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 June 30, 2014

 

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.

 

9,880,383 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2014.

 

 

 



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

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

ITEM 4.

CONTROLS AND PROCEDURES

43

 

PART II

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

45

ITEM 1A.

RISK FACTORS

45

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

45

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

45

ITEM 4.

MINE SAFETY DISCLOSURES

45

ITEM 5.

OTHER INFORMATION

45

ITEM 6.

EXHIBITS

45

 

 

 

SIGNATURES

 

46

 



Table of Contents

 

PART I

 

ITEM 1.                                                FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

58,686

 

$

75,365

 

Investment securities held to maturity, at amortized cost (fair value of $619,843 and $598,007 at June 30, 2014 and December 31, 2013, respectively)

 

613,247

 

613,436

 

Federal Home Loan Bank stock, at cost

 

11,467

 

11,689

 

Loans held for sale

 

1,504

 

2,210

 

Loans receivable, net

 

902,991

 

856,542

 

Accrued interest receivable

 

4,447

 

4,310

 

Premises and equipment, net

 

5,939

 

6,056

 

Bank-owned life insurance

 

40,774

 

40,243

 

Deferred income taxes receivable

 

6,482

 

5,075

 

Prepaid expenses and other assets

 

2,281

 

1,978

 

 

 

 

 

 

 

Total assets

 

$

1,647,818

 

$

1,616,904

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,317,947

 

$

1,288,709

 

Advances from the Federal Home Loan Bank

 

15,000

 

15,000

 

Securities sold under agreements to repurchase

 

72,000

 

72,000

 

Accounts payable and accrued expenses

 

22,448

 

23,933

 

Current income taxes payable

 

2,093

 

1,414

 

Advance payments by borrowers for taxes and insurance

 

3,718

 

3,708

 

 

 

 

 

 

 

Total liabilities

 

1,433,206

 

1,404,764

 

 

 

 

 

 

 

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 9,880,383 and 10,051,377 shares at June 30, 2014 and December 31, 2013, respectively

 

99

 

101

 

Additional paid-in capital

 

75,064

 

77,340

 

Unearned ESOP shares

 

(7,095

)

(7,340

)

Retained earnings

 

150,255

 

145,826

 

Accumulated other comprehensive loss

 

(3,711

)

(3,787

)

 

 

 

 

 

 

Total stockholders’ equity

 

214,612

 

212,140

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,647,818

 

$

1,616,904

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Investment securities

 

$

5,086

 

$

4,518

 

$

10,160

 

$

9,072

 

Loans

 

9,760

 

9,199

 

19,300

 

18,429

 

Other investments

 

35

 

66

 

78

 

164

 

Total interest and dividend income

 

14,881

 

13,783

 

29,538

 

27,665

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,103

 

1,074

 

2,194

 

2,194

 

Advances from the Federal Home Loan Bank

 

66

 

65

 

132

 

168

 

Securities sold under agreements to repurchase

 

343

 

471

 

686

 

948

 

Total interest expense

 

1,512

 

1,610

 

3,012

 

3,310

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

13,369

 

12,173

 

26,526

 

24,355

 

Provision (reversal of allowance) for loan losses

 

156

 

(16

)

165

 

2

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision (reversal of allowance) for loan losses

 

13,213

 

12,189

 

26,361

 

24,353

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

524

 

568

 

1,023

 

1,069

 

Income on bank-owned life insurance

 

264

 

258

 

532

 

479

 

Gain on sale of investment securities

 

309

 

1,024

 

655

 

1,912

 

Gain on sale of loans

 

86

 

380

 

165

 

1,025

 

Other

 

96

 

81

 

262

 

186

 

Total noninterest income

 

1,279

 

2,311

 

2,637

 

4,671

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,297

 

5,012

 

10,660

 

10,364

 

Occupancy

 

1,409

 

1,333

 

2,831

 

2,584

 

Equipment

 

905

 

851

 

1,819

 

1,723

 

Federal deposit insurance premiums

 

201

 

191

 

400

 

381

 

Other general and administrative expenses

 

935

 

1,208

 

1,901

 

2,259

 

Total noninterest expense

 

