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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 March 31, 2021

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  001-34403

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock

TBNK

The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 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 

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: 9,522,833 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of April 30, 2021.

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

39

ITEM 4.

CONTROLS AND PROCEDURES

40

PART II

ITEM 1.

LEGAL PROCEEDINGS

41

ITEM 1A.

RISK FACTORS

41

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

41

ITEM 4.

MINE SAFETY DISCLOSURES

41

ITEM 5.

OTHER INFORMATION

41

ITEM 6.

EXHIBITS

41

SIGNATURES

43

Table of Contents

PART I

ITEM 1.     FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

March 31,

 

December 31,

 

 

 

2021

 

2020

 

ASSETS

Cash and cash equivalents

$

410,793

$

363,543

Investment securities available for sale, at fair value

2,312

3,562

Investment securities held to maturity, at amortized cost (fair value of $303,454 and $262,841 at March 31, 2021 and December 31, 2020, respectively)

 

296,033

 

247,642

Loans held for sale

 

253

 

2,195

Loans receivable, net

 

1,339,539

 

1,406,995

Federal Home Loan Bank stock, at cost

 

8,173

 

8,144

Federal Reserve Bank stock, at cost

3,152

3,145

Accrued interest receivable

 

6,373

 

6,515

Premises and equipment, net

 

4,618

 

4,855

Right-of-use asset, net

13,995

12,333

Bank-owned life insurance

 

45,832

 

45,644

Deferred income tax assets, net

 

2,935

 

3,382

Prepaid expenses and other assets

 

5,553

 

2,844

Total assets

$

2,139,561

$

2,110,799

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Deposits

$

1,687,122

$

1,659,800

Advances from the Federal Home Loan Bank

 

141,000

 

141,000

Securities sold under agreements to repurchase

 

10,000

 

10,000

Accounts payable and accrued expenses

 

28,183

 

29,221

Lease liability

14,792

13,119

Income taxes payable

 

3,042

 

2,161

Advance payments by borrowers for taxes and insurance

 

3,770

 

6,790

Total liabilities

 

1,887,909

 

1,862,091

Commitments and contingencies

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 9,522,833 and 9,513,867 shares at March 31, 2021 and December 31, 2020, respectively

 

95

 

95

Additional paid-in capital

 

61,141

 

61,153

Unearned ESOP shares

 

(3,792)

 

(3,915)

Retained earnings

 

202,985

 

200,066

Accumulated other comprehensive loss

 

(8,777)

 

(8,691)

Total stockholders’ equity

 

251,652

 

248,708

Total liabilities and stockholders’ equity

$

2,139,561

$

2,110,799

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

2020

 

Interest income:

Loans

$

13,049

$

15,457

Investment securities

1,825

2,780

Other investments

 

231

 

344

Total interest income

 

15,105

 

18,581

Interest expense:

Deposits

 

1,317

 

3,124

Advances from the Federal Home Loan Bank

 

536

 

895

Securities sold under agreements to repurchase

 

46

 

45

Total interest expense

 

1,899

 

4,064

Net interest income

 

13,206

 

14,517

(Reversal of provision) provision for loan losses

 

(913)

 

217

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

 

14,119

 

14,300

Noninterest income:

Service and other fees

 

995

 

453

Income on bank-owned life insurance

 

188

 

202

Gain on sale of investment securities

 

526

 

178

Gain on sale of loans

 

420

 

407

Other

 

110

 

61

Total noninterest income

 

2,239

 

1,301

Noninterest expense:

Salaries and employee benefits

 

5,523

 

5,684

Occupancy

 

1,647

 

1,645

Equipment

 

1,130

 

1,120

Federal deposit insurance premiums

 

141

 

Other general and administrative expenses

 

1,113

 

1,089

Total noninterest expense

 

9,554

 

9,538

Income before income taxes

 

6,804

 

6,063

Income taxes

 

1,791

 

1,590

Net income

$

5,013

$

4,473

Basic earnings per share

$

0.55

$

0.48

Diluted earnings per share

$

0.55

$

0.48

Cash dividends declared per common share

$

0.23

$

0.23

Basic weighted-average shares outstanding

 

9,130,777

 

9,237,466

Diluted weighted-average shares outstanding

 

9,153,450

 

9,319,599

See accompanying notes to consolidated financial statements.

