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 June 30, 2012

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.

10,811,820 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2012.

 

 

 


Table of Contents

TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

Table of Contents

 

PART I   

ITEM 1.

  

FINANCIAL STATEMENTS

     1   

ITEM 2.

  

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

     29   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     43   

ITEM 4.

  

CONTROLS AND PROCEDURES

     44   
PART II   

ITEM 1.

  

LEGAL PROCEEDINGS

     46   

ITEM 1A.

  

RISK FACTORS

     46   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     46   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     46   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     47   

ITEM 5.

  

OTHER INFORMATION

     47   

ITEM 6.

  

EXHIBITS

     47   

SIGNATURES

     48   


Table of Contents

PART I

 

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and cash equivalents

   $ 156,373      $ 131,937   

Investment securities held to maturity, at amortized cost (fair value of $655,681 and $687,319 at June 30, 2012 and December 31, 2011, respectively)

     620,965        653,871   

Federal Home Loan Bank stock, at cost

     12,348        12,348   

Loans held for sale

     1,915        3,231   

Loans receivable, net

     726,245        688,095   

Accrued interest receivable

     4,686        4,780   

Premises and equipment, net

     5,161        5,450   

Real estate owned

     184        408   

Bank-owned life insurance

     30,701        30,234   

Deferred income taxes receivable

     3,297        2,648   

Prepaid expenses and other assets

     4,160        4,569   
  

 

 

   

 

 

 

Total assets

   $ 1,566,035      $ 1,537,571   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits

   $ 1,213,282      $ 1,166,116   

Advances from the Federal Home Loan Bank

     20,000        20,000   

Securities sold under agreements to repurchase

     90,300        108,300   

Accounts payable and accrued expenses

     21,151        22,816   

Current income taxes payable

     1,679        3,114   

Advance payments by borrowers for taxes and insurance

     3,305        3,264   
  

 

 

   

 

 

 

Total liabilities

     1,349,717        1,323,610   
  

 

 

   

 

 

 

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 10,811,820 and 11,022,309 shares at June 30, 2012 and December 31, 2011, respectively

     108        110   

Additional paid-in capital

     94,617        97,640   

Unearned ESOP shares

     (8,074     (8,319

Retained earnings

     133,427        128,300   

Accumulated other comprehensive loss

     (3,760     (3,770
  

 

 

   

 

 

 

Total stockholders’ equity

     216,318        213,961   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,566,035      $ 1,537,571   
  

 

 

   

 

 

 

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
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012      2011  

Interest and dividend income:

          

Investment securities

   $ 6,293      $ 6,889       $ 12,809       $ 13,260   

Loans

     9,110        8,763         18,139         17,646   

Other investments

     87        81         171         173   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     15,490        15,733         31,119         31,079   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense:

          

Deposits

     1,582        1,701         3,152         3,409   

Advances from the Federal Home Loan Bank

     104        104         208         190   

Securities sold under agreements to repurchase

     831        1,052         1,735         2,086   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     2,517        2,857         5,095         5,685   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     12,973        12,876         26,024         25,394   

Provision (reversal of allowance) for loan losses

     (79     14         5         122   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     13,052        12,862         26,019         25,272   
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest income:

          

Service fees on loan and deposit accounts

     480        598         1,030         1,156   

Income on bank-owned life insurance

     234        241         467         480   

Gain on sale of investment securities

     172        0         300         66   

Gain on sale of loans

     406        92         847         236   

Other

     115        292         205         411   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,407        1,223         2,849         2,349   
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest expense:

          

Salaries and employee benefits

     5,041        5,487         10,214         10,613   

Occupancy

     1,290        1,226         2,614         2,447   

Equipment

     811        808         1,623         1,574   

Federal deposit insurance premiums

     192        191         382         487   

Loss on extinguishment of debt

     198        0         198         0   

Other general and administrative expenses

     966        933         2,105         1,933   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

     8,498        8,645         17,136         17,054   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     5,961        5,440         11,732         10,567   

Income taxes

     2,115        2,055         4,346         4,182   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 3,846      $ 3,385       $ 7,386       $ 6,385   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.38      $ 0.31       $ 0.73       $ 0.57   

Diluted earnings per share

   $ 0.37      $ 0.30       $ 0.72       $ 0.57   

Cash dividends declared per common share

   $ 0.11      $ 0.09       $ 0.21       $ 0.16   

Basic weighted-average shares outstanding

     10,135,179        10,992,653         10,163,647         11,126,781   

Diluted weighted-average shares outstanding

     10,303,363        11,120,248         10,305,751         11,239,913   

See accompanying notes to consolidated financial statements.

 

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Net income

   $ 3,846       $ 3,385       $ 7,386       $ 6,385   

Change in unrealized loss on securities

     6         252         10         187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

     6         252         10         187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 3,852       $ 3,637       $ 7,396       $ 6,572   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

and Comprehensive Income (Unaudited)

(Dollars in thousands)

 

     Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss)/Income
    Total
Stockholders’

Equity
 

Balances at December 31, 2010

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

Net income

     0        0        0        6,385        0        6,385   

Other comprehensive income

     0        0        0        0        187        187   

Cash dividends declared

     0        0        0        (1,787     0        (1,787

Share-based compensation

     0        1,389        0        0        0        1,389   

Allocation of 24,466 ESOP shares

     0        239        245        0        0        484   

Repurchase of 584,828 shares of company common stock

     (6     (11,487     0        0        0        (11,493
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

   $ 116      $ 109,294      $ (8,563   $ 123,995      $ (2,318   $ 222,524   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

   $ 110      $ 97,640      $ (8,319   $ 128,300      $ (3,770   $ 213,961   

Net income

     0        0        0        7,386        0        7,386   

Other comprehensive income

     0        0        0        0        10        10   

Cash dividends declared

     0        0        0        (2,259     0        (2,259

Share-based compensation

     0        1,323        0        0        0        1,323   

Allocation of 24,466 ESOP shares

     0        274        245        0        0        519   

Repurchase of 251,739 shares of company common stock

     (2     (5,336     0        0        0        (5,338

Exercise of 41,275 options on common stock

     0        716        0        0        0        716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

   $ 108      $ 94,617      $ (8,074   $ 133,427      $ (3,760   $ 216,318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 7,386      $ 6,385   

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

    

