Edgar Filing: Territorial Bancorp Inc.

tbnk_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended September 30, 2016

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

For transition period from to

Commission File Number 1-34403

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

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

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

(808) 946-1400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

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

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

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

Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 9,764,169 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2016.

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TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

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PART I

ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40
ITEM 4.	CONTROLS AND PROCEDURES	41

PART II

ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	42
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	MINE SAFETY DISCLOSURES	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	43

SIGNATURES		44

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PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)


	September 30,		December 31,
	2016		2015
ASSETS
Cash and cash equivalents	$	40,503	$	65,919
Investment securities held to maturity, at amortized cost (fair value of $449,146 and $497,982 at September 30, 2016 and December 31, 2015, respectively)		432,142		493,059
Loans held for sale		2,048		2,139
Loans receivable, net		1,302,343		1,188,649
Federal Home Loan Bank stock, at cost		4,945		4,790
Federal Reserve Bank stock, at cost		3,081		3,022
Accrued interest receivable		4,752		4,684
Premises and equipment, net		4,207		4,903
Bank-owned life insurance		43,055		42,328
Current taxes receivable		737		—
Deferred income tax assets, net		8,250		9,378
Prepaid expenses and other assets		2,586		2,270
Total assets	$	1,848,649	$	1,821,141

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,464,479	$	1,445,103
Advances from the Federal Home Loan Bank		69,000		69,000
Securities sold under agreements to repurchase		55,000		55,000
Accounts payable and accrued expenses		26,805		25,178
Current taxes payable		1,651		2,095
Advance payments by borrowers for taxes and insurance		3,296		5,124
Total liabilities		1,620,231		1,601,500

Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 50,000,000 shares, no shares issued or outstanding		—		—
Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 9,764,169 and 9,659,685 shares at September 30, 2016 and December 31, 2015, respectively		97		96
Additional paid-in capital		71,400		70,118
Unearned ESOP shares		(5,994)		(6,361)
Retained earnings		168,071		161,024
Accumulated other comprehensive loss		(5,156)		(5,236)
Total stockholders’ equity		228,418		219,641
Total liabilities and stockholders’ equity	$	1,848,649	$	1,821,141

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Interest and dividend income:
Loans	$	13,052	$	11,809	$	38,060	$	33,761
Investment securities		3,496		4,098		11,121		12,895
Other investments		121		64		411		213
Total interest and dividend income		16,669		15,971		49,592		46,869

Interest expense:
Deposits		1,485		1,198		4,363		3,486
Advances from the Federal Home Loan Bank		259		211		772		438
Securities sold under agreements to repurchase		220		221		656		776
Total interest expense		1,964		1,630		5,791		4,700

Net interest income		14,705		14,341		43,801		42,169
Provision for loan losses		107		71		219		366

Net interest income after provision for loan losses		14,598		14,270		43,582		41,803

Noninterest income:
Service fees on loan and deposit accounts		493		590		1,422		1,577
Income on bank-owned life insurance		240		259		727		770
Gain on sale of investment securities		60		—		250		476
Gain on sale of loans		114		201		304		440
Other		96		138		320		419
Total noninterest income		1,003		1,188		3,023		3,682

Noninterest expense:
Salaries and employee benefits		5,265		5,596		15,947		15,759
Occupancy		1,432		1,483		4,285		4,348
Equipment		865		1,025		2,683		2,923
Federal deposit insurance premiums		144		214		596		634
Other general and administrative expenses		939		1,048		3,181		3,449
Total noninterest expense		8,645		9,366		26,692		27,113

Income before income taxes		6,956		6,092		19,913		18,372
Income taxes		2,792		2,406		7,928		7,323
Net income	$	4,164	$	3,686	$	11,985	$	11,049

Basic earnings per share	$	0.46	$	0.41	$	1.32	$	1.22
Diluted earnings per share	$	0.45	$	0.40	$	1.29	$	1.19
Cash dividends declared per common share	$	0.18	$	0.17	$	0.54	$	0.49
Basic weighted-average shares outstanding		9,102,837		9,085,725		9,065,892		9,086,481
Diluted weighted-average shares outstanding		9,325,506		9,301,500		9,280,260		9,250,835

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Net income	$	4,164	$	3,686	$	11,985	$	11,049