8,747

 

8,595

 

17,611

 

17,311

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5,745

 

5,905

 

11,387

 

11,713

 

Income taxes

 

2,026

 

2,244

 

4,206

 

4,411

 

Net income

 

$

3,719

 

$

3,661

 

$

7,181

 

$

7,302

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.41

 

$

0.37

 

$

0.78

 

$

0.74

 

Diluted earnings per share

 

$

0.40

 

$

0.36

 

$

0.77

 

$

0.72

 

Cash dividends declared per common share

 

$

0.15

 

$

0.13

 

$

0.29

 

$

0.25

 

Basic weighted-average shares outstanding

 

9,164,801

 

9,841,162

 

9,176,108

 

9,879,050

 

Diluted weighted-average shares outstanding

 

9,346,872

 

10,070,604

 

9,363,631

 

10,093,690

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,719

 

$

3,661

 

$

7,181

 

$

7,302

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on securities

 

1

 

10

 

4

 

18

 

Noncredit related gains on securities not expected to be sold

 

 

47

 

72

 

69

 

Other comprehensive income

 

1

 

57

 

76

 

87

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

3,720

 

$

3,718

 

$

7,257

 

$

7,389

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Unearned
ESOP
Shares

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss)/Income

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012

 

$

108

 

$

93,616

 

$

(7,829

)

$

137,410

 

$

(4,333

)

$

218,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,302

 

 

7,302

 

Other comprehensive income

 

 

 

 

 

87

 

87

 

Cash dividends declared ($0.25 per share)

 

 

 

 

(2,577

)

 

(2,577

)

Share-based compensation

 

 

1,327

 

 

 

 

1,327

 

Allocation of 24,466 ESOP shares

 

 

326

 

244

 

 

 

570

 

Repurchase of 332,018 shares of company common stock

 

(3

)

(7,651

)

 

 

 

(7,654

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2013

 

$

105

 

$

87,618

 

$

(7,585

)

$

142,135

 

$

(4,246

)

$

218,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

$

101

 

$

77,340

 

$

(7,340

)

$

145,826

 

$

(3,787

)

$

212,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,181

 

 

7,181

 

Other comprehensive income

 

 

 

 

 

76

 

76

 

Cash dividends declared ($0.29 per share)

 

 

 

 

(2,752

)

 

(2,752

)

Share-based compensation

 

 

1,327

 

 

 

 

1,327

 

Allocation of 24,466 ESOP shares

 

 

282

 

245

 

 

 

527

 

Repurchase of 170,994 shares of company common stock

 

(2

)

(3,885

)

 

 

 

(3,887

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

$

99

 

$

75,064

 

$

(7,095

)

$

150,255

 

$

(3,711

)

$

214,612

 

 

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

7,181

 

$

7,302

 

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

 

 

 

 

 

Provision for loan losses

 

165

 

2

 

Depreciation and amortization

 

677

 

567

 

Deferred income tax benefit

 

(1,457

)

(1,339

)

Amortization of fees, discounts, and premiums

 

(208

)

401

 

Origination of loans held for sale

 

(16,086

)

(47,607

)

Proceeds from sales of loans held for sale

 

16,957

 

47,861

 

Gain on sale of loans, net

 

(165

)

(1,025

)

Purchases of investment securities held for trading

 

(5,041

)

 

Proceeds from sale of investment securities held for trading

 

5,071

 

 

Gain on sale of investment securities held for trading

 

(30

)

 

Gain on sale of investment securities held to maturity

 

(625

)

(1,912

)

ESOP expense

 

527

 

570

 

Share-based compensation expense

 

1,327

 

1,327

 

Increase in accrued interest receivable

 

(137

)

(3

)

Net increase in bank-owned life insurance

 

(531

)

(479

)

Net (increase) decrease in prepaid expenses and other assets

 

(303

)

1,512

 

Net increase (decrease) in accounts payable and accrued expenses

 

(960

)

483

 

Net increase (decrease) in advance payments by borrowers for taxes and insurance

 

10

 

(64

)

Net increase in income taxes payable

 

679

 

705

 

Net cash provided by operating activities

 

7,051

 

