2015 ANNUAL REPORT
CHAIRMAN AND CEO’S MESSAGE
Fellow Shareholders:
On behalf of the Board of Directors and all of the employees of Territorial Bancorp
Inc. and Territorial Savings Bank, I wish to thank you for your continuing support in
2015. We are pleased with what we have achieved in rewarding our investors and
growing our company.
Hawaii’s Economy
In Hawaii, our construction industry continues to thrive, with residential construction
driving growth on the west side of Oahu as well as in urban Honolulu. The
construction of the fixed rail system is well underway, which will link the west side to
metropolitan Honolulu. With the building of a number of rail stations along the
system’s route, there is discussion of developing both commercial and residential
areas adjacent to the rail stations. This should provide additional work for the
construction industry for a substantial period of time. Construction of high rises in
Honolulu is not only focused on expensive high end projects, but also affordable
projects in the Kakaako and Ala Moana areas. The lack of affordable housing in
Honolulu is a problem that will continue for a number of years, so construction of this
type of housing will be in demand many years into the future.
Tourism continues to flourish and we had more than 8.6 million visitor arrivals in 2015,
setting a new record. The increase in visitors was from the continental U.S. West, the
continental U.S. East, Europe, Oceania and China. There was a slight decline in
visitors from Japan, Korea and Canada, but this decline was more than offset by an
increase in visitors from other target markets beside those noted above. Visitors spent
more than $15.28 billion in 2015, an increase of 2.3% over 2014. Hawaii hotels set a
record in revenue, which was up by 6% as compared to 2014.
The U.S. military stationed in Hawaii continues to be a strong component of our
State’s economy. The military has projected a reduction of 8% of Army personnel in
Hawaii, but this amounts to less than 1,500 soldiers. With the ongoing political
situation around the world, Hawaii’s strategic location in the middle of the Pacific
makes it an extremely important factor in maintaining peace throughout the Pacific
Asian region and we do not expect any meaningful change in any future U.S.
Administration’s perspective of Hawaii’s continuing role in maintaining world peace.
2015 Highlights and Financial Performance
2015 posed many challenges for us, but we were able to work through these
challenges and achieve some noteworthy accomplishments. One of our focal points
has always been to maintain a strong balance sheet, which we did by increasing total
assets by 7.6%. Loans receivable grew by 22.8%, which was a strong increase
compared to 2014’s increase in loans receivable from 2013 of 13.0%. Loan
production has improved significantly and this led to strengthening our balance sheet.
Asset quality remains very strong, with the ratio of non-performing assets to total
assets being only 0.30%, which is one of the lowest in the country. Total stockholders’
equity increased by $3.3 million, which was driven by our earnings but also reflected
our ongoing share repurchase program. Through the end of 2015, we repurchased
25.3% of the shares issued in our initial public offering in 2009.
Our financial highlights for 2015 include:
Š Net income increased by 4.6% to $14.7 million.
Š Net interest income increased by 5.8% to $56.6 million.
Š We completed our sixth stock repurchase program. From the beginning of our
first repurchase program in September of 2010 through the end of 2015, we
had purchased 3,099,253 or 25.3% of the original 12,233,125 shares of stock
issued and on March 7, 2016, we announced the adoption of our seventh
repurchase program.
Š In November of 2015, we declared a special dividend of $0.10 per share.
Combined with the four quarterly dividends we paid in 2015, our total
dividends paid in 2015 amounted to $0.76 per share compared to $0.70 per
share in 2014, an increase of more than 8.5%.
Š In 2015, approximately 108% of our 2015 net income was given back to
shareholders through dividends and our continuing stock repurchase
program.
Š The Company’s total assets grew from $1.69 billion at December 31, 2014 to
$1.82 billion at December 31, 2015.
Š Total deposits increased to $1.45 billion in 2015, growing by $85.4 million or
6.3% from 2014.
Š In 2015, loans receivable grew by $220.4 million or 22.8% to $1.19 billion.
New loan originations totaled $458.7 million in 2015, up from $254.8 million in
2014, for an increase of 80.0%.
Š Regulatory capital ratios for Territorial Savings Bank are in excess of Federal
“well-capitalized” standards
On behalf of the Board of Directors and all of our employees, I would like to thank all
of our shareholders and customers for their continued confidence and support of
Territorial Bancorp Inc.
Allan S. Kitagawa
Chairman, Chief Executive Officer and President
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2015
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
For the transition period from to
Commission File Number: 001-34403
Territorial Bancorp Inc.
(Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
1132 Bishop Street, Suite 2200, Honolulu, Hawaii
(Address of Principal Executive Office)
26-4674701
(I.R.S. Employer
Identification Number)
96813
(Zip Code)
(808) 946-1400
(Registrant’s Telephone Number including area code)
Securities Registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities Registered Under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES (cid:133) NO (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the
Act. YES (cid:133) NO (cid:95)
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 reports), and (2) has been subject to such requirements for the past 90 days.
YES (cid:95) NO (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted 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 and post such
files). Yes (cid:95) No (cid:133)(cid:3)
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:133)
Non-accelerated filer (cid:133)
Accelerated filer (cid:95)
Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act) (cid:133) YES (cid:95) NO
The aggregate value of the voting common equity held by nonaffiliates of the registrant, computed by
reference to the closing price of the registrant’s shares of common stock as of June 30, 2015 ($24.26) was $211.5
million.
As of February 29, 2016, there were 9,659,685 shares outstanding of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference in
Part III of this Form 10-K.
TERRITORIAL BANCORP INC.
FORM 10-K
INDEX
PART I ......................................................................................................................................................... 2
Business ........................................................................................................... 2
Risk Factors .................................................................................................. 19
Unresolved Staff Comments ....................................................................... 29
Properties ...................................................................................................... 32
Legal Proceedings ........................................................................................ 32
Mine Safety Disclosures .............................................................................. 33
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II ..................................................................................................................................................... 33
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .................................. 33
Selected Financial Data ............................................................................... 36
Management’s Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................... 37
Quantitative and Qualitative Disclosures About Market Risk ................ 67
Financial Statements and Supplementary Data ........................................ 67
Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure .......................................................................... 124
Controls and Procedures ........................................................................... 124
Other Information ..................................................................................... 124
ITEM 10.
ITEM 11.
ITEM 12.
PART III .................................................................................................................................................. 125
Directors, Executive Officers and Corporate Governance .................... 125
Executive Compensation ........................................................................... 125
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ..................................... 126
Certain Relationships and Related Transactions, and Director
Independence .............................................................................................. 126
Principal Accountant Fees and Services .................................................. 126
ITEM 14.
ITEM 13.
PART IV .................................................................................................................................................. 127
Exhibits and Financial Statement Schedules .......................................... 127
ITEM 15.
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FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, which can be identified by the use of
words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,”
“may” and words of similar meaning. These forward-looking statements include, but are not limited to:
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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. Except as
may be required by law, we disclaim any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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:
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general economic conditions, 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 or credit markets;
changes in laws or government regulations or policies affecting financial institutions,
including changes in regulatory fees and capital requirements;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate acquired entities, if any;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory
agencies, the Financial Accounting Standards Board, the Securities and Exchange
Commission and the Public Company Accounting Oversight Board;
changes in our organization, compensation and benefit plans;
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the timing and amount of revenues that we may recognize;
the value and marketability of collateral underlying our loan portfolios;
the impact of recent legislation to restructure the U.S. financial and regulatory system;
the quality and composition of our investment portfolio;
changes in our financial condition or results of operations that reduce capital available to
pay dividends; and
changes in the financial condition or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking statements. Please also see “Item
1A. Risk Factors.”
PART I
ITEM 1. Business
Territorial Bancorp Inc.
Territorial Bancorp Inc. is a Maryland corporation and owns 100% of the outstanding common
stock of Territorial Savings Bank. On July 10, 2009, we completed our initial public offering of common
stock in connection with the mutual-to-stock conversion of Territorial Mutual Holding Company, selling
12,233,125 shares of common stock at $10.00 per share. Since the completion of our initial public
offering, we have not engaged in any significant business activity other than owning the common stock of
and having savings deposits in Territorial Savings Bank, paying dividends and repurchasing shares of
common stock. At December 31, 2015, we had consolidated assets of $1.821 billion, consolidated
deposits of $1.445 billion and consolidated stockholders’ equity of $219.6 million.
Our executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.
Our telephone number at this address is (808) 946-1400.
Territorial Savings Bank
Territorial Savings Bank is a Hawaii state-chartered savings bank headquartered in Honolulu,
Hawaii. Territorial Savings Bank was organized in 1921, and reorganized into the mutual holding
company structure in 2002. Territorial Savings Bank is currently the wholly-owned subsidiary of
Territorial Bancorp Inc. We provide financial services to individuals, families and businesses through our
28 banking offices located throughout the State of Hawaii.
On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii
state-chartered savings bank. On July 10, 2014, Territorial Savings Bank became a member of the
Federal Reserve System.
Territorial Savings Bank’s executive offices are located at 1132 Bishop Street, Suite 2200,
Honolulu, Hawaii 96813. Our telephone number at this address is (808) 946-1400.
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Available Information
Territorial Bancorp Inc. is a public company, and files interim, quarterly and annual reports with
the Securities and Exchange Commission. These reports are on file and a matter of public record with the
Securities and Exchange Commission and may be read and copied at the Securities and Exchange
Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC (http://www.sec.gov).
Our website address is www.territorialsavings.net. Information on our website should not be
considered a part of this annual report.
General
Territorial Savings Bank’s business consists primarily of accepting deposits from the general
public and investing those deposits, together with funds generated from operations and borrowings, in
one- to four-family residential mortgage loans and investment securities. To a much lesser extent, we
also originate home equity loans and lines of credit, construction, commercial and other nonresidential
real estate loans, consumer loans, multi-family mortgage loans and other loans. Territorial Savings Bank
offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of
deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts.
Through our subsidiary, Territorial Financial Services, Inc., we engage in insurance agency activities.
We also offer various non-deposit investments to our customers, including annuities and mutual funds,
through a third-party broker-dealer.
Market Area
We conduct business from our corporate offices and from our 28 full-service branch offices
located throughout the State of Hawaii.
The largest sector of Hawaii’s economy is the visitor industry. The Hawaii Tourism Authority
reported that 8.6 million visitors came to the state in 2015, a 4.1% increase compared to 2014. The
increase in visitor arrivals is primarily due to growth in the number of visitors from the continental United
States, Australia and China. Total visitor expenditures in 2015 totaled $15.159 billion, a 2.3% increase
compared to 2014.
The unemployment rate for the State of Hawaii was 3.2% in December 2015, representing a
decrease from a 4.0% rate in December 2014. Hawaii’s unemployment rate continued to be lower than
the 5.0% rate for the entire United States for December 2015. The growth in the visitor and construction
industries have supported the local economy and kept the state’s unemployment rate lower than the
national rate. The construction of several new condominium projects and work on the City and County of
Honolulu’s mass transit project has increased employment in Hawaii’s construction industry.
The number of sales and the median sale prices of existing single-family homes and
condominium units sold increased in 2015 compared to 2014. On the island of Oahu, the primary real
estate market in Hawaii, sales of existing single-family homes totaled 3,455 units for the year ended
December 31, 2015, an increase of 5.2% compared to sales in 2014. The number of condominium sales,
a notable portion of the overall housing market, grew by 4.5% in 2015 compared to 2014. The median
price paid on Oahu for a single-family home in December 2015 was $700,000, an increase of 1.4%
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compared to the median price in December 2014. The median price paid on Oahu for condominiums in
December 2015 was $386,250, an increase of 6.9% compared to the median price in December 2014.
On the island of Maui, the second largest real estate market in Hawaii, sales of existing single-
family homes totaled 1,090 units in 2015, an increase of 15.7% compared to similar sales during 2014.
The number of condominium sales decreased by two units in 2015 compared to 2014. The median price
paid for a single-family home on Maui in December 2015 was $580,000, an increase of 1.8% compared to
the median price in December 2014. The median price paid on Maui for condominiums in December
2015 was $410,000, a 7.9% increase compared to the median price in December 2014.
Foreclosure and bankruptcy filings fell in 2015 compared to 2014. In 2015, there were 1,826
mortgage foreclosure cases in Hawaii, a 12.4% decrease from 2014. In 2015, there were 1,569
bankruptcy filings, a decrease of 7.8% compared to the number of filings in 2014. The decrease in
foreclosure and bankruptcy filings is primarily due to growth in Hawaii’s economy.
Competition
We face intense competition in our market area both in making loans and attracting deposits. We
compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies and investment banking firms. Some of our competitors
have greater name recognition and market presence that benefit them in attracting business, and offer
certain services that we do not or cannot provide.
Our deposit sources are primarily concentrated in the communities surrounding our banking
offices, located in all four counties in the State of Hawaii. As of June 30, 2015 (the latest date for which
information is publicly available), we ranked fifth in FDIC-insured deposit market share in the State of
Hawaii (out of 13 banks and thrift institutions with offices in Hawaii), with a 3.7% market share. As of
that date, our largest market share was in the City and County of Honolulu, where we ranked fifth in
deposit market share (out of 13 banks and thrift institutions with offices in the City and County) with a
3.9% market share.
Lending Activities
Our primary lending activity is the origination of one- to four-family residential mortgage loans.
To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial
and other nonresidential real estate loans, consumer loans, multi-family mortgage loans and commercial
business loans.
One- to Four-Family Residential Mortgage Loans. At December 31, 2015, $1.146 billion, or
95.9% of our total loan portfolio, consisted of one- to four-family residential mortgage loans. We offer
conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities generally up to 30
years. There has been little demand for adjustable-rate mortgage loans in our market area.
One- to four-family residential mortgage loans are generally underwritten according to Fannie
Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming
loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the
maximum conforming loan limits as established by the Federal Housing Finance Agency, which is
currently $625,500 for single-family homes located in the State of Hawaii. We also originate loans above
this amount, which are referred to as “jumbo loans.” These jumbo loan amounts are generally up to $1.0
million, although we do originate loans above this amount. We generally originate fixed-rate jumbo loans
with terms of up to 30 years. We have not originated significant amounts of adjustable-rate jumbo loans
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in recent years due to customer preference for fixed-rate loans in our market area. We generally
underwrite jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in our
market area.
We originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value
ratio of 100%. We generally require private mortgage insurance for loans with loan-to-value ratios in
excess of 80%. During the year ended December 31, 2015, we originated $9.8 million of one- to four-
family residential mortgage loans with loan-to-value ratios in excess of 80%. We offer a variety of credit
programs for low- to moderate-income and first-time home purchasers. These include our first time home
purchaser program, where the borrower will receive up to a 50 basis point reduction in points charged in
connection with the loan. We also originate first mortgage loans to lower-income individuals who reside
in rural census tracts where the U.S. Department of Agriculture will issue a second mortgage and
complete the underwriting of the loan, subject to our review before origination. We also offer both FHA
and VA fixed-rate loans.
Other than our loans for the construction of one- to four-family residential mortgage loans
(described under “—Nonresidential Real Estate Loans”), we currently do not originate new “interest
only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for
an initial period, after which the loan converts to a fully amortizing loan). 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).
Home Equity Loans and Lines of Credit. In addition to traditional one- to four-family
residential mortgage loans, we offer home equity loans and home equity lines of credit that are secured
primarily by one- to four-family residential homes. Home equity lines of credit have a maximum term of
10 years during which time the borrower is required to make payments to principal based on the
amortization of 0.125% of principal outstanding per month. The borrower is permitted to draw against
the line during the entire term. Our home equity lines of credit are originated with adjustable rates of
interest or with fixed rates of interest that convert to adjustable rates of interest after an initial period of up
to three years. Our home equity loans are originated with fixed rates of interest and with terms of up to
30 years. Home equity loans and lines of credit are generally underwritten with the same criteria that we
use to underwrite one- to four-family residential mortgage loans. Home equity loans may be underwritten
with a loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage
loan, while lines of credit for owner-occupied properties and investment properties may be underwritten
with loan-to-value ratios of 80% and 65%, respectively, when combined with the principal balance of the
existing mortgage loan. We require appraisals on home equity loans and lines of credit. At the time we
close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the
underlying collateral. At December 31, 2015, the outstanding balance of home equity loans totaled
$3.0 million, or 0.3% of our total loan portfolio, and the outstanding balance of home equity lines of
credit totaled $12.3 million, or 1.0% of our total loan portfolio.
Nonresidential Real Estate Loans. Our nonresidential real estate loans consist primarily of
commercial real estate loans and construction loans for residential real estate projects. These loans
totaled $19.3 million, or 1.6% of our loan portfolio as of December 31, 2015. The commercial real estate
properties primarily include owner-occupied light industrial properties. We generally seek to originate
commercial real estate loans with initial principal balances of $1.0 million or less. Loans secured by
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commercial real estate totaled $9.8 million, or 0.8%, of our total loan portfolio at December 31, 2015, and
consisted of 12 loans outstanding with an average loan balance of approximately $815,000. All of our
nonresidential real estate loans are secured by properties located in our primary market area. At
December 31, 2015, our largest commercial real estate loan had a principal balance of $3.1 million and
was secured by real property and improvements utilized as an office building. This loan was performing
in accordance with its original terms at December 31, 2015.
In the underwriting of commercial real estate loans, we generally lend up to the lesser of 75% of
the property’s appraised value or purchase price. We base our decision to lend primarily on the economic
viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial
real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service
requirement (generally requiring a minimum ratio of 110%), computed after deduction for a vacancy
factor and property expenses we deem appropriate. Personal guarantees are usually obtained from
commercial real estate borrowers. We require title insurance, fire and extended coverage casualty
insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying
property. Almost all of our commercial real estate loans are generated internally by our loan officers.
Commercial real estate loans generally carry higher interest rates and have shorter terms than
one- to four-family residential mortgage loans. Commercial real estate loans, however, entail greater
credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger
loan balances concentrated with single borrowers or groups of related borrowers. In addition, the
payment of loans secured by income-producing properties typically depends, in large part, on sufficient
income from the property to cover operating expenses and debt service. Changes in economic conditions
that are not in the control of the borrower or lender could affect the value of the collateral for the loan or
the future cash flow of the property. Additionally, any decline in real estate values may be more
pronounced for commercial real estate than for residential properties.
We also originate a limited amount of construction loans to experienced developers, almost
exclusively for the construction of residential real estate projects. Construction loans are also made to
individuals for the construction of their personal residences. Construction loans to individuals are
generally “interest-only” loans during the construction period, and convert to permanent, amortizing loans
following the completion of construction. At December 31, 2015, construction loans totaled $7.2 million,
or 0.6% of total loans receivable. At December 31, 2015, the additional unadvanced portion of these
construction loans totaled $3.7 million.
Construction financing generally involves greater credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the
accuracy of the initial estimate of the value of the property at completion of construction compared to the
estimated cost (including interest) of construction and other assumptions. If the estimate of construction
cost is inaccurate, we may be required to advance additional funds beyond the amount originally
committed in order to protect the value of the property. Moreover, if the estimated value of the completed
project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full
repayment of the construction loan upon the sale of the property. In the event we make a land acquisition
loan on property that is not yet approved for the planned development, there is the risk that approvals will
not be granted or will be delayed. We currently do not have any land acquisition development and
construction loans. Construction loans also expose us to the risk that improvements will not be completed
on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.
Loan Originations, Purchases, Sales and Servicing. All loans that we originate are underwritten
pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including
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those of Freddie Mac and Fannie Mae, to the extent applicable. We originate both adjustable-rate and
fixed-rate loans. However, in our market area, customer demand is primarily for fixed-rate loans. Our
loan origination and sales activity may be adversely affected by a rising interest rate environment that
typically results in decreased loan demand. Most of our one- to four-family residential mortgage loan
originations are generated by our branch managers and employees located in our banking offices and our
additional commissioned loan officers located in our corporate headquarters. We also advertise
throughout our market area. We also receive loans from mortgage brokers, mortgage bankers and other
financial institutions that work with our staff to process and close these loans. We underwrite and
approve all of these loans.
We sell loans to assist us in managing interest rate risk. We sold $56.2 million, $37.5 million and
$82.2 million of residential mortgage loans (all fixed-rate loans, with terms of 10 years or longer) during
the years ended December 31, 2015, 2014 and 2013, respectively. We had six loans totaling $2.1 million
classified as held for sale at December 31, 2015.
We sell our loans without recourse, except for normal representations and warranties provided in
sales transactions. At December 31, 2015, we were servicing loans owned by others with a principal
balance of $51.8 million. Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions
in the event of unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower
on the loans we service as consideration for our servicing activities. For the year ended December 31,
2015, we received servicing fees of $153,000. At December 31, 2015, substantially all of the loans
serviced for Freddie Mac and Fannie Mae were performing in accordance with their contractual terms and
we believe that there are no material repurchase obligations associated with these loans.
Loan Approval Procedures and Authority. Our lending activities follow written,
nondiscriminatory underwriting standards and loan origination procedures established by our Board of
Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and
value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the
borrower’s employment and credit history and information on the historical and projected income and
expenses of the borrower.
Our policies and loan approval limits are established by the Board of Directors. Aggregate
lending relationships in amounts up to $5.0 million can be approved by designated individual officers or
officers acting together with specific lending approval authority. Relationships in excess of $5.0 million
require the approval of the Loan Committee of the Board of Directors.
Territorial Savings Bank also uses automated systems to underwrite one- to four-family
residential mortgage loans with balances up to $625,500. We require appraisals of all real property
securing one- to four-family residential real estate loans, and on property securing home equity loans and
lines of credit. All appraisers are licensed appraisers and all third-party appraisers are approved by the
Board of Directors annually.
Investments
Our Board of Directors has primary responsibility for establishing and overseeing our investment
policy. The Board of Directors has delegated authority to implement the investment policy to our
Investment Committee, consisting of our President and Chief Executive Officer, our Vice Chairman and
Co-Chief Operating Officer, our Senior Vice President and Chief Financial Officer and our Vice
President and Controller. The investment policy is reviewed at least annually by the Investment
7
Committee, and any changes to the policy are subject to approval by the full Board of Directors. The
overall objectives of the Investment Policy are to maintain a portfolio of high quality and diversified
investments to maximize interest income over the long term and to minimize risk, to provide collateral for
borrowings, to provide additional earnings when loan production is low, and to reduce our tax liability.
The policy dictates that investment decisions give consideration to the safety of principal, liquidity
requirements and potential returns. Our Senior Vice President and Chief Financial Officer executes our
securities portfolio transactions as directed by the Investment Committee. All purchase and sale
transactions are reported to the Board of Directors on a monthly basis.
Our current investment policy permits investments in securities issued by the United States
Government as well as mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac
and Ginnie Mae. The investment policy also permits, with certain limitations, investments in certificates
of deposit, bank-owned life insurance, collateralized mortgage obligations, trust preferred securities,
municipal securities and stock in the Federal Home Loan Bank and the Federal Reserve Bank. We
purchased stock in the Federal Home Loan Bank in order to obtain services such as demand deposit
accounts, certificates of deposit, security safekeeping services and borrowings in the form of advances.
As a member of the Federal Reserve System, we are required to hold stock in the Federal Reserve Bank.
Our current 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. As of December 31, 2015, we held no asset-backed securities other than mortgage-backed
securities. As a state savings bank, Territorial Savings Bank is not permitted to invest in equity securities.
This general restriction does not apply to Territorial Bancorp Inc.
The Investments – Debt and Equity Securities topic of the Financial Accounting Standards Board
Accounting Standards Codification (FASB ASC) requires that, at the time of purchase, we designate a
security as either held-to-maturity, available-for-sale, or trading, based upon our ability and intent to hold
the security until maturity. Securities in the available-for-sale and trading classifications are reported at
market value and securities in the held-to-maturity classification are reported at amortized cost. A
periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is
conducted to determine if the fair value of any security has declined below its carrying value and whether
such decline is other-than-temporary. If we do not have the intent to sell a security and it is not more
likely than not that we will be required to sell a security, impairment occurs when the present value of the
remaining cash flows is less than the remaining amortized cost basis. The difference between the present
value of remaining cash flows and the remaining amortized cost basis is considered a credit loss. If a
credit loss has occurred, impairment is recorded by writing down the value of a security to its fair market
value as a charge to earnings. The difference between the write down and the credit loss is considered
other comprehensive loss, which is a reduction of stockholders’ equity.
Our held-to-maturity securities at December 31, 2015 consisted primarily of securities with the
following carrying values: $481.5 million of mortgage-backed securities, $10.7 million of collateralized
mortgage obligations and $916,000 of trust preferred securities that were issued by pools of issuers
consisting primarily of financial institution holding companies. At December 31, 2015, all of our
mortgage-backed securities and collateralized mortgage obligations were issued by Fannie Mae, Freddie
Mac or Ginnie Mae. At December 31, 2015, there were no securities classified as available-for-sale. At
December 31, 2015, none of the collateral underlying our securities portfolio was considered subprime or
Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of
that date. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Balance Sheet Analysis—Securities” for a discussion of the recent performance of our
8
securities portfolio. The fair values of our securities are usually based on published or securities dealers’
market values.
Mortgage-backed securities are securities issued in the secondary market that are collateralized by
pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-
through” certificates because the principal and interest of the underlying loans is “passed through” to
investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities
typically are collateralized by pools of one- to four-family or multi-family mortgages. We invest
primarily in mortgage-backed securities backed by one- to four-family mortgages. The interest rate of the
security is lower than the interest rates of the underlying loans to allow for payment of servicing and
guaranty fees. Ginnie Mae, a United States Government agency, and government sponsored enterprises,
such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of
principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage
loans since there is an active trading market for such securities. In addition, mortgage-backed securities
may be used to collateralize our borrowings. Investments in mortgage-backed securities involve a risk
that actual payments will be greater or less than the prepayment rate estimated at the time of purchase,
which may require adjustments to the amortization of any premium or accretion of any discount relating
to such interests, thereby affecting the net yield on our securities.
Sources of Funds
General. Deposits traditionally have been our primary source of funds for our investment and
lending activities. We also borrow from the Federal Home Loan Bank and from securities dealers
through securities sold under agreements to repurchase to supplement cash flow needs, to lengthen the
maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our
additional sources of funds are loan repayments, maturing investments, retained earnings, income on
other earning assets and the proceeds of loan and security sales.
Deposits. We accept deposits primarily from the areas in which our offices are located. We rely
on our competitive pricing and products, convenient locations and quality customer service to attract and
retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our
deposit accounts consist of passbook and statement savings accounts, certificates of deposit, money
market accounts, commercial and regular checking accounts and Super NOW accounts. Historically, we
have not accepted brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a
periodic basis. Deposit rates and terms are based primarily on current operating strategies, market interest
rates, liquidity requirements and our deposit growth goals.
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank and funds
borrowed from securities sold under agreements to repurchase. At December 31, 2015, our Federal Home
Loan Bank advances totaled $69.0 million, or 4.3% of total liabilities and securities sold under
agreements to repurchase totaled $55.0 million, or 3.4% of total liabilities. At December 31, 2015, we
had access to additional Federal Home Loan Bank advances of up to $555.1 million. Advances from the
Federal Home Loan Bank are secured by our investment in the common stock of the Federal Home Loan
Bank as well as by a blanket pledge on our assets not otherwise pledged. Securities sold under
agreements to repurchase are secured by mortgage-backed securities.
9
Subsidiary Activities
Territorial Savings Bank owns 100% of the common stock of Territorial Financial Services, Inc.,
a Hawaii corporation that engages primarily in insurance activities. At December 31, 2015, Territorial
Savings Bank’s investment in Territorial Financial Services, Inc. was $12,000, and Territorial Financial
Services, Inc. had assets of $78,000 at that date. Territorial Savings Bank also owns 100% of the
common stock of Territorial Real Estate Co., Inc., an inactive Hawaii corporation that is authorized to
manage and dispose of problem real estate.
Personnel
As of December 31, 2015, we had 269 full-time employees and 11 part-time employees. Our
employees are not represented by any collective bargaining group. Management believes that we have a
good working relationship with our employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Territorial Bancorp Inc. and Territorial Savings Bank are subject to federal income
taxation in the same general manner as other corporations, with some exceptions discussed below. The
following discussion of federal taxation is intended only to summarize material federal income tax
matters and is not a comprehensive description of the tax rules applicable to Territorial Bancorp Inc. and
Territorial Savings Bank.
Method of Accounting. For federal income tax purposes, Territorial Bancorp Inc. currently
reports its income and expenses on the accrual method of accounting and uses a tax year ending
December 31st for filing its consolidated federal income tax returns.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative
minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to
as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent
alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in
general, offset no more than 90% of alternative minimum taxable income. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities in future years. At
December 31, 2015 and 2014, Territorial Bancorp Inc. had no alternative minimum tax credit
carryforward.
Net Operating Loss Carryovers. A financial institution may carry back net operating losses to
the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2015
and 2014, Territorial Savings Bank had no net operating loss carryforward for federal income tax
purposes.
Corporate Dividends. We may exclude from our income 100% of dividends received from
Territorial Savings Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns. Territorial Bancorp Inc.’s 2011 federal income tax return was audited in
2013. The audit did not result in any material changes to the federal income tax return.
10
State Taxation
Territorial Bancorp Inc. and Territorial Savings Bank are subject to a franchise tax imposed under
Hawaii law at a rate of 7.92% of net income. The net income to which the tax rate is applied is
determined in a manner consistent with the taxable income determined for federal purposes with some
adjustments. The principal adjustment to federal taxable income is the inclusion of interest received on
municipal bonds in gross income for Hawaii franchise tax purposes.
Territorial Bancorp Inc.’s state franchise tax returns have not been audited in the most recent five-
year period.
General
SUPERVISION AND REGULATION
On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii
state-chartered savings bank. In addition, on July 10, 2014, Territorial Savings Bank became a member
of the Federal Reserve System. As a result of these actions, Territorial Savings Bank is examined and
supervised by the Hawaii Division of Financial Institutions, as its primary state regulator, and by the
Board of Governors of the Federal Reserve System, or Federal Reserve Board, as its primary federal
regulator. Territorial Savings Bank is also subject to examination by the Federal Deposit Insurance
Corporation, its deposit insurer, under certain circumstances. This regulation and supervision establishes
a comprehensive framework of activities in which an institution may engage and is intended primarily for
the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and
not for the protection of security holders. Under this system of state and federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable standards with respect to their
capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The
Hawaii Division of Financial Institutions and the Federal Reserve Board examine Territorial Savings
Bank and prepare reports for the consideration of the Bank’s Board of Directors on any operating
deficiencies. Territorial Savings Bank’s relationship with its depositors and borrowers also is regulated to
a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the
ownership of deposit accounts and the form and content of Territorial Savings Bank’s loan documents.
Any change in these laws or regulations, whether by the Hawaii Division of Financial
Institutions, the Federal Reserve Board, the Federal Deposit Insurance Corporation or Congress, could
have a material adverse impact on Territorial Bancorp Inc., Territorial Savings Bank and their operations.
