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 ~~September 30, 2022~~March 31, 2023

☐ 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~~1003 Bishop Street, Pauahi Tower Suite ~~2200~~500, 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, a 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: ~~9,113,668~~8,924,931 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of ~~October 31, 2022.~~April 30, 2023.

Table of Contents

TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

September 30,

December 31,

2022

2021

ASSETS

Cash and cash equivalents

$
36,286

$
99,859

Investment securities available for sale, at fair value

21,142

—

Investment securities held to maturity, at amortized cost (fair value of $585,752 and $634,987 at September 30, 2022 and December 31, 2021, respectively)

717,434

636,442

Loans receivable, net

1,295,044

1,302,824

Federal Home Loan Bank stock, at cost

8,197

8,173

Federal Reserve Bank stock, at cost

3,171

3,158

Accrued interest receivable

6,061

5,786

Premises and equipment, net

6,114

4,065

Right-of-use asset, net

14,649

9,982

Bank-owned life insurance

47,583

51,423

Deferred income tax assets, net

2,335

1,927

Prepaid expenses and other assets

6,807

6,963

Total assets

$
2,164,823

$
2,130,602

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Deposits

$
1,711,853

$
1,681,828

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

24,105

22,638

Lease liability

15,396

10,744

Income taxes payable

2,684

1,863

Advance payments by borrowers for taxes and insurance

3,040

6,207

Total liabilities

1,908,078

1,874,280

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 9,113,668 and 9,324,060 shares at September 30, 2022 and December 31, 2021, respectively

91

93

Additional paid-in capital

52,440

56,951

Unearned ESOP shares

(3,058)

(3,425)

Retained earnings

214,787

208,227

Accumulated other comprehensive loss

(7,515)

(5,524)

Total stockholders’ equity

256,745

256,322

Total liabilities and stockholders’ equity

$
2,164,823

$
2,130,602


	March 31,		December 31,
	2023		2022
ASSETS
Cash and cash equivalents	$	84,860	$	40,553
Investment securities available for sale, at fair value		21,073		20,821
Investment securities held to maturity, at amortized cost (fair value of $602,045 and $591,084 at March 31, 2023 and December 31, 2022, respectively)		715,601		717,773
Loans receivable, net		1,291,310		1,294,764
Federal Home Loan Bank stock, at cost		12,444		8,197
Federal Reserve Bank stock, at cost		3,177		3,170
Accrued interest receivable		6,128		6,115
Premises and equipment, net		7,422		7,599
Right-of-use asset, net		13,901		14,498
Bank-owned life insurance		47,986		47,783
Deferred income tax assets, net		2,097		1,643
Prepaid expenses and other assets		6,828		6,676
Total assets	$	2,212,827	$	2,169,592

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,661,973	$	1,716,152
Advances from the Federal Home Loan Bank		246,000		141,000
Securities sold under agreements to repurchase		10,000		10,000
Accounts payable and accrued expenses		22,453		24,180
Lease liability		14,720		15,295
Income taxes payable		1,034		838
Advance payments by borrowers for taxes and insurance		2,886		5,577
Total liabilities		1,959,066		1,913,042

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 9,006,551 and 9,071,076 shares at March 31, 2023 and December 31, 2022, respectively		90		91
Additional paid-in capital		50,556		51,825
Unearned ESOP shares		(2,814)		(2,936)
Retained earnings		213,336		215,314
Accumulated other comprehensive loss		(7,407)		(7,744)
Total stockholders’ equity		253,761		256,550
Total liabilities and stockholders’ equity	$	2,212,827	$	2,169,592

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~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				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Interest income:
Loans	$	11,376	$	11,836	$	33,909	$	37,019	$	11,454	$	11,357
Investment securities		4,402		3,251		11,753		7,470		4,540		3,423
Other investments		373		188		816		647		727		176
Total interest income		16,151		15,275		46,478		45,136		16,721		14,956

Interest expense:
Deposits		1,242		844		2,577		3,251		3,530		597
Advances from the Federal Home Loan Bank		522		522		1,549		1,595		1,054		511
Securities sold under agreements to repurchase		46		46		137		137		46		44
Total interest expense		1,810		1,412		4,263		4,983		4,630		1,152

Net interest income		14,341		13,863		42,215		40,153		12,091		13,804
Reversal of provision for loan losses		(109)		(167)		(603)		(1,452)
Reversal of provision for credit losses										(100)		(168)

Net interest income after reversal of provision for loan losses		14,450		14,030		42,818		41,605
Net interest income after reversal of provision for credit losses										12,191		13,972

Noninterest income:
Service and other fees		339		433		1,092		1,958		310		341
Income on bank-owned life insurance		200		192		591		570		203		197
Gain on sale of investment securities		—		403		—		1,840
Net gain (loss) on sale of loans		—		138		(3)		584
Net gain on sale of loans										1		18
Other		76		57		1,359		237		75		1,097
Total noninterest income		615		1,223		3,039		5,189		589		1,653

Noninterest expense:
Salaries and employee benefits		5,513		5,493		16,518		16,576		5,404		5,613
Occupancy		1,682		1,636		4,924		4,855		1,623		1,594
Equipment		1,317		1,079		3,749		3,273		1,312		1,196
Federal deposit insurance premiums		145		141		429		424		245		141
Other general and administrative expenses		1,112		1,215		3,291		3,602		1,029		1,054
Total noninterest expense		9,769		9,564		28,911		28,730		9,613		9,598

Income before income taxes		5,296		5,689		16,946		18,064		3,167		6,027
Income taxes		1,405		1,527		4,235		4,831		851		1,317
Net income	$	3,891	$	4,162	$	12,711	$	13,233	$	2,316	$	4,710

Basic earnings per share	$	0.44	$	0.46	$	1.42	$	1.45	$	0.26	$	0.52
Diluted earnings per share	$	0.44	$	0.46	$	1.41	$	1.44	$	0.26	$	0.52
Cash dividends declared per common share	$	0.23	$	0.23	$	0.69	$	0.69	$	0.23	$	0.23
Basic weighted-average shares outstanding		8,802,010		9,012,398		8,885,626		9,086,447		8,774,634		8,980,135
Diluted weighted-average shares outstanding		8,846,611		9,056,569		8,938,808		9,131,069		8,806,744		9,014,454

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Net income	$	3,891	$	4,162	$	12,711	$	13,233	$	2,316	$	4,710

Other comprehensive loss, net of tax:
Unrealized loss on securities		(1,114)		—		(1,991)		(3)
Amount reclassified from other comprehensive income		—		—		—		(273)
Total other comprehensive loss, net of tax		(1,114)		—		(1,991)		(276)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities										337		(103)
Total other comprehensive income (loss), net of tax										337		(103)
Comprehensive income	$	2,777	$	4,162	$	10,720	$	12,957	$	2,653	$	4,607

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


										Accumulated													Accumulated
	Common			Additional		Unearned				Other		Total		Common			Additional		Unearned				Other		Total
	Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’		Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity		Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity
Balance at June 30, 2021	9,421,560	$	94	$	58,860	$	(3,670)	$	204,928	$	(8,967)	$	251,245

Net income	—		—		—		—		4,162		—		4,162
Cash dividends declared ($0.23 per share)	—		—		—		—		(2,083)		—		(2,083)
Share-based compensation	—		—		36		—		—		—		36
Allocation of 12,233 ESOP shares	—		—		188		122		—		—		310
Repurchase of shares of common stock	(79,398)		(1)		(1,980)		—		—		—		(1,981)

Balances at September 30, 2021	9,342,162	$	93	$	57,104	$	(3,548)	$	207,007	$	(8,967)	$	251,689

Balances at December 31, 2020	9,513,867	$	95	$	61,153	$	(3,915)	$	200,066	$	(8,691)	$	248,708
Balances at December 31, 2021														9,324,060	$	93	$	56,951	$	(3,425)	$	208,227	$	(5,524)	$	256,322

Net income	—		—		—		—		13,233		—		13,233	—		—		—		—		4,710		—		4,710
Other comprehensive loss	—		—		—		—		—		(276)		(276)	—		—		—		—		—		(103)		(103)
Cash dividends declared ($0.69 per share)	—		—		—		—		(6,292)		—		(6,292)
Cash dividends declared ($0.23 per share)														—		—		—		—		(2,055)		—		(2,055)
Share-based compensation	20,437		—		241		—		—		—		241	15,671		—		134		—		—		—		134
Allocation of 36,700 ESOP shares	—		—		575		367		—		—		942
Allocation of 12,234 ESOP shares														—		—		182		122		—		—		304
Repurchase of shares of common stock	(192,142)		(2)		(4,865)		—		—		—		(4,867)	(53,741)		—		(1,330)		—		—		—		(1,330)

Balances at September 30, 2021	9,342,162	$	93	$	57,104	$	(3,548)	$	207,007	$	(8,967)	$	251,689
Balances at March 31, 2022														9,285,990	$	93	$	55,937	$	(3,303)	$	210,882	$	(5,627)	$	257,982

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


										Accumulated													Accumulated
	Common			Additional		Unearned				Other		Total		Common			Additional		Unearned				Other		Total
	Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’		Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity		Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity
Balance at June 30, 2022	9,120,458	$	91	$	52,464	$	(3,181)	$	212,932	$	(6,401)	$	255,905
Balances at December 31, 2022														9,071,076	$	91	$	51,825	$	(2,936)	$	215,314	$	(7,744)	$	256,550

Net income	—		—		—		—		3,891		—		3,891	—		—		—		—		2,316		—		2,316
Other comprehensive loss	—		—		—		—		—		(1,114)		(1,114)
Other comprehensive income														—		—		—		—		—		337		337
Cumulative change in accounting principle (1)																						(2,319)				(2,319)
Cash dividends declared ($0.23 per share)	—		—		—		—		(2,036)		—		(2,036)	—		—		—		—		(1,975)		—		(1,975)
Share-based compensation	—		—		(18)		—		—		—		(18)	4,540		—		(42)		—		—		—		(42)
Allocation of 12,233 ESOP shares	—		—		135		123		—		—		258
Allocation of 12,234 ESOP shares														—		—		159		122		—		—		281
Repurchase of shares of common stock	(6,790)		—		(141)		—		—		—		(141)	(69,065)		(1)		(1,386)		—		—		—		(1,387)

Balances at September 30, 2022	9,113,668	$	91	$	52,440	$	(3,058)	$	214,787	$	(7,515)	$	256,745

Balances at December 31, 2021	9,324,060	$	93	$	56,951	$	(3,425)	$	208,227	$	(5,524)	$	256,322

Net income	—		—		—		—		12,711		—		12,711
Other comprehensive loss	—		—		—		—		—		(1,991)		(1,991)
Cash dividends declared ($0.69 per share)	—		—		—		—		(6,151)		—		(6,151)
Share-based compensation	19,227		—		256		—		—		—		256
Allocation of 36,700 ESOP shares	—		—		467		367		—		—		834
Repurchase of shares of common stock	(229,619)		(2)		(5,234)		—		—		—		(5,236)

Balances at September 30, 2022	9,113,668	$	91	$	52,440	$	(3,058)	$	214,787	$	(7,515)	$	256,745
Balances at March 31, 2023														9,006,551	$	90	$	50,556	$	(2,814)	$	213,336	$	(7,407)	$	253,761

(1) Represents the impact of the adoption of Accounting Standards Update 2016-13. See Note 6 to the consolidated financial statements for additional information.

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
Cash flows from operating activities:
Net income	$	12,711	$	13,233	$	2,316	$	4,710
Adjustments to reconcile net income to net cash from operating activities:
Reversal of provision for loan losses		(603)		(1,452)
Adjustments to reconcile net income to net cash used in operating activities:
Reversal of provision for credit losses						(100)		(168)
Depreciation and amortization		916		870		292		317
Deferred income tax expense		314		179		266		232
Amortization of fees, discounts, and premiums, net		(109)		(311)
(Accretion) amortization of fees, discounts, and premiums, net						(90)		43
Amortization of right-of-use asset		2,166		2,316		716		700
Origination of loans held for sale		(5,302)		(24,304)		(355)		(3,032)
Proceeds from sales of loans held for sale		5,299		26,595		356		1,988
Loss (gain) on sale of loans, net		3		(584)
Gain on sale of investment securities available for sale		—		(339)
Gain on sale of investment securities held to maturity		—		(1,501)
Net loss on disposal of premises and equipment		—		2
Gain on bank-owned life insurance		(1,138)		—
Gain on sale of loans, net						(1)		(7)
ESOP expense		834		942		281		304
Share-based compensation expense		256		241		(42)		134
Net (increase) decrease in accrued interest receivable		(275)		445
Net increase in accrued interest receivable						(13)		(63)
Net increase in bank-owned life insurance		(591)		(570)		(203)		(197)
Net decrease (increase) in prepaid expenses and other assets		156		(2,481)
Net increase in accounts payable and accrued expenses		1,258		814
Net increase in prepaid expenses and other assets						(154)		(5,661)
Net decrease in accounts payable and accrued expenses						(1,661)		(233)
Net decrease in lease liability		(2,181)		(2,285)		(694)		(702)
Net decrease in advance payments by borrowers for taxes and insurance		(3,167)		(3,063)		(2,691)		(2,649)
Net increase in income taxes payable		821		35		196		610

Net cash from operating activities		11,368		8,782
Net cash used in operating activities						(1,581)		(3,674)

Cash flows from investing activities:
Purchases of investment securities held to maturity		(132,612)		(474,439)		(6,693)		(46,832)
Purchases of investment securities available for sale		(24,760)		—		—		(5,408)
Principal repayments on investment securities held to maturity		51,609		78,547		8,879		19,403
Principal repayments on investment securities available for sale		948		198		220		—
Proceeds from sale of investment securities held to maturity		—		23,570
Proceeds from sale of investment securities available for sale		—		3,330
Principal repayments on loans receivable, net of loan originations		8,459		104,832		409		7,680
Purchases of Federal Home Loan Bank stock		(24)		(29)		(5,087)		(24)
Proceeds from redemption of Federal Home Loan Bank stock						840		—
Purchases of Federal Reserve Bank stock		(13)		(13)		(7)		(5)
Proceeds from bank-owned life insurance		5,569		—		—		4,431
Purchases of premises and equipment		(2,965)		(279)		(116)		(138)

Net cash from investing activities		(93,789)		(264,283)
Net cash used in investing activities						(1,555)		(20,893)

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Nine Months Ended

September 30,

2022

2021

Cash flows from financing activities:

Net increase in deposits

$
30,025

$
5,163

Repurchases of common stock

(4,999)

(4,547)

Cash dividends paid

(6,178)

(7,272)

Net cash from financing activities

18,848

(6,656)

Net decrease in cash and cash equivalents

(63,573)

(262,157)

Cash and cash equivalents at beginning of the period

99,859

363,543

Cash and cash equivalents at end of the period

$
36,286

$
101,386

Supplemental disclosure of cash flow information:

Cash paid for:

Interest on deposits and borrowings

$
2,345

$
4,966

Income taxes

2,355

4,617

Supplemental disclosure of noncash investing and financing activities:

Company stock repurchased through stock swap and net settlement transactions

$
237

$
320

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

6,833

3,285

Establishment of lease liability, net of modifications

6,833

3,285


	2023		2022
Cash flows from financing activities:
Net decrease in deposits	$	(54,179)	$	(6,260)
Proceeds from advances from the Federal Home Loan Bank		126,000		—
Repayments of advances from the Federal Home Loan Bank		(21,000)		—
Repurchases of common stock		(1,345)		(1,135)
Cash dividends paid		(2,033)		(2,113)

Net cash provided by (used in) financing activities		47,443		(9,508)

Net change in cash and cash equivalents		44,307		(34,075)

Cash and cash equivalents at beginning of the year		40,553		99,859

Cash and cash equivalents at end of the year	$	84,860	$	65,784

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	4,318	$	1,141
Income taxes		390		475

Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased through stock swap and net settlement transactions	$	43	$	194
Establishment of right-of-use asset, net of incentives and modifications		118		4,798
Establishment of lease liability, net of modifications		118		4,798

See accompanying ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Organization

Territorial Bancorp Inc. (the Company) is a Maryland corporation and is the holding company for Territorial Savings Bank (the 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 an inactive subsidiary, Territorial Financial Services, Inc. ~~During 2021, another inactive subsidiary, Territorial Real Estate Co., was dissolved.~~

(2) ~~Basis~~Summary of ~~Presentation~~Significant Accounting Policies

(a)

Basis of Presentation

The accompanying unaudited interim condensed 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, ~~2021.~~2022. 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.