Change in unfunded pension liability		—		—		(21)		(64)
Change in unrealized loss on securities		4		8		10		24
Change in noncredit related loss on trust preferred securities		45		(7)		91		101
Other comprehensive income, net of tax		49		1		80		61
Comprehensive income	$	4,213	$	3,687	$	12,065	$	11,110

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


									Accumulated
			Additional		Unearned				Other		Total
	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Stock		Capital		Shares		Earnings		Income (Loss)		Equity
Balances at December 31, 2014	$	99	$	75,229	$	(6,851)	$	153,289	$	(5,388)	$	216,378

Net income		—		—		—		11,049		—		11,049
Other comprehensive income		—		—		—		—		61		61
Cash dividends declared ($0.49 per share)		—		—		—		(4,553)		—		(4,553)
Share-based compensation		1		2,416		—		—		—		2,417
Allocation of 36,699 ESOP shares		—		499		367		—		—		866
Repurchase of 334,976 shares of company common stock		(3)		(7,866)		—		—		—		(7,869)
Exercise of 1,000 options for common stock		—		17		—		—		—		17
Balances at September 30, 2015	$	97	$	70,295	$	(6,484)	$	159,785	$	(5,327)	$	218,366

Balances at December 31, 2015	$	96	$	70,118	$	(6,361)	$	161,024	$	(5,236)	$	219,641

Net income		—		—		—		11,985		—		11,985
Other comprehensive income		—		—		—		—		80		80
Cash dividends declared ($0.54 per share)		—		—		—		(4,938)		—		(4,938)
Share-based compensation		1		1,778		—		—		—		1,779
Allocation of 36,699 ESOP shares		—		612		367		—		—		979
Repurchase of 100,758 shares of company common stock		(1)		(2,724)		—		—		—		(2,725)
Exercise of 93,100 options for common stock		1		1,616		—		—		—		1,617
Balances at September 30, 2016	$	97	$	71,400	$	(5,994)	$	168,071	$	(5,156)	$	228,418

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2016		2015
Cash flows from operating activities:
Net income	$	11,985	$	11,049
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		219		366
Depreciation and amortization		886		985
Deferred income tax expense (benefit)		1,041		(1,152)
Amortization of fees, discounts, and premiums		(604)		(374)
Origination of loans held for sale		(39,336)		(45,452)
Proceeds from sales of loans held for sale		38,844		46,459
Gain on sale of loans, net		(304)		(440)
Net gain on sale of real estate owned		—		(12)
Gain on sale of investment securities held to maturity		(250)		(476)
Net loss on disposal of premises and equipment		—		4
ESOP expense		979		866
Share-based compensation expense		1,779		2,417
Increase in accrued interest receivable		(66)		(306)
Net increase in bank-owned life insurance		(727)		(769)
Net increase in prepaid expenses and other assets		(316)		(573)
Net increase in accounts payable and accrued expenses		1,558		3,819
Net decrease in advance payments by borrowers for taxes and insurance		(1,828)		(822)
Net increase in income taxes receivable		(737)		(1,523)
Net increase (decrease) in income taxes payable		(444)		650

Net cash from operating activities		12,679		14,716

Cash flows from investing activities:
Purchases of investment securities held to maturity		(2,523)		(10,300)
Principal repayments on investment securities held to maturity		60,077		69,966
Proceeds from sale of investment securities held to maturity		3,923		5,083
Loan originations, net of principal repayments on loans receivable		(112,498)		(194,900)
Purchases of Federal Home Loan Bank stock		(275)		(2,920)
Proceeds from redemption of Federal Home Loan Bank stock		120		9,564
Purchases of Federal Reserve Bank stock		(59)		(64)
Proceeds from sale of real estate owned		—		204
Purchases of premises and equipment		(190)		(416)

Net cash from investing activities		(51,425)		(123,783)

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2016		2015
Cash flows from financing activities:
Net increase in deposits	$	19,376	$	53,318
Proceeds from advances from the Federal Home Loan Bank		3,000		115,000
Repayments of advances from the Federal Home Loan Bank		(3,000)		(66,000)
Proceeds from securities sold under agreements to repurchase		—		30,000
Repayments of securities sold under agreements to repurchase		—		(47,000)
Purchases of Fed Funds		10		10
Sales of Fed Funds		(10)		(10)
Proceeds from issuance of common stock		566		17
Repurchases of common stock		(1,674)		(7,309)
Cash dividends paid		(4,938)		(4,553)

Net cash from financing activities		13,330		73,473

Net decrease in cash and cash equivalents		(25,416)		(35,594)

Cash and cash equivalents at beginning of the period		65,919		75,060

Cash and cash equivalents at end of the period	$	40,503	$	39,466

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	5,770	$	4,780
Income taxes		8,068		8,932

Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through swap and net settlement transactions	$	1,051	$	—
Loans transferred to real estate owned		—		192

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

(2) Organization

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company. As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008. The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion. The balance of the liquidation account at December 31, 2015 was $13.5 million.

