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TBNK > SEC Filings for TBNK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for TERRITORIAL BANCORP INC.

Form 10-Q for TERRITORIAL BANCORP INC.


8-Aug-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.


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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, 2013.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Assets. At June 30, 2014, our assets were $1.648 billion, an increase of $30.9 million, or 1.9%, from $1.617 billion at December 31, 2013. The increase in assets was primarily the result of an increase in loans receivable that was partially offset by a decrease in cash.


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Cash and Cash Equivalents. Cash and cash equivalents were $58.7 million at June 30, 2014, a decrease of $16.7 million since December 31, 2013. During the six months ended June 30, 2014, cash was used to fund a $45.7 million increase in total loans. In addition, the Company repurchased $3.9 million of common stock and paid $2.8 million of common stock dividends. This was partially offset by a $29.2 million increase in deposits.

Loans. Total loans, including $1.5 million of loans held for sale, were $904.5 million at June 30, 2014, or 54.9% of total assets. During the six months ended June 30, 2014, the loan portfolio increased by $45.7 million, or 5.3%. 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 June 30, 2014, our securities portfolio totaled $613.2 million, or 37.2% of total assets. At June 30, 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.

At June 30, 2014, we owned trust preferred securities with a carrying value of $657,000. 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 30 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 $18.54 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 June 30, 2014.

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 $1.318 billion at June 30, 2014, an increase of $29.2 million, or 2.3%, 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 six months ended June 30, 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.


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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.

                                                For the Three Months Ended June 30,
                                            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)              $    844,303   $   9,208    4.36%     $    773,771   $   8,691    4.49%
Multi-family residential            4,739          67     5.66            5,702          83     5.82
Construction, commercial
and other                          17,895         226     5.05           12,963         152     4.69
Home equity loans and
lines of credit                    15,588         192     4.93           14,976         202     5.40
Other loans                         4,691          67     5.71            4,673          71     6.08
Total loans                       887,216       9,760     4.40          812,085       9,199     4.53
Investment securities:
U.S. government sponsored
mortgage-backed securities
(2)                               620,848       5,086     3.28          567,134       4,518     3.19
Trust preferred securities            655           -      -                458           -      -
Total securities                  621,503       5,086     3.27          567,592       4,518     3.18
Other                              70,428          35     0.20          127,222          66     0.21
Total interest-earning
assets                          1,579,147      14,881     3.77        1,506,899      13,783     3.66
Non-interest-earning
assets                             64,470                                60,197
Total assets                 $  1,643,617                          $  1,567,096

Interest-bearing
liabilities:
Savings accounts             $    923,491   $     834    0.36%     $    887,430   $     756    0.34%
Certificates of deposit           209,269         261     0.50          190,265         311     0.65
Money market accounts                 850           -      -                774           1     0.52
Checking and Super NOW
accounts                          143,120           8     0.02          127,346           6     0.02
Total interest-bearing
deposits                        1,276,730       1,103     0.35        1,205,815       1,074     0.36
Federal Home Loan Bank
advances                           15,000          66     1.76           13,406          65     1.94
Securities sold under
agreements to repurchase           72,000         343     1.91           65,000         471     2.90
Total interest-bearing
liabilities                     1,363,730       1,512     0.44        1,284,221       1,610     0.50
Non-interest-bearing
liabilities                        65,964                                62,209
Total liabilities               1,429,694                             1,346,430
Stockholders' equity              213,923                               220,666
Total liabilities and
stockholders' equity         $  1,643,617                          $  1,567,096

Net interest income                         $  13,369                             $  12,173
Net interest rate spread
(3)                                                      3.33%                                 3.16%
Net interest-earning
assets (4)                   $    215,417                          $    222,678
Net interest margin (5)                                  3.39%                                 3.23%
Interest-earning assets to
interest-bearing
liabilities                       115.80%                               117.34%