(b)

Allowance of Credit Losses (ACL) on Loans and Securities

The current expected credit losses (CECL) accounting standard requires an estimate of the credit losses expected over the life of the financial instrument. CECL replaces the incurred loss approach that delayed the recognition of a credit loss until it was probable and a loss event occurred.

.The estimate of expected credit losses is based on information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial instruments. Historical loss experience is generally the starting point for estimating expected credit losses. The Company considers whether the historical loss experience should be adjusted for asset specific risk characteristics or current conditions at the reporting date that did not exist over the historical reporting period. These qualitative adjustment can include changes in the economy, loan underwriting standards, and delinquency trends. The Company then considers future economic conditions as part of the one year reasonable and supportable forecast period.

The Bank’s loan portfolio is segmented into three pools: real estate, commercial and consumer loans. Only three pools are used to segment the Bank’s loan portfolio because they share the same risk characteristics and were originated using similar underwriting standards. Loans that do not share similar risk characteristics would be evaluated on an individual basis and excluded from the collective evaluation.

The real estate pool consists primarily of residential mortgage loans secured by real estate in Hawaii. These loans have fixed interest rates, loan terms of up to 30 years, and were originated using similar loan terms. The commercial loan pool consists of business loans. The consumer loan pool consists primarily of home equity lines of credit secured by real estate in Hawaii.

The ACL on loans is estimated by calculating the total present value of expected cash flows discounted by the loan’s effective interest rate. The expected cash flows includes estimates of loan charge-offs and recoveries, loan prepayments, and credit utilization. The expected cash flows on the loans are adjusted using forecasts of economic variables which have a strong correlation with loan charge-offs and recoveries, prepayments, and credit utilization during the one year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the

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historical reversion rate is used to calculate loan charge-offs and recoveries, prepayments, and credit utilization. The reversion rate is based on historical averages. Qualitative adjustments may be made to account for current conditions and forward looking events not captured in the historical information.

The ACL is calculated on a loan by loan basis. If the loan’s amortized cost basis is less than the total present value of cash flows calculated using a discounted cash flow approach, the ACL is equal to the amortized cost basis minus the total present value of cash flows on the loan discounted by the loan’s effective interest rate. Charge-offs to the ACL are made when management determines that the collectability of all or a portion of a loan is doubtful and available collateral is insufficient to repay the loan.

A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For loans which are considered to be collateral-dependent, the Company has elected to estimate the expected credit loss based on the fair value of the collateral less selling costs. If the fair value of the collateral less selling costs is less than the loan’s fair value, the Company records a partial charge-off to reduce the loan’s amortized cost basis for the difference between the collateral fair value less selling costs and the amortized cost basis.

Loans receivable are stated at amortized cost which includes the principal amount outstanding, less the allowance for credit losses, deferred loan origination fees and costs, commitment fees, and cumulative net charge-offs. Interest income on loans receivable is accrued as earned.

The Company has a policy of placing loans on a nonaccrual basis when 90 days or more contractually delinquent or when, in the opinion of management, collection of all or part of the principal balance appears doubtful, unless the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued and not collected is reversed against current period interest income. For nonaccrual loans, the Company records payments received as a reduction in principal. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current and full payment of principal and interest is expected.

Accrued interest receivable on loans was $4.5 million as of March 31, 2023 and is included in Accrued interest receivable on the Consolidated Balance Sheet.

The Company is required to utilize the CECL methodology to estimate expected credit losses with respect to held-to-maturity (HTM) investment securities. Since all of the Company’s HTM investment securities were issued by U.S. government agencies or U.S. government sponsored enterprises, which include the explicit and/or implicit guarantee of the U.S. government and have a long history of no credit losses, the Company did not record a credit loss on these securities. The unrealized losses on these securities were due to changes in interest rates, relative to when the securities were purchased, and are not due to decreases in the credit quality of the securities.

Available for sale (AFS) investment securities in an unrealized loss position are evaluated for impairment. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the investment securities amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

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Since all of the Company’s AFS investment securities were issued by U.S. government agencies or U.S. government sponsored enterprises and include the explicit and/or implicit guarantee of the U.S. government, the Company did not record a credit loss on these securities. The unrealized loss on AFS securities were due to changes in interest rates, relative to when the securities were purchased. Management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is zero and an ACL was not recorded.

(3) Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU 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~~standard 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 iswas 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~~adopted the ~~amendment’s~~standard on January 1, 2023, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings ~~at the beginning~~as of January 1, 2023. Upon adoption of the ~~first period~~standard, the ~~amendment is effective.~~Company recorded a $3.2 million increase to the reserve for credit losses, which resulted in a $2.3 million after-tax decrease to retained earnings as of January 1, 2023. The ~~Company has formed a team that is working on~~tax effect resulted in an ~~implementation plan~~increase 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.deferred tax assets.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for loans modified as troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU ~~will be~~was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13. The Company ~~is currently evaluating~~adopted the ~~effects that ASU 2022-03 will~~standard on January 1, 2023, and it did not have a material effect on ~~its~~the Company’s consolidated financial statements.

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In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to clarify that contractual sale restrictions should not be considered in the measurement of the fair value of an equity security. The Company owns stock in the Federal Reserve Bank (FRB) and in the Federal Home Loan Bank (FHLB) which is valued at historical cost which approximates fair value. Ownership of stock is a condition for services the Company receives from the FRB and FHLB. The stock is not publically traded and can only be issued, exchanged, redeemed or repurchased by the FRB and the FHLB. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

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(4) Cash and Cash Equivalents

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


	September 30,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Cash and due from banks	$	10,376	$	11,662	$	11,782	$	9,722
Interest-earning deposits in other banks		25,910		88,197		73,078		30,831
Cash and cash equivalents	$	36,286	$	99,859	$	84,860	$	40,553

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

(5) Investment Securities

The amortized cost, gross unrealized gains and losses, fair ~~values~~value, and related ACL of investment securities are as follows:


	Amortized		Gross Unrealized				Estimated		Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value			ACL
September 30, 2022:
March 31, 2023:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	23,856	$	—	$	(2,714)	$	21,142
Mortgage-backed securities issued by U.S. government-sponsored enterprises									$	23,337	$	—	$	(2,264)	$	21,073	$	—
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises										715,601		80		(113,636)		602,045		—

Total	$	23,856	$	—	$	(2,714)	$	21,142	$	738,938	$	80	$	(115,900)	$	623,118	$	—

December 31, 2022:
Available-for-sale:
Mortgage-backed securities issued by U.S. government-sponsored enterprises									$	23,544	$	—	$	(2,723)	$	20,821	$	—
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	717,434	$	—	$	(131,682)	$	585,752
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises										717,773		62		(126,751)		591,084		—

Total	$	717,434	$	—	$	(131,682)	$	585,752	$	741,317	$	62	$	(129,474)	$	611,905	$	—

December 31, 2021:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	636,442	$	5,699	$	(7,154)	$	634,987
Total	$	636,442	$	5,699	$	(7,154)	$	634,987

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The amortized cost and estimated fair value of investment securities by maturity date at ~~September 30, 2022~~March 31, 2023 are shown below. Incorporated in the maturity schedule are mortgage-backed 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.


	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Available-for-sale:
Due after 10 years	$	23,337	$	21,073
Total	$	23,337	$	21,073

Held-to-maturity:
Due within 5 years	$	19	$	19
Due after 5 years through 10 years		9		8
Due after 10 years		715,573		602,018
Total	$	715,601	$	602,045

The Company did not sell any held-to-maturity or available-for-sale securities during the three months ended March 31, 2023 and 2022.

Investmentsecurities with amortized costs of $241.5 million and $272.8 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure deposits made by state and local governments, securities sold under agreements to repurchase, transaction clearing accounts, and Federal Reserve Bank borrowings. The Company did not have any outstanding borrowings at the Federal Reserve Bank at March 31, 2023 or December 31, 2022.

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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 after 10 years

$
23,856

$
21,142

Total

$
23,856

$
21,142

Held-to-maturity:

Due within 5 years

$
15

$
14

Due after 5 years through 10 years

19

18

Due after 10 years

717,400

585,720

Total

$
717,434

$
585,752

~~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

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2022

2021

2022

2021

Proceeds from sales

$
—

$
7,539

$
—

$
26,900

Gross gains

—

403

—

1,840

Gross losses

—

—

—

—

The Company did not sell any held-to-maturity mortgage-backed securities during the nine months ended September 30, 2022. During the nine months ended September 30, 2021, the Company sold $22.1 million of held-to-maturity mortgage-backed securities and recorded gains of $1.5 million. 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%), was in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and did not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.

The Company did not sell any available-for-sale mortgage-backed securities during the nine months ended September 30, 2022. During the nine months ended September 30, 2021, the Company sold $3.0 million of available-for-sale mortgage-backed securities and recorded a gain of $339,000.

~~Investmentsecurities~~ with amortized costs of $241.0 million and $140.6 million at September 30, 2022 and December 31, 2021, 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The Company does not intend to sell securities until such time as the value recovers or

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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					Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized		Number of			Unrealized				Unrealized				Unrealized		Number of			Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Securities	Fair Value		Losses
(Dollars in thousands)
September 30, 2022:
March 31, 2023:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	21,142	$	(2,714)	$	—	$	—	4	$	21,142	$	(2,714)
Mortgage-backed securities issued by U.S. government-sponsored enterprises														$	4,414	$	(250)	$	16,659	$	(2,014)	4	$	21,073	$	(2,264)
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises															92,902		(3,738)		502,468		(109,898)	150		595,370		(113,636)

Total														$	97,316	$	(3,988)	$	519,127	$	(111,912)	154	$	616,443	$	(115,900)
December 31, 2022:
Available-for-sale:
Mortgage-backed securities issued by U.S. government sponsored enterprises														$	20,821	$	(2,723)	$	—	$	—	4	$	20,821	$	(2,723)
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	259,897	$	(38,335)	$	325,850	$	(93,347)	146	$	585,747	$	(131,682)
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises															210,128		(22,209)		377,418		(104,542)	148		587,546		(126,751)

December 31, 2021:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	482,629	$	(6,976)	$	3,681	$	(178)	43	$	486,310	$	(7,154)
Total														$	230,949	$	(24,932)	$	377,418	$	(104,542)	152	$	608,367	$	(129,474)

Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates subsequent to purchase. All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. Since the decline in market value is attributable to changes in interest rates and not credit quality, ~~and~~ the Company does not intend to sell these investments until maturity, and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. Securities that are issued or contain collateral issues by U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee from the U.S. government, have a long history of no credit losses and are widely recognized as “risk free.” Therefore, no allowance for credit losses was recorded for these securities as of March 31, 2023.

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(6) Loans Receivable and Allowance for ~~Loan~~Credit Losses

The components of loans receivable, net of allowance for credit losses (ACL) under ASC 326 as of March 31, 2023 and net of allowance for credit losses under ASC 310 as of December 31, 2022 are as follows:


	September 30,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Real estate loans:
First mortgages:
One- to four-family residential	$	1,256,304	$	1,267,537	$	1,253,020	$	1,253,558
Multi-family residential		3,946		5,468		6,239		6,448
Construction, commercial and other		23,035		18,590
Construction, commercial, and other						24,587		23,903
Home equity loans and lines of credit		7,229		7,121		6,303		6,426
Total real estate loans		1,290,514		1,298,716		1,290,149		1,290,335
Other loans:
Loans on deposit accounts		217		278		241		216
Consumer and other loans		8,496		8,192		8,087		8,381
Total other loans		8,713		8,470		8,328		8,597
Less:
Net unearned fees and discounts		(2,168)		(1,693)		(2,040)		(2,136)
Allowance for loan losses		(2,015)		(2,669)
Total unearned fees, discounts and allowance for loan losses		(4,183)		(4,362)
Allowance for credit losses						(5,127)		(2,032)
Total unearned fees, discounts, and allowance for credit losses						(7,167)		(4,168)
Loans receivable, net	$	1,295,044	$	1,302,824	$	1,291,310	$	1,294,764

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


					Home
					Equity
					Loans and
	Real		Commercial		Lines of		Consumer
(Dollars in thousands)	Estate		Loans		Credit		Loans		Unallocated		Totals
Three months ended March 31, 2023:
Balance, beginning of period	$	1,263	$	434	$	1	$	75	$	259	$	2,032
Adoption of ASU No. 2016-13		3,393		71		(1)		5		(259)		3,209
(Reversal of provision) provision for credit losses		(27)		(88)		—		15		—		(100)
		4,629		417		—		95		—		5,141
Charge-offs		—		—		—		(15)		—		(15)
Recoveries		—		—		—		1		—		1
Net charge-offs		—		—		—		(14)		—		(14)
Balance, end of period	$	4,629	$	417	$	—	$	81	$	—	$	5,127

			Construction,		Home
			Commercial,		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
Three months ended March 31, 2022:
Balance, beginning of period	$	1,814	$	435	$	1	$	89	$	330	$	2,669
(Reversal of provision) provision for credit losses		(180)		(1)		—		45		(32)		(168)
		1,634		434		1		134		298		2,501
Charge-offs		—		—		—		(42)		—		(42)
Recoveries		—		—		—		—		—		—
Net charge-offs		—		—		—		(42)		—		(42)
Balance, end of period	$	1,634	$	434	$	1	$	92	$	298	$	2,459

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The table below presents the balance in the allowance for credit losses and the recorded investment in loans, net of unearned fees and discounts, by portfolio segment, and based on impairment method as of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


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

December 31, 2022:
Allowance for credit losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,263		434		1		75		259		2,032
Total ending allowance balance	$	1,263	$	434	$	1	$	75	$	259	$	2,032

Loans:
Ending loan balance:
Individually evaluated for impairment	$	2,693	$	—	$	16	$	—	$	6	$	2,715
Collectively evaluated for impairment		1,255,300		23,775		6,411		8,595		—		1,294,081
Total ending loan balance	$	1,257,993	$	23,775	$	6,427	$	8,595	$	6	$	1,296,796

The table below presents the balance of impaired loans individually evaluated for impairment by class of loans as of December 31, 2022, in accordance with ASC 310 prior to the adoption of ASU 2016-13:


			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
December 31, 2022:
With no related allowance recorded:
One- to four-family residential mortgages	$	2,693	$	3,209
Home equity loans and lines of credit		16		30
Consumer Loans		6		6
Total	$	2,715	$	3,245

The table below presents the average recorded investment and interest income recognized on impaired loans by class of loans as of March 31, 2022, in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	For the Three Months Ended
	March 31, 2022
	Average		Interest
	Recorded		Income
(Dollars in thousands)	Investment		Recognized
With no related allowance recorded:
One- to four-family residential mortgages	$	3,782	$	7
Home equity loans and lines of credit		18		—
Total	$	3,800	$	7

There were no loans individually evaluated for impairment with a related allowance for credit loss as of December 31, 2022. At December 31, 2022, loans individually evaluated for impairment do not have an allocated allowance for credit losses because they are written down to fair value at the time of impairment. At December 31, 2022, an impaired loan would also not have an allocated allowance if the value of the property securing the loan, less the cost to sell the property, is greater than the loan balance.

