Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the Quarterly Period ended September 30, 2013

 

or

 

o

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 x  No o.

 

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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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 o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

 

10,180,383 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2013.

 

 

 



Table of Contents

 

TERRITORIAL BANCORP INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I

 

ITEM 1.

FINANCIAL STATEMENTS

1

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

44

ITEM 4.

CONTROLS AND PROCEDURES

45

PART II

 

ITEM 1.

LEGAL PROCEEDINGS

46

ITEM 1A.

RISK FACTORS

46

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

46

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

46

ITEM 4.

MINE SAFETY DISCLOSURES

46

ITEM 5.

OTHER INFORMATION

46

ITEM 6.

EXHIBITS

46

 

 

SIGNATURES

47

 



Table of Contents

 

PART I

 

ITEM 1.                   FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

55,965

 

$

182,818

 

Investment securities held to maturity, at amortized cost (fair value of $605,857 and $584,125 at September 30, 2013 and December 31, 2012, respectively)

 

607,435

 

554,673

 

Federal Home Loan Bank stock, at cost

 

11,798

 

12,128

 

Loans held for sale

 

681

 

2,220

 

Loans receivable, net

 

827,946

 

774,876

 

Accrued interest receivable

 

4,382

 

4,367

 

Premises and equipment, net

 

5,141

 

5,056

 

Real estate owned

 

143

 

 

Bank-owned life insurance

 

39,951

 

31,177

 

Deferred income taxes receivable

 

4,619

 

3,580

 

Investment receivable

 

1,096

 

 

Prepaid expenses and other assets

 

2,353

 

3,732

 

 

 

 

 

 

 

Total assets

 

$

1,561,510

 

$

1,574,627

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,258,358

 

$

1,237,847

 

Advances from the Federal Home Loan Bank

 

15,000

 

20,000

 

Securities sold under agreements to repurchase

 

47,000

 

70,000

 

Accounts payable and accrued expenses

 

25,272

 

23,017

 

Current income taxes payable

 

908

 

1,152

 

Advance payments by borrowers for taxes and insurance

 

2,383

 

3,639

 

 

 

 

 

 

 

Total liabilities

 

1,348,921

 

1,355,655

 

 

 

 

 

 

 

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 10,180,383 and 10,806,248 shares at September 30, 2013 and December 31, 2012, respectively

 

102

 

108

 

Additional paid-in capital

 

79,531

 

93,616

 

Unearned ESOP shares

 

(7,462

)

(7,829

)

Retained earnings

 

144,647

 

137,410

 

Accumulated other comprehensive loss

 

(4,229

)

(4,333

)

 

 

 

 

 

 

Total stockholders’ equity

 

212,589

 

218,972

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,561,510

 

$

1,574,627

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Investment securities

 

$

4,775

 

$

5,551

 

$

13,847

 

$

18,360

 

Loans

 

9,267

 

9,187

 

27,696

 

27,326

 

Dividends on FHLB stock

 

3

 

 

3

 

 

Other investments

 

46

 

88

 

210

 

259

 

Total interest and dividend income

 

14,091

 

14,826

 

41,756

 

45,945

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,031

 

1,492

 

3,225

 

4,644

 

Advances from the Federal Home Loan Bank

 

67

 

105

 

235

 

313

 

Securities sold under agreements to repurchase

 

422

 

629

 

1,370

 

2,364

 

Total interest expense

 

1,520

 

2,226

 

4,830

 

7,321

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

12,571

 

12,600

 

36,926

 

38,624

 

Provision for loan losses

 

45

 

167

 

47

 

172

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

12,526

 

12,433

 

36,879

 

38,452

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

598

 

444

 

1,667

 

1,474

 

Income on bank-owned life insurance

 

295

 

239

 

774

 

706

 

Gain on sale of investment securities

 

922

 

429

 

2,834

 

729

 

Gain on sale of loans

 

365

 

669

 

1,390

 

1,516

 

Other

 

143

 

141

 

329

 

346

 

Total noninterest income

 

2,323

 

1,922

 

6,994

 

4,771

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,318

 

5,202

 

15,682

 

15,416

 

Occupancy

 

1,387

 

1,316

 

3,971

 

3,930

 

Equipment

 

853

 

800

 

2,576

 

2,423

 

Federal deposit insurance premiums

 

193

 

192

 

574

 

574

 

Loss on extinguishment of debt

 

 

123

 

 

321

 

Other general and administrative expenses

 

969

 

964

 

3,228

 

3,069

 

Total noninterest expense

 

