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TBNK Territorial Bancorp

Filed: 9 Nov 20, 10:04am

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, 2020

or

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

For transition period from               to               

Commission File Number  001-34403

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

Maryland

26-4674701

(State or Other Jurisdiction of Incorporation)

(I.R.S. Employer Identification No.)

1132 Bishop Street, Suite 2200, Honolulu, Hawaii

96813

(Address of Principal Executive Offices)

(Zip Code)

(808) 946-1400

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock

TBNK

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No .

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 9,513,867 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2020.

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,

 

 

 

2020

 

2019

 

ASSETS

Cash and cash equivalents

$

237,498

$

44,806

Investment securities available for sale, at fair value

3,959

8,628

Investment securities held to maturity, at amortized cost (fair value of $309,471 and $371,305 at September 30, 2020 and December 31, 2019, respectively)

 

292,528

 

363,883

Loans held for sale

 

834

 

470

Loans receivable, net

 

1,482,639

 

1,584,784

Federal Home Loan Bank stock, at cost

 

8,144

 

8,723

Federal Reserve Bank stock, at cost

3,145

3,128

Accrued interest receivable

 

7,214

 

5,409

Premises and equipment, net

 

4,937

 

4,370

Right-of-use asset, net

13,375

11,580

Bank-owned life insurance

 

45,720

 

45,113

Deferred income tax assets, net

 

3,290

 

2,619

Prepaid expenses and other assets

 

3,034

 

2,800

Total assets

$

2,106,317

$

2,086,313

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Deposits

$

1,662,706

$

1,631,933

Advances from the Federal Home Loan Bank

 

141,000

 

156,000

Securities sold under agreements to repurchase

 

10,000

 

10,000

Accounts payable and accrued expenses

 

25,304

 

23,038

Lease liability

14,130

12,183

Income taxes payable

 

2,411

 

2,305

Advance payments by borrowers for taxes and insurance

 

4,108

 

6,964

Total liabilities

 

1,859,659

 

1,842,423

Commitments and contingencies

Stockholders’ Equity:

Preferred stock, $0.01 par value; authorized 50,000,000 shares, 0 shares issued or outstanding

 

 

Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 9,513,867 and 9,681,493 shares at September 30, 2020 and December 31, 2019, respectively

 

95

 

97

Additional paid-in capital

 

60,905

 

65,057

Unearned ESOP shares

 

(4,037)

 

(4,404)

Retained earnings

 

197,562

 

190,808

Accumulated other comprehensive loss

 

(7,867)

 

(7,668)

Total stockholders’ equity

 

246,658

 

243,890

Total liabilities and stockholders’ equity

$

2,106,317

$

2,086,313

See accompanying notes to consolidated financial statements.

1

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2020

 

2019

 

2020

 

2019

 

Interest income:

Loans

$

14,628

$

15,864

$

45,310

$

47,475

Investment securities

2,264

2,865

7,654

8,583

Other investments

 

239

 

219

 

753

 

709

Total interest income

 

17,131

 

18,948

 

53,717

 

56,767

Interest expense:

Deposits

 

1,897

 

3,382

 

7,385

 

10,120

Advances from the Federal Home Loan Bank

 

724

 

973

 

2,448

 

2,425

Securities sold under agreements to repurchase

 

46

 

42

 

137

 

173

Total interest expense

 

2,667

 

4,397

 

9,970

 

12,718

Net interest income

 

14,464

 

14,551

 

43,747

 

44,049

Provision for loan losses

 

692

 

111

 

2,304

 

65

Net interest income after provision for loan losses

 

13,772

 

14,440

 

41,443

 

43,984

Noninterest income:

Service fees on loan and deposit accounts

 

728

 

504

 

1,716

 

1,427

Income on bank-owned life insurance

 

204

 

215

 

607

 

632

Gain on sale of investment securities

 

261

 

123

 

858

 

2,910

Gain on sale of loans

 

321

 

1,205

 

987

 

1,211

Other

 

63

 

55

 

171

 

635

Total noninterest income

 

1,577

 

2,102

 

4,339

 

6,815

Noninterest expense:

Salaries and employee benefits

 

5,346

 

5,586

 

16,294

 

17,002

Occupancy

 

1,701

 

1,610

 

4,972

 

4,780

Equipment

 

1,155

 

1,039

 

3,439

 

3,150

Federal deposit insurance premiums

 

138

 

1

 

212

 

288

Other general and administrative expenses

 

1,046

 

1,165

 

2,978

 

3,466

Total noninterest expense

 

9,386

 

9,401

 

27,895

 

28,686

Income before income taxes

 

5,963

 

7,141

 

17,887

 

22,113

Income taxes

 

1,645

 

1,775

 

4,805

 

5,163

Net income

$

4,318

$

5,366

$

13,082

$

16,950

Basic earnings per share

$

0.47

$

0.58

$

1.43

$

1.83

Diluted earnings per share

$

0.47

$

0.57

$

1.42

$

1.81

Cash dividends declared per common share

$

0.23

$

0.22

$

0.69

$

0.76

Basic weighted-average shares outstanding

 

9,104,079

 

9,212,119

 

9,144,463

 

9,184,741

Diluted weighted-average shares outstanding

 

9,134,089

 

9,295,729

 

9,201,882

 

9,309,420

See accompanying notes to consolidated financial statements.

2

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2020

    

2019

 

2020

 

2019

 

Net income

$

4,318

$

5,366

$

13,082

$

16,950

Change in unrealized (loss) gain on securities, net of tax

 

(4)

 

(21)

 

(199)

 

588

Other comprehensive (loss) gain, net of tax

 

(4)

 

(21)

 

(199)

 

588

Comprehensive income

$

4,314

$

5,345

$

12,883

$

17,538

See accompanying notes to consolidated financial statements.