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

Construction,

Home

Commercial

Equity

and Other

Loans and

Residential

Mortgage

Lines of

Consumer

(Dollars in thousands)

Mortgage

Loans

Credit

and Other

Unallocated

Totals

Three months ended September 30, 2022:

Balance, beginning of period

$
1,350

$
445

$
1

$
82

$
253

$
2,131

(Reversal of provision) provision for loan losses

(87)

(3)

—

1

(20)

(109)

1,263

442

1

83

233

2,022

Charge-offs

—

—

—

(7)

—

(7)

Recoveries

—

—

—

—

—

—

Net charge-offs

—

—

—

(7)

—

(7)

Balance, end of period

$
1,263

$
442

$
1

$
76

$
233

$
2,015

Nine months ended September 30, 2022:

Balance, beginning of period

$
1,814

$
435

$
1

$
89

$
330

$
2,669

(Reversal of provision) provision for loan losses

(551)

7

—

38

(97)

(603)

1,263

442

1

127

233

2,066

Charge-offs

—

—

—

(52)

—

(52)

Recoveries

—

—

—

1

—

1

Net charge-offs

—

—

—

(51)

—

(51)

Balance, end of period

$
1,263

$
442

$
1

$
76

$
233

$
2,015

Construction,

Home

Commercial

Equity

and Other

Loans and

Residential

Mortgage

Lines of

Consumer

(Dollars in thousands)

Mortgage

Loans

Credit

and Other

Unallocated

Totals

Three months ended September 30, 2021:

Balance, beginning of period

$
2,021

$
434

$
1

$
133

$
380

$
2,969

(Reversal of provision) provision for loan losses

(132)

11

—

(19)

(27)

(167)

1,889

445

1

114

353

2,802

Charge-offs

—

—

—

(3)

—

(3)

Recoveries

—

—

—

—

—

—

Net charge-offs

—

—

—

(3)

—

(3)

Balance, end of period

$
1,889

$
445

$
1

$
111

$
353

$
2,799

Nine months ended September 30, 2021:

Balance, beginning of period

$
3,102

$
406

$
1

$
146

$
607

$
4,262

(Reversal of provision) provision for loan losses

(1,213)

39

—

(24)

(254)

(1,452)

1,889

445

1

122

353

2,810

Charge-offs

—

—

—

(13)

—

(13)

Recoveries

—

—

—

2

—

2

Net charge-offs

—

—

—

(11)

—

(11)

Balance, end of period

$
1,889

$
445

$
1

$
111

$
353

$
2,799

Management considers the allowance for loan losses at September 30, 2022 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.

~~Table of Contents~~

~~The table below presents the balance in the allowance for loan losses and the recorded investment in loans, net of unearned fees and discounts, by portfolio segment and based on impairment method:~~

Construction,

Home

Commercial

Equity

and Other

Loans and

Residential

Mortgage

Lines of

Consumer

(Dollars in thousands)

Mortgage

Loans

Credit

and Other

Unallocated

Totals

September 30, 2022:

Allowance for loan losses:

Ending allowance balance:

Individually evaluated for impairment

$
—

$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment

1,263

442

1

76

233

2,015

Total ending allowance balance

$
1,263

$
442

$
1

$
76

$
233

$
2,015

Loans:

Ending loan balance:

Individually evaluated for impairment

$
2,402

$
—

$
16

$
—

$
—

$
2,418

Collectively evaluated for impairment

1,255,802

22,907

7,215

8,717

—

1,294,641

Total ending loan balance

$
1,258,204

$
22,907

$
7,231

$
8,717

$
—

$
1,297,059

December 31, 2021:

Allowance for loan losses:

Ending allowance balance:

Individually evaluated for impairment

$
—

$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment

1,814

435

1

89

330

2,669

Total ending allowance balance

$
1,814

$
435

$
1

$
89

$
330

$
2,669

Loans:

Ending loan balance:

Individually evaluated for impairment

$
3,812

$
—

$
19

$
—

$
—

$
3,831

Collectively evaluated for impairment

1,267,560

18,529

7,103

8,470

—

1,301,662

Total ending loan balance

$
1,271,372

$
18,529

$
7,122

$
8,470

$
—

$
1,305,493

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

Unpaid

Recorded

Principal

(Dollars in thousands)

Investment

Balance

September 30, 2022:

With no related allowance recorded:

One- to four-family residential mortgages

$
2,402

$
2,897

Home equity loans and lines of credit

16

30

Total

$
2,418

$
2,927

December 31, 2021:

With no related allowance recorded:

One- to four-family residential mortgages

$
3,812

$
4,299

Home equity loans and lines of credit

19

31

Total

$
3,831

$
4,330

~~Table of Contents~~

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

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

(Dollars in thousands)

Investment

Recognized

Investment

Recognized

2022:








With no related allowance recorded:

One- to four-family residential mortgages

$
2,431

$
6

$
2,465

$
18

Home equity loans and lines of credit

17

—

18

Total

$
2,448

$
6

$
2,483

$
18

2021:

With no related allowance recorded:

One- to four-family residential mortgages

$
4,816

$
8

$
4,866

$
28

Home equity loans and lines of credit

20

—

21

—

Total

$
4,836

$
8

$
4,887

$
28

~~There were no~~ loans individually evaluated for impairment with a related allowance for loan loss as of September 30, 2022 or December 31, 2021. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment. An impaired loan would also not have an allocated allowance if the value of the property securing the loan, less the cost to sell the property, is greater than the loan balance.

~~The Company had 11 nonaccrual loans with a book value of $2.0 million as of September 30, 2022 and 10 nonaccrual loans with a book value of $3.3~~ ~~million as of December 31, 2021. The Company did~~ no~~t have any loans 90 days or more past due and still accruing interest as of September 30, 2022. The Company had~~ ~~two consumer loans totaling $24,000 that were 90 days or more past due and still accruing interest as of December 31, 2021.~~

~~Table of Contents~~

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio. The table below presents by credit quality indicator, loan class and year of origination, the amortized cost basis of the Company’s loans as of March 31, 2023.


														Revolving Loans
	Amortized Cost of Term Loans by Origination Year													Amortized
(Dollars in thousands)		2023		2022		2021		2020		2019		Prior		Cost Basis		Total
March 31, 2023:
Commercial
30 - 59 days past due		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
60 - 89 days past due			—		—		—		—		—		—		—		—
90 days or more past due			—		—		—		—		—		—		—		—
Loans not past due			—		396		4,952		—		228		1,171		1,218		7,965
Total Commercial			—		396		4,952		—		228		1,171		1,218		7,965

Consumer
30 - 59 days past due			1		—		—		—		—		—		—		1
60 - 89 days past due			—		3		—		—		—		—		—		3
90 days or more past due			—		—		—		—		—		—		—		—
Loans not past due			78		113		39		88		29		48		5,324		5,719
Total Consumer			79		116		39		88		29		48		5,324		5,723

Real Estate
30 - 59 days past due			—		—		—		—		—		874		—		874
60 - 89 days past due			—		—		—		—		—		51		—		51
90 days or more past due			—		—		—		—		140		827		—		967
Loans not past due			19,531		132,417		290,917		191,102		95,150		551,740		—		1,280,857
Total Real Estate			19,531		132,417		290,917		191,102		95,290		553,492		—		1,282,749

Total		$	19,610	$	132,929	$	295,908	$	191,190	$	95,547	$	554,711	$	6,542	$	1,296,437

The Company did not have any revolving loans that converted to term loans during the three months ended March 31, 2023.

The table below presents the aging of loans and accrual status by class of loans, net of unearned fees and discounts. Loans with a formal loan payment deferral plan in place are not considered contractually past due or delinquent if the borrower is in compliance with the loan payment deferral plan.


															Loans																Loans
															90 Days																90 Days
															or More																or More
	30 - 59		60 - 89		90 Days or										Past Due		30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		More		Total Past		Loans Not		Total		Nonaccrual		and Still		Days Past		Days Past		More		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing		Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
September 30, 2022:
March 31, 2023:
One- to four-family residential mortgages	$	737	$	—	$	227	$	964	$	1,253,298	$	1,254,262	$	1,985	$	—	$	859	$	51	$	967	$	1,877	$	1,249,239	$	1,251,116	$	2,357	$	—
Multi-family residential mortgages		—		—		—		—		3,942		3,942		—		—		—		—		—		—		6,230		6,230		—		—
Construction, commercial and other mortgages		—		—		—		—		22,907		22,907		—		—
Construction, commercial, and other mortgages																		—		—		—		—		24,456		24,456		—		—
Home equity loans and lines of credit		—		—		—		—		7,231		7,231		16		—		15		—		—		15		6,290		6,305		15		—
Loans on deposit accounts		—		—		—		—		217		217		—		—		—		—		—		—		241		241		—		—
Consumer and other		2		4		—		6		8,494		8,500		—		—		1		3		—		4		8,085		8,089		—		—

Total	$	739	$	4	$	227	$	970	$	1,296,089	$	1,297,059	$	2,001	$	—	$	875	$	54	$	967	$	1,896	$	1,294,541	$	1,296,437	$	2,372	$	—

December 31, 2021:
December 31, 2022:
One- to four-family residential mortgages	$	129	$	—	$	244	$	373	$	1,265,540	$	1,265,913	$	3,261	$	—	$	—	$	409	$	559	$	968	$	1,250,586	$	1,251,554	$	2,279	$	—
Multi-family residential mortgages		—		—		—		—		5,459		5,459		—		—		—		—		—		—		6,439		6,439		—		—
Construction, commercial and other mortgages		—		—		—		—		18,529		18,529		—		—
Construction, commercial, and other mortgages																		—		—		—		—		23,775		23,775		—		—
Home equity loans and lines of credit		—		��		—		—		7,122		7,122		19		—		—		—		—		—		6,427		6,427		16		—
Loans on deposit accounts		—		—		—		—		278		278		—		—		—		—		—		—		217		217		—		—
Consumer and other		3		—		24		27		8,165		8,192		—		24		6		—		6		12		8,372		8,384		6		—

Total	$	132	$	—	$	268	$	400	$	1,305,093	$	1,305,493	$	3,280	$	24	$	6	$	409	$	565	$	980	$	1,295,816	$	1,296,796	$	2,301	$	—

Table of Contents

The table below presents the amortized cost basis of loans on nonaccrual status as of March 31, 2023 and December 31, 2022.


	March 31, 2023						December 31, 2022
(Dollars in thousands)	Nonaccrual Loans with a related ACL		Nonaccrual loans without a related ACL		Total Nonaccrual Loans		Total Nonaccrual Loans

Real Estate	$	878	$	1,494	$	2,372	$	2,295
Consumer		—		—		—		6
Commercial		—		—		—		—
Total Nonaccrual Loans and Leases	$	878	$	1,494	$	2,372	$	2,301

The Company ~~primarily uses~~does not recognize interest income while loans are on nonaccrual status. All payments received while on nonaccrual status are applied against the ~~aging~~principal balance of ~~loans and accrual status to monitor~~ the ~~credit quality of its loan portfolio.~~ loan.

When a mortgage loan becomes seriously delinquent (90(90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent. The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs. Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms. The amortized cost basis of collateral dependent loans was $967,000 and $559,000 at March 31, 2023 and December 31, 2022, respectively. These loans were collateralized by residential real estate in Hawaii. As of March 31, 2023 and December 31, 2022, the fair value of the collateral less selling costs of these collateral dependent loans exceeded the amortized cost basis. There was no ACL on collateral dependent loans.

There were no loans modified ~~in a troubled debt restructuring~~ during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 or ~~2021. There were~~ no new troubled debt restructurings during the nine months ended September 30, 2022 or 2021 that subsequently defaulted. Loan modifications under the CARES Act and the Interagency Statements issued by bank regulators in 2020 are discussed below.

~~Table of Contents~~

~~The table below summarizes outstanding troubled debt restructurings by class of loans:~~

Number of

Accrual

Number of

Nonaccrual

(Dollars in thousands)
Loans

Status

Loans

Status

Total
September 30, 2022:







One- to four-family residential mortgages

2

$
417

2

$
424

$
841
Total

2

$
417

2

$
424

$
841

December 31, 2021:

One- to four-family residential mortgages

3

$
551

1

$
340

$
891
Total

3

$
551

1

$
340

$
891

~~There were no delinquent troubled debt restructurings at September 30,~~ 2022. ~~There was~~ ~~one troubled debt restructuring for $126,000~~ that was 59 days delinquent as of December 31, 2021. Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers. At September 30, 2022, we had ~~no commitments to lend any additional funds to these borrowers.~~

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 were required to be related to the COVID-19 pandemic and the borrower’s payments must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must have been executed during the period from March 1, 2020 to January 1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 related 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). The Company uses the provisions of the CARES Act and the Interagency Statements to account for the eligible loans receiving modifications.

The Company has granted loan payment deferrals to borrowers who have been affected by the COVID-19 pandemic. Loans are removed from the loan payment deferral program when interest which was accrued during the deferral payment period is paid off. The table below summarizes loans remaining in the loan payment deferral program by class of loan:

September 30, 2022

December 31, 2021

(Dollars in thousands)

Loans in the Loan Payment Deferral Program

Percent of Total Loans

Loans in the Loan Payment Deferral Program

Percent of Total Loans
One- to- four family residential mortgage

$
62,027

4.8
%

$
74,704

5.7
%
Non-residential mortgage

3,431

0.3

3,928

0.3

Total

$
65,458

5.1
%

$
78,632

6.0
%

The loans on which the Company has granted loan payment deferrals are included in the allowance for loan and lease losses calculation. However, loans performing under a loan payment deferral agreement are not considered contractually past due and are excluded from the past due statistics above.

The ratio of the current loan balance to the current tax-assessed value of the property securing the mortgage loans in the payment deferral program averaged 49.7% at September 30, 2022. At September 30, 2022, one- to four family residential mortgage loans represented 97.0% of the Company’s total loan portfolio balance with a ratio of the current loan balance to the current tax assessed value of the property securing these loans averaging 42.4%. All of the Company’s residential mortgage loans are secured by real estate in Hawaii.

~~As of September 30, 2022, of the $62.0 million total one- to four-family mortgage loans in the loan payment deferral program, $61.6 million, or 99.4%, had resumed making full principal and interest payments. The interest on these loans that accrued during the deferral period will be repaid over subsequent years.~~ ~~$243,000, or 0.4%, of the total~~

~~Table of Contents~~

~~one- to four family mortgage loans in the loan payment deferral program were making interest-only payments. In the loan payment deferral program, there was~~ ~~one~~ ~~$145,000 one- to four-family mortgage loan which was over 150 days~~ ~~delinquent. At September 30, 2022, there were no other loans which have had their deferral period end and not resumed their loan payments.~~

~~As of September 30, 2022, all of the $3.4~~ ~~million of commercial mortgage, commercial and industrial and home equity lines of credit in the loan payment deferral program had resumed making full principal and interest payments.~~

Since the beginning of the year, there has not been a significant increase in loan delinquencies, significant changes in deposits or significant drawdowns on any lines of credit. We do not have any commercial loans to hotels, businesses in the transportation industry, restaurants or retail establishments.

