Kauai Branch
CORPORATE OFFICE
1132 Bishop Street, Suite 2200
Honolulu, Hawaii 96813
Aina Haina Branch
820 W. Hind Drive, Suite 118
Honolulu, Hawaii 96821
Ala Moana Center Branch
Street Level, Mauka
1450 Ala Moana Boulevard, Suite 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, Suite 102
Hilo, Hawaii 96720
Kahala Branch
4819 Kilauea Avenue, Suite 4
Honolulu, Hawaii 96816
Kahului Branch
Kaahumanu Center
275 Kaahumanu Avenue, Suite 1045A
Kahului, Maui, Hawaii 96732
Kailua Branch
19 Oneawa Street
Kailua, Hawaii 96734
Kaimuki Branch
1108 12th Avenue, Suite C
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
46-005 Kawa Street, Suite 102
Kaneohe, Hawaii 96744
Kapahulu Branch
Kilohana Square
1016 Kapahulu Avenue, Suite 130
Honolulu, Hawaii 96816
Kapolei Branch
Ace Center at Kapolei
480 Kamokila Boulevard, Suite 105
Kapolei, Hawaii 96709
Kauai Branch
Kukui Grove Shopping Center
4393 Kukui Grove Street, Suite 103
Lihue, Kauai, Hawaii 96766
Keeaumoku Branch
735 Keeaumoku Street, Suite 108
Honolulu, Hawaii 96814
Kihei Branch
Azeka Shopping Center Mauka
1279 South Kihei Road, Suite 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, Suite 168
Mililani, Hawaii 96789
Nuuanu Branch
Nuuanu Shopping Center
1613 Nuuanu Avenue, Suite A15
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, Suite 107
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
Keeaumoku Branch
Kapahulu Branch
Kahala Branch
H1
Hawaii Kai Branch
Diamond
Head
2017 ANNUAL REPORT
CHAIRMAN AND CEO’S MESSAGE
Fellow Shareholders:
At Territorial Bancorp Inc. and Territorial Savings Bank, we believe that our
shareholders and customers are the most important assets we have. Since
1921, our customers have supported our Bank and we thank you for your
ongoing support. In 2009, Territorial Bancorp Inc. became a public company and
used the funds from its stock offering to grow the Bank and make it more
successful. On behalf of the Board of Directors and all of our employees, we
thank you for your confidence and support through the years and look forward to
a long lasting relationship.
2017 Highlights and Financial Performance
Territorial Bancorp Inc. had another good year in 2017. Excluding the impact of
the one-time income tax expense for the write-down of deferred income tax
assets under the Tax Cuts and Jobs Act of 2017, our net income would have
been $17.02 million, compared to $16.35 million in 2016. Excluding the one-time
impact of the write-down of deferred tax assets, fully diluted earnings per share
improved to $1.78 per share of common stock in 2017 compared to $1.74 per
share in 2016.
Some highlights from 2017 are:
o Total assets grew by 6.72% and for the first time exceeded $2.0
billion.
o Loans receivable grew by 11.45%. This was our sixth consecutive
year of double digit loan growth.
o Deposits grew by 6.97% in 2017.
o We opened our 29th branch in the Kapiolani area of Honolulu and
we have been very successful in opening new accounts and
increasing total deposits.
o Total dividends per share grew by 30.43% in 2017 to $1.20 per
share.
o We completed our seventh share repurchase program in February
2018, with a total of 227,900 shares being repurchased during the
program.
o Regulatory capital ratios for Territorial Savings Bank are in excess
of Federal “well-capitalized” standards.
Hawaii’s Economy
The visitor industry continued to set records in 2017. Visitor arrivals rose to 9.4
million, an increase of 4.0% compared to 2016. Total visitor expenditures rose to
$16.8 billion, an increase of 6.2% compared to the prior year. Economists have
projected continued growth in visitor arrivals and total expenditures for 2018. The
reduction in federal income taxes may increase disposable income for more
Americans, making it more affordable to visit Hawaii.
The construction industry remained strong through 2017. In the Ewa plain, D.R.
Horton completed the first phase of its Hoopili development project, which
envisions 11,750 new homes over the next 20 to 30 years. Hoopili will also have
schools, a large retail center and other commercial developments. A second
large development project named Koa Ridge broke ground in late 2017 in Central
Oahu. This project will include 3,500 new homes, commercial properties, a
hospital and a school over the next 10 to 15 years. These projects, along with
the construction of new condominium projections in the Kakaako and Kapiolani
areas, continue to provide jobs in Hawaii’s construction industry.
Honolulu’s fixed rail system, which is scheduled for completion in 2025,
continues to provide added stimulus to our economy. The building of the rail
system, the construction of 21 transit stations and upgrading the infrastructure
around the transit stations, will create additional construction projects.
Hawaii’s unemployment rate dropped to 2.0% in December 2017, which was the
lowest on record. The growth in the visitor and construction industries has
created new jobs and kept Hawaii’s unemployment rate low.
The U.S. military continues to be a significant part of Hawaii’s economy. Recent
security issues in the Asia-Pacific region only reinforce the importance of Hawaii
as a strategic location to oversee military activities and maintain peace
throughout the area.
2017 was a challenging year as we were faced with many issues, here in Hawaii,
the continental United States and internationally. We were able to overcome
these challenges and continue to be successful by serving our customers by
originating new loans and increasing total deposits. On behalf of the Board of
Directors and all of our employees, I wish to thank all of our shareholders and
customers for your continued support of Territorial Bancorp Inc.
Allan S. Kitagawa
Chairman, Chief Executive Officer and President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)(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, 2017
OR
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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:134) 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:134) 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:134)
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:134)
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:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134)
Emerging growth company (cid:134)
Accelerated filer (cid:95)
Smaller reporting company (cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided persuant to Section 13(a) of the Exchange Act (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) (cid:134) 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, 2017 ($31.19) was $266.0 million.
As of February 28, 2018, there were 9,731,022 shares outstanding of the registrant’s common stock.
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TERRITORIAL BANCORP INC.
FORM 10-K
INDEX
PART I
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 6.
ITEM 7.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial
ITEM 9.
Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
ITEM 15.
ITEM 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
2
15
24
24
26
26
27
30
32
57
57
107
107
107
108
108
108
108
108
109
111
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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;
changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and
the Federal Reserve Board;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate acquired entities, if any;
changes in consumer demand, spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the
Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company
Accounting Oversight Board;
changes in our organization, compensation and benefit plans;
the timing and amount of revenues that we may recognize;
the value and marketability of collateral underlying our loan portfolios;
our ability to retain key employees;
cyber attacks, computer viruses and other technological risks that may breach the security of our websites
or other systems to obtain unauthorized access to confidential information, destroy data or disable our
systems;
technological changes that may be more difficult or expensive than expected;
the ability of third-party providers to perform their obligations to us;
1
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the ability of the U.S. Government to manage federal debt limits;
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. (the Company) 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, 2017, we had consolidated assets
of $2.004 billion, consolidated deposits of $1.597 billion and consolidated stockholders’ equity of $234.9 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 29 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.
Available Information
Territorial Bancorp Inc. is a public company, and files interim, quarterly and annual reports with the Securities
and Exchange Commission. These reports and any amendments to these reports are available for free on our website,
www.territorialsavings.net. Information on our website should not be considered a part of this Annual Report on Form
10-K. These reports are also 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).
2
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 29 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 9.4
million visitors came to the state in 2017, a 5.0% increase compared to 2016. The increase in visitor arrivals is primarily
due to growth in the number of visitors from the continental United States and Japan. Total visitor expenditures in 2017
totaled $16.776 billion, a 6.2% increase compared to 2016.
The unemployment rate for the State of Hawaii was 2.0% in December 2017, representing a decrease from a
2.9% rate in December 2016. Hawaii’s unemployment rate continued to be lower than the rate for the entire United
States, which was 4.1% in December 2017. 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 2017 compared to 2016. On the island of Oahu, the primary real estate market in Hawaii, sales of existing
single-family homes totaled 3,908 units for the year ended December 31, 2017, an increase of 6.3% compared to sales in
2016. The number of condominium sales, a notable portion of the overall housing market, grew by 6.9% in 2017
compared to 2016. The median price paid on Oahu for a single-family home in December 2017 was $755,000, an
increase of 2.7% compared to the median price in December 2016. The median price paid on Oahu for condominiums in
December 2017 was $405,000, an increase of 3.8% compared to the median price in December 2016.
On the island of Maui, the second largest real estate market in Hawaii, sales of existing single-family homes
totaled 1,099 units in 2017, a 2.1% increase compared to the number of units sold in 2016. The number of
condominium sales totaled 1,451 units in 2017, an increase of 10.7% compared to the number of units sold in 2016. The
median price paid for a single-family home on Maui in December 2017 was $695,000, an increase of 8.8% compared to
the median price in December 2016. The median price paid on Maui for condominiums in December 2017 was
$445,000, a 7.2% increase compared to the median price in December 2016.
In 2017, there were 1,352 bankruptcy filings, a decrease of 2.2% compared to the number of filings in 2016.
The decrease in 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.
3
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, 2017 (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 12 banks and thrift institutions with
offices in Hawaii), with a 3.6% 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 12 banks and thrift institutions with offices in the City
and County) with a 3.7% 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, 2017, $1.445 billion, or 96.7% 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 was $636,150 for single-family homes located in the State of Hawaii for
2017. 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 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 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, 2017, we originated $3.5 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 Federal Housing
Administration (FHA) and Veterans Administration (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. 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
4
existing mortgage loan. At December 31, 2017, the outstanding balance of home equity loans totaled $1.6 million, or
0.1% of our total loan portfolio, and the outstanding balance of home equity lines of credit totaled $11.3 million, or 0.8%
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 $21.8 million, or 1.5% of our
loan portfolio as of December 31, 2017. 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 commercial real estate totaled $9.2 million, or 0.6%, of our total loan portfolio at
December 31, 2017, and consisted of 11 loans outstanding with an average loan balance of approximately $837,000. All
of our nonresidential real estate loans are secured by properties located in our primary market area. At December 31,
2017, our largest commercial real estate loan had a principal balance of $3.0 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, 2017.
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, 2017,
construction loans totaled $6.3 million, or 0.4% of total loans receivable. At December 31, 2017, the additional
unadvanced portion of these construction loans totaled $3.6 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 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
5
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 $25.0 million, $48.9 million and $56.2 million
of residential mortgage loans (all fixed-rate loans, with terms of 10 years or longer) during the years ended December 31,
2017, 2016 and 2015, respectively. We had one loan for $403,000 classified as held for sale at December 31, 2017.
We sell our loans without recourse, except for normal representations and warranties provided in sales
transactions. Since 2009, we having been selling loans primarily on a servicing released basis where servicing is
transferred to a third-party at the time the loan is sold. Prior to 2009, most of our loan sales were conducted on a
servicing retained basis. At December 31, 2017, we were servicing loans owned by others with a principal balance of
$35.5 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, 2017, we received servicing fees of $105,000. At December 31, 2017, 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 up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which was
$636,150 for 2017. 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 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,
6
collateralized mortgage obligations, trust preferred securities, municipal securities and stock in the Federal Home Loan
Bank (FHLB) and the Federal Reserve Bank (FRB). We purchase stock in the FHLB 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 FRB.
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, 2017, 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 the present value of remaining cash flows as a charge to earnings. The
difference between the book value of the security after the write down and the fair market value is considered other
comprehensive loss, which is a reduction of stockholders’ equity.
Our held-to-maturity securities at December 31, 2017 consisted primarily of securities with the following
carrying values: $404.4 million of mortgage-backed securities and $427,000 of trust preferred securities that were issued
by pools of issuers consisting primarily of financial institution holding companies. At December 31, 2017, all of our
mortgage-backed securities were issued by Fannie Mae, Freddie Mac or Ginnie Mae. At December 31, 2017, we had
one security for $2.9 million classified as available-for-sale. At December 31, 2017, 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. 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
guarantee 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 FHLB 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 and security repayments, maturing
investments, retained earnings, income on other earning assets and the proceeds of loan and security sales.
7
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 FHLB and funds borrowed from securities sold
under agreements to repurchase. At December 31, 2017, our FHLB advances totaled $107.2 million, or 6.1% of total
liabilities, and securities sold under agreements to repurchase totaled $30.0 million, or 1.7% of total liabilities. At
December 31, 2017, we had access to additional FHLB advances of up to $579.4 million. Advances from the FHLB are
secured by our investment in the common stock of the FHLB 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.
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, 2017, Territorial Savings Bank’s investment
in Territorial Financial Services, Inc. was $12,000, and Territorial Financial Services, Inc. had assets of $76,000 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, 2017, we had 269 full-time employees and 14 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 Taxation
FEDERAL AND STATE 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.
Federal Tax Reform. On December 22, 2017, the President signed into law H.R. 1, commonly known as the
Tax Cuts and Jobs Act of 2017 (the Act). The Act includes a number of changes in existing tax law impacting
businesses including, among other things, a reduction of the federal corporate income tax rate from 35% to 21% effective
January 1, 2018. As a result, we were required to re-measure, through income tax expense, our deferred tax assets and
liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net
deferred tax asset resulted in additional income tax expense of $2.1 million.
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.
Alternative Minimum Tax. Prior to January 1, 2018, the Internal Revenue Code imposes an alternative
minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to
as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is
8
in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more
than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax
liabilities in future years. Effective January 1, 2018, the corporate AMT is repealed. At December 31, 2017, the
Company did not have any AMT payments available to carry forward to future periods.
Net Operating Loss Carryovers. Prior to January 1, 2018, subject to certain limitations, a company may carry
back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net
operating losses generated beginning January 1, 2018, there are no carry backs allowed and an unlimited carry forward
period. At December 31, 2017, the Company did not have any net operating loss carry forwards 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. Tax years 2014 to 2016 currently remain
subject to examination by the IRS.
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.
Tax years 2014 to 2016 currently remain subject to examination by the Department of Taxation of the State of Hawaii.
General
SUPERVISION AND REGULATION
Territorial Savings Bank is a Hawaii state-chartered savings bank and a member of the Federal Reserve System.
Accordingly, 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.
9
Certain 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.
Federal Banking Regulation
Capital Requirements. Federal regulations require federally insured depository institutions 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 Wall Street Reform and Consumer Protection Act of 2010 (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 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 assets 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. During calendar year 2017, the capital conservation buffer was 1.25%. It increased to
1.875% as of January 1, 2018.
At December 31, 2017, Territorial Savings Bank’s regulatory capital exceeded that required by the revised
capital requirement on a fully phased in basis.
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) 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);
(cid:120)
(cid:120)
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);
10
(cid:120)
(cid:120)
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, 2017, 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 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.
The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the
Deposit Insurance Fund. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions
deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are now based
on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure
within three years. That system, effective July 1, 2016, replaces the previous system under which institutions were
placed in risk categories.
The Dodd-Frank Act required the Federal Deposit Insurance Corporation to revise its procedures to base its
assessments upon each insured institution’s total assets less tangible equity instead of deposits. The Federal Deposit
Insurance Corporation finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of
total assets less tangible equity. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the
assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion in total
assets to 1.5 basis points to 30 basis points, effective July 1, 2016.
11
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, 2017, equaled 0.54 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. The Dodd-Frank Act requires insured institutions with assets of $10
billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a
surcharge to achieve that goal. 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 FHLB 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 FHLB of Des Moines, Territorial Savings Bank is required to acquire and hold shares of capital stock in the FHLB.
As of December 31, 2017, Territorial Savings Bank held $6.5 million of capital stock in the FHLB 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 of Financial
Institutions. 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;
(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;
(cid:120) 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;
12
(cid:120) Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit;
(cid:120) Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
(cid:120)
fair lending laws;
(cid:120) Unfair or Deceptive Acts or Practices laws and regulations;
(cid:120) Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies;
(cid:120) Truth in Savings Act; and
(cid:120)
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) 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;
(cid:120) 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;
(cid:120) 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;
(cid:120) The USA PATRIOT Act, which requires financial institutions 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
(cid:120) The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information
by financial institutions with unaffiliated third parties. Specifically, 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 specifies 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
13
with the requirements that would apply to a financial holding company’s conduct of the activity. Territorial Bancorp Inc.
has not elected financial holding company status. 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., from directly or
indirectly, or through one or more subsidiaries, acquiring more than 5% of another savings institution or holding
company thereof, without prior written approval of the Federal Reserve Board. It also prohibits, with certain exceptions,
the acquisition or retention of 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,
among others, the financial and managerial resources and 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)
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
(ii) the acquisition of a savings institution in another state if the laws of the state of the target savings
institution specifically permit such acquisition.
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
implemented 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 is being 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
14
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.
Qualified Thrift Lender Test
In order for Territorial Bancorp Inc. to continue to be regulated as a savings and loan holding company (rather
than bank holding company) when Territorial Savings Bank converted from a federal savings bank to a Hawaii savings
bank, Territorial Savings Bank is required to satisfy the same qualified thrift lender (QTL) test that it did as federal
savings bank. The QTL test requires Territorial Savings Bank to either qualify as a “domestic building and loan
association” as defined by the Internal Revenue Code or maintain at least 65% of “portfolio assets” in “qualified thrift
investments,” primarily residential mortgages and related investments, including mortgage-backed and related securities.
A savings institution that fails the QTL test must operate under specified restrictions and may be subject to enforcement
action. Territorial Savings Bank was in compliance with the QTL test at December 31, 2017.
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 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
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)
the interest income we earn on our interest-earning assets, such as loans and securities; and
15
(cid:120)
the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
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,
2017, 95.5% of our loans had maturities of 15 years or longer, while 53.1% 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. Furthermore, our loan origination and
sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan
demand. 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 loans 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, 2017, the fair value of our
investment in held-to-maturity securities totaled $406.7 million. Net unrealized gains on these securities totaled $1.9
million at December 31, 2017.
At December 31, 2017, 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 $26.5 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, 2017, these loans totaled $1.445 billion or 96.7% 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.
16
A worsening of economic conditions in our market area could reduce demand for our products and services
and/or result in increases in our level of non-performing loans, which could adversely affect our operations,
financial condition and earnings.
Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the
value of the collateral securing loans. A deterioration in economic conditions could have the following consequences,
any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
demand for our products and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future
borrowing power, and reducing the value of assets and collateral associated with existing loans; and
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to
us.
Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism,
an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control
could further impact these local economic conditions and could further negatively affect the financial results of our
banking operations. 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.
We may be adversely affected by recent changes in U.S. tax laws.
The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative
effects on our financial performance. For example, the new legislation will result in a reduction in our federal corporate
tax rate from 35% to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation
abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the
banking industry, borrowers and the market for single-family residential real estate. These limitations include (i) a lower
limit on the deductibility of mortgage interest on single-family residential mortgage and home equity loans, (ii) a
limitation on the deductibility of business interest expense and (iii) a limitation on the deductibility of property taxes and
state and local income taxes. In addition, as a result of the lower corporate tax rate, we were required under U.S.
generally accepted accounting principles (U.S. GAAP) to record a tax expense due to remeasurement in the fourth
quarter of 2017 with respect to our deferred income tax assets amounting to $2.1 million.
The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential
properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan
payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high
residential home prices and high state and local taxes, like Hawaii. If home ownership becomes less attractive, demand
for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely
impacted as a result of the changing economics of home ownership, which could require an increase in our provision for
loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition
and results of operations.
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 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, 2017 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.
17
Accordingly, our net interest income may be adversely affected and may even decrease, which may have an adverse
effect on our profitability.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial
condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the
policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money
supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives
are open market purchases and sales of U.S. government securities, adjustments of the federal funds and discount rates
and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations
to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also
affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the
operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of
such policies upon our business, financial condition and results of operations cannot be predicted.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws
could lead to material penalties.
The Community Reinvestment Act (CRA), the Equal Credit Opportunity Act, the Fair Housing Act and other
fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful
regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a
wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief,
imposition of restrictions on mergers and acquisitions activity and restrictions on activities which could result in the
denial of certain corporate applications such as branches. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation. Such actions could have a material
adverse effect on our business, financial condition and results of operations.
Nonresidential real estate loans and commercial business loans increase our exposure to credit risks.
At December 31, 2017, our portfolio of commercial real estate, construction and other nonresidential real estate
loans totaled $21.8 million, or 1.5% of total loans. In addition, at December 31, 2017, our portfolio of commercial
business loans totaled $3.9 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
18
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, 2017, material additions to our
allowance could materially decrease our net income.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for
Territorial Bancorp Inc. and Territorial Savings Bank for our first fiscal year after December 15, 2019. This standard,
referred to as Current Expected Credit Loss (CECL), will require financial institutions to determine periodic estimates of
lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will
change the current method of providing allowances for loan losses that are probable, which may require us to increase
our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine
the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred
to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial
condition and results of operations.
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 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.
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 5.0% and 6.2%, respectively, in 2017 compared to 2016. 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.
19
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.
The Federal Reserve Board may require us to commit capital resources to support Territorial Savings Bank.
Federal law requires that a holding company act as a source of financial and managerial strength to its
subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the
Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and
may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to
provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its
subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding
company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law
provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the
institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be
done by Territorial Bancorp, Inc. to make a required capital injection becomes more difficult and expensive and could
have an adverse effect on our business, financial condition and results of operations.
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 are subject to certain 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, included minimum risk-
based capital and leverage ratios, and refined the definition of what constitutes “capital” for purposes of calculating these
ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-
based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also
established a “capital conservation buffer” of 2.5%, resulting 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
capital conservation buffer requirement began to be phased in beginning in January 2016 at 0.625% of risk-weighted
assets and will increase each year until fully implemented in January 2019. A financial institution, such as Territorial
Savings Bank, is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary
bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible
retained income that can be utilized for such actions.
20
Territorial Savings Bank and Territorial Bancorp Inc. met all of these requirements, including the full 2.5%
capital conservation buffer, as if these requirements had been fully phased in as of December 31, 2017.
The application of these 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. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”
Government responses to economic conditions may adversely affect our operations, financial condition and
earnings.
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 may 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.
If the Federal Reserve Board continues to increase 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.
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.
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 recent years, 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
21
operations. New laws, regulations, and other regulatory changes may significantly affect the 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.
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 four de novo branches including the most recent branch opened in 2017. 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.
Nevertheless, our systems 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.
22
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 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.
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 $9.4 billion in the fiscal year 2017 and creating thousands of jobs for residents of the State. Cuts to defense
23
and other general spending could have an adverse impact on Hawaii’s economy, which could adversely affect our
financial condition and results of operations.
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 FHLB 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 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.
ITEM 2.
Properties
We operate from our corporate office in Honolulu, Hawaii, and from our 29 full-service branches located in the
State of Hawaii. The net book value of our premises, land and equipment was $5.7 million at December 31, 2017. The
24
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
KAIMUKI
1108 12th Avenue
Honolulu, Oahu 96816
12/31/2018
KIHEI
Azeka Shopping Center
1279 South Kihei Road
Kihei, Maui 96753
1/31/2019
PEARLRIDGE
98-084 Kamehameha Highway
Aiea, Oahu 96701
6/30/2022
ALA MOANA CENTER
1450 Ala Moana Boulevard
Honolulu, Oahu 96814
12/31/2024
KALIHI-KAPALAMA
1199 Dillingham Boulevard
Honolulu, Oahu 96817
8/31/2027
KONA
Crossroads Shopping Center
75-1027 Henry Street
Kailua-Kona, Hawaii 96740
8/31/2020
PIIKOI
1159 South Beretania Street
Honolulu, Oahu 96814
12/31/2020
DOWNTOWN
1000 Bishop Street
Honolulu, Oahu 96813
12/31/2020
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
HAWAII KAI
Hawaii Kai Shopping Center
377 Keahole Street
Honolulu, Oahu 96825
9/30/2018
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
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
WAIPIO
Laniakea Plaza
94-1221 Ka Uka Boulevard
Waipahu, Oahu 96797
9/30/2021
HILO
Waiakea Center
315 Makaala Street
Hilo, Hawaii 96720
12/31/2018
KAHALA
4819 Kilauea Avenue
Honolulu, Oahu 96816
1/31/2019
KAHULUI
Queen Kaahumanu Center
275 W. Kaahumanu Avenue
Kahului, Maui 96732
12/31/2019
KAILUA
19 Oneawa Street
Kailua, Oahu 96734
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
NUUANU
KAUAI
Kukui Grove Shopping Center Nuuanu Shopping Center
4393 Kukui Grove Street
Lihue, Kauai 96766
2/28/2023
1613 Nuuanu Avenue
Honolulu, Oahu 96817
7/22/2021
KEEAUMOKU
735 Keeaumoku Street
Honolulu, Oahu 96814
9/30/2029
PEARL CITY
Pearl City Shopping Center
850 Kamehameha Highway
Pearl City, Oahu 96782
9/22/2019
25
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. At December 31, 2017, 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.
ITEM 4. Mine Safety Disclosures
Not applicable.
26
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 28, 2018 was 1,131. 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, 2017. The following information with respect to high and low intra-day
stock prices was provided by the NASDAQ Global Select Market.
Year Ended December 31, 2017
Quarter ended December 31, 2017
Quarter ended September 30, 2017
Quarter ended June 30, 2017
Quarter ended March 31, 2017
Year Ended December 31, 2016
Quarter ended December 31, 2016
Quarter ended September 30, 2016
Quarter ended June 30, 2016
Quarter ended March 31, 2016
High
Low
Dividends
Declared Per
Share
$ 33.00 $ 29.90 $
$ 31.98 $ 28.12 $
$ 32.79 $ 29.08 $
$ 34.00 $ 30.45 $
0.50
0.30
0.20
0.20
$ 33.32 $ 27.73 $
$ 29.25 $ 26.22 $
$ 26.74 $ 24.96 $
$ 27.89 $ 24.87 $
0.38
0.18
0.18
0.18
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)
(c)
(d)
Sales of Unregistered Securities. Not applicable.
Use of Proceeds. Not applicable.
Securities Authorized for Issuance Under Equity Compensation Plans. See “Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
27
(e)
Stock Repurchases. The following table sets forth information in connection with repurchases of our
shares of common stock during the fourth quarter of 2017:
Period
October 1, 2017 through October 31, 2017
November 1, 2017 through November 30,
2017
December 1, 2017 through December 31,
2017
Total
Total Number of
Shares Purchased (1)
Average Price
Paid per
Share
Total Number of
Maximum Number of
Shares Purchased as Shares That May Yet
be Purchased Under
the Plans or
Programs (2)
Part of Publicly
Announced Plans or
Programs
28,104 $
32.77
40,443
$
32.20
—
—
68,547 $
32.43
—
—
—
—
217,300
217,300
217,300
217,300
(1) Includes shares acquired by the Company to settle the exercise price in connection with stock swap or net settlement
transactions related to the exercise of stock options.
(2) On March 7, 2016, the Company announced its seventh repurchase program. Under the repurchase program, the
Company is authorized to repurchase up to 275,000 shares of our common stock. We have entered into a
Rule 10b5-1 plan with respect to our stock repurchase program.
(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, 2012 and December 31, 2017, (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.
28
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.
Territorial Bancorp Inc.
Total Return Performance
Territorial Bancorp Inc.
NASDAQ Composite Index
SNL Bank and Thrift Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index
Territorial Bancorp Inc.
NASDAQ Composite Index
SNL Bank and Thrift Index
Period Ending
12/31/12
100.00
100.00
100.00
12/31/13
104.29
140.12
136.92
12/31/14
100.12
160.78
152.85
12/31/15
132.86
171.97
155.94
12/31/16
162.54
187.22
196.86
12/31/17
157.32
242.71
231.49
29
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 on Form 10-K.
Selected Financial Condition Data:
2017
2016
At December 31,
2015
(In thousands)
2014
2013
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
$ 2,003,846 $ 1,877,562 $ 1,821,141 $ 1,691,897 $ 1,616,904
75,365
613,436
856,542
40,243
11,689
1,288,709
15,000
72,000
212,140
65,919
493,059
1,188,649
42,328
4,790
1,445,103
69,000
55,000
219,641
61,273
407,656
1,335,987
43,294
4,945
1,493,200
69,000
55,000
229,786
32,089
404,792
1,488,971
44,201
6,541
1,597,295
107,200
30,000
234,854
75,060
572,922
968,212
41,303
11,234
1,359,679
15,000
72,000
216,378
2017
2016
Year Ended December 31,
2015
(In thousands)
2014
2013
Selected Operating Data:
Interest 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
$
68,333 $
9,589
58,744
52
66,073 $
7,844
58,229
310
63,092 $
6,515
56,577
455
59,615 $
6,118
53,497
360
56,175
6,282
49,893
39
58,692
3,846
36,474
26,064
11,102
14,962 $
57,919
4,094
34,879
27,134
10,787
16,347 $
56,122
4,911
36,499
24,534
9,786
14,748 $
53,137
5,177
35,308
23,006
8,909
14,097 $
49,854
8,716
35,077
23,493
8,846
14,647
$
30
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
2017
At or for the Year Ended December 31,
2014
2015
2016
2013
0.77 %
0.88 %
0.84 %
0.85 %
0.93 %
6.34 %
3.07 %
3.15 %
58.27 %
1.89 %
7.20 %
3.19 %
3.26 %
55.96 %
1.88 %
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 %
interest-bearing liabilities
Average equity to average total assets
Basic earnings per share
Diluted earnings per share
Dividend payout ratio (4)
115.50 %
12.20 %
1.61
$
$
1.57
76.43 %
115.66 %
12.25 %
1.80
$
$
1.76
52.27 %
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 %
$
$
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
Capital Ratios (bank-level only):
Total capital (to risk-weighted assets)
Common equity Tier 1 capital (to risk-
weighted assets) (5)
Tier I capital (to risk-weighted assets)
Tier I capital (to total assets)
Other Data:
Number of full-service offices
Full-time equivalent employees
0.21 %
0.28 %
0.24 %
0.34 %
0.30 %
0.45 %
0.26 %
0.46 %
0.37 %
0.69 %
60.28 %
0.17 %
53.78 %
0.18 %
40.00 %
0.18 %
37.97 %
0.17 %
24.77 %
0.17 %
23.59 %
25.59 %
26.07 %
29.93 %
31.99 %
23.31 %
23.31 %
11.04 %
25.30 %
25.30 %
11.76 %
25.79 %
25.79 %
11.49 %
n/a
29.68 %
12.10 %
n/a
31.75 %
12.35 %
29
276
28
271
28
275
28
268
28
274
(1) The average interest rate spread represents the difference between the yield on average interest-earning assets and
the cost of average 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) The dividend payout ratio represents cash dividends declared per share divided by the diluted earnings per share.
(5) Effective January 1, 2015, a new common equity Tier 1 capital standard was implemented.
31
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 on Form 10-K.
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 FHLB advances. As a result, we may be vulnerable
to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning
assets.
We have continued our focus on originating one- to four-family residential real estate loans. Our emphasis on
conservative loan underwriting has resulted in continued low levels of nonperforming assets. Our nonperforming assets,
which includes nonaccrual loans and real estate owned, totaled $4.2 million, or 0.21% of total assets at December 31,
2017, compared to $4.6 million, or 0.24% of total assets at December 31, 2016, and $5.4 million, or 0.30% of total assets
at December 31, 2015. As of December 31, 2017, nonperforming assets consisted of 17 mortgage loans with a principal
balance of $4.2 million. Our nonperforming loans and loan 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 $52,000, $310,000 and $455,000 for the years ended December 31,
2017, 2016 and 2015, respectively.
Other than our loans for the construction of one- to four-family residential homes, we do not offer “interest
only” mortgage loans (where the borrower pays interest for an initial period, after which the loan converts to a fully
amortizing loan) on one- to four-family residential properties. We also do not offer loans that provide for negative
amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their
loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that
generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous
charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit
scores or high debt-burden ratios) or Alt-A loans (traditionally defined as nonconforming loans having less than full
documentation). We also do not own any private label mortgage-backed securities that are collateralized by Alt-A, low
or no documentation or subprime mortgage loans.
Our operations in recent years have been affected by our efforts to manage our interest rate risk position. In
2017, 2016 and 2015, we sold $25.0 million, $48.9 million and $56.2 million, respectively, of fixed-rate mortgage loans.
In 2017 and 2015, we also increased our total long-term fixed rate FHLB advances and securities sold under agreements
to repurchase by $13.2 million and $37.0 million, respectively, to reduce our interest rate risk. See “—Management of
Market Risk” for a discussion of the actions we have taken in managing interest rate risk.
All of 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, 2017 and 2016, our additional borrowing capacity at the FHLB of Des Moines was $579.4 million and
$577.9 million, respectively.
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:
32
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 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, as
an integral part of their examination processes, the bank regulators will periodically review our allowance for loan
losses. The bank regulators may require that we recognize additions to the allowance for loan losses based on their
analysis of 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. 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 pricing models that consider bid and ask prices and prices at which similar
securities traded. 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 an amortized cost and a
remaining cost basis of $427,000 at December 31, 2017 and there is no accumulated other comprehensive loss related to
noncredit factors.
We evaluated our $6.5 million investment in FHLB stock for other-than-temporary impairment as of December
31, 2017. Considering the long-term nature of this investment and the liquidity position of the FHLB of Des Moines, our
FHLB stock was not considered to be other-than-temporarily impaired. As of December 31, 2017, 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 $3.1 million investment in FRB stock for other-than-temporary impairment as of December
31, 2017. 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. In 2017, we wrote-down our deferred tax assets by $2.1 million
when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs Act of 2017. A
valuation allowance may be 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.
33
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 equity 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, 2017, we used weighted-average discount rates of 4.30% and 3.70% for calculating annual
pension expense and projected plan liabilities, respectively, and an expected long-term rate of return on plan assets of
7.25% for calculating annual pension expense. At December 31, 2016, we used weighted-average discount rates of
4.40% and 4.30% 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 have reduced our pension expense in
2017, 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 have decreased our 2017 pension expense by $5,000 and
would have increased our year-end 2017 pension liability by $593,000, while a 25 basis point decrease in the asset return
rate would have increased our 2017 pension expense by $35,000.
Balance Sheet Analysis
Assets. At December 31, 2017, our assets were $2.004 billion, an increase of $126.3 million, or 6.7%, from
$1.878 billion at December 31, 2016. The increase was primarily caused by a $153.0 million increase in loans
receivable, which was partially offset by a $29.2 million decrease in cash and cash equivalents.
Cash and Cash Equivalents. At December 31, 2017, we had $32.1 million of cash and cash equivalents
compared to $61.3 million at December 31, 2016. During 2017, cash and cash equivalents decreased by $29.2 million
primarily due to funding a $153.0 million increase in loans receivable and $11.1 million of common stock dividends
paid. These uses of cash were partially offset by a $104.1 million increase in deposits, $15.0 million of net income, and
a $13.2 million increase in borrowings.
34
3
1
0
2
4
1
0
2
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
A
6
1
0
2
7
1
0
2
t
n
e
c
r
e
P
t
n
u
o
m
A
t
n
e
c
r
e
P
t
n
u
o
m
A
t
n
e
c
r
e
P
t
n
u
o
m
A
t
n
e
c
r
e
P
t
n
u
o
m
A
t
n
e
c
r
e
P
t
n
u
o
m
A
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
(
7
5
.
0
7
5
.
1
1
9
.
1
4
5
.
0
7
7
8
,
4
4
5
5
,
3
1
4
2
5
,
6
1
9
4
6
,
4
2
9
.
0
9
8
.
1
4
6
.
1
7
4
.
0
0
2
9
,
8
5
1
4
,
8
1
2
9
9
,
5
1
4
1
6
,
4
2
8
.
0
2
6
.
1
8
2
.
1
8
3
.
0
4
3
8
,
9
8
8
2
,
9
1
3
3
3
,
5
1
3
4
5
,
4
1
7
.
0
4
7
.
1
0
1
.
1
4
3
.
0
1
5
5
,
9
6
4
3
,
3
2
5
0
8
,
4
1
4
6
5
,
4
2
7
.
0
6
4
.
1
6
8
.
0
1
3
.
0
9
9
7
,
0
1
7
8
7
,
1
2
2
8
8
,
2
1
4
1
6
,
4
%
1
4
.