3

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

 

Shares

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Outstanding

 

Stock

 

Capital

 

Shares

 

Earnings

 

Loss

 

Equity

 

Balance at June 30, 2019

9,664,793

$

97

$

64,335

$

(4,649)

$

189,189

$

(7,200)

$

241,772

Net income

 

5,366

5,366

Other comprehensive loss

 

(21)

(21)

Cash dividends declared ($0.22 per share)

 

(2,035)

(2,035)

Share-based compensation

 

123

123

Allocation of 12,233 ESOP shares

 

227

123

350

Repurchase of shares of common stock

(11,071)

 

(321)

(321)

Exercise of options for common stock

21,200

 

368

368

Balances at September 30, 2019

9,674,922

$

97

$

64,732

$

(4,526)

$

192,520

$

(7,221)

$

245,602

Balances at December 31, 2018

9,645,955

$

97

$

65,090

$

(4,893)

$

182,594

$

(7,809)

$

235,079

Net income

 

16,950

16,950

Other comprehensive income

 

588

588

Adoption of lease accounting standard

 

(10)

(10)

Cash dividends declared ($0.76 per share)

 

(7,014)

(7,014)

Share-based compensation

6,541

 

494

494

Allocation of 36,699 ESOP shares

 

661

367

1,028

Repurchase shares of common stock

(180,944)

 

(2)

(5,042)

(5,044)

Exercise of options for common stock

203,370

 

2

3,529

3,531

Balances at September 30, 2019

9,674,922

$

97

$

64,732

$

(4,526)

$

192,520

$

(7,221)

$

245,602

4

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common

 

 

 

 

Additional

 

Unearned

 

 

 

 

Other

 

Total

 

 

Shares

 

Common

 

Paid-in

 

ESOP

 

Retained

 

Comprehensive

 

Stockholders’

 

 

Outstanding

 

Stock

 

Capital

 

Shares

 

Earnings

 

Loss

 

Equity

Balance at June 30, 2020

9,513,867

$

95

$

60,606

$

(4,159)

$

195,348

$

(7,863)

$

244,027

Net income

 

4,318

4,318

Other comprehensive loss

 

(4)

(4)

Cash dividends declared ($0.23 per share)

 

(2,104)

(2,104)

Share-based compensation

 

157

157

Allocation of 12,233 ESOP shares

 

142

122

264

Balances at September 30, 2020

9,513,867

$

95

$

60,905

$

(4,037)

$

197,562

$

(7,867)

$

246,658

Balances at December 31, 2019

9,681,493

$

97

$

65,057

$

(4,404)

$

190,808

$

(7,668)

$

243,890

Net income

 

13,082

13,082

Other comprehensive loss

 

(199)

(199)

Cash dividends declared ($0.69 per share)

 

(6,328)

(6,328)

Share-based compensation

18,875

 

523

523

Allocation of 36,699 ESOP shares

 

538

367

905

Repurchase of shares of common stock

(268,328)

 

(3)

(6,633)

(6,636)

Exercise of options for common stock

81,827

1

1,420

1,421

Balances at September 30, 2020

9,513,867

$

95

$

60,905

$

(4,037)

$

197,562

$

(7,867)

$

246,658

See accompanying notes to consolidated financial statements.

5

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2020

 

2019

 

Cash flows from operating activities:

Net income

$

13,082

$

16,950

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

Provision for loan losses

 

2,304

 

65

Depreciation and amortization

 

899

 

876

Deferred income tax (benefit) expense

 

(599)

 

874

Amortization of fees, discounts, and premiums, net

 

(228)

 

(419)

Amortization of right-of-use asset

2,238

2,076

Origination of loans held for sale

 

(22,605)

 

(3,845)

Proceeds from sales of loans held for sale

 

22,822

 

3,631

Gain on sale of loans, net

 

(987)

 

(1,211)

Gain on sale of investment securities available for sale

(290)

(153)

Gain on sale of investment securities held to maturity

 

(568)

 

(2,757)

Net gain on disposal of premises and equipment

 

(4)

 

ESOP expense

 

905

 

1,028

Share-based compensation expense

 

523

 

494

Increase in accrued interest receivable

 

(1,805)

 

(220)

Net increase in bank-owned life insurance

 

(607)

 

(631)

Net (increase) decrease in prepaid expenses and other assets

 

(96)

 

54

Net increase in accounts payable and accrued expenses

 

2,080

 

245

Net decrease in lease liability

(2,146)

(2,000)

Net decrease in advance payments by borrowers for taxes and insurance

 

(2,856)

 

(3,087)

Net increase (decrease) in income taxes payable

 

106

 

(232)

Net cash from operating activities

 

12,168

 

11,738

Cash flows from investing activities:

Purchases of investment securities held to maturity

 

 

(7,845)

Principal repayments on investment securities held to maturity

 

71,118

 

28,043

Principal repayments on investment securities available for sale

1,013

917

Proceeds from sale of investment securities held to maturity

 

10,429

 

3,527

Proceeds from sale of investment securities available for sale

3,668

5,117

Principal repayments on loans receivable, net of loan originations

 

90,780

 

(47,118)

Purchases of Federal Home Loan Bank stock

(21)

(21,642)

Proceeds from redemption of Federal Home Loan Bank stock

 

600

 

19,896

Purchases of Federal Reserve Bank stock

(17)

(14)

Proceeds from bank-owned life insurance

788

Purchases of premises and equipment

 

(1,466)

 

(383)

Proceeds from disposals of premises and equipment

 

4

 

Net cash from investing activities

 

176,108

 

(18,714)

(Continued)

6

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2020

 

2019

Cash flows from financing activities:

Net increase (decrease) in deposits

$

30,773

$

(23,970)

Proceeds from advances from the Federal Home Loan Bank

 

 

539,100

Repayments of advances from the Federal Home Loan Bank

 

(15,000)

 

(497,400)

Proceeds from securities sold under agreements to repurchase

 

5,000

 

Repayments of securities sold under agreements to repurchase

 

(5,000)

 

(20,000)

Purchases of Fed Funds

 

10

 

10

Sales of Fed Funds

 

(10)

 

(10)

Proceeds from issuance of common stock

170

Repurchases of common stock

 

(5,000)

 

(1,597)

Cash dividends paid

 

(6,357)

 

(6,980)

Net cash from financing activities

 

4,416

 

(10,677)

Net increase (decrease) in cash and cash equivalents

 

192,692

 

(17,653)

Cash and cash equivalents at beginning of the period

 

44,806

 

47,063

Cash and cash equivalents at end of the period

$

237,498

$

29,410

Supplemental disclosure of cash flow information:

Cash paid for:

Interest on deposits and borrowings

$

10,268

$

12,772

Income taxes

 

6,208

 

4,521

Supplemental disclosure of noncash investing and financing activities:

Company stock acquired through stock swap and net settlement transactions

$

1,421

$

3,361

Company stock repurchased through stock swap and net settlement transactions

1,636

3,447

Loans receivable transferred to held for sale

29,229

Loans securitized into investment securities

9,431

30,145

Dividends declared, not yet paid

(29)

34

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

4,033

13,254

Establishment of lease liability

4,093

13,733

Transfer of securities from held-to-maturity to available-for-sale

11,390

See accompanying notes to consolidated financial statements.