The Company had no real estate owned as of ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. There were three one- to four-family residential mortgage loans totaling $279,000 in the process of foreclosure at March 31, 2023. There were two one- to four-family residential mortgage loans totaling ~~$227,000~~ ~~in the process of foreclosure at September 30, 2022. There were~~ ~~no loans~~$227,000 in the process of foreclosure at December 31, ~~2021.~~2022.

Nearly all of our real estate loans are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios on these real estate loans generally do not exceed 80% at the time of origination.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company sold mortgage loans held for sale with principal balances of ~~$5.4 million~~$360,000 and ~~$26.2~~$2.0 million, respectively, and recognized ~~a loss~~gains of ~~$3,000~~$1,000 and ~~a gain of $584,000~~$18,000, respectively. The Company had no loans held for sale at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

The Company serviced loans for others with principal balances of ~~$36.9~~$35.5 million at ~~September 30, 2022~~March 31, 2023 and ~~$41.3~~$36.0 million at December 31, ~~2021.~~2022. Of these amounts, $~~21.4~~20.4 million and ~~$24.3~~$20.7 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively. The amount of~~ ~~contractually specified servicing fees~~ ~~earned for the nine months ended September 30,~~ 2022, ~~and 2021 was $77,000 and $99,000~~, respectively. The amount of contractually specified servicing fees earned for the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ was $~~24,000~~23,000 and ~~$31,000~~$27,000, respectively. The fees are reported in service and other fees in the Consolidated Statements of Income.

Table of Contents

(7)Advances from the Federal Home Loan Bank

Federal Home Loan Bank advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. At March 31, 2023 and December 31, 2022, our credit limit with the FHLB of Des Moines was equal to 45% of Territorial Savings Bank’s total assets and we had the capacity to borrow an additional $630.1 million and $769.1 million, respectively.

Advances outstanding consisted of the following:


	March 31, 2023				December 31, 2022
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Due within one year	$	24,000	1.27	%	$	24,000	1.27	%
Due over 1 year to 2 years		82,000	1.40			82,000	1.40
Due over 2 years to 3 years		25,000	1.58			25,000	1.58
Due over 3 years to 4 years		40,000	3.70			10,000	1.97
Due over 4 years to 5 years		35,000	4.22			—	—
Due over 5 years to 6 years		40,000	4.41			—	—
Total	$	246,000	2.67	%	$	141,000	1.45	%

~~(7)~~(8) Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset. Securities sold under agreements to repurchase are summarized as follows:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
			Weighted				Weighted				Weighted				Weighted
	Repurchase		Average		Repurchase		Average		Repurchase		Average		Repurchase		Average
(Dollars in thousands)	Liability		Rate		Liability		Rate		Liability		Rate		Liability		Rate
Maturing:
Over 1 year to 2 years									$	10,000	1.81	%	$	5,000	1.88	%
Over 2 years to 3 years	$	10,000	1.81	%	$	5,000	1.88	%		—	—			5,000	1.73
Over 3 years to 4 years		—	—			5,000	1.73	%
Total	$	10,000	1.81	%	$	10,000	1.81	%	$	10,000	1.81	%	$	10,000	1.81	%

Below is a summary comparing the carrying value and fair value of securities pledged to secure repurchase agreements, the repurchase liability, and the amount at risk at ~~September 30, 2022.~~March 31, 2023. The amount at risk is the greater of the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement. All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. The repurchase liability cannot exceed 90% of the fair value of securities pledged. In the event

~~Table of Contents~~

of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.

Weighted

Carrying

Fair

Average

Carrying

Fair

Average

Value of

Repurchase

Amount

Months to

Value of

Repurchase

Amount

Months to

(Dollars in thousands)

Securities

Liability

at Risk

Maturity

Securities

Liability

at Risk

Maturity

Maturing:

��

Over 90 days

13,813

11,411

10,000

3,813

13,373

11,355

10,000

3,373

Table of Contents

~~(8)~~(9) Offsetting of Financial Liabilities

~~The following table presents our securities~~Securities sold under agreements to repurchase ~~that~~ are subject to a right of offset in the event of default. See Note 7,8, Securities Sold Under Agreements to Repurchase, for additional information.


					Net Amount of		Gross Amount Not Offset in the										Net Amount of		Gross Amount Not Offset in the
	Gross Amount		Gross Amount		Liabilities		Balance Sheet						Gross Amount		Gross Amount		Liabilities		Balance Sheet
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral				of Recognized		Offset in the		Presented in the		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount		Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
September 30, 2022:
March 31, 2023:
Securities sold under agreements to repurchase	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—

December 31, 2021:
December 31, 2022:
Securities sold under agreements to repurchase	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—

~~(9)~~(10) Employee Stock Ownership Plan

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares. The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity. The shares committed to be released are considered outstanding for earnings per share computations. Compensation expense recognized for the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ amounted to $~~258,000~~281,000 and ~~$310,000, respectively. Compensation expense recognized for the nine months ended September 30, 2022 and 2021 amounted to $834,000 and $942,000~~$305,000, respectively.

~~Table of Contents~~

Shares held by the ESOP trust were as follows:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Allocated shares		571,241		540,869		595,708		583,474
Unearned shares		305,831		342,531		281,364		293,598
Total ESOP shares		877,072		883,400		877,072		877,072
Fair value of unearned shares, in thousands	$	5,670	$	8,649	$	5,433	$	7,049

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits. For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we accrued $~~23,000~~7,000 and ~~$41,000, respectively. For the nine months ended September 30, 2022 and 2021, we accrued $73,000 and $94,000~~$36,000, respectively, for the ESOP restoration plan.

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~~(10)~~(11) Share-Based Compensation

The shareholders of Territorial Bancorp Inc. ~~have~~ adopted the 2010 Equity Incentive Plan and the 2019 Equity Incentive Plan. These plans provide for the award of stock options and restricted stock to key officers and directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the equity incentive plans is based on the fair value of the awards on the grant date. The fair value of time-based restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of performance-based stock that will vest based on a performance condition is based on the closing price of the Company’s stock on the date of grant. The fair value of performance-based restricted stock that will vest on a market condition is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The fair value of time-based stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision. The cost of the awards will be recognized on a straight-line basis over the three, five- or six-year vesting period during which participants are required to provide services in exchange for the awards. No new awards can be made under the 2010 Equity Plan, but awards previously made can continue to vest. There are ~~146,347~~144,630 remaining shares ~~remaining~~ available for new awards under the 2019 Equity Plan.

The Company recognized compensation expense, measured as the fair value of the share-based award on the date of grant, on a straight-line basis over the vesting period. Share-based compensation is recorded in the Consolidated Statements of Income as a component of salaries and employee benefits with a corresponding increase in stockholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Compensation expense	$	(18)	$	36	$	256	$	241	$	(42)	$	134
Income tax benefit		(5)		10		70		66		(11)		37

Share-based compensation expense and the income tax benefit had credit balances during the three months ended ~~September 30, 2022.~~March 31, 2023. The credit ~~balance~~balances occurred when the number of performance-based restricted stock units (PRSUs), which are based on a performance condition, decreased ~~when~~because the Company’s three-year return on average equity declined in comparison to a peer group of banks.

Stock Options

The table below presents the stock option activity for the three months ended March 31, 2022:


		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2021	3,085	$	23.62	0.67	$	5
Granted	—		—	—		—
Exercised	—		—	—		—
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at March 31, 2022	3,085	$	23.62	0.42	$	1

There were no options exercised or vested during the three months ended March 31, 2022. There were no options outstanding during the three months ended March 31, 2023. As of March 31, 2023, the Company had no unrecognized compensation costs related to the stock option plans.

1920

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~~Stock Options~~

~~The table below presents the stock option activity for the nine months ended September 30, 2022 and 2021:~~

Weighted



Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Options

Price

Life (years)

(in thousands)

Options outstanding at December 31, 2021

3,085

$
23.62

0.67

$
5

Granted

—

—

—

—

Exercised

—

—

—

—

Forfeited

—

—

—

—

Expired

3,085

—

—

—

Options outstanding at September 30, 2022

—

$
—

—

$
—

Options outstanding at December 31, 2020

3,085

$
23.62

1.67

$
1

Granted

—

—

—

—

Exercised

—

—

—

—

Forfeited

—

—

—

—

Expired

—

—

—

—

Options outstanding at September 30, 2021

3,085

$
23.62

0.92

$
5

Options vested and exercisable at September 30, 2022

—

$
—

—

$
—

~~There were no~~ ~~options exercised or vested during the nine months ended September 30, 2022 or 2021. As of September 30, 2022, the Company had~~ ~~no unrecognized compensation costs related to the stock option plans.~~

Restricted Stock

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock may not be disposed of or transferred during the vesting period. Restricted stock carries the right to receive dividends, although dividends attributable to restricted stock are retained by the Company until the shares vest, at which time they are paid to the award recipient. Unvested restricted stock that is time-based contain nonforfeitable dividend rights. Accrued dividends on restricted stock that do not vest based on performance or market conditions are forfeited.

The table below presents the time-based restricted stock activity:


		Weighted			Weighted
	Time-Based	Average Grant		Time-Based	Average Grant
	Restricted	Date Fair		Restricted	Date Fair
	Stock	Value		Stock	Value
Unvested at December 31, 2022				23,664	$	24.15
Granted				—		—
Vested				4,540		21.05
Forfeited				—		—
Unvested at March 31, 2023				19,124	$	24.89

Unvested at December 31, 2021	23,208	$	24.61	23,208	$	24.61
Granted	12,013		23.77	—		—
Vested	11,557		24.68	8,001		23.75
Forfeited	—		—	—		—
Unvested at September 30, 2022	23,664	$	24.15

Unvested at December 31, 2020	23,695	$	24.24
Granted	10,849		26.67
Vested	11,336		25.81
Forfeited	—		—
Unvested at September 30, 2021	23,208	$	24.61
Unvested at March 31, 2022				15,207	$	25.06

~~Table of Contents~~

As of ~~September 30, 2022,~~March 31, 2023, the Company had ~~$425,000~~$288,000 of unrecognized compensation costs related to time-based restricted stock.

The table below presents the PRSUs that will vest on a performance condition:


	Performance-			Performance-
	Based Restricted			Based Restricted
	Stock Units	Weighted		Stock Units	Weighted
	Based on a	Average Grant		Based on a	Average Grant
	Performance	Date Fair		Performance	Date Fair
	Condition	Value		Condition	Value
Unvested at December 31, 2022				43,557	$	23.63
Granted				—		—
Vested				—		—
Forfeited				16,348		21.05
Unvested at March 31, 2023				27,209	$	25.18

Unvested at December 31, 2021	41,583	$	24.68	41,583	$	24.68
Granted	14,412		23.77	—		—
Vested	7,670		27.30	7,670		27.30
Forfeited	4,768		27.30	4,768		27.30
Unvested at September 30, 2022	43,557	$	23.63

Unvested at December 31, 2020	40,585	$	25.83
Granted	13,016		26.67
Vested	7,473		30.73
Forfeited	4,545		30.73
Unvested at September 30, 2021	41,583	$	24.68
Unvested at March 31, 2022				29,145	$	23.56

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of ~~September 30, 2022,~~March 31, 2023, the Company had $~~131,000~~73,000 of unrecognized compensation costs related to these PRSUs. Performance will be measured over a three-year performance period and will be cliff vested. The performance condition is measured quarterly by comparing the Company’s three-year return on average equity to a peer group of banks. The Company’s percentile ranking in the peer group is used to adjust the number of PRSUs that are expected to vest.

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The table below presents the PRSUs that will vest on a market condition:


	Performance-			Performance-
	Based Restricted	Monte Carlo		Based Restricted	Monte Carlo
	Stock Units	Valuation of		Stock Units	Valuation of
	Based on a	the Company's		Based on a	the Company's
	Market Condition	Stock		Market Condition	Stock
Unvested at December 31, 2022				10,889	$	24.04
Granted				—		—
Vested				—		—
Forfeited				4,087		22.16
Unvested at March 31, 2023				6,802	$	25.16

Unvested at December 31, 2021	10,396	$	24.03	10,396	$	24.03
Granted	3,603		24.42	—		—
Vested	—		—	—		—
Forfeited	3,110		24.45	3,110		24.45
Unvested at September 30, 2022	10,889	$	24.04

Unvested at December 31, 2020	10,147	$	24.69
Granted	3,254		25.94
Vested	1,628		28.32
Forfeited	1,377		28.32
Unvested at September 30, 2021	10,396	$	24.03
Unvested at March 31, 2022				7,286	$	23.85

As of ~~September 30, 2022,~~March 31, 2023, the Company had ~~$85,000~~$53,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. The market value of PRSUs that will vest on a market condition is determined by a Monte Carlo valuation of the Company’s stock as of the grant date. Performance will be measured over a three-year performance period and will be cliff vested. The market condition is measured quarterly by comparing the Company’s three-year average total stock return to a peer group of other banks. The Company’s percentile ranking in the peer group determines how many PRSUs will vest.

~~Table of Contents~~

~~(11)~~(12) Earnings Per Share

Holders of unvested restricted stock accrue dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Unvested restricted stock awards that are time-based contain nonforfeitable rights to dividends or dividend equivalents and are considered to be participating securities in the earnings per share computation using the two-class method. Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings. Unvested restricted stock awards that vest based on performance or market conditions are not considered to be participating securities in the earnings per share calculation because accrued dividends on shares that do not vest are forfeited.