5
9
3
7
2
,
3
2
8
$
%
8
0
.
5
9
4
7
0
,
6
2
9
$
%
0
9
.
5
9
4
0
9
,
5
4
1
,
1
$
%
1
1
.
6
9
4
6
3
,
9
8
2
,
1
$
%
5
6
.
6
9
5
2
6
,
4
4
4
,
1
$
%
0
0
.
0
0
1
7
7
8
,
2
6
8
%
0
0
.
0
0
1
5
1
0
,
4
7
9
%
0
0
.
0
0
1
2
0
9
,
4
9
1
,
1
%
0
0
.
0
0
1
0
3
6
,
1
4
3
,
1
%
0
0
.
0
0
1
7
0
7
,
4
9
4
,
1
r
e
h
t
o
d
n
a
l
a
i
c
r
e
m
m
o
c
,
n
o
i
t
c
u
r
t
s
n
o
C
t
i
d
e
r
c
f
o
s
e
n
i
l
d
n
a
s
n
a
o
l
y
t
i
u
q
e
e
m
o
H
l
a
i
t
n
e
d
i
s
e
r
y
l
i
m
a
f
-
r
u
o
f
o
t
-
e
n
O
l
a
i
t
n
e
d
i
s
e
r
y
l
i
m
a
f
-
i
t
l
u
M
:
e
g
a
g
t
r
o
m
t
s
r
i
F
:
s
n
a
o
l
e
t
a
t
s
e
l
a
e
R
s
n
a
o
l
l
a
t
o
T
s
n
a
o
l
r
e
h
t
O
:
s
m
e
t
i
r
e
h
t
O
g
n
i
v
a
h
s
n
a
o
l
,
s
n
a
o
l
d
n
a
m
e
D
.
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
o
i
l
o
f
t
r
o
p
n
a
o
l
r
u
o
f
o
s
e
i
t
i
r
u
t
a
m
d
e
l
u
d
e
h
c
s
e
h
t
s
e
z
i
r
a
m
m
u
s
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
.
s
d
l
e
i
Y
d
n
a
s
e
i
t
i
r
u
t
a
M
o
i
l
o
f
t
r
o
P
n
a
o
L
35
2
4
5
,
6
5
8
$
2
1
2
,
8
6
9
$
9
4
6
,
8
8
1
,
1
$
7
8
9
,
5
3
3
,
1
$
1
7
9
,
8
8
4
,
1
$
t
e
n
,
e
l
b
a
v
i
e
c
e
r
s
n
a
o
L
.
s
s
e
l
r
o
r
a
e
y
e
n
o
n
i
e
u
d
g
n
i
e
b
s
a
d
e
t
r
o
p
e
r
e
r
a
s
n
a
o
l
t
f
a
r
d
r
e
v
o
d
n
a
,
y
t
i
r
u
t
a
m
r
o
e
l
u
d
e
h
c
s
t
n
e
m
y
a
p
e
r
d
e
t
a
t
s
o
n
%
0
2
.
6
0
5
.
5
5
8
.
3
1
1
2
,
2
6
4
8
,
3
1
0
5
6
,
8
7
4
,
1
$
%
1
2
.
7
2
6
.
5
5
7
.
4
4
6
7
0
5
4
,
1
0
0
4
,
2
$
%
5
2
.
6
6
3
.
6
8
2
.
4
7
7
7
5
8
5
,
2
0
2
5
,
9
$
%
0
0
.
5
3
2
.
5
1
5
.
4
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
(
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
e
t
a
R
t
n
u
o
m
A
e
t
a
R
t
n
u
o
m
A
e
t
a
R
t
n
u
o
m
A
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
e
t
a
R
9
6
5
4
6
2
,
6
4
5
9
,
4
1
t
n
u
o
m
A
$
%
—
2
4
.
5
6
2
.
4
—
8
5
5
,
2
1
4
2
,
8
$
%
6
8
.
4
9
9
.
4
4
8
.
3
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
e
t
a
R
t
n
u
o
m
A
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
e
t
a
R
t
n
u
o
m
A
1
0
1
9
8
9
5
3
5
,
3
4
4
,
1
$
l
a
t
o
T
s
n
a
o
l
r
e
h
t
O
t
i
d
e
r
c
f
o
s
e
n
i
l
e
t
a
t
s
e
l
a
e
r
r
e
h
t
o
d
n
a
e
t
a
t
s
e
l
a
e
r
d
n
a
s
n
a
o
l
y
t
i
u
q
e
e
m
o
H
l
a
i
c
r
e
m
m
o
c
,
n
o
i
t
c
u
r
t
s
n
o
C
l
a
i
t
n
e
d
i
s
e
r
y
l
i
m
a
f
-
i
t
l
u
M
y
l
i
m
a
f
-
r
u
o
f
o
t
-
e
n
O
e
t
a
t
s
e
l
a
e
r
l
a
i
t
n
e
d
i
s
e
r
s
r
a
e
Y
e
h
t
g
n
i
r
u
D
e
u
D
,
1
3
r
e
b
m
e
c
e
D
g
n
i
d
n
E
d
n
o
y
e
b
d
n
a
3
2
0
2
2
2
0
2
o
t
9
1
0
2
8
1
0
2
%
7
8
.
3
7
0
7
,
4
9
4
,
1
$
%
3
4
.
5
4
1
6
,
4
$
%
1
8
.
4
2
8
8
,
2
1
$
%
3
7
.
4
7
8
7
,
1
2
$
%
3
5
.
4
9
9
7
,
0
1
$
%
4
8
.
3
5
2
6
,
4
4
4
,
1
$
l
a
t
o
T
)
9
4
8
,
4
(
)
6
8
4
,
1
(
)
2
1
1
,
4
(
)
1
9
6
,
1
(
)
7
8
0
,
4
(
)
6
6
1
,
2
(
)
1
9
1
,
3
(
)
2
5
4
,
2
(
)
8
8
1
,
3
(
)
8
4
5
,
2
(
t
e
n
,
s
t
n
u
o
c
s
i
d
d
n
a
s
e
e
f
d
e
n
r
a
e
n
U
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
A
.
d
e
t
a
c
i
d
n
i
s
e
t
a
d
e
h
t
t
a
o
i
l
o
f
t
r
o
p
n
a
o
l
r
u
o
f
o
n
o
i
t
i
s
o
p
m
o
c
e
h
t
h
t
r
o
f
s
t
e
s
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
.
n
o
i
t
i
s
o
p
m
o
C
o
i
l
o
f
t
r
o
P
n
a
o
L
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31,
2017 that are contractually due after December 31, 2018.
Fixed
Due After December 31, 2018
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
$ 1,442,477 $ 2,047 $ 1,444,524
10,799
21,218
12,105
3,850
723
3,387
10,520
333
10,076
17,831
1,585
3,517
Total loans
$ 1,475,486 $ 17,010 $ 1,492,496
Securities. At December 31, 2017, our securities portfolio totaled $407.6 million, or 20.3% of assets and
included $404.8 million classified as held-to-maturity and $2.9 million classified as available-for-sale. At that date, our
securities held to maturity consisted of securities with the following amortized costs: $404.4 million of mortgage-backed
securities and $427,000 of trust preferred securities. All of the mortgage-backed securities were issued by Fannie Mae,
Freddie Mac or Ginnie Mae. At December 31, 2017, 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, 2017, we
held no common or preferred stock of Fannie Mae or Freddie Mac.
The following table sets forth the amortized cost and estimated fair value of our securities portfolio at the dates
indicated.
Amortized
2017
Cost
Fair Value
At December 31,
2016
Amortized
Cost
(In thousands)
Fair Value
2015
Amortized
Cost
Fair Value
$
$
2,870 $
2,870 $
2,851 $
2,851 $
— $
— $
— $
— $
— $
— $
—
—
Available for Sale:
U.S. government sponsored
mortgage-backed securities:
Freddie Mac
Total
Held to Maturity:
U.S. government sponsored
mortgage-backed securities:
Fannie Mae
Freddie Mac
Collateralized mortgage
$
obligations (1)
Ginnie Mae
Total U.S. government
sponsored mortgage-
backed securities
127,768 $ 128,069 $ 145,065 $ 144,490 $ 174,947 $ 175,432
254,515
229,120
205,227
206,855
231,051
249,473
5,992
41,485
5,744
40,954
7,364
48,842
7,117
48,297
10,668
57,055
10,349
56,770
404,365
405,818
406,498
406,759
492,143
497,066
Trust preferred securities
427
845
1,158
1,163
916
916
Total
$
404,792 $ 406,663 $ 407,656 $ 407,922 $ 493,059 $ 497,982
(1) All of our collateralized mortgage obligations have been issued by Fannie Mae, Freddie Mac or Ginnie Mae.
36
Any unrealized loss on individual mortgage-backed securities as of December 31, 2017, 2016 and 2015 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 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, 2017, 2016 or 2015.
At December 31, 2017, we owned a trust preferred security with an amortized cost of $427,000. 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 72 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 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. We used a discount rate equal to three-
month LIBOR plus 20.00%.
At December 31, 2017, 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.
37
e
h
t
n
i
d
e
z
i
r
a
m
m
u
s
e
r
a
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
o
i
l
o
f
t
r
o
p
s
e
i
t
i
r
u
c
e
s
t
n
e
m
t
s
e
v
n
i
e
h
t
f
o
s
e
i
t
i
r
u
t
a
m
d
n
a
n
o
i
t
i
s
o
p
m
o
c
e
h
T
.
s
n
o
p
u
o
C
d
n
a
s
e
i
t
i
r
u
t
a
M
o
i
l
o
f
t
r
o
P
o
N
.
r
u
c
c
o
y
a
m
t
a
h
t
s
n
o
i
t
p
m
e
d
e
r
y
l
r
a
e
r
o
s
t
n
e
m
y
a
p
e
r
p
f
o
t
c
a
p
m
i
e
h
t
t
c
e
l
f
e
r
t
o
n
o
d
d
n
a
,
s
e
t
a
d
t
n
e
m
y
a
p
l
a
u
t
c
a
r
t
n
o
c
l
a
n
i
f
e
h
t
n
o
d
e
s
a
b
e
r
a
s
e
i
t
i
r
u
t
a
M
.
e
l
b
a
t
g
n
i
w
o
l
l
o
f
.
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
s
e
i
t
i
r
u
c
e
s
t
n
e
m
t
s
e
v
n
i
e
e
r
f
-
x
a
t
y
n
a
d
l
o
h
t
o
n
d
i
d
e
w
s
a
,
e
d
a
m
n
e
e
b
e
v
a
h
s
t
n
e
m
t
s
u
j
d
a
t
n
e
l
a
v
i
u
q
e
-
x
a
t
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
n
o
p
u
o
C
e
u
l
a
V
r
i
a
F
d
e
z
i
t
r
o
m
A
t
s
o
C
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
n
o
p
u
o
C
d
e
z
i
t
r
o
m
A
t
s
o
C
s
e
i
t
i
r
u
c
e
S
l
a
t
o
T
s
r
a
e
Y
n
e
T
n
a
h
t
e
r
o
M
s
r
a
e
Y
e
v
i
F
n
a
h
t
e
r
o
M
s
r
a
e
Y
n
e
T
h
g
u
o
r
h
t
r
a
e
Y
e
n
O
n
a
h
t
e
r
o
M
s
r
a
e
Y
e
v
i
F
h
g
u
o
r
h
t
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
n
o
p
u
o
C
d
e
z
i
t
r
o
m
A
t
s
o
C
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
n
o
p
u
o
C
d
e
z
i
t
r
o
m
A
t
s
o
C
s
s
e
L
r
o
r
a
e
Y
e
n
O
d
e
t
h
g
i
e
W
e
g
a
r
e
v
A
n
o
p
u
o
C
d
e
z
i
t
r
o
m
A
t
s
o
C
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
(
:
e
l
a
S
r
o
f
e
l
b
a
l
i
a
v
A
%
0
0
.
3
%
0
0
.
3
1
5
8
,
2
1
5
8
,
2
$
$
0
7
8
,
2
0
7
8
,
2
$
$
%
0
0
.
3
%
0
0
.
3
0
7
8
,
2
0
7
8
,
2
$
$
%
—
%
—
—
—
$
$
%
—
%
—
—
—
$
$
%
—
%
—
%
0
1
.
3
3
1
.
3
1
5
0
,
1
3
2
9
6
0
,
8
2
1
$
8
6
7
,
7
2
1
0
2
1
,
9
2
2
6
6
.
1
1
9
.
2
8
0
.
3
9
6
.
3
4
4
7
,
5
4
5
9
,
0
4
2
9
9
,
5
5
8
4
,
1
4
5
4
8
7
2
4
8
1
8
,
5
0
4
5
6
3
,
4
0
4
$
%
0
1
.
3
0
0
7
,
7
2
1
$
%
3
3
.
3
3
1
.
3
6
6
.
1
1
9
.
2
8
0
.
3
9
6
.
3
7
1
1
,
9
2
2
—
2
9
9
,
5
5
7
4
,
1
4
7
2
4
4
8
2
,
4
0
4
—
5
7
.
2
—
5
2
.
3
%
8
0
.
3
3
6
6
,
6
0
4
$
2
9
7
,
4
0
4
$
%
8
0
.
3
1
1
7
,
4
0
4
$
%
5
2
.
3
1
6
—
—
0
1
1
7
—
1
7
$
%
5
5
.
4
0
8
.
4
—
—
—
3
6
.
4
$
%
3
6
.
4
7
3
—
—
0
1
—
0
1
$
%
—
—
—
—
—
—
$
%
—
—
—
—
—
—
—
—
—
—
$
$
$
$
d
e
r
o
s
n
o
p
s
t
n
e
m
n
r
e
v
o
g
.
.
S
U
:
s
e
i
t
i
r
u
c
e
s
d
e
k
c
a
b
-
e
g
a
g
t
r
o
m
c
a
M
e
i
d
d
e
r
F
l
a
t
o
T
:
y
t
i
r
u
t
a
M
o
t
d
l
e
H
d
e
r
o
s
n
o
p
s
t
n
e
m
n
r
e
v
o
g
.
.
S
U
t
n
e
m
n
r
e
v
o
g
.
.
S
U
l
a
t
o
T
-
e
g
a
g
t
r
o
m
d
e
r
o
s
n
o
p
s
s
e
i
t
i
r
u
c
e
s
d
e
k
c
a
b
s
e
i
t
i
r
u
c
e
s
d
e
r
r
e
f
e
r
p
t
s
u
r
T
l
a
t
o
T
:
s
e
i
t
i
r
u
c
e
s
d
e
k
c
a
b
-
e
g
a
g
t
r
o
m
e
g
a
g
t
r
o
m
d
e
z
i
l
a
r
e
t
a
l
l
o
C
)
1
(
s
n
o
i
t
a
g
i
l
b
o
e
a
M
e
i
n
n
i
G
e
a
M
e
i
n
n
a
F
c
a
M
e
i
d
d
e
r
F
38
d
e
n
w
o
-
k
n
a
B
.
s
n
o
i
t
a
g
i
l
b
o
n
a
l
p
t
i
f
e
n
e
b
r
u
o
r
o
f
e
c
r
u
o
s
g
n
i
d
n
u
f
a
h
t
i
w
s
u
e
d
i
v
o
r
p
o
t
e
c
n
a
r
u
s
n
i
e
f
i
l
d
e
n
w
o
-
k
n
a
b
n
i
t
s
e
v
n
i
e
W
.
e
c
n
a
r
u
s
n
I
e
f
i
L
d
e
n
w
O
-
k
n
a
B
2
.
4
4
$
d
e
t
s
e
v
n
i
d
a
h
e
w
d
n
a
,
n
o
i
l
l
i
m
4
.
5
5
$
s
a
w
t
i
m
i
l
s
i
h
t
,
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
A
.
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
r
u
o
s
u
l
p
l
a
t
i
p
a
c
1
r
e
i
T
s
’
k
n
a
B
e
h
t
f
o
%
5
2
o
t
e
c
n
a
r
u
s
n
i
e
f
i
l
d
e
n
w
o
-
k
n
a
b
n
i
t
n
e
m
t
s
e
v
n
i
r
u
o
s
t
i
m
i
l
y
l
l
a
r
e
n
e
g
e
c
n
a
d
i
u
g
l
a
r
e
d
e
f
y
c
n
e
g
a
r
e
t
n
I
.
e
l
b
a
x
a
t
n
o
n
s
i
t
a
h
t
e
m
o
c
n
i
t
s
e
r
e
t
n
i
n
o
n
s
u
s
e
d
i
v
o
r
p
y
l
l
a
r
e
n
e
g
o
s
l
a
e
c
n
a
r
u
s
n
i
e
f
i
l
.
e
t
a
d
t
a
h
t
t
a
e
c
n
a
r
u
s
n
i
e
f
i
l
d
e
n
w
o
-
k
n
a
b
n
i
n
o
i
l
l
i
m
.
e
a
M
e
i
n
n
i
G
r
o
c
a
M
e
i
d
d
e
r
F
,
e
a
M
e
i
n
n
a
F
y
b
d
e
u
s
s
i
n
e
e
b
e
v
a
h
s
n
o
i
t
a
g
i
l
b
o
e
g
a
g
t
r
o
m
d
e
z
i
l
a
r
e
t
a
l
l
o
c
r
u
o
f
o
l
l
A
)
1
(
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, and do not currently have, 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, 2017, our deposits grew by $104.1 million, or 7.0%. The growth in
deposits was primarily due to an increase of $76.2 million in the balance of certificates of deposit and an increase of
$18.1 million in the balance of savings accounts for the year ended December 31, 2017. The increase in certificates of
deposit was primarily due to a $41.8 million increase in public deposits and $16.9 million in new accounts at our new
Keeaumoku branch, which was opened in April 2017.