Provision for loan losses

     5        122   

Depreciation and amortization

     571        557   

Deferred income tax benefit

     (655     (1,186

Amortization of fees, discounts, and premiums

     (133     (22

Origination of loans held for sale

     (44,376     (27,541

Proceeds from sales of loans held for sale

     46,539        26,013   

Gain on sale of loans, net

     (847     (236

Net gain on sale of real estate owned

     (38     0   

Purchases of investment securities held for trading

     0        (19,800

Proceeds from sale of investment securities held for trading

     0        19,866   

Gain on sale of investment securities held for trading

     0        (66

Gain on sale of investment securities held to maturity

     (300     0   

Net gain on sale of premises and equipment

     0        (5

ESOP expense

     519        484   

Share-based compensation expense

     1,323        1,389   

Excess tax benefits from share-based compensation

     (54     0   

(Increase) decrease in accrued interest receivable

     94        (406

Net increase in bank-owned life insurance

     (467     (481

Net decrease in prepaid expenses and other assets

     409        1,901   

Net decrease in accounts payable and accrued expenses

     (1,665     (1,425

Net increase (decrease) in income taxes payable

     (1,435     839   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,876        6,388   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investment securities held to maturity

     (67,354     (165,833

Principal repayments on investment securities held to maturity

     95,378        68,558   

Principal repayments on investment securities available for sale

     0        525   

Proceeds from sale of investment securities held to maturity

     4,559        0   

Loan originations, net of principal repayments on loans receivable

     (37,383     (16,138

Proceeds from sale of real estate owned

     262        0   

Proceeds from disposals of premises and equipment

     0        5   

Purchases of premises and equipment

     (282     (628
  

 

 

   

 

 

 

Net cash used in investing activities

     (4,820     (113,511
  

 

 

   

 

 

 

 

(Continued)

 

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Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from financing activities:

    

Net increase in deposits

   $ 47,166      $ 30,551   

Proceeds from advances from the Federal Home Loan Bank

     100        10,000   

Repayments of advances from the Federal Home Loan Bank

     (100     0   

Proceeds from securities sold under agreements to repurchase

     0        42,000   

Repayments of securities sold under agreements to repurchase

     (18,000     (32,000

Purchases of Fed Funds

     10        10   

Sales of Fed Funds

     (10     (10

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

     41        (333

Excess tax benefits from share-based compensation

     54        0   

Proceeds from issuance of common stock

     716        0   

Repurchases of company stock

     (5,338     (11,493

Cash dividends paid

     (2,259     (1,787
  

 

 

   

 

 

 

Net cash provided by financing activities

     22,380        36,938   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,436        (70,185

Cash and cash equivalents at beginning of the period

     131,937        194,435   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 156,373      $ 124,250   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest on deposits and borrowings

   $ 5,162      $ 5,684   

Income taxes

     6,436        4,529   

Supplemental disclosure of noncash investing activities:

    

Loans transferred to real estate owned

   $ 0      $ 162   

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, 2011. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

 

(2) Organization

On November 4, 2008, the Board of Directors of Territorial Mutual Holding Company approved a plan of conversion and reorganization under which the Company would convert from a mutual holding company to a stock holding company. The conversion to a stock holding company was approved by the depositors and borrowers of Territorial Savings Bank and the Office of Thrift Supervision (OTS) and included the filing of a registration statement with the U.S. Securities and Exchange Commission. Upon the completion of the conversion and reorganization on July 10, 2009, Territorial Mutual Holding Company and Territorial Savings Group, Inc. ceased to exist as separate legal entities and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. A total of 12,233,125 shares were issued in the conversion at $10 per share, raising $122.3 million of gross proceeds. $3.7 million of conversion expenses have been 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 April 2011, the Financial Accounting Standards Board (FASB) amended the Transfers and Servicing topic of the FASB Accounting Standards Codification (ASC). The amendment modified the criteria used to determine whether a repurchase agreement is accounted for as a sale or as a secured borrowing. The amendment was effective for interim or annual periods beginning on or after December 15, 2011. Early adoption was not permitted. The Company adopted this amendment on January 1, 2012, and the adoption did not have any effect on its consolidated financial statements.

 

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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 changed the principle or requirement for measuring fair value or disclosing fair value information. The amendment was effective for interim or annual periods beginning after December 15, 2011. Early application was not permitted. The Company adopted this amendment on January 1, 2012, and the adoption did not 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 eliminated the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. Nonowner changes in stockholders’ equity must be presented either in a continuous statement of comprehensive income or in two separate but consecutive statements. The amendment was effective for interim or annual periods beginning after December 15, 2011, with early adoption permitted. In December 2011, the FASB deferred the effective date of the part of this amendment requiring reclassifications out of accumulated other comprehensive income to be shown on the face of the financial statements. Pending a final decision on this issue by the FASB, previous disclosure requirements will remain in effect. The Company adopted this amendment on January 1, 2012, and other than the location of disclosures related to other comprehensive income, the adoption did not have a material effect on its consolidated financial statements.

In December 2011, the FASB amended the Balance Sheet topic of the FASB ASC. The amendment requires disclosures about the gross and net information related to instruments and transactions eligible for offset in the statement of financial position. The disclosures are meant to assist users of financial statements to more easily compare information that is presented based on the differing offsetting requirements of U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendment is effective for interim and annual periods beginning on or after January 1, 2013. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

(4) Cash and Cash Equivalents

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

 

(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Cash and due from banks

   $ 12,041       $ 8,692   

Interest-earning deposits in other banks

     144,332         123,245   
  

 

 

    

 

 

 

Cash and cash equivalents

   $ 156,373       $ 131,937   
  

 

 

    

 

 

 

 

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Table of Contents
(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  

June 30, 2012:

          

Held to maturity:

          

U.S. government-sponsored mortgage-backed securities

   $ 620,933       $ 34,720       $ (284   $ 655,369   

Trust preferred securities

     32         280         0        312   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 620,965       $ 35,000       $ (284   $ 655,681   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Held to maturity:

          

U.S. government-sponsored mortgage-backed securities

   $ 653,839       $ 33,490       $ (269   $ 687,060   

Trust preferred securities

     32         227         0        259   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 653,871       $ 33,717       $ (269   $ 687,319   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and estimated fair value of investment securities at June 30, 2012 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

   $ 4,830       $ 4,950   

Due after 10 years

     616,135         650,731   
  

 

 

    

 

 

 

Total

   $ 620,965       $ 655,681   
  

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
(Dollars in thousands)    2012      2011      2012      2011  

Proceeds from sales

   $ 2,926       $ 0       $ 4,559       $ 19,866   

Gross gains

     172         0         300         66   

Gross losses

     0         0         0         0   

 

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Table of Contents

During the three months ended June 30, 2012, all sales were related to $2.8 million of held-to-maturity debt securities. During the six months ended June 30, 2012, all sales were related to $4.3 million of held-to-maturity debt securities. The sale of these securities, for which the Company had already collected a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio. There were no sales of held-to-maturity securities during the three months or six months ended June 30, 2011.