The table below presents the information used to compute basic and diluted earnings per share:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands, except per share data)

2022

2021

2022

2021

Net income

$
3,891

$
4,162

$
12,711

$
13,233

Income allocated to participating securities

(23)

(23)

(70)

(47)

Net income available to common shareholders

$
3,868

$
4,139

$
12,641

$
13,186

Weighted-average number of shares used in:

Basic earnings per share

8,802,010

9,012,398

8,885,626

9,086,447

Dilutive common stock equivalents:

Stock options and restricted stock units

44,601

44,171

53,182

44,622

Diluted earnings per share

8,846,611

9,056,569

8,938,808

9,131,069

Net income per common share, basic

$
0.44

$
0.46

$
1.42

$
1.45

Net income per common share, diluted

$
0.44

$
0.46

$
1.41

$
1.44


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2023		2022
Net income	$	2,316	$	4,710
Income allocated to participating securities		(19)		(24)
Net income available to common shareholders	$	2,297	$	4,686

Weighted-average number of shares used in:
Basic earnings per share		8,774,634		8,980,135
Dilutive common stock equivalents:
Stock options and restricted stock units		32,110		34,319
Diluted earnings per share		8,806,744		9,014,454

Net income per common share, basic	$	0.26	$	0.52
Net income per common share, diluted	$	0.26	$	0.52

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~~(12)~~(13) Accumulated Other Comprehensive Loss

The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes:


	Unfunded		Unrealized				Unfunded		Unrealized
	Pension		(Gain)/Loss on				Pension		(Gain)/Loss on
(Dollars in thousands)	Liability		Securities		Total		Liability		Securities		Total
Three months ended September 30, 2022
Three months ended March 31, 2023
Balances at beginning of period							$	5,746	$	1,998	$	7,744
Other comprehensive income, net of taxes								—		(337)		(337)
Net current period other comprehensive income								—		(337)		(337)
Balances at end of period							$	5,746	$	1,661	$	7,407

Three months ended March 31, 2022
Balances at beginning of period	$	5,524	$	877	$	6,401	$	5,524	$	—	$	5,524
Other comprehensive loss, net of taxes		—		1,114		1,114		—		103		103
Net current period other comprehensive loss		—		1,114		1,114		—		103		103
Balances at end of period	$	5,524	$	1,991	$	7,515	$	5,524	$	103	$	5,627

Three months ended September 30, 2021
Balances at beginning of period	$	8,967	$	—	$	8,967
Net current period other comprehensive loss		—		—		—
Balances at end of period	$	8,967	$	—	$	8,967

Nine months ended September 30, 2022
Balances at beginning of period	$	5,524	$	—	$	5,524
Other comprehensive loss, net of taxes		—		1,991		1,991
Net current period other comprehensive loss		—		1,991		1,991
Balances at end of period	$	5,524	$	1,991	$	7,515

Nine months ended September 30, 2021
Balances at beginning of period	$	8,967	$	(276)	$	8,691
Other comprehensive loss, net of taxes		—		3		3
Amounts reclassified from other comprehensive income, net of taxes		—		273		273
Net current period other comprehensive loss		—		276		276
Balances at end of period	$	8,967	$	—	$	8,967

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


	Three Months Ended September 30,												Three Months Ended March 31,
	2022						2021						2023						2022
	Pretax				After Tax		Pretax				After Tax		Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount		Amount		Tax		Amount		Amount		Tax		Amount
Unrealized loss on securities	$	1,519	$	(405)	$	1,114	$	—	$	—	$	—
Unrealized (gain) loss on securities													$	(459)	$	122	$	(337)	$	141	$	(38)	$	103
Total	$	1,519	$	(405)	$	1,114	$	—	$	—	$	—	$	(459)	$	122	$	(337)	$	141	$	(38)	$	103

Nine Months Ended September 30,

2022

2021

Pretax

After Tax

Pretax

After Tax

(Dollars in thousands)

Amount

Tax

Amount

Amount

Tax

Amount

Unrealized loss on securities

$
2,714

$
(723)

$
1,991

$
4

$
(1)

$
3

Amount reclassified from other comprehensive income

—

—

—

373

(100)

273

Total

$
2,714

$
(723)

$
1,991

$
377

$
(101)

$
276

~~(13)~~(14) Revenue Recognition

The Company’s contracts with customers are generally short-term in nature, with cycles of one year or less. These can range from an immediate term for services such as wire transfers, foreign currency exchanges, and cashier’s check purchases, to several days for services such as processing annuity and mutual fund sales. Some contracts may be of an ongoing nature, such as providing deposit account services, including ATM access, check processing, account

~~Table of Contents~~

analysis, and check ordering. However, provision of an assessable service and payment for such service is usually concurrent or closely timed. Contracts related to financial instruments, such as loans, investments, and debt, are excluded from the scope of this reporting requirement.

After analyzing the Company’s revenue sources, including the amount of revenue received, the timing of services rendered, and the timing of payment for these services, the Company has determined that the rendering of services and the payment for such services are generally closely matched. Any differences are not material to the Company’s Consolidated Financial Statements. Accordingly, the Company generally records income when payment for services is received.

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Revenue from contracts with customers is reported in service and other fees in other noninterest income in the Consolidated Statements of Income. The table below reconciles the revenue from contracts with customers and other revenue reported in those line items:


	Service and						Service and
(Dollars in thousands)	Other Fees		Other		Total		Other Fees		Other		Total
Three months ended September 30, 2022
Three months ended March 31, 2023
Revenue from contracts with customers	$	304	$	38	$	342	$	275	$	42	$	317
Other revenue		35		38		73		35		33		68
Total	$	339	$	76	$	415	$	310	$	75	$	385

Three months ended September 30, 2021
Three months ended March 31, 2022
Revenue from contracts with customers	$	399	$	30	$	429	$	310	$	44	$	354
Other revenue		34		27		61		31		1,053		1,084
Total	$	433	$	57	$	490	$	341	$	1,097	$	1,438

Nine months ended September 30, 2022
Revenue from contracts with customers	$	989	$	138	$	1,127
Other revenue		103		1,221		1,324
Total	$	1,092	$	1,359	$	2,451

Nine months ended September 30, 2021
Revenue from contracts with customers	$	1,855	$	154	$	2,009
Other revenue		103		83		186
Total	$	1,958	$	237	$	2,195

~~(14)~~(15) Leases

The table below presents lease costs and other information for the periods indicated:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022
Lease costs:
Operating lease costs	$	712	$	843	$	2,211	$	2,552	$	705	$	762
Short-term lease costs		107		15		199		32		104		15
Variable lease costs		49		31		127		113		43		38
Total lease costs	$	868	$	889	$	2,537	$	2,697	$	852	$	815

Cash paid for amounts included in measurement of lease liabilities	$	854	$	836	$	2,381	$	2,520	$	769	$	763
ROU assets obtained in exchange for new operating lease liabilities	$	2,003	$	444	$	6,833	$	3,285	$	118	$	4,798

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At ~~September 30, 2022,~~March 31, 2023, future minimum rental commitments under noncancellable operating leases are as follows:


(Dollars in thousands)
2022	$	713
2023		2,787	$	2,216
2024		2,651		2,757
2025		2,031		2,137
2026		1,868		1,974
2027				1,896
Thereafter		12,789		10,995
Total		22,839		21,975
Less lease incentives to be received in 2022		(4,996)
Less lease incentives to be received in 2023				(4,996)
Less present value discount		(2,447)		(2,259)
Present value of leases	$	15,396	$	14,720

The table below presents other lease related information:


	September 30,			September 30,			March 31,			March 31,
	2022			2021			2023			2022
Weighted-average remaining lease term (years)		9.03			5.95			8.80			8.92
Weighted-average discount rate		2.04	%		2.18	%		2.09	%		1.90	%

~~(15)~~(16) Fair Value

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities measured or disclosed at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

●Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

●Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

●Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures. Investment securities available for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

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

Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. The fair value inputs are considered Level 2 inputs. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the Consolidated Balance Sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

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


	Carrying				Fair Value Measurements Using						Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2022
March 31, 2023
Assets
Cash and cash equivalents	$	36,286	$	36,286	$	36,286	$	—	$	—	$	84,860	$	84,860	$	84,860	$	—	$	—
Investment securities available for sale		21,142		21,142		—		21,142		—		21,073		21,073		—		21,073		—
Investment securities held to maturity		717,434		585,752		—		585,752		—		715,601		602,045		—		602,045		—
Loans receivable, net		1,295,044		1,145,828		—		—		1,145,828		1,291,310		1,159,417		—		—		1,159,417
FHLB stock		8,197		8,197		—		8,197		—		12,444		12,444		—		12,444		—
FRB stock		3,171		3,171		—		3,171		—		3,177		3,177		—		3,177		—
Accrued interest receivable		6,061		6,061		32		1,521		4,508		6,128		6,128		100		1,554		4,474

Liabilities
Deposits		1,711,853		1,705,405		—		1,376,636		328,769		1,661,973		1,655,368		—		1,211,525		443,843
Advances from the Federal Home Loan Bank		141,000		132,781		—		132,781		—		246,000		239,598		—		239,598		—
Securities sold under agreements to repurchase		10,000		9,423		—		9,423		—		10,000		9,530		—		9,530		—
Accrued interest payable		351		351		—		65		286		1,012		1,012		—		36		976

December 31, 2021
December 31, 2022
Assets
Cash and cash equivalents	$	99,859	$	99,859	$	99,859	$	—	$	—	$	40,553	$	40,553	$	40,553	$	—	$	—
Investment securities available for sale												20,821		20,821		—		20,821		—
Investment securities held to maturity		636,442		634,987		—		634,987		—		717,773		591,084		—		591,084		—
Loans receivable, net		1,302,824		1,314,609		—		—		1,314,609		1,294,764		1,180,840		—		—		1,180,840
FHLB stock		8,173		8,173		—		8,173		—		8,197		8,197		—		8,197		—
FRB stock		3,158		3,158		—		3,158		—		3,170		3,170		—		3,170		—
Accrued interest receivable		5,786		5,786		16		1,126		4,644		6,115		6,115		23		1,497		4,595
Interest rate contracts		9		9		—		9		—

Liabilities
Deposits		1,681,828		1,682,078		—		1,456,773		225,305		1,716,152		1,708,612		—		1,286,465		422,147
Advances from the Federal Home Loan Bank		141,000		141,867		—		141,867		—		141,000		133,145		—		133,145		—
Securities sold under agreements to repurchase		10,000		10,143		—		10,143		—		10,000		9,440		—		9,440		—
Accrued interest payable		35		35		—		34		1		701		701		—		33		668
Interest rate contracts		9		9		—		9		—

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the Consolidated Financial Statements of the Company.

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The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:


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

September 30, 2022
March 31, 2023
Investment securities available for sale	$	—	$	21,142	$	—	$	21,142	$	—	$	21,073	$	—	$	21,073

December 31, 2021
Interest rate contracts — assets	$	—	$	9	$	—	$	9
Interest rate contracts — liabilities		—		(9)		—		(9)
December 31, 2022
Investment securities available for sale										—		20,821		—		20,821

There were no assets or liabilities measured at fair value on a nonrecurring basis as of ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

~~(16)~~(18) Subsequent Events

On ~~October~~April 27, ~~2022,~~2023, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.23 per share of common stock. The dividend is expected to be paid on ~~November 23, 2022~~May 25, 2023 to stockholders of record as of ~~November 10, 2022.~~May 11, 2023.

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,” ~~“continue”~~“continue,” 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. You should not place undue reliance on such statements. 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:

●

~~risks, uncertainties and other factors relating to~~general economic conditions, including conditions caused by the COVID-19 pandemic, ~~including the severity~~other public health emergencies, international conflict, inflation, and duration of the effects of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments and the inability of employees to work due to illness or quarantine;

●

~~general economic conditions,~~recessionary pressures, internationally, nationally or in our market areas, that are worse than expected;

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●

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 or our ability to originate mortgage loans;

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●

changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio;

●

adverse changes in the securities or credit markets;

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

●

changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

●

our ability to enter new markets successfully and capitalize on growth opportunities;

●

our ability to successfully integrate acquired entities, if any;

●

changes in consumer demand, spending, borrowing, and savings habits;

●

changes in accounting and auditing policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

●

changes in our organization, compensation, and benefit plans;

●

the timing and amount of revenues that we may recognize;

●

the value and marketability of collateral underlying our loan portfolios;

●

our ability to retain key employees;

●

cyber attacks, computer viruses, and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems;

●

technological changes that may be more difficult or expensive than expected;

●

the ability of third-party providers to perform their obligations to us;

●

the ability of the U.S. Government to manage federal debt limits;

●

the effects of any federal government shutdown;

●

the quality and composition of our investment portfolio;

●

changes in market and other conditions that would affect our ability to repurchase our common stock;

●

changes in our financial condition or results of operations that reduce capital available to pay dividends;

●

the effects of climate change and societal, investor, and governmental responses to climate change;

●

the effects of social and governance change and societal and investor sentiment and governmental responses to social and governance matters;

●

the effects of domestic and international hostilities, including terrorism; 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.

Recent Developments

Recent bank failures have led to uncertainty and volatility in the financial services industry. In response to these events, we took a series of precautionary measures, which included enhanced monitoring of deposit and funding flows, evaluating other sources of liquidity and our securities portfolio to improve our liquidity and mitigate other potential risks that were highlighted by these events.

As a result of these procedures, we obtained $105.0 million of advances from the Federal Home Loan Bank. The proceeds of these advances were used to enhance our liquidity and let interest-rate sensitive certificates of deposit with state and local governments mature without being renewed. These actions resulted in a stronger liquidity position and a reduction in our interest rate risk. We continue to monitor these events and the impact they may have in future periods, and will respond accordingly. Refer to the “Liquidity and Capital Resources” section and to Part II. Item 1A. “Risk Factors” for further information regarding liquidity.

Additionally, the United States government, particularly the Federal Deposit Insurance Company (“FDIC”), U.S Department of Treasury, and the Board of Governors of the Federal Reserve System, have taken measures designed to restore confidence in the financial markets.

Overview

We have historically operated as a traditional thrift institution. The significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, ~~our capital,~~ proceeds from securities sold under agreements to repurchase, and proceeds from loan and security sales. As a result, we may be vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.

We have continued our focus on originating one- to four-family residential real estate loans. Our emphasis on conservative loan underwriting has resulted in continued low levels of nonperforming assets. Our nonperforming assets, which can include nonaccrual loans and real estate owned, totaled $~~2.0~~2.4 million, or ~~0.09%~~0.11% of total assets at ~~September 30, 2022~~March 31, 2023 compared to ~~$3.3~~$2.3 million, or ~~0.15%~~0.11% of total assets at December 31, ~~2021~~2022. We recorded ~~a reversal~~reversals of ~~loan~~credit loss provisions of ~~$603,000~~$100,000 under ASC 326 and ~~$1.5 million for~~$168,000 under ASC 310 during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, respectively. ASC 326 requires organizations to measure all expected credit losses for financial instruments based on historical experience, current conditions, and ~~2021, respectively.~~reasonable and supportable forecasts. We did not record a provision for credit losses on investment securities during the three months ended March 31, 2023 or 2022. The reversal of ~~loan~~credit loss provisions in the three months ended March 31, 2023 was primarily due to an improvement in economic conditions. The reversal of credit loss provisions in the three months ended March 31, 2022 occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate, and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic.

Other than our loans for the construction of one- to four-family residential homes, we do not offer “interest only” mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as nonconforming loans having less than full documentation). We also do not own any private label mortgage-backed securities that are collateralized by Alt-A, low or no documentation or subprime mortgage loans.

We sold fixed-rate mortgage loans held for sale with principal balances of ~~$5.4 million~~$360,000 and ~~$26.2~~$2.0 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Federal Home Loan Bank advances increased by $105.0 million to $246.0 million during the three months ended March 31, 2023 and remained constant at $141.0 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2022 and 2021.~~March 31, 2022. Securities sold under agreements to repurchase remained constant at $10.0 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Our investments in mortgage-backed securities have been issued by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. These entities guarantee the payment of principal and interest on our mortgage-backed securities. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we

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owned ~~$738.6~~$736.7 million and ~~$636.4~~$738.6 million, respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae, and Ginnie Mae.

Critical Accounting Policies

~~There are no~~On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to ~~the~~our critical accounting policies ~~disclosed in Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended~~that existed at December 31, ~~2021.~~2022. This standard replaces the “incurred loss” model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an “expected loss” model known as current expected credit loss (CECL), which estimates a loss based on losses expected to be recorded over the life of the loan portfolio.

The estimate of the ACL under CECL is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of cash flows. Refer to Note 2 Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements in this report for further discussions on the risk factors considered by management in establishing the ACL.

Comparison of Financial Condition at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022

Assets. Our total assets increased by $~~34.2~~43.2 million, or ~~1.6%~~2.0%, to $2.2 billion at ~~September 30, 2022 from $2.1 billion at December~~March 31, ~~2021.~~2023. The increase in assets was primarily due to a ~~$102.1~~$44.3 million increase in ~~total investment securities which was partially offset by a $63.6 million decrease in cash and cash equivalents and a $7.8 million decrease in net loans receivable.~~cash.