At December 31, 2017, we had a total of $312.2 million in certificates of deposit, of which $165.7 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,
2017
2016
Average
Balance
Weighted
Average
Rate
Percent
Average
Balance
Weighted
Average
Rate
Percent
(Dollars in thousands)
Deposit type:
Non-interest-bearing
Savings accounts
Certificates of deposit
Money market
Checking and Super NOW
$
47,148
1,033,454
270,225
5,171
180,858
67.2
17.6
0.3
11.8
3.1 % — % $
47,097
0.43 % 1,017,420
226,264
1.17 %
2,469
0.44 %
171,716
0.02 %
3.2 % — %
0.41 %
69.5
0.76 %
15.4
0.41 %
0.2
0.02 %
11.7
Total deposits
$ 1,536,856
100.0 %
0.51 % $ 1,464,966
100.0 %
0.42 %
For the Year Ended December 31, 2015
Average
Balance
Percent
(Dollars in thousands)
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
— %
0.38 %
0.50 %
0.27 %
0.02 %
Total deposits
$ 1,392,286
100.0 %
0.35 %
39
As of December 31, 2017, the aggregate amount of outstanding certificates of deposit in amounts greater than
or equal to $250,000 was $192.8 million. The following table sets forth the maturity of those certificates as of December
31, 2017.
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
Total
At
December 31, 2017
(In thousands)
$
$
49,807
57,643
12,312
57,703
15,308
192,773
Borrowings. Our borrowings consist of advances from the FHLB and funds borrowed under securities sold
under agreements to repurchase. At December 31, 2017, our FHLB advances totaled $107.2 million, or 6.1% of total
liabilities, and our securities sold under agreements to repurchase totaled $30.0 million, or 1.7% of total liabilities. At
December 31, 2017, we had the capability to borrow up to $579.4 million in the form of additional advances from the
Federal Home Loan Bank.
During the year ended December 31, 2017, our total borrowings increased by $13.2 million or 10.6%. The
increase was due to a $38.2 million increase in FHLB advances that was partially offset by a $25.0 million pay off of
securities sold under agreements to repurchase. Historically, we have not required any other borrowings to fund our
operations. Instead, we have primarily funded our operations with additional deposits, proceeds from loan and security
sales and principal repayments on loans and mortgage-backed securities.
The following table sets forth information concerning balances and interest rates on our FHLB advances at the
dates and for the years indicated.
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
2017
At or for the Year Ended December 31,
2016
2015
(Dollars in thousands)
$ 69,000
$ 69,504
$ 69,000
$ 69,000
$ 46,186
$ 69,000
$ 107,200
$ 73,416
$ 107,200
1.70 %
1.51 %
1.49 %
1.49 %
1.49 %
1.51 %
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.
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
2017
At or for the Year Ended December 31,
2015
2016
(Dollars in thousands)
$ 55,000
$ 55,000
$ 55,000
$ 55,000
$ 60,014
$ 72,000
$ 30,000
$ 51,315
$ 55,000
1.66 %
1.59 %
1.57 %
1.57 %
1.57 %
1.66 %
Stockholders’ Equity. At December 31, 2017, our stockholders’ equity was $234.9 million, an increase of $5.1
million, or 2.2%, from $229.8 million at December 31, 2016. The increase in stockholders’ equity resulted primarily
from net income of $15.0 million, which was partially offset by $11.1 million of dividends paid during the year ended
December 31, 2017.
40
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.
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
For the Year Ended
December 31, 2017
Average
Outstanding
Balance
Interest
Yield/ Rate
(Dollars in thousands)
$
$
$
$
$
52,751
448
1,032
654
259
55,144
12,526
—
12,526
663
68,333
4,445
3,159
23
39
7,666
1,105
818
9,589
$
1,357,508
9,572
22,603
13,930
4,925
1,408,538
403,537
868
404,405
51,686
1,864,629
69,887
1,934,516
1,033,454
270,225
5,171
180,858
1,489,708
73,416
51,315
1,614,439
84,000
1,698,439
236,077
1,934,516
$
58,744
250,190
115.56 %
3.89 %
4.68
4.57
4.69
5.26
3.91
3.10
0.00
3.10
1.28
3.66
0.43 %
1.17
0.44
0.02
0.51
1.51
1.59
0.59
3.07 %
3.15 %
(footnotes on following page)
41
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
For the Year Ended December 31,
2016
2015
Average
Outstanding
Balance
Interest
Yield/ Rate
Average
Outstanding
Balance
Interest
Yield/ Rate
(Dollars in thousands)
$ 1,210,635
9,686
$
48,742
453
4.03 % $ 1,050,352
9,692
4.68
$ 43,654
459
4.16 %
4.74
23,268
1,059
4.55
18,110
837
4.62
15,493
4,441
1,263,523
675
239
51,168
14,365
—
14,365
540
66,073
4,162
1,724
10
37
5,933
1,035
876
7,844
454,648
974
455,622
64,790
1,783,935
68,444
$ 1,852,379
$ 1,017,420
226,264
2,469
171,716
1,417,869
69,504
55,000
1,542,373
83,012
1,625,385
226,994
4.36
5.38
4.05
3.16
—
3.15
0.83
3.70
15,560
4,502
1,098,216
709
244
45,903
529,535
790
530,325
57,147
1,685,688
67,486
$ 1,753,174
16,873
—
16,873
316
63,092
4.56
5.42
4.18
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
0.41 % $
0.76
0.41
0.02
0.42
1.49
965,754
225,048
1,117
156,776
1,348,695
46,186
1.59
0.51
60,014
1,454,895
79,762
1,534,657
218,517
$ 1,753,174
Total liabilities and stockholders’
equity
$ 1,852,379
Net interest income
Net interest rate spread (2)
Net interest-earning assets (3)
Net interest margin (4)
Interest-earning assets to interest-
bearing liabilities
$
241,562
$
58,229
$ 56,577
3.19 %
3.26 %
$
230,793
3.29 %
3.36 %
115.66 %
115.86 %
(1) Average balance includes loans or investments available for sale, as applicable.
(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.
42
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.
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
U.S. government sponsored mortgage-
backed securities
Other
Year Ended December 31,
2017 vs. 2016
Year Ended December 31,
2016 vs. 2015
Increase (Decrease)
Due to
Total
Increase
Increase (Decrease)
Due to
Volume
Rate
(Decrease) Volume
Rate
Total
Increase
(Decrease)
(In thousands)
$
5,624 $ (1,615) $
(5)
(30)
(91)
25
5,523
—
3
70
(5)
(1,547)
4,009 $
(5)
(27)
(21)
20
3,976
6,400 $ (1,312) $
—
235
(3)
(3)
6,629
(6)
(13)
(31)
(2)
(1,364)
5,088
(6)
222
(34)
(5)
5,265
(1,590)
(74)
(249)
197
(1,839)
123
(2,367)
47
(141)
177
(2,508)
224
Total interest-earning assets
3,859
(1,599)
2,260
4,309
(1,328)
2,981
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
66
383
12
2
463
59
(59)
217
1,052
1
—
1,270
11
283
1,435
13
2
1,733
70
203
6
5
3
217
347
289
603
2
1
895
(9)
492
609
7
4
1,112
338
1
(58)
(81)
(40)
(121)
Total interest-bearing liabilities
463
1,282
1,745
483
846
1,329
Change in net interest income
$
3,396 $ (2,881) $
515 $
3,826 $ (2,174) $
1,652
Comparison of Operating Results for the Years Ended December 31, 2017, 2016 and 2015
General. Net income decreased by $1.4 million, or 8.5%, to $15.0 million for the year ended December 31,
2017 from $16.3 million for the year ended December 31, 2016. The decrease in net income was caused by a $1.7
million increase in interest expense, a $1.6 million increase in noninterest expense, a $315,000 increase in income tax
expense, and a $248,000 decrease in noninterest income. The decreases were partially offset by a $2.3 million increase
in interest and dividend income and a $258,000 decrease in loan loss provisions.
Net income increased by $1.6 million, or 10.8%, to $16.3 million for the year ended December 31, 2016 from
$14.7 million for the year ended December 31, 2015. The increase in net income was caused by a $3.0 million increase
43
in interest income, a $1.6 million decrease in noninterest expense, and a $145,000 decrease in loan loss provisions. The
increases were offset by a $1.3 million increase in interest expense, a $1.0 million increase in income tax expense, and
an $817,000 decrease in noninterest income.
Net Interest Income. Net interest income increased by $515,000, or 0.9%, to $58.7 million for the year ended
December 31, 2017 from $58.2 million for the year ended December 31, 2016. Interest income increased by $2.3
million, or 3.4%, to $68.3 million for the year ended December 31, 2017 from $66.1 million for the year ended
December 31, 2016. The increase in interest income occurred primarily because of an $80.7 million increase in average
interest-earning assets, which was partially offset by a four basis point decline in the average yield on interest-earning
assets. Interest expense increased by $1.7 million, or 22.2%, to $9.6 million for the year ended December 31, 2017 from
$7.8 million for the year ended December 31, 2016. The increase in interest expense was due to a $72.1 million increase
in average interest-bearing liabilities and an eight basis point increase in the average cost of interest-bearing liabilities.
The interest rate spread and net interest margin were 3.07% and 3.15%, respectively, for the year ended December 31,
2017, compared to 3.19% and 3.26%, respectively, for the year ended December 31, 2016. The change in the interest
rate spread and net interest margin was due to a decrease in the average yield on interest-earning assets and an increase
in the cost of average interest-bearing liabilities.
Net interest income increased by $1.7 million, or 2.9%, to $58.2 million for the year ended December 31, 2016
from $56.6 million for the year ended December 31, 2015. Interest income increased by $3.0 million, or 4.7%, to $66.1
million for the year ended December 31, 2016 from $63.1 million for the year ended December 31, 2015. The increase
in interest income occurred primarily because of a $98.2 million increase in average interest-earning assets, which was
partially offset by a four basis point decline in the average yield on interest-earning assets. Interest expense increased by
$1.3 million, or 20.4%, to $7.8 million for the year ended December 31, 2016 from $6.5 million for the year ended
December 31, 2015. The increase in interest expense was due to an $87.5 million increase in average interest-bearing
liabilities and a six basis point increase in the average cost of interest-bearing liabilities. The interest rate spread and net
interest margin were 3.19% and 3.26%, respectively, for the year ended December 31, 2016, compared to 3.29% and
3.36%, respectively, for the year ended December 31, 2015. The change in the interest rate spread and net interest
margin was due to a decrease in the average yield on interest-earning assets and an increase in the cost of average
interest-bearing liabilities.
Interest Income. Interest income rose by $2.3 million, or 3.4%, to $68.3 million for the year ended
December 31, 2017 from $66.1 million for the year ended December 31, 2016. Interest income on loans increased by
$4.0 million, or 7.8%, to $55.1 million for the year ended December 31, 2017 from $51.2 million for the year ended
December 31, 2016. The increase in interest income on loans occurred because the average balance of loans grew by
$145.0 million, or 11.5%, as new loan originations exceeded loan repayments and loan sales. The increase in interest
income that occurred because of growth in the loan portfolio was partially offset by a 14 basis point decline in the
average loan yield to 3.91% for the year ended December 31, 2017 compared to 4.05% for the year ended December 31,
2016. 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 $1.8 million, or
12.8%, to $12.5 million for the year ended December 31, 2017 from $14.4 million for the year ended December 31,
2016. The decrease in interest income on securities occurred primarily because of a $51.2 million decrease in the
average securities balance and a five basis point decline in the average investment yield to 3.10% for the year ended
December 31, 2017 compared to 3.15% for the year ended December 31, 2016. The decrease in the average securities
balance occurred as repayments and security sales exceeded security purchases. The repayments on securities were
reinvested into higher yielding loans.
Interest income rose by $3.0 million, or 4.7%, to $66.1 million for the year ended December 31, 2016 from
$63.1 million for the year ended December 31, 2015. Interest income on loans increased by $5.3 million, or 11.5%, to
$51.2 million for the year ended December 31, 2016 from $45.9 million for the year ended December 31, 2015. The
increase in interest income on loans occurred because the average balance of loans grew by $165.3 million, or 15.1%, as
new loan originations exceeded loan repayments and loan sales. The increase in interest income that occurred because
of growth in the loan portfolio was partially offset by a 13 basis point decline in the average loan yield to 4.05% for the
year ended December 31, 2016 compared to 4.18% for the year ended December 31, 2015. 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 $2.5 million, or 14.9%, to $14.4 million for the year ended
44
December 31, 2016 from $16.9 million for the year ended December 31, 2015. The decrease in interest income on
securities occurred primarily because of a $74.7 million decrease in the average securities balance and a three basis point
decline in the average investment yield to 3.15% for the year ended December 31, 2016 compared to 3.18% for the year
ended December 31, 2015. The decrease in the average securities balance occurred as repayments and security sales
exceeded security purchases. The repayments on securities were reinvested into higher yielding loans.
Interest Expense. Interest expense increased by $1.7 million, or 22.2%, to $9.6 million for the year ended
December 31, 2017 from $7.8 million for the year ended December 31, 2016. Interest expense on deposits increased by
$1.7 million, or 29.2%, to $7.7 million for the year ended December 31, 2017 from $5.9 million for the year ended
December 31, 2016. The increase in interest expense on deposits was due to a $71.8 million, or 5.1%, increase in the
average balance of deposits and a nine basis point increase in the average cost of deposits. The average balance of
deposits grew to $1.490 billion during the year ended December 31, 2017 compared to $1.418 billion during the year
ended December 31, 2016. The average cost of deposits rose primarily because the cost of certificates of deposit rose to
1.17% in 2017 from 0.76% in 2016. The increase in the average cost of certificates of deposit was primarily due to an
increase in interest rates on public deposits. Interest expense on FHLB advances increased by $70,000, or 6.8%, during
the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in interest expense on
FHLB advances was due to a $3.9 million increase in the average balance of FHLB advances. Additional advances were
obtained in 2017 to extend the maturity of liabilities as part of our efforts to reduce interest rate risk. Interest expense on
securities sold under agreements to repurchase declined by $58,000, or 6.6%, during the year ended December 31, 2017
compared to the year ended December 31, 2016. The decrease in interest expense on securities sold under agreements to
repurchase was caused by a $3.7 million, or 6.7%, decrease in the average outstanding balance of securities sold under
agreements to repurchase. The decline in the average balance of securities sold under agreements to repurchase occurred
as the Company paid off matured borrowings in 2017.
Interest expense increased by $1.3 million, or 20.4%, to $7.8 million for the year ended December 31, 2016
from $6.5 million for the year ended December 31, 2015. Interest expense on deposits increased by $1.1 million, or
23.1%, to $5.9 million for the year ended December 31, 2016 from $4.8 million for the year ended December 31, 2015.
The increase in interest expense on deposits was due to a $69.2 million, or 5.1%, increase in the average balance of
deposits and a six basis point increase in the average cost of deposits. The average balance of deposits grew to $1.418
billion during the year ended December 31, 2016 compared to $1.349 billion during the year ended December 31, 2015.
Interest rates increased due to an increase in the cost of savings accounts and certificates of deposit. Interest expense on
FHLB advances increased by $338,000, or 48.5%, during the year ended December 31, 2016 compared to the year ended
December 31, 2015. The increase in interest expense on FHLB advances was due to a $23.3 million increase in the
average balance of FHLB advances. Additional advances were obtained in 2015 to extend the maturity of liabilities and
reduce interest rate risk. Interest expense on securities sold under agreements to repurchase declined by $121,000, or
12.1%, during the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in
interest expense on securities sold under agreements to repurchase was caused by a $5.0 million, or 8.4%, decrease in the
average outstanding balance of securities sold under agreements to repurchase. The decrease in the average balance was
augmented by a seven basis point decrease in the average interest rate to 1.59% for the year ended December 31, 2016
compared to 1.66% for the year ended December 31, 2015. The decline in the average balance of securities sold under
agreements to repurchase occurred as the Company paid off matured borrowings in 2015.
Provision for Loan Losses. Based on our analysis of the factors described in “—Allowance for Loan Losses,”
we recorded provisions for loan losses of $52,000, $310,000 and $455,000 for the years ended December 31, 2017, 2016
and 2015, respectively. The decrease in loan loss provisions from 2016 to 2017 is primarily due to a decrease in
nonperforming loans and relatively low levels of loan losses. The provisions for loan losses included net recoveries of
$44,000 for the year ended December 31, 2017, net charge-offs of $24,000 for the year ended December 31, 2016, and
net recoveries of $20,000 for the year ended December 31, 2015. The provisions recorded resulted in ratios of the
allowance for loan losses to total loans of 0.17% at December 31, 2017 and 0.18% at December 31, 2016 and 2015.
Nonaccrual loans totaled $4.2 million, $4.6 million and $5.4 million at December 31, 2017, 2016 and 2015, respectively.
To the best of our knowledge, at December 31, 2017, 2016 and 2015, we had provided for all losses that are both
probable and reasonable to estimate at those respective dates.
45
Noninterest Income. The following table summarizes changes in noninterest income for the years ended
December 31, 2017, 2016 and 2015.
Year Ended December 31,
2016
2015
2017
Change 2017/2016
Change 2016/2015
$ Change % Change $ Change % Change
(Dollars in thousands)
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
$ 1,962 $ 1,960 $ 2,161 $
2
0.1 % $
(201)
(9.3) %
907
966
1,026
(59)
(6.1) %
(60)
(5.8) %
431
199
347
370
406
392
701
503
520
$ 3,846 $ 4,094 $ 4,911 $
61
(207)
(45)
(248)
16.5 %
(51.0) %
(11.5) %
(6.1) % $
(331)
(97)
(128)
(817)
(47.2) %
(19.3) %
(24.6) %
(16.6) %
Noninterest income declined by $248,000 for the year ended December 31, 2017 compared to the year ended
December 31, 2016. During the years ended December 31, 2017 and 2016, we sold $25.0 million and $48.9 million,
respectively, of mortgage loans held for sale, primarily to reduce interest rate risk, and recognized gains of $199,000 and
$406,000, respectively. During the years ended December 31, 2017 and 2016, we sold $7.0 million and $5.1 million,
respectively, of held-to-maturity investment securities and recognized gross realized gains of $431,000 and $370,000,
respectively. The sale of held-to-maturity securities, for which the Company had already received a substantial portion
of the outstanding principal (at least 85%), is in accordance with the 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.
