tbnk_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period ended June 30, 2018

 

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, former address and formal fiscal year, if changed since last report)

 

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

 

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

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

(Do not check if a smaller reporting company)

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 9,739,697 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2018.

 

 

 


 

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

28

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

ITEM 4. 

CONTROLS AND PROCEDURES

43

 

 

 

PART II 

 

ITEM 1. 

LEGAL PROCEEDINGS

44

ITEM 1A. 

RISK FACTORS

44

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

44

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

44

ITEM 4. 

MINE SAFETY DISCLOSURES

44

ITEM 5. 

OTHER INFORMATION

44

ITEM 6. 

EXHIBITS

44

 

 

 

SIGNATURES 

46

 

 

 


 

Table of Contents

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,672

 

$

32,089

 

Investment securities available for sale

 

 

2,658

 

 

2,851

 

Investment securities held to maturity, at amortized cost (fair value of $382,962 and $406,663 at June 30, 2018 and December 31, 2017, respectively)

 

 

392,189

 

 

404,792

 

Loans held for sale

 

 

 —

 

 

403

 

Loans receivable, net

 

 

1,536,392

 

 

1,488,971

 

Federal Home Loan Bank stock, at cost

 

 

5,925

 

 

6,541

 

Federal Reserve Bank stock, at cost

 

 

3,106

 

 

3,103

 

Accrued interest receivable

 

 

5,195

 

 

5,142

 

Premises and equipment, net

 

 

5,362

 

 

5,721

 

Bank-owned life insurance

 

 

44,631

 

 

44,201

 

Income taxes receivable

 

 

1,196

 

 

1,571

 

Deferred income tax assets, net

 

 

4,210

 

 

4,609

 

Prepaid expenses and other assets

 

 

3,923

 

 

3,852

 

Total assets

 

$

2,032,459

 

$

2,003,846

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits

 

$

1,647,183

 

$

1,597,295

 

Advances from the Federal Home Loan Bank

 

 

88,000

 

 

107,200

 

Securities sold under agreements to repurchase

 

 

30,000

 

 

30,000

 

Accounts payable and accrued expenses

 

 

24,418

 

 

26,390

 

Income taxes payable

 

 

1,459

 

 

1,483

 

Advance payments by borrowers for taxes and insurance

 

 

6,700

 

 

6,624

 

  Total liabilities

 

 

1,797,760

 

 

1,768,992

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; authorized 50,000,000 shares, no shares issued or outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 9,749,697 and 9,915,058 shares at June 30, 2018 and December 31, 2017, respectively

 

 

98

 

 

99

 

Additional paid-in capital

 

 

67,584

 

 

73,050

 

Unearned ESOP shares

 

 

(5,138)

 

 

(5,383)

 

Retained earnings

 

 

179,044

 

 

172,782

 

Accumulated other comprehensive loss

 

 

(6,889)

 

 

(5,694)

 

  Total stockholders’ equity

 

 

234,699

 

 

234,854

 

  Total liabilities and stockholders’ equity

 

$

2,032,459

 

$

2,003,846

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

1


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

14,884

 

$

13,527

 

$

29,791

 

$

27,040

 

Investment securities

 

 

3,122

 

 

3,078

 

 

6,251

 

 

6,159

 

Other investments

 

 

176

 

 

172

 

 

374

 

 

359

 

Total interest income

 

 

18,182

 

 

16,777

 

 

36,416

 

 

33,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,690

 

 

1,775

 

 

5,141

 

 

3,426

 

Advances from the Federal Home Loan Bank

 

 

459

 

 

261

 

 

878

 

 

515

 

Securities sold under agreements to repurchase

 

 

126

 

 

217

 

 

251

 

 

433

 

Total interest expense

 

 

3,275

 

 

2,253

 

 

6,270

 

 

4,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

14,907

 

 

14,524

 

 

30,146

 

 

29,184

 

Provision (reversal of provision) for loan losses

 

 

60

 

 

(123)

 

 

69

 

 

(52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14,847

 

 

14,647

 

 

30,077

 

 

29,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fees on loan and deposit accounts

 

 