(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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                                                 For the Six Months Ended June 30,
                                            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)              $    833,656   $  18,218    4.37%     $    761,986   $  17,371    4.56%
Multi-family residential            4,795         135     5.63            6,273         182     5.80
Construction, commercial
and other                          16,617         422     5.08           13,363         329     4.92
Home equity loans and
lines of credit                    15,967         391     4.90           14,910         406     5.45
Other loans                         4,646         134     5.77            4,705         141     5.99
Total loans                       875,681      19,300     4.41          801,237      18,429     4.60
Investment securities:
U.S. government sponsored
mortgage-backed securities
(2)                               619,290      10,160     3.28          556,132       9,072     3.26
Trust preferred securities            597           -      -                440           -      -
Total securities                  619,887      10,160     3.28          556,572       9,072     3.26
Other                              76,879          78     0.20          152,971         164     0.21
Total interest-earning
assets                          1,572,447      29,538     3.76        1,510,780      27,665     3.66
Non-interest-earning
assets                             64,958                                58,283
Total assets                 $  1,637,405                          $  1,569,063

Interest-bearing
liabilities:
Savings accounts             $    919,571   $   1,639    0.36%     $    885,111   $   1,544    0.35%
Certificates of deposit           211,370         539     0.51          194,026         635     0.65
Money market accounts                 838           1     0.24              710           1     0.28
Checking and Super NOW
accounts                          140,748          15     0.02          124,945          14     0.02
Total interest-bearing
deposits                        1,272,527       2,194     0.34        1,204,792       2,194     0.36
Federal Home Loan Bank
advances                           15,000         132     1.76           16,685         168     2.01
Securities sold under
agreements to repurchase           72,000         686     1.91           65,746         948     2.88
Total interest-bearing
liabilities                     1,359,527       3,012     0.44        1,287,223       3,310     0.51
Non-interest-bearing
liabilities                        65,096                                61,890
Total liabilities               1,424,623                             1,349,113
Stockholders' equity              212,782                               219,950
Total liabilities and
stockholders' equity         $  1,637,405                          $  1,569,063

Net interest income                         $  26,526                             $  24,355
Net interest rate spread
(3)                                                      3.32%                                 3.15%
Net interest-earning
assets (4)                   $    212,920                          $    223,557
Net interest margin (5)                                  3.37%                                 3.22%
Interest-earning assets to
interest-bearing
liabilities                       115.66%                               117.37%



(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, 2014 and 2013

General. Net income increased by $58,000, or 1.6%, to $3.7 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in net income was primarily caused by a $1.1 million increase in interest and dividend income, a $98,000 decrease in interest expense and a $218,000 decrease in income taxes. This was partially offset by a $1.0 million decrease in noninterest income, a $172,000 increase in the provision for loan losses and a $152,000 increase in noninterest expense.

Net Interest Income. Net interest income increased by $1.2 million, or 9.8%, to $13.4 million for the three months ended June 30, 2014 compared to $12.2 million for the three months ended June 30, 2013. Interest and dividend income increased by $1.1 million, or 8.0%, due primarily to an 11 basis point increase in the average yield on interest-earning assets and a $72.2 million increase in the average balance of interest-earning assets. Interest expense decreased by $98,000, or 6.1%, due to a six basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a $79.5 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 3.33% and 3.39%, respectively, for the three months ended June 30, 2014, compared to 3.16% and 3.23%, respectively, for the three months ended June 30, 2013.