Investment securities with carrying values of $250.5 million and $281.0 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

Provided below is a summary of investment securities which were in an unrealized loss position at June 30, 2012 and December 31, 2011. The Company does not intend to sell these securities until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.

 

     Less than 12 months      12 months or longer      Total  

Description of securities

   Fair value      Unrealized
losses
     Fair value      Unrealized
losses
     Number of
securities
     Fair value      Unrealized
losses
 
(Dollars in thousands)                                                 

June 30, 2012:

                    

Mortgage-backed securities

   $ 21,519       $ 283       $ 62       $ 1         12       $ 21,581       $ 284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                    

Mortgage-backed securities

   $ 17,697       $ 268       $ 122       $ 1         7       $ 17,819       $ 269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Trust Preferred Securities. At June 30, 2012, 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 noncredit 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 six transactions in the last 18 months in similar tranches to the securities owned by the Company. The Company used a discounted cash flow model to determine whether these securities are other-than-temporarily impaired. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending June 30, 2012 as the present value of cash flows exceed the amortized cost basis of $1.1 million.

At June 30, 2012, 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

 

10


Table of Contents

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)    2012      2011  

Balance at January 1

   $ 5,885       $ 5,885   

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

     0         0   
  

 

 

    

 

 

 

Balance at June 30

   $ 5,885       $ 5,885   
  

 

 

    

 

 

 

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

 

     June 30,  
(Dollars in thousands)    2012      2011  

Noncredit losses on other-than-temporarily impaired securities

   $ 679       $ 679   

 

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Table of Contents
(6) Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:

 

(Dollars in thousands)    June 30,
2012
    December 31,
2011
 

Real estate loans:

    

First mortgages:

    

One- to four-family residential

   $ 694,539      $ 654,412   

Multi-family residential

     6,859        6,956   

Construction, commercial, and other

     13,789        12,741   

Home equity loans and lines of credit

     15,292        17,253   
  

 

 

   

 

 

 

Total real estate loans

     730,479        691,362   
  

 

 

   

 

 

 

Other loans:

    

Loans on deposit accounts

     458        756   

Consumer and other loans

     4,329        4,732   
  

 

 

   

 

 

 

Total other loans

     4,787        5,488   
  

 

 

   

 

 

 

Less:

    

Net unearned fees and discounts

     (5,425     (5,613

Undisbursed loan funds

     (2,139     (1,601

Allowance for loan losses

     (1,457     (1,541
  

 

 

   

 

 

 
     (9,021     (8,755
  

 

 

   

 

 

 

Loans receivable, net

   $ 726,245      $ 688,095   
  

 

 

   

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in thousands)    2012     2011     2012     2011  

Balance, beginning of period

   $ 1,529      $ 1,566      $ 1,541      $ 1,488   

Provision (reversal of allowance) for loan losses

     (79     14        5        122   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,450        1,580        1,546        1,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs

     (22     (15     (136     (55

Recoveries

     29        27        47        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     7        12        (89     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 1,457      $ 1,592      $ 1,457      $ 1,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

(Dollars in thousands)    Residential
Mortgage
    Construction,
Commercial
and Other
Mortgage
Loans
    Home
Equity
Loans and
Lines of
Credit
    Consumer
and Other
    Unallocated     Totals  

Three months ended June 30, 2012:

            

Balance, beginning of period

   $ 544      $ 641      $ 34      $ 174      $ 136      $ 1,529   

Provision (reversal of allowance) for loan losses

     (12     8        0        (61     (14     (79
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     532        649        34        113        122        1,450   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs

     (4     (8     0        (10     0        (22

Recoveries

     24        0        1        4        0        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     20        (8     1        (6     0        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 552      $ 641      $ 35      $ 107      $ 122      $ 1,457   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2012:

            

Balance, beginning of period

   $ 631      $ 285      $ 258      $ 291      $ 76      $ 1,541   

Provision (reversal of allowance) for loan losses

     (6     364        (224     (175     46        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     625        649        34        116        122        1,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs

     (108     (8     (1     (19     0        (136

Recoveries

     35        0        2        10        0        47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (73     (8     1        (9     0        (89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 552      $ 641      $ 35      $ 107      $ 122      $ 1,457   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning with the quarter ended March 31, 2012, the Company enhanced its methodology for reviewing its loan portfolio when calculating the general portion of the allowance for loan losses. The modification consisted of additional segmentation of the residential mortgage loan portfolio by items such as year of origination, loan-to-value ratios, owner or nonowner occupancy status and the purpose of the loan (purchase, cash-out refinance, no cash-out refinance or construction). As under our prior methodology, the allowance for loan loss for each segment of the loan portfolio is determined by calculating the historical loss of each segment for a two- to three-year look-back period and adding a qualitative adjustment for the following factors:

 

   

Changes in lending policies and procedures;

 

   

Changes in economic trends;

 

   

Changes in types of loans in the loan portfolio;

 

   

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

 

   

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

 

   

Changes in our internal loan review system;

 

   

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

 

   

Changes in any concentrations of credit; and

 

   

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

The Company also revised the qualitative factors which were used to determine the allowance for loan losses on construction, commercial and other mortgage loans, home equity loans and lines of credit and consumer and

 

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Table of Contents

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

Management considers the allowance for loan losses at June 30, 2012 to be at an appropriate level to provide for probable losses that can be estimated based on general and specific conditions. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings. In addition, as an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review the allowance for loan losses. The Office of the Comptroller of the Currency may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

 

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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
Loans and
Lines of
Credit
     Consumer
and Other
     Unallocated      Totals  

June 30, 2012:

                 

Allowance for loan losses:

                 

Ending allowance balance:

                 

Individually evaluated for impairment

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

Collectively evaluated for impairment

     552         641         35         107         122         1,457   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 552       $ 641       $ 35       $ 107       $ 122       $ 1,457   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Ending loan balance:

                 

Individually evaluated for impairment

   $ 4,865       $ 176       $ 160       $ 1       $ 0       $ 5,202   

Collectively evaluated for impairment

     691,160         11,411         15,142         4,787         0         722,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 696,025       $ 11,587       $ 15,302       $ 4,788       $ 0       $ 727,702   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

Allowance for loan losses:

                 

Ending allowance balance:

                 