7

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1)      Organization

In 2009, Territorial Savings Bank (the Bank) completed a conversion from a mutual holding company to a stock holding company and Territorial Bancorp Inc. (the Company) became the holding company for Territorial Savings Bank. Upon completion of the conversion and reorganization, a special “liquidation account” was established in an amount equal to the total equity of Territorial Mutual Holding Company as of December 31, 2008. The liquidation account is to provide eligible account holders and supplemental eligible account holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion.

In 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-chartered savings bank and became a member of the Federal Reserve System.

(2)      Basis of Presentation

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year. 

.

(3)      Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) amended various sections of the FASB Accounting Standards Codification (ASC) related to the accounting for credit losses on financial instruments. The amendment changes the threshold for recognizing losses from a “probable” to an “expected” model. The new model is referred to as the current expected credit loss model and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees. The amendment requires the measurement of all expected credit losses for financial assets as of the reporting date (including historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures that will help financial statement users understand the estimates and judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued an update that delays the effective date of the amendment for smaller reporting companies, as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022. The Company is a smaller reporting company. The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company has formed a team that is working on an implementation plan to adopt the amendment. The implementation plan will include developing policies, procedures and internal controls over the model. The Company is also working with a software vendor to measure expected losses required by the amendment. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.

8

In August 2018, the FASB amended the Fair Value Measurement topic of the FASB ASC. The amendment affects disclosures only, and includes additions, deletions and modifications of the disclosures of assets and liabilities reported in the fair value hierarchy. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Entities are allowed to early adopt any removed or modified disclosures while delaying adoption of any added disclosures until the effective date. The Company adopted this amendment as of January 1, 2020 and it did not have a material effect on its consolidated financial statements.

In August 2018, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC. The amendment affects disclosures related to defined benefit pension or other post retirement plans and includes additions, deletions and clarifications of disclosures. The amendment is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

See Note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements for a change in the treatment of troubled debt restructuring in the CARES Act.

(4)      Cash and Cash Equivalents

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

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2020

 

2019

 

Cash and due from banks

$

10,873

$

9,571

Interest-earning deposits in other banks

 

226,625

 

35,235

Cash and cash equivalents

$

237,498

$

44,806

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

(5)      Investment Securities

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

Amortized

Gross Unrealized

Estimated

 

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

 

September 30, 2020:

Available-for-sale:

U.S. government-sponsored mortgage-backed securities

$

3,534

$

425

 

$

$

3,959

Total

$

3,534

$

425

 

$

$

3,959

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

292,528

$

16,945

 

$

(2)

$

309,471

Total

$

292,528

$

16,945

 

$

(2)

$

309,471

December 31, 2019:

Available-for-sale:

U.S. government-sponsored mortgage-backed securities

$

7,905

$

723

 

$

$

8,628

Total

$

7,905

$

723

 

$

$

8,628

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

363,883

$

8,436

 

$

(1,014)

$

371,305

Total

$

363,883

$

8,436

 

$

(1,014)

$

371,305

9

The amortized cost and estimated fair value of investment securities by maturity date at September 30, 2020 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 within 5 years

$

0

$

0

Due after 5 years through 10 years

 

0

 

0

Due after 10 years

 

3,534

 

3,959

Total

$

3,534

$

3,959

Held-to-maturity:

Due within 5 years

$

0

$

0

Due after 5 years through 10 years

 

62

 

61

Due after 10 years

 

292,466

 

309,410

Total

$

292,528

$

309,471

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)

 

2020

 

2019

 

2020

 

2019

 

Proceeds from sales

$

5,737

$

4,308

$

14,097

$

8,644

Gross gains

 

261

 

123

 

858

 

2,910

Gross losses

 

 

 

 

During the nine months ended September 30, 2020, the Company sold $9.9 million of held-to-maturity mortgage-backed securities and recorded a gain of $568,000. During the nine months ended September 30, 2019, the Company sold its $75,000 investment in its trust preferred security, PreTSL XXIII, and recorded a gain of $2.7 million and sold $746,000 of held-to-maturity mortgage-backed securities and recorded a gain of $40,000. The sale of the trust preferred security, which had a significant deterioration in the issuer’s credit rating, and the sale of the mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.

During the nine months ended September 30, 2020, the Company sold $3.4 million of available-for-sale mortgage-backed securities and recorded a gain of $290,000. During the nine months ended September 30, 2019, the Company sold $5.0 million of available-for-sale mortgage-backed securities and recorded a gain of $153,000.

As of January 1, 2019, the Company transferred securities with an amortized cost of $11.4 million from held-to-maturity to available-for-sale with the adoption of ASU 2017-12 on derivatives and hedging.

Investment securities with amortized costs of $217.5 million and $188.9 million at September 30, 2020 and December 31, 2019, 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 that were in an unrealized loss position at September 30, 2020 and December 31, 2019. The Company does not intend to sell held-to-maturity and available-for-sale securities

10

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

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Number of

 

 

 

 

Unrealized

 

Description of securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

(Dollars in thousands)

 

September 30, 2020:

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

958

$

(1)

$

4

$

(1)

 

6

$

962

$

(2)

December 31, 2019:

Held-to-maturity:

U.S. government-sponsored mortgage-backed securities

$

55,882

$

(302)

$

34,492

$

(712)

 

30

$

90,374

$

(1,014)

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, 2020 and December 31, 2019.

During the nine months ended September 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million into Freddie Mac mortgage-backed securities to increase liquidity. The securitization transaction increased investment securities and lowered loans receivable. The securitization transaction was accounted for by recording the mortgage-backed securities at a fair value of $9.8 million in accordance with the Transfers and Servicing topic of the FASB ASC. Mortgage servicing assets of $78,000 were also recorded on the transaction and a net gain of $377,000 was recognized on the securitization and recorded in gain on sale of loans in the consolidated statements of income.