2

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

2020

 

Net income

$

5,013

$

4,473

Unrealized loss on securities, net of tax

 

(86)

 

(102)

Other comprehensive loss, net of tax

 

(86)

 

(102)

Comprehensive income

$

4,927

$

4,371

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

 

 

 

 

 

 

Common

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

 

Shares

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Outstanding

 

Stock

 

Capital

 

Shares

 

Earnings

 

Loss

 

Equity

 

Balances at December 31, 2019

9,681,493

$

97

$

65,057

$

(4,404)

$

190,808

$

(7,668)

$

243,890

Net income

 

4,473

4,473

Other comprehensive loss

 

(102)

(102)

Cash dividends declared ($0.23 per share)

 

(2,121)

(2,121)

Share-based compensation

15,671

 

157

157

Allocation of 12,233 ESOP shares

 

217

122

339

Repurchase shares of common stock

(126,379)

 

(1)

(3,107)

(3,108)

Exercise of options for common stock

22,547

391

391

Balances at March 31, 2020

9,593,332

$

96

$

62,715

$

(4,282)

$

193,160

$

(7,770)

$

243,919

4

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

Shares

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

Outstanding

 

Stock

 

Capital

 

Shares

 

Earnings

 

Loss

 

Equity

Balances at December 31, 2020

9,513,867

$

95

$

61,153

$

(3,915)

$

200,066

$

(8,691)

$

248,708

Net income

 

5,013

5,013

Other comprehensive loss

 

(86)

(86)

Cash dividends declared ($0.23 per share)

 

(2,094)

(2,094)

Share-based compensation

20,437

 

113

113

Allocation of 12,234 ESOP shares

 

194

123

317

Repurchase of shares of common stock

(11,471)

 

(319)

(319)

Balances at March 31, 2021

9,522,833

$

95

$

61,141

$

(3,792)

$

202,985

$

(8,777)

$

251,652

See accompanying notes to consolidated financial statements.

5

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

2020

 

Cash flows from operating activities:

Net income

$

5,013

$

4,473

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

(Reversal of provision) provision for loan losses

 

(913)

 

217

Depreciation and amortization

 

296

 

293

Deferred income tax expense

 

478

 

156

Amortization of fees, discounts, and premiums, net

 

(134)

 

(95)

Amortization of right-of-use asset

776

724

Origination of loans held for sale

 

(10,136)

 

(2,862)

Proceeds from sales of loans held for sale

 

12,498

 

2,652

Gain on sale of loans, net

 

(420)

 

(407)

Gain on sale of investment securities available for sale

(106)

(150)

Gain on sale of investment securities held to maturity

 

(420)

 

(28)

ESOP expense

 

317

 

339

Share-based compensation expense

 

113

 

157

Decrease (increase) in accrued interest receivable

 

142

 

(56)

Net increase in bank-owned life insurance

 

(188)

 

(202)

Net increase in prepaid expenses and other assets

 

(2,709)

 

(1)

Net decrease in accounts payable and accrued expenses

 

(342)

 

(1,313)

Net decrease in lease liability

(765)

(710)

Net decrease in advance payments by borrowers for taxes and insurance

 

(3,020)

 

(2,949)

Net increase in income taxes payable

 

881

 

1,045

Net cash from operating activities

 

1,361

 

1,283

Cash flows from investing activities:

Purchases of investment securities held to maturity

 

(83,539)

 

Principal repayments on investment securities held to maturity

 

30,293

 

12,367

Principal repayments on investment securities available for sale

193

343

Proceeds from sale of investment securities held to maturity

 

5,248

 

757

Proceeds from sale of investment securities available for sale

1,049

1,893

Principal repayments on loans receivable, net of loan originations

 

68,527

 

13,650

Purchases of Federal Home Loan Bank stock

(29)

(21)

Purchases of Federal Reserve Bank stock

(7)

(6)

Purchases of premises and equipment

 

(59)

 

(91)

Net cash from investing activities

 

21,676

 

28,892

(Continued)

6

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2021

 

2020

Cash flows from financing activities:

Net increase in deposits

$

27,322

$

25,098

Proceeds from securities sold under agreements to repurchase

 

 

5,000

Repayments of securities sold under agreements to repurchase

 

 

(5,000)

Repurchases of common stock

 

 

(2,193)

Cash dividends paid

 

(3,109)

 

(2,140)

Net cash from financing activities

 

24,213

 

20,765

Net increase in cash and cash equivalents

 

47,250

 

50,940

Cash and cash equivalents at beginning of the period

 

363,543

 

44,806

Cash and cash equivalents at end of the period

$

410,793

$

95,746

Supplemental disclosure of cash flow information:

Cash paid for:

Interest on deposits and borrowings

$

1,892

$

4,254

Income taxes

 

432

 

389

Supplemental disclosure of noncash investing and financing activities:

Company stock repurchased, not settled

$

$

524

Company stock acquired through stock swap and net settlement transactions

391

Company stock repurchased through stock swap and net settlement transactions

319

391

Loans securitized into investment securities

9,431

Establishment of right-of-use asset, net of incentives

2,438

1,768

Establishment of lease liability

2,438

1,768

See accompanying notes to consolidated financial statements.