Territorial Bancorp Inc. maintained its status as a savings and loan holding company in
connection with Territorial Savings Bank’s charter conversion. Accordingly, Territorial Bancorp Inc. is
required to file certain reports with, is subject to examination by, and otherwise must comply with the
rules and regulations of the Federal Reserve Board. Territorial Bancorp Inc. is also subject to the rules
and regulations of the Securities and Exchange Commission under the federal securities laws.
Certain of the regulatory requirements that are applicable to Territorial Savings Bank and
Territorial Bancorp Inc. are described below. This description of statutes and regulations is not intended
to be a complete description of such statutes and regulations and their effects on Territorial Savings Bank
and Territorial Bancorp Inc. and is qualified in its entirety by reference to the actual statutes and
regulations.
11
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), signed
into law in 2010, eliminated our then-primary federal regulator, the Office of Thrift Supervision, by
merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency (the primary
federal regulator for national banks). The Office of the Comptroller of the Currency assumed the
responsibility for examining, regulating and enforcing laws and regulations against federal savings banks
effective July 21, 2011. The legislation also established a Financial Services Oversight Council and
granted the Board of Governors of the Federal Reserve System exclusive authority to regulate all bank
and thrift holding companies. As a result, Territorial Bancorp Inc. became subject to supervision by the
Federal Reserve Board as opposed to the Office of Thrift Supervision. Compliance with new regulations
and being supervised by one or more new regulatory agencies could increase our expenses.
The Dodd-Frank Act also created a new agency, the Consumer Financial Protection Bureau, as an
independent bureau of the Federal Reserve Board, to take over the implementation of federal consumer
financial protection and fair lending laws from the depository institution regulators. However, institutions
with $10 billion or fewer in assets, such as Territorial Savings Bank, continue to be examined for
compliance with such laws and regulations by the Federal Reserve Board, its primary banking regulator,
rather than the Consumer Financial Protection Bureau.
The Dodd-Frank Act contained the so-called “Volcker Rule,” which generally prohibits banking
organizations from engaging in proprietary trading and from investing in, sponsoring or having certain
relationships with hedge or private equity funds (“covered funds”). On December 13, 2013, the federal
agencies issued a final rule implementing the Volcker Rule which, among other things, requires banking
organizations to restructure and limit certain of their investments in and relationships with covered funds.
The final rule unexpectedly included within the interests subject to its restrictions collateralized debt
obligations backed by trust-preferred securities (“TruPS CDOs”). Many banking organizations, including
Territorial Savings Bank, had purchased such instruments because of their favorable tax, accounting and
regulatory treatment and would have been subject to unexpected write-downs. In response to concerns
expressed by community banking organizations, the federal agencies subsequently issued an interim final
rule which grandfathers TruPS CDOs issued before May 19, 2010 if (i) acquired by a banking
organization on or before December 10, 2013 and (ii) the organization reasonably believed the proceeds
from the TruPS CDOs were invested primarily in any trust preferred security or subordinated debt
instrument issued by a depository institution holding company with less than $15 billion in assets or by a
mutual holding company. Territorial Savings Bank’s investment in TruPS CDOs is grandfathered by
these new provisions and is further discussed in this 10-K report.
Federal Banking Regulation
Capital Requirements. Federal regulations require federally insured depository institutions to
meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of
4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%,
and a 4% Tier 1 capital to total assets leverage ratio. The current capital requirements were effective
January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee
on Banking Supervision (BASEL III) and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital
ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit
substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on
the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories
believed to present greater risk. Common equity Tier 1 capital is generally defined as common
stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1
and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred
12
stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total
capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified
requirements, and may include cumulative preferred stock and long-term perpetual preferred stock,
mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in
Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted
assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated
other comprehensive income, up to 45% of net unrealized gains on available-for-sale equity securities
with readily determinable fair market values. Calculation of all types of regulatory capital is subject to
deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the
Federal Reserve Bank takes into consideration, not only these numeric factors, but qualitative factors as
well, and has the authority to establish higher capital requirements for individual institutions where
deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit
capital distributions and certain discretionary bonus payments to management if the institution does not
hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted
asset above the amount necessary to meet its minimum risk-based capital requirements. The capital
conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted
assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
At December 31, 2015, Territorial Savings Bank’s regulatory capital was considered to be well
capitalized under the revised capital requirements, which became effective on January 1, 2015.
Prompt Corrective Action Regulations. Under prompt corrective action regulations, the Federal
Reserve Board is authorized and, under certain circumstances, required to take supervisory actions against
undercapitalized member banks. The extent of supervisory action depends upon the degree of the
institution’s undercapitalization. For this purpose, a member bank is placed in one of the following five
categories based on the bank’s capital:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total
risk-based capital and 6.5% common equity Tier 1 risk-based capital);
adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8%
total risk-based capital and 4.5% common equity Tier 1 risk-based capital);
undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total
risk-based capital or 4.5% common equity Tier 1 risk-based capital);
significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based
capital, 6% total risk-based capital or 3% common equity Tier 1 risk-based capital); and
critically undercapitalized (less than 2% tangible capital).
At December 31, 2015, Territorial Savings Bank met the criteria for being considered “well-
capitalized.”
Capital Distributions. Federal Reserve member banks must receive the prior approval of the
Federal Reserve Board to pay dividends: (i) in an amount that exceeds the sum of the bank’s net income
during the calendar year and retained net income of the prior two calendar years or (ii) that would exceed
the bank’s undivided profits. Even if an application is not otherwise required, every savings bank that is a
13
subsidiary of a savings and loan holding company must file a notice with the Federal Reserve Board at
least 30 days before the Board of Directors declares a dividend.
The Federal Reserve Board may disapprove a notice or application if:
(cid:120)
(cid:120)
(cid:120)
the savings bank would be undercapitalized following the distribution;
the proposed dividend raises safety and soundness concerns; or
the dividend would violate a prohibition contained in any statute, regulation with a
federal banking regulatory agency or any formal or informal enforcement action.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall
not make any capital distribution if, after making such distribution, the institution would be
undercapitalized.
Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility
under the Community Reinvestment Act and related federal regulations to help meet the credit needs of
their communities, including low- and moderate-income borrowers. In connection with its examination
of a state member bank, the Federal Reserve Board is required to assess the savings bank’s record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such
as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by the Federal Reserve
Board, as well as other federal regulatory agencies and the Department of Justice. The Community
Reinvestment Act requires all Federal Deposit Insurance Corporation-insured institutions to publicly
disclose their rating. Territorial Savings Bank received a “satisfactory” Community Reinvestment Act
rating in its most recent federal examination.
Insurance of Deposit Accounts. Territorial Savings Bank’s deposits are insured up to applicable
limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Deposit insurance
per account owner is $250,000.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors, with less risky institutions paying lower assessments. An institution’s
assessment rate depends upon the category to which it is assigned, and certain adjustments specified by
Federal Deposit Insurance Corporation regulations. The Federal Deposit Insurance Corporation may
adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base
scale without notice and comment. No institution may pay a dividend if in default of the federal deposit
insurance assessment.
The Dodd-Frank Act required the Federal Deposit Insurance Corporation to revise its procedures
to base its assessments upon total assets less tangible equity instead of deposits. The Federal Deposit
Insurance Corporation finalized a rule, effective April 1, 2011, that changed the assessment range to 2.5
to 45 basis points of total assets less tangible equity.
14
In addition to the assessment for deposit insurance, institutions are required to make payments on
bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit
insurance fund. That payment is established quarterly and during the quarter ended December 31, 2015,
equaled 0.60 basis points of total assets less tangible capital.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of
estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance
Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets
of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5%
maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation,
and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range
fund ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A
significant increase in insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. Management cannot predict what insurance assessment rates will
be in the future.
Federal Home Loan Bank System. Territorial Savings Bank is a member of the Federal Home
Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The Federal Home
Loan Bank System provides a central credit facility primarily for member institutions as well as other
entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Des
Moines, Territorial Savings Bank is required to acquire and hold shares of capital stock in the Federal
Home Loan Bank. As of December 31, 2015, Territorial Savings Bank held $4.8 million of capital stock
in the Federal Home Loan Bank of Des Moines and was in compliance with this requirement.
Hawaii Banking Regulation
Authority granted by Hawaii laws includes accepting and holding deposits, borrowing from any
source, making loans and extensions of credit of any kind, investing in service corporation subsidiaries
engaged in activities permissible for service corporations of federal savings banks and engaging in other
activities that are usual or incidental to the business of a savings bank. Hawaii law requires that at least
50% of a savings bank’s loans and extensions of credit be secured by real estate. In addition, certain
commercial loans are limited to 15% of the savings bank’s assets and education loans are limited to 10%
of assets.
Hawaii law generally limits a savings bank’s capital distributions to the amount of its retained
earnings.
Hawaii has a parity statute, which provides Hawaii savings banks with authority to engage in any
activity permitted by federal law for federal savings banks, upon receiving the approval of the
Commissioner. Territorial Savings Bank received such approval when it converted from a federal savings
bank to a Hawaii savings bank.
Other Regulations
Territorial Savings Bank’s operations are also subject to federal laws applicable to credit
transactions, such as the:
(cid:120)
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
15
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for
one- to four-family residential real estate receive various disclosures, including good faith
estimates of settlement costs, lender servicing and escrow account practices, and
prohibiting certain practices that increase the cost of settlement services;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit
reporting agencies;
fair lending laws;
Unfair or Deceptive Acts or Practices (“UDAP”) laws and regulations;
Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies;
Truth in Savings Act; and
rules and regulations of the various federal agencies charged with the responsibility of
implementing such federal laws.
The operations of Territorial Savings Bank are further subject to the:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern
automatic deposits to and withdrawals from deposit accounts and customers’ rights and
liabilities arising from the use of automated teller machines and other electronic banking
services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives
“substitute checks,” such as digital check images and copies made from that image, the
same legal standing as the original paper check;
The USA PATRIOT Act, which requires savings banks to, among other things, establish
broadened anti-money laundering compliance programs, due diligence policies and
controls to ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign
Assets Control regulations; and
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer
financial information by financial institutions with unaffiliated third parties. Specifically,
16
the Gramm-Leach-Bliley Act requires all financial institutions offering financial products
or services to retail customers to provide such customers with the financial institution’s
privacy policy and provide such customers the opportunity to “opt out” of the sharing of
certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. Territorial Bancorp Inc. is a nondiversified savings and loan holding company within
the meaning of the Home Owners’ Loan Act. As such, Territorial Bancorp Inc. is registered with the
Federal Reserve Board and subject to Federal Reserve Board regulations, examinations, supervision and
reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Territorial
Bancorp Inc. and its subsidiaries. Among other things, this authority permits the Federal Reserve Board
to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings
institution. The Dodd-Frank Act regulatory restructuring transferred the responsibility for regulating and
supervising savings and loan holding companies from the Office of Thrift Supervision to the Federal
Reserve Board, effective July 21, 2011.
Permissible Activities. The business activities of Territorial Bancorp Inc. are generally limited to
those activities permissible for financial holding companies under Section 4(k) of the Bank Holding
Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial
holding company may engage in activities that are financial in nature, including underwriting equity
securities and insurance as well as activities that are incidental to financial activities or complementary to
a financial activity. The Dodd-Frank Act added that any savings and loan holding company that engages
in activities permissible for a financial holding company must meet the qualitative requirements for a
bank holding company to be a financial holding company and conduct the activities in accordance with
the requirements that would apply to a financial holding company’s conduct of the activity. A multiple
savings and loan holding company is generally limited to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.
Federal law prohibits a savings and loan holding company, including Territorial Bancorp Inc.,
directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another
savings institution or holding company thereof, without prior written approval of the Federal Reserve
Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature,
or acquiring or retaining control of an institution that is not federally insured. In evaluating applications
by holding companies to acquire savings institutions, the Federal Reserve Board must consider the
financial and managerial resources, future prospects of the company and institution involved, the effect of
the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the
community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in more than one state, subject
to two exceptions:
(i)
(ii)
the approval of interstate supervisory acquisitions by savings and loan holding
companies; and
the acquisition of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisition.
17
The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Capital. Savings and loan holding companies have historically not been subject to specific
regulatory capital requirements. The Dodd-Frank Act required the Federal Reserve Board to promulgate
consolidated capital requirements for depository institution holding companies that are no less stringent,
both quantitatively and in terms of components of capital, than those applicable to institutions themselves.
Instruments such as cumulative preferred stock and trust preferred securities are no longer includable as
Tier 1 capital, as was previously the case with bank holding companies, subject to certain grandfathering.
The previously discussed final rule regarding regulatory capital requirements implements this Dodd-
Frank Act requirement as to savings and loan holding companies. Consolidated regulatory capital
requirements identical to those applicable to the subsidiary depository institutions applied to savings and
loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital
conservation buffer for savings and loan holding companies will be phased in between 2016 and 2019.
Source of Strength. The Dodd-Frank Act also extended the “source of strength” doctrine to
savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all
bank and savings and loan holding companies serve as a source of strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of financial stress.
Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement
regarding the payment of dividends and the repurchase of shares of common stock by bank and savings
and loan holding companies. In general, the policy provides that dividends should be paid only out of
current earnings and only if the prospective rate of earnings retention by the holding company appears
consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory
guidance provides for prior regulatory review of capital distributions in certain circumstances, such as
where the company's net income for the past four quarters, net of dividends previously paid over that
period, is insufficient to fully fund the dividend. The guidance also provides for prior regulatory review
where the company's overall rate of earnings retention is inconsistent with the company's capital needs
and overall financial condition. The ability of a holding company to pay dividends may be restricted if a
subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior
to a holding company redeeming or repurchasing regulatory capital instruments when the holding
company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual
preferred stock that would result in a net reduction in the amount of such equity instruments outstanding
as of the end of a quarter compared with the beginning of the quarter in which the redemption or
repurchase occurred. These regulatory policies could affect the ability of Territorial Bancorp Inc. to pay
dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a savings and loan
holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior
written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration
certain factors, including the financial and managerial resources of the acquirer and the competitive
effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding
irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the
election of a majority of the company’s directors, or a determination by the regulator that the acquirer has
the power to direct, or directly or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding
company’s voting stock constitutes a rebuttable presumption of control under the regulations under
18
certain circumstances including where, as is the case with Territorial Bancorp Inc., the issuer has
registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal Securities Laws
Territorial Bancorp Inc.’s common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Territorial Bancorp Inc. is subject to the
information, proxy solicitation, insider trading restrictions and other requirements under the Securities
Exchange Act of 1934.
Territorial Bancorp Inc. common stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of Territorial Bancorp Inc. may not be resold without registration
unless sold in accordance with certain resale restrictions. If Territorial Bancorp Inc. meets specified
current public information requirements, each affiliate of Territorial Bancorp Inc. is able to sell in the
public market, without registration, a limited number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing
and accounting, executive compensation, and enhanced and timely disclosure of corporate information.
We have prepared policies, procedures and systems designed to ensure compliance with the Sarbanes-
Oxley Act and related regulations.
ITEM 1A. Risk Factors
Historically low interest rates may adversely affect our net interest income and profitability.
In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at
historically low levels through its targeted federal funds rate and the purchase of mortgage-backed
securities. As a result, interest rates on the loans we have originated and the yields on securities we have
purchased have been at lower levels than available prior to 2008. As a general matter, our interest-bearing
liabilities reprice or mature more quickly than our interest-earning assets, which has been one factor
contributing to the increase in our interest rate spread as interest rates decreased. However, our ability to
lower our interest expense continues to be limited since our cost of funds at December 31, 2015 is
relatively low while the average yield on our interest-earning assets may continue to decrease as our
higher yielding loans and securities are paid off. Accordingly, our net interest income may be adversely
affected and may even decrease, which may have an adverse effect on our profitability.
Future changes in interest rates could reduce our profits.
Our ability to make a profit largely depends on our net interest income, which could be negatively
affected by changes in interest rates. Net interest income is the difference between:
(cid:120)
(cid:120)
the interest income we earn on our interest-earning assets, such as loans and securities;
and
the interest expense we pay on our interest-bearing liabilities, such as deposits and
borrowings.
19
As a result of our focus on one- to four-family residential real estate loans and the low demand
for adjustable-rate loans in our market area, the interest rates we earn on our loans are generally fixed for
long periods of time. Additionally, many of our securities investments are of long maturities with fixed
interest rates. Like many savings institutions, our focus on deposit accounts as a source of funds, which
have no stated maturity date or shorter contractual maturities than loans, results in our liabilities having a
shorter duration than our assets. For example, as of December 31, 2015, 93.5% of our loans had
maturities of 15 years or longer, while 73.7% of our certificates of deposits had maturities of one year or
less. This imbalance can create significant earnings volatility, because market interest rates change over
time. In a period of rising interest rates, the interest income earned on our assets, such as loans and
investments, likely will not increase as rapidly as the interest paid on our liabilities, such as deposits. In a
period of declining interest rates, the interest income earned on our assets likely will decrease more
rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans and mortgage-backed
securities, thereby requiring us to reinvest these cash flows at lower interest rates. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management
of Market Risk.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and
related securities and the fair value of mortgage servicing assets. A reduction in interest rates results in
increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their
debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may
not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it
more difficult for borrowers to repay adjustable-rate loans. Potential reduction, or impairment, to the fair
value of mortgage servicing assets generally occurs as market interest rates decline. Alternatively, an
increase in market interest rates generally causes an increase in the fair value of mortgage servicing
assets.
Changes in interest rates also affect the current fair value of our interest-earning securities
portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December
31, 2015, the fair value of our investment in held-to-maturity securities totaled $498.0 million. Net
unrealized gains on these securities totaled $4.9 million at December 31, 2015.
At December 31, 2015, our “rate shock” analysis indicated that our economic value of equity (the
difference between the market value of our assets and the market value of our liabilities with adjustments
made for off-balance sheet items) would decrease by $9.7 million if there was an instantaneous 200 basis
point increase in market interest rates. See “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Management of Market Risk.”
Our lending activities provide lower interest rates than financial institutions that originate more
commercial loans.
Our principal lending activity consists of originating one- to four-family residential real estate
mortgage loans. As of December 31, 2015, these loans totaled $1.146 billion or 95.9% of total loans. We
originate our loans with a focus on limiting credit risk and not to generate the highest return or create the
greatest difference between the yield on our interest-earning assets and our cost of funds (interest rate
spread).
Residential real estate mortgage loans generally have lower interest rates than commercial
business loans, commercial real estate loans and consumer loans. As a result, we may generate lower
interest rate spreads and rates of return when compared to our competitors who originate more consumer
or commercial loans than we do. We intend to continue our focus on residential real estate lending.
20
We could record future losses on our holding of a trust preferred security that we purchased from
an issuer pool consisting primarily of financial institution holding companies. In addition, we may
not receive full future principal or interest payments, or both, on this security.
We owned a share of trust preferred security PreTSL XXIII with an adjusted cost basis and fair
value of $916,000 at December 31, 2015. PreTSL XXIII is a debt obligations issued by an issuer pool
(Preferred Term Securities XXIII, Ltd. co-marketed by Keefe, Bruyette & Woods, Inc. and FTN Financial
Capital Markets) consisting primarily of holding companies for Federal Deposit Insurance Corporation-
insured financial institutions. This security is a Class D security, and was originated with a credit rating
of BBB. As of December 31, 2015, PreTSL XXIII is rated C by Fitch.
Our investment in PreTSL XXIII was determined to be other-than-temporarily impaired as the
present value of cash flows was lower than the amortized cost basis of the security. We recorded an
impairment charge of $2.4 million in the year ended December 31, 2010. When the impairment charge
of $2.4 million on PreTSL XXIII was recorded, the security was written down to its fair value of $32,000.
The book value of our investment in PreTSL XXIII has risen from $32,000 to $916,000 based on an
increase in fair value which has occurred with an increase in the present value of cash flows from this
security. The $1.1 million difference between the original outstanding principal balance of $3.5 million
and the impairment charge of $2.4 million was reported as other comprehensive loss and is related to
noncredit factors such as an inactive trust preferred securities market.
It is reasonably possible that the fair value of PreTSL XXIII could decline in the near term if the
overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of
this security remains low. As a result, there is a risk that the Company’s remaining amortized cost basis
of $1.1 million in PreTSL XXIII could be credit-related other-than-temporarily impaired in the near term.
The impairment could be material to the Company’s consolidated statement of income.
A number of factors or combinations of factors could cause us to conclude in one or more future
reporting periods that an unrealized loss that exists with respect to PreTSL XXIII constitutes an
impairment that is other than temporary, which could result in material losses to us. These factors
include, but are not limited to, continued failure to make scheduled interest or principal payments, an
increase in the severity of the unrealized loss, an increase in the continuous duration of the unrealized loss
without an improvement in value or changes in market conditions and/or industry or issuer specific
factors that would render us unable to forecast a full recovery in value. In addition, the fair value of
PreTSL XXIII could decline if the overall economy and the financial condition of some of the issuers
deteriorate further and there remains limited liquidity for this security.
For the year ended December 31, 2015, we received no interest payments on the trust preferred
security. The continued failure of the trust preferred issuers to make interest payments for any quarter
will reduce our earnings during that quarter.
21
The following table sets forth information with respect to this security as of December 31, 2015:
Pool Deal
Name
Book Value
Fair Value
Unrealized
Gain
Credit
Rating
Number of
Financial
Institutions
in Pool
Deferrals
and
Defaults as
a % of
Collateral
(Dollars in Thousands)
$
PreTSL
XXIII
_____________________________
(1) Estimated present value of future cash flows in excess of amortized cost basis, assuming that 50% of the
21.9%
916
916
101
C
-
$
$
Excess
Subordination
(1)
$
-
security collateral is called in the 10th year following issuance.
Changes in governmental programs or continuation and/or worsening of prevailing economic
conditions could adversely affect our financial condition and results of operations.
In October 2014, the Federal Reserve Board reported that conditions in the labor market have
improved and the nation’s unemployment rate has declined. Household spending has risen moderately
and business investment is advancing while the recovery in the housing market remains slow. The
Federal Reserve Board also indicated in October 2014 that it would no longer be buying mortgage-backed
securities to increase the size of its securities portfolio. The Federal Reserve Board will continue to
reinvest principal repayments on its securities portfolio into mortgage-backed securities. The change in
the Federal Reserve Board’s securities purchase program could result in higher interest rates and reduced
economic activity. Moreover, a return to prolonged deteriorating economic conditions could significantly
affect the markets in which we do business, the value of our loans and investments, and our ongoing
operations, costs and profitability. Declines in real estate values and sales volumes and increases in
unemployment levels may result in greater loan delinquencies, increases in our nonperforming, criticized
and classified assets and a decline in demand for our products and services. These events may cause us to
incur losses and may adversely affect our financial condition and results of operations.
Changes in laws and regulations and the cost of regulatory compliance with new laws and
regulations may adversely affect our operations and our income.
In response to the developments described above, Congress has taken actions that are intended to
strengthen confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance
Corporation has taken actions to increase insurance coverage on deposit accounts. In addition, there have
been proposals made by members of Congress and others that would reduce the amount distressed
borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an
institution’s ability to foreclose on mortgage collateral.
The potential exists for additional federal or state laws and regulations, or changes in policy,
regarding lending and funding practices and liquidity standards, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders. Bank regulatory agencies, such as the Federal
Reserve Board, the Hawaii Division of Financial Institutions and the Federal Deposit Insurance
Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and
not for the protection or benefit of potential investors. In addition, new laws, regulations and other
regulatory changes may increase our costs of regulatory compliance and of doing business, and otherwise
affect our operations. New laws, regulations, and other regulatory changes may significantly affect the
22
markets in which we do business, the markets for and value of our loans and investments, and our
ongoing operations, costs and profitability. Federal and state proposals limiting our rights as a creditor
could result in credit losses or increased expense in pursuing our remedies as a creditor.
Nonresidential real estate loans and commercial business loans increase our exposure to credit
risks.
At December 31, 2015, our portfolio of commercial real estate, construction and other
nonresidential real estate loans totaled $19.3 million, or 1.6% of total loans. In addition, at December 31,
2015, our portfolio of commercial business loans totaled $3.8 million, or 0.3% of total loans. These loans
generally expose us to a greater risk of nonpayment and loss than residential real estate loans because
repayment of such loans often depends on the successful operations and income stream of the borrowers.
Additionally, such loans typically involve larger loan balances to single borrowers or groups of related
borrowers compared to residential real estate loans.
We target our business lending and marketing strategy towards small- to medium-sized
businesses. These small- to medium-sized businesses generally have fewer financial resources in terms of
capital or borrowing capacity than larger entities. If general economic conditions adversely affect these
businesses, our results of operations and financial condition may be negatively impacted. In addition,
some of our commercial business loans are collateralized by a security interest in furniture, fixtures and
equipment and the liquidation of collateral in the event of default is often an insufficient source of
repayment because the collateral may have limited use or value.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we
compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment banking firms operating
locally. Some of our competitors have greater name recognition and market presence that benefit them in
attracting business, and offer certain services that we do not or cannot provide. In addition, larger
competitors may be able to price loans and deposits more aggressively than we do, which could affect our
ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued
ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or
lower interest rates charged on our loans, our net interest margin and profitability could be adversely
affected. For additional information see “Item 1. Business—Competition.”
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will
decrease.
We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. In determining the amount of the allowance for loan
losses, we review our loans and our loss and delinquency experience, and we evaluate economic
conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover
probable incurred losses in our loan portfolio, resulting in additions to our allowance. While our
allowance for loan losses was 0.2% of total loans at December 31, 2015, material additions to our
allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us
to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our
23
allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a
material adverse effect on our financial condition and results of operations.
Our employee stock ownership plan may continue to increase our costs, which would reduce our
income.
Our employee stock ownership plan purchased 8% of the total shares of common stock sold
in our stock offering using funds borrowed from Territorial Bancorp Inc. We record annual employee
stock ownership plan expense in an amount equal to the fair value of the shares of common stock
released to employees over the term of the loan. If the value of the shares of common stock
continues to appreciate up to the time shares are released, compensation expense relating to the
employee stock ownership plan will increase and our net income will decline.
Our 2010 Equity Incentive Plan has increased our expenses and reduced our income, and may
dilute your ownership interests.
In August 2010, our stockholders approved the Territorial Bancorp Inc. 2010 Equity Incentive
Plan. Stockholders approved the issuance of 736,434 shares of common stock pursuant to restricted stock
and the issuance of 976,203 shares of common stock pursuant to stock options. During 2015, we
recognized $2.7 million in noninterest expense relating to this stock benefit plan.
We may fund the 2010 Equity Incentive Plan either through open market purchases or from the
issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common
stock to fund this plan will be subject to many factors, including, but not limited to, applicable regulatory
restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our
capital levels, alternative uses for our capital and our financial performance. Our intention is to fund the
plan through open market purchases and we have repurchased 3,099,253 shares as of December 31, 2015.
However, stockholders would experience a reduction in ownership interest in the event newly issued
shares of our common stock are used to fund stock options and restricted stock awards.
Concentration of loans in our primary market area may increase risk.
Our success depends primarily on the general economic conditions in the State of Hawaii, as
nearly all of our loans are to customers in the state. Accordingly, the economic conditions in the State of
Hawaii have a significant impact on the ability of borrowers to repay loans as well as our ability to
originate new loans. As such, a decline in real estate valuations in this market would lower the value of
the collateral securing those loans. In addition, significant weakening in general economic conditions
such as inflation, recession, unemployment or other factors beyond our control could negatively affect our
financial results.
Our local economy relies heavily on the tourism industry. Downturns in this industry could affect
our operations and results.
Tourism is the largest sector of Hawaii’s economy. The Hawaii Tourism Authority reported
visitor arrivals and visitor spending grew by 4.1% and 2.3%, respectively, in 2015 compared to 2014. A
downturn in the tourism industry, and the related loss of jobs or operating income for businesses, could
have a significant impact on our ability to originate loans, and the ability of borrowers to repay loans,
either of which could adversely affect our financial condition and results of operations.
24
Proposed reductions in defense spending by the federal government could have a detrimental
impact on Hawaii’s economy.
The defense industry is the second largest contributor to Hawaii’s economy after the visitor
industry, contributing $7.6 billion and creating thousands of jobs for residents of the State. The amount
spent by the defense industry represents 9.9% of the State’s gross domestic product. Proposals to cut
defense and other general spending could have an adverse impact on Hawaii’s economy, which could
adversely affect our financial condition and results of operations.
We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive regulation and supervision. Regulators have
intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money
laundering and Bank Secrecy Act compliance requirements. There also is increased scrutiny of our
compliance practices generally and particularly with the rules enforced by the Office of Foreign Assets
Control. Our failure to comply with these and other regulatory requirements could lead to, among other
remedies, administrative enforcement actions and legal proceedings. In addition, the Dodd-Frank Act and
implementing regulations are likely to have a significant effect on the financial services industry, which
are likely to increase operating costs and reduce profitability. Regulatory or legislative changes could
make regulatory compliance more difficult or expensive for us, and could cause us to change or limit
some of our products and services, or the way we operate our business.
Severe weather, natural disasters and other external events could significantly affect our operations
and results.
Because all of our office locations are in the State of Hawaii, severe weather or natural disasters,
such as tsunamis, volcanic eruptions, hurricanes and earthquakes and other adverse external events, could
have a significant effect on our ability to conduct business. Such events could affect the stability of our
deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral
securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur
additional expenses. Natural disasters, like the tsunami that occurred in Japan in 2011, could have an
impact on the visitor industry in Hawaii. Accordingly, the occurrence of any such severe weather or
natural disaster event could have a material adverse effect on our business, which, in turn, could adversely
affect our financial condition and results of operations.
We have become subject to more stringent capital requirements, which may adversely impact our
return on equity, require us to raise additional capital, or constrain us from paying dividends or
repurchasing shares.
A final capital rule that became effective for financial institutions on January 1, 2015, includes
new minimum risk-based capital and leverage ratios, and refines the definition of what constitutes
“capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new
common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased
from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio
of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the
following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based
assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer
requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases
each year until fully implemented in January 2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below
25
the buffer amount. These limitations will establish a maximum percentage of eligible retained income that
can be utilized for such actions.
Territorial Savings Bank and Territorial Bancorp Inc. met all of these new requirements,
including the full 2.5% capital conservation buffer, as if these new requirements had been fully phased in
as of December 31, 2015.
The application of more stringent capital requirements could, among other things, result in lower
returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be
unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in
connection with the implementation of Basel III could result in our having to lengthen the term of our
funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of
changes to asset risk weightings for risk-based capital calculations, items included or deducted in
calculating regulatory capital and/or additional capital conservation buffers could result in management
modifying its business strategy, and could limit our ability to make distributions, including paying out
dividends or buying back shares. Specifically, beginning in 2016, Territorial Savings Bank’s ability to
pay dividends will be limited if it does not have the capital conservation buffer required by the new
capital rules, which may limit our ability to pay dividends to stockholders. See “Supervision and
Regulation—Federal Banking Regulation—Capital Distributions.”