Noninterest income declined by $817,000 for the year ended December 31, 2016 compared to the year ended
December 31, 2015. During the years ended December 31, 2016 and 2015, we sold $5.1 million and $7.0 million,
respectively, of held-to-maturity investment securities and recognized gross realized gains of $370,000 and $701,000,
respectively. The sale of held-to-maturity securities, for which the Company had already received a substantial portion
of the outstanding principal (at least 85%), is in accordance with the 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, 2016 and 2015, we also sold $48.9 million and $56.2 million,
respectively, of mortgage loans held for sale primarily to reduce interest rate risk and recognized gains of $406,000 and
$503,000, respectively. Service fees on loan and deposit accounts decreased by $201,000 for the year ended
December 31, 2016 compared to the year ended December 31, 2015 primarily due to a decrease in return item fees that
was partially offset by an increase in broker loan fee income. The decrease in return item fees occurred because of a
change we made in our overdraft loan program in response to regulatory guidance.
Noninterest Expense. The following table summarizes changes in noninterest expense for the years ended
December 31, 2017, 2016 and 2015.
Year Ended December 31,
2016
2015
2017
Change 2017/2016
Change 2016/2015
$ Change % Change $ Change % Change
(Dollars in thousands)
Salaries and employee benefits
Occupancy
Equipment
Federal deposit insurance
premiums
Other general and administrative
expenses
Total
$ 21,614 $ 20,591 $ 21,497 $ 1,023
188
48
5,749
3,566
5,937
3,614
5,809
3,894
5.0 % $
3.3 % $
1.3 % $
(906)
(60)
(328)
(4.2) %
(1.0) %
(8.4) %
605
743
857
(138)
(18.6) % $
(114)
(13.3) %
4,704
474
$ 36,474 $ 34,879 $ 36,499 $ 1,595
4,230
4,442
11.2 % $
(212)
4.6 % $ (1,620)
(4.8) %
(4.4) %
46
Noninterest expense increased by $1.6 million to $36.5 million for the year ended December 31, 2017 from
$34.9 million for the year ended December 31, 2016. Salaries and employee benefits expense increased by $1.0 million
for the year ended December 31, 2017 primarily due to an increase in employee stock ownership plan (ESOP) expense,
additional $1,000 year-end bonuses paid to non-management employees to share the benefits we will receive from the
reduction in the federal corporate tax rate from 35% to 21%, and a decrease in the capitalized cost of new loan
originations. The increase in ESOP expense occurred because of a change in the methodology of distributing dividends
to participants in the ESOP plan. The decrease in the number of new loans originated in 2017 compared to 2016
decreased capitalized loan costs and increased salary expense. These increases were offset by a decrease in share-based
compensation that resulted when a majority of awards under our 2010 equity incentive plan became fully vested in 2016.
The increase in other general and administrative expenses was mainly due to increases in marketing, legal and
professional fees. Occupancy expense increased primarily due to increases in rent, furniture, fixture and equipment and
repairs and maintenance expenses. Federal deposit insurance premiums declined because of a decrease in the insurance
assessment rate on deposits in the third quarter of 2016.
Noninterest expense decreased by $1.6 million to $34.9 million for the year ended December 31, 2016 from
$36.5 million for the year ended December 31, 2015. Salaries and employee benefits decreased by $906,000 during the
year ended December 31, 2016 primarily due to a decrease in share-based compensation, an increase in the capitalized
cost of new loan originations and a decrease in year-end incentive compensation accruals. The reduction in the cost of
share-based compensation plans occurred as the majority of awards under our 2010 equity incentive plan became fully
vested during the year. In addition, the origination of new mortgage loans in 2016 increased capitalized loan costs and
decreased salary expense. As new loans are originated, the Bank capitalizes the cost of new loan originations and
reduces the salary expense attributable to such originations. The decrease in equipment expense is primarily due to
declines in equipment leasing, depreciation and data processing expenses. Other general and administrative expenses
decreased primarily due to a reduction in accounting and auditing expenses and in the loss provisions for undrawn lines
of credit. Federal deposit insurance premiums declined because of a decrease in the insurance assessment rate on
deposits.
Income Tax Expense. Income taxes were $11.1 million for 2017, reflecting an effective tax rate of 42.6%,
$10.8 million for 2016, reflecting an effective tax rate of 39.8%, and $9.8 million for 2015, reflecting an effective tax
rate of 39.9%. The effective tax rate in 2017 was higher than the effective tax rate in 2016 and 2015 due to a $2.1
million write-down of deferred income tax assets that resulted when the federal corporate income tax rate was lowered
from 35% to 21% due to the Tax Cuts and Jobs Act of 2017. The increase in income tax expense that occurred in 2017
because of the write-down of deferred income tax assets was partially offset by a $1.0 million tax benefit received on the
exercise of stock options.
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 121st 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 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 consumer loans are generally unsecured,
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
47
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.
Nonperforming Assets. The table below sets forth the amounts and categories of our nonperforming assets
(loans and real estate owned) at the dates indicated.
Nonaccrual loans:
Real estate loans:
First mortgage:
One- to four-family residential
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
2017
2016
At December 31,
2015
(Dollars in thousands)
2014
2013
$
4,062
165
—
4,227
$
4,402
156
1
4,559
$
5,282
124
9
5,415
$
4,153
296
4
4,453
$
5,840
160
—
6,000
—
—
—
—
—
—
—
—
—
—
Total nonperforming assets
4,227
4,559
5,415
4,453
6,000
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
915
915
1,185
1,185
1,203
1,203
2,005
2,005
2,533
2,533
Total nonperforming assets, accruing loans delinquent for 90
days or more and restructured loans still accruing interest
$
5,142
$
5,744
$
6,618
$
6,458
$
8,533
Ratios:
Nonperforming loans to total loans
Nonperforming assets to total assets
0.28 %
0.21 %
0.34 %
0.24 %
0.45 %
0.30 %
0.46 %
0.26 %
0.69 %
0.37 %
For the year ended December 31, 2017, gross interest income that would have been recorded had our
nonaccruing loans been current in accordance with original terms was $240,000. For the year ended December 31,
2017, we recognized no interest income on such nonaccruing loans on a cash basis during the year. For the year ended
December 31, 2017, gross interest income due and collected on our accruing restructured loans was $58,000.
The Company had 10 troubled debt restructurings totaling $2.1 million as of December 31, 2017 that were
considered to be impaired. This total included nine one- to four-family residential mortgage loans totaling $2.0 million
and one home equity loan for $92,000. Four of the loans, totaling $915,000, were performing in accordance with their
restructured terms and accruing interest at December 31, 2017. Five of the loans, totaling $1.0 million, were performing
in accordance with their restructured terms but not accruing interest at December 31, 2017. One of the loans, for
$149,000, was more than 150 days delinquent and not accruing interest at December 31, 2017. The Company had 13
troubled debt restructurings totaling $2.9 million as of December 31, 2016 that were considered to be impaired. This
total included 12 one- to four-family residential mortgage loans totaling $2.8 million and one home equity loan for
$107,000. Five of the loans, totaling $1.2 million, were performing in accordance with their restructured terms and
accruing interest at December 31, 2016. Seven of the loans, totaling $1.6 million, were performing in accordance with
their restructured terms but not accruing interest at December 31, 2016. One of the loans, for $149,000, was more than
48
149 days delinquent and not accruing interest at December 31, 2016. There were no new troubled debt restructurings in
2017 or 2016.
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
Number Amount Number Amount Number Amount
(Dollars in thousands)
Total
At December 31, 2017
Real estate loans:
First mortgage:
One- to four-family residential
Home equity loans and lines of credit
Other loans
Total loans
At December 31, 2016
Real estate loans:
First mortgage:
One- to four-family residential
Home equity loans and lines of credit
Other loans
Total loans
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
4 $ 1,207
—
—
0
6
10 $ 1,207
4 $ 1,589
41
1
—
—
5 $ 1,630
8 $ 2,796
41
1
0
6
15 $ 2,837
1 $
1
4
6 $
133
35
0
168
4 $ 1,358
2
49
1
1
7 $ 1,408
5 $ 1,491
3
84
1
5
13 $ 1,576
— $ —
—
3
3 $
— —
10
1
7 $ 1,625
6 $ 1,615
—
— —
11
4
10 $ 1,626
6 $ 1,615
1
1
2 $
—
4
6 $
736
—
1
737
2 $
1
1
4 $
593
161
4
758
4 $ 1,329
161
1
5
5
10 $ 1,495
1 $
9
10 $
612
616
4 —
5 $ 1,577
—
5 $ 1,577
6 $ 2,189
4
9
15 $ 2,193
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, 2017,
2016, 2015, 2014, and 2013, we had no real estate owned.
49
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and
other assets as substandard, doubtful or loss. 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.
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 bank regulators, who 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 at
December 31, 2017, we had substandard assets of $5.4 million and no doubtful or loss assets. Substandard assets at
December 31, 2017 included $1.7 million of troubled debt restructurings, $3.3 million of nonperforming loans and
$427,000 of trust preferred securities. At December 31, 2016, we had $6.5 million of substandard assets and no doubtful
or loss assets. Substandard assets at December 31, 2016 included $2.3 million of troubled debt restructurings, $3.1
million of nonperforming loans and $1.2 million of trust preferred securities. We classify any loan that is delinquent 90
days or more as substandard. Loans which have been delinquent for fewer days may also be classified as substandard.
In addition to classifying assets as substandard, doubtful or loss, we also categorize assets as special mention.
A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these
potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit
position at some future date. We designate any loan that is 30 to 89 days delinquent as special mention. Loans which
have been delinquent for fewer days may also be categorized as special mention. At December 31, 2017 and 2016,
special mention assets were $799,000 and $421,000, respectively.
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 loan-to-value ratios. 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 qualitative and 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.
50
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.
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 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 bank regulators will periodically review the allowance for loan losses. The bank regulators may require us
to increase the allowance based on their analysis of information available at the time of their examination.
51
The following table sets forth activity in our allowance for loan losses for the years indicated.
2017
At or For the Year Ended December 31,
2015
2014
2016
2013
(Dollars in thousands)
Balance at beginning of year
Charge-offs:
Real estate loans:
First mortgage:
One- to four-family residential
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
$ 2,452
$ 2,166
$ 1,691
$ 1,486
$ 1,672
11
—
26
37
33
—
28
61
—
—
53
53
118
10
57
185
299
50
146
495
75
—
—
6
81
44
52
24
1
—
12
37
3
11
47
12
73
9
2
4
15
30
235
12
7
16
270
(24)
310
20
455
(155)
360
(225)
39
Balance at end of year
$ 2,548
$ 2,452
$ 2,166
$ 1,691
$ 1,486
Ratios:
Net charge-offs to average loans outstanding
Allowance for loan losses to nonperforming loans at end of
year
Allowance for loan losses to total loans at end of year
0.00 % 0.00 % 0.00 %
0.02 %
0.03 %
60.28 % 53.78 % 40.00 % 37.97 % 24.77 %
0.17 %
0.18 %
0.18 %
0.17 %
0.17 %
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
52
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 as well as other factors.
2017
Percent of
Loans in Each
Allowance for Category to
Total Loans
Loan Losses
At December 31,
2016
Percent of
Loans in Each
Allowance for Category to
Total Loans
Loan Losses
(Dollars in thousands)
2015
Percent of
Loans in Each
Allowance for Category to
Total Loans
Loan Losses
Real estate loans:
First mortgage:
One- to four-family
residential
Multi-family residential
Construction, commercial
and other
$
1,706
15
96.65 % $
0.72
1,579
15
96.11 % $
0.71
1,365
15
95.90 %
0.82
539
1.46
519
1.74
517
1.62
Home equity loans and lines
of credit
Other loans
Total allocated allowance
Unallocated
Total
1
55
2,316
232
2,548
0.86
0.31
100.00 %
$
2
115
2,230
222
2,452
1.10
0.34
100.00 %
$
$
At December 31,
1.28
0.38
100.00 %
3
72
1,972
194
2,166
2013
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
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
(Dollars in thousands)
$
$
410
3
977
5
263
1,658
33
1,691
95.08 % $
0.92
1.89
1.64
0.47
100.00 %
$
375
1
799
10
229
1,414
72
1,486
95.41 %
0.57
1.57
1.91
0.54
100.00 %
In 2015, we revised the qualitative factors that were used to determine the allowance for loan losses. As a
result of these modifications, we 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.
53
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 2017, 2016 and 2015, we sold $25.0 million, $48.9
million and $56.2 million, respectively, of fixed-rate mortgage loans. In 2017 and 2015, we also increased our total
long-term fixed rate FHLB advances and securities sold under agreements to repurchase by $13.2 million and $37.0
million, respectively, to reduce our interest rate risk. In addition, we may utilize the following strategies to further
reduce our interest rate risk:
(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;
(cid:120) Continuing to repay short-term borrowings;
(cid:120) Maintaining overnight cash balances at the Federal Reserve Bank or a portfolio of short-term investments;
(cid:120) Purchasing mortgage-backed securities with shorter durations;
(cid:120) Selling a portion of the fixed-rate mortgage loans we originate to Freddie Mac or Fannie Mae;
(cid:120) Extending the maturity of our liabilities by obtaining longer-term fixed-rate FHLB advances and securities
sold under agreements to repurchase;
(cid:120) 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
(cid:120) Maintaining relatively high regulatory capital ratios.
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.
54
The following table presents our internal calculations of the estimated changes in our EVE as of December 31,
2017 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)
Increase
(Decrease) in
EVE Ratio as a
Percent of
Present Value of
Assets (3)(4)
(Dollars in thousands)
+400
+300
+200
+100
0
(100)
$
$
$
$
$
$
169,417 $
196,472 $
223,891 $
246,363 $
250,363 $
217,588 $
(80,946)
(53,891)
(26,472)
(4,000)
—
(32,775)
(32.33) %
(21.53) %
(10.57) %
(1.60) %
— %
(13.09) %
10.50 %
11.53 %
12.44 %
12.98 %
12.61 %
10.65 %
(2.11) %
(1.08) %
(0.17) %
0.37 %
— %
(1.96) %
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the difference between the present value of an institution’s assets and liabilities.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
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 FRB, loan and security repayments, advances from the
FHLB, 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, 2017.
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.
55
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, 2017, the Company’s cash and cash equivalents totaled
$32.1 million.
If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB,
which provide an additional source of funds. We also utilize securities sold under agreements to repurchase as another
borrowing source. At December 31, 2017, we had the ability to borrow up to an additional $579.4 million from the
FHLB. Advances from the FHLB and securities sold under agreements to repurchase were $107.2 million and $30.0
million, respectively for the year ended December 31, 2017. In 2017, FHLB advances increased by $38.2 million while
securities under agreements to repurchase decreased by $25.0 million. The increase in FHLB advances was used
primarily to fund the growth in the mortgage loan portfolio, pay off maturing securities sold under agreements to
repurchase and to reduce our interest rate risk.
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, 2017, we had $15.5 million in loan commitments outstanding, most of which were for fixed-
rate loans. In addition to commitments to originate loans, we had $27.2 million in unused lines of credit to borrowers.
Certificates of deposit due within one year of December 31, 2017 totaled $165.7 million, or 10.4% 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 FHLB 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, 2018. 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, 2017, 2016 and 2015, we originated $337.2 million, $389.9 million and $436.0 million of
loans, respectively. During these years, we purchased $59.9 million, $3.8 million and $11.6 million of securities,
respectively. We increased the amount of securities purchased in 2017 to offset principal repayments and to maintain
the size and interest income on our securities portfolio.
Financing activities consist primarily of activity in deposit accounts, FHLB advances, securities sold under
agreements to repurchase, stock repurchases and dividend payments. We experienced net increases in deposits of $104.1
million and $48.1 million for the years ended December 31, 2017 and 2016, 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.
As a separate legal entity, the Company is required to have liquidity to fund stock repurchases and dividend
payments to shareholders and for other corporate purposes. As of December 31, 2017, we have 217,300 shares that may
be purchased under our current share repurchase program. 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, 2017 and 2016, the Company had accumulated
repurchases of 3,138,153 of the total 3,374,253 shares authorized by the Board of Directors. There were no shares
repurchased as part of our common stock repurchase program during 2017. During 2016, shares were repurchased at an
average cost of $25.96. At December 31, 2017 and 2016, on a stand-alone basis, the Company had cash in banks of
$20.1 million and $15.3 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, 2017, 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.
56
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.
The following table summarizes our significant fixed and determinable contractual obligations and other
funding needs by payment date at December 31, 2017. 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
Long-term debt
Operating leases
Purchase obligations
Certificates of deposit
Total
Commitments to extend credit
One Year
or Less
More Than
One Year to
Three Years
Payments Due by Period
More Than
Three Years to
Five Years
(In thousands)
More Than
Five Years
$
$
$
46,200 $
2,809
2,569
165,706
217,284 $
15,470 $
76,000 $
4,272
4,939
101,695
186,906 $
— $
15,000 $
2,756
4,833
44,824
67,413 $
— $
— $
4,557
178
—
4,735 $
— $
Total
137,200
14,394
12,519
312,225
476,338
15,470
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2(u) with our audited 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
57
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Territorial Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Territorial Bancorp, Inc. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework 2013 issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated 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 Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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
58
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.
/s/ Moss Adams LLP
Portland, Oregon
March 15, 2018
We have served as the Company’s auditor since 2015.
59
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2017 and 2016
(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity, at amortized cost (fair value of $406,663 and
$407,922 at December 31, 2017 and December 31, 2016, 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
Income taxes receivable
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
Income taxes payable
Advance payments by borrowers for taxes and insurance
Total liabilities
Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 50,000,000 shares, no shares issued or
outstanding
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and
December 31, December 31,
2017
2016
$
32,089 $
2,851
61,273
—
404,792
403
1,488,971
6,541
3,103
5,142
5,721
44,201
1,571
4,609
3,852
407,656
1,601
1,335,987
4,945
3,095
4,732
4,327
43,294
122
7,905
2,625
$ 2,003,846 $ 1,877,562
$ 1,597,295 $ 1,493,200
69,000
55,000
23,258
1,616
5,702
1,647,776
107,200
30,000
26,390
1,483
6,624
1,768,992
—
—
outstanding 9,915,058 and 9,778,974 shares at December 31, 2017 and December
31, 2016, respectively
Additional paid-in capital
Unearned ESOP shares
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
99
73,050
(5,383)
172,782
(5,694)
234,854
98
71,914
(5,872)
168,962
(5,316)
229,786
$ 2,003,846 $ 1,877,562
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
60
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands, except per share data)
Interest income:
Loans
Investment securities
Other investments
Total interest 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
2017
2016
2015
$
$
55,144
12,526
663
68,333
$
51,168
14,365
540
66,073
45,903
16,873
316
63,092
7,666
1,105
818
9,589
58,744
52
5,933
1,035
876
7,844
58,229
310
4,821
697
997
6,515
56,577
455
Net interest income after provision for loan losses
58,692
57,919
56,122
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.