8,301

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(34,831

)

(167,189

)

Principal repayments on investment securities held to maturity

 

28,479

 

110,983

 

Proceeds from sale of investment securities held to maturity

 

7,199

 

29,188

 

Loan originations, net of principal repayments on loans receivable

 

(46,313

)

(46,218

)

Proceeds from redemption of Federal Home Loan Bank stock

 

222

 

220

 

Purchases of bank-owned life insurance

 

 

(8,000

)

Purchases of premises and equipment

 

(560

)

(310

)

Net cash used in investing activities

 

(45,804

)

(81,326

)

 

(Continued)

 

5



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

$

29,238

 

$

(2,391

)

Proceeds from advances from the Federal Home Loan Bank

 

 

5,000

 

Repayments of advances from the Federal Home Loan Bank

 

 

(10,000

)

Repayments of securities sold under agreements to repurchase

 

 

(5,000

)

Purchases of Company stock

 

(4,412

)

(7,654

)

Cash dividends paid

 

(2,752

)

(2,577

)

Net cash provided by (used in) financing activities

 

22,074

 

(22,622

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(16,679

)

(95,647

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

75,365

 

182,818

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

58,686

 

$

87,171

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

2,953

 

$

3,305

 

Income taxes

 

4,984

 

5,045

 

 

 

 

 

 

 

 

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. (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 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, 2013.  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 (MHC) approved a plan of conversion and reorganization under which MHC 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.  Approximately $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. The balance of the liquidation account at December 31, 2013 was $17.6 million.

 

On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank.

 

7



Table of Contents

 

(3)                     Recently Adopted Accounting Pronouncements

 

In January 2014, the Financial Accounting Standards Board (FASB) amended the Receivables topic of the FASB Accounting Standards Codification (ASC).  The amendment clarifies when an in substance repossession or foreclosure occurs and when a mortgage loan should be derecognized and the related real property recognized.  The amendment also requires disclosures about the amount of foreclosed residential real property held and the recorded investment in mortgage loans collateralized by residential real property in the process of foreclosure.  The amendment is effective for interim and annual periods beginning after December 15, 2014, with early adoption allowed.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

In May 2014, the FASB amended the Revenue Recognition topic of the FASB 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.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

In June 2014, the FASB amended the Transfers and Servicing topic of the FASB ASC.  The amendment modifies the accounting for certain types of repurchase transactions as well as adds new disclosure requirements for repurchase transactions.  The amendment is effective for interim and annual periods beginning after December 15, 2014, with early adoption prohibited.  The Company does not expect the adoption of this amendment 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:

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,741

 

$

9,962

 

Interest-earning deposits in other banks

 

49,945

 

65,403

 

Cash and cash equivalents

 

$

58,686

 

$

75,365

 

 

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

 

8



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

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

612,590

 

$

16,130

 

$

(9,534

)

$

619,186

 

Trust preferred securities

 

657

 

 

 

657

 

Total

 

$

613,247

 

$

16,130

 

$

(9,534

)

$

619,843

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

612,899

 

$

7,979

 

$

(23,408

)

$

597,470

 

Trust preferred securities

 

537

 

 

 

537

 

Total

 

$

613,436

 

$

7,979

 

$

(23,408

)

$

598,007

 

 

The carrying and estimated fair value of investment securities at June 30, 2014 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

 

$

167

 

$

167

 

Due after 5 years through 10 years

 

74

 

79

 

Due after 10 years

 

613,006

 

619,597

 

Total

 

$

613,247

 

$

619,843

 

 

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 June 30,

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Proceeds from sales

 

$

3,475

 

$

15,558

 

$

12,270

 

$

29,188

 

Gross gains

 

309

 

1,024

 

655

 

1,912

 

Gross losses

 

 

 

 

 

 

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Table of Contents

 

During the three months ended June 30, 2014 and 2013, the Company received proceeds of $3.5 million and $15.6 million, respectively, from the sale of $3.2 million and $14.5 million, respectively, of held-to-maturity debt securities, resulting in gross realized gains of $309,000 and $1.0 million, respectively.  During the six months ended June 30, 2014 and 2013, the Company received proceeds of $7.2 million and $29.2 million, respectively, from the sale of $6.6 million and $27.3 million, respectively, of held-to-maturity debt securities, resulting in gross realized gains of $625,000 and $1.9 million, respectively.  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 $268.5 million and $273.2 million at June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013.  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

3,644

 

$

14

 

$

236,464

 

$

9,520

 

49

 

$

240,108

 

$

9,534

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

361,445

 

$

21,678

 

$

22,010

 

$

1,730

 

69

 

$

383,455

 

$

23,408

 

 

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 June 30, 2014 and December 31, 2013.