8,720

 

8,597

 

26,031

 

25,733

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

6,129

 

5,758

 

17,842

 

17,490

 

Income taxes

 

2,298

 

2,111

 

6,709

 

6,457

 

Net income

 

$

3,831

 

$

3,647

 

$

11,133

 

$

11,033

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.40

 

$

0.36

 

$

1.13

 

$

1.09

 

Diluted earnings per share

 

$

0.39

 

$

0.36

 

$

1.12

 

$

1.08

 

Cash dividends declared per common share

 

$

0.13

 

$

0.11

 

$

0.38

 

$

0.32

 

Basic weighted-average shares outstanding

 

9,676,304

 

10,052,630

 

9,810,725

 

10,126,371

 

Diluted weighted-average shares outstanding

 

9,809,987

 

10,199,400

 

9,930,438

 

10,205,408

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,831

 

$

3,647

 

$

11,133

 

$

11,033

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on securities

 

3

 

8

 

21

 

18

 

Noncredit related gains on securities not expected to be sold

 

14

 

177

 

83

 

177

 

Other comprehensive income

 

17

 

185

 

104

 

195

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

3,848

 

$

3,832

 

$

11,237

 

$

11,228

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
and Comprehensive Income (Unaudited)
(Dollars in thousands)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Unearned
ESOP
Shares

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss)/Income

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2011

 

$

110

 

$

97,640

 

$

(8,319

)

$

128,300

 

$

(3,770

)

$

213,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,033

 

 

11,033

 

Other comprehensive income

 

 

 

 

 

195

 

195

 

Cash dividends declared

 

 

 

 

(3,418

)

 

(3,418

)

Share-based compensation

 

1

 

2,016

 

 

 

 

2,017

 

Allocation of 36,699 ESOP shares

 

 

438

 

367

 

 

 

805

 

Repurchase of 275,186 shares of company common stock

 

(2

)

(5,890

)

 

 

 

(5,892

)

Exercise of 41,275 options on common stock

 

 

716

 

 

 

 

716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2012

 

$

109

 

$

94,920

 

$

(7,952

)

$

135,915

 

$

(3,575

)

$

219,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012

 

$

108

 

$

93,616

 

$

(7,829

)

$

137,410

 

$

(4,333

)

$

218,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,133

 

 

11,133

 

Other comprehensive income

 

 

 

 

 

104

 

104

 

Cash dividends declared

 

 

 

 

(3,896

)

 

(3,896

)

Share-based compensation

 

1

 

2,001

 

 

 

 

2,002

 

Allocation of 36,699 ESOP shares

 

 

478

 

367

 

 

 

845

 

Repurchase of 739,197 shares of company common stock

 

(7

)

(16,564

)

 

 

 

(16,571

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2013

 

$

102

 

$

79,531

 

$

(7,462

)

$

144,647

 

$

(4,229

)

$

212,589

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

11,133

 

$

11,033

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

47

 

172

 

Depreciation and amortization

 

837

 

852

 

Deferred income tax benefit

 

(1,108

)

(516

)

Amortization of fees, discounts, and premiums

 

395

 

53

 

Origination of loans held for sale

 

(67,252

)

(75,184

)

Proceeds from sales of loans held for sale

 

70,181

 

75,899

 

Gain on sale of loans, net

 

(1,390

)

(1,516

)

Net gain on sale of real estate owned

 

 

(43

)

Gain on sale of investment securities held to maturity

 

(2,834

)

(729

)

ESOP expense

 

845

 

805

 

Share-based compensation expense

 

2,002

 

2,016

 

Excess tax benefits from share-based compensation

 

 

(54

)

(Increase) decrease in accrued interest receivable

 

(15

)

104

 

Net increase in bank-owned life insurance

 

(774

)

(706

)

Net (increase) decrease in prepaid expenses and other assets

 

1,379

 

(186

)

Net increase in accounts payable and accrued expenses

 

2,255

 

342

 

Net decrease in income taxes payable

 

(244

)

(2,967

)

Net cash provided by operating activities

 

15,457

 

9,375

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(240,496

)

(111,467

)

Principal repayments on investment securities held to maturity

 

146,301

 

160,668

 

Proceeds from sale of investment securities held to maturity

 

42,034

 

9,983

 

Loan originations, net of principal repayments on loans receivable

 

(52,345

)

(57,911

)

Proceeds from redemption of Federal Home Loan Bank stock

 

330

 

110

 

Purchases of bank-owned life insurance

 

(8,000

)