61
1,962
907
431
199
347
3,846
21,614
5,937
3,614
605
4,704
36,474
26,064
11,102
14,962
1.61
1.57
1.20
9,273,783
9,532,724
1,960
966
370
406
392
4,094
20,591
5,749
3,566
743
4,230
34,879
27,134
10,787
16,347
1.78
1.74
0.92
9,093,385
9,311,975
$
$
$
$
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
1.59
1.56
0.76
9,073,015
9,263,267
$
$
$
$
$
$
$
$
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands)
Net income
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
See accompanying notes to consolidated financial statements.
2017
14,962 $
2016
16,347 $
2015
14,748
$
(373)
(5)
—
(378)
14,584 $
(240)
13
147
(80)
16,267 $
(12)
27
137
152
14,900
$
62
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands, except share data)
Additional Unearned
Accumulated
Other
Total
Balances at December 31, 2014
Common Paid-in
Stock
Capital
$
ESOP
Shares
99 $ 75,229 $ (6,851) $ 153,289 $
Retained
Earnings
Comprehensive Stockholders’
Income (Loss)
Equity
(5,388) $ 216,378
Net income
Other comprehensive income
Cash dividends paid ($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 for common stock
—
—
—
1
—
—
—
—
3,085
720
—
—
—
—
490
14,748
—
(7,013)
—
—
—
152
—
—
—
14,748
152
(7,013)
3,086
1,210
(4) (8,933)
17
—
—
—
—
—
—
—
(8,937)
17
Balances at December 31, 2015
$
96 $ 70,118 $ (6,361) $ 161,024 $
(5,236) $ 219,641
Net income
Other comprehensive loss
Cash dividends paid ($0.92 per share)
Share-based compensation
Allocation of 48,932 ESOP shares
Repurchase of 118,723 shares of company common
stock
Exercise of 125,870 options for common stock
—
—
—
1
—
—
—
—
2,041
864
—
—
—
—
489
16,347
—
(8,409)
—
—
—
(80)
—
—
—
16,347
(80)
(8,409)
2,042
1,353
(1) (3,293)
2,184
2
—
—
—
—
—
—
(3,294)
2,186
Balances at December 31, 2016
$
98 $ 71,914 $ (5,872) $ 168,962 $
(5,316) $ 229,786
Net income
Other comprehensive loss
Cash dividends paid ($1.20 per share)
Share-based compensation
Allocation of 48,932 ESOP shares
Repurchase of 160,003 shares of company common
stock
Exercise of 294,887 options for common stock
—
—
—
—
—
—
—
—
106
1,040
14,962
—
—
—
— (11,142)
—
—
—
489
—
(378)
—
—
—
14,962
(378)
(11,142)
106
1,529
(2) (5,127)
5,117
3
—
—
—
—
—
—
(5,129)
5,120
Balances at December 31, 2017
$
99 $ 73,050 $ (5,383) $ 172,782 $
(5,694) $ 234,854
See accompanying notes to consolidated financial statements.
63
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2017, 2016 and 2015
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
$
14,962 $
16,347 $
14,748
2017
2016
2015
Provision for loan losses
Depreciation and amortization
Deferred income tax expense (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
Net gain on sale of real estate owned
Gain on sale of investment securities held to maturity
Net loss on disposal of premises and equipment
ESOP expense
Share-based compensation expense
Increase in accrued interest receivable
Net increase in bank-owned life insurance
Net increase 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 in income taxes receivable
Net increase (decrease) in income taxes payable
52
1,129
3,436
(478)
(23,665)
25,063
(199)
—
(431)
24
1,529
106
(410)
(907)
(1,227)
2,604
922
(1,449)
(133)
310
1,139
1,490
(715)
(49,157)
49,207
(406)
—
(370)
—
1,353
2,042
(48)
(966)
(355)
(1,081)
578
(122)
(479)
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
Net cash from operating activities
20,928
18,767
17,111
Cash flows from investing activities:
Purchases of investment securities held to maturity
Purchases of investment securities available for sale
Principal repayments on investment securities held to maturity
Principal repayments on investment securities available for sale
Proceeds from sale of investment securities held to maturity
Loan originations, net of principal repayments on loans receivable
Purchases of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Purchases of Federal Reserve Bank stock
Proceeds from sale of real estate owned
Purchases of premises and equipment
(56,899)
(2,970)
52,831
99
7,446
(152,631)
(5,929)
4,333
(8)
—
(2,547)
(3,803)
—
83,234
—
5,462
(146,095)
(1,075)
920
(73)
—
(563)
(11,606)
—
85,802
—
7,718
(220,215)
(3,120)
9,564
(97)
204
(604)
Net cash from investing activities
(156,275)
(61,993)
(132,354)
(Continued)
64
TERRITORIAL BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2017, 2016 and 2015
(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
2017
2016
2015
$ 104,095 $ 48,097 $ 85,424
120,000
144,525
(66,000)
(106,325)
30,000
—
(47,000)
(25,000)
10
10
(10)
(10)
17
—
(9,326)
(9)
(7,013)
(11,123)
23,000
(23,000)
—
—
10
(10)
566
(1,674)
(8,409)
Net cash from financing activities
106,163
38,580
106,102
Net decrease in cash and cash equivalents
(29,184)
(4,646)
(9,141)
Cash and cash equivalents at beginning of the period
61,273
65,919
75,060
Cash and cash equivalents at end of the period
$
32,089 $ 61,273 $ 65,919
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement
transactions
Loans transferred to real estate owned
Investments purchased, not settled
Investments purchased prior period, settled current period
Company stock repurchased prior period, settled current period
Dividends declared, not yet paid
See accompanying notes to consolidated financial statements.
$
9,231 $
9,319
7,863 $
9,645
6,648
10,324
$
5,120 $
—
—
—
—
19
1,620 $
—
—
1,200
—
—
—
192
1,200
—
389
—
65
(1) Organization
On July 10, 2009, Territorial Savings Bank completed a conversion from a mutual holding company to a stock
holding company. As part of the conversion, Territorial Mutual Holding Company and Territorial Savings Group,
Inc., the former holding companies for Territorial Savings Bank, ceased to exist as separate legal entities, and
Territorial Bancorp Inc. became the holding company for Territorial Savings Bank. Upon completion of the
conversion and reorganization, a special “liquidation account” was established in an amount equal to the total
equity of Territorial Mutual Holding Company as of December 31, 2008. The liquidation account is to provide
eligible account holders and supplemental eligible account holders who maintain their deposit accounts with
Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete
liquidation of Territorial Savings Bank after the conversion. The balance of the liquidation account at December
31, 2017 was $11.0 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 29
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 repayments 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.
(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.
66
At December 31, 2017, the Company classified all of its investments, except $2.9 million of securities, as
held-to-maturity. At December 31, 2016, 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 the type of the investment,
the cause of the decline in value and the amount and duration of the decline in value. It also 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 income line item in the consolidated statements of income. Interest
income is 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.
(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.
67
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 loan-to-value ratio. 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 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)
(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.
68
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)
(cid:120)
home equity loans and lines of credit; and
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 bank regulators will
periodically review the allowance for loan losses. The bank regulators may require the Company to
increase the allowance based on their analysis of information available at the time of their examination.
(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.
69
(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, 2017 and 2016, 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.
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 2014 to 2016 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.
70
(o) Supplemental Employee Retirement Plan (SERP)
The SERP is a noncontributory supplemental retirement plan covering certain current and former
employees of the Company. Benefits in the SERP plan are paid after retirement, in addition to the benefits
provided by the Pension Plan. The Company accrues SERP costs over the estimated period until retirement
by charging salaries and employee benefits expense in the consolidated statements of income, with a
corresponding credit to accounts payable and accrued expenses in the consolidated balance sheets.
(p) 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.
(q) 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.
(r) Common Stock Repurchase Program
In 2016, 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, 2017 and 2016, the Company had accumulated repurchases of 3,138,153 of the total
3,374,253 shares authorized by the Board of Directors. There were no shares repurchased as part of our
common stock repurchase program during 2017. During 2016, shares were repurchased at an average cost
of $25.96.
(s) 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, 2017, this limit was $55.4 million and the Company had invested
$44.2 million in bank-owned life insurance at that date.
(t) 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
71
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.
(u) Recently Issued Accounting Pronouncements
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
Company has reviewed all revenue sources to determine if the sources are in scope for this guidance. Net
interest income from financial assets and liabilities are explicitly excluded from the scope of the
amendment. The Company’s overall assessment of key in-scope revenue sources include service charges
on deposit accounts, rental income from safe deposit boxes and commissions on insurance and annuity
sales. The guidance will not have a significant impact on the Company’s revenue recognition for these key
in-scope revenue sources. The Company adopted this amendment effective January 1, 2018, under the
modified retrospective approach.
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. Since the Company does not own any equity
securities subject to the amendment in its investment portfolio, the amendment will not have a material
impact on its consolidated financial statements. The Company will continue to evaluate the effects that the
use of exit prices will have on its fair value disclosures. The amendment is effective for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years.
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 has several
lease agreements for branch locations and equipment that will require recognition on the consolidated
balance sheets upon adoption of the amendment. The Company will continue to evaluate the effects that
the adoption of this amendment will have on its consolidated financial statements.
In March 2016, the FASB amended the Compensation – Stock Compensation topic of the FASB ASC.
The amendment includes provisions intended to simplify various aspects related to how share-based
payments are accounted for and presented in the financial statements. Some of the key provisions of the
amendment require companies to record all excess tax benefits and tax deficiencies as income tax benefit
or expense in the income statement rather than as an adjustment to additional paid-in capital. In addition,
the amendment requires that excess tax benefits should be reported as an operating activity on the
statement of cash flows and increases the amount an employer can withhold for taxes for share-based
compensation awards. The amendment is effective for annual periods beginning after December 15, 2016.
The Company adopted this amendment effective January 1, 2017. The adoption of this amendment has
resulted in increased volatility to income tax expense related to excess tax benefits and tax deficiencies for
share-based compensation. The amount of tax benefits or deficiencies recognized in income tax expense
depends on the number of options exercised and the difference in the stock prices at the exercise and grant
dates. For the year ended December 31, 2017, the Company recognized in earnings $1.0 million of tax
benefits related to the exercise of stock options.
In June 2016, the FASB amended various sections of the FASB ASC related to the accounting for credit
losses on financial instruments. The amendment changes the threshold for recognizing losses from a
“probable” to an “expected” model. The new model is referred to as the current expected credit loss model
72
and applies to loans, leases, held-to-maturity investments, loan commitments and financial guarantees.
The amendment requires the measurement of all expected credit losses for financial assets as of the
reporting date (including historical experience, current conditions and reasonable and supportable
forecasts) and enhanced disclosures that will help financial statement users understand the estimates and
judgments used in estimating credit losses and evaluating the credit quality of an organization’s portfolio.
The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company will apply the amendment’s provisions as a cumulative-effect
adjustment to retained earnings at the beginning of the first period the amendment is effective. The
Company is currently evaluating the effects that the adoption of this amendment will have on its
consolidated financial statements by gathering the information that is necessary to make the calculations
required by the amendment. This may result in increased credit losses on financial instruments recorded in
the consolidated financial statements.
In March 2017, the FASB amended the Compensation – Retirement Benefits topic of the FASB ASC. The
amendment requires the service cost component of net benefit cost to be reported in the same line item as
other compensation costs arising from employee services. It also requires the other components of net
benefit cost to be reported in the income statement separately from the service cost component. The
amendment is effective for annual periods beginning after December 15, 2017, including interim periods
within those annual periods. The Company does not expect the adoption of this amendment to have a
material effect on its consolidated financial statements.
In February 2018, the FASB amended the Income Statement – Reporting Comprehensive Income topic of
the FASB ASC. Existing accounting standards require that the tax effects of tax rate changes on deferred
taxes be recorded in current income. Deferred taxes previously included in accumulated other
comprehensive income are not allowed to be adjusted and may not reflect current tax rates. This
amendment allows the reclassification from accumulated other comprehensive income to retained earnings
the tax effects resulting from the Tax Cuts and Jobs Act passed in December 2017. The amendment is
effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any period
for which financial statements have not yet been issued. The Company expects to adopt this amendment
during the first quarter of 2018 with the reclassification of $1.1 million of deferred taxes between
accumulated other comprehensive income and retained earnings.
(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,
2017
9,114 $
2016
9,043
$
52,230
22,975
$ 32,089 $ 61,273
Interest-earning deposits in other banks consist primarily of deposits at the Federal Reserve Bank of San
Francisco.
73
(4) Investment Securities
The amortized cost and fair values of investment securities are as follows:
(Dollars in thousands)
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities
Total
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities
Trust preferred securities
Total
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities
Trust preferred securities
Total
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated
Fair Value
$
$
2,870 $
2,870 $
— $
— $
(19) $
(19) $
2,851
2,851
$ 404,365 $ 6,056 $ (4,603) $ 405,818
845
418
$ 404,792 $ 6,474 $ (4,603) $ 406,663
427
—
$ 406,498 $ 7,285 $ (7,024) $ 406,759
1,163
5
$ 407,656 $ 7,290 $ (7,024) $ 407,922
1,158
—
The amortized cost and estimated fair value of investment securities by maturity date at December 31, 2017 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)
Available-for-sale:
Due within 5 years
Due after 5 years through 10 years
Due after 10 years
Total
Held-to-maturity:
Due within 5 years
Due after 5 years through 10 years
Due after 10 years
Total
Amortized Estimated
Fair Value
Cost
$
$
— $
—
2,870
2,870 $
—
—
2,851
2,851
$
10 $
71
404,711
11
71
406,581
$ 404,792 $ 406,663
Realized gains and losses and the proceeds from sales of held-to-maturity securities 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
2017
2015
2016
$ 7,446 $ 5,462 $ 7,718
701
—
370
—
431
—
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 portfolio to maturity.
74
In 2015, the Company recognized a gross realized gain of $61,000 from the sale of one of the trust preferred
securities the Company owned, PreTSL XXIV. The Company previously wrote off the entire book value of this
security when it incurred an other-than-temporary impairment charge in prior years. The trust preferred security
sold was classified in the held-to-maturity portfolio. Since the credit rating of this security was downgraded, in
accordance with the Investment-Debt and Equity Securities topic of the FASB ASC, the sale of this security does
not taint management’s intent to hold the remaining securities in the held-to-maturity portfolio.
Investment securities with amortized costs of $287.2 million and $239.9 million at December 31, 2017 and 2016,
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,
2017 and 2016. The Company does not intend to sell held-to-maturity and available-for-sale 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.
Description of securities
(Dollars in thousands)
December 31, 2017:
Available-for-sale:
U.S. government-sponsored mortgage-
Less Than 12 Months 12 Months or Longer
Total
Unrealized
Unrealized Number of
Unrealized
Fair Value Losses
Fair Value Losses
Securities Fair Value Losses
backed securities
$
2,851 $
19 $
— $
—
1 $
2,851 $
19
Held-to-maturity:
U.S. government-sponsored mortgage-
backed securities
$ 41,163 $
299 $ 140,200 $ 4,304
49 $ 181,363 $ 4,603
December 31, 2016:
Held-to-maturity:
U.S. government-sponsored mortgage-
backed securities
$ 179,741 $ 5,599 $ 23,402 $ 1,425
50 $ 203,143 $ 7,024
Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed securities
were caused by increases in market interest rates subsequent to purchase. All of the mortgage-backed securities
are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae,
which is a U.S. government agency. Since the decline in market value is attributable to changes in interest rates
and not credit quality, 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, 2017.
Trust Preferred Securities. At December 31, 2017, the Company owned one trust preferred security, PreTSL
XXIII. PreTSL XXIII has an amortized cost and a remaining cost basis of $427,000 at December 31, 2017. 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 72 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 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.
75
Based on the Company’s review, the Company’s investment in PreTSL XXIII did not incur additional impairment
during the years ended December 31, 2017, 2016 and 2015 and there is no accumulated other comprehensive loss
related to noncredit factors.
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 $427,000 on the 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,
2017
2016
$
2,403 $
2,403
—
—
2,403 $
—
—
2,403
$
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,
2017
2016
$
— $
—
(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, 2017 and 2016, the Bank met such requirement. At December 31, 2017 and 2016, the Bank
owned $6.5 million and $4.9 million, respectively, of capital stock of the FHLB Des Moines.
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 FRB of
San Francisco equal to six percent of capital and surplus of the Bank. At December 31, 2017 and 2016, the Bank
met such requirement. At December 31, 2017 and 2016, the Bank owned $3.1 million of capital stock of the FRB
of San Francisco.
The Company evaluated its investment in the stock of the FRB of San Francisco 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 FRB of San Francisco, the Company did not consider its FRB stock other-than-
temporarily impaired.
