Form 10-Q
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, 2011

or

 

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

For transition period from              to             

Commission File Number 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  ¨

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  ¨

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   ¨    Accelerated filer   x
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  x.

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

11,044,031 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2011.

 

 

 


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

     24   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     38   

ITEM 4.

  

CONTROLS AND PROCEDURES

     40   
PART II   

ITEM 1.

  

LEGAL PROCEEDINGS

     41   

ITEM 1A.

  

RISK FACTORS

     41   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     41   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     41   

ITEM 4.

  

[RESERVED]

     41   

ITEM 5.

  

OTHER INFORMATION

     42   

ITEM 6.

  

EXHIBITS

     42   

SIGNATURES

     43   


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,
2011
    December 31,
2010
 

ASSETS

    

Cash and cash equivalents

   $ 132,448      $ 194,435   

Investment securities available for sale

     0        15,010   

Investment securities held to maturity, at amortized cost (fair value of $694,996 and $546,844 at September 30, 2011 and December 31, 2010, respectively)

     658,574        530,555   

Federal Home Loan Bank stock, at cost

     12,348        12,348   

Loans held for sale

     2,987        3,234   

Loans receivable, net

     662,734        641,790   

Accrued interest receivable

     4,882        4,536   

Premises and equipment, net

     5,564        5,426   

Real estate owned

     162        0   

Bank-owned life insurance

     29,991        29,266   

Deferred income taxes receivable

     1,029        22   

Prepaid expenses and other assets

     5,247        6,790   
  

 

 

   

 

 

 

Total assets

   $ 1,515,966      $ 1,443,412   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities

    

Deposits

   $ 1,139,317      $ 1,076,470   

Advances from the Federal Home Loan Bank

     20,000        10,000   

Securities sold under agreements to repurchase

     120,200        105,200   

Accounts payable and accrued expenses

     19,727        20,430   

Current income taxes payable

     416        577   

Advance payments by borrowers for taxes and insurance

     2,088        3,376   
  

 

 

   

 

 

 

Total liabilities

     1,301,748        1,216,053   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ Equity

    

Preferred stock, $.01 par value; authorized 50,000,000 shares, no shares issued or outstanding

     0        0   

Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 11,124,553 and 12,177,418 shares at September 30, 2011 and December 31, 2010, respectively

     111        122   

Additional paid-in capital

     98,842        119,153   

Unearned ESOP shares

     (8,441     (8,808

Retained earnings

     126,022        119,397   

Accumulated other comprehensive loss

     (2,316     (2,505
  

 

 

   

 

 

 

Total stockholders’ equity

     214,218        227,359   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,515,966      $ 1,443,412   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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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,
 
     2011     2010      2011      2010  

Interest and dividend income:

          

Investment securities

   $ 6,907      $ 6,371       $ 20,167       $ 19,819   

Loans

     8,798        8,907         26,444         26,018   

Other investments

     85        115         258         290   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     15,790        15,393         46,869         46,127   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense:

          

Deposits

     1,700        2,555         5,109         8,484   

Advances from the Federal Home Loan Bank

     105        54         295         99   

Securities sold under agreements to repurchase

     1,067        1,070         3,153         3,211   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     2,872        3,679         8,557         11,794   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     12,918        11,714         38,312         34,333   

Provision (reversal of allowance) for loan losses

     (39     118         83         276   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     12,957        11,596         38,229         34,057   
  

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest income:

          

Total other-than-temporary impairment losses

     0        0         0         (3,510

Portion of loss recognized in other comprehensive income (before taxes)

     0        0         0         1,106   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net other-than-temporary impairment losses

     0        0         0         (2,404

Service fees on loan and deposit accounts

     534        546         1,690         1,834   

Income on bank-owned life insurance

     245        256         725         765   

Gain on sale of investment securities

     74        0         140         350   

Gain on sale of loans

     138        165         374         420   

Other

     177        76         588         224   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total non-interest income

     1,168        1,043         3,517         1,189   
  

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest expense:

          

Salaries and employee benefits

     6,017        4,526         16,630         13,533   

Occupancy

     1,267        1,146         3,714         3,428   

Equipment

     792        734         2,366         2,184   

Federal deposit insurance premiums

     191        308         678         898   

Other general and administrative expenses

     954        952         2,887         2,843   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total non-interest expense

     9,221        7,666         26,275         22,886   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,904        4,973         15,471         12,360   

Income taxes

     1,918        1,839         6,100         4,530   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 2,986      $ 3,134       $ 9,371       $ 7,830   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.28      $ 0.28       $ 0.85       $ 0.69   

Diluted earnings per share

   $ 0.28      $ 0.28       $ 0.84       $ 0.69   

Cash dividends declared per common share

   $ 0.09      $ 0.07       $ 0.25       $ 0.17   

Basic weighted average shares outstanding

     10,659,532        11,334,058         10,969,320         11,321,912   

Diluted weighted average shares outstanding

     10,835,649        11,344,622         11,117,444         11,356,737   

See accompanying notes to consolidated financial statements.

 

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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, 2009

   $ 122        118,823        (9,297     111,082        (1,059     219,671   

Comprehensive income:

            

Net income

     0        0        0        7,830        0        7,830   

Other comprehensive loss, net of tax:

            

Investment securities:

            

Noncredit related losses on securities not expected to be sold, net of taxes of $427

     0        0        0        0        (679     (679
            

 

 

 

Total comprehensive income

     0        0        0        0        0        7,151   

Cash dividends declared

     0        0        0        (1,922     0        (1,922

Stock compensation expense

     0        233        0        0        0        233   

Allocation of 36,699 ESOP shares

     0        318        367        0        0        685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2010

   $ 122        119,374        (8,930     116,990        (1,738     225,818   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2010

   $ 122        119,153        (8,808     119,397        (2,505     227,359   

Comprehensive income:

            

Net income

     0        0        0        9,371        0        9,371   

Other comprehensive loss, net of tax:

            

Investment securities:

            

Change in unrealized loss on securities, net of taxes of $119

     0        0        0        0        189        189   
            

 

 

 

Total comprehensive income

               9,560   

Cash dividends declared

     0        0        0        (2,746     0        (2,746

Stock compensation expense

     1        2,790        0        0        0        2,791   

Allocation of 36,699 ESOP shares

     0        362        367        0        0        729   

Repurchase of 1,202,471 shares of company stock

     (12     (23,463     0        0        0        (23,475
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2011

   $ 111        98,842        (8,441     126,022        (2,316     214,218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 9,371      $ 7,830   

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

    

Provision for loan losses

     83        276   

Depreciation and amortization

     835        681   

Deferred income tax benefit

     (1,126     (1,315

Amortization of fees, discounts, and premiums

     (44     50   

Origination of loans held for sale

     (34,600     (31,686

Proceeds from sales of loans held for sale

     35,221        31,161   

Gain on sale of loans, net

     (374     (420

Net gain on sale of real estate owned

     0        (1

Other-than-temporary impairment loss on investment

     0        2,404   

Purchases of investment securities held for trading

     (36,171     (18,143

Proceeds from sale of investment securities held for trading

     36,311        18,244   

Gain on sale of investment securities held for trading

     (140     (101

Gain on sale of investment securities available for sale

     0        (249

Net (gain) loss on sale of premises and equipment

     (5     59   

ESOP expense

     729        685   

Share-based compensation expense

     2,791        233   

(Increase) decrease in accrued interest receivable

     (346     43   

Net increase in bank-owned life insurance

     (725     (765

Net decrease in prepaid expenses and other assets

     1,543        457   

Net decrease in accounts payable and accrued expenses

     (703     (1,007

Net decrease in income taxes payable

     (161     (174
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,489        8,262   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investment securities held to maturity

     (211,257     (81,730

Purchases of investment securities available for sale

     0        (49,206

Principal repayments on investment securities held to maturity

     97,289        104,872   

Principal repayments on investment securities available for sale

     525        90   

Proceeds from sale of investment securities available for sale

     0        49,365   

Loan originations, net of principal repayments on loans receivable

     (20,403     (38,556

Proceeds from sale of real estate owned

     0        160   

Proceeds from disposals of premises and equipment

     5        0   

Purchases of premises and equipment

     (973     (996
  

 

 

   

 

 

 

Net cash used in investing activities

     (134,814     (16,001
  

 

 

   

 

 

 

 

(Continued)

 

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from financing activities:

    

Net increase in deposits

   $ 62,847      $ 64,226   

Proceeds from advances from the Federal Home Loan Bank

     10,000        10,000   

Proceeds from securities sold under agreements to repurchase

     47,000        1,136   

Repayments of securities sold under agreements to repurchase

     (32,000     (26,136

Purchases of Fed Funds

     10        10   

Sales of Fed Funds

     (10     (10

Net decrease in advance payments by borrowers for taxes and insurance

     (1,288     (716

Repurchases of company stock

     (23,475     0   

Cash dividends paid

     (2,746     (1,922
  

 

 

   

 

 

 

Net cash provided by financing activities

     60,338        46,588   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (61,987     38,849   

Cash and cash equivalents at beginning of the period

     194,435        135,953   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 132,448      $ 174,802   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest on deposits and borrowings

   $ 8,531      $ 11,917   

Income taxes

     7,388        6,019   

Supplemental disclosure of noncash investing activities:

    

Loans transferred to real estate owned

   $ 162      $ 0   

See accompanying notes to consolidated financial statements.