 

Proceeds from sale of real estate owned

 

 

451

 

Purchases of premises and equipment

 

(922

)

(484

)

Net cash provided by (used in) investing activities

 

(113,098

)

1,350

 

 

(Continued)

 

5



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

$

20,511

 

$

60,411

 

Proceeds from advances from the Federal Home Loan Bank

 

5,000

 

100

 

Repayments of advances from the Federal Home Loan Bank

 

(10,000

)

(100

)

Repayments of securities sold under agreements to repurchase

 

(23,000

)

(38,300

)

Purchases of Fed Funds

 

 

10

 

Sales of Fed Funds

 

 

(10

)

Net decrease in advance payments by borrowers for taxes and insurance

 

(1,256

)

(969

)

Excess tax benefits from share-based compensation

 

 

54

 

Proceeds from issuance of common stock

 

 

717

 

Repurchases of company stock

 

(16,571

)

(5,892

)

Cash dividends paid

 

(3,896

)

(3,418

)

Net cash provided by (used in) financing activities

 

(29,212

)

12,603

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(126,853

)

23,328

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

182,818

 

131,937

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

55,965

 

$

155,265

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

4,861

 

$

7,478

 

Income taxes

 

8,061

 

9,940

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

Loans transferred to real estate owned

 

$

143

 

$

176

 

Investments purchased, not settled

 

1,096

 

1,136

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                     Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. 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 Territorial Bancorp Inc.’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2012.  In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.

 

(2)                     Organization

 

On November 4, 2008, the Board of Directors of Territorial Mutual Holding Company approved a plan of conversion and reorganization under which the Company would convert from a mutual holding company to a stock holding company.  The conversion to a stock holding company was approved by the depositors and borrowers of Territorial Savings Bank and the Office of Thrift Supervision (OTS) and included the filing of a registration statement with the U.S. Securities and Exchange Commission.  Upon the completion of the conversion and reorganization on July 10, 2009, Territorial Mutual Holding Company and Territorial Savings Group, Inc. ceased to exist as separate legal entities and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. A total of 12,233,125 shares were issued in the conversion at $10 per share, raising $122.3 million of gross proceeds.  $3.7 million of conversion expenses were offset against the gross proceeds.  Territorial Bancorp Inc.’s common stock began trading on the NASDAQ Global Select Market under the symbol “TBNK” on July 13, 2009.

 

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 liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits.  Subsequent increases will not restore an eligible account holder’s or supplemental eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of Territorial Savings Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.

 

(3)                     Recently Adopted Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) amended the Comprehensive Income topic of the FASB Accounting Standards Codification (ASC).  The amendment eliminated the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Nonowner changes in stockholders’ equity must be presented either in a continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment was effective for interim or annual periods beginning after December 15, 2011, with early

 

7



Table of Contents

 

adoption permitted.  In December 2011, the FASB deferred the effective date of the part of this amendment requiring reclassifications out of accumulated other comprehensive income to be shown on the face of the financial statements to allow time for further deliberation.  Until final reporting requirements were effective, previous disclosure requirements would remain in effect.  The Company adopted this amendment on January 1, 2012, and other than the location of disclosures related to other comprehensive income, the adoption did not have a material effect on its consolidated financial statements.  In February 2013, the FASB finalized the reporting requirements for reclassifications out of accumulated other comprehensive income.  When an amount reclassified out of accumulated other comprehensive income is required to be reported in net income in its entirety, the effect on income statement items must be disclosed.  When an amount reclassified out of accumulated other comprehensive income is not required to be reported in net income in its entirety in the same period, cross references to other required disclosures providing information about the transaction are required.  This amendment was effective for reporting periods beginning after December 15, 2012.  The Company adopted this amendment on January 1, 2013 and the adoption did not have a material effect on its consolidated financial statements.

 

In December 2011, the FASB amended the Balance Sheet topic of the FASB ASC.  The amendment requires disclosures about the gross and net information related to instruments and transactions eligible for offset in the statement of financial position.  The disclosures are meant to assist users of financial statements to more easily compare information that is presented based on the differing offsetting requirements of U.S. generally accepted accounting principles and International Financial Reporting Standards. In January 2013, the FASB issued a clarification that stated the amendment applies only to certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement.  The amendment was effective for interim and annual periods beginning on or after January 1, 2013.  The Company adopted this amendment on January 1, 2013 and the adoption did not 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:

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,636

 

$

10,574

 

Interest-earning deposits in other banks

 

46,329

 

172,244

 