(6)      Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:

September 30,

December 31,

(Dollars in thousands)

    

2020

    

2019

 

Real estate loans:

First mortgages:

One- to four-family residential

$

1,436,900

$

1,536,781

Multi-family residential

 

8,897

 

9,965

Construction, commercial and other

 

22,250

 

23,382

Home equity loans and lines of credit

 

9,704

 

10,084

Total real estate loans

 

1,477,751

 

1,580,212

Other loans:

Loans on deposit accounts

 

272

 

235

Consumer and other loans

 

11,475

 

9,484

Total other loans

 

11,747

 

9,719

Less:

Net unearned fees and discounts

 

(1,917)

 

(2,435)

Allowance for loan losses

 

(4,942)

 

(2,712)

Total unearned fees, discounts and allowance for loan losses

 

(6,859)

 

(5,147)

Loans receivable, net

$

1,482,639

$

1,584,784

11

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, 2020:

Balance, beginning of period

$

3,020

$

459

$

1

$

197

$

579

$

4,256

Provision (reversal of provision) for loan losses

 

988

 

(2)

 

 

(21)

 

(273)

 

692

 

4,008

 

457

 

1

 

176

 

306

 

4,948

Charge-offs

 

 

 

 

(6)

 

 

(6)

Recoveries

 

 

 

 

 

 

Net charge-offs

 

 

 

 

(6)

 

 

(6)

Balance, end of period

$

4,008

$

457

$

1

$

170

$

306

$

4,942

Nine months ended September 30, 2020:

Balance, beginning of period

$

1,741

$

511

$

1

$

54

$

405

$

2,712

Provision (reversal of provision) for loan losses

 

2,267

 

(54)

 

(10)

 

200

 

(99)

 

2,304

 

4,008

 

457

 

(9)

 

254

 

306

 

5,016

Charge-offs

 

 

 

 

(86)

 

 

(86)

Recoveries

 

 

 

10

 

2

 

 

12

Net recoveries (charge-offs)

 

 

 

10

 

(84)

 

 

(74)

Balance, end of period

$

4,008

$

457

$

1

$

170

$

306

$

4,942

 

 

 

 

 

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, 2019:

Balance, beginning of period

$

1,769

$

411

$

1

$

44

$

391

$

2,616

(Reversal of provision) provision for loan losses

 

(11)

 

90

 

 

15

 

17

 

111

 

1,758

 

501

 

1

 

59

 

408

 

2,727

Charge-offs

 

 

 

 

(5)

 

 

(5)

Recoveries

 

 

 

 

2

 

 

2

Net charge-offs

 

 

 

 

(3)

 

 

(3)

Balance, end of period

$

1,758

$

501

$

1

$

56

$

408

$

2,724

Nine months ended September 30, 2019:

Balance, beginning of period

$

1,797

$

443

$

1

$

47

$

354

$

2,642

(Reversal of provision) provision for loan losses

 

(57)

 

58

 

 

10

 

54

 

65

 

1,740

 

501

 

1

 

57

 

408

 

2,707

Charge-offs

 

 

 

 

(21)

 

 

(21)

Recoveries

 

18

 

 

 

20

 

 

38

Net recoveries (charge-offs)

 

18

 

 

 

(1)

 

 

17

Balance, end of period

$

1,758

$

501

$

1

$

56

$

408

$

2,724

Management considers the allowance for loan losses at September 30, 2020 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. In addition, as an integral part of their examination process, the bank regulators periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

12

The loan loss provision for the nine months ended September 30, 2020 was $2.3 million compared to $65,000 for the nine months ended September 30, 2019. The increase in the loan loss provision occurred primarily from an increase in the qualitative factors used to calculate the allowance for loan losses. The qualitative factors increased because Hawaii’s unemployment rate increased due to layoffs that resulted from government mandates to minimize the spread of COVID-19.

The table below presents the balance in the allowance for loan losses and the recorded investment in loans 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, 2020:

Allowance for loan losses:

Ending allowance balance:

Individually evaluated for impairment

$

$

$

$

$

$

Collectively evaluated for impairment

 

4,008

 

457

 

1

 

170

 

306

 

4,942

Total ending allowance balance

$

4,008

$

457

$

1

$

170

$

306

$

4,942

Loans:

Ending loan balance:

Individually evaluated for impairment

$

2,732

$

$

23

$

$

$

2,755

Collectively evaluated for impairment

 

1,441,193

 

22,191

 

9,682

 

11,760

 

 

1,484,826

Total ending loan balance

$

1,443,925

$

22,191

$

9,705

$

11,760

$

$

1,487,581

December 31, 2019:

Allowance for loan losses:

Ending allowance balance:

Individually evaluated for impairment

$

$

$

$

$

$

Collectively evaluated for impairment

 

1,741

 

511

 

1

 

54

 

405

 

2,712

Total ending allowance balance

$

1,741

$

511

$

1

$

54

$

405

$

2,712

Loans:

Ending loan balance:

Individually evaluated for impairment

$

1,224

$

$

89

$

$

$

1,313

Collectively evaluated for impairment

 

1,543,125

 

23,326

 

9,997

 

9,735

 

 

1,586,183

Total ending loan balance

$

1,544,349

$

23,326

$

10,086

$

9,735

$

$

1,587,496

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, 2020:

With no related allowance recorded:

One- to four-family residential mortgages

$

2,732

$

3,164

Home equity loans and lines of credit

 

23

 

32

Total

$

2,755

$

3,196

December 31, 2019:

With no related allowance recorded:

One- to four-family residential mortgages

$

1,224

$

1,615

Home equity loans and lines of credit

89

178

Total

$

1,313

$

1,793

13

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

 

2020:

    

    

    

    

 

With no related allowance recorded:

One- to four-family residential mortgages

$

2,745

$

8

$

2,770

$

25

Home equity loans and lines of credit

 

24

 

 

25

 

Total

$

2,769

$

8

$

2,795

$

25

2019:

With no related allowance recorded:

One- to four-family residential mortgages

$

1,364

$

8

$

1,391

$

25

Home equity loans and lines of credit

96

 

 

100

 

Total

$

1,460

$

8

$

1,491

$

25

There were 0 loans individually evaluated for impairment with a related allowance for loan loss as of September 30, 2020 or December 31, 2019. 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.

The Company had 8 nonaccrual loans with a book value of $2.2 million as of September 30, 2020 and 6 nonaccrual loans with a book value of $736,000 as of December 31, 2019. The Company collected interest on nonaccrual loans of $40,000 and $51,000 during the nine months ended September 30, 2020 and 2019, respectively, but due to accounting and regulatory requirements, the Company recorded the interest as a reduction of principal. The Company would have recognized additional interest income of $68,000 and $51,000 during the nine months ended September 30, 2020 and 2019, respectively, had the loans been accruing interest. The Company did not have any loans 90 days or more past due and still accruing interest as of September 30, 2020. At December 31, 2019, the Company had 1 loan for $1,000 that was 90 days or more past due and still accruing interest.