Territorial Savings Bank became a member of the Federal Reserve Bank of San Francisco in July
2014. The Federal Reserve Bank, as a condition of membership, requires that Territorial Savings Bank
maintain a Tier 1 capital ratio of at least 9.0% for the next three years.
Government responses to economic conditions may adversely affect our operations, financial
condition and earnings.
Newly enacted financial reform legislation has changed the bank regulatory framework, creating
an independent consumer protection bureau that will assume the consumer protection responsibilities of
the various federal banking agencies, and establish more stringent capital standards for banks and bank
holding companies. The legislation has resulted in new regulations affecting the lending, funding, trading
and investment activities of banks and bank holding companies. Bank regulatory agencies also have been
responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty
and adverse developments in the financial services industry and the domestic and international credit
markets, and the effect of new legislation and regulatory actions in response to these conditions, may
adversely affect our operations by restricting our business activities, including our ability to originate or
sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to
increase our costs of doing business and may have a significant adverse effect on our lending activities,
financial performance and operating flexibility. In addition, these risks could affect the performance and
value of our loan and investment securities portfolios, which also would negatively affect our financial
performance.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the
overall economy, has, among other things, kept interest rates low through its targeted federal funds rate
and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds
rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S.
economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs,
could have a significant negative effect on our borrowers, especially our business borrowers, and the
values of underlying collateral securing loans, which could negatively affect our financial performance.
26
Noncompliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations
could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to
prevent financial institutions from being used for money laundering and terrorist activities. If such
activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S.
Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to
establish procedures for identifying and verifying the identity of customers seeking to open new financial
accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year,
several banking institutions have received large fines for non-compliance with these laws and regulations.
While we have developed policies and procedures designed to assist in compliance with these laws and
regulations, these policies and procedures may not be effective in preventing violations of these laws and
regulations.
The building of market share through de novo branching could cause our expenses to increase
faster than revenues.
We intend to continue to build market share in the State of Hawaii through de novo branching.
Since 2010, we have opened three de novo branches including the most recent branch opened in 2013.
There are considerable costs involved in opening branches that generally require a period of time to
generate the necessary revenues to offset their costs, especially in areas in which we do not have an
established presence. Accordingly, any such business expansion can be expected to negatively impact our
earnings for some period of time until certain economies of scale are reached. Our expenses could be
further increased if we encounter delays in the opening of any of our new branches. Finally, our business
expansion may not be successful after establishment.
System failure or breaches of our network security could subject us to increased operating costs as
well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to protect our computer equipment against
damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event,
as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems
caused by hackers. Any damage or failure that causes an interruption in our operations could have a
material adverse effect on our financial condition and results of operations. Computer break-ins, phishing
and other disruptions could also jeopardize the security of information stored in and transmitted through
our computer systems and network infrastructure, which may result in significant liability to us and may
cause existing and potential customers to refrain from doing business with us. Although we, with the help
of third-party service providers, intend to continue to implement security technology and establish
operational procedures to prevent such damage, these security measures may not be successful. In
addition, advances in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms we and our third-party service
providers use to encrypt and protect customer transaction data. A failure of such security measures could
have a material adverse effect on our financial condition and results of operations.
We mitigate this risk through guidance promulgated for all financial institutions by the Federal
Financial Institutions Examination Council and the regulations issued under the Gramm-Leach-Bliley
Act. This guidance also requires our core data processor to meet these standards. We regularly self-audit
or review exams from auditors as well as federal banking regulators to assure that these standards are
being met, internally as well as by our important data processing vendors. We also implemented firewall
and other internal controls to protect our systems from compromise.
27
Nevertheless, our system could be compromised and it is possible that significant amounts of
time and money may be spent to rectify the harm caused by a breach or hack. While we have general
liability insurance and cyber liability insurance, we know there are limitations on coverage as well as
dollar amount. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally,
depending on the type of incident, banking regulators can impose restrictions on our business and
consumer laws may require reimbursement of customer loss.
Our risk management framework may not be effective in mitigating risk and reducing the potential
for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify,
measure, monitor, report and control our exposure to risk, including strategic, market, liquidity,
compliance and operational risks. While we use a broad and diversified set of risk monitoring and
mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence
or future development of currently unanticipated or unknown risks. Recent economic conditions and
heightened legislative and regulatory scrutiny of the financial services industry, among other
developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our
failure to properly anticipate and manage these risks.
Our business may be adversely affected by an increasing prevalence of fraud, including cyberfraud,
and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are
subject to exposure to the risk of loss due to fraud, including cyberfraud, and other financial
crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also
experienced losses due to apparent fraud and other financial crimes. While we have policies and
procedures designed to prevent such losses, losses may still occur.
Legal and regulatory proceedings and related matters could adversely affect us or the financial
services industry in general.
We, and other participants in the financial services industry upon whom we rely to operate, have
been and may in the future become involved in legal and regulatory proceedings. Most of the
proceedings we consider to be in the normal course of our business or typical for the industry; however, it
is inherently difficult to assess the outcome of these matters, and other participants in the financial
services industry or we may not prevail in any proceeding or litigation. There could be substantial cost
and management diversion in such litigation and proceedings, and any adverse determination could have
a materially adverse effect on our business, brand or image, or our financial condition and results of our
operations.
We are a community bank and our ability to maintain our reputation is critical to the success of
our business and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our
business. A key component of our business strategy is to rely on our reputation for customer service and
knowledge of local markets to expand our presence by capturing new business opportunities from existing
and prospective customers in our current market and contiguous areas. As such, we strive to conduct our
business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
employees who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. If our reputation is
28
negatively affected, by the actions of our employees, by our inability to conduct our operations in a
manner that is appealing to current or prospective customers, or otherwise, our business and operating
results may be adversely affected.
The corporate governance provisions in our articles of incorporation and bylaws, and the corporate
governance provisions under Maryland law, may prevent or impede the holders of our common
stock from obtaining representation on our Board of Directors and may impede takeovers of the
company that our board might conclude are not in the best interest of Territorial Bancorp Inc. or
its stockholders.
Provisions in our articles of incorporation and bylaws may prevent or impede holders of our
common stock from obtaining representation on our Board of Directors and may make takeovers of
Territorial Bancorp Inc. more difficult. For example, our Board of Directors is divided into three
staggered classes. A classified board makes it more difficult for stockholders to change a majority of the
directors because it generally takes at least two annual elections of directors for this to occur. Our articles
of incorporation include a provision that no person will be entitled to vote any shares of our common
stock in excess of 10% of our outstanding shares of common stock. This limitation does not apply to the
purchase of shares by a tax-qualified employee stock benefit plan established by us. In addition, our
articles of incorporation and bylaws restrict who may call special meetings of stockholders and how
directors may be removed from office. Additionally, in certain instances, the Maryland General
Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business
combination with a large stockholder, if the proposed transaction is not approved by a majority of our
directors.
Final regulations could restrict our ability to originate and sell loans.
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how
they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for
ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition
will be presumed to have complied with the new ability-to-repay standard. Under the Consumer
Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified
features, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
excessive upfront points and fees (those exceeding 3% of the total loan amount, less
“bona fide discount points” for prime loans);
interest-only payments;
negative-amortization; or
terms longer than 30 years.
Also, to qualify as a “qualified mortgage”, a loan must be made to a borrower whose total
monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income
and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a
fully amortizing payment schedule and maximum interest rate during the first five years, taking into
account all applicable taxes, insurance and assessments.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require
securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified
29
residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement.
The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the
definition of qualified mortgage issued by the Consumer Financial Protection Bureau for purposes of its
regulations.
These rules could have a significant effect on the secondary market for loans and the types of
loans we originate, and restrict our ability or desire to make certain types of loans or loans to certain
borrowers, which could limit our growth or profitability.
Our funding sources may prove insufficient to replace deposits at maturity and support our future
growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part
of our liquidity management, we use a number of funding sources in addition to core deposit growth and
repayments and maturities of loans and investments. As we continue to grow, we are likely to become
more dependent on these sources, which may include Federal Home Loan Bank advances, securities sold
under agreements to repurchase, proceeds from the sale of loans, federal funds purchased and brokered
certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty
or an inability to access these additional funding sources. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate financing is not available to
accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more
expensive funding sources to support future growth, our revenues may not increase proportionately to
cover our costs. In this case, our operating margins and profitability would be adversely affected.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject
to environmental liabilities with respect to one or more of these properties. During the ordinary course of
business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a
risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or
toxic substances are found on these properties, we may be liable for remediation costs, as well as for
personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous
conditions or toxic substances first affected any particular property. Environmental laws may require us to
incur substantial expenses to address unknown liabilities and may materially reduce the affected
property’s value or limit our ability to use or sell the affected property. In addition, future laws or more
stringent interpretations or enforcement policies with respect to existing laws may increase our exposure
to environmental liability. Although we have policies and procedures to perform an environmental review
before initiating any foreclosure action on nonresidential real property, these reviews may not be
sufficient to detect all potential environmental hazards. The remediation costs and any other financial
liabilities associated with an environmental hazard could have a material adverse effect on us.
Changes in management’s estimates and assumptions may have a material impact on our
consolidated financial statements and our financial condition or operating results.
In preparing this annual report as well as other periodic reports we are required to file under the
Securities Exchange Act of 1934, including our consolidated financial statements, our management is and
will be required under applicable rules and regulations to make estimates and assumptions as of a
specified date. These estimates and assumptions are based on management’s best estimates and
experience as of that date and are subject to substantial risk and uncertainty. Materially different results
may occur as circumstances change and additional information becomes known. Areas requiring
significant estimates and assumptions by management include our valuation of investment securities, our
30
determination of our income tax provision, and our evaluation of the adequacy of our allowance for loan
losses.
ITEM 1B. Unresolved Staff Comments
Not applicable.
31
ITEM 2. Properties
We operate from our corporate office in Honolulu, Hawaii, and from our 28 full-service branches
located in the State of Hawaii. The net book value of our premises, land and equipment was $4.9 million
at December 31, 2015. The following table sets forth information with respect to our full-service banking
offices, including the expiration date of leases with respect to leased facilities.
AINA HAINA
Aina Haina Shopping Center
820 West Hind Drive
Honolulu, Oahu 96821
4/30/2021
KAILUA
19 Oneawa Street
Kailua, Oahu 96734
KAUAI
Kukui Grove Shopping Center
4393 Kukui Grove Street
Lihue, Kauai 96766
2/28/2018
NUUANU
Nuuanu Shopping Center
1613 Nuuanu Avenue
Honolulu, Oahu 96817
7/22/2021
ALA MOANA CENTER
1450 Ala Moana Boulevard
Honolulu, Oahu 96814
12/31/2017
KAIMUKI
1108 12th Avenue
Honolulu, Oahu 96816
12/31/2018
KIHEI
Azeka Shopping Center
1279 South Kihei Road
Kihei, Maui 96753
1/31/2019
PEARL CITY
Pearl City Shopping Center
850 Kamehameha Highway
Pearl City, Oahu 96782
9/22/2019
DOWNTOWN
1000 Bishop Street
Honolulu, Oahu 96813
12/31/2020
KALIHI-KAPALAMA
1199 Dillingham Boulevard
Honolulu, Oahu 96817
8/31/2017
KONA
Crossroads Shopping Center
75-1027 Henry Street
Kailua-Kona, Hawaii 96740
8/31/2020
PEARLRIDGE
98-084 Kamehameha Highway
Aiea, Oahu 96701
6/30/2022
HAWAII KAI
Hawaii Kai Shopping Center
377 Keahole Street
Honolulu, Oahu 96825
9/30/2018
KAMEHAMEHA
SHOPPING CENTER
1620 North School Street
Honolulu, Oahu 96817
6/30/2025
LAHAINA
Old Lahaina Center
170 Papalaua Street
Lahaina, Maui 96761
3/31/2023
HILO
Waiakea Center
315 Makaala Street
Hilo, Hawaii 96720
12/31/2018
KAHALA
4819 Kilauea Avenue
Honolulu, Oahu 96816
3/31/2020
KANEOHE
46-005 Kawa Street
Kaneohe, Oahu 96744
12/31/2019
KAPAHULU
Kilohana Square
1016 Kapahulu Avenue
Honolulu, Oahu 96816
11/14/2018
MANOA
Manoa Marketplace
2752 Woodlawn Drive
Honolulu, Oahu 96822
7/10/2023
McCULLY
1111 McCully Street
Honolulu, Oahu 96826
5/31/2018
PIIKOI
1159 South Beretania Street
Honolulu, Oahu 96814
12/31/2020
SALT LAKE
Salt Lake Shopping Center
848 Ala Lilikoi Street
Honolulu, Oahu 96818
1/31/2021
WAIPAHU
Waipahu Town Center
94-050 Farrington Highway
Waipahu, Oahu 96797
12/31/2019
KAHULUI
Queen Kaahumanu Center
275 W. Kaahumanu Avenue
Kahului, Maui 96732
12/31/2019
KAPOLEI
Ace Center at Kapolei
480 Kamokila Boulevard
Kapolei, Oahu 96709
7/31/2019
MILILANI
Town Center of Mililani
95-1249 Meheula Parkway
Mililani, Oahu 96789
10/11/2019
WAIPIO
Laniakea Plaza
94-1221 Ka Uka Boulevard
Waipahu, Oahu 96797
9/30/2016
ITEM 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various legal proceedings arising
in the ordinary course of business. Except as previously disclosed, at December 31, 2015, we were not
involved in any legal proceedings, the outcome of which we believe would be material to our financial
condition or results of operations.
32
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
(a) Market, Holder and Dividend Information. Our common stock is traded on the NASDAQ
Global Select Market under the symbol “TBNK.” The approximate number of holders of record of
Territorial Bancorp Inc.’s common stock as of February 29, 2016 was 1,177. Certain shares of Territorial
Bancorp Inc. are held in “nominee” or “street” name and, accordingly, the number of beneficial owners of
such shares is not known or included in the foregoing number. The following table presents quarterly
market and dividend information for Territorial Bancorp Inc.’s common stock for the two years ended
December 31, 2015. The following information with respect to high and low closing prices was provided
by the NASDAQ Global Select Market.
High
Low
Year Ended December 31, 2015
Quarter ended December 31, 2015 ....................
$29.13
Quarter ended September 30, 2015 ....................
$26.77
Quarter ended June 30, 2015 .............................
$24.26
Quarter ended March 31, 2015 ..........................
$23.76
Year Ended December 31, 2014
Quarter ended December 31, 2014 ....................
$21.95
Quarter ended September 30, 2014 ....................
$21.24
Quarter ended June 30, 2014 .............................
$21.59
Quarter ended March 31, 2014 ..........................
$23.08
$26.06
$24.54
$22.69
$21.20
$20.34
$20.10
$19.82
$21.60
Dividends
Declared Per
Share
$0.27
$0.17
$0.16
$0.16
$0.26
$0.15
$0.15
$0.14
Dividend payments by Territorial Bancorp Inc. are dependent on dividends it receives from
Territorial Savings Bank, because Territorial Bancorp Inc. has no source of income other than dividends
from Territorial Savings Bank, earnings from the investment of proceeds from the sale of shares of
common stock and interest payments with respect to Territorial Bancorp Inc.’s loan to the Employee
Stock Ownership Plan. See “Item 1. Business—Supervision and Regulation—Federal Banking
Regulation—Capital Distributions” and “—Holding Company Regulation—Dividends and Stock
Repurchases.”
(b) Sales of Unregistered Securities. Not applicable.
(c) Use of Proceeds. Not applicable.
(d) Securities Authorized for Issuance Under Equity Compensation Plans. See “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
33
(e) Stock Repurchases. The following table sets forth information in connection with
repurchases of our shares of common stock during the fourth quarter of 2015:
Period
October 1, 2015 through
October 31, 2015
November 1, 2015 through
November 30, 2015
December 1, 2015 through
December 31, 2015
Total
___________________________
Total Number of
Shares Purchased
Average Price
Paid per
Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number of
Shares That May Yet
be Purchased Under
the Plans or
Programs (1)
18,098
$26.04
18,098
-
-
20,637
28.89
38,735
$27.56
-
20,637
38,735
20,637
20,637
-
-
(1) On December 4, 2014, our Board of Directors authorized the repurchase of up to 400,000 shares of our
common stock. The Company initially repurchased a total of 250,000 shares. Further repurchases were
subject to the receipt of regulatory approvals or non-objections for the employee stock ownership plan to
own 10% or more of the Company’s outstanding shares of common stock. On July 1, 2015, the Company
received the final regulatory approval needed for the ESOP to own more than 10% of the Company’s
common stock. In accordance with this authorization, we completed the repurchase of 400,000 shares of
our common stock as of December 31, 2015. We have entered into a Rule 10b5-1 plan with respect to our
stock repurchase plan.
(f) Stock Performance Graph. Set forth below is a stock performance graph comparing (a) the
cumulative total return on our shares of common stock between December 31, 2010 and December 31,
2015, (b) the cumulative total return on stocks included in the Total Return Index for the NASDAQ Stock
Market (US) over such period, and (c) the cumulative total return on stocks included in the SNL Bank and
Thrift Index over such period. Cumulative return assumes the reinvestment of dividends, and is
expressed in dollars based on an assumed investment of $100.
There can be no assurance that the Company’s stock performance will continue in the future with
the same or similar trend depicted in the graph. The Company will not make or endorse any predictions
as to future stock performance.
34
Territorial Bancorp Inc.
Total Return Performance
Territorial Bancorp Inc.
SNL Bank and Thrift
NASDAQ Composite
220
190
160
130
100
e
u
l
a
V
x
e
d
n
I
70
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Index
Territorial Bancorp Inc.
SNL Bank and Thrift
NASDAQ Composite
12/31/10
100.00
100.00
100.00
12/31/11
100.92
77.76
99.21
Period Ending
12/31/12
119.64
104.42
116.82
12/31/13
124.77
142.97
163.75
12/31/14
119.79
159.60
188.03
12/31/15
158.96
162.83
201.40
35
ITEM 6.
Selected Financial Data
The following selected financial data and ratios have been derived, in part, from the consolidated
financial statements and notes appearing elsewhere in this annual report.
Selected Financial Condition Data:
Total assets ............................................
Cash and cash equivalents .....................
Investment securities held to maturity ..
Loans receivable, net .............................
Bank-owned life insurance ....................
Federal Home Loan Bank stock, at cost
Deposits .................................................
Federal Home Loan Bank advances ......
Securities sold under agreements to
repurchase ..........................................
Stockholders’ equity ..............................
2015
2014
Year Ended December 31,
2013
(In thousands)
2012
2011
$ 1,821,141
65,919
493,059
1,188,649
42,328
4,790
1,445,103
69,000
$ 1,691,897
75,060
572,922
968,212
41,303
11,234
1,359,679
15,000
$ 1,616,904
75,365
613,436
856,542
40,243
11,689
1,288,709
15,000
$ 1,574,627
182,818
554,673
774,876
31,177
12,128
1,237,847
20,000
$ 1,537,571
131,937
653,871
688,095
30,234
12,348
1,166,116
20,000
55,000
219,641
72,000
216,378
72,000
212,140
70,000
218,972
108,300
213,961
2015
2014
Year Ended December 31,
2013
(In thousands)
2012
Selected Operating Data:
Interest and dividend income ................
Interest expense .....................................
Net interest income ...........................
Provision for loan losses ........................
Net interest and dividend income
after provision for loan losses ......
Noninterest income ................................
Noninterest expense ..............................
Income before income taxes .............
Income taxes ..........................................
Net income ........................................
$
$
63,092
6,515
56,577
455
56,122
4,911
36,499
24,534
9,786
14,748
$
$
59,615
6,118
53,497
360
53,137
5,177
35,308
23,006
8,909
14,097
$
$
56,175
6,282
49,893
39
49,854
8,716
35,077
23,493
8,846
14,647
$
$
60,149
9,229
50,920
415
50,505
7,068
34,438
23,135
8,297
14,838
2011
$
$
62,733
11,285
51,448
418
51,030
5,111
34,654
21,487
8,698
12,789
36
2015
At or For the Year Ended December 31,
2013
2012
2014
2011
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets) .........................................
Return on average equity (ratio of net income to
average equity) .................................................
Interest rate spread (1) ..........................................
Net interest margin (2)..........................................
Efficiency ratio (3) ...............................................
Noninterest expense to average total assets .........
Average interest-earning assets to average
interest-bearing liabilities ................................
Average equity to average total assets .................
Basic earnings per share .......................................
Diluted earnings per share ....................................
Dividend payout ratio ...........................................
0.84%
0.85%
0.93%
0.95%
0.85%
6.75%
3.29%
3.36%
59.36%
2.08%
6.54%
3.30%
3.37%
60.18%
2.13%
6.71%
3.22%
3.28%
59.85%
2.22%
6.78%
3.25%
3.36%
59.39%
2.20%
5.72%
3.41%
3.55%
61.27%
2.31%
115.86%
12.46%
1.63
1.59
47.80%
$
$
115.83%
13.02%
1.53
1.51
46.36%
$
$
117.07%
13.82%
1.51
1.49
41.61%
$
$
117.38%
13.97%
1.47
1.45
37.24%
$
$
118.21%
14.91%
1.19
1.17
29.06%
$
$
Asset Quality Ratios:
Nonperforming assets to total assets ....................
Nonperforming loans to total loans ......................
Allowance for loan losses to nonperforming
loans .................................................................
Allowance for loan losses to total loans ...............
0.30%
0.45%
40.00%
0.18%
0.26%
0.46%
37.97%
0.17%
0.37%
0.69%
24.77%
0.17%
0.28%
0.56%
37.95%
0.22%
0.22%
0.42%
52.65%
0.22%
Capital Ratios (bank-level only):
Total capital (to risk-weighted assets) ..................
Common equity Tier 1 capital (to risk-weighted
assets) (4) .........................................................
Tier I capital (to risk-weighted assets) .................
Tier I capital (to total assets) ................................
Other Data:
Number of full-service offices .............................
Full-time equivalent employees ...........................
26.07%
29.93%
31.99%
36.87%
38.76%
25.79%
25.79%
11.49%
n/a
n/a
n/a
n/a
29.68%
12.10%
31.75%
12.35%
36.57%
13.13%
38.47%
13.07%
28
275
28
268
28
274
27
271
27
258
__________________________
(1) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-
average cost of interest-bearing liabilities for the year.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3) The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
(4) Effective January 1, 2015, a new common equity Tier 1 capital standard was implemented.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The objective of this section is to help readers understand our views on our results of operations
and financial condition. You should read this discussion in conjunction with the consolidated financial
statements and notes to the consolidated financial statements that appear elsewhere in this annual report.
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 accounts, securities sold under agreements to repurchase and
Federal Home Loan Bank advances. 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.
37
We have continued our focus on originating one- to four-family residential real estate loans. Our
emphasis on conservative loan underwriting has resulted in low levels of nonperforming assets at a time
when many financial institutions are experiencing significant asset quality issues. Our nonperforming
assets totaled $5.4 million, or 0.30% of total assets at December 31, 2015, compared to $4.5 million, or
0.26% of total assets at December 31, 2014, and $6.0 million, or 0.37% of total assets at December 31,
2013. As of December 31, 2015, nonperforming assets consisted primarily of 22 mortgage loans for $5.4
million. Our nonperforming loans and loss experience has enabled us to maintain a relatively low
allowance for loan losses in relation to other peer institutions and correspondingly resulted in low levels
of provisions for loan losses. Our provisions for loan losses were $455,000, $360,000 and $39,000 for
the years ended December 31, 2015, 2014 and 2013, respectively.
Other than our loans for the construction of one- to four-family residential homes, we do not offer
“interest only” mortgage loans on one- to four-family residential properties (where the borrower pays
interest for an initial period, after which the loan converts to a fully amortizing loan). 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.
Our operations in recent years have been affected by our efforts to manage our interest rate risk
position. In 2015, we sold $56.2 million of fixed-rate mortgage loans and obtained $37.0 million of
additional long-term, fixed-rate borrowings. In 2014, we sold $37.5 million of fixed-rate mortgage loans.
In 2013, we sold $82.2 million of fixed-rate mortgage loans, obtained $30.0 million of long-term, fixed-
rate borrowings and purchased $5.1 million of shorter-duration mortgage-backed securities. See “—
Management of Market Risk” for a discussion of the actions we took in 2015, 2014 and 2013 in managing
interest rate risk.
Territorial Savings Bank’s investments in mortgage-backed securities and collateralized mortgage
obligations 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 agencies guarantee the payment
of principal and interest on the Bank’s mortgage-backed securities. We do not own any preferred stock
issued by Fannie Mae or Freddie Mac. As of December 31, 2015, our additional borrowing capacity at
the Federal Home Loan Bank of Des Moines was $555.1 million. As of December 31, 2014, our
additional borrowing capacity at the Federal Home Loan Bank of Seattle was $399.0 million.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or
discretion or make significant assumptions that have, or could have, a material impact on the carrying
value of certain assets or on income, to be critical accounting policies. We consider the following to be
our critical accounting policies:
Allowance for Loan Losses. We maintain an allowance for loan losses at an amount estimated to
equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a
balance sheet date. To estimate credit losses on impaired loans (in accordance with the Receivables topic
of the FASB ASC), we evaluate numerous factors, as described below in “—Allowance for Loan Losses.”
Based on our estimate of the level of allowance for loan losses required, we record a provision for loan
38
losses to maintain the allowance for loan losses at an amount that provides for all losses that are both
probable and reasonable to estimate.
Since we cannot predict with certainty the amount of loan charge-offs that will be incurred and
because the eventual level of loan charge-offs is affected by numerous conditions beyond our control, a
range of loss estimates can reasonably be used to determine the allowance for loan losses and the related
provisions for loan losses. In addition, various regulatory agencies, as an integral part of their
examination processes, periodically review our allowance for loan losses. Such agencies may require that
we recognize additions to the allowance for loan losses based on their judgments about information
available to them at the time of their examination. Accordingly, actual results could differ materially
from those estimates.
Deterioration in the Hawaii real estate market could result in an increase in loan delinquencies,
additional increases in our allowance for loan losses and provision for loan losses, as well as an increase
in loan charge-offs.
Securities Impairment. We periodically perform analyses to determine whether there has been
an other-than-temporary decline in the value of our securities. Our held-to-maturity securities consist
primarily of debt securities for which we have a positive intent and ability to hold to maturity, and are
carried at amortized cost. Our available-for-sale securities are carried at fair value. We conduct a
quarterly review and evaluation of the securities portfolio to determine if the value of any security has
declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such
decline is deemed other-than-temporary, we would adjust the cost basis of the security by writing down
the security for any credit losses through a charge on the income statement. The market values of our
securities are affected by changes in interest rates as well as shifts in the market’s perception of the
issuers. The fair value of investment securities is usually based on quoted market prices or dealer quotes.
However, if there are no observable market inputs (for securities such as trust preferred securities), we
estimate the fair value using unobservable inputs. We discount projected cash flows using a risk-adjusted
discount rate in accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC.
Our investment in PreTSL XXIII was determined to be other-than-temporarily impaired and we
recorded an impairment charge of $2.4 million in the year ended December 31, 2010. PreTSL XXIII has
a book value of $916,000 at December 31, 2015. The difference between the book value of $916,000 and
the remaining unamortized cost basis of $1.1 million is reported as other comprehensive loss and is
related to noncredit factors such as an inactive trust preferred securities market.
See also “Item 1A. Risk Factors” for a discussion on our investment in trust preferred securities.
We evaluated our $4.8 million investment in FHLB stock for other-than-temporary impairment as
of December 31, 2015. Considering the long-term nature of this investment and the liquidity position of
the FHLB of Des Moines, our FHLB stock was not considered other-than-temporarily impaired. As of
December 31, 2015, the FHLB of Des Moines has met all of its regulatory capital requirements. Moody’s
Investor Services and Standard and Poor’s have given the FHLB of Des Moines long-term credit ratings
of Aaa and AA+, respectively.
We evaluated our $3.0 million investment in FRB stock for other-than-temporary impairment as
of December 31, 2015. Based on the long-term nature of this investment and the liquidity position of the
FRB of San Francisco, our FRB stock was not considered to be other-than-temporarily impaired.
Deferred Tax Assets. Deferred tax assets and liabilities are recognized for the estimated future
tax effects attributable to temporary differences and carryforwards. A valuation allowance may be
39
required if, based on the weight of available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. In determining whether a valuation allowance is necessary,
we consider the level of taxable income in prior years, to the extent that carrybacks are permitted under
current tax laws, as well as estimates of future taxable income and tax planning strategies that could be
implemented to accelerate taxable income if necessary. If our estimates of future taxable income were
materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were
inaccurate, some or all of our deferred tax assets may not be realized, which would result in a charge to
earnings.
Defined Benefit Retirement Plan. Defined benefit plan obligations and related assets of our
defined benefit retirement plan are presented in Note 17 to the Consolidated Financial Statements.
Effective December 31, 2008, the defined benefit retirement plan was frozen and all plan benefits were
fixed as of that date. Plan assets, which consist primarily of marketable securities and mutual funds, are
typically valued using market quotations. Plan obligations and the annual pension expense are
determined by independent actuaries through the use of a number of assumptions. Key assumptions in
measuring the plan obligations include the discount rate and the expected long-term rate of return on plan
assets. In determining the discount rate, we utilize a yield that reflects the top 50% of the universe of
bonds, ranked in the order of the highest yield. These bonds provide cash flows that match the timing of
expected benefit payments. Asset returns are based upon the anticipated average rate of earnings
expected on the invested funds of the plans.
At December 31, 2015, we used weighted-average discount rates of 4.10% and 4.40% for
calculating annual pension expense and projected plan liabilities, respectively, and an expected long-term
rate of return on plan assets of 7.50% for calculating annual pension expense. At December 31, 2014, we
used a weighted-average discount rate of 4.90% and 4.10% for calculating annual pension expense and
projected plan liabilities, respectively, and an expected long-term rate of return on plan assets of 7.50%
for calculating annual pension expense. For both the discount rate and the asset return rate, a range of
estimates could reasonably have been used, which would affect the amount of pension expense and
pension liability recorded.
A decrease in the discount rate or an increase in the asset return rate would reduce pension
expense in 2015, while an increase in the discount rate or a decrease in the asset return rate would have
the opposite effect. A 25 basis point decrease in the discount rate assumptions would decrease 2015
pension expense by $3,000 and increase year-end 2015 pension liability by $554,000, while a 25 basis
point decrease in the asset return rate would increase 2015 pension expense by $33,000.
Balance Sheet Analysis
Assets. At December 31, 2015, our assets were $1.821 billion, an increase of $129.2 million, or
7.6%, from $1.692 billion at December 31, 2014. The increase was primarily caused by a $220.4 million
increase in loans receivable that occurred as loan production exceeded loan sales and repayments. This
was partially offset by a $79.9 million decrease in investment securities that occurred as repayments and
sales exceeded purchases.