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

(3) Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) amended the Revenue Recognition topic of the FASB Accounting Standards Codification (ASC). The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB deferred the effective date of the amendment by one year. However, entities may still choose to adopt the amendment as of the original effective date. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

In April 2015, the FASB amended the Intangibles – Goodwill and Other topic of the FASB ASC. The amendment adds guidance to help entities evaluate the accounting for fees paid in cloud computing arrangements. The amendment is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company adopted this amendment on January 1, 2016, and the adoption did not have a material effect on its consolidated financial statements.

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC. The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments. Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit

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price notion when measuring the fair value of financial instruments for disclosure purposes. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

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

In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC. The amendment seeks to simplify several areas of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification of transactions on the statement of cash flows. The amendment is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements.

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments. The primary areas affecting the Company will be in the accounting for loans receivable and investments held to maturity. The amendment changes the threshold for recognizing losses from “probable” to “expected” and may result in increases in the Company’s allowances for loan and investment losses. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements.

(4) Cash and Cash Equivalents

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


	September 30,		December 31,
(Dollars in thousands)	2016		2015
Cash and due from banks	$	9,391	$	10,318
Interest-earning deposits in other banks		31,112		55,601
Cash and cash equivalents	$	40,503	$	65,919

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

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(5) Investment Securities

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


	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	431,076	$	17,228	$	(224)	$	448,080
Trust preferred securities		1,066		—		—		1,066
Total	$	432,142	$	17,228	$	(224)	$	449,146

December 31, 2015:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	492,143	$	11,092	$	(6,169)	$	497,066
Trust preferred securities		916		—		—		916
Total	$	493,059	$	11,092	$	(6,169)	$	497,982

The amortized cost and estimated fair value of investment securities at September 30, 2016 are shown below. Incorporated in the maturity schedule are mortgage-backed and trust preferred 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.


	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Held-to-maturity:
Due within 5 years	$	25	$	27
Due after 5 years through 10 years		52		52
Due after 10 years		432,065		449,067
Total	$	432,142	$	449,146

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2016		2015		2016		2015
Proceeds from sales	$	801	$	—	$	3,923	$	5,083
Gross gains		60		—		250		476
Gross losses		—		—		—		—

During the three months ended September 30, 2016, the Company received proceeds of $801,000 from the sale of $741,000 of held-to-maturity mortgage-backed securities, resulting in gross realized gains of $60,000. The Company did not sell any held-to-maturity mortgage-backed securities during the three months ended September 30, 2015. During the nine months ended September 30, 2016 and 2015, the Company received proceeds of $3.9 million and $5.0 million, respectively, from the sale of $3.7 million and $4.6 million, respectively, of held-to-maturity mortgage-backed securities, resulting in gross realized gains of $250,000 and $415,000, respectively. The sale of these mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), is in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.

During the nine months ended September 30, 2015, the Company received proceeds of $61,000 from the sale of one of the trust preferred securities the Company owned, PreTSL XXIV. The Company previously wrote off the entire book value of this security when it incurred an other-than-temporary impairment charge in prior years. The trust preferred security sold was classified in the held-to-maturity portfolio. Since the credit rating of this security was

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downgraded in accordance with the Investments – Dept and Equity Securities topic of the FASB ASC, the sale of this security does not taint management’s assertion of intent to hold remaining securities in the held-to-maturity portfolio to maturity.

Investment securities with amortized costs of $224.7 million and $241.4 million at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

Provided below is a summary of investment securities which were in an unrealized loss position at September 30, 2016 and December 31, 2015. The Company does not intend to sell these 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				Total
			Unrealized				Unrealized		Number of			Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Securities	Fair Value		Losses
(Dollars in thousands)
September 30, 2016
Mortgage-backed securities	$	—	$	—	$	25,627	$	224	10	$	25,627	$	224
December 31, 2015
Mortgage-backed securities	$	142,810	$	3,939	$	53,142	$	2,230	43	$