14

The table below presents the aging of loans and accrual status by class of loans, net of unearned fees and discounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or More

 

 

 

30 - 59

 

60 - 89

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due

 

 

 

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

 

September 30, 2020:

One- to four-family residential mortgages

$

$

140

$

122

$

262

$

1,434,781

$

1,435,043

$

2,163

$

Multi-family residential mortgages

 

 

 

 

 

8,882

 

8,882

 

 

Construction, commercial and other mortgages

 

 

 

 

 

22,191

 

22,191

 

 

Home equity loans and lines of credit

 

 

23

 

 

23

 

9,682

 

9,705

 

23

 

Loans on deposit accounts

 

 

 

 

 

272

 

272

 

 

Consumer and other

 

6

 

 

 

6

 

11,482

 

11,488

 

 

Total

$

6

$

163

$

122

$

291

$

1,487,290

$

1,487,581

$

2,186

$

December 31, 2019:

One- to four-family residential mortgages

$

$

959

$

$

959

$

1,533,446

$

1,534,405

$

647

$

Multi-family residential mortgages

 

 

 

 

 

9,944

 

9,944

 

 

Construction, commercial and other mortgages

 

 

 

 

 

23,326

 

23,326

 

 

Home equity loans and lines of credit

 

 

26

 

 

26

 

10,060

 

10,086

 

89

 

Loans on deposit accounts

 

 

 

 

 

235

 

235

 

 

Consumer and other

 

33

 

1

 

1

 

35

 

9,465

 

9,500

 

 

1

Total

$

33

$

986

$

1

$

1,020

$

1,586,476

$

1,587,496

$

736

$

1

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio. When a mortgage loan becomes seriously delinquent (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.

There were 0 loans modified in a troubled debt restructuring during the nine months ended September 30, 2020 or 2019. There were 0 new troubled debt restructurings within the 12 months ended September 30, 2020 or 2019 that subsequently defaulted.

15

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

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

(Dollars in thousands)

Loans

 

Status

 

Loans

 

Status

 

Total

September 30, 2020:

    

    

    

 

One- to four-family residential mortgages

3

$

568

2

$

481

$

1,049

Total

3

$

568

2

$

481

$

1,049

December 31, 2019:

One- to four-family residential mortgages

3

$

577

2

$

525

$

1,102

Home equity loans and lines of credit

 

 

1

 

64

 

64

Total

3

$

577

3

$

589

$

1,166

There were 0 delinquent troubled debt restructurings as of September 30, 2020 or December 31, 2019. 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, 2020, we had 0 commitments to lend any additional funds to these borrowers.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by the President on March 27, 2020. The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. In addition, Interagency Statements were issued on March 22, 2020 and April 7, 2020 by bank regulatory agencies to encourage financial institutions to work prudently with borrowers who may be unable to meet their contractual payment obligations because of the effects of COVID-19. The Company will be using the provisions of the CARES Act and the Interagency Statements to account for the loans receiving modifications.

The Company has granted loan deferrals to borrowers who have been affected by COVID-19.  As of September 30, 2020, the Company granted loan deferrals on $146.2 million of loans, which represent 9.9% of total loans receivable.  $140.9 million of these loan deferrals consist of one- to four-family residential mortgage loans, which represent 9.5% of the total loans receivable.  The Company believes these loans are currently well secured as the ratio of the current loan balance to the current tax-assessed value of the property securing these mortgage loans averages 54.9%.  One- to four-family residential mortgage loans represent 96.9% of the Company’s total loan portfolio balance.  All of our residential mortgage loans are secured by real estate in Hawaii.  The Company believes that the total one- to four-family residential mortgage loans are also well-secured as the ratio of the current loan balance to the current tax-assessed value of the property securing these loans averages 45.5%.  The Company has also granted loan deferrals of $5.3 million on other non-residential mortgage loans, which represent 0.4% of the total balance of loans receivable.  The loans on which the Company has granted loan deferrals are included in the ALLL calculation.  Loans performing under a loan deferral agreement are not contractually past due and are excluded from the past due statistics above.

The Company had 0 real estate owned as of September 30, 2020 or December 31, 2019. There were 0 loans in the process of foreclosure at September 30, 2020 and December 31, 2019.

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 months ended September 30, 2020 and 2019, the Company sold mortgage loans held for sale with principal balances of $22.3 million and $3.6 million, respectively, and recognized gains of $610,000 and $18,000, respectively. The Company had 2 loans held for sale totaling $834,000 at September 30, 2020 and 1 loan held for sale for $470,000 at December 31, 2019.

During the nine months ended September 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. The

16

Company retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000. A net gain of $377,000 was recognized on the transaction.

The Company serviced loans for others with principal balances of $62.7 million at September 30, 2020 and $65.1 million at December 31, 2019. Of these amounts, $40.1 million and $37.8 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at September 30, 2020 and December 31, 2019, respectively. The amount of contractually specified servicing fees earned for the nine months ended September 30, 2020 and 2019 was $134,000 and $71,000, respectively. The amount of contractually specified servicing fees earned for the three months ended September 30, 2020 and 2019 was $43,000 and $31,000, respectively. The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

(7)      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, 2020

 

December 31, 2019

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

Repurchase

 

Average

 

Repurchase

 

Average

 

(Dollars in thousands)

 

Liability

 

Rate

 

Liability

 

Rate

 

Maturing:

1 year or less

$

 

%  

$

5,000

 

1.65

%

Over 4 year to 5 years

 

10,000

 

1.81

 

5,000

 

1.88

Total

$

10,000

 

1.81

%  

$

10,000

 

1.77

%

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, 2020. 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-sponsored enterprises. The repurchase liability cannot exceed 90% of the fair value of securities pledged. In the event 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

 

 

 

Value of

 

Value of

 

Repurchase

 

Amount

 

Months to

 

(Dollars in thousands)

 

Securities

 

Securities

 

Liability

 

at Risk

 

Maturity

 

Maturing:

Over 90 days

$

10,001

$

10,994

$

10,000

$

994

 

51

17

(8)    Offsetting of Financial Liabilities

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

 

 

 

 

 

 

Net Amount of

 

Gross Amount Not Offset in the

 

 

 

 

 

Gross Amount

 

Gross Amount

 

Liabilities

 

Balance Sheet

 

 

 

 

 

of Recognized

 

Offset in the

 

Presented in the

 

Financial

    

Cash Collateral

 

 

 

(Dollars in thousands)

 

Liabilities

 

Balance Sheet

 

Balance Sheet

 

Instruments

Pledged

 

Net Amount

September 30, 2020:

Securities sold under agreements to repurchase

$

10,000

$

$

10,000

$

10,000

$

$

December 31, 2019:

Securities sold under agreements to repurchase

$

10,000

$

$

10,000

$

10,000

$

$

(9)    Employee Benefit Plans

The Company has a noncontributory defined benefit pension plan (Pension Plan) that covers most employees with at least one year of service. Effective December 31, 2008, under approved changes to the Pension Plan, there were no further accruals of benefits for any participants and benefits will not increase with any additional years of service. Net periodic benefit cost, subsequent to December 31, 2008, has not been significant and is not disclosed in the table below.

