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TBNK > SEC Filings for TBNK > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for TERRITORIAL BANCORP INC.

Form 10-Q for TERRITORIAL BANCORP INC.


12-May-2014

Quarterly Report


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

Cautionary Statement Regarding Forward-Looking Information

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

general economic conditions, either 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.


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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, 2013.

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Assets. At March 31, 2014, our assets were $1.640 billion, an increase of $23.1 million, or 1.4%, from $1.617 billion at December 31, 2013. The increase in assets was primarily the result of an increase in loans receivable and investment securities.

Cash and Cash Equivalents. Cash and cash equivalents were $72.1 million at March 31, 2014, a decrease of $3.2 million since December 31, 2013. During the three months ended March 31, 2014, cash was used to fund a $14.9 million increase in total loans and a $10.2 million increase in investment securities. In addition, the Company repurchased $3.9 million of common stock and paid $1.3 million of common stock dividends. This was partially offset by a $28.6 million increase in deposits.

Loans. Total loans, including $1.0 million of loans held for sale, were $873.6 million at March 31, 2014, or 53.3% of total assets. During the three months ended March 31, 2014, the loan portfolio increased by $14.9 million, or 1.7%. The increase in the loan portfolio primarily occurred as the production of new one- to four-family residential loans exceeded principal repayments and loan sales.

Securities. At March 31, 2014, our securities portfolio totaled $623.6 million, or 38.0% of total assets. At March 31, 2014, 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 three months ended March 31, 2014, our securities portfolio increased by $10.2 million, or 1.7%, as purchases exceeded repayments and sales.

At March 31, 2014, we owned trust preferred securities with a carrying value of $655,000. 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 three transactions have occurred over the past 27 months in the same tranche of securities that we own. We used a discounted cash flow model to determine whether these securities were 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. We used a discount rate equal to three-month LIBOR plus 20.00% and provided a fair value estimate of $18.51 per $100 of par value for PreTSL XXIII.

Based on the Company's review, the Company's investment in trust preferred securities did not incur additional impairment during the quarter ending March 31, 2014.


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It is reasonably possible that the fair values of the trust preferred securities could decline in the near term if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low. As a result, there is a risk that the Company's remaining amortized cost basis of $1.1 million on its trust preferred securities could be credit-related other-than-temporarily impaired in the near term. The impairment could be material to the Company's consolidated statements of income.

Deposits. Deposits were $1.317 billion at March 31, 2014, an increase of $28.6 million, or 2.2%, since December 31, 2013. The growth in deposits occurred in savings and checking accounts.

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Seattle and funds borrowed under securities sold under agreements to repurchase. During the three months ended March 31, 2014, our borrowings remained constant at $87.0 million. We have not required any other borrowings to fund our operations. Instead, we have primarily funded our operations with additional deposits, proceeds from loan and security sales and principal repayments on loans and mortgage-backed securities.

Average Balances and Yields

The following table sets 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 March 31,
                                            2014                                  2013
                               Average                               Average
                             Outstanding                 Yield/    Outstanding                 Yield/
                               Balance      Interest    Rate (1)     Balance      Interest    Rate (1)
                                                      (Dollars in thousands)

Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family
residential (2)              $    822,891   $   9,010    4.38%     $    750,070   $   8,680    4.63%
Multi-family residential            4,852          68     5.61            6,850          99     5.78
Construction, commercial
and other                          15,325         196     5.12           13,767         177     5.14
Home equity loans and
lines of credit                    16,350         199     4.87           14,843         204     5.50
Other loans                         4,601          67     5.82            4,737          70     5.91
Total loans                       864,019       9,540     4.42          790,267       9,230     4.67
Investment securities:
U.S. government sponsored
mortgage-backed securities
(2)                               617,715       5,074     3.29          545,008       4,554     3.34
Trust preferred securities            538           -      -                422           -      -
Total securities                  618,253       5,074     3.28          545,430       4,554     3.34
Other                              83,402          43     0.21          179,006          98     0.22
Total interest-earning
assets                          1,565,674      14,657     3.74        1,514,703      13,882     3.67
Non-interest-earning
assets                             65,449                                56,347
Total assets                 $  1,631,123                          $  1,571,050