 

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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, 2010. 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 Territorial Mutual Holding 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 January 2010, the Financial Accounting Standards Board (“FASB”) amended the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification (“ASC”). The amendment requires disclosures about the significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, and requires the reconciliation of activity in Level 3 fair value measurements be made on a gross basis. The amendment also clarifies the level of

 

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disaggregation required in disclosures and the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 or Level 3 items. The part of the amendment related to the reconciliation of Level 3 activity is effective for interim and annual periods beginning after December 15, 2010, and was adopted by the Company on January 1, 2011. The remaining parts of the amendment were effective for interim and annual periods beginning after December 15, 2009, and were adopted by the Company on January 1, 2010. The Fair Value of Financial Instruments footnote has been updated to include the revised disclosures.

In April 2011, the FASB amended the Receivables topic of the FASB ASC. The amendment helps creditors determine whether a troubled debt restructuring has occurred by clarifying whether a restructuring constitutes a concession and whether the debtor is experiencing financial difficulties. The amendment also requires disclosures related to troubled debt restructurings that were initially effective for periods ending after December 15, 2010, but deferred to make the effective date concurrent with this amendment. The amendment is effective for the first interim or annual period beginning on or after June 15, 2011, and was adopted by the Company on July 1, 2011. The adoption did not have a material effect on its consolidated financial statements.

In April 2011, the FASB amended the Transfers and Servicing topic of the FASB ASC. The amendment modifies the criteria used to determine whether a repurchase agreement is accounted for as a sale or as a secured borrowing. The amendment is effective for interim or annual periods beginning on or after December 15, 2011. Early adoption is not permitted. The Company does not expect the adoption of this amendment to have any effect on its consolidated financial statements.

In May 2011, the FASB amended the Fair Value Measurement topic of the FASB ASC. The amendment results in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendment both clarifies the intent about existing fair value measurements as well as changes the principle or requirement for measuring fair value or disclosing fair value information. The amendment is effective for interim or annual periods beginning after December 15, 2011. 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 2011, the FASB amended the Comprehensive Income topic of the FASB ASC. The amendment eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. Non-owner changes in stockholders’ equity must be presented either in a continuous statement of comprehensive income or in two separate but consecutive statements. The amendment is effective for interim or annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of this amendment will affect the location of disclosures related to other comprehensive income, but the Company does not expect any other material effect on its consolidated financial statements.

 

(4) Cash and Cash Equivalents

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

 

(Dollars in thousands)    September 30,
2011
     December 31,
2010
 

Cash and due from banks

   $ 9,266       $ 8,827   

Interest-earning deposits in other banks

     123,182         185,608   
  

 

 

    

 

 

 

Cash and cash equivalents

   $ 132,448       $ 194,435   
  

 

 

    

 

 

 

 

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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, 2011:

          

Held to maturity:

          

U.S. government-sponsored mortgage-backed securities

   $ 658,542         36,324         (38   $ 694,828   

Trust preferred securities

     32         136         0        168   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 658,574         36,460         (38   $ 694,996   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010:

          

Held to maturity:

          

U.S. government-sponsored mortgage-backed securities

   $ 530,523         18,191         (1,998   $ 546,716   

Trust preferred securities

     32         96         0        128   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 530,555         18,287         (1,998   $ 546,844   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available for sale:

          

U.S. government-sponsored mortgage-backed securities

   $ 15,540         0         (530   $ 15,010   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,540         0         (530   $ 15,010   
  

 

 

    

 

 

    

 

 

   

 

 

 

$15.0 million of U.S. government-sponsored mortgage-backed securities were reclassified from available-for-sale to held-to-maturity during the three months ended June 30, 2011. Management considers the held-to-maturity classification of these securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity.

The amortized cost and estimated fair value of investment securities at September 30, 2011 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.

 

(Dollars in thousands)    Amortized
cost
     Estimated
fair value
 

Held to maturity:

     

Due after 5 years through 10 years

   $ 8,018       $ 8,278   

Due after 10 years

     650,556         686,718   
  

 

 

    

 

 

 

Total

   $ 658,574       $ 694,996   
  

 

 

    

 

 

 

 

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Table of Contents

Realized gains and losses and the proceeds from sales of securities available for sale 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)    2011      2010      2011      2010  

Proceeds from sales

   $ 16,445       $ 0       $ 36,311       $ 67,609   

Gross gains

     74         0         140         350   

Gross losses

     0         0         0         0   

Investment securities with carrying values of $296.2 million at September 30, 2011 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, 2011 and December 31, 2010. The Company has the ability to hold these securities until such time as the value recovers 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, 2011:

                    

Mortgage-backed securities

   $ 2,599         23         676         15         9         3,275         38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,599         23         676         15         9         3,275         38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                    

Mortgage-backed securities

   $ 98,524         2,480         2,962         48         17         101,486         2,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 98,524         2,480         2,962         48         17         101,486         2,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Trust Preferred Securities. At September 30, 2011, the Company owns two trust preferred securities, PreTSL XXIII and XXIV, with a carrying value of $32,000. The difference between the carrying value of $32,000 and the remaining amortized cost basis of $1.1 million is included as a component of accumulated other comprehensive loss, net of taxes, and is related to non-credit factors such as the trust preferred securities market being inactive. 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. All 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 there were only five transactions in the last 21 months in similar tranches to the securities owned by the Company. The

 

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Table of Contents

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 September 30, 2011 as the present value of cash flows exceed the amortized cost basis of $1.1 million.

At September 30, 2011, PreTSL XXIII and XXIV are rated C by Fitch.

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 amortized cost basis of $1.1 million on its trust preferred securities could be 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)    2011      2010  

Balance at January 1

   $ 5,885       $ 3,481   

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

     0         2,404   
  

 

 

    

 

 

 

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:

 

(Dollars in thousands)    September 30,
2011
     December 31,
2010
 

Non-credit losses on other-than-temporarily impaired securities

   $ 679       $ 679   

 

(6) Loans Receivable

The components of loans receivable are as follows:

 

(Dollars in thousands)    September 30,
2011
    December 31,
2010
 

Real estate loans:

    

First mortgages:

    

One- to four-family residential

   $ 626,719      $ 604,456   

Multi-family residential

     6,214        5,408   

Construction, commercial, and other

     14,993        14,412   

Home equity loans and lines of credit

     17,826        20,064   
  

 

 

   

 

 

 

Total real estate loans

     665,752        644,340   
  

 

 

   

 

 

 

Other loans:

    

Loans on deposit accounts

     737        895   

Consumer and other loans

     4,787        4,740   
  

 

 

   

 

 

 

Total other loans

     5,524        5,635   
  

 

 

   

 

 

 

Less:

    

Net unearned fees and discounts

     (5,767     (5,585

Undisbursed loan funds

     (1,223     (1,112

Allowance for loan losses

     (1,552     (1,488
  

 

 

   

 

 

 
     (8,542     (8,185
  

 

 

   

 

 

 

Loans receivable, net

   $ 662,734      $ 641,790   
  

 

 

   

 

 

 

 

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Table of Contents

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)    2011     2010     2011     2010  

Balance, beginning of period

   $ 1,592      $ 1,737      $ 1,488      $ 1,681   

Provision (reversal of allowance) for loan losses

     (39     118        83        276   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,553        1,855        1,571        1,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs

     (7     (378     (62     (501

Recoveries

     6        94        43        115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1     (284     (19     (386
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 1,552      $ 1,571      $ 1,552      $ 1,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 and
Lines of
Credit
    Consumer
and Other
    Unallocated      Totals  

Three months ended September 30, 2011:

             

Balance, beginning of period

   $ 615      $ 390      $ 277      $ 193      $ 117       $ 1,592   

Provision (reversal of allowance) for loan losses

     (13     (32     (9     15        0         (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     602        358        268        208        117         1,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Charge-offs

     0        0        0        (7     0         (7

Recoveries

     2        0        0        4        0         6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     2        0        0        (3     0         (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 604      $ 358      $ 268      $ 205      $ 117       $ 1,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Nine months ended September 30, 2011:

             

Balance, beginning of period

   $ 583      $ 277      $ 305      $ 208      $ 115       $ 1,488   

Provision (reversal of allowance) for loan losses

     23        81        (37     14        2         83   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     606        358        268        222        117         1,571   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Charge-offs

     (27     0        0        (35     0         (62

Recoveries

     25        0        0        18        0         43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (2     0        0        (17     0         (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 604      $ 358      $ 268      $ 205      $ 117       $ 1,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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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 and
Lines of
Credit
     Consumer
and Other
     Unallocated      Totals  

September 30, 2011:

                 

Allowance for loan losses:

                 

Ending allowance balance:

                 

Individually evaluated for impairment

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Collectively evaluated for impairment

     604         358         268         205         117         1,552   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 604       $ 358       $ 268       $ 205       $ 117       $ 1,552   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Ending loan balance:

                 

Individually evaluated for impairment

   $ 4,980       $ 0       $ 0       $ 53       $ 0       $ 5,033   

Collectively evaluated for impairment

     622,288         13,656         17,838         5,471         0         659,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 627,268       $ 13,656       $ 17,838       $ 5,524       $ 0       $ 664,286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                 

Allowance for loan losses:

                 

Ending allowance balance:

                 

Individually evaluated for impairment

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Collectively evaluated for impairment

     583         277         305         208         115         1,488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 583       $ 277       $ 305       $ 208       $ 115       $ 1,488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Ending loan balance:

                 

Individually evaluated for impairment

   $ 3,401       $ 2       $ 0       $ 5       $ 0       $ 3,408   

Collectively evaluated for impairment

     600,981         13,185         20,079         5,625         0         639,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 604,382       $ 13,187       $ 20,079       $ 5,630       $ 0       $ 643,278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(Dollars in thousands)    September 30,
2011
     December 31,
2010
 

Loans with no allocated allowance for loan losses

   $ 5,033       $ 3,408   

Loans with allocated allowance for loan losses

     0         0   
  

 

 

    

 

 

 

Total impaired loans

   $ 5,033       $ 3,408   
  

 

 

    

 

 

 

Amount of allocated loan loss allowance

   $ 0       $ 0   

 

12


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, 2011:

     

With no related allowance recorded:

     

One- to four-family residential mortgages

   $ 4,980       $ 5,113   

Consumer and other

     53         53   
  

 

 

    

 

 

 

Total

   $ 5,033       $ 5,166   
  

 

 

    

 

 

 

December 31, 2010:

     

With no related allowance recorded:

     

One- to four-family residential mortgages

   $ 3,401       $ 3,413   

Construction, commercial and other mortgages

     2         2   

Consumer and other

     5         5   
  

 

 

    

 

 

 

Total

   $ 3,408       $ 3,420   
  

 

 

    

 

 

 

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
 

2011:

           

With no related allowance recorded:

           

One- to four-family residential mortgages

   $ 4,292       $ 40       $ 4,982       $ 108   

Consumer and other

     29         0         54         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,321       $ 40       $ 5,036       $ 108   
  

 

 

    

 

 

    

 

 

    

 

 

 

2010:

           

With no related allowance recorded:

           

One- to four-family residential mortgages

   $ 2,911       $ 35       $ 3,018       $ 98   

Construction, commercial and other mortgages

     97         0         26         0   

Consumer and other

     5         0         150         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,013       $ 35       $ 3,194       $ 98   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

There were no loans individually evaluated for impairment with a related allowance for loan loss as of September 30, 2011 or December 31, 2010.

Impaired loans at September 30, 2011 and December 31, 2010 amounted to $5.0 million and $3.4 million, respectively, and included all nonaccrual and restructured loans. During the nine months ended September 30, 2011, the average recorded investment in impaired loans was $5.0 million and interest income recognized on impaired loans was $108,000. During the nine months ended September 30, 2010, the average recorded investment in impaired loans was $3.2 million and interest income recognized on impaired loans was $98,000.

The table below presents the aging of loans and accrual status by class of loans as of September 30, 2011 and December 31, 2010:

 

(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, 2011:

                       

One- to four family residential mortgages

   $ 629       $ 403       $ 2,384       $ 3,416       $ 617,680       $ 621,096       $ 2,384       $ 0   

Multi-family residential mortgages

     0         0         0         0         6,172         6,172         0         0   

Construction, commercial and other mortgages

     238         0         0         238         13,418         13,656         0         0   

Home equity and lines of credit

     0         0         0         0         17,838         17,838         0         0   

Loans on deposit accounts

     0         0         0         0         737         737         0         0   

Consumer and other

     19         7         53         79         4,708         4,787         53         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 886       $ 410       $ 2,437       $ 3,733       $ 660,553       $ 664,286       $ 2,437       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                       

One- to four-family residential mortgages

   $ 1,476       $ 0       $ 801       $ 2,277       $ 596,732       $ 599,009       $ 801       $ 0   

Multi-family residential mortgages

     0         0         0         0         5,373         5,373         0         0   

Construction, commercial and other mortgages

     0         0         2         2         13,185         13,187         2         0   

Home equity and lines of credit

     58         0         0         58         20,021         20,079         0         0   

Loans on deposit accounts

     0         0         0         0         895         895         0         0   

Consumer and other

     10         8         5         23         4,712         4,735         5         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,544       $ 8       $ 808       $ 2,360       $ 640,918       $ 643,278       $ 808       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio. When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses which may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral dependent. A mortgage loan becomes collateral dependent when the proceeds for repayment can be expected to

 

14


Table of Contents

come only from the sale or operation of the collateral and not from borrower repayments. Generally, new appraisals are obtained after a loan becomes collateral dependent or is five months delinquent. The carrying value of collateral dependent loans is adjusted to the fair market value of the collateral less selling costs. Any commercial real estate, commercial, or construction loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

The Company had 11 nonaccrual loans with a book value of $2.4 million at September 30, 2011 and seven nonaccrual loans with a book value of $808,000 as of December 31, 2010. The Company collected or recognized interest income on nonaccrual loans of $8,000 and $0 during the nine months ended September 30, 2011 and 2010, respectively. The Company would have recognized additional interest income of $84,000 and $19,000 during the nine months ended September 30, 2011 and 2010, respectively, had the loans been accruing interest. The Company did not have any loans 90 or more days past due and still accruing interest as of September 30, 2011 and December 31, 2010.

The table below presents information about the Company’s new troubled debt restructurings by class of loans:

 

     2011      2010  
(Dollars in thousands)    Number
of Loans
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Number
of Loans
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Nine months ended September 30:

                 

One- to four-family residential

     0       $ 0       $ 0         2       $ 417       $ 396   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0       $ 0         2       $ 417       $ 396   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no new troubled debt restructurings during the three months ended September 30, 2011 or 2010. There were also no new troubled debt restructurings within the past twelve months that subsequently defaulted.

The Company had nine troubled debt restructurings totaling $2.6 million as of September 30, 2011, all of which were one- to four-family residential mortgage loans and considered to be impaired. Eight of the nine loans are performing in accordance with their restructured terms and accruing interest at September 30, 2011. One loan was 29 days delinquent and still accruing interest at September 30, 2011. There were nine restructured one- to four-family residential mortgage loans totaling $2.6 million as of December 31, 2010 that were considered to be impaired. Eight of the nine loans were performing in accordance with their restructured terms and accruing interest as of December 31, 2010. One loan was 29 days delinquent and still accruing interest at December 31, 2010. Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers. We have no commitments to lend any additional funds to these borrowers. The troubled debt restructurings were individually evaluated for impairment and did not have a significant effect on the allowance for loan losses.