Individually evaluated for impairment

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

Collectively evaluated for impairment

     631         285         258         291         76         1,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 631       $ 285       $ 258       $ 291       $ 76       $ 1,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Ending loan balance:

                 

Individually evaluated for impairment

   $ 4,926       $ 184       $ 159       $ 3       $ 0       $ 5,272   

Collectively evaluated for impairment

     650,901         10,872         17,105         5,486         0         684,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 655,827       $ 11,056       $ 17,264       $ 5,489       $ 0       $ 689,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Loans with no allocated allowance for loan losses

   $ 5,202       $ 5,272   

Loans with allocated allowance for loan losses

     0         0   
  

 

 

    

 

 

 

Total impaired loans

   $ 5,202       $ 5,272   
  

 

 

    

 

 

 

Amount of allocated loan loss allowance

   $ 0       $ 0   

 

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Table of Contents

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

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
 

June 30, 2012:

     

With no related allowance recorded:

     

One- to four-family residential mortgages

   $ 4,865       $ 5,182   

Construction, commercial and other mortgages

     176         241   

Home equity loans and lines of credit

     160         165   

Consumer and other

     1         1   
  

 

 

    

 

 

 

Total

   $ 5,202       $ 5,589   
  

 

 

    

 

 

 

December 31, 2011:

     

With no related allowance recorded:

     

One- to four-family residential mortgages

   $ 4,926       $ 5,206   

Construction, commercial and other mortgages

     184         241   

Home equity loans and lines of credit

     159         165   

Consumer and other

     3         3   
  

 

 

    

 

 

 

Total

   $ 5,272       $ 5,615   
  

 

 

    

 

 

 

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

 

     For the Three Months Ended
June 30,
     For the Six Months  Ended
June 30,
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest Income
Recognized
     Average
Recorded
Investment
     Interest Income
Recognized
 

2012:

           

With no related allowance recorded:

           

One- to four-family residential mortgages

   $ 4,869       $ 41       $ 4,918       $ 84   

Construction, commercial and other mortgages

     180         0         180         0   

Home equity loans and lines of credit

     160         2         160         3   

Consumer and other

     1         0         2         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,210       $ 43       $ 5,260       $ 87   
  

 

 

    

 

 

    

 

 

    

 

 

 

2011:

           

With no related allowance recorded:

           

One- to four-family residential mortgages

   $ 3,606       $ 35       $ 3,606       $ 68   

Consumer and other

     5         0         5         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,611       $ 35       $ 3,611       $ 68   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2012 or December 31, 2011.

 

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Table of Contents

Impaired loans at June 30, 2012 and December 31, 2011 amounted to $5.2 million and $5.3 million, respectively, and included all nonaccrual and restructured loans. During the six months ended June 30, 2012, the average recorded investment in impaired loans was $5.3 million and interest income recognized on impaired loans was $87,000. During the six months ended June 30, 2011, the average recorded investment in impaired loans was $3.6 million and interest income recognized on impaired loans was $68,000.

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

 

(Dollars in thousands)    30 – 59
Days Past
Due
     60 – 89
Days Past
Due
     90 Days or
Greater
Past Due
     Total Past
Due
     Loans Not
Past Due
     Total
Loans
     Nonaccrual
Loans
     Loans
More
Than 90
Days Past
Due and
Still
Accruing
 

June 30, 2012:

                       

One- to four-family residential mortgages

   $ 595       $ 0       $ 1,768       $ 2,363       $ 686,844       $ 689,207       $ 2,535       $ 0   

Multi-family residential mortgages

     0         0         0         0         6,818         6,818         0         0   

Construction, commercial and other mortgages

     0         0         176         176         11,411         11,587         176         0   

Home equity loans and lines of credit

     0         0         0         0         15,302         15,302         161         0   

Loans on deposit accounts

     0         0         0         0         458         458         0         0   

Consumer and other

     5         1         1         7         4,323         4,330         1         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 600       $ 1       $ 1,945       $ 2,546       $ 725,156       $ 727,702       $ 2,873       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                       

One- to four-family residential mortgages

   $ 499       $ 0       $ 2,148       $ 2,647       $ 646,268       $ 648,915       $ 2,582       $ 0   

Multi-family residential mortgages

     0         0         0         0         6,912         6,912         0         0   

Construction, commercial and other mortgages

     0         0         184         184         10,872         11,056         184         0   

Home equity loans and lines of credit

     168         0         0         168         17,096         17,264         159         0   

Loans on deposit accounts

     0         0         0         0         756         756         0         0   

Consumer and other

     11         2         3         16         4,717         4,733         3         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 678       $ 2       $ 2,335       $ 3,015       $ 686,621       $ 689,636       $ 2,928       $ 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 come only from the sale or operation of the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes collateral-dependent or is 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, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

 

17


Table of Contents

The Company had 14 nonaccrual loans with a book value of $2.9 million at June 30, 2012 and 12 nonaccrual loans with a book value of $2.9 million as of December 31, 2011. The Company collected or recognized interest income on nonaccrual loans of $27,000 and $2,000 during the six months ended June 30, 2012 and 2011, respectively. The Company would have recognized additional interest income of $123,000 and $45,000 during the six months ended June 30, 2012 and 2011, respectively, had the loans been accruing interest. The Company did not have any loans more than 90 days past due and still accruing interest as of June 30, 2012 and December 31, 2011.

There were no loans modified in a troubled debt restructuring during the six months ended June 30, 2012 or 2011. The Company had 11 troubled debt restructurings totaling $2.9 million as of June 30, 2012 that were considered to be impaired. This total included ten one- to four-family residential mortgage loans totaling $2.8 million and one home equity loan for $161,000. Eight of the loans, totaling $2.3 million, are performing in accordance with their restructured terms and accruing interest at June 30, 2012. Three of the loans, totaling $589,000, are performing in accordance with their restructured terms but not accruing interest at June 30, 2012. There were 11 troubled debt restructurings totaling $2.9 million as of December 31, 2011 that were considered to be impaired. This total included ten one- to four-family residential mortgage loans totaling $2.8 million and one home equity loan for $159,000. Eight of the loans, totaling $2.3 million, are performing in accordance with their restructured terms and accruing interest at December 31, 2011. Two of the loans, totaling $344,000, are performing in accordance with their restructured terms but not accruing interest at December 31, 2011. One of the loans, for $248,000, is 59 days delinquent and not accruing interest at December 31, 2011. 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.