76
(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
Loans receivable, net
December 31,
2017
2016
$ 1,444,625 $ 1,289,364
9,551
23,346
14,805
1,337,066
10,799
21,787
12,882
1,490,093
274
4,340
4,614
204
4,360
4,564
(3,188)
(2,548)
(5,736)
(3,191)
(2,452)
(5,643)
$ 1,488,971 $ 1,335,987
The table below presents the activity in the allowance for loan losses by portfolio segment:
(Dollars in thousands)
2017:
Balance, beginning of year
Provision (reversal of provision) for loan losses
Charge-offs
Recoveries
Net recoveries (charge-offs)
Balance, end of year
2016:
Balance, beginning of year
Provision (reversal of provision) for loan losses
Charge-offs
Recoveries
Net recoveries (charge-offs)
Balance, end of year
2015:
Balance, beginning of year
Provision (reversal of allowance) for loan losses
Charge-offs
Recoveries
Net recoveries (charge-offs)
Balance, end of year
Construction, Home
Commercial Equity
and Other
Residential Mortgage
Mortgage
Loans
Loans and
Lines of Consumer
Credit
and Other Unallocated Totals
519 $
20
539
—
—
—
539 $
517 $
1
518
—
1
1
519 $
2 $
(1)
1
—
—
—
1 $
115 $
(40)
75
(26)
6
(20)
55 $
10
222 $ 2,452
52
232 2,504
(37)
81
44
232 $ 2,548
—
—
—
3 $
(1)
2
—
—
—
2 $
72 $
59
131
(28)
12
(16)
115 $
194 $ 2,166
28
310
222 2,476
(61)
—
37
—
—
(24)
222 $ 2,452
977 $
(471)
506
—
11
11
517 $
5 $
(49)
(44)
—
47
47
3 $
263 $
(150)
113
(53)
12
(41)
72 $
33 $ 1,691
161
455
194 2,146
(53)
—
73
—
20
—
194 $ 2,166
$ 1,594 $
63
1,657
(11)
75
64
$ 1,721 $
$ 1,380 $
223
1,603
(33)
24
(9)
$ 1,594 $
$
$
413 $
964
1,377
—
3
3
1,380 $
77
In 2016, the Company changed the look-back period that is used to calculate the historical loss rate from five to seven
years. The look-back period was extended to seven years because the longer look-back period is considered to be more
representative of an entire economic cycle. The seven year look-back period includes loan charge-offs and recoveries
related to the recession and the subsequent economic recovery. The change in the look-back period did not have a
material effect on the allowance for loan losses.
The allowance for loan loss for each segment of the loan portfolio is generally determined by calculating the historical
loss of each segment in the look-back period and adding a qualitative adjustment for the following factors:
(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.
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, 2017 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.
78
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:
(Dollars in thousands)
December 31, 2017:
Allowance for loan losses:
Ending allowance balance:
Construction, Home
Commercial Equity
and Other Loans and
Residential Mortgage
Mortgage
Loans
Lines of Consumer
Credit
and Other Unallocated
Totals
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
$
$
— $
1,721
1,721 $
— $
539
539 $
— $
1
1 $
— $
55
55 $
— $
232
232 $
—
2,548
2,548
Loans:
Ending loan balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
4,977 $
1,447,326
$ 1,452,303 $
— $
— $
165 $
21,701 12,722
4,628
21,701 $ 12,887 $ 4,628 $
— $
5,142
— 1,486,377
— $ 1,491,519
December 31, 2016:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
$
$
— $
1,594
1,594 $
— $
519
519 $
— $
2
2 $
— $
115
115 $
— $
222
222 $
—
2,452
2,452
Loans:
Ending loan balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
5,587 $
1,290,209
$ 1,295,796 $
— $
1 $
156 $
23,256 14,656
4,574
23,256 $ 14,812 $ 4,575 $
— $
5,744
— 1,332,695
— $ 1,338,439
The table below presents the balance of impaired loans individually evaluated for impairment by class of loans:
(Dollars in thousands)
December 31, 2017:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Total
December 31, 2016:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
Unpaid
Principal
Recorded
Investment Balance
$
$
4,977 $
165
5,142 $
5,897
228
6,125
$
$
5,587 $
156
1
5,744 $
6,469
204
1
6,674
The table below presents the average recorded investment and interest income recognized on impaired loans by
class of loans:
79
(Dollars in thousands)
2017:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
2016:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
2015:
With no related allowance recorded:
One- to four-family residential mortgages
Home equity loans and lines of credit
Consumer and other
Total
Average
Recorded Interest Income
Investment Recognized
$
$
5,112 $
175
—
5,287 $
$
5,743 $
161
1
$
5,905 $
$
$
6,642 $
131
9
6,782 $
58
—
—
58
72
—
—
72
71
—
—
71
There were no loans individually evaluated for impairment with a related allowance for loan loss as of December
31, 2017, 2016 or 2015. Loans individually evaluated for impairment do not have an allocated allowance for loan
loss because they are written down to fair value at the time of impairment.
The table below presents the aging of loans and accrual status by class of loans:
30 - 59 60 - 89 90 Days or
Days Past Days Past Greater Total Past Loans Not Total
Past Due Loans
Due
Past Due Due
Due
Loans
More Than
90 Days
Past Due
Nonaccrual and Still
Accruing
Loans
(Dollars in thousands)
December 31, 2017:
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
$
— $
—
—
—
—
4
1,207 $
—
—
—
—
—
1,589 $
—
—
41
—
—
2,796 $ 1,438,725 $ 1,441,521 $
10,782
10,782
21,701
21,701
12,887
12,846
274
274
4,354
4,350
—
—
41
—
4
4,062 $
—
—
165
—
—
—
—
—
—
—
—
Total
$
4 $
1,207 $
1,630 $
2,841 $ 1,488,678 $ 1,491,519 $
4,227 $
—
December 31, 2016:
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
$
185 $
—
—
16
—
3
133 $
—
—
35
—
—
1,358 $
—
—
49
—
1
1,676 $ 1,284,590 $ 1,286,266 $
9,530
9,530
23,256
23,256
14,812
14,712
204
204
4,371
4,367
—
—
100
—
4
4,402 $
—
—
156
—
1
—
—
—
—
—
—
Total
$
204 $
168 $
1,408 $
1,780 $ 1,336,659 $ 1,338,439 $
4,559 $
—
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
80
the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes
collateral-dependent or is four months delinquent. The carrying value of collateral-dependent loans is adjusted to
the fair value of the collateral less selling costs. Any commercial real estate, commercial, construction or equity
loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the
loan exhibits any weaknesses and is performing in accordance with its contractual terms.
The Company had 17 nonaccrual loans with a book value of $4.2 million at December 31, 2017 and 19
nonaccrual loans with a book value of $4.6 million as of December 31, 2016. The Company collected interest on
nonaccrual loans of $179,000, $195,000 and $233,000 during 2017, 2016 and 2015, respectively, but due to
regulatory requirements, the Company recorded the interest as a reduction of principal. The Company would
have recognized additional interest income of $240,000, $268,000 and $312,000 during 2017, 2016, and 2015,
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, 2017, 2016 or 2015.
There were no loans modified in a troubled debt restructuring during the year ended December 31, 2017 or 2016.
There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.
The table below summarizes troubled debt restucturings by class of loans:
(Dollars in thousands)
December 31, 2017:
One- to four-family residential mortgages
Home equity loans and lines of credit
Total
December 31, 2016:
One- to four-family residential mortgages
Home equity loans and lines of credit
Total
Number of Accrual Number of Nonaccrual
Loans
Status
Loans
Status
Total
4 $
—
4 $
915
—
915
5 $ 1,074 $ 1,989
1
92
6 $ 1,166 $ 2,081
92
5 $ 1,185
—
—
5 $ 1,185
7 $ 1,629 $ 2,814
107
1
107
8 $ 1,736 $ 2,921
One of the restructured loans, for $149,000, was more than 149 days delinquent and not accruing interest as of
December 31, 2017 and 2016. Restructurings include deferrals of interest and/or principal payments and
temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers. At
December 31, 2017, we have no commitments to lend any additional funds to these borrowers.
The Company had no real estate owned as of December 31, 2017 or 2016. There were three one- to four-family
residential mortgage loans totaling $650,000 and one home equity loan for $41,000 in the process of foreclosure
as of December 31, 2017. There were three one-to four-family residential mortgage loans totaling $660,000 and
one home equity loan for $42,000 in the process of foreclosure as of December 31, 2016.
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, 2017, 2016 and 2015, the Company sold $25.0 million, $48.9 million and
$56.2 million, respectively, of mortgage loans held for sale and recognized gains of $199,000, $406,000, and
$503,000, respectively. The Company had one loan held for sale for $403,000 at December 31, 2017 and five
loans held for sale totaling $1.6 million at December 31, 2016.
The Company serviced loans for others of $35.5 million, $41.5 million and $51.8 million at December 31, 2017,
2016, and 2015, respectively. Of these amounts, $1.5 million, $2.2 million, and $2.8 million relate to
securitizations for which the Company continues to hold the related mortgage-backed securities at December 31,
2017, 2016, and 2015, respectively. The amount of contractually specified servicing fees earned was $105,000,
81
$128,000 and $153,000 for 2017, 2016, and 2015, 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 $890,000 at December 31, 2017 and $1.4 million at December 31, 2016.
(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,
2017
1,045 $
4,090
7
5,142 $
2016
1,064
3,658
10
4,732
$
$
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 $3,000 and $0 for the years ended
December 31, 2017 and 2016, respectively.
The table below presents the changes in our mortgage servicing assets:
(Dollars in thousands)
Balance at beginning of year
Additions
Impairments
Amortization
Balance at end of year
2017
2016
$
$
307 $
3
—
(47)
263 $
426
—
(49)
(70)
307
The table below presents the gross carrying values, accumulated amortization, and net carrying values of our
mortgage servicing assets:
December 31,
(Dollars in thousands)
Gross carrying value
Accumulated amortization
Net carrying value
2017
1,310 $
$
(1,047)
263 $
2016
1,307
(1,000)
307
$
82
The estimated amortization expense for our mortgage servicing assets for the next five years and all years
thereafter are as follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
48
32
26
22
20
115
263
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 and cost of servicing.
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 future 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, 2017 and 2016:
Fair value, beginning of year (in thousands)
Fair value, end of year (in thousands)
$
2017
2016
$
368
311
441
368
Weighted average discount rate
Weighted average prepayment speed assumption (PSA prepayment speed)
Annual cost to service (per loan)
10.50 %
173.3
70
$
10.50 %
159.2
65
$
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 and accrued
expenses. Changes in fair value are recorded in current earnings. At December 31, 2017, interest rate locks and
forward loan sale commitments on loans held for sale amounted to $2.5 million and $2.9 million, respectively.
83
The table below presents the location of assets and liabilities related to derivatives:
(Dollars in thousands)
Interest rate contracts
Interest rate contracts
Total derivatives
Location on
Balance Sheet
Asset Derivatives
Liability Derivatives
Fair Value at December 31, Fair Value at December 31,
2017
2016
2017
2016
Prepaid expenses and other assets
$
8 $
104 $
— $
—
Accounts payable and accrued expenses
$
—
8 $
—
104 $
8
8 $
104
104
The table below presents the location of gains and losses related to derivatives:
(Dollars in thousands)
Interest rate contracts
(11) Premises and Equipment
Location of
Loss on
Statement of Income
Gain on sale of loans
2017
2016
$
— $
6
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,
2017
2016
585 $
1,301
13,915
5,727
115
21,643
(15,962)
5,681
40
5,721 $
585
1,045
13,005
5,261
115
20,011
(16,066)
3,945
382
4,327
$
Depreciation expense was $1.1 million, $1.1 million and $1.3 million for the years ended December 31, 2017,
2016 and 2015, respectively.
(12) Deposits
Deposit accounts by type are summarized with their respective weighted-average interest rates as follows:
December 31,
2017
2016
(Dollars in thousands)
Non-interest bearing
Savings accounts
Certificates of deposit
Money market
Checking and Super NOW
Total
Amount
$
49,725
Rate
Amount
Rate
- % $
47,703
- %
1,040,248 0.46
312,225 1.34
5,578 0.43
189,519 0.02
1,022,159 0.41
236,043 0.96
3,406 0.44
183,889 0.02
$ 1,597,295 0.56 % $ 1,493,200 0.43 %
84
The maturity of certificate of deposit accounts at December 31, 2017 is as follows (dollars in thousands):
Maturing in:
2018
2019
2020
2021
2022
Total
$ 165,706
70,272
31,423
20,458
24,366
$ 312,225
Certificates of deposit with balances greater than or equal to $250,000 totaled $192.8 mllion and $141.6 million at
December 31, 2017 and 2016, 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
2017
2015
2016
$ 4,445 $ 4,162 $ 3,670
1,118
1,734
33
37
$ 7,666 $ 5,933 $ 4,821
3,182
39
At December 31, 2017 and 2016, overdrawn deposit accounts totaled $22,000 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 Des Moines is equal to 35% of the Bank’s total assets and as of December 31,
2017 and 2016, we had the capacity to borrow an additional $579.4 million and $577.9 million, respectively.
Advances outstanding consisted of the following:
December 31,
2017
2016
Weighted
Average
Amount
Rate
—
1.39 % $
37,000
1.79
22,000
1.85
10,000
2.32
1.70 % $ 69,000
Amount
$ 46,200
31,000
15,000
15,000
$ 107,200
Weighted
Average
Rate
— %
1.33
1.66
1.66
1.49 %
(Dollars in thousands)
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
Total
85
(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:
(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
Total
2017
Repurchase
Liability
Weighted
Average
Rate
2016
Weighted
Repurchase
Liability
Average
Rate
$
$
—
25,000
5,000
—
30,000
— % $
1.66
1.65
—
1.66 % $
25,000
—
25,000
5,000
55,000
1.46 %
—
1.66
1.65
1.57 %
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, 2017. 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
(15) Offsetting of Financial Liabilities
Weighted
Carrying
Average
Value of Value of Repurchase Amount Months to
Securities Securities Liability at Risk Maturity
Fair
$ 39,834 $ 39,986 $ 30,000 $ 9,986
17
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.
Net Amount of Gross Amount Not Offset in the
(Dollars in thousands)
December 31, 2017:
Securities sold under agreements to
Gross Amount Gross Amount Liabilities
of Recognized Offset in the Presented in the Financial
Liabilities
Balance Sheet Balance Sheet Instruments
Balance Sheet
Cash Collateral
Pledged
Net Amount
repurchase
$
30,000 $
— $
30,000 $
30,000 $
— $
—
December 31, 2016:
Securities sold under agreements to
repurchase
$
55,000 $
— $
55,000 $
55,000 $
— $
—
86
(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
2017
2016
2015
$ 6,219 $ 7,487 $ 10,176
1,833
12,009
1,810
9,297
1,447
7,666
3,273
163
3,436
(2,147)
(76)
(2,223)
$ 11,102 $ 10,787 $ 9,786
1,339
151
1,490
The federal statutory corporate tax rate for the years ended December 31, 2017, 2016 and 2015 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)
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
2017
9,123
2016
9,497
2015
8,587
$
$
$
(317)
2
(338)
68
(359)
87
benefits
1,104
1,057
1,104
Tax benefit from the exercise of stock options
(1)
Write-down of deferred income taxes (2)
Other
Total income tax expense
Effective income tax rate
(1,046)
2,054
182
11,102
$
42.59 %
—
—
503
10,787
$
39.75 %
—
—
367
9,786
39.89 %
$
(1) Starting in 2017 a new accounting standard requires that any excess tax benefits resulting from the
exercise of stock options be recognized in income tax expense. Prior to the adoption of the new
standard, the excess tax benefits were recorded as additional paid-in-capital.
(2) Income tax expense for 2017 included a $2.1 million write-down of deferred income tax assets that
resulted when the federal corporate tax rate was lowered from 35% to 21% due to the Tax Cuts and Jobs
Act.
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,
2017
2016
$ (1,571) $
1,483
(122)
1,616
(88) $ 1,494
$
$ (3,178) $ (6,350)
(1,555)
$ (4,609) $ (7,905)
(1,431)
87
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
Unrealized losses on securities available-for-sale
Deferred compensation
Other
Deferred tax liabilities:
Net deferred loan fees
FHLB stock dividends
Prepaid expense
Premiums on loans sold
Net deferred tax assets
$
December 31,
2017
2016
966 $ 1,737
560
440
1,550
1,229
969
678
1,020
724
3,785
2,580
1,330
420
21
17
744
453
137
215
11,931
7,644
2,676
126
163
70
3,035
3,566
196
143
121
4,026
$ 4,609 $ 7,905
Deferred tax assets and liabilities at December 31, 2017 and 2016 were calculated using federal corporate tax
rates of 21% and 35%, respectively. The corporate tax rate was lowered to 21% due to the Tax Cuts and Jobs Act
of 2017. The lower tax rate caused a $2.1 million increase in income tax expense and write down of deferred
income tax assets.
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, 2017 and 2016.
(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 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 are no further accrual of benefits for any participants and benefits do not
88
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:
(Dollars in thousands)
Accumulated benefit obligation at end of year
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year
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
Accumulated other comprehensive loss, before tax
Pension Plan
SERP
December 31,
2017
2016
$ 19,314 $ 17,496 $
2017
9,242 $
2016
9,044
$ 17,496 $ 17,321 $
193
763
1,670
(808)
19,314
194
752
(90)
(681)
17,496
9,044 $
75
140
—
(17)
9,242
8,891
38
132
—
(17)
9,044
14,804
1,931
—
(808)
15,927
—
—
17
(17)
—
$ (3,387) $ (2,692) $ (9,242) $ (9,044)
13,140
345
2,000
(681)
14,804
—
—
17
(17)
—
$ (3,387) $ (2,692) $ (9,242) $ (9,044)
$
$
9,096 $
149
9,245 $
8,582 $
154
8,736 $
— $
—
— $
—
—
—
The following table sets forth the changes recognized in accumulated other comprehensive loss for the years
indicated:
Pension Plan
Year Ended December 31,
2017
8,736 $
764
2016
8,375
580
$
(250)
(5)
509
9,245 $
(214)
(5)
361
8,736
(Dollars in thousands)
Accumulated other comprehensive loss at beginning of year, before tax
Actuarial net loss arising during the period
Amortizations (recognized in net periodic benefit cost):
Actuarial loss
Prior service cost
Total recognized in other comprehensive loss
Accumulated other comprehensive loss at end of year, before tax
$
89
For the years ended December 31, 2017 and 2016, the following weighted average assumptions were used to
determine benefit obligations at the end of the year:
Assumptions used to determine the year-end benefit obligations:
Discount rate
Rate of compensation increase
Pension Plan
SERP
Year Ended December 31,
2017
2016
2017
2016
3.70 %
N/A
4.30 %
N/A
5.04 %
5.00 %
5.05 %
5.00 %
The Company does not expect any plan assets to be returned to the Company during calendar year 2018.
The dates used to determine retirement measurements for the Pension Plan were December 31, 2017 and 2016.
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, 2017 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.