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

During the nine months ended September 30, 2011 and 2010, the Company sold $35.3 million and $31.1 million, respectively, of residential mortgage loans held for sale and recognized gains of $374,000 and $420,000, respectively. During the three months ended September 30, 2011 and 2010, the Company sold $9.2 million and $12.4 million, respectively, of mortgage loans held for sale and recognized gains of

 

15


Table of Contents

$138,000 and $165,000, respectively. The Company had 13 residential mortgage loans held for sale totaling $3.0 million at September 30, 2011 and 13 residential mortgage loans held for sale totaling $3.2 million at December 31, 2010. We have not had to repurchase any loans from Freddie Mac for the nine months ended September 30, 2011 and 2010.

The Company serviced loans for others of $120.8 million at September 30, 2011 and $131.6 million at December 31, 2010. Of these amounts, $7.1 million and $8.1 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at September 30, 2011 and December 31, 2010, respectively. The amount of contractually specified servicing fees earned for the nine-month periods ended September 30, 2011 and 2010 was $266,000 and $302,000, respectively. The amount of contractually specified servicing fees earned for the three-month periods ended September 30, 2011 and 2010 was $87,000 and $100,000, respectively. The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

 

(7) Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the dollar amount of securities underlying the agreements remaining in the asset accounts. Securities sold under agreements to repurchase are summarized as follows:

 

     September 30, 2011     December 31, 2010  
(Dollars in thousands)    Repurchase
Liability
     Weighted
Average
Rate
    Repurchase
Liability
     Weighted
Average
Rate
 

Maturing:

          

1 year or less

   $ 40,200         4.72   $ 43,900         3.53

Over 1 year to 2 years

     33,000         3.91        28,300         4.75   

Over 2 years to 3 years

     0         0        33,000         3.91   

Over 3 years to 4 years

     47,000         2.11        0         0   
  

 

 

      

 

 

    
   $ 120,200         3.48   $ 105,200         3.98
  

 

 

      

 

 

    

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at September 30, 2011. The amount at risk is the greater of the carrying value or fair value over the repurchase liability. All the agreements to repurchase are with JP Morgan Chase Bank N.A. and JP Morgan Securities LLC. The securities pledged are issued and guaranteed by U.S. government-sponsored enterprises.

 

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(Dollars in thousands)    Carrying
value of
securities
     Fair
value  of
securities
     Repurchase
liability
     Amount
at risk
     Weighted
average
months to
maturity
 

Maturing:

              

Over 90 days

   $ 137,143       $ 145,209       $ 120,200       $ 25,009         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 137,143       $ 145,209       $ 120,200       $ 25,009         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(8) Employee Benefit Plans

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers substantially all employees with at least one year of service. Effective December 31, 2008, under approved changes to the Pension Plan, there were no further accruals of benefits for any participants and benefits will not increase with any additional years of service. Net periodic benefit cost, subsequent to December 31, 2008, has not been significant and is not disclosed in the table below.

In addition, the Company sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.

The components of net periodic benefit cost were as follows:

 

     SERP      SERP  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands)    2011      2010      2011      2010  

Net periodic benefit cost for the period

        

Service cost

   $ 111       $ 155       $ 332       $ 465   

Interest cost

     53         89         161         266   

Expected return on plan assets

     0         0         0         0   

Amortization of prior service cost

     0         0         0         0   

Recognized actuarial loss

     0         0         0         0   

Recognized curtailment loss

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 164       $ 244       $ 493       $ 731   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(9) Employee Stock Ownership Plan

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares or 8% of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP

 

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and dividends payable on the shares. The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity. The shares committed to be released are considered outstanding for earnings per share computations. Compensation expense recognized for the three months ended September 30, 2011 and 2010 amounted to $236,000 and $212,000, respectively. Compensation expense recognized for the nine months ended September 30, 2011 and 2010 amounted to $704,000 and $677,000, respectively.

Shares held by the ESOP trust were as follows:

 

     September 30,
2011
     December 31,
2010
 

Allocated shares

     134,564         97,865   

Unearned shares

     844,086         880,785   
  

 

 

    

 

 

 

Total ESOP shares

     978,650         978,650   
  

 

 

    

 

 

 

Fair value of unearned shares, in thousands

   $ 16,164       $ 17,536   
  

 

 

    

 

 

 

The ESOP restoration plan is a non-qualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the employee stock ownership plan’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits. For the three months ended September 30, 2011 and 2010, we accrued $1,000 and $3,000, respectively, for the ESOP restoration plan. For the nine months ended September 30, 2011 and 2010, we accrued $159,000 and $158,000, respectively, for the ESOP restoration plan.

 

(10) Share-Based Compensation

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term. These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision. The cost of the awards will be recognized on a straight-line basis over the six-year vesting period during which participants are required to provide services in exchange for the awards.

Shares of our common stock issued under the Plan shall be authorized but unissued shares. The maximum number of shares that will be awarded under the Plan will be 1,712,637 shares. Share-based compensation expense for the three months and nine months ended September 30, 2011 was $1.5 million and $3.0 million, respectively.

 

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Stock Options

The table below presents the stock option activity for the nine months ended September 30, 2011:

 

     Options      Weighted
average
exercise
price
     Remaining
contractual
life (years)
     Aggregate
intrinsic  value

(in thousands)
 

Balance at December 31, 2010

     871,144       $ 17.36         9.67       $ 2,221   

Granted

     0         0         0         0   

Exercised

     0         0         0         0   

Forfeited

     0         0         0         0   

Expired

     0         0         0         0   
  

 

 

          

Balance at September 30, 2011

     871,144       $ 17.36         8.92       $ 1,559   
  

 

 

          

As of September 30, 2011, the Company had $3.5 million of unrecognized compensation costs related to stock options. The cost of stock options will be amortized in equal annual installments over the six-year vesting period. There were 179,587 options vested in the nine months ending September 30, 2011.

The fair value of the Company’s stock options was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula:

 

Expected volatility

     31.98

Risk-free interest rate

     2.58

Expected dividends

     1.61

Expected life (in years)

     6.75   

Grant price for the stock options

   $ 17.36   

Expected volatility - Based on the historical volatility of the Company’s stock and a peer group of comparable thrifts.

Risk-free interest rate - Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.

Expected dividends - Based on the quarterly dividend and the price of the Company’s stock at the time of grant.

Expected life - Based on a weighted-average of the six-year vesting period and the 10-year contractual term of the stock option plan.

Grant price for the stock options - Based on the closing price of the Company’s stock on the date of grant.

 

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Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

The table below presents the restricted stock award activity for the six months ended September 30, 2011:

 

     Restricted
stock awards
     Weighted
average
grant date
fair value
 

Non-vested at December 31, 2010

     713,600       $ 17.36   

Granted

     0         0   

Vested

     149,606         0   

Forfeited

     0         0   
  

 

 

    

Non-vested at September 30, 2011

     563,994       $ 17.36   
  

 

 

    

There were 149,606 shares vested in the nine months ending September 30, 2011.

As of September 30, 2011, the Company had $9.6 million of unrecognized compensation cost related to restricted stock awards. The cost of the restricted stock awards will be amortized in equal annual installments over the six-year vesting period.

 

(11) Earnings Per Share

The table below presents the information used to compute basic and diluted earnings per share:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in thousands, except share data)    2011      2010      2011      2010  

Net income

   $ 2,986       $ 3,134       $ 9,371       $ 7,830   

Weighted average number of shares used in:

           

Basic earnings per share

     10,659,532         11,334,058         10,969,320         11,321,912   

Dilutive common stock equivalents:

           

Stock options and restricted stock units

     176,117         10,564         148,124         34,825   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

     10,835,649         11,344,622         11,117,444         11,356,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share, basic

   $ 0.28       $ 0.28       $ 0.85       $ 0.69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share, diluted

   $ 0.28       $ 0.28       $ 0.84       $ 0.69   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(12) Fair Value of Financial Instruments

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

 

   

Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 

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Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

   

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures. Investment securities held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Cash and Cash Equivalents, Accrued Interest Receivable, Accounts Payable and Accrued Expenses (excluding interest rate contracts), Current Income Taxes Payable, and Advance Payments by Borrowers for Taxes and Insurance. The carrying amount approximates fair value because of the short maturity of these instruments.