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 six months ended June 30, 2012 and 2011, the Company sold $46.2 million and $26.1 million, respectively, of mortgage loans held for sale and recognized gains of $847,000 and $236,000, respectively. During the three months ended June 30, 2012 and 2011, the Company sold $22.3 million and $6.9 million, respectively, of mortgage loans held for sale and recognized gains of $406,000 and $92,000, respectively. The Company had seven loans held for sale totaling $1.9 million at June 30, 2012 and 12 loans held for sale totaling $3.2 million at December 31, 2011.

The Company serviced loans for others of $101.2 million at June 30, 2012 and $115.3 million at December 31, 2011. Of these amounts, $5.2 million and $6.2 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at June 30, 2012 and December 31, 2011, respectively. The amount of contractually specified servicing fees earned for the six-month periods ended June 30, 2012 and 2011 was $145,000 and $179,000, respectively. The amount of contractually specified servicing fees earned for the three-month periods ended June 30, 2012 and June 30, 2011 was $73,000 and $88,000, respectively. The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

 

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(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:

 

     June 30, 2012     December 31, 2011  
            Weighted            Weighted  
     Repurchase      average     Repurchase      average  
(Dollars in thousands)    liability      rate     liability      rate  

Maturing:

          

1 year or less

   $ 25,300         3.64   $ 28,300         4.75

Over 1 year to 2 years

     18,000         4.87        33,000         3.91   

Over 2 years to 3 years

     42,000         2.13        0         0.00   

Over 3 years to 4 years

     5,000         1.90        47,000         2.11   
  

 

 

      

 

 

    
   $ 90,300         3.09   $ 108,300         3.35
  

 

 

      

 

 

    

During the quarter ended June 30, 2012, the Company prepaid $15 million of securities sold under agreements to repurchase and incurred a $198,000 prepayment penalty.

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 June 30, 2012. 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 Securities and the securities pledged are issued and guaranteed by U.S. government-sponsored enterprises.

 

(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

   $ 105,148       $ 111,498       $ 90,300       $ 21,198         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(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.

 

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The components of net periodic benefit cost were as follows:

 

     SERP      SERP  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Dollars in thousands)    2012      2011      2012      2011  

Net periodic benefit cost for the period

           

Service cost

   $ 49       $ 111       $ 98       $ 221   

Interest cost

     24         54         49         108   

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

   $ 73       $ 165       $ 147       $ 329   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 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 June 30, 2012 and 2011 amounted to $248,000 and $234,000, respectively. Compensation expense recognized for the six months ended June 30, 2012 and 2011 amounted to $488,000 and $468,000, respectively.

 

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Shares held by the ESOP trust were as follows:

 

     June 30,      December 31,  
     2012      2011  

Allocated shares

     169,369         145,775   

Unearned shares

     807,387         831,853   
  

 

 

    

 

 

 

Total ESOP shares

     976,756         977,628   
  

 

 

    

 

 

 

Fair value of unearned shares, in thousands

   $ 18,384       $ 16,429   
  

 

 

    

 

 

 

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the 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 June 30, 2012 and 2011, we accrued $18,000 and $85,000, respectively, for the ESOP restoration plan. For the six months ended June 30, 2012 and 2011, we accrued $104,000 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 over the six-year vesting period.

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 six months ended June 30, 2012 was $660,000 and $1,323,000, respectively.

 

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Table of Contents

Stock Options

The table below presents the stock option activity for the six months ended June 30, 2012:

 

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

(in  thousands)
 

Options outstanding at December 31, 2011

     871,144       $ 17.36         8.67       $ 2,082   

Granted

     0         0.00         0.00         0   

Exercised

     41,275         17.36         0.00         0   

Forfeited

     0         0.00         0.00         0   

Expired

     0         0.00         0.00         0   
  

 

 

          

Options outstanding at June 30, 2012

     829,869       $ 17.36         8.17       $ 4,490   
  

 

 

          

 

 

 

As of June 30, 2012, the Company had $2.9 million of unrecognized compensation costs related to stock options. The cost of stock options will be amortized over the six-year vesting period. There were no options vested in the six months ending June 30, 2012.

The fair value of the Company’s stock options granted in 2010 was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula in 2010:

 

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   

There were no options granted in 2011 or the six months ended June 30, 2012.

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.

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.

 

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The table below presents the restricted stock award activity for the six months ended June 30, 2012:

 

     Restricted
stock awards
     Weighted
average grant
date fair
value
 

Nonvested at December 31, 2011

     563,994       $ 17.36   

Granted

     0         0.00   

Vested

     0         0.00   

Forfeited

     0         0.00   
  

 

 

    

Nonvested at June 30, 2012

     563,994       $ 17.36   
  

 

 

    

As of June 30, 2012, the Company had $8.2 million of unrecognized compensation cost related to restricted stock awards. The cost of the restricted stock awards will be amortized 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     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands, except share data)   2012     2011     2012     2011  

Net income

  $ 3,846      $ 3,385      $ 7,386      $ 6,385   

Weighted-average number of shares used in:

       

Basic earnings per share

    10,135,179        10,992,653        10,163,647        11,126,781   

Dilutive common stock equivalents:

       

Stock options and restricted stock units

    168,184        127,595        142,104        113,132   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

    10,303,363        11,120,248        10,305,751        11,239,913   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share, basic

  $ 0.38      $ 0.31      $ 0.73      $ 0.57   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share, diluted

  $ 0.37      $ 0.30      $ 0.72      $ 0.57   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(12) Other Comprehensive Loss

The table below presents the changes in the components of other comprehensive loss:

 

     Three Months Ended June 30,  
     2012      2011  
(Dollars in thousands)    Beginning
Balance
     Current
Income
    Ending
Balance
     Beginning
Balance
     Current
Income
    Ending
Balance
 

Unfunded pension liability

   $ 2,966       $ 0      $ 2,966       $ 1,504       $ 0      $ 1,504   

Noncredit related losses on securities not expected to be sold

     679         0        679         679         0        679   

Unrealized loss on securities

     121         (6     115         387         (252     135   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,766       $ (6   $ 3,760       $ 2,570       $ (252   $ 2,318   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2012      2011  
(Dollars in thousands)    Beginning
Balance
     Current
Income
    Ending
Balance
     Beginning
Balance
     Current
Income
    Ending
Balance
 

Unfunded pension liability

   $ 2,966       $ 0      $ 2,966       $ 1,504       $ 0      $ 1,504   

Noncredit related losses on securities not expected to be sold

     679         0        679         679         0        679   

Unrealized loss on securities

     125         (10     115         322         (187     135   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,770       $ (10   $ 3,760       $ 2,505       $ (187   $ 2,318   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The table below presents the tax effect on each component of other comprehensive loss:

 

     Six Months Ended June 30,  
     2012      2011  
(Dollars in thousands)    Pretax
Amount
     Tax     After Tax
Amount
     Pretax
Amount
     Tax     After Tax
Amount
 

Unfunded pension liability

   $ 4,954       $ (1,988   $ 2,966       $ 2,488       $ (984   $ 1,504   

Noncredit related losses on securities not expected to be sold

     1,106         (427     679         1,106         (427     679   

Unrealized loss on securities

     193         (78     115         225         (90     135   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,253       $ (2,493   $ 3,760       $ 3,819       $ (1,501   $ 2,318   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(13) 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.