Cash and Cash Equivalents. At December 31, 2015, we had $65.9 million of cash and cash
equivalents compared to $75.1 million at December 31, 2014. During 2015, cash and cash equivalents
decreased by $9.1 million primarily due to a $220.4 million increase in loans receivable, $8.9 million of
common stock repurchases, a $17.0 million decrease in securities sold under agreements to repurchase
and the $7.0 million payment of common stock dividends. These uses of cash were partially offset by an
$85.4 million increase in deposits, a $79.9 million decrease in investment securities, a $54.0 million
increase in FHLB advances, net income of $14.7 million, and a $6.4 million decrease in FHLB stock.
40
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The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at
December 31, 2015 that are contractually due after December 31, 2016.
Fixed
Due After December 31, 2016
Adjustable
(In thousands)
Total
Real estate loans:
First mortgage:
One- to four-family residential ........................................
Multi-family residential ...................................................
Construction, commercial and other ................................
Home equity loans and lines of credit ..................................
Other loans ................................................................................
$ 1,142,591
9,195
15,501
2,987
3,416
$
3,313
639
3,578
12,342
383
$ 1,145,904
9,834
19,079
15,329
3,799
Total loans ..............................................................
$ 1,173,690
$
20,255
$ 1,193,945
Securities. At December 31, 2015, our securities portfolio totaled $493.1 million, or 27.1% of
assets. At that date, our securities held to maturity consisted of securities with the following amortized
costs: $481.5 million of mortgage-backed securities, $10.7 million of collateralized mortgage obligations
and $916,000 of trust preferred securities. All of the mortgage-backed securities and collateralized
mortgage obligations were issued by Fannie Mae, Freddie Mac or Ginnie Mae. At December 31, 2015,
none of the underlying collateral consisted of subprime or Alt-A loans (traditionally defined as
nonconforming loans having less than full documentation). At December 31, 2015, we held no common
or preferred stock of Fannie Mae or Freddie Mac.
During the year ended December 31, 2015 our securities portfolio decreased by $79.9 million, or
13.9%, primarily due to repayments and sales exceeding purchases.
The following table sets forth the amortized cost and estimated fair value of our securities
portfolio at the dates indicated.
2015
At December 31,
2014
2013
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(In thousands)
Held to Maturity:
U.S. government sponsored
mortgage-backed securities:
Fannie Mae .............................. $ 174,947
Freddie Mac ............................
249,473
Collateralized mortgage
$ 175,432
254,515
$ 204,184
292,890
$ 207,000
302,943
$ 200,058
331,753
$ 191,717
326,707
obligations (1) ...................
Ginnie Mae ..............................
Total U.S. government
sponsored mortgage-
backed securities ............
10,668
57,055
10,349
56,770
17,315
57,843
17,178
58,899
26,238
54,850
25,853
53,193
492,143
497,066
572,232
586,020
612,899
597,470
Trust preferred securities .............
916
916
690
690
537
537
Total ........................... $ 493,059
$ 497,982
$ 572,922
$ 586,710
$ 613,436
$ 598,007
___________________________
(1) All of our collateralized mortgage obligations have been issued by Fannie Mae, Freddie Mac or Ginnie Mae.
Any unrealized loss on individual mortgage-backed securities as of December 31, 2015, 2014 and
2013 was caused by increases in market interest rates. All of our mortgage-backed securities are
guaranteed by U.S. government-sponsored enterprises or a U.S. government agency. Since the decline in
42
market value has been attributable to changes in interest rates and not credit quality, we continue to have
the intent not to sell these investments, and it is not more likely than not that we will be required to sell
such investments prior to the recovery of the amortized cost basis, we have not considered these
investments to be other-than-temporarily impaired as of December 31, 2015, 2014 or 2013.
At December 31, 2015, we owned a trust preferred security with an amortized cost of $916,000.
This security represents an investment in a pool of debt obligations issued primarily by holding
companies of Federal Deposit Insurance Corporation-insured financial institutions.
The trust preferred securities market is considered to be inactive as only six transactions have
occurred over the past 48 months in the same tranche of securities that we own and no new issues of
pooled trust preferred securities have occurred since 2007. We used a discounted cash flow model to
determine whether these securities are other-than-temporarily impaired. The assumptions used in
preparing the discounted cash flow model include the following: estimated discount rates, estimated
deferral and default rates on collateral, and estimated cash flows. We used a discount rate equal to three-
month LIBOR plus 20.00%.
See also “Item 1A. Risk Factors” for a discussion on our investment in trust preferred securities.
At December 31, 2015, we had no investments in a single company (other than U.S. government
sponsored enterprises) or entity that had an aggregate book value in excess of 10% of our consolidated
stockholders’ equity.
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Deposits. We accept deposits primarily from the areas in which our offices are located. We rely on our
competitive pricing, convenient locations and customer service to attract and retain deposits. We offer a variety
of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of passbook and
statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking
accounts and Super NOW accounts. Historically, we have not accepted brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic
basis. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity
requirements and our deposit growth goals.
During the year ended December 31, 2015, our deposits grew by $85.4 million, or 6.3%. The increase
was caused primarily by our strategy of promoting higher-than-market rates for our passbook and statement
savings accounts. Savings accounts grew by $56.8 million, or 6.0%, because of the higher interest rates offered.
We also believe that the ability to get immediate access to their funds without incurring an early withdrawal
penalty appeals to customers.
At December 31, 2015, we had a total of $224.0 million in certificates of deposit, of which $165.0
million had remaining maturities of one year or less. Based on historical experience and our current pricing
strategy, we believe we will retain a significant portion of these accounts upon maturity.
The following tables set forth the distribution of our average total deposit accounts (including interest-
bearing and non-interest-bearing deposits), by account type, for the periods indicated.
For the Year Ended December 31,
2015
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
(Dollars in thousands)
2014
Percent
Weighted
Average
Rate
Deposit type:
Non-interest-bearing ....................
Savings accounts .........................
Certificates of deposit ..................
Money market ..............................
Checking and Super NOW ..........
$ 43,591
965,754
225,048
1,117
156,776
3.1%
69.3
16.2
0.1
11.3
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0.50%
0.27%
0.02%
$ 36,812
926,080
215,127
801
142,726
2.8%
70.0
16.3
0.1
10.8
Total deposits ..........................
$1,392,286
100.0%
0.35%
$1,321,546
100.0%
0.0-%
0.36%
0.50%
0.25%
0.02%
0.34%
For the Year Ended December 31, 2013
Weighted
Average
Rate
Average
Balance
Percent
(Dollars in thousands)
Deposit type:
Non-interest-bearing ....................
Savings accounts .........................
Certificates of deposit ..................
Money market ..............................
Checking and Super NOW ..........
$ 31,863
889,986
197,604
761
129,160
2.6%
71.2
15.8
0.1
10.3
-%
0.34%
0.62%
0.26%
0.02%
Total deposits .........................
$1,249,374
100.0%
0.34%
45
As of December 31, 2015, the aggregate amount of outstanding certificates of deposit in amounts greater
than or equal to $100,000 was $172.2 million. The following table sets forth the maturity of those certificates as
of December 31, 2015.
At
December 31, 2015
(In thousands)
Three months or less ......................................
Over three months through six months ..........
Over six months through one year .................
Over one year to three years ...........................
Over three years ..............................................
$
97,017
41,296
5,581
8,911
19,423
Total ................................................................
$
172,228
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank and funds
borrowed under securities sold under agreements to repurchase. At December 31, 2015, our Federal Home Loan
Bank advances totaled $69.0 million, or 4.3% of total liabilities and our securities sold under agreements to
repurchase totaled $55.0 million, or 3.4% of total liabilities. At December 31, 2015, we had the capability to
borrow up to $555.1 million in the form of additional advances from the Federal Home Loan Bank.
During the year ended December 31, 2015, our borrowings increased by $37.0 million, or 42.5%. The
increase occurred when we had a $54.0 million net increase in Federal Home Loan Bank advances that was
partially offset by a $17.0 million net pay off of securities sold under agreements to repurchase. We have not
required any other borrowings to fund our operations. Instead, we have primarily funded our operations with the
net proceeds from our stock offering, additional deposits, proceeds from loan and security sales and principal
repayments on loans and mortgage-backed securities.
The following table sets forth information concerning balances and interest rates on our Federal Home
Loan Bank advances at the dates and for the years indicated.
2015
At or For the Year Ended December 31,
2014
(Dollars in thousands)
2013
Balance at end of year ..........................................
Average balance during year ................................
Maximum outstanding at any month end .............
Weighted average interest rate at end of year ......
Average interest rate during year .........................
$
$
$
$
$
$
69,000
46,186
69,000
1.49%
1.51%
$
$
$
15,000
15,000
15,000
1.77%
1.77%
15,000
15,836
20,000
1.77%
1.91%
The following table sets forth information concerning balances and interest rates on our securities sold
under agreements to repurchase at the dates and for the years indicated.
2015
At or For the Year Ended December 31,
2014
(Dollars in thousands)
2013
Balance at end of year ..........................................
Average balance during year ................................
Maximum outstanding at any month end .............
Weighted average interest rate at end of year ......
Average interest rate during year .........................
$
$
$
$
$
$
55,000
60,014
72,000
1.57%
1.66%
$
$
$
72,000
72,000
72,000
1.88%
1.88%
72,000
64,111
72,000
1.88%
2.63%
Stockholders’ Equity. At December 31, 2015, our stockholders’ equity was $219.6 million, an increase
of $3.3 million, or 1.5%, from $216.4 million at December 31, 2014. The increase in stockholders’ equity
primarily resulted from net income of $14.7 million, a $3.1 million increase in paid-in-capital related to share-
46
based compensation awards and a $1.2 million increase due to the allocation of ESOP shares. This was partially
offset by the declaration of $7.0 million of dividends during the year ended December 31, 2015 and $8.9 million
spent to repurchase 373,711 shares of our common stock.
47
Average Balances and Yields
The following tables set forth average balance sheets, average yields and rates, and certain other
information for the years 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, but have been reflected in the table as loans carrying a zero yield. The yields
set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to
interest income.
Average
Outstanding
Balance
$
$
$
$
1,050,352
9,692
18,110
15,560
4,502
1,098,216
529,535
790
530,325
57,147
1,685,688
67,486
1,753,174
965,754
225,048
1,117
156,776
1,348,695
46,186
60,014
1,454,895
79,762
1,534,657
218,517
1,753,174
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (1) ...................
Multi-family residential ....................................
Construction, commercial and other ................
Home equity loans and lines of credit ...............
Other loans ............................................................
Total loans ........................................................
Investment securities:
U.S. government sponsored mortgage-backed
securities (1) .....................................................
Trust preferred securities ......................................
Total securities .................................................
Other .......................................................................
Total interest-earning assets ...............................
Non-interest-earning assets ....................................
Total assets .........................................................
Interest-bearing liabilities:
Savings accounts .....................................................
Certificates of deposit .............................................
Money market accounts ..........................................
Checking and Super NOW accounts ......................
Total interest-bearing deposits ...........................
Federal Home Loan Bank advances .......................
Securities sold under agreements to repurchase .....
Total interest-bearing liabilities .........................
Non-interest-bearing liabilities ...............................
Total liabilities ...................................................
Stockholders’ equity ...............................................
Total liabilities and stockholders’ equity ..........
Net interest income .................................................
Net interest rate spread (2) .....................................
Net interest-earning assets (3) ................................
Net interest margin (4) ............................................
Interest-earning assets to interest-bearing
For the Year Ended
December 31, 2015
Interest
(Dollars in thousands)
Yield/ Rate
$
43,654
459
837
709
244
45,903
4.16%
4.74
4.62
4.56
5.42
4.18
16,873
-
16,873
316
63,092
3.19
-
3.18
0.55
3.74
3,670
1,115
3
33
4,821
697
997
6,515
0.38%
0.50
0.27
0.02
0.36
1.51
1.66
0.45
3.29%
3.36%
$
56,577
$
230,793
liabilities .............................................................
115.86%
(footnotes on following page)
48
For the Year Ended December 31,
2014
2013
Average
Outstanding
Balance
Interest
Yield/ Rate
Average
Outstanding
Balance
(Dollars in thousands)
Interest
Yield/ Rate
$
780,556
5,706
13,397
15,237
4,728
819,624
34,905
328
661
805
283
36,982
4.47%
5.75
4.93
5.28
5.99
4.51
18,941
-
18,941
252
56,175
3.26
-
3.26
0.21
3.70
$
$
$
$
$
859,541
4,990
18,332
15,709
4,653
903,225
37,411
278
904
760
267
39,620
4.35%
5.57
4.93
4.84
5.74
4.39
19,752
-
19,752
243
59,615
3.27
-
3.26
0.30
3.75
3,369
1,073
2
30
4,474
266
1,378
6,118
0.36%
0.50
0.25
0.02
0.35
1.77
1.91
0.45
604,651
628
605,279
80,339
1,588,843
65,511
1,654,354
926,080
215,127
801
142,726
1,284,734
15,000
72,000
1,371,734
67,164
1,438,898
215,456
1,654,354
$
$
$
$
580,600
494
581,094
118,252
1,518,970
60,356
1,579,326
889,986
197,604
761
129,160
1,217,511
15,836
64,111
1,297,458
63,567
1,361,025
218,301
1,579,326
3,035
1,231
2
28
4,296
302
1,684
6,282
0.34%
0.62
0.26
0.02
0.35
1.91
2.63
0.48
3.22%
3.28%
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (1) ...................
Multi-family residential ....................................
Construction, commercial and other ................
Home equity loans and lines of credit ................
Other loans ............................................................
Total loans.........................................................
Investment securities:
U.S. government sponsored mortgage-backed
securities (1) ......................................................
Trust preferred securities ......................................
Total securities ..................................................
Other ........................................................................
Total interest-earning assets ...............................
Non-interest-earning assets .....................................
Total assets .........................................................
Interest-bearing liabilities:
Savings accounts .....................................................
Certificates of deposit .............................................
Money market accounts ..........................................
Checking and Super NOW accounts ......................
Total interest-bearing deposits ...........................
Federal Home Loan Bank advances .......................
Securities sold under agreements to repurchase .....
Total interest-bearing liabilities .........................
Non-interest-bearing liabilities ...............................
Total liabilities ....................................................
Stockholders’ equity ...............................................
Total liabilities and stockholders’ equity ...........
Net interest income .................................................
Net interest rate spread (2) ......................................
Net interest-earning assets (3) ................................
Net interest margin (4) ............................................
Interest-earning assets to interest-bearing
liabilities .............................................................
115.83%
$
217,109
$
53,497
$
49,893
3.30%
3.37%
$
221,512
117.07%
(1) Average balance includes loans or investments available for sale.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
49
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the
years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately
based on the changes due to rate and the changes due to volume.
Year Ended December 31,
2015 vs. 2014
Year Ended December 31,
2014 vs. 2013
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
(In thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential ..............
Multi-family residential .........................
Construction, commercial and other ......
Home equity loans and lines of credit ......
Other loans ..................................................
Total loans ..............................................
$ 7,835
215
(11)
(7)
(8)
8,024
$ (1,592)
(34)
(56)
(44)
(15)
(1,741)
$
U.S. government sponsored
mortgage-backed securities ....................
Other .............................................................
(2,403)
(39)
(476)
112
$
6,243
181
(67)
(51)
(23)
6,283
(2,879)
73
$ 3,404
(40)
243
26
(4)
3,629
786
29
$
(898)
(10)
-
(71)
(12)
(991)
25
(38)
2,506
(50)
243
(45)
(16)
2,638
811
(9)
Total interest-earning assets ................
5,582
(2,105)
3,477
4,444
(1,004)
3,440
Interest-bearing liabilities:
Savings accounts ..........................................
Certificates of deposit ...................................
Money market accounts ................................
Checking and Super NOW accounts ............
Total interest-bearing deposits .................
Federal Home Loan Bank advances .............
Securities sold under agreements to
repurchase .....................................................
147
49
1
3
200
464
154
(7)
-
-
147
(33)
(213)
(168)
Total interest-bearing liabilities ..........
451
(54)
301
42
1
3
347
431
(381)
397
126
127
-
3
256
(15)
254
495
208
(285)
-
(1)
(78)
(21)
(560)
(659)
334
(158)
-
2
178
(36)
(306)
(164)
Change in net interest income ......................
$ 5,131
$ (2,051)
$
3,080
$ 3,949
$
(345)
$
3,604
50
Comparison of Operating Results for the Years Ended December 31, 2015, 2014 and 2013
General. Net income increased by $651,000, or 4.6%, to $14.7 million for the year ended December 31,
2015 from $14.1 million for the year ended December 31, 2014. The increase in net income was caused by a
$3.5 million increase in interest and dividend income due primarily to a higher average loan balance. This was
partially offset by a $1.2 million increase in noninterest expense, an $877,000 increase in income tax expense, a
$397,000 increase in interest expense, and a $266,000 decrease in noninterest income.
Net income decreased by $550,000, or 3.8%, to $14.1 million for the year ended December 31, 2014
from $14.6 million for the year ended December 31, 2013. The decrease in net income was caused by a $3.5
million decline in noninterest income due to a decrease in gains on sale of securities and loans, a $321,000
increase in the provision for loan losses and a $231,000 increase in noninterest expense. This was partially offset
by a $3.4 million increase in interest and dividend income due to higher average loan and investment security
balances, and a $164,000 decline in interest expense due to a lower average rate on borrowings.
Net Interest Income. Net interest income increased by $3.1 million, or 5.8%, to $56.6 million for the
year ended December 31, 2015 from $53.5 million for the year ended December 31, 2014. Interest and dividend
income increased by $3.5 million, or 5.8%, to $63.1 million for the year ended December 31, 2015 from $59.6
million for the year ended December 31, 2014. The increase in interest and dividend income occurred primarily
because of a $96.8 million increase in average interest-earning assets which was partially offset by a one basis
point decline in the average yield on interest-earning assets. Interest expense increased by $397,000, or 6.5%, to
$6.5 million for the year ended December 31, 2015 from $6.1 million for the year ended December 31, 2014.
The increase in interest expense is due to an $83.2 million increase in average interest-bearing liabilities. The
interest rate spread and net interest margin were 3.29% and 3.36%, respectively, for the year ended December 31,
2015, compared to 3.30% and 3.37% for 2014.
Net interest income increased by $3.6 million, or 7.2%, to $53.5 million for the year ended December 31,
2014 from $49.9 million for the year ended December 31, 2013. Interest and dividend income increased by $3.4
million, or 6.1%, to $59.6 million for the year ended December 31, 2014 from $56.2 million for the year ended
December 31, 2013. The increase in interest and dividend income occurred primarily because of a $69.9 million
increase in average interest-earning assets and a five basis point increase in the average interest-earning asset
yield. Interest expense decreased by $164,000, or 2.6%, to $6.1 million for the year ended December 31, 2014
from $6.3 million for the year ended December 31, 2013. The decrease in interest expense is primarily due to a
three basis point decline in the average cost of interest-bearing liabilities that was partially offset by a $74.3
million increase in average interest-bearing liabilities. The interest rate spread and net interest margin were
3.30% and 3.37%, respectively, for the year ended December 31, 2014, compared to 3.22% and 3.28% for 2013.
The eight basis point increase in the net interest rate spread is due to a five basis point increase in the average
yield on interest-earning assets and a three basis point decline in the cost of interest-bearing liabilities. The
decrease in the cost of interest-bearing liabilities resulted from lower market interest rates.
Interest and Dividend Income. Interest and dividend income rose by $3.5 million, or 5.8%, to $63.1
million for the year ended December 31, 2015 from $59.6 million for the year ended December 31, 2014.
Interest income on loans increased by $6.3 million, or 15.9%, to $45.9 million for the year ended December 31,
2015 from $39.6 million for the year ended December 31, 2014. The growth in interest income on loans
occurred because the average balance of loans grew by $195.0 million, or 21.6%, as new loan originations
exceeded loan repayments and loan sales. This increase in interest income that occurred because of growth in the
loan portfolio was partially offset by a 21 basis point decline in the average loan yield to 4.18% for the year
ended December 31, 2015 compared to 4.39% for the year ended December 31, 2014. The decline in the average
yield on loans occurred because of repayments on higher-yielding loans and the origination of new loans with
lower yields. Interest income on investment securities decreased by $2.9 million, or 14.6%, to $16.9 million for
the year ended December 31, 2015 from $19.8 million for the year ended December 31, 2014. The decrease in
51
interest income on securities occurred primarily because of a $75.0 million decrease in the average securities
balance and an eight basis point decline in the average investment yield to 3.18% for the year ended December
31, 2015 compared to 3.26% for the year ended December 31, 2014. The decrease in the average securities
balance occurred as repayments and security sales exceeded security purchases.
Interest and dividend income rose by $3.4 million, or 6.1%, to $59.6 million for the year ended
December 31, 2014 from $56.2 million for the year ended December 31, 2013. Interest income on loans
increased by $2.6 million, or 7.1%, to $39.6 million for the year ended December 31, 2014 from $37.0 million
for the year ended December 31, 2013. The growth in interest income on loans occurred because the average
balance of loans grew by $83.6 million, or 10.2%, as new loan originations exceeded loan repayments and loan
sales. This increase in interest income that occurred because of growth in the loan portfolio was partially offset
by a 12 basis point decline in the average loan yield to 4.39% for the year ended December 31, 2014 compared to
4.51% for the year ended December 31, 2013. The decline in the average yield on loans occurred because of
repayments on higher-yielding loans and the origination of new loans with lower yields. Interest income on
investment securities rose by $811,000, or 4.3%, to $19.8 million for the year ended December 31, 2014 from
$18.9 million for the year ended December 31, 2013. The increase in interest income on securities occurred
primarily because of a $24.2 million increase in the average securities balance. The increase in the average
securities balance occurred as the purchase of securities exceeded repayments and the amount of securities sold.
Interest Expense. Interest expense increased by $397,000, or 6.5%, to $6.5 million for the year ended
December 31, 2015 from $6.1 million for the year ended December 31, 2014. Interest expense on FHLB
advances increased by $431,000, or 162.0%, during the year ended December 31, 2015 compared to the year
ended December 31, 2014. The increase in interest expense on FHLB advances was due to a $31.2 million
increase in the average balance of FHLB advances. This was partially offset by a 26 basis point decrease in the
average interest rate to 1.51% for the year ended December 31, 2015 compared to 1.77% for the year ended
December 31, 2014. Additional advances were obtained during the year ended December 31, 2015 to extend the
maturity of liabilities and reduce interest rate risk. Interest expense on deposits increased by $347,000, or 7.8%,
to $4.8 million for the year ended December 31, 2015 from $4.5 million for the year ended December 31, 2014.
The increase in interest expense on deposits is primarily due to a $64.0 million, or 5.0% increase in the average
balance of deposits. The average balance of deposits grew to $1.349 billion during the year ended December 31,
2015 compared to $1.285 billion during the year ended December 31, 2014. Interest expense on securities sold
under agreements to repurchase declined by $381,000, or 27.6%, during the year ended December 31, 2015
compared to the year ended December 31, 2014. The decrease in interest expense on securities sold under
agreements to repurchase was caused by a $12.0 million, or 16.6%, decrease in the average outstanding balance
of securities sold under agreements to repurchase. The decrease in the average balance was augmented by a 25
basis point decrease in the average interest rate to 1.66% for the year ended December 31, 2015 compared to
1.91% for the year ended December 31, 2014. The decline in the average balance of securities sold under
agreements to repurchase occurred as the Company paid off matured borrowings.
Interest expense decreased by $164,000, or 2.6%, to $6.1 million for the year ended December 31, 2014
from $6.3 million for the year ended December 31, 2013. Interest expense on securities sold under agreements to
repurchase declined by $306,000, or 18.2%, during the year ended December 31, 2014. The decrease in interest
expense on securities sold under agreements to repurchase was caused by a 72 basis point decrease in the average
interest rate to 1.91% for the year ended December 31, 2014 compared to 2.63% for the year ended December
31, 2013, which occurred as higher costing agreements matured and were refinanced at lower rates in 2013. The
decline in the average rate on securities sold under agreements to repurchase was partially offset by a $7.9
million, or 12.3%, growth in the average outstanding balance of securities sold under agreements to repurchase.
Interest expense on FHLB advances decreased by $36,000, or 11.9%, during the year ended December 31, 2014
compared to the year ended December 31, 2013. The decline in interest expense on FHLB advances was caused
by an $836,000, or 5.3%, decrease in the average balance of FHLB advances and a 14 basis point decrease in the
average interest rate to 1.77% for the year ended December 31, 2014 compared to 1.91% for the year ended
52
December 31, 2013. The decrease in the average interest rate on FHLB advances occurred as higher costing
advances matured and were refinanced at lower interest rates. Interest expense on deposits increased by
$178,000, or 4.1%, to $4.5 million for the year ended December 31, 2014 from $4.3 million for the year ended
December 31, 2013. The average balance of deposits rose by $67.2 million, or 5.5%, to $1.285 billion during the
year ended December 31, 2014 compared to $1.218 billion during the year ended December 31, 2013.
Provision for Loan Losses. Based on our analysis of the factors described in “—Allowance for Loan
Losses,” we recorded provisions for loan losses of $455,000, $360,000 and $39,000 for the years ended
December 31, 2015, 2014 and 2013, respectively. The increase in loan loss provisions is primarily due to an
increase in the size of the loan portfolio. The provisions for loan losses included a net recovery of $20,000 for
the year ended December 31, 2015 and net charge-offs of $155,000 and $225,000 for the years ended December
31, 2014 and 2013, respectively. The provisions recorded resulted in ratios of the allowance for loan losses to
total loans of 0.18%, 0.17% and 0.17% at December 31, 2015, 2014 and 2013, respectively. Nonaccrual loans
totaled $5.4 million, $4.5 million and $6.0 million at December 31, 2015, 2014 and 2013, respectively. To the
best of our knowledge, at December 31, 2015, 2014 and 2013, we had provided for all losses that are both
probable and reasonable to estimate at those respective dates.
Noninterest Income. The following table summarizes changes in noninterest income for the years ended
December 31, 2015, 2014 and 2013.
Year Ended December 31,
2014
2013
2015
Change 2015/2014
Change 2014/2013
$ Change
(Dollars in thousands)
% Change
$ Change
% Change
Service fees on loan and
deposit accounts ...................
Income on bank-owned life
insurance ..............................
Gain on sale of investment
securities ...............................
Gain on sale of loans .............
Other ......................................
Total ..................................
$
2,161
$
2,022
$
2,232
$
139
6.9%
$
(210)
(9.4)%
1,026
701
503
520
4,911
$
1,060
1,263
396
436
5,177
$
1,066
3,450
1,541
427
8,716
$
(34)
(562)
107
84
(266)
$
(3.2)%
(44.5)%
27.0%
19.3%
(5.1)%
(6)
(0.6)%
(2,187)
(1,145)
9
(3,539)
$
(63.4)%
(74.3)%
2.1%
(40.6)%
Noninterest income declined by $266,000 for the year ended December 31, 2015 compared to the year
ended December 31, 2014. During the years ended December 31, 2015 and 2014, we sold $7.0 million and
$18.1 million, respectively, of held-to-maturity and trading investment securities and recognized gains of
$701,000 and $1.3 million, respectively. The sale of held-to-maturity securities, for which the Company had
already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the
Investments – Debt and Equity Securities topic of the FASB ASC and will not affect the historical cost basis
used to account for the remaining securities in the held-to-maturity portfolio. During the years ended December
31, 2015 and 2014, we also sold $56.2 million and $37.5 million, respectively, of mortgage loans held for sale
primarily to reduce interest rate risk and recognized gains of $503,000 and $396,000, respectively. Service fees
on loan and deposit accounts increased by $139,000 for the year ended December 31, 2015 compared to the year
ended December 31, 2014 primarily due to an increase in broker fee income.
Noninterest income declined by $3.5 million for the year ended December 31, 2014 compared to the year
ended December 31, 2013. During the years ended December 31, 2014 and 2013, we sold $18.1 million and
$47.7 million, respectively, of held-to-maturity and trading investment securities and recognized gains of $1.3
million and $3.5 million, respectively. The sale of held-to-maturity securities, for which the Company had
already received a substantial portion of the outstanding principal (at least 85%), is in accordance with the
Investment topic of the FASB ASC and will not affect the historical cost basis used to account for the remaining
securities in the held-to-maturity portfolio. During the years ended December 31, 2014 and 2013, we also sold
53
$37.5 million and $82.2 million, respectively, of mortgage loans held for sale primarily to reduce interest rate
risk and recognized gains of $396,000 and $1.5 million, respectively.
Noninterest Expense. The following table summarizes changes in noninterest expense for the years
ended December 31, 2015, 2014 and 2013.
Year Ended December 31,
2014
2013
2015
Change 2015/2014
Change 2014/2013
$ Change
(Dollars in thousands)
% Change
$ Change
% Change
Salaries and employee
benefits .................................
Occupancy .............................
Equipment ..............................
Federal deposit insurance
premiums .............................
Other general and
administrative expenses .......
Total ..................................
$
21,497
5,809
3,894
$
20,932
5,761
3,701
$
21,015
5,365
3,524
$
857
808
770
565
48
193
49
4,442
36,499
$
4,106
35,308
4,403
35,077
$
$
$
336
1,191
2.7%
0.8%
5.2%
6.1%
8.2%
3.4%
$
$
(83)
396
177
38
(297)
231
(0.4)%
7.4%
5.0%
4.9%
(6.7)%
0.7%
Noninterest expense rose by $1.2 million to $36.5 million for the year ended December 31, 2015 from
$35.3 million for the year ended December 31, 2014. Salaries and employee benefits increased by $565,000
during the year ended December 31, 2015 primarily due to a bank-wide budgeted salary increase of
approximately 3.0%, which was effective July 1, 2015, the hiring of additional staff to originate new loans and to
handle the additional workload associated with the increase in regulatory requirements, an increase in employee
stock ownership plan expense, which occurred because of the Company’s higher stock price, and higher loan
officer compensation that occurred primarily because of the increase in new loan originations. Equipment
expense grew by $193,000 due to higher service bureau and data processing expenses. Other general and
administrative expenses increased primarily due to higher advertising, professional fees and expenses to originate
new mortgage loans.
Noninterest expense rose by $231,000 to $35.3 million for the year ended December 31, 2014 from
$35.1 million for the year ended December 31, 2013. Occupancy expense increased by $396,000 during the year
ended December 31, 2014 primarily due to higher depreciation, repair and maintenance costs and rent expense.
Equipment expense grew by $177,000 due to higher depreciation, repairs and maintenance and service bureau
expense. The increases in these expenses were partially offset by a $297,000 decline in other general and
administrative expenses due to lower legal costs and a loss on a deposit account recognized during the year ended
December 31, 2013.