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Cash and Cash Equivalents. Cash and cash equivalents were ~~$36.3~~$84.9 million at ~~September 30, 2022, a decrease~~March 31, 2023, an increase of ~~$63.6~~$44.3 million, or ~~63.7%~~109.3%, since December 31, ~~2021.~~2022. The ~~decrease~~increase in cash and cash equivalents was primarily caused by a ~~$102.1~~$105.0 million increase in ~~total investment securities, as we used excess cash to purchase securities,~~Federal Home Loan Bank advances, which was partially offset by a ~~$30.0 million increase in deposits and a $7.8~~$54.2 million decrease in ~~total loans.~~deposits, each as described below.

Loans. Total loans were $1.3 billion at ~~September 30, 2022,~~March 31, 2023, or ~~59.8%~~58.4% of total assets. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the loan portfolio decreased by ~~$7.8~~$3.5 million, or ~~0.6%~~0.3%. The decrease in the loan portfolio primarily occurred as principal repayments and loan sales exceeded the origination of new loans.

Securities. Total investment securities, including $21.1 million of investment securities available for sale, were ~~$738.6~~$736.7 million at ~~September 30, 2022,~~March 31, 2023, or ~~34.1%~~33.3% of total assets. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the investment securities portfolio ~~increased~~decreased by ~~$102.1~~$1.9 million, or ~~16.0%~~0.3%. The ~~increase~~decrease in the investment securities balance occurred as ~~purchases~~principal repayments exceeded ~~principal repayments. Mortgage-backed securities were purchased to offset the decrease in interest income that occurred because of the decrease in our loan portfolio.~~purchases.

At ~~September 30, 2022,~~March 31, 2023, none of the underlying collateral for the securities consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.

Deposits. Deposits were $1.7 billion at ~~September 30, 2022, an increase~~March 31, 2023, a decrease of ~~$30.0~~$54.2 million, or ~~1.8%~~3.2%, since December 31, ~~2021.~~2022. The ~~growth~~decrease in deposits was primarily due to a ~~$110.2~~$71.4 million decrease in passbook savings that was partially offset by a $20.8 million increase in certificates of deposit ~~that was partially offset by an $88.3 million~~during the three months ended March 31, 2023. The decrease in passbook savings ~~accounts during the nine months ended September 30, 2022. The growth in certificates of deposit included a $71.2 million increase in public deposits and also~~ occurred ~~when~~as funds were transferred by customers ~~transferred funds~~ from savings accounts ~~to certificates of deposit with~~for higher interest ~~rates.~~rates and to obtain FDIC insurance on balances over $250,000.

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank (FHLB) and funds borrowed under securities sold under agreements to repurchase. ~~During the nine months ended~~At ~~September 30, 2022~~ March 31, 2023 total borrowings ~~remained constant~~were $256.0 million, an increase of $105.0 million, or 69.5%, from $151.0 million at ~~$151.0 million.~~December 31, 2022. The proceeds from the advances were used to enhance liquidity and fund the decrease in deposits.

Stockholders’ Equity. Total stockholders’ equity was ~~$256.7~~$253.8 million at ~~September 30, 2022~~March 31, 2023, ~~an increase~~a decrease of ~~$423,000,~~$2.8 million, or ~~0.2%,~~1.1% from ~~$256.3~~$256.6 million at December 31, ~~2021.~~2022. The ~~increase~~decrease in stockholders’ equity occurred primarily as ~~net income exceeded~~the reduction in retained earnings from the adoption of the CECL accounting standard, dividends declared and shares ~~repurchased.~~repurchased exceeded net income.

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Average Balances and Yields

The following ~~tables set~~table sets forth average balance sheets, yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as we did not hold any tax-free investments. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances and are included with accrual loans in the tables. However, no interest income was attributed to nonaccrual loans. The yields set forth below include the effect of net deferred costs, discounts, and premiums that are amortized or accreted to interest income of ~~$53,000~~$64,000 and ~~$76,000~~$1,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~respectively, and $100,000 and $354,000 for the three and nine months ended September 30, 2021,~~ respectively.

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For the Three Months Ended September 30,

2022

2021

Average

Average

Outstanding

Yield/Rate

Outstanding

Yield/Rate

Balance

Interest

(1)

Balance

Interest

(1)

(Dollars in thousands)

Interest-earning assets:

Loans:

Real estate loans:

First mortgage:












One- to four-family residential (2)

$
1,248,670

$
10,918

3.50
%

$
1,268,878

$
11,383

3.59
%

Multi-family residential

4,268

47

4.40

6,726

75

4.46

Construction, commercial and other

22,678

235

4.14

18,599

201

4.32

Home equity loans and lines of credit

6,204

89

5.74

7,291

92

5.05

Other loans

8,655

87

4.02

8,851

85

3.84

Total loans

1,290,475

11,376

3.53

1,310,345

11,836

3.61

Investment securities:

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

739,633

4,402

2.38

612,385

3,251

2.12

Total securities

739,633

4,402

2.38

612,385

3,251

2.12

Other

57,331

373

2.60

117,643

188

0.64

Total interest-earning assets

2,087,439

16,151

3.09

2,040,373

15,275

2.99

Non-interest-earning assets

90,162

85,751

Total assets

$
2,177,601

$
2,126,124

Interest-bearing liabilities:

Savings accounts

$
1,021,685

223

0.09
%

$
1,072,155

234

0.09
%

Certificates of deposit

324,489

1,003

1.24

246,522

593

0.96

Money market accounts

5,538

1

0.07

4,264

3

0.28

Checking and Super NOW accounts

302,515

15

0.02

277,579

14

0.02

Total interest-bearing deposits

1,654,227

1,242

0.30

1,600,520

844

0.21

Federal Home Loan Bank advances

141,000

522

1.48

141,000

522

1.48

Securities sold under agreements to repurchase

10,000

46

1.84

10,000

46

1.84

Total interest-bearing liabilities

1,805,227

1,810

0.40

1,751,520

1,412

0.32

Non-interest-bearing liabilities

114,391

121,885

Total liabilities

1,919,618

1,873,405

Stockholders’ equity

257,983

252,719

Total liabilities and stockholders’ equity

$
2,177,601

$
2,126,124

Net interest income

$
14,341

$
13,863

Net interest rate spread (3)

2.69
%

2.67
%

Net interest-earning assets (4)

$
282,212

$
288,853

Net interest margin (5)

2.75
%

2.72
%

Interest-earning assets to interest-bearing liabilities

115.63
%

116.49
%

~~(1)~~

~~Annualized.~~

~~(2)~~

~~Average balance includes loans or investments held to maturity and 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.~~

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For the Nine Months Ended September 30,

2022

2021

Average

Average



Outstanding

Yield/Rate

Outstanding

Yield/Rate

Balance

Interest

(1)

Balance

Interest

(1)

(Dollars in thousands)

Interest-earning assets:

Loans:

Real estate loans:

First mortgage:

One- to four-family residential (2)

$
1,253,679

$
32,585

3.47
%

$
1,296,870

$
35,612

3.66
%

Multi-family residential

4,693

155

4.40

6,740

231

4.57

Construction, commercial and other

21,492

665

4.13

18,387

607

4.40

Home equity loans and lines of credit

6,438

257

5.32

8,072

300

4.96

Other loans

8,641

247

3.81

9,268

269

3.87

Total loans

1,294,943

33,909

3.49

1,339,337

37,019

3.69

Investment securities:

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

700,482

11,753

2.24

433,541

7,470

2.30

Total securities

700,482

11,753

2.24

433,541

7,470

2.30

Other

66,965

816

1.62

269,148

647

0.32

Total interest-earning assets

2,062,390

46,478

3.00

2,042,026

45,136

2.95

Non-interest-earning assets

90,203

85,470

Total assets

$
2,152,593

$
2,127,496

Interest-bearing liabilities:

Savings accounts

$
1,053,112

624

0.08
%

$
1,053,634

872

0.11
%

Certificates of deposit

265,635

1,903

0.96

276,635

2,329

1.12

Money market accounts

5,530

4

0.10

5,712

9

0.21

Checking and Super NOW accounts

304,718

46

0.02

267,567

41

0.02

Total interest-bearing deposits

1,628,995

2,577

0.21

1,603,548

3,251

0.27

Federal Home Loan Bank advances

141,000

1,549

1.46

141,000

1,595

1.51

Securities sold under agreements to repurchase

10,000

137

1.83

10,000

137

1.83

Total interest-bearing liabilities

1,779,995

4,263

0.32

1,754,548

4,983

0.38

Non-interest-bearing liabilities

114,487

120,394

Total liabilities

1,894,482

1,874,942

Stockholders’ equity

258,111

252,554

Total liabilities and stockholders’ equity

$
2,152,593

$
2,127,496

Net interest income

$
42,215

$
40,153

Net interest rate spread (3)

2.68
%

2.57
%

Net interest-earning assets (4)

$
282,395

$
287,478

Net interest margin (5)

2.73
%

2.62
%

Interest-earning assets to interest-bearing liabilities

115.86
%

116.38
%


	For the Three Months Ended March 31,
	2023							2022
	Average							Average
	Outstanding					Yield/Rate		Outstanding					Yield/Rate
	Balance			Interest		(1)		Balance			Interest		(1)

	(Dollars in thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (2)	$	1,250,060		$	10,948	3.50	%	$	1,261,293		$	10,923	3.46	%
Multi-family residential		4,766			61	5.12			5,265			59	4.48
Construction, commercial, and other		24,041			251	4.18			20,075			208	4.14
Home equity loans and lines of credit		6,279			104	6.63			6,866			88	5.13
Other loans		8,439			90	4.27			8,741			79	3.62
Total loans		1,293,585			11,454	3.54			1,302,240			11,357	3.49
Investment securities:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises (2)		740,350			4,540	2.45			656,885			3,423	2.08
Total securities		740,350			4,540	2.45			656,885			3,423	2.08
Other		67,217			727	4.33			71,918			176	0.98
Total interest-earning assets		2,101,152			16,721	3.18			2,031,043			14,956	2.95
Non-interest-earning assets		88,719							88,764
Total assets	$	2,189,871						$	2,119,807

Interest-bearing liabilities:
Savings accounts	$	875,870			346	0.16	%	$	1,080,757			193	0.07	%
Certificates of deposit		438,593			3,168	2.89			207,925			388	0.75
Money market accounts		5,273			1	0.08			5,382			1	0.07
Checking and Super NOW accounts		296,024			15	0.02			300,827			15	0.02
Total interest-bearing deposits		1,615,760			3,530	0.87			1,594,891			597	0.15
Federal Home Loan Bank advances		192,333			1,054	2.19			141,000			511	1.45
Securities sold under agreements to repurchase		10,000			46	1.84			10,000			44	1.76
Total interest-bearing liabilities		1,818,093			4,630	1.02			1,745,891			1,152	0.26
Non-interest-bearing liabilities		116,103							115,458
Total liabilities		1,934,196							1,861,349
Stockholders’ equity		255,675							258,458
Total liabilities and stockholders’ equity	$	2,189,871						$	2,119,807

Net interest income				$	12,091						$	13,804
Net interest rate spread (3)						2.16	%						2.69	%
Net interest-earning assets (4)	$	283,059						$	285,152
Net interest margin (5)						2.30	%						2.72	%
Interest-earning assets to interest-bearing liabilities		115.57	%						116.33	%

~~(1)Annualized.~~

(1)	Annualized by using the ratio of the number of months in the year over the number of months in the period.

(2)	Average balance includes loans or investments held to maturity and 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.

Table of Contents

Comparison of Operating Results for the Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

General. Net income decreased by ~~$271,000,~~$2.4 million, or ~~6.5%~~50.8%, to ~~$3.9~~$2.3 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$4.2~~$4.7 million for the three months ended ~~September 30, 2021.~~March 31, 2022. The decrease in net income was ~~primarily~~ due to a ~~$608,000~~$1.7 million decrease in net interest income, a $1.1 million decrease in non-interest income ~~a $205,000 increase in non-interest expense~~ and a ~~$58,000~~$68,000 reduction in the reversal of ~~loan~~credit loss provisions. These decreases to net income were partially offset by a ~~$478,000 increase in net interest income and a $122,000~~$466,000 decrease in income ~~tax expense.~~taxes.

Net Interest Income. Net interest income ~~increased~~decreased by ~~$478,000,~~$1.7 million, or ~~3.4%~~12.4%, to ~~$14.3~~$12.1 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$13.9~~$13.8 million for the three months ended ~~September 30, 2021~~. Interest income increased by $876,000, or 5.7%, primarily due to a 10 basis point increase in the yield on average interest-earning assets and a $47.1 million increase in the average balance of interest-earning assets.March 31, 2022. Interest expense increased by ~~$398,000,~~$3.5 million, or ~~28.2%~~301.9%, due to ~~an eight~~a 76 basis point increase in the cost of average interest-bearing liabilities and a ~~$53.7~~$72.2 million increase in the average balance of interest-bearing liabilities. Interest income increased by $1.8 million, or 11.8%, due to a 23 basis point increase in the yield of average interest-earning assets and a $70.1 million increase in the average balance of interest-earning assets. The net interest rate spread and net interest margin were ~~2.69%~~2.16% and ~~2.75%~~2.30%, respectively, for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~2.67%~~2.69% and 2.72%, respectively, for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decreases in the net interest rate spread and in the net interest margin are attributable to the ~~10 basis point increase in the yield of average interest-earning assets, which was partially offset by the eight~~76 basis point increase in the cost of average interest-bearing ~~liabilities.~~liabilities, which was partially offset by a 23 basis point increase in the yield on average interest-earning assets.

Interest Income.Interest income increased by ~~$876,000,~~$1.8 million, or ~~5.7%~~11.8%, to ~~$16.2~~$16.7 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$15.3~~$15.0 million for the three months ended ~~September 30, 2021~~.March 31, 2022. Interest income on securities increased by ~~$1.2~~$1.1 million, or ~~35.4%~~32.6%, to ~~$4.4~~$4.5 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$3.3~~$3.4 million for the three months ended ~~September 30, 2021.~~March 31, 2022. The increase in interest income on securities occurred primarily because ~~the average balance~~ of ~~securities increased by $127.2~~an $83.5 million, or ~~20.8%~~12.7%, ~~to $739.6 million for the three months ended September 30, 2022 from $612.4 million for the three months ended September 30, 2021. The~~ increase in the average balance of securities ~~occurred~~ as ~~mortgage-backed securities were purchased to offset the decrease in interest income on our loan portfolio. The~~security purchases exceeded security repayments. This increase ~~in interest income on investment securities~~ was augmented by a 2637 basis point increase in the yield on average ~~yield. The increase to interest income on investment~~ securities, ~~was partially offset by a decrease in interest~~which occurred as higher yielding securities were purchased. Interest income on loans ~~of $460,000,~~increased by $97,000, or ~~3.9%~~0.9%, ~~from $11.8~~to $11.5 million for the three months ended ~~September 30, 2021 to~~March 31, 2023 from $11.4 million for the three months ended ~~September 30, 2022~~.March 31, 2022. The ~~decrease~~increase in interest income on loans occurred because ~~of an eight~~the average loan yield increased by five basis ~~point decrease~~points, or 1.4%, which was partially offset by the average loan balance decreasing by $8.7 million, or 0.7%. The increase in the average loan yield ~~and a $19.9 million, or 1.5%, decrease~~was primarily due to an increase in ~~the average balance of loans.~~market rates. The decrease in the average ~~yield occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the~~ loan ~~portfolio.~~ The decrease in the average yield occurred as loans with lower interest rates had been added to the loan portfolio and higher yielding loans continue to be paid down. Despite an increase in current market rates, the average yield decreased in the three months ended September 30, 2022,balance was primarily due to ~~a low amount of~~loan repayments and loan sales exceeding new loan ~~originations at these higher market rates.~~originations.