Investment Securities. The fair values for investment securities were based on quoted market prices, if available, and were classified as Level 1. The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 1 inputs. If quoted market prices were not available, the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information. Securities priced using this information were classified as Level 2.

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. The trust preferred securities market is considered to be inactive since there have been only five sales transactions of similar rated securities over the past 21 months and no new issues of pooled trust preferred securities have occurred since 2007. The fair value of our trust preferred securities was determined by an independent third-party pricing service which used a discounted cash flow model. Our pricing service used a discount rate of 23.00% and provided a fair value estimate of $4.75 per $100 of par value for PreTSL XXIII.

The discounted cash flow analysis included a review of all issuers within each collateral pool and incorporated higher deferral and default rates in the cash flow projections over the next three years and a forecast of lower deferral and default rates in later years. The fair value of the trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow models.

 

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FHLB Stock. FHLB stock, which is redeemable for cash at par value, is reported at its par value.

Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of loans is not based on the concept of exit price.

Deposits. The fair value of checking and Super NOW savings accounts, passbook accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits with similar remaining maturities.

Advances from the FHLB and Securities Sold Under Agreements to Repurchase. Fair value is estimated by discounting future cash flows using the rates currently offered to the Company for debt with similar remaining maturities.

Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

The estimated fair values of the Company’s financial instruments are as follows:

 

     September 30, 2011      December 31, 2010  
(Dollars in thousands)    Carrying
amount
     Estimated
fair value
     Carrying
amount
     Estimated
fair value
 
Assets            

Cash and cash equivalents

   $ 132,448         132,448         194,435         194,435   

Investment securities available for sale

     0         0         15,010         15,010   

Investment securities held to maturity

     658,574         694,996         530,555         546,844   

FHLB stock

     12,348         12,348         12,348         12,348   

Loans held for sale

     2,987         3,093         3,234         3,234   

Loans receivable, net

     662,734         764,118         641,790         666,339   

Accrued interest receivable

     4,882         4,882         4,536         4,536   

Interest rate contracts

     199         199         456         456   
Liabilities            

Deposits

   $ 1,139,317         1,141,523         1,076,470         1,078,590   

Advances from the Federal Home Loan Bank

     20,000         20,637         10,000         10,274   

Securities sold under agreement to repurchase

     120,200         125,103         105,200         109,953   

Accounts payable and accrued expenses

     19,549         19,549         20,116         20,116   

Interest rate contracts

     178         178         314         314   

Current income taxes payable

     416         416         577         577   

Advance payments by borrowers for taxes and insurance

     2,088         2,088         3,376         3,376   

 

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At September 30, 2011 and December 31, 2010, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:

 

(Dollars in thousands)    Level 1      Level 2     Level 3      Total  

September 30, 2011

          

Interest rate contracts – assets

   $ 0         199        0         199   

Interest rate contracts – liabilities

     0         (178     0         (178

December 31, 2010

          

Interest rate contracts – assets

   $ 0         456        0         456   

Interest rate contracts – liabilities

     0         (314     0         (314

Available-for-sale investments

     0         15,010        0         15,010   

The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for similar contracts. Gains and losses are included in gain on sale of loans in the consolidated statements of income. The fair value of available-for-sale investments was determined using quoted market prices for similar investments. The losses, net of taxes, are included in accumulated other comprehensive loss in the consolidated balance sheets.

The table below presents the balance of assets measured at fair value on a nonrecurring basis and the related gains and losses for the nine months ended September 30, 2011 and the year ended December 31, 2010:

 

(Dollars in thousands)    Level 1      Level 2      Level 3      Total      Total
Gains
(Losses)
 

September 30, 2011

              

Impaired loans

   $ 0         0         2,425         2,425         1   

Mortgage servicing assets

     0         0         1,008         1,008         (32

December 31, 2010

              

Impaired loans

   $ 0         254         2,429         2,683         (183

Trust preferred securities

     0         0         128         128         (2,404

Mortgage servicing assets

     0         0         1,366         1,366         (64

The fair value of impaired loans that are considered to be collateral dependent is determined using the value of collateral less estimated selling costs. The fair value of impaired loans that are not

 

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considered to be collateral dependent is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Gains and losses on impaired loans are included in the provision for loan losses in the consolidated statements of income. The fair value of trust preferred securities was determined by an independent third-party pricing service using a discounted cash flow model. The assumptions used in the discounted cash flow model are discussed above. Losses on trust preferred securities are included in net other-than-temporary impairment losses in the consolidated statements of income. Mortgage servicing assets are valued using a cash flow model prepared by an independent third-party appraiser. Assumptions used in the model include mortgage prepayment speeds, discount rates, cost of servicing and ancillary income. Losses on mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.

 

(13) Subsequent Events

On October 13, 2011, Territorial Bancorp Inc. announced that it completed its second repurchase program. The Company repurchased 581,265 shares of its common stock at an average price of $19.22 per share.

On November 3, 2011, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.09 per share of common stock. The dividend is expected to be paid on December 1, 2011 to stockholders of record as of November 17, 2011.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

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competition among depository and other financial institutions;

 

   

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

   

adverse changes in the securities markets;

 

   

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

   

our ability to enter new markets successfully and capitalize on growth opportunities;

 

   

our ability to successfully integrate acquired entities, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

changes in our organization, compensation and benefit plans;

 

   

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

   

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Assets. At September 30, 2011, our assets were $1.516 billion, an increase of $72.6 million, or 5.0%, from $1.443 billion at December 31, 2010. The growth in assets was primarily the result of increases in investment securities and loans receivable, which were partially offset by a decrease in cash and cash equivalents.

Cash and Cash Equivalents. Cash and cash equivalents were $132.4 million at September 30, 2011, a decrease of $62.0 million since December 31, 2010. Cash and cash equivalents, along with the

 

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proceeds from a $62.8 million increase in deposits and a $25.0 million increase in borrowings, were primarily used to fund an increase of $113.0 million in investment securities and $20.7 million in total loans, repurchase Company shares costing $23.5 million, and pay dividends of $2.7 million to common shareholders.

Loans. Total loans, including $3.0 million of loans held for sale, were $665.7 million at September 30, 2011, or 43.9% of total assets. During the nine months ended September 30, 2011, the loan portfolio increased by $20.7 million, or 3.2%. The increase in the loan portfolio occurred as one- to four-family residential loan production exceeded principal repayments and loan sales.

Securities. At September 30, 2011, our securities portfolio totaled $658.6 million, or 43.4% of assets. At September 30, 2011, all of such securities were classified as held-to-maturity and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as non-conforming loans having less than full documentation) loans. During the nine months ended September 30, 2011, our securities portfolio increased by $113.0 million, or 20.7%, primarily due to purchases exceeding repayments.

$15.0 million of U.S. government-sponsored mortgage-backed securities were reclassified from available-for-sale to held-to-maturity during the nine months ended September 30, 2011. Management considers the held-to-maturity classification of these securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity.

At September 30, 2011, we owned trust preferred securities with a carrying value of $32,000. This portfolio consists of two securities (PreTSL XXIII and PreTSL XXIV), which represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions. The difference between the carrying value of $32,000 and the remaining amortized cost basis of $1.1 million is included as a component of accumulated other comprehensive loss, net of taxes, and is related to non-credit factors such as the trust preferred securities market being inactive.

The trust preferred securities market is considered inactive as only five sales transactions of similarly rated securities have occurred over the past 21 months. In addition, there have been no new issues of pooled trust preferred securities since 2007. Because the trust preferred securities market is inactive, we use a discounted cash flow model to determine whether they are other-than-temporarily impaired. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), 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 September 30, 2011 as the present value of cash flows exceeded the amortized cost basis of $1.1 million.

At September 30, 2011, PreTSL XXIII and XXIV are rated C by Fitch.

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 amortized cost basis of $1.1 million on its trust preferred securities could become other-than-temporarily impaired in the near term. Any such impairment could be material to the Company’s consolidated statements of income.

Deposits. Deposits were $1.139 billion at September 30, 2011, an increase of $62.8 million, or 5.8%, since December 31, 2010. The increase in deposits was caused by opening two new branches and our continuing to promote higher-than-market rates for savings accounts.

