.1%, increase in the average FHLB advance balance. The increase in the cost and the average balance of FHLB advances was primarily due to $125.0 million of additional FHLB advances obtained in 2023 to enhance our liquidity and to fund the decrease in deposits.
Provision for Credit/Loan Losses. We recorded a reversal of credit loss provision for $147,000 under ASC 326 and a reversal of loan loss provision of $603,000 under ASC 310 during the nine months ended September 30, 2023 and 2022, respectively. The reversal of credit loss provisions in the nine months ended September 30, 2023 was primarily due to a decrease in our real estate portfolio’s forecasted charge-offs that was partially offset by a decrease in its forecasted prepayments. The reversal of the loan loss provision in the nine months ended September 30, 2022 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 credit/loan losses to total loans of 0.38% and 0.16% at September 30, 2023 and 2022, respectively. Nonaccrual loans totaled $2.3 million at September 30, 2023, or 0.18% of total loans at that date, compared to $2.0 million of nonaccrual loans at September 30, 2022, or 0.15% of total loans at that date. Nonaccrual loans as of September 30, 2023 and 2022 consisted primarily of one- to four-family residential real estate loans. For additional information see Note (6), “Loans Receivable and Allowance for Credit/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, 2023 and 2022.
(6.4)
6.3
433.3
(1,151)
(84.7)
(1,171)
(38.5)
Noninterest income decreased by $1.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Other income decreased primarily due to $1.1 million of bank-owned life insurance net proceeds received during the nine months ended September 30, 2022. Service and other fees decreased primarily due to a decrease in broker fee income.
Noninterest Expense. The following table summarizes changes in noninterest expense between the nine months ended September 30, 2023 and 2022.
(795)
(4.8)
277
5.6
129
3.4
308
71.8
(40)
(1.2)
(121)
(0.4)
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Noninterest expense decreased by $121,000 for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in salaries and employee benefits was primarily due to a decrease in bonus accruals, stock benefit plan expenses, and employee stock option program expenses which was partially offset by a decrease in deferred salary expenses for originating new loans. The increase in federal deposit insurance premiums was primarily due to an increase in the Federal Deposit Insurance Corporation (FDIC) premium rate beginning January 1, 2023. The increase in occupancy expense was primarily due to increases in repairs and maintenance expense, rent expense and depreciation for leasehold improvements. The increase in equipment expenses was primarily due to an increase in data processing expense, furniture and fixture expense and service bureau expense which was partially offset by a decrease in depreciation on furniture and fixtures.
Income Tax Expense. Income tax expense was $1.7 million for the nine months ended September 30, 2023, reflecting an effective tax rate of 27.1%, compared to $4.2 million for the nine months ended September 30, 2022, reflecting an effective tax rate of 25.0%. The decrease to income tax expense and the increase in the effective tax rate during the nine months ended September 30, 2023, was primarily due to a $10.5 million decrease in income before income taxes and the receipt of $1.1 million of proceeds on bank-owned life insurance during the nine months ended September 30, 2022, that was not taxable.
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 Executive Vice President and Chief Financial Officer, our Senior Vice President of Finance, 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, 2023.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
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, 2023, our cash and cash equivalents totaled $89.1 million. On that date, we had $10.0 million in securities sold under agreements to repurchase outstanding and $256.0 million of Federal Home Loan Bank advances outstanding with the ability to borrow an additional $593.8 million under Federal Home Loan Bank advances. At September 30, 2023, we had unpledged securities with a market value of $132.4 million and had the ability to borrow up to $124.5 million using these securities as collateral by borrowing from the Federal Reserve Bank or using securities sold under agreements to repurchase. We also had securities with a market value of $208.1 million pledged to the Federal Reserve Bank with the ability to borrow up to $195.7 million using these securities as collateral.
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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, 2023, we had $6.1 million in loan commitments outstanding for fixed-rate loans and had $14.8 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2023 totaled $478.0 million, or 29.0% 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, 2024. 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, 2023 and 2022, we originated $83.0 million and $127.4 million of loans, respectively. During the nine months ended September 30, 2023 and 2022, we purchased securities with a face value of $6.8 million and $159.5 million, respectively.
Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, securities sold under agreements to repurchase, stock repurchases, and dividend payments. We experienced a decrease in deposits of $65.1 million for the nine months ended September 30, 2023 and an increase in deposits of $30.0 million for the nine months ended September 30, 2022. The decrease in deposits for the nine months ended September 30, 2023 occurred as customers sought higher interest rates than what we offer. 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. FHLB borrowings increased $115.0 million to $256.0 million for the nine months ended September 30, 2023 and were $141.0 million for the nine months ended September 30, 2022.
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, 2023, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of $18.0 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, 2023, Territorial Savings Bank exceeded all of the fully phased in 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, 2023 and December 31, 2022:
Required Ratio
Actual Amount
Actual Ratio
Tier 1 Leverage Capital
Territorial Savings Bank
5.00
238,404
10.84
Territorial Bancorp Inc.
257,251
11.70
Common Equity Tier 1 Risk-Based Capital (1)
9.00
26.17
28.24
Tier 1 Risk-Based Capital (1)
10.50
Total Risk-Based Capital (1)
12.50
243,407
26.72
262,254
28.78
235,408
10.87
264,295
12.21
25.98
29.16
237,488
26.20
266,375
29.39
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, 2023 and December 31, 2022, 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.
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Legislation enacted in 2018 required 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 currently adopted 9% as the applicable ratio. 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. Between December 31, 2022 and September 30, 2023, except for an increase of $115.0 million in FHLB advances and an increase of $96.8 million in certificates of deposit, there have not been any material changes in our contractual obligations and funding needs since December 31, 2022.
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. During the nine months ended September 30, 2023, we obtained $125.0 million of new two- to six-year FHLB advances and during the nine months ended September 30, 2023 and 2022, we sold $827,000 and $5.4 million, respectively, of fixed-rate mortgage loans 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 to 200 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.
The following table presents our internal calculations of the estimated changes in our EVE as of June 30, 2023 (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
(39,799)
(196,911)
(125.33)
(2.66)
(11.05)
+300
4,058
(153,054)
(97.42)
0.26
(8.13)
+200
52,007
(105,105)
(66.90)
3.11
(5.28)
+100
103,530
(53,582)
(34.10)
5.85
(2.54)
0
157,112
8.39
-100
203,772
46,660
29.70
10.28
1.89
-200
244,770
87,658
55.79
11.71
3.32
-300
268,427
111,315
70.85
12.23
3.84
-400
231,201
74,089
47.16
10.29
Interest rates on Freddie Mac mortgage-backed securities increased by 41 basis points between June 30, 2023 and September 30, 2023. The increase in mortgage interest rates has decreased the value of our interest-earning assets.
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 Executive 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, 2023. Based on that evaluation, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2023, 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
Other than as disclosed in our previously filed Quarterly Report on Form 10-Q, there have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
(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, 2023:
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, 2023 through July 31, 2023
220,748
August 1, 2023 through August 31, 2023
7,817
10.08
141,949
September 1, 2023 through September 30, 2023
14,081
21,898
______________________________________
On September 12, 2023, Territorial Bancorp Inc. announced the completion of its twelfth repurchase program. Under this share repurchase program, the Company was authorized to repurchase up to $5,000,000 of its outstanding shares.
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, Executive 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, Executive 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, 2023, 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 8, 2023
/s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
Executive Vice President and Chief Financial Officer