Income Tax Expense. Income taxes were $9.8 million for 2015, reflecting an effective tax rate of
39.9%, $8.9 million for 2014, reflecting an effective tax rate of 38.7%, and $8.8 million for 2013, reflecting an
effective tax rate of 37.7%. The effective tax rate in 2015 was higher than the effective tax rate in 2014 primarily
due to changes in permanent tax benefits related to compensation and share-based compensation plans. The
changes in permanent tax benefits related to compensation and share-based compensation plans also caused the
effective tax rate in 2014 to be higher than the effective tax rate for 2013.
Nonperforming and Problem Assets
When a residential mortgage loan or home equity line of credit is 15 days past due, we attempt personal,
direct contact with the borrower to determine when payment will be made. On the first day of the following
month, we mail a letter reminding the borrower of the delinquency, and will send an additional letter when a loan
is 60 days or more past due. If necessary, subsequent late notices are issued and the account will be monitored
on a regular basis thereafter. By the 75th day of delinquency, unless the borrower has made arrangements to
bring the loan current, we will refer the loan to legal counsel to commence foreclosure proceedings. Upon the
54
recommendation of our Vice President of Mortgage Loan Servicing, the Senior Vice President in charge of the
Mortgage Loan Servicing Department can shorten these time frames.
Commercial business loans, commercial real estate loans and consumer loans are generally handled in
the same manner as residential mortgage loans or home equity lines of credit. All commercial business loans that
are 15 days past due are immediately referred to our senior lending officer. In addition, we generate past due
notices and attempt direct contact with a borrower when a consumer loan is 10 days past due. Because of the
nature of the collateral securing consumer loans, we may commence collection procedures earlier for consumer
loans than for residential mortgage loans or home equity lines of credit.
Loans are placed on nonaccrual status when payment of principal or interest is more than 90 days
contractually delinquent or when, in the opinion of management, collection of principal or interest in full appears
doubtful. When loans are placed on a nonaccrual status, unpaid accrued interest is fully reversed. The payments
received on nonaccrual loans are recorded as a reduction of principal. The loan may be returned to accrual status
if both principal and interest payments are brought current and full payment of principal and interest is expected.
55
Nonperforming Assets. The table below sets forth the amounts and categories of our nonperforming
assets at the dates indicated.
2015
2014
At December 31,
2013
(Dollars in thousands)
2012
2011
$
5,282
$
4,153
$
5,840
$
4,246
$
2,582
-
124
9
5,415
-
296
4
4,453
-
160
-
6,000
-
160
-
4,406
184
158
3
2,927
Nonaccrual loans:
Real estate loans:
First mortgage:
One- to four-family residential .......
Construction, commercial and
other ............................................
Home equity loans and lines
of credit .........................................
Other loans ...............................................
Total nonaccrual loans ....................
Real estate owned:
Real estate loans:
First mortgage:
One- to four-family residential .......
Total real estate owned ...................
-
-
-
-
-
-
-
-
408
408
Total nonperforming assets ............
5,415
4,453
6,000
4,406
3,335
-
-
-
-
-
Loans delinquent 90 days or greater and
still accruing interest ...........................
Restructured loans still accruing interest:
Real estate loans:
First mortgage:
One- to four-family residential .......
Total restructured loans still
accruing interest .......................
1,203
1,203
2,005
2,005
2,533
2,533
2,529
2,529
2,345
2,345
Total nonperforming assets, accruing
loans delinquent for 90 days or
more and restructured loans still
accruing interest ............................
Ratios:
$
6,618
$
6,458
$
8,533
$
6,935
$
5,680
Nonperforming loans to total loans ....
Nonperforming assets to total
0.45%
assets .............................................
0.30%
0.46%
0.26%
0.69%
0.37%
0.56%
0.28%
0.42%
0.22%
For the year ended December 31, 2015, gross interest income that would have been recorded had our
nonaccruing loans been current in accordance with original terms was $312,000. For the year ended December
31, 2015, we recognized no interest income on such nonaccruing loans on a cash basis during the year. For the
year ended December 31, 2015, gross interest income due and collected on our accruing restructured loans was
$71,000.
The Company had 15 troubled debt restructurings totaling $3.4 million as of December 31, 2015 that
were considered to be impaired. This total included 14 one- to four-family residential mortgage loans totaling
$3.3 million and one home equity loan for $120,000. Four of the loans, totaling $885,000, were performing in
accordance with their restructured terms and accruing interest at December 31, 2015. Nine of the loans, totaling
$2.0 million, were performing in accordance with their restructured terms but not accruing interest at December
31, 2015. One of the loans, for $318,000, was 59 days delinquent and accruing interest at December 31, 2015.
One of the loans, for $149,000, was more than 149 days delinquent and not accruing interest as of December 31,
2015. The Company had 17 troubled debt restructurings totaling $4.6 million as of December 31, 2014 that were
considered to be impaired. This total included 16 one- to four-family residential mortgage loans totaling $4.4
million and one home equity loan for $135,000. Six of the loans, totaling $2.0 million, were performing in
56
accordance with their restructured terms and were accruing interest at December 31, 2014. Nine of the loans,
totaling $2.2 million, were performing in accordance with their restructured terms but were not accruing interest
at December 31, 2014. Two of the loans, totaling $343,000, were delinquent and not accruing interest as of
December 31, 2014.
Delinquent Loans. The following table sets forth our loan delinquencies by type and by amount at the
dates indicated.
Loans Delinquent For
60-89 Days
90 Days and Over
Total
Number
Amount
Number
Amount
Number
Amount
(Dollars in thousands)
At December 31, 2015
Real estate loans:
First mortgage:
One- to four-family residential ........
Home equity loans and lines of credit ..
Other loans ................................................
Total loans ........................................
At December 31, 2014
Real estate loans:
First mortgage:
One- to four-family residential ........
Home equity loans and lines of credit ..
Other loans ................................................
Total loans ........................................
At December 31, 2013
Real estate loans:
First mortgage:
One- to four-family residential ........
Other loans ................................................
Total loans ........................................
At December 31, 2012
Real estate loans:
First mortgage:
One- to four-family residential ........
Other loans ................................................
Total loans ........................................
At December 31, 2011
Real estate loans:
First mortgage:
One- to four-family residential ...
Construction, commercial and other
Other loans.................................................
Total loans ........................................
-
-
3
3
2
-
4
6
1
9
10
1
1
2
-
-
-
-
$
$
$
$
$
$
$
$
$
$
-
-
1
1
736
-
1
737
612
4
616
152
2
154
-
-
-
-
6
-
1
7
2
1
1
4
5
-
5
8
-
8
7
1
1
9
$
$
$
$
$
$
$
$
$
$
1,615
-
10
1,625
593
161
4
758
1,577
-
1,577
2,044
-
2,044
2,148
184
3
2,335
6
-
4
10
4
1
5
10
6
9
15
9
1
10
7
1
1
9
$
$
$
$
$
$
$
$
$
$
1,615
-
11
1,626
1,329
161
5
1,495
2,189
4
2,193
2,196
2
2,198
2,148
184
3
2,335
Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure
is classified as real estate owned. When property is acquired it is recorded at estimated fair value at the date of
foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the price
a buyer would be willing to pay on the basis of current market conditions, including normal terms from other
financial institutions. Holding costs and declines in estimated fair value result in charges to expense after
acquisition. At December 31, 2015, 2014, 2013 and 2012, we had no real estate owned. At December 31, 2011,
we had real estate owned of $408,000.
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the
classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss
57
assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized
by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose
us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential
weaknesses that deserve our close attention, are required to be designated as special mention.
We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our
loan portfolio that are both probable and reasonable to estimate at a balance sheet date. Our determination as to
the classification of our assets and the amount of our loss allowances is subject to review by our principal federal
regulator, the Federal Reserve Board, which can require that we establish additional loss allowances. We
regularly review our asset portfolio to determine whether any assets require classification in accordance with
applicable regulations. On the basis of our review of our assets, classified assets totaled $8.1 million at
December 31, 2015, and consisted of substandard assets of $7.4 million, special mention assets of $643,000 and
no doubtful or loss assets. The classified assets total at December 31, 2015 included $2.9 million of troubled
debt restructurings, $4.0 million of nonperforming loans and $1.1 million of trust preferred securities. Effective
September 30, 2015, we automatically designate any loan that is 30 to 89 days delinquent as special mention and
automatically classify any loan that is delinquent 90 days or more as substandard. Loans which have been
delinquent for fewer days may also be classified in these categories.
Allowance for Loan Losses
We provide for loan losses based upon the consistent application of our documented allowance for loan
loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to income based on various factors which,
in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan
portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance
with GAAP.
General allowances are established for loan losses on a portfolio basis for loans that do not meet the
definition of impaired in accordance with current accounting standards. The portfolio is grouped into similar risk
characteristics, primarily loan type and delinquency status. We apply an estimated loss rate to each loan group.
The loss rates applied are based upon our loss experience adjusted, as appropriate, for the environmental factors
discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible
to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses
may be significantly more than the allowance for loan losses we have established, which could have a material
negative effect on our financial results.
Residential mortgage loans represent the largest segment of our loan portfolio. All of the residential
mortgage loans are secured by a first mortgage on residential real estate in Hawaii, consist primarily of fixed-rate
mortgage loans that have been underwritten to Freddie Mac and Fannie Mae guidelines and have similar risk
characteristics. The loan loss allowance is determined by first calculating the historical loss rate for this segment
of the portfolio. The loss rate may be adjusted for qualitative and environmental factors. The allowance for loan
loss is calculated by multiplying the adjusted loss rate by the total loans in this segment of the portfolio.
58
The adjustments to historical loss experience are based on an evaluation of several qualitative and
environmental factors, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
changes in lending policies and procedures, including changes in underwriting standards and
collections, charge-off and recovery practices;
changes in international, national, and local economic trends;
changes in the types of loans in the loan portfolio;
changes in the experience and ability of personnel in the mortgage loan origination and loan
servicing departments;
changes in the number and amount of delinquent loans and classified assets;
changes in the type and volume of loans being originated;
changes in the value of underlying collateral for collateral dependent loans;
changes in any concentration of credit; and
external factors such as competition, legal and regulatory requirements on the level of estimated
credit losses in the existing loan portfolio.
We also use historical loss rates adjusted for qualitative and environmental factors to establish loan loss
allowances for the following portfolio segments:
(cid:120)
(cid:120)
home equity loans and lines of credit; and
consumer and other loans.
We have a limited loss experience for the construction, commercial and other mortgage segment of the
loan portfolio. The loan loss allowance on this portfolio segment is determined using the loan loss rate of other
financial institutions in the State of Hawaii. The allowance for loan loss is calculated by multiplying the loan
loss rate of other financial institutions in the state by the total loans in this segment of the loan portfolio.
Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss
methodology results in a higher dollar amount of estimated probable losses than would be the case without the
increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss
methodology results in a lower dollar amount of estimated probable losses than would be the case without the
decrease. The unallocated allowance is established to provide for probable losses that have been incurred as of
the reporting date but are not reflected in the allocated allowance.
We evaluate our loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we
use the best information available to make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the evaluations. In addition, as an integral
part of their examination process, the Federal Reserve Board will periodically review the allowance for loan
losses. The Federal Reserve Board may require us to increase the allowance based on their analysis of
information available at the time of their examination.
59
The following table sets forth activity in our allowance for loan losses for the years indicated.
(Dollars in thousands)
Balance at beginning of year .....................
Charge-offs:
Real estate loans:
First mortgage:
One- to four-family residential .........
Construction, commercial and other.
Home equity loans and lines of credit ..
Other loans ................................................
Total charge-offs ..............................
Recoveries:
Real estate loans:
First mortgage:
One- to four-family residential .........
Construction, commercial and other.
Home equity loans and lines of credit ..
Other loans ................................................
Total recoveries ................................
Net (charge-offs) recoveries .....................
Provision for loan losses ...........................
2015
At or For the Year Ended December 31,
2012
2013
2014
2011
$
1,691
$
1,486
$
1,672
$
1,541
$
1,488
-
-
-
53
53
3
11
47
12
73
20
455
118
-
10
57
185
9
2
4
15
30
(155)
360
299
-
50
146
495
235
12
7
16
270
(225)
39
333
8
3
48
392
79
8
5
16
108
(284)
415
188
54
9
164
415
28
-
-
22
50
(365)
418
Balance at end of year ...............................
$
2,166
$
1,691
$
1,486
$
1,672
$
1,541
Ratios:
Net charge-offs to average loans
outstanding ............................................
0.00%
0.02%
0.03%
0.04%
0.06%
Allowance for loan losses to
nonperforming loans at end of year ......
Allowance for loan losses to total loans
at end of year ........................................
40.00%
37.97%
24.77%
37.95%
52.65%
0.18%
0.17%
0.17%
0.22%
0.22%
60
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses
allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The
allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular
category. The allowance for loan losses for each category is affected by the national and Hawaii economies and
interest rates as well as other factors.
2015
At December 31,
2014
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
(Dollars in thousands)
2013
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
Real estate loans:
First mortgage:
One- to four-family residential .....
Multi-family residential ................
Construction, commercial and
other ..........................................
Home equity loans and lines
of credit .......................................
Other loans ............................................
Total allocated allowance .................
Unallocated............................................
Total ..................................................
$
$
1,365
15
517
3
72
1,972
194
2,166
95.90%
0.82
$
1.62
1.28
0.38
100.00
-
100.00%
$
410
3
977
5
263
1,658
33
1,691
95.08%
0.92
$
1.89
1.64
0.47
100.00
-
100.00%
$
375
1
799
10
229
1,414
72
1,486
95.41%
0.57
1.57
1.91
0.54
100.00
-
100.00%
At December 31,
2012
2011
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
(Dollars in thousands)
Real estate loans:
First mortgage:
One- to four-family residential ....
Multi-family residential ...............
Construction, commercial and
other .........................................
Home equity loans and lines
of credit ........................................
Other loans ............................................
Total allocated allowance ................
Unallocated ...........................................
Total .................................................
$
$
585
5
818
35
107
1,550
122
1,672
94.84%
0.88
$
1.77
1.94
0.57
100.00
-
100.00%
$
624
7
285
258
291
1,465
76
1,541
93.90%
1.00
1.83
2.48
0.79
100.00
-
100.00%
61
In 2015, we revised the qualitative factors that were used to determine the allowance for loan losses. As
a result of these modifications, the Company increased the portion of the allowance for loan losses attributable to
first mortgage loans and decreased the portion of the allowance for loan losses attributable to construction,
commercial and other mortgage loans, and other loans. The allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other categories.
Management of 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 checking and savings accounts and short-term borrowings. 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.
We continue our efforts to reduce interest rate risk. In 2015, we sold $56.2 million of fixed-rate
mortgage loans and obtained $37.0 million of additional long-term, fixed-rate borrowings. In 2014, we sold
$37.5 million of fixed-rate mortgage loans. In 2013, we sold $82.2 million of fixed-rate mortgage loans,
obtained $30.0 million of long-term, fixed-rate borrowings, and purchased $5.1 million of shorter-duration
mortgage-backed securities. In addition, we may utilize the following strategies to further reduce our interest
rate risk:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Continuing our efforts to increase our core checking and passbook accounts, which are less rate-
sensitive than certificates of deposit and which provide us with a stable, low-cost source of
funds;
Continuing to repay short-term borrowings;
Maintaining overnight cash balances at the Federal Reserve Bank or a portfolio of short-term
investments;
Purchasing mortgage-backed securities with shorter durations;
Selling a portion of the fixed-rate mortgage loans we originate to Freddie Mac or Fannie Mae;
Extending the maturity of our liabilities by obtaining longer-term fixed-rate FHLB advances and
securities sold under agreements to repurchase;
Subject to the maintenance of our credit quality standards, originating commercial loans and
home equity lines of credit, which have adjustable interest rates and shorter average lives than
first mortgage loans; and
Maintaining relatively high regulatory capital ratios.
62
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. We have no
current intention to sell loans classified as held-for-investment.
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 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. 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
December 31, 2015 that would result from the designated instantaneous changes in the interest rate yield curve.
Change in
Interest Rates
(bp) (1)
Estimated EVE
(2)
Estimated
Increase
(Decrease) in
EVE
Percentage
Change in EVE
EVE Ratio as a
Percent of
Present Value
of Assets (3)(4)
(Dollars in thousands)
Increase
(Decrease) in
EVE Ratio as a
Percent of
Present Value of
Assets (3)(4)
+400
+300
+200
+100
0
-100
$ 189,762
$ 213,175
$ 235,831
$ 250,952
$ 245,554
$ 211,131
$ (55,792)
$ (32,378)
(9,723)
$
5,399
$
$
-
$ (34,423)
(22.72)%
(13.19)%
(3.96)%
2.20%
-%
(14.02)%
10.61%
11.73%
12.79%
13.46%
13.17%
11.51%
(2.56)%
(1.44)%
(0.38)%
0.29%
-%
(1.66)%
(1)
(2)
(3)
(4)
Assumes an instantaneous uniform change in interest rates at all maturities.
EVE is the difference between the present value of an institution’s assets and liabilities.
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
EVE Ratio represents EVE divided by the present value of assets.
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.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Territorial Savings Bank’s
primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments,
63
advances from the Federal Home Loan Bank, securities sold under agreements to repurchase, proceeds from loan
and security sales and principal repayments on securities. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. We have established an Asset/Liability
Management Committee, consisting of our President and Chief Executive Officer, our Vice Chairman and Co-
Chief Operating Officer, our Senior Vice President and Chief Financial Officer and our Vice President and
Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to
ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers
as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short-
and long-term liquidity needs as of December 31, 2015.
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.
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 December 31, 2015, Territorial Savings Bank’s cash and
cash equivalents totaled $65.9 million. On that date, we had $69.0 million of Federal Home Loan Bank advances
outstanding, with the ability to borrow an additional $555.1 million under Federal Home Loan Bank advances
and $55.0 million in securities sold under agreements to repurchase outstanding.
Our cash flows are derived from operating activities, investing activities and financing activities as
reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At December 31, 2015, we had $26.5 million in loan commitments outstanding, most of which were for
fixed-rate loans. In addition to commitments to originate loans, we had $26.6 million in unused lines of credit to
borrowers. Certificates of deposit due within one year of December 31, 2015 totaled $165.0 million, or 11.4% of
total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds,
including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan
Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2016. We
believe, however, based on past experience that a significant portion of such deposits will remain with us. We
have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating loans and purchasing mortgage-backed securities. During
the years ended December 31, 2015, 2014 and 2013, we originated $436.0 million, $248.0 million and $306.0
million of loans, respectively. During these years, we purchased $11.7 million, $43.9 million and $270.4 million
of securities, respectively.
64
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 net
increases in deposits of $85.4 million and $71.0 million for the years ended December 31, 2015 and 2014,
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.
Liquidity management is both a daily and long-term function of business management. If we require
funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan
Bank, which provide an additional source of funds. We also utilize securities sold under agreements to
repurchase as another borrowing source. At December 31, 2015, we had the ability to borrow up to an additional
$555.1 million from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank increased by
$54.0 million while securities sold under agreements to repurchase decreased by $17.0 million for the year ended
December 31, 2015.
As a separate legal entity, Territorial Bancorp Inc. is required to have liquidity to fund stock repurchases
and dividend payments to shareholders and for other corporate purposes. In 2014, 2013, 2011 and 2010,
Territorial Bancorp Inc. adopted common stock repurchase programs. Shares repurchased will reduce the
amount of shares issued and outstanding. The repurchased shares may be reissued in connection with share-
based compensation plans and for general corporate purposes. During the years ended December 31, 2015 and
2014, the Company repurchased 373,711 and 221,530 shares, respectively, of the total 3,099,253 shares
authorized by the Board of Directors. For the years ended December 31, 2015 and 2014, the shares were
repurchased at an average cost of $23.91 and $22.48, respectively. At December 31, 2015 and 2014, on a stand-
alone basis, Territorial Bancorp Inc. had liquid assets of $15.8 million and $16.2 million, respectively.
Territorial Savings Bank and the Company are 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. At December 31, 2015, Territorial Savings Bank and the Company exceeded all regulatory
capital requirements and are considered to be “well capitalized” under regulatory guidelines. See Note 23 of the
Notes to the Consolidated Financial Statements.
The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over
time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general
corporate purposes, including the funding of loans. Our financial condition and results of operations were
enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net
interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock
offering, our return on equity has been adversely affected following the stock offering.
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.
For additional information, see Note 22 of the Notes to the Consolidated Financial Statements.
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.
65
The following table summarizes our significant fixed and determinable contractual obligations and other
funding needs by payment date at December 31, 2015. The payment amounts represent those amounts due to the
recipient and do not include any unamortized premiums or discounts or other similar carrying amount
adjustments.
Contractual Obligations
One Year
or Less
Long-term debt ............................ $
Operating leases ..........................
Capitalized leases ........................
Purchase obligations ...................
Certificates of deposit .................
Other long-term liabilities ...........
-
2,677
-
2,182
165,007
-
Total ........................................ $ 169,866
27,459
Commitments to extend credit .... $
Payments Due by Period
More Than
One Year to
Three Years
More Than
Three Years to
Five Years
(In thousands)
$
$
$
62,000
4,202
-
2,213
22,820
-
91,235
-
$
$
$
62,000
2,207
-
10
36,208
-
100,425
-
$
$
$
More Than
Five Years
Total
-
844
-
-
-
-
844
-
$ 124,000
9,930
-
4,405
224,035
-
$ 362,370
27,459
$
Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) amended the Receivables topic of
the FASB Accounting Standards Codification (ASC). The amendment clarifies when an in substance
repossession or foreclosure occurs and when a mortgage loan should be derecognized and the related real
property recognized. The amendment also requires disclosures about the amount of foreclosed residential real
property held and the recorded investment in mortgage loans collateralized by residential real property in the
process of foreclosure. The amendment was effective for interim and annual periods beginning after December
15, 2014. The Company adopted this amendment on January 1, 2015, and the adoption did not have a material
effect on its consolidated financial statements.
In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC. The amendment
seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S.
generally accepted accounting principles and International Financial Reporting Standards. The amendment is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Early application is not permitted. In August 2015, the FASB deferred the effective date of the
amendment by one year. However, entities may still choose to adopt the amendment as of the original effective
date. The Company does not expect the adoption of this amendment to have a material effect on its consolidated
financial statements.
In June 2014, the FASB amended the Transfers and Servicing topic of the FASB ASC. The amendment
modifies the accounting for certain types of repurchase transactions as well as adds new disclosure requirements
for repurchase transactions. The amendment was effective for interim and annual periods beginning after
December 15, 2014, with early adoption prohibited. The Company adopted this amendment on January 1, 2015,
and the adoption did not have a material effect on its consolidated financial statements.
In August 2014, the FASB amended the Receivables topic of the FASB ASC. The amendment seeks to
clarify the classification of foreclosed mortgage loans that are either fully or partially guaranteed under
government programs, such as from the Federal Housing Administration (FHA) or the U.S. Department of
Veterans Affairs (VA). The amendment was effective for interim and annual periods beginning after December
15, 2014. The Company adopted this amendment on January 1, 2015, and the adoption did not have any effect
on its consolidated financial statements.
66
In April 2015, the FASB amended the Intangibles – Goodwill and Other topic of the FASB ASC. The
amendment adds guidance to help entities evaluate the accounting for fees paid in cloud computing
arrangements. The amendment is effective for annual periods, including interim periods within those annual
periods, beginning after December 15, 2015. The Company does not expect the adoption of this amendment to
have a material effect on its consolidated financial statements.
In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC. The
amendment addresses several aspects of recognition, measurement, presentation and disclosure of financial
instruments. Included are: (a) a requirement to measure equity investments at fair value, with changes in fair
value recognized in net income, (b) a simplification of the impairment assessment of equity investments without
readily determinable fair values, (c) the elimination of the requirement to disclose the methods and significant
assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance
sheet, and (d) a requirement to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes. The amendment is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company does not expect the adoption of this
amendment to have a material effect on its consolidated financial statements.
In February 2016, the FASB amended the Leases topic of the FASB ASC. The primary effects of the
amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose certain
information about leasing arrangements. The amendment is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effects
that the adoption of this amendment will have on its consolidated financial statements.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with U.S.
GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of
historical dollars without consideration of changes in the relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial
companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest
rates have a greater impact on performance than the effects of inflation.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in “ITEM 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” above.
ITEM 8. Financial Statements and Supplementary Data
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Territorial Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Territorial Bancorp Inc. and subsidiaries (the
“Company”) as of December 31, 2015, and the related consolidated statements of income, comprehensive
income, stockholders’ equity, and cash flows for the year ended December 31, 2015. We also have audited the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements
and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall consolidated financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Territorial Bancorp Inc. as of December 31, 2015, and the consolidated results
of their operations and their cash flows for the year ended December 31, 2015, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Territorial Bancorp Inc.
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015
68
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
Portland, Oregon
March 14, 2016
69
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Territorial Bancorp Inc.:
We have audited the accompanying consolidated balance sheet of Territorial Bancorp Inc. and subsidiaries as of
December 31, 2014, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Territorial Bancorp Inc. and subsidiaries as of December 31, 2014, and the results of their
operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
March 13, 2015
70
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2015 and 2014
(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents
Investment securities held to maturity, at amortized cost (fair value of
$497,982 and $586,710 at December 31, 2015 and 2014, respectively)
Loans held for sale
Loans receivable, net
Federal Home Loan Bank stock, at cost
Federal Reserve Bank stock, at cost
Accrued interest receivable
Premises and equipment, net
Bank-owned life insurance
Deferred income tax assets, net
Prepaid expenses and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Accounts payable and accrued expenses
Current income taxes payable
Advance payments by borrowers for taxes and insurance
Total liabilities
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 50,000,000 shares,
no shares issued or outstanding
Common stock, $.01 par value; authorized 100,000,000 shares; issued
and outstanding 9,659,685 and 9,919,064 shares at December 31,
2015 and 2014, respectively
Additional paid-in capital
Unearned ESOP shares
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
2015
2014
$
65,919
$
75,060
493,059
2,139
1,188,649
4,790
3,022
4,684
4,903
42,328
9,378
2,270
$ 1,821,141
572,922
1,048
968,212
11,234
2,925
4,436
5,629
41,303
7,254
1,874
$ 1,691,897
$ 1,445,103
69,000
55,000
25,178
2,095
5,124
1,601,500
$ 1,359,679
15,000
72,000
24,098
826
3,916
1,475,519
-
-
96
70,118
(6,361)
161,024
(5,236)
219,641
$ 1,821,141
99
75,229
(6,851)
153,289
(5,388)
216,378
$ 1,691,897
71
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 2015, 2014 and 2013
(Dollars in thousands, except per share data)
Interest and dividend income:
Loans
Investment securities
Other investments
Total interest and dividend income
Interest expense:
Deposits
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service fees on loan and deposit accounts
Income on bank-owned life insurance
Gain on sale of investment securities
Gain on sale of loans
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy
Equipment
Federal deposit insurance premiums
Other general and administrative expenses
Total noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends declared per common share
Basic weighted-average shares outstanding
Diluted weighted-average shares outstanding
See accompanying notes to consolidated financial statements.
2015
2014
2013
$
$
45,903
16,873
316
63,092
4,821
697
997
6,515
56,577
455
56,122
2,161
1,026
701
503
520
4,911
21,497
5,809
3,894
857
4,442
36,499
24,534
9,786
14,748
$
$
39,620
19,752
243
59,615
4,474
266
1,378
6,118
53,497
360
53,137
2,022
1,060
1,263
396
436
5,177
20,932
5,761
3,701
808
4,106
35,308
23,006
8,909
14,097
$
$
36,982
18,941
252
56,175
4,296
302
1,684
6,282
49,893
39
49,854
2,232
1,066
3,450
1,541
427
8,716
21,015
5,365
3,524
770
4,403
35,077
23,493
8,846
14,647
$
$
$
1.63
1.59
0.76
9,073,015
9,263,267
$
$
$
1.53
1.51
0.70
9,211,409
9,317,323
$
$
$
1.51
1.49
0.62
9,711,233
9,844,942
72
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
2015
2014
2013
Net income
$
14,748
$
14,097
$
14,647
Change in unfunded pension liability
Change in unrealized loss on securities
Change in noncredit related loss on trust preferred securities
Other comprehensive income (loss), net of tax
Comprehensive income
(12)
137
27
152
14,900
$
(1,694)
1
92
(1,601)
12,496
454
23
69
546
15,193
$
$
See accompanying notes to consolidated financial statements.
73
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2015, 2014 and 2013
(Dollars in thousands, except share data)
Balances at December 31, 2012
Additional Unearned
Common
Stock
Paid-in
Capital
$
108
$
93,616
ESOP
Shares
$ (7,829)
Retained
Earnings
$ 137,410
Accumulated
Other
Comprehensive
Income (Loss)
(4,333)
$
Total
Stockholders'
Equity
$ 218,972
Net income
Other comprehensive income
Cash dividends declared ($0.62 per share)
Share-based compensation
Allocation of 48,932 ESOP shares
Repurchase of 868,203 shares of company common stock
-
-
-
1
-
(8)
-
-
-
2,675
636
(19,587)
-
-
-
-
489
-
14,647
-
(6,231)
-
-
-
-
546
-
-
-
-
14,647
546
(6,231)
2,676
1,125
(19,595)
Balances at December 31, 2013
$
101
$
77,340
$ (7,340)
$ 145,826
$
(3,787)
$ 212,140
Net income
Other comprehensive loss
Cash dividends declared ($0.70 per share)
Share-based compensation
Allocation of 48,932 ESOP shares
Repurchase of 245,645 shares of company common stock
-
-
-
1
-
(3)
-
-
-
2,816
547
(5,474)
-
-
-
-
489
-
14,097
-
(6,634)
-
-
-
-
(1,601)
-
-
-
-
14,097
(1,601)
(6,634)
2,817
1,036
(5,477)
Balances at December 31, 2014
$
99
$
75,229
$ (6,851)
$ 153,289
$
(5,388)
$ 216,378
Net income
Other comprehensive income
Cash dividends declared ($0.76 per share)
Share-based compensation
Allocation of 48,932 ESOP shares
Repurchase of 373,711 shares of company common stock
Exercise of 1,000 options of common stock
-
-
-
1
-
(4)
-
-
-
-
3,085
720
(8,933)
17
-
-
-
-
490
-
-
14,748
-
(7,013)
-
-
-
-
-
152
-
-
-
-
-
14,748
152
(7,013)
3,086
1,210
(8,937)
17
Balances at December 31, 2015
$
96
$
70,118
$ (6,361)
$ 161,024
$
(5,236)
$ 219,641
See accompanying notes to consolidated financial statements.