 

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Borrowings. During the nine months ended September 30, 2011, our borrowings increased by $25.0 million, or 21.7%, to $140.2 million, due to a $15.0 million net increase in securities sold under agreements to repurchase and a $10.0 million increase in Federal Home Loan Bank advances. The increase in long-term borrowings was part of the Bank’s strategy to control interest rate risk.

Stockholders’ Equity. Stockholders’ equity was $214.2 million at September 30, 2011, a decrease of $13.1 million, or 5.8%, since December 31, 2010. The decrease in stockholders’ equity occurred primarily because of the repurchase of shares costing $23.5 million and the payment of $2.7 million of dividends to shareholders. This decrease in stockholders’ equity was offset by current year’s earnings of $9.4 million and a $2.8 million increase in paid-in-capital related to stock benefit plans.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts, and premiums that are amortized or accreted to interest income.

 

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Table of Contents
     For the Three Months Ended September 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield/
Rate (1)
    Average
Outstanding
Balance
    Interest      Yield/
Rate (1)
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans:

              

Real estate loans:

              

First mortgage:

              

One- to four-family residential (5)

   $ 618,576      $ 8,127         5.26   $ 585,520      $ 8,154         5.57

Multi-family residential

     6,082        97         6.38        5,012        84         6.70   

Construction, commercial and other

     14,512        217         5.98        16,972        260         6.13   

Home equity loans and lines of credit

     18,052        272         6.03        20,491        317         6.19   

Other loans

     5,244        85         6.48        6,112        92         6.02   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     662,466        8,798         5.31        634,107        8,907         5.62   

Investment securities:

              

U.S. government sponsored mortgage-backed securities (5)

     648,645        6,907         4.26        569,364        6,371         4.48   

Trust preferred securities

     32        —           —          31        —           —     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     648,677        6,907         4.26        569,395        6,371         4.48   

Other

     154,679        85         0.22        201,910        115         0.23   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,465,822        15,790         4.31        1,405,412        15,393         4.38   

Non-interest-earning assets

     51,035             50,468        
  

 

 

        

 

 

      

Total assets

   $ 1,516,857           $ 1,455,880        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings accounts

   $ 776,218      $ 1,178         0.61   $ 745,040      $ 1,887         1.01

Certificates of deposit

     222,619        510         0.92        222,001        653         1.18   

Money market accounts

     510        1         0.78        504        —           —     

Checking and Super NOW accounts

     106,229        11         0.04        101,128        15         0.06   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     1,105,576        1,700         0.62        1,068,673        2,555         0.96   

Federal Home Loan Bank advances

     20,001        105         2.10        9,999        54         2.16   

Other borrowings

     119,927        1,067         3.56        105,199        1,070         4.07   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,245,504        2,872         0.92        1,183,871        3,679         1.24   

Non-interest-bearing liabilities

     48,860             46,722        
  

 

 

        

 

 

      

Total liabilities

     1,294,364             1,230,593        

Stockholders’ equity

     222,494             225,287        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,516,858           $ 1,455,880        
  

 

 

        

 

 

      

Net interest income

     $ 12,918           $ 11,714      
    

 

 

        

 

 

    

Net interest rate spread (2)

          3.39          3.14

Net interest-earning assets (3)

   $ 220,318           $ 221,541        
  

 

 

        

 

 

      

Net interest margin (4)

          3.53          3.33

Interest-earning assets to interest-bearing liabilities

     117.69          118.71     

 

(1) Annualized
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(5) Average balance includes loans or investments available for sale.

 

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Table of Contents
     For the Nine Months Ended September 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield/
Rate (1)
    Average
Outstanding
Balance
    Interest      Yield/
Rate (1)
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans:

              

Real estate loans:

              

First mortgage:

              

One- to four-family residential (5)

   $ 614,515      $ 24,400         5.29   $ 567,996      $ 23,676         5.56

Multi-family residential

     6,090        293         6.41        4,497        230         6.82   

Construction, commercial and other

     14,246        644         6.03        17,145        821         6.38   

Home equity loans and lines of credit

     18,636        850         6.08        21,062        991         6.27   

Other loans

     5,374        257         6.38        6,395        300         6.25   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     658,861        26,444         5.35        617,095        26,018         5.62   

Investment securities:

              

U.S. government sponsored mortgage-backed securities (5)

     627,718        20,167         4.28        583,492        19,819         4.53   

Trust preferred securities

     32        —           —          1,176        —           —     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     627,750        20,167         4.28        584,668        19,819         4.52   

Other

     157,126        258         0.22        174,976        290         0.22   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,443,737        46,869         4.33        1,376,739        46,127         4.47   

Non-interest-earning assets

     50,322             50,093        
  

 

 

        

 

 

      

Total assets

   $ 1,494,059           $ 1,426,832        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings accounts

   $ 763,819      $ 3,540         0.62   $ 706,694      $ 6,397         1.21

Certificates of deposit

     214,755        1,528         0.95        234,419        2,043         1.16   

Money market accounts

     587        2         0.45        25,262        12         0.06   

Checking and Super NOW accounts

     106,711        39         0.05        76,254        32         0.06   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     1,085,872        5,109         0.63        1,042,629        8,484         1.08   

Federal Home Loan Bank advances

     18,901        295         2.08        6,300        99         2.10   

Other borrowings

     115,075        3,153         3.65        106,834        3,211         4.01   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,219,848        8,557         0.94        1,155,763        11,794         1.36   

Non-interest-bearing liabilities

     47,837             47,875        
  

 

 

        

 

 

      

Total liabilities

     1,267,685             1,203,638        

Stockholders’ equity

     226,374             223,194        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,494,059           $ 1,426,832        
  

 

 

        

 

 

      

Net interest income

     $ 38,312           $ 34,333      
    

 

 

        

 

 

    

Net interest rate spread (2)

          3.39          3.11

Net interest-earning assets (3)

   $ 223,889           $ 220,976        
  

 

 

        

 

 

      

Net interest margin (4)

          3.54          3.33

Interest-earning assets to interest-bearing liabilities

     118.35          119.12     

 

(1) Annualized
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(5) Average balance includes loans or investments available for sale.

 

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Table of Contents

Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010

General. Net income decreased by $148,000, or 4.7%, to $3.0 million for the three months ended September 30, 2011 from $3.1 million for the three months ended September 30, 2010. The decrease in net income was caused by a $1.6 million increase in non-interest expense, which included $696,000 of stock benefit plan expenses which we recognized due to the death of a director. This was partially offset by an $807,000 decrease in interest expense, a $397,000 increase in interest and dividend income, a $157,000 decrease in provision for loan losses, and a $125,000 increase in non-interest income.

Net Interest Income. Net interest income increased by $1.2 million, or 10.3%, to $12.9 million for the three months ended September 30, 2011 compared to $11.7 million for the three months ended September 30, 2010. Interest expense decreased by $807,000, or 21.9%, due to a 32 basis point decrease in the average cost of interest-bearing liabilities, which was partially offset by a $61.6 million increase in the average balance of interest-bearing liabilities. Interest and dividend income increased by $397,000, or 2.6%, due primarily to a $60.4 million increase in the average balance of interest-earning assets, which was partially offset by a seven basis point decrease in the average yield on interest-earning assets. The interest rate spread and net interest margin were 3.39% and 3.53%, respectively, for the three months ended September 30, 2011, compared to 3.14% and 3.33%, respectively, for the three months ended September 30, 2010.

Interest and Dividend Income. Interest and dividend income increased by $397,000, or 2.6%, to $15.8 million for the three months ended September 30, 2011 from $15.4 million for the three months ended September 30, 2010. Interest income on investment securities increased by $536,000, or 8.4%, to $6.9 million for the three months ended September 30, 2011 from $6.4 million for the three months ended September 30, 2010. The increase in interest income on securities occurred primarily because of a $79.3 million increase in the average balance of investment securities, which was partially offset by a 22 basis point decrease in the average yield on securities. The decrease in yield occurred as higher-yielding mortgage-backed securities were repaid and the Company purchased new mortgage-backed securities that had lower yields. The decrease in yields on the mortgage-backed securities purchased occurred because of a reduction in long-term mortgage rates. Interest income on loans decreased by $109,000, or 1.2%, to $8.8 million for the three months ended September 30, 2011 from $8.9 million for the three months ended September 30, 2010. The decrease in interest income on loans occurred because of a 31 basis point decline in the average loan yield to 5.31% for the three months ended September 30, 2011. The decline in the average yield on loans occurred because of repayments on higher-yielding loans while new loans with lower yields were added to the loan portfolio. The decrease in interest income that occurred because of a decline in yield was partially offset by a $28.4 million, or 4.5%, increase in the average balance of loans as new loan originations exceeded loan repayments and loan sales.