 

   

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.

 

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Table of Contents

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 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, 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 estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

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 six sales transactions of similar rated securities over the past 18 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 three-month LIBOR plus 20.00% and provided a fair value estimate of $8.82 per $100 of par value for PreTSL XXIII.

The discounted cash flow analysis was prepared by an independent third party and included a review of all issuers within the pool. The fair value of the trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow models.

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.

 

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Table of Contents

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.

 

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Table of Contents

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

 

                   Fair Value Measurements Using  
(Dollars in thousands)    Carrying
amount
     Fair value      Level 1      Level 2      Level 3  

June 30, 2012

              

Assets

              

Cash and cash equivalents

   $ 156,373       $ 156,373       $ 156,373       $ 0       $ 0   

Investment securities held to maturity

     620,965         655,681         0         655,369         312   

FHLB stock

     12,348         12,348         12,348         0         0   

Loans held for sale

     1,915         2,007         0         2,007         0   

Loans receivable, net

     726,245         769,059         0         0         769,059   

Accrued interest receivable

     4,686         4,686         4,686         0         0   

Interest rate contracts

     156         156         0         156         0   

Liabilities

              

Deposits

     1,213,282         1,214,966         996,626         0         218,340   

Advances from the Federal Home Loan Bank

     20,000         20,512         0         0         20,512   

Securities sold under agreements to repurchase

     90,300         93,402         0         0         93,402   

Accounts payable and accrued expenses

     21,151         21,151         21,151         0         0   

Interest rate contracts

     140         140         0         140         0   

Current income taxes payable

     1,679         1,679         1,679         0         0   

Advance payments by borrowers for taxes and insurance

     3,305         3,305         3,305         0         0   

December 31, 2011

              

Assets

              

Cash and cash equivalents

   $ 131,937       $ 131,937       $ 131,937       $ 0       $ 0   

Investment securities held to maturity

     653,871         687,319         0         687,060         259   

FHLB stock

     12,348         12,348         12,348         0         0   

Loans held for sale

     3,231         3,352         0         3,352         0   

Loans receivable, net

     688,095         790,220         0         0         790,220   

Accrued interest receivable

     4,780         4,780         4,780         0         0   

Interest rate contracts

     156         156         0         156         0   

Liabilities

              

Deposits

     1,166,116         1,167,855         942,365         0         225,490   

Advances from the Federal Home Loan Bank

     20,000         20,525         0         0         20,525   

Securities sold under agreements to repurchase

     108,300         112,306         0         0         112,306   

Accounts payable and accrued expenses

     22,816         22,816         22,816         0         0   

Interest rate contracts

     139         139         0         139         0   

Current income taxes payable

     3,114         3,114         3,114         0         0   

Advance payments by borrowers for taxes and insurance

     3,264         3,264         3,264         0         0   

At June 30, 2012 and December 31, 2011, 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.

 

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Table of Contents

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  

June 30, 2012

          

Interest rate contracts – assets

   $ 0       $ 156      $ 0       $ 156   

Interest rate contracts – liabilities

     0         (140     0         (140

December 31, 2011

          

Interest rate contracts – assets

   $ 0       $ 156      $ 0       $ 156   

Interest rate contracts – liabilities

     0         (139     0         (139

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 table below presents the balance of assets measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011 and the related losses for the six months ended June 30, 2012 and the year ended December 31, 2011:

 

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

June 30, 2012

              

Impaired loans

   $ 0       $ 349       $ 2,749       $ 3,098       $ 90   

Mortgage servicing assets

     0         0         832         832         74   

December 31, 2011

              

Impaired loans

   $ 0       $ 885       $ 2,766       $ 3,651       $ 219   

Mortgage servicing assets

     0         0         970         970         34   

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 considered to be collateral-dependent is determined using a discounted cash flow analysis. Assumptions used in the analysis include the discount rate and projected cash flows. Gains and losses on impaired loans are included in the provision for loan 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.

 

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Table of Contents

The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements:

 

(Dollars in thousands)    Fair Value     

Valuation Technique

  

Unobservable

Input

   Value

June 30, 2012:

           

Impaired loans – non-collateral dependent

   $ 2,749       Discounted cash flow    Discount rate (1)    3.73% - 6.94%

Mortgage servicing assets

     832       Discounted cash flow    Discount rate    10.00%
         Prepayment speed (PSA)    173.0 - 275.3
        

Cost to service

(Basis points)

   40

December 31, 2011:

           

Impaired loans – non-collateral dependent

   $ 2,766       Discounted cash flow    Discount rate (1)    3.73% - 6.94%

Mortgage servicing assets

     970       Discounted cash flow    Discount rate    10.00%
         Prepayment speed (PSA)    180.1 - 437.9
         Cost to service
(Basis points)
   40

 

(1) Represents the yield on contractual cash flows prior to modification in troubled debt restructurings.

 

(14) Subsequent Events

On August 2, 2012, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.11 per share of common stock. The dividend is expected to be paid on August 30, 2012 to stockholders of record as of August 16, 2012.

 

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.

 

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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 internationally, nationally or in our market areas, that are worse than expected;

 

   

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, 2011.

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Assets. At June 30, 2012, our assets were $1.566 billion, an increase of $28.5 million, or 1.9%, from $1.538 billion at December 31, 2011. The growth in assets was primarily the result of an increase in loans receivable and cash and cash equivalents, which was partially offset by a decrease in investment securities.

 

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Cash and Cash Equivalents. Cash and cash equivalents were $156.4 million at June 30, 2012, an increase of $24.4 million since December 31, 2011. The growth in cash and cash equivalents resulted primarily from a $47.2 million increase in deposits.

Loans. Total loans, including $1.9 million of loans held for sale, were $728.2 million at June 30, 2012, or 46.5% of total assets. During the six months ended June 30, 2012, the loan portfolio increased by $36.8 million, or 5.3%. The increase in the loan portfolio occurred as the production of new one- to four-family residential loans exceeded principal repayments and loan sales. The continued high level of loan originations is due primarily to the current interest rate environment.