Interest-bearing
liabilities:
Savings accounts             $    915,607   $     805    0.35%     $    882,766   $     788    0.36%
Certificates of deposit           213,494         278     0.52          197,829         324     0.66
Money market accounts                 826           1     0.48              645           -      -
Checking and Super NOW
accounts                          138,350           7     0.02          122,517           8     0.03
Total interest-bearing
deposits                        1,268,277       1,091     0.34        1,203,757       1,120     0.37
Federal Home Loan Bank
advances                           15,000          66     1.76           20,000         103     2.06
Securities sold under
agreements to repurchase           72,000         343     1.91           66,500         477     2.87
Total interest-bearing
liabilities                     1,355,277       1,500     0.44        1,290,257       1,700     0.53
Non-interest-bearing
liabilities                        64,218                                61,567
Total liabilities               1,419,495                             1,351,824
Stockholders' equity              211,628                               219,226
Total liabilities and
stockholders' equity         $  1,631,123                          $  1,571,050

Net interest income                         $  13,157                             $  12,182
Net interest rate spread
(3)                                                      3.30%                                 3.14%
Net interest-earning
assets (4)                   $    210,397                          $    224,446
Net interest margin (5)                                  3.36%                                 3.22%
Interest-earning assets to
interest-bearing
liabilities                       115.52%                               117.40%



(1) Annualized

(2) Average balance includes loans or investments available for sale, as applicable.

(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.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. Net income decreased by $179,000, or 4.9%, to $3.5 million for the three months ended March 31, 2014 from $3.6 million for the three months ended March 31, 2013. The decrease in net income was primarily caused by a $1.0 million decrease in noninterest income and a $148,000 increase in noninterest expense. This was partially offset by a $775,000 increase in interest and dividend income and a $200,000 decrease in interest expense.


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Net Interest Income. Net interest income increased by $975,000, or 8.0%, to $13.2 million for the three months ended March 31, 2014 compared to $12.2 million for the three months ended March 31, 2013. Interest and dividend income increased by $775,000, or 5.6%, due primarily to a seven basis point increase in the average yield on interest-earning assets and a $51.0 million increase in the average balance of interest-earning assets. Interest expense decreased by $200,000, or 11.8%, due to a nine basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a $65.0 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 3.30% and 3.36%, respectively, for the three months ended March 31, 2014, compared to 3.14% and 3.22%, respectively, for the three months ended March 31, 2013.

Interest and Dividend Income. Interest and dividend income increased by $775,000 or 5.6%, to $14.7 million for the three months ended March 31, 2014 from $13.9 million for the three months ended March 31, 2013. Interest income on investment securities increased by $520,000, or 11.4%, to $5.1 million for the three months ended March 31, 2014 from $4.6 million for the three months ended March 31, 2013. The increase in interest income on securities occurred primarily because of a $72.8 million increase in the average securities balance that was partially offset by a six basis point decrease in the average securities yield. Interest income on loans increased by $310,000, or 3.4%, to $9.5 million for the three months ended March 31, 2014 from $9.2 million for the three months ended March 31, 2013. The increase in interest income on loans occurred because the average balance of loans grew by $73.8 million, or 9.3%, as new loan originations exceeded loan repayments and loan sales. The increase in interest income that occurred because of growth in the loan portfolio was partially offset by a 25 basis point decline in the average loan yield to 4.42% for the three months ended March 31, 2014. 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 $200,000, or 11.8%, to $1.5 million for the three months ended March 31, 2014 compared to $1.7 million for the three months ended March 31, 2013. Interest expense on securities sold under agreements to repurchase decreased by $134,000, or 28.1%, during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was caused by a 96 basis point decrease in the average interest rate to 1.91% for the three months ended March 31, 2014 compared to 2.87% for the three months ended March 31, 2013 and was partially offset by a $5.5 million, or 8.3%, increase in the average outstanding balance. The decrease in the average interest rate on securities sold under agreements to repurchase occurred as higher costing agreements matured and were refinanced at lower interest rates. Interest expense on FHLB advances decreased by $37,000, or 35.9%, during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was caused by a $5.0 million, or 25.0% decrease in the average outstanding balance and a 30 basis point decrease in the average interest rate to 1.76% for the three months ended March 31, 2014 compared to 2.06% for the three months ended March 31, 2013. The decrease in the average interest rate on FHLB advances occurred as higher costing advances matured and were refinanced at lower interest rates. Interest expense on deposits decreased by $29,000, or 2.6%, to $1.1 million for the three months ended March 31, 2014 from $1.1 million for the three months ended March 31, 2013. The average interest rate on deposits decreased by three basis points, or 8.1%, to 0.34% during the three months ended March 31, 2014 compared to 0.37% for the three months ended March 31, 2013. We lowered the rates we pay on deposits 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 in Hawaii. The decrease in the average interest rate on deposits was partially offset by an increase in the average outstanding balance of deposits of $64.5 million, or 5.4%, to $1.268 billion compared to $1.204 billion for the three months ended March 31, 2013.