Interest Expense. Interest expense decreased by $807,000, or 21.9%, to $2.9 million for the three months ended September 30, 2011 compared to $3.7 million for the three months ended September 30, 2010. Interest expense on deposits decreased $855,000, or 33.5%, to $1.7 million for the three months ended September 30, 2011 from $2.6 million for the three months ended September 30, 2010. During the three months ended September 30, 2011, interest expense on savings accounts and certificates of deposit declined by $709,000 and $143,000, respectively. During the three months ended September 30, 2011, the average interest rate on savings accounts and certificates of deposit decreased by 40 and 26 basis points, respectively. We lowered the rates we pay on savings accounts and certificates of deposit due to declining market interest rates.

 

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Table of Contents

Provision for Loan Losses. We recorded a reversal of provisions for loan losses of $39,000 for the three months ended September 30, 2011 as compared to a provision for loan losses of $118,000 for the three months ended September 30, 2010. The reversal of provisions made during the three months ended September 30, 2011 is primarily due to a $1.2 million decrease in the construction, commercial and other loan portfolio. Non-performing loans totaled $2.4 million at September 30, 2011, or 0.36% of total loans at that date, compared to $509,000 of non-performing loans at September 30, 2010, or 0.08% of total loans at that date. Non-performing loans as of September 30, 2011 and 2010 consisted primarily of one- to four-family residential real estate loans. The provisions made during the three months ended September 30, 2010 included specific reserves of $274,000 related to $368,000 of loans consisting of two one- to four-family residential real estate loans and one commercial loan. This was partially offset by the reversal of an $84,000 write down on a restructured loan that was paid off and a reduction in the general loan loss provision of $80,000 in the three months ended September 30, 2010. We experienced charge offs of $7,000 and $378,000 and recoveries of $6,000 and $94,000 for the three months ended September 30, 2011 and 2010, respectively. The allowance for loan losses to total loans was 0.23% and 0.25% at September 30, 2011 and 2010, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at September 30, 2011 and 2010.

Non-Interest Income. The following table summarizes changes in non-interest income between the three months ended September 30, 2011 and 2010.

 

     Three Months  Ended
September 30,
     Change  
     2011      2010      $ Change     % Change  
     (In thousands)  

Service fees on loan and deposit accounts

   $ 534       $ 546       $ (12     (2.2)%   

Income on bank-owned life insurance

     245         256         (11     (4.3)%   

Gain on sale of investment securities

     74         —           74        N/A   

Gain on sale of loans

     138         165         (27     (16.4)%   

Other

     177         76         101        132.9%   
  

 

 

    

 

 

    

 

 

   

Total

   $ 1,168       $ 1,043       $ 125        12.0%   
  

 

 

    

 

 

    

 

 

   

Non-interest income increased by $125,000 for the three months ended September 30, 2011. During the three months ended September 30, 2011, the Company realized gains of $74,000 from sales of securities. During the three months ended September 30, 2010, we did not sell any investment securities. Other non-interest income was $177,000 for the quarter ended September 30, 2011 compared to $76,000 for the quarter ended September 30, 2010. The increase in other non-interest income is primarily due to a $97,000 increase in commissions from the sale of non-deposit products.

 

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Table of Contents

Non-Interest Expense. The following table summarizes changes in non-interest expense between the three months ended September 30, 2011 and 2010.

 

     Three Months  Ended
September 30,
     Change  
     2011      2010      $ Change     % Change  
     (In thousands)  

Salaries and employee benefits

   $ 6,017       $ 4,526       $ 1,491        32.9%   

Occupancy

     1,267         1,146         121        10.6%   

Equipment

     792         734         58        7.9%   

Federal deposit insurance premiums

     191         308         (117     (38.0)%   

Other general and administrative expenses

     954         952         2        0.2%   
  

 

 

    

 

 

    

 

 

   

Total

   $ 9,221       $ 7,666       $ 1,555        20.3%   
  

 

 

    

 

 

    

 

 

   

Non-interest expense rose by $1.6 million during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Salaries and employee benefits increased for the three months ended September 30, 2011 primarily because of a $1.2 million increase in expenses accrued for the equity incentive plan that was approved by the shareholders in August 2010. Included in the $1.2 million increase in expenses is $696,000 of stock benefit plan expenses which the Company recognized when a director passed away. In addition, the Company incurred a bank-wide budgeted salary increase of approximately 2.0%, which was effective July 1, 2011.

Income Tax Expense. Income taxes were $1.9 million for the three months ended September 30, 2011, reflecting an effective tax rate of 39.1% compared to $1.8 million for the three months ended September 30, 2010, reflecting an effective tax rate of 37.0%. The increase in the effective tax rate for the three months ended September 30, 2011 is primarily due to consistent amounts of non-taxable income received from bank-owned life insurance relative to an increase in pre-tax income and adjustments made during the three months ended September 30, 2011 to reflect an increase in the estimate of taxes we will pay for the year ending December 31, 2011.

Comparison of Operating Results for the Nine Months Ended September 30, 2011 and 2010

General. Net income increased by $1.5 million, or 19.7%, to $9.4 million for the nine months ended September 30, 2011 from $7.8 million for the nine months ended September 30, 2010. The increase in net income was primarily caused by a $3.2 million decrease in interest expense, a $2.3 million increase in non-interest income, a $742,000 increase in interest and dividend income, and a $193,000 decrease in provision for loan losses. This was partially offset by a $3.4 million increase in non-interest expense and a $1.6 million increase in income taxes.

Net Interest Income. Net interest income increased by $4.0 million, or 11.6%, to $38.3 million for the nine months ended September 30, 2011 compared to $34.3 million for the nine months ended September 30, 2010. Interest expense decreased by $3.2 million, or 27.4%, due to a 42 basis point decrease in the average cost of interest-bearing liabilities, which was partially offset by a $64.1 million increase in the average balance of interest-bearing liabilities. Interest and dividend income increased by $742,000, or 1.6%, due primarily to a $67.0 million increase in the average balance of interest-earning assets, which was offset by 14 basis point decrease in the average yield on interest-earning assets. The interest rate spread and net interest margin were 3.39% and 3.54%, respectively, for the nine months ended September 30, 2011, compared to 3.11% and 3.33%, respectively, for the nine months ended September 30, 2010.

 

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Table of Contents

Interest and Dividend Income. Interest and dividend income increased by $742,000, or 1.6%, to $46.9 million for the nine months ended September 30, 2011 from $46.1 million for the nine months ended September 30, 2010. Interest income on loans increased by $426,000, or 1.6%, to $26.4 million for the nine months ended September 30, 2011 from $26.0 million for the nine months ended September 30, 2010. The increase in interest income on loans occurred because the average balance of loans grew by $41.8 million, or 6.8%, as new loan originations exceeded loan repayments and loan sales. The increase in interest income which occurred because of growth in the loan portfolio was partially offset by a 27 basis point decline in the average loan yield to 5.35% for the nine months ended September 30, 2011. The decline in the average yield on loans occurred because of repayments on higher-yielding loans while new loans with lower yields were added to the loan portfolio. In addition to the increase in interest income on loans, interest income on investment securities increased $348,000, or 1.8%, to $20.2 million for the nine months ended September 30, 2011 from $19.8 million for the nine months ended September 30, 2010. The increase in interest income on securities occurred primarily because of a $43.1 million increase in the average securities balance due to the purchase of government-sponsored mortgage-backed securities. The increase in the average securities balance was partially offset by a 24 basis point decrease in the average yield on securities. The decrease in yield occurred as higher-yielding mortgage-backed securities were repaid and the Company purchased new mortgage-backed securities that had lower yields. The decrease in yields on the mortgage-backed securities purchased occurred because of a drop in long-term mortgage rates.