Interest Expense. Interest expense increased by ~~$398,000,~~$3.5 million, or ~~28.2%~~301.9%, to ~~$1.8~~$4.6 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$1.4~~$1.2 million for the three months ended ~~September 30, 2021~~.March 31, 2022. Interest expense on interest-bearing deposits increased by ~~$398,000,~~$2.9 million, or ~~47.2%~~491.3%, to ~~$1.2~~$3.5 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$844,000~~$597,000 for the three months ended ~~September 30, 2021.~~March 31, 2022. Interest expense on certificates of deposit increased by $2.8 million, or 716.5%, to $3.2 million for the three months ended March 31, 2023 from $388,000 for the three months ended March 31, 2022. The increase in interest expense on ~~interest-bearing deposits~~certificates of deposit occurred because of a 214 basis point increase in the average rate which was augmented by a $230.7 million increase in the average balance of certificates of deposit. Interest expense on savings accounts increased by $153,000, or 79.3%, to $346,000 for the three months ended March 31, 2023 from $193,000 for the three months ended March 31, 2022. The increase in interest expense on savings accounts occurred primarily because of a nine basis point increase in the average rate which was partially offset by a $204.9 million, or 19.0%, decrease in the average balance of savings accounts. The increase in the average rates on certificates of deposit and savings accounts were primarily due to ~~a $78.0 million, or 31.6%~~increases in market rates. The increase in the average balance of certificates of deposit and the decrease in the average balance of savings accounts occurred as customers transferred funds from lower rate savings accounts for higher interest rates. Interest expense on FHLB advances rose by $543,000, or 106.3%, from $511,000 for the three months ended March 31, 2022 to $1.1 million for the three months ended March 31, 2023. The increase in interest expense occurred because of a 28$51.3 million, or 36.4%, increase in the average FHLB advance balance. This increase to interest expense was augmented by a 74 basis point increase in the average ~~rate on certificates~~cost of ~~deposit.~~FHLB advances. The increase in the average balance ~~of certificates of deposit included a $38.4 million increase in~~and the average ~~balance~~cost of ~~public deposits and also occurred as customers transferred funds from savings accounts~~FHLB advances was primarily due to ~~certificates of deposit with higher interest rates. The average rate paid on average certificates of deposit increased to 1.24% for~~$105.0 million in additional FHLB advances obtained during the three months ended ~~September 30, 2022 from 0.96%~~March 31, 2023 to enhance our liquidity and to reduce interest rate risk by allowing interest-rate sensitive State and local government certificates of deposit to mature.

Table of Contents

Provision for Credit Losses. We recorded reversals of credit loss provisions of $100,000 under ASC 326 and $168,000 under ASC 310 during the three months ended ~~September 30, 2021, primarily due to increases in market rates.~~

~~Provision~~March 31, 2023 and 2022, respectively. We did not record a provision for ~~Loan Losses.~~ ~~We recorded a reversal of loan loss provisions of $109,000 and $167,000 for~~credit losses on investment securities during the three months ended ~~September 30, 2022 and 2021, respectively.~~March 31, 2023 or 2022. The reversal of ~~loan~~credit loss provisions in the three months ended March 31, 2023 was primarily due to an improvement in economic conditions. The reversal of credit loss provisions in the three months ended March 31, 2022 occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate, and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for ~~loan~~credit losses to total loans of ~~0.16%~~0.40% and ~~0.21%~~0.19% at ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Nonaccrual loans totaled ~~$2.0~~

~~Table of Contents~~

$2.4 million at ~~September 30, 2022,~~March 31, 2023, or ~~0.15%~~0.18% of total loans at that date, compared to ~~$4.2~~$3.2 million of nonaccrual loans at ~~September 30, 2021,~~March 31, 2022, or ~~0.32%~~0.25% of total loans at that date. Nonaccrual loans as of ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ consisted primarily of one- to four-family residential real estate loans. We have provided for all losses that can be reasonably estimated based on general and specific conditions at ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. For additional information see Note ~~(6), “Loans~~6 Loans Receivable and Allowance for ~~Loan Losses”~~Credit Losses in our Notes to Consolidated Financial Statements.

Noninterest Income. The following table summarizes changes in noninterest income between the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.


	Three Months Ended								Three Months Ended
	September 30,				Change				March 31,				Change
	2022		2021		$ Change		% Change		2023		2022		$ Change		% Change

				(Dollars in thousands)								(Dollars in thousands)
Service and other fees	$	339	$	433	$	(94)	(21.7)	%	$	310	$	341	$	(31)	(9.1)	%
Income on bank-owned life insurance		200		192		8	4.2	%		203		197		6	3.0	%
Gain on sale of investment securities		—		403		(403)	(100.0)	%
Net gain (loss) on sale of loans		—		138		(138)	(100.0)	%
Net gain on sale of loans										1		18		(17)	(94.4)	%
Other		76		57		19	33.3	%		75		1,097		(1,022)	(93.2)	%
Total	$	615	$	1,223	$	(608)	(49.7)	%	$	589	$	1,653	$	(1,064)	(64.4)	%

Noninterest income decreased by ~~$608,000~~$1.0 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared to the three months ended ~~September 30, 2021. During the three months ended September 30, 2021, we sold held-to-maturity mortgage-backed securities with a book value~~March 31, 2022. Other income decreased primarily due to $1.0 million of ~~$7.1 million and recorded a gain of $403,000. There were no mortgage-backed security sales~~bank-owned life insurance net proceeds received during the three months ended ~~September 30,~~March 31, 2022. The sale of the held-to-maturity mortgage-backed securities for which we 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 September 30, 2022 and 2021, we sold mortgage loans held for sale with a principal balances of $362,000 and $11.7 million, respectively, and recognized a loss of $330 and a gain of $138,000, respectively. Service and other fees decreased by $94,000 primarily due to a reduction in the amount of mortgage loans referred to other financial institutions and mortgage brokers.

Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Three Months Ended

September 30,

Change

2022

2021

$ Change

% Change

(Dollars in thousands)

Salaries and employee benefits

$
5,513

$
5,493

$
20

0.4
%

Occupancy

1,682

1,636

46

2.8
%

Equipment

1,317

1,079

238

22.1
%

Federal deposit insurance premiums

145

141

4

2.8
%

Other general and administrative expenses

1,112

1,215

(103)

(8.5)
%

Total

$
9,769

$
9,564

$
205

2.1
%

Noninterest expense increased by $205,000 for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in equipment fees was primarily due to an increase in data processing expense. The decrease in other general and administrative expenses was primarily due to a decrease in other loan expense. The decrease in other loan expense occurred as we originated fewer loans during the three months ended, September 30, 2022.


	Three Months Ended
	March 31,				Change
	2023		2022		$ Change		% Change

				(Dollars in thousands)
Salaries and employee benefits	$	5,404	$	5,613	$	(209)	(3.7)	%
Occupancy		1,623		1,594		29	1.8	%
Equipment		1,312		1,196		116	9.7	%
Federal deposit insurance premiums		245		141		104	73.8	%
Other general and administrative expenses		1,029		1,054		(25)	(2.4)	%
Total	$	9,613	$	9,598	$	15	0.2	%

Table of Contents

~~Income Tax Expense.~~ ~~Income taxes were $1.4 million~~Noninterest expense increased by $15,000 for the three months ended ~~September 30, 2022, reflecting an effective tax rate of 26.5%,~~March 31, 2023 compared to ~~$1.5 million for~~ the three months ended ~~September 30, 2021, reflecting an effective tax rate of 26.8%.~~

~~Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021~~

~~General.~~ Net income decreased by $522,000, or 3.9%, to $12.7 million for the nine months ended September 30, 2022 from $13.2 million for the nine months ended September 30, 2021. The decrease in net income was due to a $2.2 million decrease in non-interest income, an $849,000 reduction in the reversal of loan loss provisions and a $181,000 increase in non-interest expense. These decreases to net income were partially offset by a $2.1 million increase in net interest income and a $596,000 decrease in income taxes.

~~Net Interest Income. Net interest income increased by~~ ~~$2.1 million, or 5.1%, to $42.2 million for the nine months ended September 30, 2022~~ from $40.2 million for the nine months ended September 30, 2021. Interest income increased by $1.3 million, or 3.0%, due to a five basis point increase in the yield of average interest-earning assets and a $20.4 million increase in the average balance of interest-earning assets. Interest expense decreased by $720,000, or 14.4%, due to a six basis point decrease in the cost of average interest-bearing liabilities, which was partially offset by a $25.4 million increase in the average balance of interest-bearing liabilities. The net interest rate spread and net interest margin were 2.68% and 2.73%, respectively, for the nine months ended September 30, 2022, compared to 2.57% and 2.62%, respectively, for the nine months ended September 30, 2021. The increases in the net interest rate spread and in the net interest margin are attributable to the five basis point increase in the yield on average interest-earning assets and the six basis point decrease in the cost of average interest-bearing liabilities.

~~Interest Income.~~ Interest income increased by $1.3 million, or 3.0%, to $46.5 million for the nine months ended September 30, 2022 from $45.1 million for the nine months ended September 30, 2021. Interest income on securities increased by $4.3 million, or 57.3%, to $11.8 million for the nine months ended September 30, 2022 from $7.5 million for the nine months ended September 30, 2021. The increase in interest income on securities occurred primarily because of a $266.9 million, or 61.6%, increase in the average balance of securities as security purchases exceeded security repayments. The increase in the average balance of securities occurred as mortgage-backed securities were purchased to offset the decrease in interest income on our loan portfolio. This increase was partially offset by a six basis point decrease in the yield on average securities, which occurred as higher yielding securities were paid off or sold and securities with lower interest rates were purchased. Interest income on loans decreased by $3.1 million, or 8.4%, to $33.9 million for the nine months ended September 30, 2022 from $37.0 million for the nine months ended September 30, 2021. The decrease in interest income on loans occurred because the average loan yield decreased by 20 basis points, or 5.4%, and the average loan balance decreased by $44.4 million, or 3.3%. The decrease in the yield on average loans occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the loan portfolio. The decrease in the average yield occurred as loans with lower interest rates had been added to the loan portfolio and higher yielding loans continue to be paid down. Despite an increase in current market rates, the average yield decreased in the nine months ended September 30, 2022, due to a low amount of new loan originations at these higher market rates.

~~Interest Expense.~~ ~~Interest expense decreased by $720,000, or 14.4%, to $4.3 million for the nine months ended September 30, 2022~~ from $5.0 million for the nine months ended September 30, 2021. Interest expense on interest-bearing deposits decreased by $674,000, or 20.7%, to $2.6 million for the nine months ended September 30, 2022 from $3.3 million for the nine months ended September 30, 2021. Interest expense on certificates of deposit decreased by $426,000, or 18.3%, to $1.9 million for the nine months ended September 30, 2022 from $2.3 million for the nine months ended September 30, 2021. The decrease in interest expense on certificates of deposit occurred because of a 16 basis point decrease in the average rate which was augmented by an $11.0 million decrease in the average balance of certificates of deposit. Interest expense on savings accounts decreased by $248,000, or 28.4%, to $624,000 for the nine months ended September 30, 2022 from $872,000 for the nine months ended September 30, 2021. The decrease in interest expense on savings accounts occurred primarily because of a three basis point decrease in the average rate which was augmented by a $522,000 decrease in the average balance of savings accounts. The decrease in the average rates on certificates of deposit and savings accounts occurred as the average rates in the first nine months of 2021 were higher than the average rates in the first nine months ofMarch 31, 2022. ~~The interest rate increases that occurred in the second~~

~~Table of Contents~~

and third quarters of 2022 have not had a significant effect on interest expense for the first nine months of 2022 because certificates of deposits opened at lower interest rates in 2021 have not matured yet and rolled over at higher interest rates in 2022.

~~Provision for Loan Losses.~~ We recorded a reversal of loan loss provisions of $603,000 and $1.5 million for the nine months ended September 30, 2022 and 2021, respectively. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.16% and 0.21% at September 30, 2022 and 2021, respectively. Nonaccrual loans totaled $2.0 million at September 30, 2022, or 0.15% of total loans at that date, compared to $4.2 million of nonaccrual loans at September 30, 2021, or 0.32% of total loans at that date. Nonaccrual loans as of September 30, 2022 and 2021 consisted primarily of one- to four-family residential real estate loans. We have provided for all losses that can be reasonably estimated based on general and specific conditions at September 30, 2022 and 2021. For additional information see Note (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 nine months ended September 30, 2022 and 2021.~~

Nine Months Ended

September 30,

Change

2022

2021

$ Change

% Change

(Dollars in thousands)

Service and other fees

$
1,092

$
1,958

$
(866)

(44.2)
%

Income on bank-owned life insurance

591

570

21

3.7
%

Gain on sale of investment securities

—

1,840

(1,840)

(100.0)
%

Net gain (loss) on sale of loans

(3)

584

(587)

(100.5)
%

Other

1,359

237

1,122

473.4
%

Total

$
3,039

$
5,189

$
(2,150)

(41.4)
%

Noninterest income decreased by $2.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we sold available-for-sale and held-to-maturity mortgage-backed securities with book values of $3.0 million and $22.1 million, respectively, and recorded gains of $339,000 and $1.5 million, respectively. We did not sell any mortgage-backed securities during the nine months ended September 30, 2022. The sale of the held-to-maturity mortgage-backed securities, for which we had already collected a substantial portion of the outstanding purchased principal (at least 85%), was 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. Service and other fees decreased by $866,000, primarily due to ~~a reduction the amount of mortgage loans referred to other financial institutions and mortgage brokers~~. During the nine months ended September 30, 2022 and 2021, we sold mortgage loans held for sale with principal balances of $5.4 million and $26.2 million, respectively, and recognized a loss of $3,000 and a gain of $584,000, respectively. Other income increased primarily due to $1.1 million of bank-owned life insurance net proceeds received during the nine months ended September 30, 2022.

~~Table of Contents~~

~~Noninterest Expense.~~ ~~The following table summarizes changes in noninterest expense between the nine months ended September 30, 2022 and 2021.~~

Nine Months Ended

September 30,

Change


2022

2021

$ Change

% Change

(Dollars in thousands)

Salaries and employee benefits

$
16,518

$
16,576

$
(58)

(0.3)
%

Occupancy

4,924

4,855

69

1.4
%

Equipment

3,749

3,273

476

14.5
%

Federal deposit insurance premiums

429

424

5

1.2
%

Other general and administrative expenses

3,291

3,602

(311)

(8.6)
%

Total

$
28,911

$
28,730

$
181

0.6
%

~~Noninterest expense increased by $181,000 for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.~~ The increase in equipment expense was primarily due to an increase in service bureau expense and data processing expense. The increase in federal deposit insurance premiums was primarily due to an increase in the Federal Deposit Insurance Corporation (FDIC) premium rate beginning January 1, 2023. The decrease in ~~other general~~salaries and ~~administrative expense~~employee benefits was primarily due to a decrease in ~~legal expense~~stock benefit plan expenses and ~~other loan expense. The decrease in other loan expense occurred as we originated fewer loans during the nine months ended September 30, 2022.~~deferred compensation accruals.