Cash and cash equivalents

 

$

55,965

 

$

182,818

 

 

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

 

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Table of Contents

 

(5)                     Investment Securities

 

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

 

 

 

Carrying

 

Gross unrealized

 

Estimated

 

(Dollars in thousands)

 

value

 

Gains

 

Losses

 

fair value

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

606,876

 

$

13,038

 

$

(14,616

)

$

605,298

 

Trust preferred securities

 

559

 

 

 

559

 

Total

 

$

607,435

 

$

13,038

 

$

(14,616

)

$

605,857

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

554,252

 

$

29,706

 

$

(254

)

$

583,704

 

Trust preferred securities

 

421

 

 

 

421

 

Total

 

$

554,673

 

$

29,706

 

$

(254

)

$

584,125

 

 

The carrying and estimated fair value of investment securities at September 30, 2013 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.

 

 

 

Carrying

 

Estimated

 

(Dollars in thousands)

 

value

 

fair value

 

Held to maturity:

 

 

 

 

 

Due within 5 years

 

$

1,195

 

$

1,203

 

Due after 5 years through 10 years

 

427

 

458

 

Due after 10 years

 

605,813

 

604,196

 

Total

 

$

607,435

 

$

605,857

 

 

Realized gains and losses and the proceeds from sales of securities available for sale, 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
September 30,

 

Nine months ended
September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

2013

 

2012

 

Proceeds from sales

 

$

13,943

 

$

5,424

 

$

43,131

 

$

9,983

 

Gross gains

 

922

 

429

 

2,834

 

729

 

Gross losses

 

 

 

 

 

 

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Table of Contents

 

During the three months ended September 30, 2013 and 2012, all sales were related to $13.0 million and $5.0 million, respectively, of held-to-maturity debt securities.  During the nine months ended September 30, 2013 and 2012, all sales were related to $40.3 million and $9.3 million, respectively, of held-to-maturity debt securities.  The sale of these securities, for which the Company had already collected a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio.

 

Investment securities with carrying values of $247.3 million and $221.3 million at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012.  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

 

Description of securities

 

Fair value

 

Unrealized
losses

 

Fair value

 

Unrealized
losses

 

Number of
securities

 

Fair value

 

Unrealized
losses

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

273,380

 

$

14,417

 

$

3,785

 

$

199

 

48

 

$

277,165

 

$

14,616

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

32,921

 

$

253

 

$

47

 

$

1

 

21

 

$

32,968

 

$

254

 

 

Mortgage-Backed Securities.  The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates.  All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency.  Since the decline in market value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell these investments until maturity and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its amortized cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2013 and December 31, 2012.

 

Trust Preferred Securities.  At September 30, 2013, the Company owns two trust preferred securities, PreTSL XXIII and XXIV.  The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.  Both of these securities are classified in the Bank’s held-to-maturity investment portfolio.

 

The trust preferred securities market is considered to be inactive as only three transactions have occurred over the past 21 months in the same tranche of securities owned by the Company.  The Company used a discounted cash flow model to determine whether these securities are other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

 

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Table of Contents

 

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending September 30, 2013.

 

PreTSL XXIV has a book value of $0.  PreTSL XXIII has a book value of $559,000.  The difference between the book value of $559,000 and the remaining amortized cost basis of $1.1 million is reported as other comprehensive loss and is related to noncredit factors such as the trust preferred securities market being inactive.

 

It is reasonably possible that the fair values of the trust preferred securities could decline in the near term if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low.  As a result, there is a risk that the Company’s remaining amortized cost basis of $1.1 million on its trust preferred securities could be credit-related other-than-temporarily impaired in the near term.  The impairment could be material to the Company’s consolidated statements of income.

 

The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

 

(Dollars in thousands)

 

2013

 

2012

 

Balance at January 1,

 

$

5,885

 

$

5,885

 

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

 

 

Balance at September 30,

 

$

5,885

 

$

5,885

 

 

The table below shows the components of comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities:

 

 

 

September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

Noncredit losses on other-than-temporarily impaired securities, net of taxes

 

$

362

 

$

502

 

 

11



Table of Contents

 

(6)                     Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2013

 

2012

 

Real estate loans:

 

 

 

 

 

First mortgages:

 

 

 

 

 

One- to four-family residential

 

$

795,739

 

$

741,334

 

Multi-family residential

 

4,918

 

6,888

 

Construction, commercial, and other

 

13,626

 

13,819

 

Home equity loans and lines of credit

 

15,493

 

15,202

 