Interest Expense. Interest expense decreased by $3.2 million, or 27.4%, to $8.6 million for the nine months ended September 30, 2011 compared to $11.8 million for the nine months ended September 30, 2010. Interest expense on deposits decreased $3.4 million, or 39.8%, to $5.1 million for the nine months ended September 30, 2011 from $8.5 million for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, interest expense on savings accounts and certificates of deposit declined by $2.9 million and $515,000, respectively. During the nine months ended September 30, 2011, the average interest rate on savings accounts and certificates of deposit decreased by 59 and 21 basis points, respectively. We lowered the rates we pay on savings accounts and certificates of deposit due to declining market interest rates and increased liquidity from principal repayments on loans and mortgage-backed securities.

Provision for Loan Losses. We recorded provisions for loan losses of $83,000 and $276,000 for the nine months ended September 30, 2011 and 2010, respectively. The provisions made during the nine months ended September 30, 2011 included $64,000 of general loan loss provisions due to the increase in non-performing loans. The provision made during the nine months ended September 30, 2010 included specific reserves of $415,000 related to $936,000 of loans consisting of four one- to four-family residential real estate loans and two commercial loans. This was partially offset by the reversal of an $84,000 write down on a restructured loan that was paid off and a reduction in general reserves of $50,000. Non-performing loans totaled $2.4 million at September 30, 2011, or 0.36% of total loans at that date, compared to $509,000 of non-performing loans at September 30, 2010, or 0.08% of total loans at that date. Non-performing loans as of September 30, 2011 and 2010 consisted primarily of one- to four-family residential real estate loans. We experienced charge offs of $62,000 and $501,000 and recoveries of $43,000 and $115,000 for the nine months ended September 30, 2011 and 2010, respectively. The allowance for loan losses to total loans was 0.23% and 0.25% at September 30, 2011 and 2010, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at September 30, 2011 and 2010.

 

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Table of Contents

Non-Interest Income. The following table summarizes changes in non-interest income between the nine months ended September 30, 2011 and 2010.

 

     Nine Months  Ended
September 30,
    Change  
     2011      2010     $ Change     % Change  
     (In thousands)  

Other-than-temporary impairment loss on investments, net

   $ —         $ (2,404   $ 2,404        100.0

Service fees on loan and deposit accounts

     1,690         1,834        (144     (7.9 )% 

Income on bank-owned life insurance

     725         765        (40     (5.2 )% 

Gain on sale of investment securities

     140         350        (210     (60.0 )% 

Gain on sale of loans

     374         420        (46     (11.0 )% 

Other

     588         224        364        162.5
  

 

 

    

 

 

   

 

 

   

Total

   $ 3,517       $ 1,189      $ 2,328        195.8
  

 

 

    

 

 

   

 

 

   

Non-interest income rose by $2.3 million for the nine months ended September 30, 2011. We recognized a $2.4 million loss for other-than-temporary impairment on our investments in trust preferred securities during the nine months ended September 30, 2010. In the nine months ended September 30, 2011, we did not incur any other-than-temporary impairment loss on our investments. See”—Comparison of Financial Condition at September 30, 2011 and December 31, 2010—Securities” for a discussion of these securities. For the nine months ended September 30, 2011 and 2010, we recognized gains of $140,000 and $350,000, respectively, on the sale of investment securities. Other non-interest income was $588,000 for the nine months ended September 30, 2011 compared to $224,000 for the nine months ended September 30, 2010. The increase in other non-interest income is primarily due to a legal settlement of an insurance claim in the amount of $194,000 and a $162,000 increase in commissions from the sale of non-deposit products.

Non-Interest Expense. The following table summarizes changes in non-interest expense between the nine months ended September 30, 2011 and 2010.

 

     Nine Months Ended
September 30,
     Change  
     2011      2010      $ Change     % Change  
     (In thousands)  

Salaries and employee benefits

   $ 16,630       $ 13,533       $ 3,097        22.9

Occupancy

     3,714         3,428         286        8.3

Equipment

     2,366         2,184         182        8.3

Federal deposit insurance premiums

     678         898         (220     (24.5 )% 

Other general and administrative expenses

     2,887         2,843         44        1.5
  

 

 

    

 

 

    

 

 

   

Total

   $ 26,275       $ 22,886       $ 3,389        14.8
  

 

 

    

 

 

    

 

 

   

Non-interest expense rose by $3.4 million during the nine months ended September 30, 2011. Salaries and employee benefits increased for the nine months ended September 30, 2011 primarily because of a $2.7 million increase in expenses accrued for the equity incentive plan that was approved by the shareholders in August 2010. During the nine months ended September 30, 2011, the Company recognized $696,000 of stock benefit plan expense when a director passed away. In addition, the Company incurred a bank-wide budgeted salary increase of approximately 2.0%, which was effective July 1, 2011.

Income Tax Expense. Income taxes were $6.1 million for the nine months ended September 30, 2011, reflecting an effective tax rate of 39.4% compared to $4.5 million for the nine months ended

 

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Table of Contents

September 30, 2010, reflecting an effective tax rate of 36.7%. The increase in the effective tax rate for the nine months ended September 30, 2011 is primarily due to consistent amounts of non-taxable income received from bank-owned life insurance relative to an increase in pre-tax income and adjustments made during the nine months ended September 30, 2011 to reflect an increase in the estimate of taxes we will pay for the year ending December 31, 2011.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments, advances from the Federal Home Loan Bank of Seattle, borrowings using securities sold under agreements to repurchase, maturities and principal repayments on held-to-maturity and available-for-sale securities and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We have established an Asset/Liability Management Committee, consisting of our Chairman of the Board, President and Chief Executive Officer, our Vice Chairman and Co-Chief Operating Officer, our Senior Vice President and Treasurer and our Vice President and Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2011.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

 

  (i) expected loan demand;

 

  (ii) expected deposit flows and borrowing maturities;

 

  (iii) yields available on interest-earning deposits and securities; and

 

  (iv) the objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and mortgage-backed securities. Excess liquid assets may also be used to pay off short-term borrowings.

Our most liquid asset is cash and cash equivalents. The amount of this asset is dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2011, cash and cash equivalents totaled $132.4 million. On that date, we had $20.0 million of Federal Home Loan Bank advances outstanding and $120.2 million in securities sold under agreements to repurchase outstanding, with the ability to borrow an additional $352.6 million under Federal Home Loan Bank advances.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At September 30, 2011, we had $26.5 million in loan commitments outstanding, most of which were for fixed-rate loans. In addition to commitments to originate loans, we had $19.0 million in unused lines of credit to borrowers as of September 30, 2011. Certificates of deposit due within one year at September 30, 2011 totaled $179.4 million, or 15.7% of total deposits. If these deposits do not remain

 

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with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2012. We believe, however, based on past experience that a portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are originating loans and purchasing mortgage-backed securities. During the three months ended September 30, 2011 and 2010, we originated $41.1 million and $63.6 million of loans, respectively, and purchased $45.4 million and $51.2 million of securities, respectively. During the nine months ended September 30, 2011 and 2010, we originated $146.3 million and $141.9 million of loans, respectively, and purchased $211.3 million and $81.7 million of securities, respectively.

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances and securities sold under agreements to repurchase. We experienced net increases in deposits of $62.8 million and $64.2 million for the nine months ended September 30, 2011 and 2010, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Seattle, which provide an additional source of funds. We also utilize securities sold under agreements to repurchase as another borrowing source. Federal Home Loan Bank advances increased by $10.0 million for the nine months ended September 30, 2011. We had the ability to borrow up to an additional $352.6 million and $351.7 million from the Federal Home Loan Bank of Seattle as of September 30, 2011 and 2010, respectively. Securities sold under agreements to repurchase increased by $15.0 million for the nine months ended September 30, 2011, compared to a decrease of $25.0 million for the nine months ended September 30, 2010. Borrowings were obtained to control interest rate risk.

Territorial Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2011, Territorial Savings Bank exceeded all regulatory capital requirements. Territorial Savings Bank is considered “well capitalized” under regulatory guidelines. The tables below present the capital required as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained at September 30, 2011 and December 31, 2010.

As of September 30, 2011

(Dollars in thousands)

 

     Required     Territorial Savings Bank  

Tier 1 Capital

     4   $ 200,095         13.12

Total Risk-Based Capital

     8   $ 201,647         39.01

Tier 1 Risk-Based Capital

     4   $ 200,095         38.71

As of December 31, 2010

(Dollars in thousands)

 

     Required     Territorial Savings Bank  

Tier 1 Capital

     4   $ 202,527         14.02

Total Risk-Based Capital

     8   $ 204,015         43.06

Tier 1 Risk-Based Capital