74
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses
Depreciation and amortization
Deferred income tax benefit
Amortization of fees, discounts, and premiums
Origination of loans held for sale
Proceeds from sales of loans held for sale
Gain on sale of loans, net
Provision for real estate owned losses
Net gain on sale of real estate owned
Purchases of investment securities held for trading
Proceeds from sale of investment securities held for trading
Gain on sale of investment securities held for trading
Gain on sale of investment securities held to maturity
Net loss on sale of premises and equipment
ESOP expense
Share-based compensation expense
(Increase) decrease in accrued interest receivable
Net increase in bank-owned life insurance
Net (increase) decrease in prepaid expenses and other assets
Net increase (decrease) in accounts payable and accrued expenses
Net increase in advance payments by borrowers for taxes and
insurance
Net increase (decrease) in income taxes payable
2015
2014
2013
$
14,748
$
14,097
$
14,647
455
1,296
(2,223)
(492)
(57,337)
56,493
(503)
-
(12)
-
-
-
(701)
4
1,210
3,086
(248)
(1,025)
(366)
249
1,208
1,269
360
1,389
(1,122)
(441)
(36,146)
37,704
(396)
-
-
(5,041)
5,071
(30)
(1,233)
4
1,036
2,817
(126)
(1,060)
104
(2,513)
208
(588)
39
1,138
(1,856)
249
(81,654)
83,205
(1,541)
14
(1)
-
-
-
(3,450)
-
1,125
2,676
57
(1,066)
1,754
1,669
69
262
Net cash from operating activities
17,111
14,094
17,336
Cash flows from investing activities:
Purchases of investment securities held to maturity
Principal repayments on investment securities held to maturity
Proceeds from sale of investment securities held to maturity
Loan originations, net of principal repayments on loans receivable
Purchases of FHLB stock
Proceeds from redemption of FHLB stock
Purchases of Federal Reserve Bank stock
Purchases of bank-owned life insurance
Proceeds from sale of real estate owned
Purchases of premises and equipment
Proceeds from disposals of premises and equipment
(11,606)
85,802
7,718
(220,215)
(3,120)
9,564
(97)
-
204
(604)
-
(38,826)
66,317
14,248
(111,426)
-
455
(2,925)
-
-
(973)
7
(270,406)
162,800
51,102
(80,752)
-
439
-
(8,000)
130
(2,138)
-
Net cash from investing activities
(132,354)
(73,123)
(146,825)
(Continued)
75
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
Cash flows from financing activities:
Net increase in deposits
Proceeds from advances from the Federal Home Loan Bank
Repayments of advances from the Federal Home Loan Bank
Proceeds from securities sold under agreements to repurchase
Repayments of securities sold under agreements to repurchase
Purchases of Fed Funds
Sales of Fed Funds
Proceeds from exercise of stock options
Repurchases of common stock
Cash dividends paid
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Loans transferred to real estate owned
Investments purchased, not settled
Company stock repurchased prior year, settled current year
See accompanying notes to consolidated financial statements.
$
2015
2014
2013
$
85,424
120,000
(66,000)
30,000
(47,000)
10
(10)
17
(9,326)
(7,013)
106,102
(9,141)
75,060
$
70,970
-
-
-
-
10
(10)
-
(5,612)
(6,634)
58,724
50,862
5,000
(10,000)
25,000
(23,000)
-
-
-
(19,595)
(6,231)
22,036
(305)
(107,453)
75,365
182,818
$
65,919
$
75,060
$
75,365
$
$
6,648
10,324
$
6,055
10,478
$
6,232
10,440
$
192
1,200
389
$
-
-
-
143
-
-
76
(1) Organization
On November 4, 2008, the Board of Directors of Territorial Mutual Holding Company (MHC) approved a
plan of conversion and reorganization under which MHC would convert from a mutual holding company to
a stock holding company. The conversion to a stock holding company was approved by the depositors and
borrowers of Territorial Savings Bank and the Office of Thrift Supervision (OTS) and included the filing of
a registration statement with the U.S. Securities and Exchange Commission. Upon the completion of the
conversion and reorganization on July 10, 2009, Territorial Mutual Holding Company and Territorial
Savings Group, Inc. ceased to exist as separate legal entities and Territorial Bancorp Inc. became the
holding company for Territorial Savings Bank. A total of 12,233,125 shares were issued in the conversion
at $10 per share. Territorial Bancorp Inc.’s common stock began trading on the NASDAQ Global Select
Market under the symbol “TBNK” on July 13, 2009.
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. The
liquidation account will be reduced annually to the extent that eligible account holders and supplemental
eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder’s or supplemental eligible account holder’s interest in the liquidation account. In the
event of a complete liquidation of Territorial Savings Bank, and only in such event, each account holder
will be entitled to receive a distribution from the liquidation account in an amount proportionate to the
adjusted qualifying account balances then held. The balance of the liquidation account at December 31,
2015 was $13.5 million.
On June 25, 2014, Territorial Savings Bank converted from a federal savings bank to a Hawaii state-
chartered savings bank. On July 10, 2014, Territorial Savings Bank became a member of the Federal
Reserve System.
(2) Summary of Significant Accounting Policies
(a) Description of Business
Territorial Bancorp Inc. (the “Company”), through its wholly-owned subsidiary, Territorial Savings
Bank (the “Bank”), provides loan and deposit products and services primarily to individual customers
through 28 branches located throughout Hawaii. We deal primarily in residential mortgage loans in
the State of Hawaii. The Company’s earnings depend primarily on its net interest income, which is
the difference between the interest income earned on interest-earning assets (loans receivable and
investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and
borrowings). Deposits traditionally have been the principal source of the Bank’s funds for use in
lending, meeting liquidity requirements, and making investments. The Company also derives funds
from receipt of interest and principal on outstanding loans receivable and investments, borrowings
from the Federal Home Loan Bank (FHLB), securities sold under agreements to repurchase, and
proceeds from issuance of common stock.
(b) Principles of Consolidation
The consolidated financial statements include the accounts and results of operations of Territorial
Bancorp Inc. and Territorial Savings Bank and its wholly-owned subsidiaries, Territorial Real Estate
Co., Inc. and Territorial Financial Services, Inc. Significant intercompany balances and transactions
have been eliminated in consolidation.
77
(c) Cash and Cash Equivalents
Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks,
federal funds sold, and short-term, highly liquid investments with original maturities of three months
or less.
(d)
Investment Securities
The Company classifies and accounts for its investment securities as follows: (1) held-to-maturity
debt securities in which the Company has the positive intent and ability to hold to maturity are
reported at amortized cost; (2) trading securities that are purchased for the purpose of selling in the
near term are reported at fair value, with unrealized gains and losses included in current earnings; and
(3) available-for-sale securities not classified as either held-to-maturity or trading securities are
reported at fair value, with unrealized gains and losses excluded from current earnings and reported as
a separate component of equity. At December 31, 2015 and 2014, the Company classified all of its
investments as held-to-maturity.
A decline in the market value of any available-for-sale or held-to-maturity security below cost, that is
deemed to be other than temporary, results in an impairment to reduce the carrying amount to fair
value. To determine whether impairment is other than temporary, the Company considers whether it
has the intent and ability not to sell and would not be required to sell for a sufficient period of time to
recover the remaining amortized cost basis.
Gains or losses on the sale of investment securities are computed using the specific-identification
method. The Company amortizes premiums and accretes discounts associated with investment
securities using the interest method over the contractual life of the respective investment security.
Such amortization and accretion is included in the interest and dividend income line item in the
consolidated statements of income. Dividend and interest income are recognized when earned.
(e) Loans Receivable
This policy applies to all loan classes. Loans receivable are stated at the principal amount
outstanding, less the allowance for loan losses, loan origination fees and costs, and commitment fees.
Interest 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. For nonaccrual loans,
the Company records payments received as a reduction in principal. The Company, considering
current information and events regarding the borrowers’ ability to repay their obligations, considers a
loan to be impaired when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When a loan is considered to be impaired,
the amount of the impairment is measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent,
based on the fair value of the collateral less estimated costs to sell. Impairment losses are written off
against the allowance for loan losses. For nonaccrual impaired 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.
(f) Loans Held for Sale
Loans held for sale are stated at the lower of aggregate cost or market value. Net fees and costs of
originating loans held for sale are deferred and are included in the basis for determining the gain or
loss on sales of loans held for sale.
78
(g) Deferred Loan Origination Fees and Unearned Loan Discounts
Loan origination and commitment fees and certain direct loan origination costs are being deferred,
and the net amount is recognized over the life of the related loan as an adjustment to yield. Net
deferred loan fees are amortized using the interest method over the contractual term of the loan,
adjusted for actual prepayments. Net unamortized fees on loans paid in full are recognized as a
component of interest income.
(h) Real Estate Owned
Real estate owned is valued at the time of foreclosure at fair value, less estimated cost to sell, thereby
establishing a new cost basis. The Company obtains appraisals based on recent comparable sales to
assist management in estimating the fair value of real estate owned. Subsequent to acquisition, real
estate owned is valued at the lower of cost or fair value, less estimated cost to sell. Declines in value
are charged to expense through a direct write-down of the asset. Costs related to holding real estate
are charged to expense while costs related to development and improvements are capitalized.
Gains from the sale of real estate owned, if any, are recognized when title has passed, minimum down
payment requirements are met, the terms of any notes received are such as to satisfy continuing
investment requirements, and the Company is relieved of any requirements for continued involvement
with the properties. If the minimum down payment or the continuing investment is not adequate to
meet the criteria specified in the Property, Plant and Equipment topic of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC), the Company will defer income
recognition and account for such sales using alternative methods, such as installment, deposit, or cost
recovery.
(i) Allowance for Loan Losses
The Company maintains an allowance adequate to cover Management’s estimate of probable loan
losses as of the balance sheet date. The Company’s allowance for loan losses is maintained at a level
considered adequate to provide for losses that can be estimated based upon specific and general
conditions. All loan losses are charged, and all recoveries are credited, to the allowance for loan
losses. Additions to the allowance for loan losses are provided by charges to income based on various
factors, which, in the Company’s judgment, deserve current recognition in estimating probable losses.
Charge-offs to the allowance are made when management determines that collectability of all or a
portion of a loan is doubtful and available collateral is insufficient to repay the loan.
General allowances are established for loan losses on a portfolio basis for loans that do not meet the
definition of impaired, in accordance with the Receivables topic of the FASB ASC. The portfolio is
grouped into similar risk characteristics, primarily loan type and delinquency status. The Company
applies an estimated loss rate to each loan group. The loss rates applied are based upon its loss
experience adjusted, as appropriate, for environmental factors discussed below. This evaluation is
inherently subjective, as it requires material estimates that may be susceptible to significant revisions
based upon changes in economic and real estate market conditions. Actual loan losses may be
significantly more than the allowance for loan losses the Company has established, which could have
a material negative effect on its financial results.
Residential mortgage loans represent the largest segment of the Company’s loan portfolio. All of the
residential mortgage loans are secured by a first mortgage on residential real estate in Hawaii and
consist primarily of fixed-rate mortgage loans which have been underwritten to Freddie Mac and
Fannie Mae guidelines and have similar risk characteristics. The loan loss allowance is determined
by first calculating the historical loss rate for this segment of the portfolio. The loss rate may be
79
adjusted for qualitative and environmental factors. The allowance for loan loss is calculated by
multiplying the adjusted loss rate by the total loans in this segment of the portfolio.
The adjustments to historical loss experience are based on an evaluation of several qualitative and
environmental factors, including:
(cid:120) changes in lending policies and procedures, including changes in underwriting standards and
collections, charge-off and recovery practices;
(cid:120) changes in international, national, and local economic trends;
(cid:120) changes in the types of loans in the loan portfolio;
(cid:120) changes in the experience and ability of personnel in the mortgage loan origination and loan
servicing departments;
(cid:120) changes in the number and amount of delinquent loans and classified assets;
(cid:120) changes in the type and volume of loans being originated;
(cid:120) changes in the value of underlying collateral for collateral dependent loans;
(cid:120) changes in any concentration of credit; and
(cid:120) external factors such as competition, legal and regulatory requirements on the level of estimated
credit losses in the existing loan portfolio.
The Company also uses historical loss rates adjusted for qualitative and environmental factors to
establish loan loss allowances for the following portfolio segments:
(cid:120) home equity loans and lines of credit; and
(cid:120) consumer and other loans.
The Company has a limited loss experience for the construction, commercial and other mortgage
segment of the loan portfolio. The loan loss allowance on this portfolio segment is determined using
the loan loss rate of other financial institutions in the State of Hawaii. The allowance for loan loss is
calculated by multiplying the loan loss rate of other financial institutions in the state by the total loans
in this segment of the Company’s loan portfolio.
The allocation of a portion of the allowance to one category of loans does not preclude its availability
to absorb losses in other categories. In addition, the unallocated allowance is established to provide
for probable losses that have been incurred as of the reporting date but are not reflected in the
allocated allowance.
While the Company uses the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, the Federal Reserve Board
will periodically review the allowance for loan losses. The Federal Reserve Board may require the
Company to increase the allowance based on their analysis of information available at the time of
their examination.
80
(j)
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control is surrendered. Control is
surrendered when the assets have been isolated from the Company, the transferee obtains the right to
pledge or exchange the assets without constraint, and the Company does not maintain effective
control over the transferred assets. Mortgage loans sold for cash are accounted for as sales as the
above criteria have been met.
Mortgage loans may also be packaged into securities that are issued and guaranteed by
U.S. government-sponsored enterprises or a U.S. government agency. The Company receives 100%
of the mortgage-backed securities issued. Securitizations are not accounted for as sales and no gain or
loss is recognized. The mortgage-backed securities received in securitizations are valued at amortized
cost and classified as held-to-maturity.
Mortgage loan transfers accounted for as sales and securitizations are without recourse, except for
normal representations and warranties provided in sales transactions, and the Company may retain the
related rights to service the loans. The retained servicing rights create mortgage servicing assets that
are accounted for in accordance with the Transfers and Servicing topic of the FASB ASC. Mortgage
servicing assets are initially valued at fair value and subsequently at the lower of cost or fair value and
are amortized in proportion to and over the period of estimated net servicing income. The Company
uses a discounted cash flow model to determine the fair value of retained mortgage servicing rights.
Prior to 2010, we retained the servicing rights on residential mortgage loans sold. In 2010, we began
selling loans primarily on a servicing-released basis.
(k) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is principally computed on the straight-line method over the estimated useful lives of the
respective assets. The estimated useful life of buildings and improvements is 30 years, furniture,
fixtures, and equipment is 3 to 10 years, and automobiles are 3 years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the
asset.
(l)
Income Taxes
The Company files consolidated federal income tax and consolidated state franchise tax returns.
Deferred tax assets and liabilities are recognized using the asset and liability method of accounting for
the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
We establish income tax contingency reserves for potential tax liabilities related to uncertain tax
positions. A liability for income tax uncertainties would be recorded for unrecognized tax benefits
related to uncertain tax positions where it is more likely than not that the position will be sustained
upon examination by a taxing authority.
As of December 31, 2015 and 2014, the Company had not recognized a liability for income tax
uncertainties in the accompanying consolidated balance sheets because Management concluded that
the Company does not have uncertain tax positions.
81
The Company recognizes interest and penalties related to tax liabilities in other interest expense and
other general and administrative expenses, respectively, in the consolidated statements of income.
Tax years 2012 to 2014 currently remain subject to examination by the Internal Revenue Service and
by the Department of Taxation of the State of Hawaii.
(m) Impairment of Long-Lived Assets
Long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the consolidated balance sheets and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated.
(n) Pension Plan
Pension benefit costs (returns) are charged (credited) to salaries and employee benefits expense, and
the corresponding prepaid (accrued) pension cost is recorded in prepaid expenses and other assets or
accounts payable and accrued expenses in the consolidated balance sheets. The Company’s policy is
to fund pension costs in amounts that will not be less than the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 and will not exceed the maximum tax-deductible
amounts. The Company generally funds at least the net periodic pension cost, subject to limits and
targeted funded status as determined with the consulting actuary.
(o) Employee Stock Ownership Plan (ESOP)
The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of
stockholders’ equity. Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP shares reduce
retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.
(p) Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is computed by dividing
net income by the sum of the weighted-average number of shares outstanding plus the dilutive effect
of stock options and restricted stock. ESOP shares not committed to be released are not considered
outstanding.
We have two forms of our outstanding common stock: common stock and unvested restricted stock
awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same
rate as common shareholders and they both share equally in undistributed earnings. The computed
basic and diluted earnings per share are substantially equivalent using both the two-class and the
treasury stock methods of calculating earnings per share.
(q) Common Stock Repurchase Program
In 2014, 2013, 2011 and 2010, the Company adopted common stock repurchase programs in which
shares repurchased reduce the amount of shares issued and outstanding. The repurchased shares may
be reissued in connection with share-based compensation plans and for general corporate purposes.
As of December 31, 2015 and 2014, the Company had accumulated repurchases of 3,099,253 and
82
2,749,789 shares, respectively, of the total 3,099,253 shares authorized by the Board of Directors.
During 2015 and 2014, shares were repurchased at an average cost of $23.91 and $22.48,
respectively.
(r) Bank-Owned Life Insurance
The Company’s investment in bank-owned life insurance is based on cash surrender value. The
Company invests in bank-owned life insurance to provide a funding source for benefit plan
obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable.
Federal regulations generally limit the investment in bank-owned life insurance to 25% of the Bank’s
Tier 1 capital plus the allowance for loan losses. At December 31, 2015, this limit was $52.6 million
and the Company had invested $42.3 million in bank-owned life insurance at that date.
(s) Use of Estimates
The preparation of the consolidated financial statements requires management to make a number of
estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amount of revenues and expenses during the reporting period. Significant items subject to such
estimates and assumptions include the allowance for loan losses; valuation of certain investment
securities and determination as to whether declines in fair value below amortized cost are other than
temporary; valuation allowances for deferred income tax assets; mortgage servicing assets; and assets
and obligations related to employee benefit plans. Accordingly, actual results could differ from those
estimates.
(t) Recently Issued Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) amended the Receivables topic
of the FASB Accounting Standards Codification (ASC). The amendment clarifies when an in
substance repossession or foreclosure occurs and when a mortgage loan should be derecognized and
the related real property recognized. The amendment also requires disclosures about the amount of
foreclosed residential real property held and the recorded investment in mortgage loans collateralized
by residential real property in the process of foreclosure. The amendment was effective for interim
and annual periods beginning after December 15, 2014. The Company adopted this amendment on
January 1, 2015, and the adoption did not have a material effect on its consolidated financial
statements.
In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC. The amendment
seeks to clarify the principles for recognizing revenue as well as to develop common revenue
standards for U.S. generally accepted accounting principles and International Financial Reporting
Standards. The amendment is effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period. Early application is not permitted. In
August 2015, the FASB deferred the effective date of the amendment by one year. However, entities
may still choose to adopt the amendment as of the original effective date. The Company does not
expect the adoption of this amendment to have a material effect on its consolidated financial
statements.
In June 2014, the FASB amended the Transfers and Servicing topic of the FASB ASC. The
amendment modifies the accounting for certain types of repurchase transactions as well as adds new
disclosure requirements for repurchase transactions. The amendment was effective for interim and
annual periods beginning after December 15, 2014, with early adoption prohibited. The Company
adopted this amendment on January 1, 2015, and the adoption did not have a material effect on its
consolidated financial statements.
83
In August 2014, the FASB amended the Receivables topic of the FASB ASC. The amendment seeks
to clarify the classification of foreclosed mortgage loans that are either fully or partially guaranteed
under government programs, such as from the Federal Housing Administration (FHA) or the U.S.
Department of Veterans Affairs (VA). The amendment was effective for interim and annual periods
beginning after December 15, 2014. The Company adopted this amendment on January 1, 2015, and
the adoption did not have any effect on its consolidated financial statements.
In April 2015, the FASB amended the Intangibles – Goodwill and Other topic of the FASB ASC.
The amendment adds guidance to help entities evaluate the accounting for fees paid in cloud
computing arrangements. The amendment is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015. The Company does not expect the
adoption of this amendment to have a material effect on its consolidated financial statements.
In January 2016, the FASB amended the Financial Instruments – Overall topic of the FASB ASC.
The amendment addresses several aspects of recognition, measurement, presentation and disclosure
of financial instruments. Included are: (a) a requirement to measure equity investments at fair value,
with changes in fair value recognized in net income, (b) a simplification of the impairment
assessment of equity investments without readily determinable fair values, (c) the elimination of the
requirement to disclose the methods and significant assumptions used to estimate the fair value for
financial instruments measured at amortized cost on the balance sheet, and (d) a requirement to use
the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
The amendment is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company does not expect the adoption of this amendment to
have a material effect on its consolidated financial statements.
In February 2016, the FASB amended the Leases topic of the FASB ASC. The primary effects of the
amendment will be to recognize lease assets and lease liabilities on the balance sheet and to disclose
certain information about leasing arrangements. The amendment is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. The
Company is currently evaluating the effects that the adoption of this amendment will have on its
consolidated financial statements.
(3) Cash and Cash Equivalents
The table below presents the balances of cash and cash equivalents:
(Dollars in thousands)
Cash and due from banks
Interest-earning deposits in other banks
Cash and cash equivalents
December 31,
2015
2014
$
10,318
55,601
$
10,803
64,257
$
65,919
$
75,060
Interest-earning deposits in other banks consist primarily of deposits at the Federal Reserve Bank.
84
(4) Investment Securities
The amortized cost and fair values of investment securities are as follows:
(Dollars in thousands)
December 31, 2015:
Held to maturity:
U.S. government-sponsored
mortgage-backed securities
Trust preferred securities
Total
December 31, 2014:
Held to maturity:
U.S. government-sponsored
mortgage-backed securities
Trust preferred securities
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated
Fair Value
$ 492,143
916
$ 493,059
$
$
11,092
-
11,092
$
$
(6,169)
-
(6,169)
$ 497,066
916
$ 497,982
$ 572,232
690
$
18,078
-
$
(4,290)
-
$ 586,020
690
Total
$ 572,922
$
18,078
$
(4,290)
$ 586,710
The amortized cost and estimated fair value of investment securities at December 31, 2015 are shown
below. Incorporated in the maturity schedule are mortgage-backed and trust preferred 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.
(Dollars in thousands)
Held to maturity:
Due within 5 years
Due after 5 years through 10 years
Due after 10 years
Total
Amortized
Cost
Estimated
Fair Value
$
32
7
493,020
$ 493,059
$
34
7
497,941
$ 497,982
Realized gains and losses and the proceeds from sales of securities held to maturity and trading are shown
in the table below. Most of the securities which were sold were U.S. government-sponsored mortgage-
backed securities.
(Dollars in thousands)
Proceeds from sales
Gross gains
Gross losses
2015
$ 7,719
701
-
2014
$ 19,319
1,263
-
2013
$ 51,102
3,450
-
In 2015, the Company received proceeds of $7.7 million from the sale of $7.0 million of held-to-maturity
mortgage-backed securities, resulting in gross realized gains of $639,000. In 2014, the Company received
proceeds of $14.2 million from the sale of $13.0 million of held-to-maturity mortgage-backed securities,
resulting in gross realized gains of $1.2 million. In 2013, the Company received proceeds of $51.1 million
85
from the sale of $47.7 million of held-to-maturity mortgage-backed securities, resulting in gross realized
gains of $3.5 million. The sale of these mortgage-backed securities, for which the Company had already
collected a substantial portion of the outstanding purchased principal (at least 85%), is in accordance with
the Investments – Debt and Equity Securities topic of the FASB ASC and does not taint management’s
assertion of intent to hold remaining securities in the held-to-maturity portfolios to maturity.
Investment securities with amortized costs of $241.4 million and $270.2 million at December 31, 2015 and
2014, respectively, were pledged to secure public deposits, 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
December 31, 2015 and 2014. The Company does not intend to sell these securities 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
Description of securities
Fair Value
(Dollars in thousands)
Unrealized
Losses
Fair Value
Unrealized Number of
Securities
Losses
Fair Value
Unrealized
Losses
December 31, 2015:
Mortgage-backed securities
December 31, 2014:
Mortgage-backed securities
$ 142,810
$
3,939
$ 53,142
$
2,230
43
$ 195,952
$
6,169
$
12,717
$
65
$ 183,349
$
4,225
37
$ 196,066
$
4,290
Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed
securities were caused by increases in market interest rates. 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, 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 December 31, 2015 and 2014.
Trust Preferred Securities. At December 31, 2015, the Company owned one trust preferred security,
PreTSL XXIII. The trust preferred security represents an investment in a pool of debt obligations issued
primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions.
This security is classified in the Company’s held-to-maturity investment portfolio.
The trust preferred securities market is considered to be inactive as only six transactions have occurred over
the past 48 months in the same tranche of securities owned by the Company. The Company uses a
discounted cash flow model to determine whether this security is other-than-temporarily impaired. The
assumptions used in preparing the discounted cash flow model include the following: estimated discount
rates, estimated deferral and default rates on collateral, and estimated cash flows.
Based on the Company’s review, the Company’s investment in PreTSL XXIII did not incur additional
impairment during the years ended December 31, 2015, 2014 and 2013.
PreTSL XXIII has an amortized cost of $916,000 at December 31, 2015. The difference between the
amortized cost of $916,000 and the remaining cost basis of $1.1 million is reported as accumulated other
comprehensive loss and is related to noncredit factors.
86
It is reasonably possible that the fair value of the trust preferred security could decline in the near term if the
overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of
this security remains low. As a result, there is a risk that the Company’s remaining cost basis of $1.1
million on its trust preferred security could be credit-related other-than-temporarily impaired in the near
term. The impairment, if any, could be material to the Company’s consolidated statements of income.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt
securities held and not intended to be sold:
(Dollars in thousands)
Balance at January 1,
Credit losses on debt securities for which other-than-temporary
impairment was not previously recognized
Credit losses on debt securities which were sold
Balance at December 31,
2015
$ 5,885
2014
$ 5,885
-
(3,482)
-
-
$ 2,403
$ 5,885
The table below shows the components of accumulated other comprehensive loss, net of taxes, resulting from
other-than-temporarily impaired securities:
(Dollars in thousands)
Noncredit losses on other-than-temporarily impaired securities, net of
taxes
December 31,
2015
2014
$
147
$
283
(5) Federal Home Loan Bank Stock
The Bank, as a member of the FHLB system, is required to obtain and hold shares of capital stock in the
FHLB. At December 31, 2015 and 2014, the Bank met such requirement. At December 31, 2015 and 2014,
the Bank owned $4.8 million and $11.2 million, respectively, of capital stock of the FHLB.
On June 1, 2015, the Federal Home Loan Bank of Seattle (FHLB Seattle) completed its merger with the
Federal Home Loan Bank of Des Moines (FHLB Des Moines). After the merger, the FHLB Des Moines
repurchased all outstanding excess capital stock, resulting in the repurchase of $7.2 million of capital stock
we held in the FHLB Des Moines. Combined with $759,000 of additional net stock purchases related to
collateral on new advances, this resulted in a decrease in our investment in FHLB stock from $11.2 million
at December 31, 2014 to $4.8 million at December 31, 2015.
The Company evaluated its investment in the stock of the FHLB Des Moines for impairment. Based on the
Company’s evaluation of the underlying investment, including the long-term nature of the investment and
the liquidity position of the FHLB Des Moines, the Company did not consider its FHLB stock other-than-
temporarily impaired.
(6) Federal Reserve Bank Stock
The Bank, as a member of the Federal Reserve System, is required to hold shares of capital stock of the
Federal Reserve Bank of San Francisco equal to six percent of capital and surplus of the Bank. At
December 31, 2015 and 2014, the Bank met such requirement. At December 31, 2015 and 2014, the Bank
owned $3.0 million and $2.9 million of capital stock of the Federal Reserve Bank of San Francisco.
The Company evaluated its investment in the stock of the Federal Reserve Bank of San Francisco for
impairment. Based on the Company’s evaluation of the underlying investment, including the long-term
87
nature of the investment and the liquidity position of the FRB of San Francisco, the Company did not
consider its FRB stock other-than-temporarily impaired.
(7) Loans Receivable and Allowance for Loan Losses
The components of loans receivable are as follows:
(Dollars in thousands)
Real estate loans:
First mortgages:
One- to four-family residential
Multi-family residential
Construction, commercial, and other
Home equity loans and lines of credit
Total real estate loans
Other loans:
Loans on deposit accounts
Consumer and other loans
Total other loans
Less:
Net unearned fees and discounts
Allowance for loan losses
Total unearned fees, discounts and allowance
for loan losses
December 31,
2015
2014
$ 1,145,904
9,834
19,288
15,333
$ 926,074
8,920
18,415
15,992
1,190,359
969,401
304
4,239
4,543
(4,087)
(2,166)
(6,253)
441
4,173
4,614
(4,112)
(1,691)
(5,803)
Loans receivable, net
$ 1,188,649
$ 968,212
88
The table below presents the activity in the allowance for loan losses by portfolio segment:
(Dollars in thousands)
2015:
Balance, beginning of year
Provision (reversal of allowance)
for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance, end of year
2014:
Balance, beginning of year
Provision (reversal of allowance)
for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance, end of year
2013:
Balance, beginning of year
Provision (reversal of allowance)
for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance, end of year
Construction,
Commercial
and Other
Mortgage
Loans
Home
Equity
Loans and
Lines of
Credit
Residential
Mortgage
Consumer
and Other
Unallocated
Totals
$
413
$
977
$
5
$
263
$
33
$
1,691
964
1,377
-
3
3
(471)
506
-
11
11
$
1,380
$
517
$
$
376
$
146
522
(118)
9
(109)
413
$
$
799
176
975
-
2
2
977
$
$
$
590
$
818
$
(150)
440
(299)
235
(64)
(31)
787
-
12
12
(49)
(44)
-
47
47
3
10
1
11
(10)
4
(6)
5
35
18
53
(50)
7
(43)
(150)
113
(53)
12
(41)
161
194
-
-
-
455
2,146
(53)
73
20
$
72
$
194
$
2,166
$
$
$
229
76
305
(57)
15
(42)
263
107
252
359
(146)
16
(130)
$
72
$
1,486
(39)
33
-
-
-
33
360
1,846
(185)
30
(155)
1,691
$
$
$
122
$
1,672
(50)
72
-
-
-
39
1,711
(495)
270
(225)
$
376
$
799
$
10
$
229
$
72
$
1,486
The allowance for loan loss for each segment of the loan portfolio is generally determined by calculating the
historical loss of each segment for a three- to five-year look-back period and adding a qualitative adjustment for
the following factors:
(cid:120) changes in lending policies and procedures, including changes in underwriting standards and
collections, charge-off and recovery practices;
(cid:120) changes in international, national, and local economic trends;
(cid:120) changes in the types of loans in the loan portfolio;
(cid:120) changes in the experience and ability of personnel in the mortgage loan origination and loan
servicing departments;
(cid:120) changes in the number and amount of delinquent loans and classified assets;
(cid:120) changes in the type and volume of loans being originated;
(cid:120) changes in the value of underlying collateral for collateral dependent loans;
(cid:120) changes in any concentration of credit; and
89
(cid:120) external factors such as competition, legal and regulatory requirements on the level of estimated
credit losses in the existing loan portfolio.
In 2014, the Company extended the look-back period that is used to calculate the historical loss rates from three to
five years. The look-back period was extended to five years because the longer look-back is considered to be
more representative of an entire economic cycle.