Total real estate loans

 

829,776

 

777,243

 

Other loans:

 

 

 

 

 

Loans on deposit accounts

 

351

 

493

 

Consumer and other loans

 

4,425

 

3,988

 

Total other loans

 

4,776

 

4,481

 

Less:

 

 

 

 

 

Net unearned fees and discounts

 

(4,939

)

(5,176

)

Allowance for loan losses

 

(1,667

)

(1,672

)

 

 

(6,606

)

(6,848

)

Loans receivable, net

 

$

827,946

 

$

774,876

 

 

The activity in the allowance for loan losses on loans receivable is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

2013

 

2012

 

Balance, beginning of period

 

$

1,622

 

$

1,457

 

$

1,672

 

$

1,541

 

Provision for loan losses

 

45

 

167

 

47

 

172

 

 

 

1,667

 

1,624

 

1,719

 

1,713

 

Charge-offs

 

(68

)

(137

)

(205

)

(273

)

Recoveries

 

68

 

8

 

153

 

55

 

Net charge-offs

 

 

(129

)

(52

)

(218

)

Balance, end of period

 

$

1,667

 

$

1,495

 

$

1,667

 

$

1,495

 

 

12



Table of Contents

 

The table below presents the activity in the allowance for loan losses by portfolio segment:

 

(Dollars in thousands)

 

Residential
Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

Three months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

513

 

$

813

 

$

35

 

$

125

 

$

136

 

$

1,622

 

Provision (reversal of allowance) for loan losses

 

(16

)

14

 

(1

)

44

 

4

 

45

 

 

 

497

 

827

 

34

 

169

 

140

 

1,667

 

Charge-offs

 

(13

)

 

 

(55

)

 

(68

)

Recoveries

 

49

 

11

 

1

 

7

 

 

68

 

Net charge-offs

 

36

 

11

 

1

 

(48

)

 

 

Balance, end of period

 

$

533

 

$

838

 

$

35

 

$

121

 

$

140

 

$

1,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

590

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,672

 

Provision (reversal of allowance) for loan losses

 

(84

)

9

 

(7

)

111

 

18

 

47

 

 

 

506

 

827

 

28

 

218

 

140

 

1,719

 

Charge-offs

 

(94

)

 

 

(111

)

 

(205

)

Recoveries

 

121

 

11

 

7

 

14

 

 

153

 

Net charge-offs

 

27

 

11

 

7

 

(97

)

 

(52

)

Balance, end of period

 

$

533

 

$

838

 

$

35

 

$

121

 

$

140

 

$

1,667

 

 

(Dollars in thousands)

 

Residential

Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

Three months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

552

 

$

641

 

$

35

 

$

107

 

$

122

 

$

1,457

 

Provision for loan losses

 

157

 

 

2

 

8

 

 

167

 

 

 

709

 

641

 

37

 

115

 

122

 

1,624

 

Charge-offs

 

(125

)

 

(2

)

(10

)

 

(137

)

Recoveries

 

6

 

 

 

2

 

 

8

 

Net charge-offs

 

(119

)

 

(2

)

(8

)

 

(129

)

Balance, end of period

 

$

590

 

$

641

 

$

35

 

$

107

 

$

122

 

$

1,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

631

 

$

285

 

$

258

 

$

291

 

$

76

 

$

1,541

 

Provision (reversal of allowance) for loan losses

 

151

 

364

 

(222

)

(167

)

46

 

172

 

 

 

782

 

649

 

36

 

124

 

122

 

1,713

 

Charge-offs

 

(233

)

(8

)

(3

)

(29

)

 

(273

)

Recoveries

 

41

 

 

2

 

12

 

 

55

 

Net charge-offs

 

(192

)

(8

)

(1

)

(17

)

 

(218

)

Balance, end of period

 

$

590

 

$

641

 

$

35

 

$

107

 

$

122

 

$

1,495

 

 

13



Table of Contents

 

In 2012, the Company enhanced its methodology for reviewing its loan portfolio when calculating the allowance for loan losses. The modification consisted of additional segmentation of the residential mortgage loan portfolio by items such as year of origination, loan-to-value ratios, owner or nonowner occupancy status and the purpose of the loan (purchase, cash-out refinance, no cash-out refinance or construction).  The allowance for loan loss for each segment of the loan portfolio is determined by calculating the historical loss of each segment for a two- to three-year look-back period and adding a qualitative adjustment for the following factors:

 

·                Changes in lending policies and procedures;

·                Changes in economic trends;

·                Changes in types of loans in the loan portfolio;