487

 

 

507

 

 

902

 

 

1,063

 

Income on bank-owned life insurance

 

 

216

 

 

227

 

 

431

 

 

453

 

Gain on sale of investment securities

 

 

45

 

 

186

 

 

45

 

 

281

 

Gain on sale of loans

 

 

10

 

 

63

 

 

53

 

 

126

 

Other

 

 

79

 

 

76

 

 

148

 

 

158

 

Total noninterest income

 

 

837

 

 

1,059

 

 

1,579

 

 

2,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,496

 

 

4,900

 

 

11,143

 

 

9,983

 

Occupancy

 

 

1,574

 

 

1,461

 

 

3,090

 

 

2,910

 

Equipment

 

 

997

 

 

882

 

 

1,939

 

 

1,748

 

Federal deposit insurance premiums

 

 

154

 

 

148

 

 

307

 

 

296

 

Other general and administrative expenses

 

 

1,153

 

 

1,363

 

 

2,288

 

 

2,524

 

Total noninterest expense

 

 

9,374

 

 

8,754

 

 

18,767

 

 

17,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

6,310

 

 

6,952

 

 

12,889

 

 

13,856

 

Income taxes

 

 

1,347

 

 

2,651

 

 

3,106

 

 

5,234

 

Net income

 

$

4,963

 

$

4,301

 

$

9,783

 

$

8,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.54

 

$

0.46

 

$

1.05

 

$

0.93

 

Diluted earnings per share

 

$

0.53

 

$

0.45

 

$

1.03

 

$

0.90

 

Cash dividends declared per common share

 

$

0.30

 

$

0.20

 

$

0.50

 

$

0.40

 

Basic weighted-average shares outstanding

 

 

9,219,859

 

 

9,255,739

 

 

9,251,999

 

 

9,235,553

 

Diluted weighted-average shares outstanding

 

 

9,394,031

 

 

9,539,757

 

 

9,439,618

 

 

9,539,543

 

 

See accompanying notes to consolidated financial statements.

2


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2018

    

2017

 

2018

 

2017

 

Net income

 

$

4,963

 

$

4,301

 

$

9,783

 

$

8,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on securities, net of tax

 

 

(11)

 

 

(15)

 

 

(60)

 

 

(13)

 

Other comprehensive loss, net of tax

 

 

(11)

 

 

(15)

 

 

(60)

 

 

(13)

 

Comprehensive income

 

$

4,952

 

$

4,286

 

$

9,723

 

$

8,609

 

 

See accompanying notes to consolidated financial statements.

3


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Capital

 

Shares

 

Earnings

 

Loss

 

Equity

 

Balances at December 31, 2016

 

$

98

 

$

71,914

 

$

(5,872)

 

$

168,962

 

$

(5,316)

 

$

229,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

8,622

 

 

 —

 

 

8,622

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

 

(13)

 

Cash dividends declared ($0.40 per share)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,692)

 

 

 —

 

 

(3,692)

 

Share-based compensation

 

 

 —

 

 

(11)

 

 

 —

 

 

 —

 

 

 —

 

 

(11)

 

Allocation of 24,466 ESOP shares

 

 

 —

 

 

530

 

 

245

 

 

 —

 

 

 —

 

 

775

 

Repurchase of 59,430 shares of company common stock

 

 

(1)

 

 

(1,924)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,925)

 

Exercise of 110,894 options for common stock

 

 

 1

 

 

1,924

 

 

 —

 

 

 —

 

 

 —

 

 

1,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2017

 

$

98

 

$

72,433

 

$

(5,627)

 

$

173,892

 

$

(5,329)

 

$

235,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

$

99

 

$

73,050

 

$

(5,383)

 

$

172,782

 

$

(5,694)

 

$

234,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

9,783

 

 

 —

 

 

9,783

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(60)

 

 

(60)

 

Reclassification of deferred taxes

 

 

 —

 

 

 —

 

 

 —

 

 

1,135

 

 

(1,135)

 

 

 —

 

Cash dividends declared ($0.50 per share)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,656)

 

 

 —

 

 

(4,656)

 