 

Trust Preferred Securities.  At June 30, 2014, 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 30 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.

 

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending June 30, 2014.

 

10



Table of Contents

 

PreTSL XXIV has a book value of $0 at June 30, 2014.  PreTSL XXIII has a book value of $657,000 at June 30, 2014.  The difference between the book value of $657,000 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)

 

2014

 

2013

 

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 June 30,

 

$

5,885

 

$

5,885

 

 

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

 

 

 

June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

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

 

$

304

 

$

376

 

 

(6)                     Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Real estate loans:

 

 

 

 

 

First mortgages:

 

 

 

 

 

One- to four-family residential

 

$

864,827

 

$

823,273

 

Multi-family residential

 

5,086

 

4,877

 

Construction, commercial, and other

 

18,830

 

13,554

 

Home equity loans and lines of credit

 

15,356

 

16,524

 

Total real estate loans

 

904,099

 

858,228

 

Other loans:

 

 

 

 

 

Loans on deposit accounts

 

476

 

342

 

Consumer and other loans

 

4,427

 

4,307

 

Total other loans

 

4,903

 

4,649

 

Less:

 

 

 

 

 

Net unearned fees and discounts

 

(4,501

)

(4,849

)

Allowance for loan losses

 

(1,510

)

(1,486

)

Total unearned fees, discounts and allowance for loan losses

 

(6,011

)

(6,335

)

Loans receivable, net

 

$

902,991

 

$

856,542

 

 

11



Table of Contents

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Balance, beginning of period

 

$

1,485

 

$

1,667

 

$

1,486

 

$

1,672

 

Provision (reversal of allowance) for loan losses

 

156

 

(16

)

165

 

2

 

 

 

1,641

 

1,651

 

1,651

 

1,674

 

Charge-offs

 

(136

)

(85

)

(153

)

(137

)

Recoveries

 

5

 

56

 

12

 

85

 

Net charge-offs

 

(131

)

(29

)

(141

)

(52

)

Balance, end of period

 

$

1,510

 

$

1,622

 

$

1,510

 

$

1,622

 

 

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 June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

434

 

$

823

 

$

7

 

$

153

 

$

68

 

$

1,485

 

Provision for loan losses

 

28

 

109

 

9

 

10

 

 

156

 

 

 

462

 

932

 

16

 

163

 

68

 

1,641

 

Charge-offs

 

(118

)

 

(10

)

(8

)

 

(136

)

Recoveries

 

 

 

1

 

4

 

 

5

 

Net charge-offs

 

(118

)

 

(9

)

(4

)

 

(131

)

Balance, end of period

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

Provision (reversal of allowance) for loan losses

 

86

 

133

 

5

 

(55

)

(4

)

165

 

 

 

462

 

932

 

15

 

174

 

68

 

1,651

 

Charge-offs

 

(118

)

 

(10

)

(25

)

 

(153

)

Recoveries

 

 

 

2

 

10

 

 

12

 

Net charge-offs

 

(118

)

 

(8

)

(15

)

 

(141

)

Balance, end of period

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

12



Table of Contents

 

(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 June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

585

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,667

 

Provision (reversal of allowance) for loan losses

 

(42

)

(5

)

(3

)

20

 

14

 

(16

)

 

 

543

 

813

 

32

 

127

 

136

 

1,651

 

Charge-offs

 

(80

)

 

 

(5

)

 

(85

)

Recoveries

 

50

 

 

3

 

3

 

 

56

 

Net charge-offs

 

(30

)

 

3

 

(2

)

 

(29

)

Balance, end of period

 

$

513

 