Securities. At June 30, 2012, our securities portfolio totaled $621.0 million, or 39.7% of total assets. At June 30, 2012, 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 nonconforming loans having less than full documentation) loans. During the six months ended June 30, 2012, our securities portfolio decreased by $32.9 million, or 5.0%, as repayments exceeded purchases.

At June 30, 2012, we owned trust preferred securities with a carrying value of $32,000. This portfolio consists of two securities, which represent investments in a pool of debt obligations issued by Federal Deposit Insurance Corporation-insured financial institutions, insurance companies and real estate investment trusts.

The trust preferred securities market is considered to be inactive as only six transactions have occurred over the past 18 months in similar tranches to the securities owned by the Company. The Company used a discounted cash flow model to determine whether these securities are other-than-temporarily impaired. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows. The Company used a discount rate equal to three-month LIBOR plus 20.00% and determined fair value to be $8.82 per $100 of par value.

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending June 30, 2012, as the present value of cash flows exceeded the amortized cost basis of $1.1 million.

At June 30, 2012, these trust preferred securities 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. The impairment could be material to the Company’s consolidated statements of income.

Deposits. Deposits were $1.213 billion at June 30, 2012, an increase of $47.2 million, or 4.0%, since December 31, 2011. The increase in deposits was caused by our continuing to promote higher-than-market rates for our savings accounts.

Borrowings. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Seattle and funds borrowed under securities sold under agreements to repurchase. During the six months ended June 30, 2012, our borrowings decreased by $18.0 million, or 14.0%, to $110.3 million, due to the pay off of $18.0 million of securities sold under agreements to repurchase. We have not required any other borrowings to fund our operations. Instead, we have primarily funded our operations with the net proceeds from our stock offering, additional deposits, proceeds from loan sales and principal repayments on loans and mortgage-backed securities.

 

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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. Nonaccrual 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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    For the Three Months Ended June 30,  
    2012     2011  
    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 (2)

  $ 681,732      $ 8,521        5.00   $ 615,677      $ 8,075        5.25

Multi-family residential

    6,896        106        6.15        6,139        98        6.39   

Construction, commercial and other

    12,724        172        5.41        14,481        222        6.13   

Home equity loans and lines of credit

    16,023        235        5.87        18,608        283        6.08   

Other loans

    5,010        76        6.07        5,332        85        6.38   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total loans

    722,385        9,110        5.04        660,237        8,763        5.31   

Investment securities:

           

U.S. government sponsored mortgage-backed
securities (2)

    639,096        6,293        3.94        637,814        6,889        4.32   

Trust preferred securities

    32        0        0.00        32        0        0.00   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total securities

    639,128        6,293        3.94        637,846        6,889        4.32   

Other

    158,320        87        0.22        147,756        81        0.22   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    1,519,833        15,490        4.08        1,445,839        15,733        4.35   

Non-interest-earning assets

    54,369            50,105       
 

 

 

       

 

 

     

Total assets

  $ 1,574,202          $ 1,495,944       
 

 

 

       

 

 

     

Interest-bearing liabilities:

           

Savings accounts

  $ 842,987      $ 1,155        0.55   $ 761,757      $ 1,177        0.62

Certificates of deposit

    218,181        417        0.76        214,141        509        0.95   

Money market accounts

    497        1        0.80        607        1        0.66   

Checking and Super NOW accounts

    115,316        9        0.03        108,862        14        0.05   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    1,176,981        1,582        0.54        1,085,367        1,701        0.63   

Federal Home Loan Bank advances

    20,002        104        2.08        19,999        104        2.08   

Securities sold under agreements to repurchase

    100,300        831        3.31        117,354        1,052        3.59   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,297,283        2,517        0.78        1,222,720        2,857        0.93   

Non-interest-bearing liabilities

    58,146            45,715       
 

 

 

       

 

 

     

Total liabilities

    1,355,429            1,268,435       

Stockholders’ equity

    218,773            227,509       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 1,574,202          $ 1,495,944       
 

 

 

       

 

 

     

Net interest income

    $ 12,973          $ 12,876     
   

 

 

       

 

 

   

Net interest rate spread (3)

        3.30         3.42

Net interest-earning assets (4)

  $ 222,550          $ 223,119       
 

 

 

       

 

 

     

Net interest margin (5)

        3.41         3.56

Interest-earning assets to interest-bearing liabilities

    117.16         118.25    

 

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

 

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Table of Contents
    For the Six Months Ended June 30,  
    2012     2011  
    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 (2)

  $ 672,628      $ 16,946        5.04   $ 612,451      $ 16,273        5.31

Multi-family residential

    6,719        207        6.16        6,094        196        6.43   

Construction, commercial and other

    11,980        342        5.71        14,111        427        6.05   

Home equity loans and lines of credit

    16,494        485        5.88        18,933        578        6.11   

Other loans

    5,190        159        6.13        5,440        172        6.32   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total loans

    713,011        18,139        5.09        657,029        17,646        5.37   

Investment securities:

           

U.S. government sponsored mortgage-backed
securities (2)

    642,259        12,809        3.99        617,081        13,260        4.30   

Trust preferred securities

    32        0        0.00        32        0        0.00   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total securities

    642,291        12,809        3.99        617,113        13,260        4.30   

Other

    157,036        171        0.22        158,370        173        0.22   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    1,512,338        31,119        4.12        1,432,512        31,079        4.34   

Non-interest-earning assets

    53,605            49,959       
 

 

 

       

 

 

     

Total assets

  $ 1,565,943          $ 1,482,471       
 

 

 

       

 

 

     

Interest-bearing liabilities:

           

Savings accounts

  $ 833,048      $ 2,246        0.54   $ 757,517      $ 2,362        0.62

Certificates of deposit

    219,881        887        0.81        210,758        1,018        0.97   

Money market accounts

    514        1        0.39        626        1        0.32   

Checking and Super NOW accounts

    112,582        18        0.03        106,956        28        0.05   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    1,166,025        3,152        0.54        1,075,857        3,409        0.63   

Federal Home Loan Bank advances

    20,001        208        2.08        18,342        190        2.07   

Securities sold under agreements to repurchase

    103,855        1,735        3.34        112,609        2,086        3.70   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,289,881        5,095        0.79        1,206,808        5,685        0.94   

Non-interest-bearing liabilities

    58,298            47,317       
 

 

 

       

 

 

     