Share-based compensation

 

 

 —

 

 

135

 

 

 —

 

 

 —

 

 

 —

 

 

135

 

Allocation of 24,466 ESOP shares

 

 

 —

 

 

504

 

 

245

 

 

 —

 

 

 —

 

 

749

 

Repurchase of 237,570 shares of company common stock

 

 

(2)

 

 

(7,302)

 

 

 —

 

 

 —

 

 

 —

 

 

(7,304)

 

Exercise of 69,008 options for common stock

 

 

 1

 

 

1,197

 

 

 —

 

 

 —

 

 

 —

 

 

1,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2018

 

$

98

 

$

67,584

 

$

(5,138)

 

$

179,044

 

$

(6,889)

 

$

234,699

 

 

See accompanying notes to consolidated financial statements.

4


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

9,783

 

$

8,622

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

Provision (reversal of provision) for loan losses

 

 

69

 

 

(52)

 

Depreciation and amortization

 

 

630

 

 

513

 

Deferred income tax expense

 

 

421

 

 

379

 

Amortization of fees, discounts, and premiums, net

 

 

(235)

 

 

(235)

 

Origination of loans held for sale

 

 

(6,612)

 

 

(16,006)

 

Proceeds from sales of loans held for sale

 

 

7,068

 

 

16,568

 

Gain on sale of loans, net

 

 

(53)

 

 

(126)

 

Net gain on sale of real estate owned

 

 

(4)

 

 

 —

 

Gain on sale of investment securities held to maturity

 

 

(45)

 

 

(281)

 

ESOP expense

 

 

749

 

 

775

 

Share-based compensation expense (benefit)

 

 

135

 

 

(11)

 

Increase in accrued interest receivable

 

 

(53)

 

 

(37)

 

Net increase in bank-owned life insurance

 

 

(430)

 

 

(453)

 

Net increase in prepaid expenses and other assets

 

 

(71)

 

 

(171)

 

Net increase (decrease) in accounts payable and accrued expenses

 

 

(2,963)

 

 

666

 

Net increase in advance payments by borrowers for taxes and insurance

 

 

76

 

 

257

 

Net decrease in income taxes receivable

 

 

375

 

 

122

 

Net increase (decrease) in income taxes payable

 

 

(24)

 

 

592

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

8,816

 

 

11,122

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investment securities held to maturity

 

 

(14,983)

 

 

(19,908)

 

Purchases of investment securities available for sale

 

 

 —

 

 

(2,970)

 

Principal repayments on investment securities held to maturity

 

 

23,188

 

 

27,245

 

Principal repayments on investment securities available for sale

 

 

106

 

 

 —

 

Proceeds from sale of investment securities held to maturity

 

 

4,462

 

 

5,053

 

Loan originations, net of principal repayments on loans receivable

 

 

(47,315)

 

 

(68,203)

 

Purchases of Federal Home Loan Bank stock

 

 

(2,672)

 

 

(483)

 

Proceeds from redemption of Federal Home Loan Bank stock

 

 

3,288

 

 

415

 

Purchases of Federal Reserve Bank stock

 

 

(3)

 

 

(8)

 

Proceeds from sale of real estate owned

 

 

50

 

 

 —

 

Purchases of premises and equipment

 

 

(271)

 

 

(1,313)

 

 

 

 

 

 

 

 

 

Net cash from investing activities

 

 

(34,150)

 

 

(60,172)

 

 

(Continued)

 

5


 

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

2017

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

$

49,888

 

$

39,357

 

Proceeds from advances from the Federal Home Loan Bank

 

 

53,000

 

 

10,375

 

Repayments of advances from the Federal Home Loan Bank

 

 

(72,200)

 

 

(10,375)

 

Repurchases of common stock

 

 

(6,106)

 

 

 —

 

Cash dividends paid

 

 

(3,665)

 

 

(3,692)

 

 

 

 

 

 

 

 

 

Net cash from financing activities

 

 

20,917

 

 

35,665

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(4,417)

 

 

(13,385)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

 

32,089

 

 

61,273

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

27,672

 

$

47,888

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest on deposits and borrowings

 

$

6,475

 

$

4,308

 

Income taxes

 

 

2,334

 

 

4,212

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Company stock acquired through stock swap and net settlement transactions

 

$

1,198

 

$

1,925

 

Loans transferred to real estate owned

 

 

46

 

 

 —

 

Dividends declared, not yet paid

 

 

991

 

 

 —

 

 

See accompanying notes to consolidated financial statements.