$

813

 

$

35

 

$

125

 

$

136

 

$

1,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

590

 

$

818

 

$

35

 

$

107

 

$

122

 

$

1,672

 

Provision (reversal of allowance) for loan losses

 

(68

)

(5

)

(6

)

67

 

14

 

2

 

 

 

522

 

813

 

29

 

174

 

136

 

1,674

 

Charge-offs

 

(81

)

 

 

(56

)

 

(137

)

Recoveries

 

72

 

 

6

 

7

 

 

85

 

Net charge-offs

 

(9

)

 

6

 

(49

)

 

(52

)

Balance, end of period

 

$

513

 

$

813

 

$

35

 

$

125

 

$

136

 

$

1,622

 

 

Management considers the allowance for loan losses at June 30, 2014 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the bank regulatory agencies periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

 

13



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

 

Totals

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

344

 

932

 

7

 

159

 

68

 

1,510

 

Total ending allowance balance

 

$

344

 

$

932

 

$

7

 

$

159

 

$

68

 

$

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,995

 

$

 

$

142

 

$

 

$

 

$

7,137

 

Collectively evaluated for impairment

 

858,411

 

18,830

 

15,221

 

4,902

 

 

897,364

 

Total ending loan balance

 

$

865,406

 

$

18,830

 

$

15,363

 

$

4,902

 

$

 

$

904,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

376

 

799

 

10

 

229

 

72

 

1,486

 

Total ending allowance balance

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

8,373

 

$

 

$

160

 

$

 

$

 

$

8,533

 

Collectively evaluated for impairment

 

814,960

 

13,514

 

16,372

 

4,649

 

 

849,495

 

Total ending loan balance

 

$

823,333

 

$

13,514

 

$

16,532

 

$

4,649

 

$

 

$

858,028

 

 

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

 

(Dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

Loans with no allocated allowance for loan losses

 

$

7,137

 

$

8,533

 

Loans with allocated allowance for loan losses

 

 

 

Total impaired loans

 

$

7,137

 

$

8,533

 

 

 

 

 

 

 

Amount of allocated loan loss allowance

 

$

 

$

 

 

14



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

 

June 30, 2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,995

 

$

7,527

 

Home equity loans and lines of credit

 

142

 

164

 

 

 

 

 

 

 

Total

 

$

7,137

 

$

7,691

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

8,373

 

$

8,716

 

Home equity loans and lines of credit

 

160

 

165

 

 

 

 

 

 

 

Total

 

$

8,533

 

$

8,881

 

 

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

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(Dollars in thousands)

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

2014:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,106

 

$

29

 

$

7,141

 

$

60

 

Home equity loans and lines of credit

 

149

 

 

151

 

 

Total

 

$

7,255

 

$

29

 

$

7,292

 

$

60

 

 

 

 

 

 

 

 

 

 

 

2013:

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,793

 

$

34

 

$

7,806

 

$

68

 

Home equity loans and lines of credit

 

161

 

 

161

 

 

Total

 

$

7,954

 

$

34

 

$

7,967

 

$

68

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2014 or December 31, 2013.  Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value.

 

15



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

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

881

 

$

852

 

$

795

 

$

2,528

 

$

857,813

 

$

860,341

 

$

4,974

 

$

 

Multi-family residential mortgages

 

 

 

 

 

5,065

 

5,065

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

18,830

 

18,830

 

 

 

Home equity loans and lines of credit

 

 

37

 

 

37

 

15,326

 

15,363

 

142

 

 

Loans on deposit accounts

 

 

 

 

 

476

 

476

 

 

 

Consumer and other

 

5

 

1

 

 

6

 

4,420

 

4,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

886

 

$

890

 

$

795

 

$

2,571

 

$

901,930

 

$

904,501

 

$

5,116

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

376

 

$

612

 

$

1,577

 

$

2,565

 

$

815,917

 

$

818,482

 

$

5,840

 

$

 

Multi-family residential mortgages

 

 

 

 

 

4,851

 

4,851

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

13,514

 

13,514

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

16,532

 

16,532

 

160

 

 

Loans on deposit accounts

 

 

 

 

 

342

 

342