Income Tax Expense. Income ~~taxes were $4.2~~tax expense was $851,000 for the three months ended March 31, 2023, reflecting an effective tax rate of 26.9%, compared to $1.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022, reflecting an effective tax rate of ~~25.0%, compared to $4.8 million for the nine months ended September 30, 2021, reflecting an effective tax rate of 26.7%~~21.9%. The ~~decreases~~decrease to income tax expense ~~and in the effective tax rate~~ during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, was primarily due to a ~~$1.1~~$2.9 million decrease in income before income ~~taxes and~~taxes. The higher effective tax rate during the three months ended March 31, 2023 was primarily due to the receipt of ~~$1.1~~$1.0 million of proceeds on bank-owned life insurance that was not ~~taxable.~~taxable in the three months ended March 31, 2022.

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 and security repayments, advances from the Federal Home Loan Bank, proceeds from securities sold under agreements to repurchase, and proceeds from loan and security sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and mortgage-backed security 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 Executive Vice President and Chief Financial Officer, and our Vice President and Senior Treasury Analyst, 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 ~~September 30, 2022.~~March 31, 2023.

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

(i)

expected loan demand;

(ii)

purchases and sales of investment securities;

(iii)

expected deposit flows and borrowing maturities;

(iv)

yields available on interest-earning deposits and securities; and

(v)

the objectives of our asset/liability management program.

~~Table of Contents~~

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 ~~September 30, 2022,~~March 31, 2023, our cash and cash equivalents totaled ~~$36.3~~$84.9 million. On that date, we had $10.0 million in securities sold under agreements to repurchase outstanding and ~~$141.0~~$246.0 million of Federal Home Loan Bank advances outstanding with the ability to borrow an additional ~~$763.1~~$630.1 million under Federal Home Loan Bank advances. We have unpledged securities with a market value of ~~$410.8~~$424.2 million and have the ability to borrow up to ~~$386.2~~$398.7 million using these securities as ~~collateral.~~collateral by borrowing from the Federal Reserve Bank or using securities sold under agreements to repurchase. We also have securities with a market value of ~~$4.9~~$4.8 million pledged to the Federal Reserve Bank and have the ability to borrow up to ~~$4.7~~$4.5 million using these securities as collateral.

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.

Table of Contents

At ~~September 30, 2022,~~March 31, 2023, we had ~~$6.4~~$3.5 million in loan commitments outstanding for fixed-rate loans and had ~~$14.1~~$15.3 million in unused lines of credit to borrowers. Certificates of deposit due within one year of ~~September 30, 2022~~March 31, 2023 totaled ~~$282.2~~$387.1 million, or ~~16.5%~~23.3% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and security 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 ~~September 30, 2023. We believe, however, based on past experience that a significant portion of such deposits will remain with us.~~March 31, 2024. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are originating loans and purchasing mortgage-backed securities. During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we originated ~~$127.4~~$21.2 million and ~~$264.9~~$58.9 million of loans, respectively. During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we purchased securities with a face value of ~~$159.5~~$6.8 million and ~~$474.4~~$53.1 million, respectively.

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, securities sold under agreements to repurchase, stock repurchases, and dividend payments. We experienced a net ~~increase~~decreases in deposits of ~~$30.0~~$54.2 million and ~~$5.2~~$6.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. 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.

Territorial Bancorp Inc. is a separate legal entity from Territorial Savings Bank and must provide for its own liquidity to pay dividends, repurchase shares of its common stock, and for other corporate purposes. Territorial Bancorp Inc.’s primary source of liquidity is dividend payments from Territorial Savings Bank. The ability of Territorial Savings Bank to pay dividends to Territorial Bancorp Inc. is subject to regulatory requirements. At ~~September 30, 2022,~~March 31, 2023, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of ~~$14.0~~$25.5 million.

Territorial Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Territorial Bancorp Inc. is not subject to regulatory capital requirements because its total assets are less than $3.0 billion. At ~~September 30, 2022,~~March 31, 2023, Territorial Savings Bank exceeded all of the fully phased in regulatory capital requirements and is considered to be “well capitalized” under regulatory guidelines.

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The tables below present the fully-phased in capital required to be considered “well-capitalized” and meet the regulatory capital conservation buffer requirement as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for Territorial Savings Bank and the Company at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio		Required Ratio			Actual Amount	Actual Ratio
September 30, 2022:
March 31, 2023:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	249,151	11.46	%	5.00	%	$	235,515	10.76	%
Territorial Bancorp Inc.			$	264,260	12.15	%			$	261,168	11.93	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	249,151	27.49	%	9.00	%	$	235,515	25.96	%
Territorial Bancorp Inc.			$	264,260	29.15	%			$	261,168	28.79	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	249,151	27.49	%	10.50	%	$	235,515	25.96	%
Territorial Bancorp Inc.			$	264,260	29.15	%			$	261,168	28.79	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	251,215	27.72	%	12.50	%	$	240,642	26.53	%
Territorial Bancorp Inc.			$	266,324	29.38	%			$	266,295	29.36	%

December 31, 2021:
December 31, 2022:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	235,785	11.09	%	5.00	%	$	235,408	10.87	%
Territorial Bancorp Inc.			$	261,846	12.31	%			$	264,295	12.21	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	235,785	26.47	%	9.00	%	$	235,408	25.98	%
Territorial Bancorp Inc.			$	261,846	29.40	%			$	264,295	29.16	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	235,785	26.47	%	10.50	%	$	235,408	25.98	%
Territorial Bancorp Inc.			$	261,846	29.40	%			$	264,295	29.16	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	238,515	26.78	%	12.50	%	$	237,488	26.20	%
Territorial Bancorp Inc.			$	264,576	29.70	%			$	266,375	29.39	%

(1)	The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer.

Prompt Corrective Action provisions define specific capital categories based on an institution’s capital ratios. However, the regulators may impose higher minimum capital standards on individual institutions or may downgrade an institution from one capital category to a lower category because of safety and soundness concerns. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our ~~consolidated financial statements.~~Consolidated Financial Statements.

Prompt Corrective Action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “undercapitalized” to “critically undercapitalized.”

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Bank’s capital ratios exceeded the minimum capital thresholds for a “well-capitalized” institution. There are no conditions or events that have changed the institution’s category under the capital guidelines.

Depending on the amount of dividends to be paid, the Bank is required to either notify or make application to the Federal Reserve Bank before dividends are paid to the Company.

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Legislation enacted in 2018 required the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” between 8% to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk based requirements. The federal regulators have currently adopted 9% as the applicable ~~ratio, effective March 31, 2020. The ratio was temporarily reduced to 8% as a result of the CARES Act and transitioned back to 9% effective January 1, 2022.~~ratio. We have not elected to follow the alternative framework.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities, and agreements with respect to investments. Except for an increase of ~~$110.2~~$20.8 million in certificates of deposit and ~~a decrease~~an increase of ~~$4.9~~$2.3 million in loan commitments between December 31, ~~2021~~2022 and ~~September 30, 2022,~~March 31, 2023, there have not been any material changes in our contractual obligations and funding needs since December 31, ~~2021.~~2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity, and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

Because we have historically operated as a traditional thrift institution, the significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, our capital, proceeds from securities sold under agreements to repurchase, and proceeds from loan and security sales. In addition, there is little demand for adjustable-rate mortgage loans in the Hawaii market area. This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. WeDuring the three months ended March 31, 2023, we obtained $105.0 million of three- to six-year FHLB advances and during the three months ended March 31, 2023 and 2022, we sold ~~$5.4~~$360,000 and $2.0 million, ~~and $26.2 million~~respectively, of fixed-rate mortgage loans ~~during the nine months ended September 30, 2022 and 2021, respectively,~~ to reduce our interest rate risk.

Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

Economic Value of Equity. We use an interest rate sensitivity analysis that computes changes in the economic value of equity (EVE) of our cash flows from assets, liabilities, and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE represents the market value of portfolio equity and is equal to the present value of assets minus the present value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market-risk-sensitive instruments in the event of an instantaneous and sustained 100 to 400 basis point increase or a 100 to 200 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

4038

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increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

The following table presents our internal calculations of the estimated changes in our EVE as of ~~June 30,~~December 31, 2022 (the latest date for which we have available information) that would result from the designated instantaneous changes in the interest rate yield curve.


										Increase											Increase
										(Decrease) in											(Decrease) in
				Estimated				EVE Ratio as a		EVE Ratio as a					Estimated				EVE Ratio as a		EVE Ratio as a
Change in				Increase				Percent of		Percent of					Increase				Percent of		Percent of
Interest Rates		Estimated EVE		(Decrease) in		Percentage		Present Value		Present Value of			Estimated EVE		(Decrease) in		Percentage		Present Value		Present Value of
(bp) (1)		(2)		EVE		Change in EVE		of Assets (3)(4)		Assets (3)(4)			(2)		EVE		Change in EVE		of Assets (3)(4)		Assets (3)(4)
(Dollars in thousands)	(Dollars in thousands)											(Dollars in thousands)
+400		$	134,054	$	(162,498)	(54.80)	%	8.78	%	(6.32)	%		$	83,653	$	(176,982)	(67.90)	%	5.75	%	(8.30)	%
+300		$	168,092	$	(128,460)	(43.32)	%	10.37	%	(4.73)	%		$	119,458	$	(141,177)	(54.17)	%	7.76	%	(6.29)	%
+200		$	209,817	$	(86,735)	(29.25)	%	12.15	%	(2.95)	%		$	164,141	$	(96,494)	(37.02)	%	10.03	%	(4.02)	%
+100		$	254,586	$	(41,966)	(14.15)	%	13.81	%	(1.29)	%		$	211,748	$	(48,887)	(18.76)	%	12.15	%	(1.90)	%
0		$	296,552	$	—	—	%	15.10	%	—	%		$	260,635	$	—	—	%	14.05	%	—	%
-100		$	324,979	$	28,427	9.59	%	15.63	%	0.53	%		$	304,359	$	43,724	16.78	%	15.46	%	1.41	%
-200													$	336,317	$	75,682	29.04	%	16.19	%	2.14	%

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

(2)	EVE is the difference between the present value of an institution’s assets and liabilities.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	EVE Ratio represents EVE divided by the present value of assets.

Interest rates on Freddie Mac mortgage-backed securities ~~have increased~~decreased by 5725 basis points between ~~June 30,~~December 31, 2022 and ~~September 30, 2022.~~March 31, 2023. The ~~increase~~decrease in mortgage interest rates ~~has decreased~~increased the value of our interest-earning assets. The decrease in ~~the value of our interest-earning assets has been partially offset by~~mortgage interest rates is not expected to have a ~~decrease in the value of interest-bearing liabilities that occurred during the three months ended September 30, 2022 because of the increase in short-term interest rates.~~significant effect on estimated EVE.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE. Modeling changes in EVE requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and net interest income and will differ from actual results.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of ~~September 30, 2022.~~March 31, 2023. Based on that evaluation, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended ~~September 30, 2022,~~March 31, 2023, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions that are considered ordinary, routine litigation incidental to the business of the Company. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations, and no claim for money damages exceeds ten percent of the Company’s consolidated assets.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the period ended December 31, ~~2021~~2022 filed with the Securities and Exchange ~~Commission.~~Commission with the exception of the following:

Our stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions. Further, if we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, which have come under greater scrutiny in light of recent bank failures, it may have a material adverse effect on our financial condition and results of operations.

On March 9, 2023, Silvergate Bank, La Jolla, California, announced its decision to voluntarily liquidate its assets and wind down operations. On March 10, 2023, Silicon Valley Bank, Santa Clara, California, was closed by the California Department of Financial Protection and Innovation and on March 12, 2023, Signature Bank, New York, New York, was closed by the New York State Department of Financial Services. These banks also had elevated levels of uninsured deposits, which may be less likely to remain at the bank over time and less stable as a source of funding than insured deposits. These failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions.

These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. If we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, it may have a material adverse effect on our financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

(c) Stock Repurchases. The following table sets forth information in connection with repurchases of our shares of common stock during the three months ended ~~September 30, 2022:~~March 31, 2023:


				Total Number of	Maximum Approximate					Total Number of	Maximum Approximate
				Shares Purchased as	Dollar Value of Shares					Shares Purchased as	Dollar Value of Shares
	Total Number	Average Price		Part of Publicly	That May Yet be		Total Number	Average Price		Part of Publicly	That May Yet be
	of Shares	Paid per		Announced Plans or	Purchased Under the		of Shares	Paid per		Announced Plans or	Purchased Under the
Period	Purchased	Share		Programs	Plans or Programs (1)		Purchased	Share		Programs	Plans or Programs (1)
July 1, 2022 through July 31, 2022	6,790	$	20.77	6,790	$	—
August 1, 2022 through August 31, 2022	—		—	—		—
September 1, 2022 through September 30, 2022	—		—	—		—
January 1, 2023 through January 31, 2023							—	$	—	—	$	—
February 1, 2023 through February 28, 2023							—		—	—		—
March 1, 2023 through March 31, 2023							69,065		20.08	66,841		2,681,504

Total	6,790	$	20.77	6,790	$	—	69,065	$	20.08	66,841	$	2,681,504

Table of Contents

(1)

On ~~July 12,~~December 5, 2022, ~~Territorial Bancorp Inc.~~the Board of Directors announced ~~the completion of its eleventh~~a twelfth share repurchase program. Under this share repurchase program, the Company ~~was authorized to~~may repurchase up to $5,000,000 of ~~its~~the Company’s outstanding shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Quarterly Report on Form 10-Q and are listed below.

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INDEX TO EXHIBITS


Exhibit
Number		Description
31.1		Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

31.2		Certification of Melvin M. Miyamoto, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32		Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, and Melvin M. Miyamoto, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Territorial Bancorp Inc.’s Form 10-Q report for the quarter ended ~~September 30, 2022,~~March 31, 2023, formatted in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL document and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TERRITORIAL BANCORP INC.
	(Registrant)


Date: ~~November 10, 2022~~May 12, 2023	/s/ Allan S. Kitagawa
	Allan S. Kitagawa
	Chairman of the Board, President and
	Chief Executive Officer


Date: ~~November 10, 2022~~May 12, 2023	/s/ Melvin M. Miyamoto
	Melvin M. Miyamoto
	Executive Vice President and Chief Financial Officer

4443

PART I

ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4038
ITEM 4.	CONTROLS AND PROCEDURES	4139

PART II

ITEM 1.	LEGAL PROCEEDINGS	4240
ITEM 1A.	RISK FACTORS	4240
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4240
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4241
ITEM 4.	MINE SAFETY DISCLOSURES	4241
ITEM 5.	OTHER INFORMATION	4241
ITEM 6.	EXHIBITS	4241

SIGNATURES		4443


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
2022:
With no related allowance recorded:
One- to four-family residential mortgages	$	2,431	$	6	$	2,465	$	18
Home equity loans and lines of credit		17		—		18
Total	$	2,448	$	6	$	2,483	$	18

2021:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,816	$	8	$	4,866	$	28
Home equity loans and lines of credit		20		—		21		—
Total	$	4,836	$	8	$	4,887	$	28


	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
September 30, 2022:
One- to four-family residential mortgages		2	$	417		2	$	424	$	841
Total		2	$	417		2	$	424	$	841

December 31, 2021:
One- to four-family residential mortgages		3	$	551		1	$	340	$	891
Total		3	$	551		1	$	340	$	891


	Nine Months Ended September 30,
	2022						2021
	Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount
Unrealized loss on securities	$	2,714	$	(723)	$	1,991	$	4	$	(1)	$	3
Amount reclassified from other comprehensive income		—		—		—		373		(100)		273
Total	$	2,714	$	(723)	$	1,991	$	377	$	(101)	$	276