·                Changes in experience and ability of personnel in the loan origination and loan servicing departments;

·                Changes in the number and amount of delinquent loans and classified assets;

·                Changes in our internal loan review system;

·                Changes in the value of underlying collateral for collateral dependent loans;

·                Changes in any concentrations of credit; and

·                External factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

 

The Company also revised the qualitative factors that were used to determine the allowance for loan losses on construction, commercial and other mortgage loans, home equity loans and lines of credit and consumer and other loans.  As a result of these modifications, the Company increased the portion of the allowance for loan losses attributable to construction, commercial and other mortgage loans and decreased the portion of the allowance for loan losses attributable to residential mortgages.  The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.  The unallocated allowance is established for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

 

Management considers the allowance for loan losses at September 30, 2013 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review the allowance for loan losses.  The Office of the Comptroller of the Currency may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

 

14



Table of Contents

 

The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

 

(Dollars in thousands)

 

Residential
Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Total

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

533

 

838

 

35

 

121

 

140

 

1,667

 

Total ending allowance balance

 

$

533

 

$

838

 

$

35

 

$

121

 

$

140

 

$

1,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

7,425

 

$

 

$

162

 

$

 

$

 

$

7,587

 

Collectively evaluated for impairment

 

788,309

 

13,602

 

15,339

 

4,776

 

 

822,026

 

Total ending loan balance

 

$

795,734

 

$

13,602

 

$

15,501

 

$

4,776

 

$

 

$

829,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

590

 

818

 

35

 

107

 

122

 

1,672

 

Total ending allowance balance

 

$

590

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,775

 

$

 

$

160

 

$

 

$

 

$

6,935

 

Collectively evaluated for impairment

 

736,297

 

13,784

 

15,051

 

4,481

 

 

769,613

 

Total ending loan balance

 

$

743,072

 

$

13,784

 

$

15,211

 

$

4,481

 

$

 

$

776,548

 

 

The table below presents the balance of impaired loans and the related amount of allocated loan loss allowances:

 

(Dollars in thousands)

 

September 30,
2013

 

December 31,
2012

 

Loans with no allocated allowance for loan losses

 

$

7,587

 

$

6,935

 

Loans with allocated allowance for loan losses

 

 

 

Total impaired loans

 

$

7,587

 

$

6,935

 

 

 

 

 

 

 

Amount of allocated loan loss allowance

 

$

 

$

 

 

15



Table of Contents

 

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:

 

(Dollars in thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

September 30, 2013:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,425

 

$

7,721

 

Home equity loans and lines of credit

 

162

 

165

 

 

 

 

 

 

 

Total

 

$

7,587

 

$

7,886

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,775

 

$

7,175

 

Home equity loans and lines of credit

 

160

 

165

 

 

 

 

 

 

 

Total

 

$

6,935

 

$

7,340

 

 

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans:

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

(Dollars in thousands)

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

2013:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,440

 

$

33

 

$

7,477

 

$

98

 

Home equity loans and lines of credit

 

162

 

 

161

 

 

Total

 

$

7,602

 

$

33

 

$

7,638

 

$

98

 

 

 

 

 

 

 

 

 

 

 

2012:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,084

 

$

69

 

$

7,114

 

$

153

 

Home equity loans and lines of credit

 

159

 

2

 

158

 

5

 

Total

 

$

7,243

 

$

71

 

$

7,272

 

$

158

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of September 30, 2013 or December 31, 2012.  Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value.

 

16



Table of Contents

 

The table below presents the aging of loans and accrual status by class of loans:

 

(Dollars in thousands)

 

30 – 59
Days Past
Due

 

60 – 89
Days Past
Due

 

90 Days or
Greater
Past Due

 

Total Past
Due

 

Loans Not
Past Due

 

Total
Loans

 

Nonaccrual
Loans

 

Loans
More
Than 90
Days Past
Due and
Still
Accruing

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

1,296

 

$

 

$

1,230

 

$

2,526

 

$

788,317

 

$

790,843

 

$

5,160

 

$

 

Multi-family residential mortgages

 

 

 

 

 

4,891

 

4,891

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

13,602

 

13,602

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

15,501

 

15,501

 

162

 

 

Loans on deposit accounts

 

 

 

 

 

351

 

351

 

 

 

Consumer and other

 

13

 

1

 

 

14

 

4,411

 

4,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,309

 

$

1

 

$

1,230

 

$

2,540

 

$

827,073

 

$

829,613

 

$

5,322

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

2,298