 

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)      Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2017.  In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.

.

 

(2)      Organization

 

On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock holding company.  As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group, Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008.  The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion.  The balance of the liquidation account at December 31, 2017 was $11.0 million.

 

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

 

(3)      Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) amended the Revenue Recognition topic of the FASB Accounting Standards Codification (ASC).  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The Company reviewed all revenue sources to determine if the sources are in scope for this guidance.  Net interest income from financial assets and liabilities are explicitly excluded from the scope of the amendment.  The Company’s overall assessment of key in-scope revenue sources include service charges on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity sales.  Based on the Company’s analysis of these revenue sources, including the amount of revenue, the timing of services rendered and timing of payment for these services, there is no material change in the timing of revenue recognition under the amendment.  The Company adopted this amendment as of January 1, 2018, using the modified retrospective approach.  Since there was no material impact on the timing of revenue recognition, no adjustment to beginning retained earnings was deemed necessary.  See Note 14, Revenue Recognition, for further information.

 

In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.  The amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial instruments.  Included are: (a) a requirement to measure equity investments at fair value, with changes in fair value recognized in net income, (b) a simplification of the impairment assessment of equity investments without readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.  The Company adopted this amendment as of January 1, 2018, and there was no material effect on its consolidated financial statements.

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

 

In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit losses on financial instruments.  The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model.  The new model is referred to as the current expected credit loss model and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.  The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.  The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements by gathering the information that is necessary to make the calculations required by the amendment.  This may result in increased credit losses on financial instruments recorded in the consolidated financial statements.

 

In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC.  The amendment requires the service cost component of net benefit cost to be reported in the same line item as other compensation costs arising from employee services.  It also requires the other components of net benefit cost to be reported in the income statement separately from the service cost component.  The Company adopted this amendment as of January 1, 2018, and there was no material effect on its consolidated financial statements.

 

In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of the FASB ASC.  Prior to the adoption of the amendment, deferred taxes previously included in accumulated other comprehensive income were not allowed to be adjusted for changes in tax rates.  This amendment allows the reclassification of the tax effects resulting from the change in the federal corporate tax rate in the Tax Cuts and Jobs Act, which was passed in December 2017, from accumulated other comprehensive income to retained earnings.  The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period for which financial statements have not yet been issued.  The Company adopted this amendment during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes from accumulated other comprehensive income to retained earnings.

 

 

(4)      Cash and Cash Equivalents

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2018

 

2017

 

Cash and due from banks

 

$

9,781

 

$

9,114

 

Interest-earning deposits in other banks

 

 

17,891

 

 

22,975

 

  Cash and cash equivalents

 

$

27,672

 

$

32,089

 

 

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

 

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(5)      Investment Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Gross Unrealized

 

Estimated

 

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

2,764

 

$

 —

 

$

(106)

 

$

2,658

 

Total

 

$

2,764

 

$

 —

 

$

(106)

 

$

2,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

392,059

 

$

2,049

 

$

(11,877)

 

$

382,231

 

Trust preferred securities

 

 

130

 

 

601

 

 

 —

 

 

731

 

Total

 

$

392,189

 

$

2,650

 

$

(11,877)

 

$

382,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

2,870

 

$

 —

 

$

(19)

 

$

2,851

 

Total

 

$

2,870

 

$

 —

 

$

(19)

 

$

2,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

404,365

 

$

6,056

 

$

(4,603)

 

$

405,818

 

Trust preferred securities

 

 

427

 

 

418

 

 

 —

 

 

845

 

Total

 

$

404,792

 

$

6,474

 

$

(4,603)

 

$

406,663

 

 

The amortized cost and estimated fair value of investment securities by maturity date at June 30, 2018 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.