The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb
losses in other categories. The unallocated allowance is established for probable losses that have been incurred as
of the reporting date but are not reflected in the allocated allowance.
Management considers the allowance for loan losses at December 31, 2015 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.
90
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
Commercial
and Other
Mortgage
Loans
Home
Equity
Loans and
Lines of
Credit
Residential
Mortgage
Consumer
and Other
Unallocated
Totals
(Dollars in thousands)
December 31, 2015:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
$
$
-
1,380
1,380
$
$
-
517
517
$
$
-
3
3
Loans:
Ending loan balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
6,486
1,145,259
$ 1,151,745
$
$
-
19,175
19,175
$
$
124
15,216
15,340
December 31, 2014:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
$
$
-
413
413
$
$
-
977
977
$
$
-
5
5
Loans:
Ending loan balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
6,158
924,732
$ 930,890
$
$
-
18,399
18,399
$
$
296
15,702
15,998
$
$
$
$
$
$
$
$
-
72
72
9
4,546
4,555
-
263
263
4
4,612
4,616
$
$
$
$
$
$
$
$
-
194
194
$
$
-
2,166
2,166
-
-
-
$
6,619
1,184,196
$ 1,190,815
-
33
33
$
$
-
1,691
1,691
-
-
-
$
6,458
963,445
$ 969,903
91
The table below presents the balance of impaired loans individually evaluated for impairment by class of
loans:
(Dollars in thousands)
December 31, 2015:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
December 31, 2014:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
December 31, 2013:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Total
Recorded
Investment
Unpaid
Principal
Balance
$
$
6,486
124
9
7,307
163
9
$
6,619
$
7,479
$
$
$
$
6,158
296
4
6,458
8,373
160
8,533
$
$
$
$
6,775
324
4
7,103
8,716
165
8,881
92
The table below presents the average recorded investment and interest income recognized on impaired loans
by class of loans:
(Dollars in thousands)
2015:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
2014:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
2013:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Total
Average
Recorded
Investment
Interest Income
Recognized
$
$
6,642
131
9
$
6,782
$
$
$
6,383
309
4
$
6,696
$
$
$
$
8,451
160
8,611
$
71
-
-
71
118
-
-
118
130
-
130
There were no loans individually evaluated for impairment with a related allowance for loan loss as of
December 31, 2015, 2014 or 2013. Loans individually evaluated for impairment do not have an allocated
allowance for loan loss because they are written down to fair value.
93
The table below presents the aging of loans and accrual status by class of loans:
30 – 59
Days Past
Due
60 – 89
Days Past
Due
90 Days or
Greater
Past Due
Total Past
Due
Loans Not
Past Due
Total
Loans
Nonaccrual
Loans
Loans
More Than
90 Days
Past Due
and Still
Accruing
(Dollars in thousands)
December 31, 2015:
One- to four-family
residential mortgages
Multi-family residential
mortgages
Construction,
commercial and other
mortgages
Home equity loans and
lines of credit
Loans on deposit accounts
Consumer and other
$
1,354
$
-
-
-
-
4
-
-
-
-
-
1
$
1,615
$
2,969
$ 1,138,966
$ 1,141,935
$
5,282
$
-
-
-
-
-
-
-
-
10
15
9,810
9,810
19,175
19,175
15,340
304
4,236
15,340
304
4,251
-
-
124
-
9
Total
$
1,358
$
1
$
1,625
$
2,984
$ 1,187,831
$ 1,190,815
$
5,415
$
December 31, 2014:
One- to four-family
residential mortgages
Multi-family residential
mortgages
Construction,
commercial and other
mortgages
Home equity loans and
lines of credit
Loans on deposit accounts
Consumer and other
$
1,040
$
736
$
593
$
2,369
$ 919,624
$ 921,993
$
4,153
$
-
-
-
-
7
-
-
-
-
1
-
-
161
-
4
-
-
161
-
12
8,897
8,897
18,399
18,399
15,837
440
4,164
15,998
440
4,176
-
-
296
-
4
Total
$
1,047
$
737
$
758
$
2,542
$ 967,361
$ 969,903
$
4,453
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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 five 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 Company had 23 nonaccrual loans with a book value of $5.4 million at December 31, 2015 and 18
nonaccrual loans with a book value of $4.5 million as of December 31, 2014. The Company collected
interest on nonaccrual loans of $233,000, $244,000 and $164,000 during 2015, 2014 and 2013, respectively,
but due to regulatory requirements, the Company recorded it as a reduction of principal. The Company
would have recognized additional interest income of $312,000, $204,000 and $222,000 during 2015, 2014,
94
and 2013, respectively, had the loans been accruing interest. The Company did not have any loans more
than 90 days past due and still accruing interest as of December 31, 2015, 2014 or 2013.
There were no loans modified in a troubled debt restructuring during the year ended December 31, 2015 or
2014. There were no new troubled debt restructurings within the past 12 months that subsequently
defaulted.
The Company had 15 troubled debt restructurings totaling $3.4 million as of December 31, 2015 that were
considered to be impaired. This total included 14 one- to four-family residential mortgage loans totaling
$3.3 million and one home equity loan for $120,000. Four of the loans, totaling $885,000, were performing
in accordance with their restructured terms and accruing interest at December 31, 2015. Nine of the loans,
totaling $2.0 million, were performing in accordance with their restructured terms but not accruing interest
at December 31, 2015. One of the loans, for $318,000, was 59 days delinquent and accruing interest at
December 31, 2015. One of the loans, for $149,000, was more than 149 days delinquent and not accruing
interest as of December 31, 2015. The Company had 17 troubled debt restructurings totaling $4.6 million
as of December 31, 2014 that were considered to be impaired. This total included 16 one- to four-family
residential mortgage loans totaling $4.4 million and one home equity loan for $135,000. Six of the loans,
totaling $2.0 million, were performing in accordance with their restructured terms and accruing interest at
December 31, 2014. Nine of the loans, totaling $2.2 million, were performing in accordance with their
restructured terms but not accruing interest at December 31, 2014. Two of the loans, totaling $343,000, are
delinquent and not accruing interest as of December 31, 2014. 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. We have no commitments to lend any additional funds to these borrowers.
The Company had no real estate owned as of December 31, 2015 or 2014. There were four one-to four-
family residential mortgage loans totaling $747,000 in the process of foreclosure as of December 31, 2015,
and three one-to four-family residential mortgage loans totaling $755,000 in the process of foreclosure as of
December 31, 2014.
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 years ended December 31, 2015, 2014 and 2013, the Company sold $56.2 million, $37.5 million
and $82.2 million, respectively, of mortgage loans held for sale and recognized gains of $503,000, $396,000
and $1.5 million, respectively. The Company had six loans held for sale totaling $2.1 million and $1.0
million at December 31, 2015 and 2014, respectively.
The Company serviced loans for others of $51.8 million, $60.5 million and $68.4 million at December 31,
2015, 2014, and 2013, respectively. Of these amounts, $2.8 million, $3.0 million, and $3.3 million relate to
securitizations for which the Company continues to hold the related mortgage-backed securities at
December 31, 2015, 2014, and 2013, respectively. The amount of contractually specified servicing fees
earned was $153,000, $179,000 and $213,000 for 2015, 2014, and 2013, respectively. The fees are reported
in service fees on loan and deposit accounts in the consolidated statements of income.
In the normal course of business, the Company has made loans to certain directors and executive officers
under terms which management believes are consistent with the Company’s general lending policies. Loans
to directors and executive officers amounted to $1.4 million at December 31, 2015 and $1.5 million at
December 31, 2014.
95
(8) Accrued Interest Receivable
The components of accrued interest receivable are as follows:
(Dollars in thousands)
Investment securities
Loans receivable
Interest-bearing deposits
Total
(9) Mortgage Servicing Assets
December 31,
$
2015
1,310
3,369
5
$
$
4,684
$
2014
1,562
2,872
2
4,436
Mortgage servicing assets are created when the Company sells mortgage loans and retains the rights to
service the loans. Mortgage servicing assets are accounted for in accordance with the Transfers and
Servicing topic of the FASB ASC and are initially valued at fair value and subsequently at the lower of cost
or fair value. We amortize mortgage servicing assets in proportion to and over the period of estimated net
servicing income. All servicing assets are grouped into categories based on the interest rate and original
term of the loan sold. Mortgage servicing assets related to loan sales are recorded as a gain on sale of loans
and totaled $6,000 and $20,000 for the years ended December 31, 2015 and 2014, respectively.
The table below presents the changes in our mortgage servicing assets:
(Dollars in thousands)
2015
2014
Balance at beginning of year
Additions
Impairments
Amortization
Balance at end of year
$
$
505
6
(8)
(77)
426
$
$
580
20
(15)
(80)
505
The table below presents the gross carrying values, accumulated amortization, and net carrying values of
our mortgage servicing assets:
(Dollars in thousands)
Gross carrying value
Accumulated amortization
Net carrying value
December 31,
2015
2014
$
$
1,356
(930)
426
$
$
1,358
(853)
505
96
The estimated amortization expense for our mortgage servicing assets for the next five years and all years
thereafter are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
$
70
55
45
37
31
188
426
The Company uses a discounted cash flow model to determine the fair value of retained mortgage servicing
assets. The discounted cash flow model is also used to assess impairment of servicing assets. Impairments
are recorded as adjustments to amortization expense and included in service fees on loan and deposit
accounts in the statements of income. Critical assumptions used in the discounted cash flow model include
mortgage prepayment speeds, discount rates, cost of servicing and ancillary income.
Prepayment speed may be affected by economic factors such as home price appreciation, market interest
rates, the availability of other loan products to our borrowers and customer payment patterns. Prepayment
speeds include the impact of all borrower prepayments, including full payoffs, additional principal
payments and the impact of loans paid off due to foreclosure liquidations. As market interest rates decline,
prepayment speeds will generally increase as customers refinance existing mortgage loans under more
favorable interest rate terms and anticipated cash flows will generally decline resulting in a potential
reduction, or impairment, to the fair value of the mortgage servicing assets. Alternatively, an increase in
market interest rates may cause a decrease in prepayment speeds and therefore an increase in the fair value
of mortgage servicing assets.
The table below presents the fair values and key assumptions used in determining the fair values of our
mortgage servicing assets as of December 31, 2015 and 2014:
2015
2014
Fair value, beginning of year (in thousands)
Fair value, end of year (in thousands)
Weighted average discount rate
Weighted average prepayment speed
assumption (PSA prepayment speed)
Annual cost to service (per loan)
$
505
441
10.00%
178.9
60
$
$
617
505
10.50%
178.9
55
$
The PSA prepayment model assumes increasing prepayment rates for the first 30 months of a loan’s term
and constant prepayment rates thereafter.
(10) Interest Rate Lock and Forward Loan Sale Commitments
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 values in prepaid expenses and other assets or in accounts payable
97
and accrued expenses. Changes in fair value are recorded in current earnings. At December 31, 2015,
interest rate locks and forward loan sale commitments on loans held for sale amounted to $6.1 million and
$8.2 million, respectively.
The table below presents the location of assets and liabilities related to derivatives:
(Dollars in thousands)
Location on
Balance Sheet
Interest rate contracts
Prepaid expenses and
Asset Derivatives
Fair Value at December 31,
Liability Derivatives
Fair Value at December 31,
2015
2014
2015
2014
other assets
$
71
$
62
$
-
$
-
Interest rate contracts
Accounts payable and
accrued expenses
-
-
Total derivatives
$
71
$
62
$
77
77
54
54
$
The table below presents the location of gains and losses related to derivatives:
(Dollars in thousands)
Location of
Loss on
Statement of Income
2015
2014
Interest rate contracts
Gain on sale of loans
$
(14)
$
11
(11) Premises and Equipment
Premises and equipment are as follows:
(Dollars in thousands)
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Automobiles
Less accumulated depreciation and amortization
Construction in progress
Total
December 31,
2015
2014
$
585
1,040
12,975
5,145
115
19,860
(14,961)
4,899
4
$
585
1,008
12,765
5,612
115
20,085
(14,474)
5,611
18
$
4,903
$
5,629
Depreciation expense was $1.3 million, $1.4 million and $1.1 million for the years ended December 31,
2015, 2014 and 2013, respectively.
98
(12) Deposits
Deposit accounts by type are summarized with their respective weighted-average interest rates as follows:
December 31,
2015
2014
(Dollars in thousands)
Amount
Rate
Amount
Rate
Non-interest bearing
Savings accounts
Certificates of deposit
Money market
Checking and Super NOW
Total
$
46,514
1,002,893
224,035
1,766
169,895
$ 1,445,103
0.0-%
0.40
0.61
0.36
0.02
0.38%
$
40,040
946,060
221,737
749
151,093
$ 1,359,679
0.0-%
0.36
0.48
0.20
0.02
0.33%
The maturity of certificate of deposit accounts at December 31, 2015 is as follows (dollars in thousands):
Maturing in:
2016
2017
2018
2019
2020
Total
$
165,007
12,090
10,730
19,315
16,893
$
224,035
Certificates of deposit with balances greater than or equal to $100,000 totaled $172.2 million and
$170.6 million at December 31, 2015 and 2014, respectively. Deposit accounts in the Bank are insured by
the FDIC, generally up to a maximum of $250,000 per account owner.
Interest expense by type of deposit is as follows:
(Dollars in thousands)
Savings
Certificates of deposit and money market
Checking and Super NOW
Total
2015
$ 3,670
1,118
33
2014
$ 3,369
1,075
30
2013
$ 3,035
1,232
29
$ 4,821
$ 4,474
$ 4,296
At December 31, 2015 and 2014, overdrawn deposit accounts totaled $38,000 and $77,000, respectively,
and have been reclassified as loans in the consolidated balance sheets.
(13) 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. Our credit line with the FHLB Seattle was equal to 25% of the Bank’s total assets and as of
December 31, 2014, we had the capacity to borrow an additional $399.0 million. After the FHLB Seattle
merged with the FHLB Des Moines, our credit line was raised to 35% of the Bank’s total assets and as of
December 31, 2015, we had the capacity to borrow an additional $555.1 million.
99
Advances outstanding consisted of the following:
December 31,
2015
2014
(Dollars in thousands)
Amount
Weighted
Average
Rate
Due within one year
Due over 1 year to 2 years
Due over 2 years to 3 years
Due over 3 years to 4 years
Due over 4 years to 5 years
$
-
-
37,000
22,000
10,000
-%
-
1.33
1.66
1.66
Total
$ 69,000
1.49%
Weighted
Average
Rate
2.06%
-
-
1.20
-
1.77%
Amount
$ 10,000
-
-
5,000
-
$ 15,000
(14) 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:
December 31,
2015
2014
Repurchase
Liability
Weighted
Average
Rate
Repurchase
Liability
Weighted
Average
Rate
$
-
25,000
-
25,000
5,000
$ 55,000
-%
1.46
-
1.66
1.65
1.57%
$ 47,000
-
25,000
-
-
$ 72,000
2.11%
-
1.46
-
-
1.88%
(Dollars in thousands)
Maturing:
1 year or less
Over 1 year to 2 years
Over 2 years to 3 years
Over 3 years to 4 years
Over 4 years to 5 years
Total
100
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 December 31, 2015. 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.
(Dollars in thousands)
Maturing:
Over 90 days
Carrying
Value of
Securities
Fair
Value of
Securities
Repurchase
Liability
Amount
at Risk
Weighted
Average
Months to
Maturity
$ 66,517
$ 66,560
$ 55,000
$ 11,560
32
(15) Offsetting of Financial Liabilities
Securities sold under agreements to repurchase are subject to a right of offset in the event of default. See
note 14, Securities Sold Under Agreements to Repurchase, for additional information.
Gross Amount
of Recognized
Liabilities
Gross Amount
Offset in the
Balance Sheet
Net Amount of
Liabilities
Presented in the
Balance Sheet
Gross Amount Not Offset in the
Balance Sheet
Financial
Instruments
Cash Collateral
Pledged
Net Amount
$
55,000
$
$
72,000
$
-
-
$
55,000
$
55,000
$
$
72,000
$
72,000
$
-
-
$
$
-
-
(Dollars in thousands)
December 31, 2015:
Securities sold under
agreements to repurchase
December 31, 2014:
Securities sold under
agreements to repurchase
(16) Income Taxes
Allocation of federal and state income taxes between current and deferred provisions is as follows:
(Dollars in thousands)
Current
Federal
State
Deferred
Federal
State
Total
2015
2014
2013
$ 10,176
1,833
12,009
(2,147)
(76)
(2,223)
$ 8,047
1,984
10,031
(730)
(392)
(1,122)
$ 8,746
1,956
10,702
(1,531)
(325)
(1,856)
$ 9,786
$ 8,909
$ 8,846
101
The federal statutory corporate tax rate for the years ended December 31, 2015, 2014 and 2013 was 35%. A
reconciliation of the tax provision based on the statutory corporate rate on pretax income and the provision
for taxes as shown in the accompanying consolidated statements of income is as follows:
(Dollars in thousands)
2015
2014
2013
Income tax expense at statutory rate
Income tax effect of:
Other tax-exempt income
Share-based compensation
State income taxes, net of federal
income tax benefits
Other
$ 8,587
$ 8,052
$ 8,223
(359)
87
1,104
367
(371)
83
1,035
110
(373)
(188)
1,060
124
Total income tax expense
Effective income tax rate
$ 9,786
$ 8,909
$ 8,846
39.89%
38.72%
37.65%
The components of income taxes payable (receivable) are as follows:
(Dollars in thousands)
Current taxes payable (receivable):
Federal
State
Deferred taxes receivable:
Federal
State
December 31,
$
2015
357
1,738
2,095
(7,675)
(1,703)
(9,378)
$
2014
(875)
1,701
826
(5,610)
(1,644)
(7,254)
Total
$
(7,283)
$
(6,428)
102
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities are presented below:
(Dollars in thousands)
Deferred tax assets:
Premises and equipment
Hawaii franchise tax
Unfunded pension liability
Allowance for loan losses
Impaired asset write-down
Employee benefit plans
Equity incentive plan
Unamortized unrealized losses on
transfers of securities from available-
for-sale to held-to-maturity
Deferred compensation
Other
Deferred tax liabilities:
Net deferred loan fees
FHLB stock dividends
Prepaid expense
Premiums on loans sold
December 31,
2015
2014
$
1,761
706
2,138
856
1,068
3,664
1,802
30
827
223
$
1,521
678
2,099
669
2,503
2,750
1,475
48
729
24
13,075
12,496
3,085
330
114
168
3,697
2,619
2,301
122
200
5,242
Net deferred tax assets
$
9,378
$
7,254
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.
There was no valuation allowance for deferred tax assets as of December 31, 2015 and 2014.
(17) 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. The benefits are based on years of service and the employees’
compensation during the service period. The Company’s policy is to accrue the actuarially determined
pension costs and to fund pension costs within regulatory guidelines. The Company reviews its assumptions
on an annual basis and makes modifications to the assumptions based on current rates and trends when it is
appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other
comprehensive income (AOCI) beginning in 2006 and amortized to net periodic benefit cost over future
103
periods using the corridor method. The Company believes that the assumptions utilized in recording its
obligations under the plan are reasonable based on its experience and market conditions.
On November 4, 2008, the Board of Directors approved changes to the Company’s defined benefit pension
plan. Effective December 31, 2008, there will be no further accrual of benefits for any participants and
benefits will not increase with any additional years of service. Employees already enrolled in the Pension
Plan as of December 31, 2008 will be 100% vested if they have at least five years of service. For employees
with less than five years of service, vesting would occur at the employee’s five-year anniversary date.
In addition, the Company 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 following table sets forth the status of the Pension Plan and SERP at the dates indicated:
Pension Plan
SERP
December 31,
(Dollars in thousands)
Accumulated benefit obligation at end of year
2015
$ 17,321
2014
$ 17,687
2015
$ 8,891
2014
$ 8,754
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
$ 17,687
$ 14,966
$ 8,754
$ 8,595
120
722
(686)
(522)
92
727
2,353
(451)
29
125
-
(17)
59
117
-
(17)
Benefit obligation at end of year
17,321
17,687
8,891
8,754
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in the consolidated
balance sheets:
Accounts payable and accrued expenses -
liability
Amounts recognized in accumulated other
comprehensive loss:
Net actuarial loss
Prior service cost
13,606
56
-
(522)
13,140
12,723
334
1,000
(451)
13,606
-
-
17
(17)
-
-
-
17
(17)
-
$
(4,181)
$
(4,081)
$ (8,891)
$ (8,754)
$
(4,181)
$
(4,081)
$ (8,891)
$ (8,754)
$
8,375
-
$
8,355
-
$
-
-
-
$
$
-
-
-
Accumulated other comprehensive loss,
before tax
$
8,375
$
8,355
$
104
The following table sets forth the changes recognized in accumulated other comprehensive loss for the years
indicated:
(Dollars in thousands)
Accumulated other comprehensive loss at
beginning of year, before tax
Pension Plan
Year Ended December 31,
2015
2014
$
8,355
$
5,542
Actuarial net loss (gain) arising during the period
Amortizations (recognized in net periodic benefit cost):
Actuarial loss
Prior service cost
Total recognized in other comprehensive loss
235
(215)
-
20
2,943
(130)
-
2,813
Accumulated other comprehensive loss at
end of year, before tax
$
8,375
$
8,355
For the years ended December 31, 2015 and 2014, the following weighted average assumptions were used
to determine benefit obligations at the end of the year:
Pension Plan
SERP
Year Ended December 31,
2015
2014
2015
2014
Assumptions used to determine the
year-end benefit obligations:
Discount rate
Rate of compensation increase
4.40%
N/A
4.10%
N/A
5.05%
5.00%
5.06%
5.00%
The Company does not expect any plan assets to be returned to the Company during calendar year 2016.
The dates used to determine retirement measurements for the Pension Plan were December 31, 2015 and
2014.
The Company’s investment strategy for the defined benefit retirement plan is to maintain a consistent rate of
return with primary emphasis on capital appreciation and secondary emphasis on income to enhance the
purchasing power of the plan’s assets over the long-term and to preserve capital. The investment policy
establishes a target allocation for each asset class that is reviewed periodically and rebalanced when
considered appropriate. Normal target allocations at December 31, 2015 were 55% domestic equity
securities, 10% international equity securities and 35% bonds. Equity securities primarily include stocks,
investment in exchange traded funds and large-cap, mid-cap and small-cap mutual funds. Bonds include
U.S. Treasuries, mortgage-backed securities and corporate bonds of companies in diversified industries.
Other types of investments include money market funds and savings accounts opened with the Company.
105
As of December 31, 2015 and 2014, the Pension Plan’s assets measured at fair value were classified as
follows:
Fair Value of Measurements at Report Date
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
1,373
-
8,160
3,607
$
1,373
-
8,160
3,607
$
$
13,140
$
13,140
$
$
1,041
1,274
7,720
3,571
$
1,041
1,274
7,720
3,571
$
$
13,606
$
13,606
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
-
-
-
-
-
-
-
-
-
-
(Dollars in thousands)
December 31, 2015:
Cash
Money market funds
Equities
Mutual funds (1)
Total
December 31, 2014:
Cash
Money market funds
Equities
Mutual funds (1)
Total
__________________
(1) This category includes mutual funds that invest in equities and bonds. The mutual fund managers have the
ability to change the amounts invested in equities and bonds depending on their investment outlook.
Estimated future benefit payments reflecting expected future service at December 31, 2015 are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
2021 – 2025
Total
$
Pension
Plan
798
814
844
899
935
5,219
$
SERP
6,403
17
52
156
156
3,111
$
9,509
$
9,895
106
For the years ended December 31, 2015, 2014, and 2013, the following weighted average assumptions were
used to determine net periodic benefit cost for the fiscal years shown:
(Dollars in thousands)
2015
2014
2013
2015
2014
2013
Pension Plan
SERP
Year Ended December 31,
Assumptions used to determine the
net periodic benefit cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
4.10%
7.50
N/A
4.90%
7.50
N/A
4.20%
7.75
N/A
5.06%
-
5.00
5.06%
-
5.00
5.06%
-
5.00
The components of net periodic benefit cost were as follows:
(Dollars in thousands)
2015
2014
Year Ended December 31,
2015
2013
2014
2013
Pension Plan
SERP
Net periodic benefit cost for the year:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Recognized curtailment loss
Net periodic benefit cost
$
$
120
722
(976)
-
215
-
92
727
(924)
-
130
-
$
108
611
(870)
-
163
-
$
29
125
-
-
-
-
$
59
117
-
-
-
-
$
95
109
-
-
-
-
$
81
$
25
$
12
$
154
$
176
$
204
The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic
pension benefit cost in 2015 are $0 and $209,000, respectively.
The expected return on plan assets is based on the weighted-average long-term rates of return for the types
of assets held in the plan. The expected return on plan assets is adjusted when there is a change in the
expected long-term rate of return or in the composition of assets held in the plan. The discount rate is based
on the return of high-quality fixed-income investments that can be used to fund the benefit payments under
the Company’s defined benefit plan.
The Company made a contribution of $1.0 million to the defined benefit pension plan in the first quarter of
2016. The Company expects to make a $6.4 million contribution to the SERP in 2016 to cover actual
benefit payments.
The Company also has a 401(k) defined contribution plan and profit sharing plan covering all employees
after one year of service. The 401(k) plan provides for employer matching contributions, as determined by
the Company, based on a percentage of employees’ contributions subject to a maximum amount defined in
the plan agreement. The Company’s 401(k) matching contributions, based on 5% of employees’
contributions for 2015, 2014 and 2013, amounted to $56,000, $50,000, and $51,000, respectively. The
Company contributes to the profit sharing plan an amount determined by the Board of Directors. No
contributions were made to the profit sharing plan for years ended December 31, 2015, 2014, and 2013.
(18) 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.
107
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 years ended December 31, 2015 and 2014 amounted to $998,000 and $872,000,
respectively.
Shares held by the ESOP trust were as follows:
Allocated shares
Unearned shares
Total ESOP shares
Fair value of unearned shares, in thousands
December 31,
2015
2014
325,677
636,125
283,381
685,057
961,802
968,438
$17,646
$14,763
The ESOP restoration plan is a non-qualified 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 years
ended December 31, 2015 and 2014, we accrued $316,000 and $231,000, respectively, for the ESOP
restoration plan.
(19) 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- to 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
108
stockholders’ equity. The table below presents information on compensation expense and the related tax
benefit for all share-based awards:
(In thousands)
Compensation expense
Income tax benefit
2015
2014
$
2,670
1,072
$
2,676
1,074
$
2013
2,676
1,291
Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized but unissued
shares. The maximum number of shares that will be awarded under the plan will be 1,712,637 shares.
Stock Options
The table below presents the stock option activity of the Company:
Options outstanding at December 31, 2012
Granted
Exercised
Forfeited
Expired
Options outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Options outstanding at December 31, 2014
Granted
Exercised
Forfeited
Expired
Options outstanding at December 31, 2015
Weighted
Average
Exercise
Price
$ 17.38
-
-
-
-
$ 17.38
-
-
-
-
$ 17.38
26.23
17.36
17.36
-
$ 17.42
Options
832,954
-
-
-
-
832,954
-
-
-
-
832,954
3,600
1,000
3,254
-
832,300
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in thousands)
7.67
-
-
-
-
6.68
-
-
-
-
5.68
9.67
-
-
-
4.70
$ 4,554
-
-
-
-
$ 4,845
-
-
-
-
$ 3,471
-
8
-
-
$ 8,588
Options vested and exercisable at December 31, 2015
693,026
$ 17.38
4.68
$ 7,178
The following summarizes certain stock option activity of the Company:
(In thousands)
Intrinsic value of stock options exercised
Cash received from stock options exercised
Tax benefits realized from stock options exercised
Total fair value of stock options that vested
$
2015
8
17
3
3,854
$
2014
-
-
-
2,995
$
2013
-
-
-
3,223
As of December 31, 2015, the Company had $475,000 of unrecognized compensation costs related to the
stock option plan. The cost of the stock option plan is being amortized over the three-, five- or six-year
vesting period. There were 138,929 shares vested in 2015.
109
The fair value of the Company’s stock options was determined using the Black-Scholes option pricing
formula. The following assumptions were used in the formula for options issued in 2015:
Expected volatility .................................................
Risk-free interest rate ............................................
Expected dividends ...............................................
Expected life (in years) .........................................
Grant price for the stock options ........................... $
2015
20.56%
1.62%
2.59%
6.00
26.23
Expected volatility—Based on the historical volatility of the Company’s stock and a peer group of
comparable thrifts.
Risk-free interest rate—Based on the U.S. Treasury yield curve and expected life of the options at the
time of grant.
Expected dividends—Based on the quarterly dividend and the price of the Company’s stock at the time
of grant.
Expected life—Based on a weighted-average of the three-year vesting period and the 10-year
contractual term of the stock option plan.
Grant price for the stock options—Based on the closing price of the Company’s stock at the time of
grant.
Restricted Stock Awards
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 awards may not be disposed of or transferred during the vesting
period. Restricted stock awards carry with them the right to receive dividends.
The table below presents the restricted stock award activity:
Nonvested at December 31, 2012
Granted
Vested
Forfeited
Nonvested at December 31, 2013
Granted
Vested
Forfeited
Nonvested at December 31, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2015
Restricted
Stock Awards
453,397
-
113,332
-
340,065
-
113,332
-
226,733
3,600
113,332
2,459
114,542
Weighted
Average Grant
Date Fair
Value
$ 17.39
-
17.39
-
$ 17.39
-
17.39
-
$ 17.39
26.23
17.39
17.36
$ 17.67
As of December 31, 2015, the Company had $1.4 million of unrecognized compensation costs related to
restricted stock awards. The cost of the restricted stock awards is being amortized over the three-, five- or
six-year vesting period.
110
(20) Earnings Per Share
The table below presents the information used to compute basic and diluted earnings per share:
(Dollars in thousands, except per share data)
2015
2014
2013
For the Year Ended December 31,
Net income
$
14,748
$
14,097
$
14,647
Weighted-average number of shares used in:
Basic earnings per share
9,073,015
9,211,409
9,711,233
Dilutive common stock equivalents:
Stock options and restricted stock units
Diluted earnings per share
190,252
9,263,267
105,914
9,317,323
133,709
9,844,942
Net income per common share, basic
Net income per common share, diluted
$
$
1.63
1.59
$
$
1.53
1.51
$
$
1.51
1.49
We have two forms of our outstanding common stock: common stock and unvested restricted stock awards.
Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common
shareholders and they both share equally in undistributed earnings. The computed basic and diluted earnings per
share presented are substantially equivalent using both the two-class and the treasury stock methods of calculating
earnings per share.