7

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1)      Organization

Territorial Bancorp Inc. is a Maryland corporation and is the holding company for Territorial Savings Bank. Territorial Savings Bank is a Hawaii state-chartered bank headquartered in Honolulu, Hawaii and is a member of the Federal Reserve System. Territorial Savings Bank has two inactive subsidiaries, Territorial Real Estate Co., Inc. and Territorial Financial Services, Inc.

(2)      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 annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited 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, 2020. 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. 

.

(3)      Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) amended various sections of the FASB Accounting Standards Codification (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. In November 2019, the FASB issued an update that delays the effective date of the amendment for smaller reporting companies, as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022. The Company is a smaller reporting company. 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 has formed a team that is working on an implementation plan to adopt the amendment. The implementation plan will include developing policies, procedures and internal controls over the model. The Company is also working with a software vendor to measure expected losses required by the amendment. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. Eligible loan modifications under the CARES Act must be related to the COVID-19 pandemic and the borrower must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must be executed during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after the end of the national emergency. On December 21, 2020, legislation extended the troubled debt restructuring relief provisions of the CARES Act to January

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1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 loan modification should not be considered a troubled debt restructuring if the borrower was not more than 30 days past due on payments at the time the loan modification program was implemented and the modification is considered short-term (not to exceed six months).

(4)      Cash and Cash Equivalents

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

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2021

 

2020

 

Cash and due from banks

$

13,259

$

14,355

Interest-earning deposits in other banks

 

397,534

 

349,188

Cash and cash equivalents

$

410,793

$

363,543

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

(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

 

March 31, 2021:

Available-for-sale:

U.S. government-sponsored mortgage-backed securities

$

2,052

$

260

 

$

$

2,312

Total

$

2,052

$

260

 

$

$

2,312

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

296,033

$

10,132

 

$

(2,711)

$

303,454

Total

$

296,033

$

10,132

 

$

(2,711)

$

303,454

December 31, 2020:

Available-for-sale:

U.S. government-sponsored mortgage-backed securities

$

3,185

$

377

 

$

$

3,562

Total

$

3,185

$

377

 

$

$

3,562

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

247,642

$

15,200

 

$

(1)

$

262,841

Total

$

247,642

$

15,200

 

$

(1)

$

262,841

The amortized cost and estimated fair value of investment securities by maturity date at March 31, 2021 are shown below. Incorporated in the maturity schedule are mortgage-backed securities, which are allocated using the

9

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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.

 

    

Amortized

    

Estimated

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Available-for-sale:

Due within 5 years

$

$

Due after 5 years through 10 years

 

 

Due after 10 years

 

2,052

 

2,312

Total

$

2,052

$

2,312

Held-to-maturity:

Due within 5 years

$

$

Due after 5 years through 10 years

 

54

 

53

Due after 10 years

 

295,979

 

303,401

Total

$

296,033

$

303,454

Realized gains and losses and the proceeds from sales of held-to-maturity and available-for-sale securities are shown in the table below.

Three Months Ended

March 31,

(Dollars in thousands)

 

2021

 

2020

 

Proceeds from sales

$

6,297

$

2,650

Gross gains

 

526

 

178

Gross losses

 

 

During the three months ended March 31, 2021 and 2020, the Company sold $4.8 million and $729,000, respectively, of held-to-maturity mortgage-backed securities and recorded gains of $420,000 and $28,000, respectively. The sale of the mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.

During the three months ended March 31, 2021 and 2020, the Company sold $943,000 and $1.7 million, respectively, of available-for-sale mortgage-backed securities and recorded gains of $106,000 and $150,000, respectively.

Investment securities with amortized costs of $170.5 million and $192.7 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure deposits made by state and local governments, 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 March 31, 2021 and December 31, 2020. The Company does not intend to sell held-to-maturity and available-for-sale securities

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until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Number of

 

 

 

 

Unrealized

 

Description of securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

(Dollars in thousands)

 

March 31, 2021:

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

80,745

$

(2,710)

$

48

$

(1)

 

12

$

80,793

$

(2,711)

December 31, 2020:

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

678

$

(1)

$

4

$

 

6

$

682

$

(1)

Mortgage-Backed Securities. The unrealized losses on th