The Company also sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan, which covers certain current and former employees of the Company for amounts in addition to those provided under the Pension Plan.

The components of net periodic benefit cost were as follows:

 

 

SERP

 

SERP

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2020

 

2019

 

2020

 

2019

 

Net periodic benefit cost for the period:

Service cost

$

22

$

26

$

66

$

77

Interest cost

 

43

 

41

 

130

 

122

Expected return on plan assets

 

 

 

 

Amortization of prior service cost

 

 

 

 

Recognized actuarial loss

 

 

 

 

Recognized curtailment loss

 

 

 

 

Net periodic benefit cost

$

65

$

67

$

196

$

199

The service cost component of net periodic benefit cost is included with salaries and employee benefits in the consolidated statements of income. The other components of net periodic benefit cost are included in other general and administrative expenses.

(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.

18

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, 2020 and 2019 amounted to $264,000 and $350,000, respectively. Compensation expense recognized for the nine months ended September 30, 2020 and 2019 amounted to $905,000 and $1.0 million, respectively.

Shares held by the ESOP trust were as follows:

 

 

September 30,

 

December 31,

 

 

 

2020

 

2019

 

Allocated shares

 

495,070

 

466,807

Unearned shares

 

403,698

 

440,397

Total ESOP shares

 

898,768

 

907,204

Fair value of unearned shares, in thousands

$

8,167

$

13,626

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, 2020 and 2019, we accrued $5,000 and $67,000, respectively, for the ESOP restoration plan. For the nine months ended September 30, 2020 and 2019, we accrued $79,000 and $246,000, respectively, for the ESOP restoration plan.

(11)    Share-Based Compensation

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of 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.

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 statement 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

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2020

 

2019

 

2020

 

2019

 

Compensation expense

$

157

$

123

$

523

$

494

Income tax benefit

 

43

 

33

 

143

 

135

19

Shares of our common stock issued under the 2010 Equity Incentive Plan shall come from authorized shares. The maximum number of shares that will be awarded under the plan will be 1,862,637 shares.

Stock Options

The table below presents the stock option activity for the nine months ended September 30, 2020 and 2019:

    

    

Weighted

    

    

Aggregate

 

Average

Remaining

Intrinsic

 

Exercise

Contractual

Value

 

Options

Price

Life (years)

(in thousands)

 

Options outstanding at December 31, 2019

 

116,409

$

17.53

 

0.72

$

1,562

Granted

 

 

 

 

Exercised

 

81,827

 

17.36

 

 

725

Forfeited

 

 

 

 

Expired

 

31,497

 

 

 

Options outstanding at September 30, 2020

3,085

$

23.62

 

1.92

$

(11)

Options outstanding at December 31, 2018

 

337,654

$

17.51

 

1.74

$

2,859

Granted

 

 

 

 

Exercised

 

203,370

 

17.36

 

 

2,282

Forfeited

 

 

 

 

Expired

 

 

 

 

Options outstanding at September 30, 2019

 

134,284

$

17.74

 

1.10

$

1,455

Options vested and exercisable at September 30, 2020

 

3,085

$

23.62

 

1.92

$

(11)

The following summarizes certain stock option activity of the Company:

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2020

 

2019

 

2020

 

2019

 

Intrinsic value of stock options exercised

$

$

251

$

725

$

2,282

Proceeds received from stock options exercised

 

 

368

 

1,421

 

3,531

Tax benefits realized from stock options exercised

 

 

60

 

158

 

484

Total fair value of stock options that vested

 

 

 

 

During the nine months ended September 30, 2020, we issued 27,194 shares of common stock, net, in exchange for 81,827 stock options and 54,633 shares of common stock. Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of our common stock they own in a net settlement to pay the exercise price of stock options.

As of September 30, 2020, the Company had 0 unrecognized compensation costs related to the stock option plan.

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. 

20

The table below presents the restricted stock activity:

 

 

 

 

Weighted

 

 

 

 

 

Average Grant

 

 

 

Restricted

 

Date Fair

 

 

 

Stock

 

Value

 

Unvested at December 31, 2019

 

20,249

$

28.78

Granted

 

13,444

 

21.05

Vested

 

9,998

 

29.16

Forfeited

 

 

Unvested at September 30, 2020

 

23,695

$

24.24

Unvested at December 31, 2018

 

16,424

$

30.26

Granted

 

10,366

 

27.30

Vested

 

6,541

 

30.14

Forfeited

 

 

Unvested at September 30, 2019

 

20,249

$

28.78

During the nine months ended September 30, 2020, the Company issued 13,444 shares of restricted stock to certain members of executive management under the 2019 Equity Incentive Plan. The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant. Restricted stock will vest over three years from the date of grant.

As of September 30, 2020, the Company had $410,000 of unrecognized compensation costs related to restricted stock.

During the nine months ended September 30, 2020, the Company issued 16,129 performance-based restricted stock units (PRSUs) to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest in the first quarter of 2023 after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved. Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% and 150% of the target award. For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized.  This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.        

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

 

 

Performance-

 

Based Restricted

 

 

Stock Units

 

Weighted

Based on a

Average Grant

Performance

Date Fair

 

 

Condition

 

Value

Unvested at December 31, 2019

 

35,976

$

29.16

Granted

 

16,129

 

21.05

Vested

 

7,680

 

29.53

Forfeited

 

3,840

 

29.53

Unvested at September 30, 2020

 

40,585

$

25.83

Unvested at December 31, 2018

 

23,538

$

30.14

Granted

 

12,438

 

27.30

Vested

 

 

Forfeited

 

 

Unvested at September 30, 2019

 

35,976

$

29.16

21

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, 2020, the Company had $428,000 of unrecognized compensation costs related to these PRSUs. Performance will be measured over a three-year performance period and will be cliff vested.