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Provision for Loan Losses. We recorded provisions for loan losses of $9,000 and $18,000 for the three months ended March 31, 2014 and 2013, respectively. The provisions for loan losses reflected net charge-offs of $10,000 and $23,000 for the three months ended March 31, 2014 and 2013, respectively. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.21% at March 31, 2014 and 2013, respectively. Nonaccrual loans totaled $5.1 million at March 31, 2014, or 0.58% of total loans at that date, compared to $5.1 million of nonaccrual loans at March 31, 2013, or 0.64% of total loans at that date. Nonaccrual loans as of March 31, 2014 and 2013 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 March 31, 2014 and 2013. 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 March 31, 2014 and 2013.

                                              Three Months Ended
                                                  March 31,                 Change
                                               2014         2013     $ Change    % Change
                                                       (Dollars in thousands)

Service fees on loan and deposit accounts   $      499    $    501   $      (2 )  (0.4)%
Income on bank-owned life insurance                268         221          47    21.3%
Gain on sale of investment securities              346         888        (542 ) (61.0)%
Gain on sale of loans                               79         645        (566 ) (87.8)%
Other                                              166         105          61    58.1%
Total                                       $    1,358    $  2,360   $  (1,002 ) (42.5)%

Noninterest income decreased by $1.0 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. During the three months ended March 31, 2014 and 2013, we sold $8.4 million and $12.7 million, respectively, of held-to-maturity and trading investment securities and recognized gains of $346,000 and $888,000, respectively. The sale of held-to-maturity 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. During the three months ended March 31, 2014 and 2013, we also sold $9.9 million and $24.9 million, respectively, of mortgage loans held for sale to reduce interest rate risk and recognized gains of $79,000 and $645,000, respectively.

Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended March 31, 2014 and 2013.

                                              Three Months Ended
                                                  March 31,                 Change
                                               2014         2013     $ Change    % Change
                                                       (Dollars in thousands)

Salaries and employee benefits              $    5,363    $  5,352   $      11     0.2%
Occupancy                                        1,422       1,251         171    13.7%
Equipment                                          914         872          42     4.8%
Federal deposit insurance premiums                 199         190           9     4.7%
Other general and administrative expenses          966       1,051         (85 )  (8.1)%
Total                                       $    8,864    $  8,716   $     148     1.7%

Noninterest expense rose by $148,000 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Occupancy expense increased by $171,000 to $1.4 million for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2013. The increase in occupancy expense was due to higher repairs and maintenance costs, depreciation and rent expense.


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Income Tax Expense. Income taxes were $2.2 million for each of the three months ended March 31, 2014 and 2013, reflecting an effective tax rate of 38.6% and 37.3%, respectively. The effective tax rate for 2014 was slightly higher than the effective tax rate in 2013 primarily due to a decrease in permanent tax benefits related to compensation.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments, advances from the Federal Home Loan Bank of Seattle, securities sold under agreements to repurchase, proceeds from loan and security sales and principal repayments on securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We have established an Asset/Liability Management Committee, consisting of our President and Chief Executive Officer, our Vice Chairman and Co-Chief Operating Officer, our Senior Vice President and Treasurer and our Vice President and Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2014.

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

(i) expected loan demand;

(ii) expected deposit flows and borrowing maturities;

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

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

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

Our most liquid asset is cash. The amount of this asset is dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2014, cash and cash equivalents totaled $72.1 million. On that date, we had $72.0 million in securities sold under agreements to repurchase outstanding and $15.0 million of Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $389.2 million under Federal Home Loan Bank advances.

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

At March 31, 2014, we had $14.5 million in loan commitments outstanding, most of which were for fixed-rate loans, and had $25.0 million in unused lines of credit to borrowers. Certificates of deposit due within one year at March 31, 2014 totaled $156.8 million, or 11.9% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2015. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.


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Our primary investing activities are originating loans and purchasing mortgage-backed securities. During the three months ended March 31, 2014 and 2013, we originated $45.2 million and $86.1 million of loans, respectively, and purchased $27.9 million and $74.6 million of securities, respectively.

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances and securities sold under agreements to repurchase. We experienced a net increase in deposits of $28.6 million for the three months ended March 31, 2014 and a net decrease in deposits of $613,000 for the three months ended March 31, 2013. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Seattle, which provide an additional source of funds. Federal Home Loan Bank advances remained . . .

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