Total liabilities

    1,348,179            1,254,125       

Stockholders’ equity

    217,764            228,346       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 1,565,943          $ 1,482,471       
 

 

 

       

 

 

     

Net interest income

    $ 26,024          $ 25,394     
   

 

 

       

 

 

   

Net interest rate spread (3)

        3.33         3.40

Net interest-earning assets (4)

  $ 222,457          $ 225,704       
 

 

 

       

 

 

     

Net interest margin (5)

        3.44         3.55
     

 

 

       

 

 

 

Interest-earning assets to interest-bearing liabilities

    117.25         118.70    

 

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

 

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Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

General. Net income increased by $461,000, or 13.6%, to $3.8 million for the three months ended June 30, 2012 from $3.4 million for the three months ended June 30, 2011. The increase in net income was caused by a $340,000 decrease in interest expense, a $184,000 increase in noninterest income, a $147,000 decrease in noninterest expense and a $93,000 decrease in provision for loan losses. This was partially offset by a $243,000 decrease in interest and dividend income and a $60,000 increase in income taxes.

Net Interest Income. Net interest income increased by $97,000, or 0.8%, to $13.0 million for the three months ended June 30, 2012 compared to $12.9 million for the three months ended June 30, 2011. Interest and dividend income decreased by $243,000, or 1.5%, due primarily to a 27 basis point decrease in the average yield on interest-earning assets that was partially offset by a $74.0 million increase in the average balance. Interest expense decreased by $340,000, or 11.9%, due to a 15 basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a $74.6 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 3.30% and 3.41%, respectively, for the three months ended June 30, 2012, compared to 3.42% and 3.56%, respectively, for the three months ended June 30, 2011.

Interest and Dividend Income. Interest and dividend income decreased by $243,000, or 1.5%, to $15.5 million for the three months ended June 30, 2012 from $15.7 million for the three months ended June 30, 2011. Interest income on investment securities decreased by $596,000, or 8.7%, to $6.3 million for the three months ended June 30, 2012 from $6.9 million for the three months ended June 30, 2011. The decrease in interest income on securities occurred primarily because of a 38 basis point decrease in the average securities yield that was partially offset by a $1.3 million increase in the average securities balance. The decline in the average yield on investments occurred as repayments on higher yielding mortgage-backed securities were reinvested at lower yields. Interest income on loans increased by $347,000, or 4.0%, to $9.1 million for the three months ended June 30, 2012 from $8.8 million for the three months ended June 30, 2011. The increase in interest income on loans occurred because the average balance of loans grew by $62.1 million, or 9.4%, as new loan originations exceeded loan repayments and loan sales. The increase in interest income was partially offset by a 27 basis point decline in the average loan yield to 5.04% for the three months ended June 30, 2012. The decline in the average yield on loans occurred because of repayments on higher-yielding loans and additions of new loans with lower yields to the loan portfolio.

Interest Expense. Interest expense decreased by $340,000, or 11.9%, to $2.5 million for the three months ended June 30, 2012 compared to $2.9 million for the three months ended June 30, 2011. Interest expense on securities sold under agreements to repurchase decreased by $221,000, or 21.0%, during the three months ended June 30, 2012. This decrease was caused by a $17.1 million, or 14.5%, decrease in the average outstanding balance and a 28 basis point, or 7.8%, decrease in the average interest rate. The decrease in the average outstanding balance was primarily due to the prepayment of $15.0 million of borrowings during the three months ended June 30, 2012. Interest expense on deposits decreased by $119,000, or 7.0%, to $1.6 million for the three months ended June 30, 2012 from $1.7 million for the three months ended June 30, 2011. During the three months ended June 30, 2012, interest expense on certificates of deposit and savings accounts declined by $92,000 and $22,000, respectively, due to a decrease in the average interest rates of 19 and seven basis points, respectively. We lowered the rates we pay on certificates of deposit and savings accounts due to declining market interest rates and increased liquidity from principal repayments on loans and mortgage-backed securities. However, the interest rates on our savings accounts are still higher than market interest rates. The decrease in the average interest rate on deposits was partially offset by a $91.6 million, or 8.4%, increase in the average balance of deposit accounts.

 

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Provision for Loan Losses. We recorded a reversal of $79,000 of loan loss provisions for the three months ended June 30, 2012 and a $14,000 provision for loan losses for the three months ended June 30, 2011. The reversal of loan loss provisions in the three months ended June 30, 2012 occurred because of an improvement in the credit quality of the loan portfolio. The reversal of loan loss provisions reflected a net charge-off of $7,000 for the three months ended June 30, 2012 and resulted in a ratio of the allowance for loan losses to total loans of 0.20% at June 30, 2012. The provision for loan losses for the three months ended June 30, 2011 included a net charge-off of $12,000 and resulted in a ratio of allowance for loan losses to total loans of 0.24% at June 30, 2011. Nonaccrual loans totaled $2.9 million at June 30, 2012, or 0.39% of total loans at that date, compared to $1.0 million of nonaccrual loans at June 30, 2011, or 0.15% of total loans at that date. Nonaccrual loans as of June 30, 2012 and 2011 consisted primarily of one- to four-family residential real estate loans. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2012 and 2011. For additional information see footnote (6) “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.

Noninterest Income. The following table summarizes changes in noninterest income between the three months ended June 30, 2012 and 2011.

 

     Three Months Ended
June  30,
     Change  
     2012      2011      $ Change     % Change  
     (In thousands)  

Service fees on loan and deposit accounts

   $ 480       $ 598       $ (118     (19.7 )% 

Income on bank-owned life insurance

     234         241         (7     (2.9 )% 

Gain on sale of investment securities

     172         0         172        n/a   

Gain on sale of loans

     406         92         314        341.3

Other

     115         292         (177     (60.6 )% 
  

 

 

    

 

 

    

 

 

   

Total

   $ 1,407       $ 1,223       $ 184        15.0
  

 

 

    

 

 

    

 

 

   

Noninterest income rose by $184,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. During the three months ended June 30, 2012 and 2011, we sold $22.3 million and $6.9 million, respectively, of mortgage loans held for sale and recognized gains of $406,000 and $92,000, respectively. During the three months ended June 30, 2012, we also sold $2.8 million of held-to-maturity investment securities and recognized a gain of $172,000. The sale of these securities, for which the Company had already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining securities in the held-to-maturity portfolio. Other noninterest income decreased by $177,000 primarily due to a legal settlement of a $194,000 insurance claim during the three months ended June 30, 2011.

 

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Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended June 30, 2012 and 2011.