During the nine months ended September 30, 2020, the Company issued 4,032 of PRSUs to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest in the first quarter of 2023 after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved. The number of shares that will be expensed will not be adjusted for performance. The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

Grant date: March 12, 2020

Performance period: January 1, 2020 to December 31, 2022

2.80 year risk-free rate on grant date: 0.56%

December 31, 2019 closing price: $30.94

Closing stock price on the date of grant: $21.05

Annualized volatility (based on 2.82 year historical volatility as of the grant date): 18.02%

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

Performance-

Based Restricted

Monte Carlo

Stock Units

Valuation of

Based on a

the Company's

 

 

Market Condition

 

Stock

Unvested at December 31, 2019

 

8,994

$

25.74

Granted

 

4,032

 

22.16

Vested

 

1,197

 

24.44

Forfeited

 

1,682

 

24.44

Unvested at September 30, 2020

 

10,147

$

24.69

Unvested at December 31, 2018

 

5,884

$

26.42

Granted

 

3,110

 

24.45

Vested

 

 

Forfeited

 

 

Unvested at September 30, 2019

 

8,994

$

25.74

As of September 30, 2020, the Company had $90,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. Performance will be measured over a three-year performance period and will be cliff vested.

(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.

22

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)

 

2020

 

2019

 

2020

 

2019

 

Net income

$

4,318

$

5,366

$

13,082

$

16,950

Income allocated to participating securities

(23)

(38)

(47)

(112)

Net income available to common shareholders

$

4,295

$

5,328

$

13,035

$

16,838

Weighted-average number of shares used in:

Basic earnings per share

 

9,104,079

 

9,212,119

 

9,144,463

 

9,184,741

Dilutive common stock equivalents:

Stock options and restricted stock units

 

30,010

 

83,610

 

57,419

 

124,679

Diluted earnings per share

 

9,134,089

 

9,295,729

 

9,201,882

 

9,309,420

Net income per common share, basic

$

0.47

$

0.58

$

1.43

$

1.83

Net income per common share, diluted

$

0.47

$

0.57

$

1.42

$

1.81

23

(13)    Other Comprehensive Income and Loss

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

 

 

Unfunded

 

Unrealized

 

 

 

 

 

 

Pension

 

(Gain)/Loss on

 

 

 

 

(Dollars in thousands)

 

Liability

 

Securities

 

Total

 

Three months ended September 30, 2020

Balances at beginning of period

$

8,178

$

(315)

$

7,863

Other comprehensive loss, net of taxes

 

4

 

4

Amounts reclassified from other comprehensive income, net of taxes

 

 

 

Net current period other comprehensive loss

 

 

4

 

4

Balances at end of period

$

8,178

$

(311)

$

7,867

Three months ended September 30, 2019

Balances at beginning of period

$

7,721

$

(521)

$

7,200

Other comprehensive income, net of taxes

 

 

(70)

 

(70)

Amounts reclassified from other comprehensive income, net of taxes

 

 

91

 

91

Net current period other comprehensive loss

 

 

21

 

21

Balances at end of period

$

7,721

$

(500)

$

7,221

Nine months ended September 30, 2020

Balances at beginning of period

$

8,178

$

(510)

$

7,668

Other comprehensive income, net of taxes

 

 

(22)

 

(22)

Amounts reclassified from other comprehensive income, net of taxes

 

 

221

 

221

Net current period other comprehensive loss

 

 

199

 

199

Balances at end of period

$

8,178

$

(311)

$

7,867

Nine months ended September 30, 2019

Balances at beginning of period

$

7,721

$

88

$

7,809

Other comprehensive income, net of taxes

 

 

(711)

 

(711)

Amounts reclassified from other comprehensive income, net of taxes

 

 

123

 

123

Net current period other comprehensive income

 

 

(588)

 

(588)

Balances at end of period

$

7,721

$

(500)

$

7,221

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

 

 

Three Months Ended September 30,

 

 

 

2020

 

2019

 

 

 

Pretax

 

 

 

 

After Tax

 

Pretax

 

 

 

 

After Tax

 

(Dollars in thousands)

 

Amount

 

Tax

 

Amount

 

Amount

 

Tax

 

Amount

 

Unrealized loss (gain) on securities

$

5

$

(1)

$

4

$

(95)

$

25

$

(70)

Amount reclassified from other comprehensive income

123

(32)

91

Total

$

5

$

(1)

$

4

$

28

$

(7)

$

21

 

 

Nine Months Ended September 30,

 

 

2020

 

2019

 

 

Pretax

 

 

 

 

After Tax

 

Pretax

 

 

 

 

After Tax

 

(Dollars in thousands)

 

Amount

 

Tax

 

Amount

 

Amount

 

Tax

 

Amount

 

Unrealized gain on securities

$

(30)

$

8

$

(22)

$

(969)

$

258

$

(711)

Amount reclassified from other comprehensive income

301

(80)

221

167

(44)

123

Total

$

271

$

(72)

$

199

$

(802)

$

214

$

(588)

24

(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 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.

Revenue from contracts with customers is reported in service fees on loan and deposit accounts and 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 Fees on

 

 

 

 

Loan and Deposit

 

 

(Dollars in thousands)

 

Accounts

 

Other

 

Total

Three months ended September 30, 2020

Revenue from contracts with customers

$

275

$

35

$

310

Other revenue

453

28

481

Total

$

728

$

63

$

791

Three months ended September 30, 2019

Revenue from contracts with customers

$

347

$

37

$

384

Other revenue

157

18

175

Total

$

504

$

55

$

559

Nine months ended September 30, 2020

Revenue from contracts with customers

$

918

$

88

$

1,006

Other revenue

798

83

881

Total

$

1,716

$

171

$

1,887

Nine months ended September 30, 2019

Revenue from contracts with customers

$

1,047

$

137

$

1,184

Other revenue

380

498

878

Total

$

1,427

$

635

$

2,062

(15)    Leases

The Company leases most of its premises and some vehicles and equipment under operating leases expiring on various dates through 2030. The majority of lease agreements relate to real estate and generally provide that the Company pay taxes, insurance, maintenance and certain other operating expenses applicable to the leased premises. Variable lease components and nonlease components are not included in the Company’s computation of the right-of-use (ROU) asset or lease liability. The Company also does not include short-term leases in the computation of the ROU asset or lease liability. Short-term leases are leases with a term at commencement of 12 months or less. Short-term lease

25

expense is recorded on a straight-line basis over the term of the lease. Lease agreements do not contain any residual value guarantees or restrictive covenants.