111
(21) Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of
taxes:
(Dollars in thousands)
December 31, 2015:
Balances at beginning of period
Other comprehensive loss (income), net of taxes
Amounts reclassified from accumulated other
comprehensive loss
Net current period other comprehensive income
Balances at end of period
December 31, 2014:
Balances at beginning of period
Other comprehensive loss (income), net of taxes
Amounts reclassified from accumulated other
comprehensive loss
Net current period other comprehensive income
Balances at end of period
December 31, 2013:
Balances at beginning of period
Other comprehensive income, net of taxes
Amounts reclassified from accumulated other
comprehensive loss
Net current period other comprehensive income
Balances at end of period
Noncredit
Related Loss
on Trust
Preferred
Securities
Unfunded
Pension
Liability
Unrealized
Loss on
Securities
Total
$ 5,032
12
-
12
$ 5,044
$ 3,338
1,694
-
1,694
$ 5,032
$ 3,792
(454)
-
(454)
$ 3,338
$
$
$
$
$
$
284
(137)
-
(137)
147
376
(92)
-
(92)
284
445
(69)
-
(69)
376
$
$
$
$
$
$
72
(27)
-
(27)
45
73
(1)
-
(1)
72
96
(23)
-
(23)
73
$ 5,388
(152)
-
(152)
$ 5,236
$ 3,787
1,601
-
1,601
$ 5,388
$ 4,333
(546)
-
(546)
$ 3,787
The table below presents the tax effect on each component of accumulated other comprehensive loss:
(Dollars in thousands)
Unfunded pension
liability
Noncredit related loss
on trust preferred
securities
Unrealized loss on
securities
Total
Pretax
Amount
2015
Tax
Year Ended December 31,
2014
After Tax
Amount
Pretax
Amount
Tax
After Tax
Amount
Pretax
Amount
2013
Tax
After Tax
Amount
$
20
$
(8)
$
12
$
2,813
$
(1,119)
$
1,694
$
(753)
$
299
$
(454)
(226)
(45)
89
18
(137)
(27)
(153)
(2)
61
1
(92)
(1)
(116)
(38)
47
15
(69)
(23)
$
(251)
$
99
$
(152)
$
2,658
$
(1,057)
$
1,601
$
(907)
$
361
$
(546)
112
(22) Commitments
(a) Loan Commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any terms or conditions established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since commitments may expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The
Company’s policy is to require suitable collateral, primarily real estate, to be provided by customers
prior to disbursement of approved loans. At December 31, 2015 and 2014, the Company had loan
commitments aggregating to $26.5 million (interest rates from 2.625% to 5.625%) and $18.1 million
(interest rates from 2.750% to 5.500%), respectively, primarily consisting of fixed-rate residential
first mortgage loans. In addition to commitments to originate loans, at December 31, 2015 and 2014,
the Company had $26.6 million and $24.9 million, respectively, in unused lines of credit to
borrowers.
(b) Lease Commitments
The Company leases a majority of its premises under operating leases expiring on various dates
through 2025. Total rental expense comprised minimum rentals of $2.9 million, $2.8 million, and
$2.7 million for the years ended December 31, 2015, 2014, and 2013, respectively.
At December 31, 2015, future minimum rental commitments under all noncancelable operating leases
are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
$
2,677
2,433
1,769
1,349
858
844
9,930
Certain leases are renegotiable during the period of the lease or have renewal options at the expiration
of the lease term. The majority of lease agreements relates to real estate and generally provides that
the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to
the leased premises.
113
In addition, the Company leases to a tenant certain property that it owns. Future minimum rental
income for this noncancelable lease is as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
$
110
110
110
110
110
110
660
Rental income comprised of minimum rentals for 2015, 2014, and 2013 was approximately $110,000
each year.
(c) Reserve Requirements
The Company is required by the Federal Reserve Bank to maintain reserves based on the amount of
deposits held. The reserve requirement at December 31, 2015 and 2014 was $10.4 million and $9.6
million, respectively, and the Company met such requirements.
(23) Regulatory Capital and Supervision
Territorial Savings Bank and the Company are 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. On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve
System. The Federal Reserve requires that Territorial Savings Bank maintain a Tier 1 Leverage Capital ratio of
9.0% for three years as a condition of membership. Effective January 1, 2015, the well capitalized threshold for
Tier 1 risk-based capital was increased from 6.0% to 8.0% and a new capital standard, common equity Tier 1 risk-
based capital, was implemented with a 6.5% ratio requirement for a financial institution to be considered well
capitalized. Additionally, effective January 1, 2015, consolidated regulatory capital requirements identical to
those applicable to the subsidiary depository institutions became applicable to savings and loan holding
companies over $1.0 billion in assets, such as the Company. At December 31, 2015, Territorial Savings Bank and
the Company exceeded all regulatory capital requirements and are considered to be “well capitalized” under
regulatory guidelines. The tables below present the capital required to be considered “well-capitalized” as a
percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained for both
Territorial Savings Bank and the Company at December 31, 2015 and for Territorial Savings Bank at December
31, 2014:
114
As of December 31, 2015
(Dollars in Thousands)
Required Ratio
Actual Amount
Actual Ratio
Tier 1 Leverage Capital
Territorial Savings Bank (1)
Territorial Bancorp Inc.
Common Equity Tier 1 Risk-Based
Capital (2)
Territorial Savings Bank
Territorial Bancorp Inc.
Tier 1 Risk-Based Capital (2)
Territorial Savings Bank
Territorial Bancorp Inc.
Total Risk-Based Capital (2)
Territorial Savings Bank
Territorial Bancorp Inc.
9.00%
5.00%
9.00%
9.00%
10.50%
10.50%
12.50%
12.50%
$208,009
$224,877
$208,009
$224,877
$208,009
$224,877
$210,287
$227,155
11.49%
12.42%
25.79%
27.88%
25.79%
27.88%
26.07%
28.16%
___________________
(1) As a condition of membership in the Federal Reserve System, Territorial Savings Bank is required to maintain a Tier 1 Leverage
Capital ratio of 9.00% for three years beginning on July 10, 2014.
(2) 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 that becomes effective
on January 1, 2019.
As of December 31, 2014
(Dollars in Thousands)
Tier 1 Leverage Capital
Territorial Savings Bank (1)
Tier 1 Risk-Based Capital
Territorial Savings Bank
Total Risk-Based Capital
Territorial Savings Bank
Required Ratio
Actual Amount
Actual Ratio
9.00%
4.00%
8.00%
$203,708
$203,708
$205,403
12.10%
29.68%
29.93%
___________________
(1) As a condition of membership in the Federal Reserve System, Territorial Savings Bank is required to maintain a Tier 1 Leverage
Capital ratio of 9.00% for three years beginning on July 10, 2014.
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 the Company’s 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.”
115
At December 31, 2015 and 2014, 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 parent company.
(24) Contingencies
The Company is involved in various claims and legal actions arising out of the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters will not have a material adverse
effect on the Company’s consolidated balance sheets or consolidated statements of income.
(25) Fair Value of Financial Instruments
In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company
groups its financial assets and liabilities valued 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:
(cid:120) 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.
(cid:120) 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.
(cid:120) 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 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.
Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. The carrying
amount approximates fair value because of the short maturity of these instruments.
Investment Securities. 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.
116
The trust preferred securities represent investments in a pool of debt obligations issued primarily by holding
companies for Federal Deposit Insurance Corporation-insured financial institutions. The trust preferred
securities market is considered to be inactive as only six transactions have occurred over the past 48 months
in the same tranche of securities we own and no new issues of pooled trust preferred securities have
occurred since 2007. The fair value of our trust preferred securities was determined using a discounted cash
flow model. Our model used a discount rate equal to three-month LIBOR plus 20.00%.
The discounted cash flow analysis includes a review of all issuers within the pool. The fair value of the
trust preferred securities are classified as Level 3 inputs because they are based on discounted cash flow
models.
FHLB Stock. FHLB stock, which is redeemable for cash at par value, is reported at its par value.
FRB Stock. FRB stock, which is redeemable for cash at par value, is reported at its par value.
Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of loans is not based on the concept of exit price.
Loans Held for Sale. The fair value of loans held for sale is determined based on prices quoted in the
secondary market for similar loans.
Deposits. The fair value of checking and Super NOW savings accounts, passbook accounts, and certain
money market deposits is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently
offered for deposits with similar remaining maturities.
Advances From the FHLB and Securities Sold Under Agreements to Repurchase. Fair value is estimated
by discounting future cash flows using the rates currently offered to the Company for debt with similar
remaining maturities.
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. 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.
117
The estimated fair values of the Company’s financial instruments are as follows:
(Dollars in thousands)
December 31, 2015:
Assets
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
Fair Value Measurements Using
$
$
Cash and cash equivalents
Investment securities held to maturity
Loans held for sale
Loans receivable, net
FHLB stock
FRB stock
Accrued interest receivable
Interest rate contracts
$
65,919
493,059
2,139
1,188,649
4,790
3,022
4,684
71
$
65,919
497,982
2,205
1,208,300
4,790
3,022
4,684
71
Liabilities
Deposits
Advances from the Federal Home
Loan Bank
Securities sold under agreements to
repurchase
Accrued interest payable
Interest rate contracts
December 31, 2014:
Assets
$
Cash and cash equivalents
Investment securities held to maturity
Loans held for sale
Loans receivable, net
FHLB stock
FRB stock
Accrued interest receivable
Interest rate contracts
Liabilities
Deposits
Advances from the Federal Home
Loan Bank
Securities sold under agreements to
repurchase
Accrued interest payable
Interest rate contracts
1,445,103
1,445,484
69,000
55,000
237
77
75,060
572,922
1,048
968,212
11,234
2,925
4,436
62
69,191
55,280
237
77
75,060
586,710
1,079
998,183
11,234
2,925
4,436
62
$
1,359,679
1,360,074
15,000
72,000
370
54
14,977
72,334
370
54
65,919
-
-
-
-
-
5
-
$
-
497,066
2,205
-
4,790
3,022
1,310
71
$
-
916
-
1,208,300
-
-
3,369
-
-
-
-
-
-
1,221,069
224,415
-
-
-
77
69,191
55,280
237
-
75,060
-
-
-
-
-
2
-
$
-
586,020
1,079
-
11,234
2,925
1,562
62
$
-
690
-
998,183
-
-
2,872
-
-
-
-
-
-
1,137,942
222,132
-
-
-
54
14,977
72,334
370
-
At December 31, 2015 and 2014, 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.
118
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
December 31, 2015:
Interest rate contracts – assets
Interest rate contracts – liabilities
December 31, 2014:
Interest rate contracts – assets
Interest rate contracts – liabilities
$
$
-
-
-
-
$
71
(77)
$
62
(54)
$
$
-
-
-
-
$
71
(77)
$
62
(54)
The fair value of interest rate contracts was determined by referring to prices quoted in the secondary
market for similar contracts. Gains and losses are included in gain on sale of loans in the consolidated
statements of income.
The table below presents the balance of assets measured at fair value on a nonrecurring basis as of
December 31, 2015 and 2014 and the related gains and losses for the years then ended:
(Dollars in thousands)
Level 1
Level 2
Level 3
Total
Total Gains
(Losses)
December 31, 2015:
Trust preferred securities
$
-
$
-
$
916
$
916
$ 226
December 31, 2014:
Impaired loans
Trust preferred securities
Mortgage servicing assets
$
$
-
-
-
-
-
-
$
327
690
505
$
327
690
505
$
(4)
153
(15)
The fair value of impaired loans that are considered to be collateral-dependent is determined using the value
of collateral less estimated selling costs. The fair value of impaired loans not considered to be collateral-
dependent is determined using a discounted cash flow analysis. Assumptions used in the analysis include
the discount rate and projected cash flows. Gains and losses on impaired loans are included in the provision
for loan losses in the consolidated statements of income. Mortgage servicing assets are valued using a
discounted cash flow model. Assumptions used in the model include mortgage prepayment speeds,
discount rates, cost of servicing and ancillary income. Losses on mortgage servicing assets are included in
service fees on loan and deposit accounts in the consolidated statements of income. The fair value of trust
preferred securities is determined using a discounted cash flow model. The assumptions used in the
discounted cash flow model are discussed above. Gains and losses on trust preferred securities that are
credit related are included in net other-than-temporary impairment losses in the consolidated statements of
income. Gains and losses on trust preferred securities that are not credit related are included in other
comprehensive income in the consolidated statements of comprehensive income.
119
The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value
measurements:
(Dollars in thousands)
December 31, 2015:
Fair Value
Valuation Technique
Unobservable
Input
Value
Trust preferred securities
$
916
Discounted cash flow
Discount rate
Three-month
LIBOR plus
20.00%
December 31, 2014:
Impaired loans – non-collateral dependent
$
327
Discounted cash flow
Discount rate (1)
6.10%
Trust preferred securities
Mortgage servicing assets
690
505
Discounted cash flow
Discount rate
Discounted cash flow
Discount rate
Prepayment speed
(PSA)
Annual cost to
service (per loan)
Three-month
LIBOR plus
20.00%
10.50%
164.8 – 262.5
$55
(1) Represents the yield on contractual cash flows prior to modification in troubled debt restructurings.
(26) Parent Company Only
Presented below are the condensed balance sheet, statement of income, and statement of cash flows for
Territorial Bancorp Inc.
Condensed Balance Sheet
(Dollars in thousands)
Assets
Cash
Investment in Territorial Savings Bank
Receivable from Territorial Savings Bank
Prepaid expenses and other assets
Total assets
Other liabilities
Equity
Liabilities and Equity
Total liabilities and equity
December 31,
2015
2014
$
15,777
202,773
1,053
62
$
16,155
198,370
2,262
23
$
219,665
$
216,810
$
24
219,641
$
432
216,378
$
219,665
$
216,810
120
Condensed Statement of Income
(Dollars in thousands)
For the Year Ended December 31,
2014
2013
2015
Interest and dividend income:
Dividends from Territorial Savings Bank
Interest-earning deposit with Territorial Savings Bank
Total interest and dividend income
$
$
14,000
29
14,029
$
14,000
20
14,020
25,000
26
25,026
Noninterest expense:
Salaries
Other general and administrative expenses
Total noninterest expense
Income before income taxes and equity in
undistributed earnings in subsidiaries
Income taxes
34
829
863
37
837
874
37
728
765
13,166
13,146
24,261
(416)
(360)
(299)
Income before
equity in undistributed earnings in subsidiaries
13,582
13,506
24,560
Equity in undistributed earnings of Territorial Savings
Bank, net of dividends
1,166
591
(9,913)
Net income
$
14,748
$
14,097
$
14,647
121
Condensed Statement of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Territorial
Savings Bank, net of dividends
ESOP expense
Net decrease in prepaid expenses and other assets
Net increase (decrease) in other liabilities
For the Year Ended December 31,
2013
2014
2015
$ 14,748
$ 14,097
$ 14,647
(1,166)
1,210
1,170
(18)
(591)
1,036
751
29
9,913
1,125
2,325
526
Net cash provided by operating activities
15,944
15,322
28,536
Cash flows from investing activities:
Investment in Territorial Savings Bank
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Repurchases of company stock
Cash dividends paid
-
-
-
-
-
-
17
(9,326)
(7,013)
-
(5,612)
(6,634)
-
(19,595)
(6,231)
Net cash used in financing activities
(16,322)
(12,246)
(25,826)
Net increase (decrease) in cash
(378)
3,076
2,710
Cash at beginning of the period
Cash at end of the period
16,155
13,079
10,369
$ 15,777
$ 16,155
$ 13,079
122
(27) Unaudited Quarterly Financial Information
First
Quarter
$15,288
1,516
13,772
194
13,578
1,246
8,904
5,920
2,394
3,526
0.39
0.38
0.16
First
Quarter
$14,657
1,500
13,157
9
13,148
1,358
8,864
5,642
2,180
3,462
0.38
0.37
0.14
Fourth
Third
Second
Quarter
Quarter
Quarter
(Dollars in thousands, except per share data)
Full Year
$15,610
1,554
14,056
101
13,955
1,248
8,843
6,360
2,523
3,837
0.42
0.41
0.16
$15,971
1,630
14,341
71
14,270
1,188
9,366
6,092
2,406
3,686
0.41
0.40
0.17
$16,223
1,815
14,408
89
14,319
1,229
9,386
6,162
2,463
3,699
0.41
0.40
0.27
$63,092
6,515
56,577
455
56,122
4,911
36,499
24,534
9,786
14,748
1.63
1.59
0.76
Fourth
Third
Second
Quarter
Quarter
Quarter
(Dollars in thousands, except per share data)
Full Year
$14,881
1,512
13,369
156
13,213
1,279
8,747
5,745
2,026
3,719
0.41
0.40
0.15
$14,990
1,551
13,439
23
13,416
1,398
9,079
5,735
2,273
3,462
0.38
0.37
0.15
$15,087
1,555
13,532
172
13,360
1,142
8,618
5,884
2,430
3,454
0.37
0.37
0.26
$59,615
6,118
53,497
360
53,137
5,177
35,308
23,006
8,909
14,097
1.53
1.51
0.70
2015:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends declared per
common share
2014:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends declared per
common share
(28) Subsequent Events
On January 28, 2016, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend
of $0.18 per share of common stock. The dividend was paid on February 25, 2016 to stockholders of record
as of February 11, 2016.
123
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
(a) 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 Senior 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 December 31, 2015. Based on that evaluation, the Company’s management,
including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and
Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended December 31, 2015, 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.
(b) Management’s annual report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining effective internal control over
financial reporting as such term is defined in Rule 13a-15(f) in the Exchange Act. The Company’s internal control
system is a process designed to provide reasonable assurance to the Company’s management and Board of
Directors regarding the preparation and fair presentation of published financial statements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made
only in accordance with authorizations of management and the directors of the Company; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2015. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based
on our assessment we believe that, as of December 31, 2015, the Company’s internal control over financial
reporting is effective based on those criteria.
The Company’s independent registered public accounting firm that audited the consolidated financial
statements has issued an audit report on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2015, and it is included in Item 8, under Part II of this Annual Report on Form 10-K.
ITEM 9B. Other Information
None.
124
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2016 Annual Meeting of
Stockholders under the captions “Proposal 1—Election of Directors,” “Information About Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics and Business Conduct,”
“Nominating and Corporate Governance Committee Procedures—Procedures to be Followed by Stockholders,”
“Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by reference.
ITEM 11. Executive Compensation
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2016 Annual Meeting of
Stockholders under the caption “Executive Compensation” is incorporated herein by reference.
125
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2016 Annual Meeting of
Stockholders under the caption “Stock Ownership” is incorporated herein by reference. Information with respect
to the security ownership of our directors and executive officers is included above in “Item 10. Directors,
Executive Officers and Corporate Governance,” and is incorporated herein by reference.
Equity Compensation Plan Information
Set forth below is information as of December 31, 2015 with respect to compensation plans (other than
our employee stock ownership plan) under which equity securities of the Registrant are authorized for issuance.
Equity Compensation Plan Information
Number of Securities to
Be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Share-based
Compensation Plans
(excluding securities
reflected in first column)
Equity compensation plans approved by security
holders (1) .................................................................
832,300
$
17.42
120,586
_______________________
(1) Reflects stock options only
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2016 Annual Meeting of
Stockholders under the captions “Transactions with Certain Related Persons” and “Proposal 1 — Election of
Directors” is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2016 Annual Meeting of
Stockholders under the captions “Proposal II—Ratification of Independent Registered Public Accounting Firm—
Audit Fees” and “—Pre-Approval of Services by the Independent Registered Public Accounting Firm” is
incorporated herein by reference.
126
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
The following documents are filed as part of this annual report:
(i)
Reports of Independent Registered Public Accounting Firms
(ii)
Consolidated Balance Sheets at December 31, 2015 and 2014
(iii)
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
(iv)
(v)
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014
and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014
and 2013
(vi)
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
(vii) Notes to Consolidated Financial Statements
(b) Exhibits
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Articles of Incorporation of Territorial Bancorp Inc. (1)
Bylaws of Territorial Bancorp Inc. (1)
Form of Common Stock Certificate of Territorial Bancorp Inc. (1)
Employment Agreement between Territorial Bancorp Inc. and Allan S. Kitagawa (2)
Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa (1)
First Amendment to Employment Agreement between Territorial Savings Bank and Allan S.
Kitagawa (4)
Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata (2)
Employment Agreement between Territorial Savings Bank and Vernon Hirata (1)
First Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata
(4)
Employment Agreement between Territorial Bancorp Inc. and Ralph Y. Nakatsuka (2)
Employment Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka (1)
First Amendment to Employment Agreement between Territorial Savings Bank and Ralph Y.
Nakatsuka (4)
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Allan S.
Kitagawa (1)
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Vernon Hirata
(1)
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Ralph Y.
Nakatsuka (1)
Executive Deferred Incentive Agreement between Territorial Savings Bank and Allan S. Kitagawa
(1)
Executive Deferred Incentive Agreement between Territorial Savings Bank and Vernon Hirata (1)
Territorial Savings Bank 2010 Amended and Restated Employee Stock Ownership Plan (4)
127
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
23.1
23.2
31.1
31.2
32
101
Territorial Savings Bank Non-Qualified Supplemental Employee Stock Ownership Plan (2)
Territorial Savings Bank Executive Incentive Compensation Plan (1)
First Amendment to Territorial Savings Bank Executive Incentive Compensation Plan (1)
Second Amendment to Territorial Savings Bank Executive Incentive Compensation Plan (4)
Territorial Bancorp Inc. 2010 Equity Incentive Plan (3)
Form of Employee Restricted Stock Award (4)
Form of Employee Stock Option Award (4)
Form of Director Restricted Stock Award (4)
Form of Director Stock Option Award (4)
Territorial Savings Bank Separation Pay Plan and Summary Plan Description (1)
Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee
Retirement Agreement for Vernon Hirata (5)
Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee
Retirement Agreement for Ralph Nakatsuka (5)
Amendment One to Territorial Savings Bank Amended and Restated Supplemental Employee
Retirement Agreement for Karen J. Cox (5)
Amendment Two to Territorial Savings Bank Amended and Restated Supplemental Employee
Retirement Agreement for Vernon Hirata (6)
Amendment Two to Territorial Savings Bank Amended and Restated Supplemental Employee
Retirement Agreement for Ralph Nakatsuka (6)
Second Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata
(7)
Third Amendment to Employment Agreement between Territorial Savings Bank and Vernon Hirata
(8)
First Amendment to Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata (8)
Second Amendment to Employment Agreement between Territorial Savings Bank and Allan S.
Kitagawa (8)
First Amendment to Employment Agreement between Territorial Bancorp Inc. and Allan S.
Kitagawa (8)
Second Amendment to Employment Agreement between Territorial Savings Bank and Ralph
Nakatsuka (8)
First Amendment to Employment Agreement between Territorial Bancorp Inc. and Ralph Nakatsuka
(8)
First Amendment to Amended and Restated Executive Deferred Incentive Agreement between
Territorial Savings Bank and Vernon Hirata (8)
First Amendment to Amended and Restated Supplemental Employee Retirement Agreement between
Territorial Savings Bank and Allan S. Kitagawa (8)
Third Amendment to Amended and Restated Supplemental Employee Retirement Agreement
between Territorial Savings Bank and Vernon Hirata (8)
Third Amendment to Amended and Restated Supplemental Employee Retirement Agreement
between Territorial Savings Bank and Ralph Nakatsuka (8)
Consent of Moss Adams LLP
Consent of KPMG LLP
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer 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
The following financial statements from Territorial Bancorp Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2015, filed on March 14, 2016, formatted in XBRL: (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of
128
Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated
Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Interactive datafile XBRL Instance Document
Interactive datafile XBRL Taxonomy Extension Schema Document
Interactive datafile XBRL Taxonomy Extension Calculation Linkbase Document
Interactive datafile XBRL Taxonomy Extension Definition Linkbase Document
Interactive datafile XBRL Taxonomy Extension Label Linkbase
Interactive datafile XBRL Taxonomy Extension Presentation Linkbase Document
_________________________
(1)
(2)
(3)
Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-155388), initially filed
November 14, 2008.
Incorporated by reference to the Current Report on Form 8-K (file no. 001-34403), filed November 18,
2009.
Incorporated by reference to the Proxy Statement for the 2010 Annual Meeting of Stockholders (file no.
001-34403), filed July 12, 2010.
Incorporated by reference to the Annual Report on Form 10-K/A (file no. 001-34403), filed March 29,
2011.
Incorporated by reference to the Annual Report on Form 10-Q (file no. 001-34403), filed May 14, 2011.
(5)
Incorporated by reference to the Annual Report on Form 10-K (file no. 001-34403), filed March 14, 2012.
(6)
(7)
Incorporated by reference to the Annual Report on Form 10-K (file no. 001-34403), filed March 15, 2013.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q (file no. 001-34403), filed November 7,
2014.
(4)
(c) Financial Statement Schedules
Not applicable.
129
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
TERRITORIAL BANCORP INC.
Date: March 14, 2016
By: /s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to requirements of the Exchange Act, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
/s/ Allan S. Kitagawa
Allan S. Kitagawa
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
/s/ Kirk W. Caldwell
Kirk W. Caldwell
/s/ Howard Y. Ikeda
Howard Y. Ikeda
/s/ David S. Murakami
David S. Murakami
/s/ Richard I. Murakami
Richard I. Murakami
/s/ Francis E. Tanaka
Francis E. Tanaka
Chairman of the Board,
President and Chief
Executive Officer (Principal
Executive Officer)
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Director
Director
Director
Date
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
Director
March 14, 2016
Director
March 14, 2016
130
(cid:3)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-168839 and No.
333-170579 on Form S-8 of Territorial Bancorp Inc. of our reports dated March 14, 2016, with respect to
the consolidated financial statements of Territorial Bancorp Inc. and Subsidiaries and the effectiveness of
internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year
ended December 31, 2015.
/s/ Moss Adams LLP
Portland, Oregon
March 14, 2016
131
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
The Board of Directors
Territorial Bancorp Inc.:
We consent to the incorporation by reference in the registration statement No. 333-168839 and No. 333-
170579 on Form S-8 of Territorial Bancorp Inc. of our report dated March 13, 2015, with respect to the
consolidated balance sheet of Territorial Bancorp Inc. as of December 31, 2014, and the related
consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each
of the years in the two-year period ended December 31, 2014, which report appears in the December 31,
2015 annual report on Form 10-K of Territorial Bancorp Inc.
/s/ KPMG LLP
Honolulu, Hawaii
March 14, 2016
132
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Allan S. Kitagawa, certify that:
1)
I have reviewed this Annual Report on Form 10-K of Territorial Bancorp Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
a)
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
b)
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
d)
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
a)
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b)
registrant’s internal control over financial reporting.
any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: March 14, 2016
/s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
133
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Melvin M. Miyamoto, certify that:
1)
I have reviewed this Annual Report on Form 10-K of Territorial Bancorp Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
a)
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
b)
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
d)
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
a)
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b)
registrant’s internal control over financial reporting.
any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: March 14, 2016
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer
134
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Territorial Bancorp Inc. (the “Company”) on Form 10-K for the
year ended December 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), the
undersigned, Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer of the Company,
and Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, each certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
Date: March 14, 2016
/s/ Melvin M. Miyamoto Date: March 14, 2016
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Territorial Bancorp Inc. and
will be retained by Territorial Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
135
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Kauai Branch
CORPORATE OFFICE
1132 Bishop Street, Suite 2200
Honolulu, Hawaii 96813
Aina Haina Branch
820 W. Hind Drive, Suite 118
Honolulu, Hawaii 96814
Ala Moana Center Branch
Street Level, Mauka
1450 Ala Moana Boulevard, #1052
Honolulu, Hawaii 96814
Downtown Branch
1000 Bishop Street
Honolulu, Hawaii 96813
Hawaii Kai Branch
Hawaii Kai Shopping Center
377 Keahole Street
Honolulu, Hawaii 96825
Hilo Branch
Waiakea Center
315 Makaala Street
Hilo, Hawaii 96720
Kahala Branch
4819 Kilauea Avenue
Honolulu, Hawaii 96816
Kahului Branch
Kaahumanu Center
275 Kaahumanu Avenue
Kahului, Maui, Hawaii 96732
Kailua Branch
19 Oneawa Street
Kailua, Hawaii 96734
Kaimuki Branch
1108 12th Avenue
Honolulu, Hawaii 96816
Kalihi-Kapalama Branch
1199 Dillingham Boulevard
Honolulu, Hawaii 96817
Kamehameha Shopping
Center Branch
1620 North School Street, Suite 136
Honolulu, Hawaii 96817
Honolulu
Kaneohe Branch
Kaneohe Branch
46-005 Kawa Street
Kaneohe, Hawaii 96744
Kapahulu Branch
Kilohana Square
1016 Kapahulu Avenue, Suite 130
Honolulu, Hawaii 96816
Kapolei Branch
Ace Center at Kapolei
480 Kamokila Boulevard, #2
Kapolei, Hawaii 96707
Kauai Branch
Kukui Grove Shopping Center
4393 Kukui Grove Street
Lihue, Kauai, Hawaii 96766
Kihei Branch
Azeka Shopping Center Mauka
1279 South Kihei Road, #311
Kihei, Hawaii 96753
Kona Branch
Crossroads Shopping Center
75-1027 Henry Street, Suite 111B
Kailua-Kona, Hawaii 96740
Lahaina Branch
Old Lahaina Center
170 Papalaua Street, Unit 3
Lahaina, Hawaii 96761
Manoa Branch
2752 Woodlawn Drive, #5-110
Honolulu, Hawaii 96822
Mililani Branch
H2
Waipio Branch
Lahaina Branch
Kahului Branch
Kihei Branch
McCully Branch
1111 McCully Street
Honolulu, Hawaii 96826
Mililani Branch
Town Center of Mililani
95-1249 Meheula Park Way, Unit 168
Mililani, Hawaii 96789
Nuuanu Branch
Nuuanu Shopping Center
1613 Nuuanu Avenue, B6
Honolulu, Hawaii 96817
Pearl City Branch
Pearl City Shopping Center
850 Kamehameha Highway, Suite B2
Pearl City, Hawaii 96782
Pearlridge Branch
98-084 Kamehameha Highway
Aiea, Hawaii 96701
Piikoi Branch
1159 S. Beretania Street
Honolulu, Hawaii 96814
Salt Lake Branch
Salt Lake Shopping Center
848 Ala Lilikoi Street
Honolulu, Hawaii 96818
Kona Branch
Hilo Branch
Waipahu Branch
Waipahu Town Center
94-050 Farrington Highway
Waipahu, Hawaii 96797
Waipio Branch
Laniakea Plaza
94-1221 Ka Uka Boulevard, #102
Waipahu, Hawaii 96797
Pearl City Branch
H3
Waipahu Branch
Pearlridge Branch
H3
Kailua Branch
Kaneohe Branch
H1
Kapolei Branch
Pearl
Harbor
Hickman
Air Force Base
Salt Lake Branch
Honolulu
International
Airport
Kamehameha Shopping
Center Branch
Kalihi-Kapalama Branch
Nuuanu Branch
CORPORATE OFFICE
Downtown Branch
Manoa Branch
Piikoi Branch
McC
ully Branch
Ala Moana Center Branch
Kaimuki Branch
Aina Haina Branch
Kapahulu Branch
H1
Diamond
Head
Kahala Branch
Hawaii Kai Branch