Interest and Dividend Income. Interest and dividend income increased by $1.1 million, or 8.0%, to $14.9 million for the three months ended June 30, 2014 from $13.8 million for the three months ended June 30, 2013. Interest income on investment securities increased by $568,000, or 12.6%, to $5.1 million for the three months ended June 30, 2014 from $4.5 million for the three months ended June 30, 2013. The increase in interest income on securities occurred primarily because of a $53.9 million increase in the average securities balance and a nine basis point increase in the average securities yield. The increase in the average securities balance occurred as the purchase of securities exceeded repayments and the amount of securities sold. The increase in the yield on securities occurred as we added higher- yielding securities to our investment portfolio and a decline in the amortization of premiums paid for securities. Interest income on loans increased by $561,000, or 6.1%, to $9.8 million for the three months ended June 30, 2014 from $9.2 million for the three months ended June 30, 2013. The increase in interest income on loans occurred because the average balance of loans grew by $75.1 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 13 basis point decline in the average loan yield to 4.40% for the three months ended June 30, 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 $98,000, or 6.1%, to $1.5 million for the three months ended June 30, 2014 compared to $1.6 million for the three months ended June 30, 2013. Interest expense on securities sold under agreements to repurchase decreased by $128,000, or 27.2%, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The decrease in interest expense on securities sold under agreements to repurchase was caused by a 99 basis point decrease in the average interest rate to 1.91% for the three months ended June 30, 2014 compared to 2.90% for the three months ended June 30, 2013. The decrease in the average rate on securities sold under agreements to repurchase was partially offset by a $7.0 million, or 10.8%, 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 increased by $1,000, or 1.5%, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was caused by a $1.6 million,


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or 11.9% increase in the average outstanding balance that was partially offset by an 18 basis point decrease in the average interest rate to 1.76% for the three months ended June 30, 2014 compared to 1.94% for the three months ended June 30, 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 increased by $29,000, or 2.7%, to $1.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in interest expense on deposits occurred primarily because the average outstanding balance of deposits increased by $70.9 million, or 5.9%, to $1.277 billion during the three months ended June 30, 2014 compared to $1.206 billion during the three months ended June 30, 2013. This was partially offset by the decrease in average interest rate by one basis point to 0.35% during the three months ended June 30, 2014 compared to 0.36% for the three months ended June 30, 2013. We lowered the rates we paid 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 were still higher than market interest rates in Hawaii.

Provision for Loan Losses. We recorded a provision for loan losses of $156,000 for the three months ended June 30, 2014 and a reversal of provision for loan losses of $16,000 for the three months ended June 30, 2013. The net charge-offs for the three months ended June 30, 2014 and 2013 were $131,000 and $29,000, respectively. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.17% and 0.20% at June 30, 2014 and 2013, respectively. Nonaccrual loans totaled $5.1 million at June 30, 2014, or 0.56% of total loans at that date, compared to $5.4 million of nonaccrual loans at June 30, 2013, or 0.65% of total loans at that date. Nonaccrual loans as of June 30, 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 June 30, 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 June 30, 2014 and 2013.

                                              Three Months Ended
                                                   June 30,                 Change
                                               2014         2013     $ Change    % Change
                                                           (In thousands)

Service fees on loan and deposit accounts   $      524    $    568   $     (44 )  (7.7)%
Income on bank-owned life insurance                264         258           6     2.3%
Gain on sale of investment securities              309       1,024        (715 ) (69.8)%
Gain on sale of loans                               86         380        (294 ) (77.4)%
Other                                               96          81          15    18.5%
Total                                       $    1,279    $  2,311   $  (1,032 ) (44.7)%

Noninterest income decreased by $1.0 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. During the three months ended June 30, 2014 and 2013, we sold $3.2 million and $14.5 million, respectively, of held-to-maturity investment securities and recognized gains of $309,000 and $1.0 million, 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 June 30, 2014 and 2013, we also sold $7.0 million and $22.3 million, respectively, of mortgage loans held for sale to reduce interest rate risk and recognized gains of $86,000 and $380,000, respectively.


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Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended June 30, 2014 and 2013.

                                              Three Months Ended
                                                   June 30,                 Change
                                               2014         2013     $ Change    % Change
                                                           (In thousands)

Salaries and employee benefits              $    5,297    $  5,012   $     285     5.7%
Occupancy                                        1,409       1,333          76     5.7%
Equipment                                          905         851          54     6.3%
Federal deposit insurance premiums                 201         191          10     5.2%
Other general and administrative expenses          935       1,208        (273 ) (22.6)%
Total                                       $    8,747    $  8,595   $     152     1.8%

Noninterest expense rose by $152,000 for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Salaries and employee benefits increased by $285,000 to $5.3 million for the three months ended June 30, 2014 from $5.0 million for the three months ended June 30, 2013. The . . .

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