Certain leases have renewal options at the expiration of the lease terms. Generally, option periods are not included in the computation of the lease term, ROU asset or lease liability because the Company is not reasonably certain to exercise renewal options at the expiration of the lease terms. The Company has elected to use the package of practical expedients to: a) not reassess whether any expired or existing contracts are or contain leases, b) not reassess the lease classification for any expired or existing leases, and c) not reassess initial direct costs for any existing leases. The Company has also chosen the option to not restate comparative periods prior to the adoption of the new lease accounting standard.

Because the discount rates implicit in our leases are not known, discount rates have been estimated using the rates for fixed-rate, amortizing advances from the Federal Home Loan Bank (FHLB) for the approximate terms of the leases. FHLB advances are collateralized by a blanket pledge of the Bank’s assets that are not otherwise pledged.

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

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2020

 

2019

 

2020

 

2019

 

Lease Costs:

Operating lease costs

$

878

$

777

$

2,509

$

2,342

Short-term lease costs

 

5

 

21

 

17

 

37

Variable lease costs

 

38

 

40

 

115

 

93

Total lease costs

$

921

$

838

$

2,641

$

2,472

Cash paid for amounts included in measurement of lease liabilities

$

808

$

721

$

2,414

$

2,266

ROU assets obtained in exchange for new operating lease liabilities

$

2,247

$

246

$

4,033

$

13,254

26

At September 30, 2020, future minimum rental commitments under noncancellable operating leases are as follows:

(Dollars in thousands)

    

2020

$

820

2021

 

2,974

2022

 

2,690

2023

 

2,339

2024

 

2,060

Thereafter

 

4,294

Total

15,177

Less present value discount

1,047

Present value of leases

$

14,130

The table below presents other lease related information:

September 30,

September 30,

    

2020

    

2019

 

Weighted-average remaining lease term (years)

 

6.00

 

6.23

Weighted-average discount rate

2.45

%

2.90

%

(16)    Fair Value

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its assets and liabilities measured or disclosed at fair value into three levels based on the markets in which the 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 held 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 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.

Investment Securities Available for Sale. The estimated fair values of U.S. government-sponsored mortgage-backed securities 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.

27

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

 

(Dollars in thousands)

    

Amount

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

 

September 30, 2020

Assets

Cash and cash equivalents

$

237,498

$

237,498

$

237,498

$

$

Investment securities available for sale

3,959

3,959

3,959

Investment securities held to maturity

 

292,528

309,471

309,471

Loans held for sale

 

834

870

870

Loans receivable, net

 

1,482,639

1,562,422

1,562,422

FHLB stock

 

8,144

8,144

8,144

FRB stock

3,145

3,145

3,145

Accrued interest receivable

 

7,214

7,214

19

794

6,401

Interest rate contracts

 

60

60

60

Liabilities

Deposits

 

1,662,706

1,667,045

1,285,438

381,607

Advances from the Federal Home Loan Bank

 

141,000

145,623

145,623

Securities sold under agreements to repurchase

 

10,000

10,484

10,484

Accrued interest payable

 

99

99

48

51

Interest rate contracts

 

60

60

60

December 31, 2019

Assets

Cash and cash equivalents

$

44,806

$

44,806

$

44,806

$

$

Investment securities available for sale

8,628

8,628

8,628

Investment securities held to maturity

 

363,883

371,305

371,305

Loans held for sale

 

470

480

480

Loans receivable, net

 

1,584,784

1,627,903

1,627,903

FHLB stock

 

8,723

8,723

8,723

FRB stock

3,128

3,128

3,128

Accrued interest receivable

 

5,409

5,409

32

952

4,425

Interest rate contracts

 

5

5

5

Liabilities

Deposits

 

1,631,933

1,632,741

1,167,990

464,751

Advances from the Federal Home Loan Bank

 

156,000

156,906

156,906

Securities sold under agreements to repurchase

 

10,000

9,968

9,968

Accrued interest payable

 

397

397

47

350

Interest rate contracts

 

5

5

5

28

At September 30, 2020 and December 31, 2019, 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.

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

 

September 30, 2020

Interest rate contracts — assets

$

$

60

$

$

60

Interest rate contracts — liabilities

 

 

(60)

 

 

(60)

Investment securities available for sale

3,959

3,959

December 31, 2019

Interest rate contracts — assets

$

$

5

$

$

5

Interest rate contracts — liabilities

 

 

(5)

 

 

(5)

Investment securities available for sale

 

 

8,628

 

 

8,628

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019 and the related losses for the nine months ended September 30, 2020 and the year ended December 31, 2019:

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Adjustment Date

Level 1

 

Level 2

 

Level 3

 

Total

 

Total Losses

 

 

September 30, 2020

Mortgage servicing assets

9/30/2020

$

$

$

452

$

452

$

(53)

December 31, 2019

Mortgage servicing assets

9/30/2019

452

452

(16)

Mortgage servicing assets are valued using a discounted cash flow model. Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing. Losses on mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.

The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements. The discount rates and prepayment speeds have been weighted by the relative notional amounts.

 

 

 

 

 

 

 

Unobservable

 

 

Range

 

(Dollars in thousands)

 

Fair Value

 

Valuation Technique

 

Input

 

(Weighted Average)

 

September 30, 2020:

Mortgage servicing assets

$

452

Discounted cash flow

Discount rate

9.25% - 11.25% (10.25%)

Prepayment speed (CPR)

 

9.36 - 18.16 (13.54)

Annual cost to service (per loan, in dollars)

$

75

December 31, 2019:

Mortgage servicing assets

$

452

 

Discounted cash flow

 

Discount rate

9.25% - 11.25% (10.25%)

 

Prepayment speed (CPR)

 

11.09 - 14.24 (12.58)

 

Annual cost to service (per loan, in dollars)

$

75

29

(17)    Subsequent Events

On October 29, 2020, 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 25, 2020 to stockholders of record as of November 12, 2020.

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” 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:

the effect of any pandemic disease, including COVID-19, natural disaster, war, act of terrorism, accident or similar action or event;

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

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

adverse changes in the securities markets;

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

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;

30

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

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

changes in our organization, compensation and benefit plans;

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;

cyberattacks, 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;