As of December 31, 2017 and 2016, the Pension Plan’s assets measured at fair value were classified as follows:
(Dollars in thousands)
December 31, 2017:
Cash
Equities
Mutual funds (1)
Total
December 31, 2016:
Cash
Equities
Mutual funds (1)
Total
Fair Value of Measurements at Report Date Using:
Quoted Prices
in Active
Markets for
Significant
Other
Total Fair
Value
Identical
Assets
(Level 1)
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
846 $
11,814
3,267
$ 15,927 $
846 $
11,814
3,267
15,927 $
$ 1,839 $
9,794
3,171
$ 14,804 $
1,839 $
9,794
3,171
14,804 $
— $
—
—
— $
— $
—
—
— $
—
—
—
—
—
—
—
—
(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.
90
Estimated future benefit payments reflecting expected future service at December 31, 2017 are as follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
2023 - 2027
Total
Pension
Plan
SERP
$
954 $
1,007
1,039
1,092
1,133
5,794
$ 11,019 $
17
6,488
150
2,320
144
665
9,784
For the years ended December 31, 2017, 2016, and 2015, the following weighted average assumptions were used
to determine net periodic benefit cost for the fiscal years shown:
(Dollars in thousands)
Assumptions used to determine the net
periodic benefit cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
Pension Plan
SERP
Year Ended December 31,
2017
2016
2015
2017
2016
2015
4.30 %
7.25
N/A
4.40 %
7.50
N/A
4.10 %
7.50
N/A
5.03 %
N/A
5.00
5.05 %
N/A
5.00
5.06 %
N/A
5.00
The components of net periodic benefit cost were as follows:
(Dollars in thousands)
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
Pension Plan
SERP
Year Ended December 31,
2017
2016
2015
2017
2016
2015
$
193 $
763
(1,026)
5
250
—
185 $
194 $
752
(1,015)
5
214
—
150 $
75 $
120 $
140
722
—
(976)
—
—
—
215
—
—
81 $ 215 $
38 $
132
—
—
—
—
170 $
29
125
—
—
—
—
154
$
The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic pension
benefit cost in 2018 are $5,000 and $249,000, 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 does not expect to make any contributions to the defined benefit pension plan in 2018. The
Company expects to make a $17,000 contribution to the SERP in 2018 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 2017, 2016 and
2015, amounted to $57,000, $57,000, and $56,000, 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, 2017, 2016 and 2015.
91
(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.
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, 2017 and 2016 amounted to $1.8 million and $1.1 million, 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,
2017
397,912
538,261
936,173
2016
372,997
587,193
960,190
$ 16,616 $ 19,283
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, 2017 and 2016, we
accrued $341,000 and $454,000, 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-
or six-year vesting period during which participants are required to provide services in exchange for the awards.
The Company recognized compensation expense, measured as the fair value of the share-based award on the date
of grant, on a straight-line basis over the vesting period. Share-based compensation is recorded in the statement
of income as a component of salaries and employee benefits with a corresponding increase in stockholders’
92
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
2017
2016
2015
$
153 $ 1,789 $ 2,670
1,072
718
42
Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized shares. The
maximum number of shares that will be awarded under the plan is 1,862,637 shares.
Stock Options
The table below presents the stock option activity of the Company:
Options outstanding at December 31, 2014
Granted
Exercised
Forfeited
Expired
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Remaining
Contractual
Life (years) (in thousands)
3,471
5.68 $
9.67
8
Options
832,954 $ 17.38
26.23
17.36
17.36
3,600
1,000
3,254
—
Options outstanding at December 31, 2015
832,300 $ 17.42
4.70 $
8,588
Granted
Exercised
Forfeited
Expired
—
125,870
—
—
17.36
1,378
Options outstanding at December 31, 2016
706,430 $ 17.43
3.70 $
10,884
Granted
Exercised
Forfeited
Expired
—
294,887
—
—
17.36
4,345
Options outstanding at December 31, 2017
411,543 $ 17.48
2.73 $
5,509
Options vested and exercisable at December 31, 2017
410,343 $ 17.46
2.71 $
5,503
The following summarizes certain stock option activity of the Company:
(In thousands)
Intrinsic value of stock options exercised
Proceeds received from stock options exercised
Tax benefits realized from stock options exercised
Total fair value of stock options that vested
2017
2016
2015
$ 4,345 $ 1,378 $
5,119
1,601
37
2,186
368
4,495
8
17
3
3,854
During the year ended December 31, 2017, the Company issued 135,210 shares of common stock in exchange for
294,887 stock options and 159,677 common shares. Pursuant to the provisions of our equity incentive plan,
optionees are permitted to use the value of common stock they own in a stock swap transaction or use a net
settlement method to pay the exercise price of stock options.
As of December 31, 2017, the Company had $3,000 of unrecognized compensation costs related to the stock
option plan. The cost of the stock option plan is being amortized over a three-year vesting period.
Restricted Stock
Restricted stock is accounted for as a fixed grant using the fair value of the Company’s stock at the time of grant.
Unvested restricted stock may not be disposed of or transferred during the vesting period. Restricted stock carries
93
the right to receive dividends, although dividends attributable to restricted stock may be retained by the Company
until the shares vest, at which time they are paid to the award recipient.
The table below presents the restricted stock activity:
Nonvested at December 31, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Weighted
Average Grant
Date Fair
Restricted
Stock
226,733 $
3,600
113,332
2,459
114,542 $
—
112,142
—
2,400 $
9,604
1,200
—
10,804 $
Value
17.39
26.33
17.39
17.36
17.67
—
17.49
—
26.23
29.53
26.23
—
29.16
During the year ended December 31, 2017, the Company issued 9,604 shares of restricted stock to certain
members of executive management under the 2010 Equity Incentive Plan. The fair value of the restricted stock is
based on the value of the Company’s stock on the date of grant. Restricted stock will vest over three years from
the date of the grant.
As of December 31, 2017, the Company had $246,000 of unrecognized compensation costs related to restricted
stock.
During the year ended December 31, 2017, the Company issued 11,525 of performance-based restricted stock
units (PRSUs) to certain members of executive management under the 2010 Equity Incentive Plan. These PRSUs
will vest in the first quarter of 2020 after our Compensation Committee determines whether a performance
condition that compares the Company’s return on average equity to the SNL Bank Index is achieved. Depending
on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period
can vary between 0% to 150% of the target award. For the PRSUs, an estimate is made of the number of shares
expected to vest based on the probability that the performance criteria will be achieved to determine the amount
of compensation expense to be recognized. This estimate is re-evaluated quarterly and total compensation
expense is adjusted for any change in the current period.
The table below presents the PRSUs that will vest on a performance condition:
Performance-
Based
Restricted
Stock Units Weighted
Based on a Average Grant
Performance
Condition
Date Fair
Value
— $
11,525
—
—
11,525 $
—
29.53
—
—
29.53
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
94
The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of
December 31, 2017, the Company had $194,000 of unrecognized compensation costs related to these PRSUs.
Performance will be measured over a three-year period and will be cliff vested.
During the year ended December 31, 2017, the Company issued 2,881 of PRSUs to certain members of executive
management under the 2010 Equity Incentive Plan. These PRSUs will vest in the first quarter of 2020 after our
Compensation Committee determines whether a market condition that compares the Company’s total stock return
to the SNL Bank Index is achieved. The number of shares that will be expensed will not be adjusted for
performance. The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the
date of grant. The assumptions which were used in the Monte Carlo valuation of the PRSUs are:
Grant date: May 25, 2017
Performance period: January 1, 2017 to December 31, 2019
2.60 year risk-free rate on grant date: 1.40%
December 31, 2016 closing price: $32.84
Closing stock price on date of grant: $29.53
Annualized volatility (based on 2.60 year historical volatility as of the grant date): 15.7%
Annual dividend preceeding the grant date: $0.80
The table below presents the PRSUs that will vest on a market condition:
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Performance-
Based Restricted Monte Carlo
Valuation of
the Company's
Stock
Stock Units
Based on a
Market Condition
— $
2,881
—
—
2,881 $
—
24.44
—
—
24.44
As of December 31, 2017, the Company had $37,000 of unrecognized compensation costs related to the PRSUs
that are based on a market condition. Performance will be measured over a three-year period and will be cliff
vested.
(20) Earnings Per Share
Holders of unvested restricted stock receive nonforfeitable dividends at the same rate as common shareholders
and they both share equally in undistributed earnings. Unvested resticted stock awards that contain nonforfeitable
rights to dividends or dividend equivalents are considered to be participating securities in the earnings per share
95
computation using the two-class method. Under the two-class method, earnings are allocated to common
shareholders and participating securities according to their respective rights to earnings.
The table below presents the information used to compute basic and diluted earnings per share:
(Dollars in thousands, except per share data)
Net income
Income allocated to participating securities
Net income available to common shareholders
$
$
For the Year Ended December 31,
2016
16,347 $
(126)
16,221 $
2017
14,962 $
(27)
14,935 $
2015
14,748
(297)
14,451
Weighted-average number of shares used in:
Basic earnings per share
Dilutive common stock equivalents:
Stock options and restricted stock units
Diluted earnings per share
9,273,783
9,093,385
9,073,015
258,941
9,532,724
218,590
9,311,975
190,252
9,263,267
Net income per common share, basic
Net income per common share, diluted
$
$
1.61 $
1.57 $
1.78 $
1.74 $
1.59
1.56
(21) Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive income and loss,
net of taxes:
Noncredit
Related
Loss on
Trust
Preferred
Securities
Unfunded
Pension
Liability
Unrealized
Loss on
Securities
Total
5,284 $
373
—
373
5,657 $
— $
—
—
—
— $
32 $
5
—
5
37 $
5,316
378
—
378
5,694
5,044 $
240
—
240
5,284 $
147 $
(147)
—
(147)
— $
45 $
(13)
—
(13)
32 $
5,236
80
—
80
5,316
5,032 $
12
—
12
5,044 $
284 $
(137)
—
(137)
147 $
72 $
(27)
—
(27)
45 $
5,388
(152)
—
(152)
5,236
(Dollars in thousands)
December 31, 2017:
Balances at beginning of year
$
Other comprehensive loss, net of taxes
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive loss
Balances at end of year
December 31, 2016:
Balances at beginning of year
$
$
Other comprehensive loss (income), net of taxes
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive loss (income)
Balances at end of year
December 31, 2015:
Balances at beginning of year
$
$
Other comprehensive loss (income), net of taxes
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive loss (income)
Balances at end of year
$
96
The table below presents the tax effect on each component of accumulated other comprehensive loss:
2017
Year Ended December 31,
2016
2015
Pretax
Amount Tax
$ 509 $ (136) $
After Tax Pretax
Amount
Amount Tax
373 $ 361 $ (121) $
After Tax Pretax
Amount
Amount Tax
240 $
20 $ (8) $
After Tax
Amount
12
—
9
—
(4)
$ 518 $ (140) $
—
5
378 $
(242)
(22)
97 $ (17) $
95
9
(226)
(45)
(137)
(147)
(13)
(27)
80 $ (251) $ 99 $ (152)
89
18
(Dollars in thousands)
Unfunded pension liability
Noncredit related loss on trust
preferred securities
Unrealized loss on securities
Total
(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, 2017 and 2016, the Company had loan commitments aggregating to $15.5 million
(interest rates from 2.875% to 4.125%) and $50.5 million (interest rates from 2.500% to 4.625%),
respectively, primarily consisting of fixed-rate residential first mortgage loans. In addition to commitments
to originate loans, at December 31, 2017 and 2016, the Company had $27.2 million and $28.6 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
2029. Total rental expense comprised minimum rentals of $3.0 million, $2.9 million, and $2.9 million for
the years ended December 31, 2017, 2016, and 2015, respectively.
At December 31, 2017, future minimum rental commitments under all noncancelable operating leases are
as follows:
(Dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
2,809
2,353
1,919
1,463
1,293
4,557
14,394
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.
97
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)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
110
110
110
110
—
—
440
Rental income comprised of minimum rentals for 2017, 2016, and 2015 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, 2017 and 2016 was $12.8 million and $10.7
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. 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. The capital requirements become fully-phased in on January 1, 2019. At December 31, 2017,
Territorial Savings Bank and the Company exceeded all of the fully-phased in regulatory capital requirements and
are considered to be “well capitalized” under regulatory guidelines.
98
The table below present the fully-phased in 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 Territorial
Savings Bank and the Company at December 31, 2017 and 2016:
(Dollars in thousands)
December 31, 2017:
Tier 1 Leverage Capital
Territorial Savings Bank
Territorial Bancorp Inc.
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
Total Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
December 31, 2016:
Tier 1 Leverage Capital
Territorial Savings Bank (2)
Territorial Bancorp Inc.
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
Total Risk-Based Capital (1)
Territorial Savings Bank
Territorial Bancorp Inc.
Required Ratio Actual Amount Actual Ratio
5.00 % $
5.00 % $
218,826
240,548
9.00 % $
9.00 % $
218,826
240,548
10.50 % $
10.50 % $
218,826
240,548
12.50 % $
12.50 % $
221,460
243,182
9.00 % $
5.00 % $
219,365
235,102
9.00 % $
9.00 % $
219,365
235,102
10.50 % $
10.50 % $
219,365
235,102
12.50 % $
12.50 % $
221,912
237,649
11.04 %
12.13 %
23.31 %
25.62 %
23.31 %
25.62 %
23.59 %
25.90 %
11.76 %
12.60 %
25.30 %
27.11 %
25.30 %
27.11 %
25.59 %
27.41 %
(1)
(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.
On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System. As a condition
of membership, Territorial Savings Bank was required to maintain a Tier 1 Leverage Capital ratio of 9.00% for
three years.
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.”
At December 31, 2017 and 2016, 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.
99
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.
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 72 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%.
100
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, including estimated
prepayments, 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.
101
The estimated fair values of the Company’s financial instruments are as follows:
(Dollars in thousands)
December 31, 2017
Assets
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity
Loans held for sale
Loans receivable, net
FHLB stock
FRB stock
Accrued interest receivable
Interest rate contracts
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
Fair Value Measurements Using
32,089 $ 32,089 $
— $
$
32,089 $
2,851
404,792
403
1,488,971
6,541
3,103
5,142
8
2,851
406,663
414
1,505,097
6,541
3,103
5,142
8
—
—
—
—
—
—
7
—
2,851
405,818
414
—
6,541
3,103
1,045
8
—
—
845
—
1,505,097
—
—
4,090
—
Liabilities
Deposits
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Accrued interest payable
Interest rate contracts
1,597,295
107,200
30,000
575
8
1,595,992
107,019
29,846
575
8
—
—
—
—
—
1,285,070
107,019
29,846
115
8
310,922
—
—
460
—
December 31, 2016
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
$
61,273 $
61,273 $ 61,273 $
— $
407,656
1,601
1,335,987
4,945
3,095
4,732
104
407,922
1,601
1,352,137
4,945
3,095
4,732
104
—
—
—
—
—
10
—
406,759
1,601
—
4,945
3,095
1,064
104
—
1,163
—
1,352,137
—
—
3,658
—
Liabilities
Deposits
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Accrued interest payable
Interest rate contracts
1,493,200
69,000
55,000
218
104
1,493,094
69,068
55,123
218
104
—
—
—
—
—
1,257,157
69,068
55,123
172
104
235,937
—
—
46
—
At December 31, 2017 and 2016, 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.
102
The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:
(Dollars in thousands)
December 31, 2017
Level 1 Level 2 Level 3 Total
Interest rate contracts — assets
Interest rate contracts — liabilities
Available-for-sale investments
$
— $
—
—
8 $
(8)
2,851
— $
—
—
8
(8)
2,851
December 31, 2016
Interest rate contracts — assets
Interest rate contracts — liabilities
$
— $ 104 $
—
(104)
— $
—
104
(104)
The fair value of interest rate contracts was determined by referring to prices quoted in the secondary market for
similar contracts. The fair value of available-for-sale investments was determined using pricing models that
consider bid and ask prices and prices at which similar securities traded.
The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31,
2017 and 2016 and the related gains and losses for the years then ended:
(Dollars in thousands)
December 31, 2017
Impaired loans
December 31, 2016
Trust preferred securities
Mortgage servicing assets
Impaired loans
Loans held for sale
Fair Value
Adjustment
Date
Level 1 Level 2 Level 3 Total
Total Gains (Losses)
3/31/2017 $ — $
87 $
— $
87 $
(11)
— $ 1,066 $ 1,066 $
9/30/2016 $ — $
341
341
—
—
6/30/2016
—
—
8/31/2016
64
64
— 1,601
— 1,601
12/31/2016
242
(49)
(33)
(1)
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. Mortgage servicing assets are
valued using a discounted cash flow model. Assumptions used in the model include mortgage prepayment
speeds, discount rates and cost of servicing. Losses on mortgage servicing assets are included in service fees on
loan and deposit accounts in the consolidated statements of income. The fair value of impaired loans is
determined using the value of collateral less estimated selling costs. Losses on impaired loans are included in the
provision for loan losses in the consolidated statements of income. The fair value of loans held for sale is
determined based on the prices quoted in the secondary market for similar loans. Losses on loans held for sale
are included in gain on sale of loans in the consolidated statements of income.
103
The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements:
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable
Input
Value
December 31, 2016:
Trust preferred
securities
Mortgage servicing
assets
$
1,066
Discounted cash flow
Discount rate
341
Discounted cash flow
Discount rate
Prepayment speed (PSA)
Annual cost to service (per
loan, in dollars)
$
Three-month LIBOR
plus 20.00%
10.50%
158.4 - 203.5
65
(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
Total liabilities and equity
Liabilities and Equity
December 31,
2017
2016
$
20,093 $
213,132
1,539
141
234,905 $
15,288
214,050
373
81
229,792
51 $
234,854
234,905 $
6
229,786
229,792
$
$
$
104
(Dollars in thousands)
Interest and dividend income:
Condensed Statement of Income
For the Year Ended December 31,
2015
2016
2017
Dividends from Territorial Savings Bank
Interest-earning deposit with Territorial Savings Bank
Total interest and dividend income
$ 16,200 $
49
16,249
7,500 $ 14,000
29
14,029
34
7,534
Noninterest expense:
Salaries
Other general and administrative expenses
Total noninterest expense
Income before income taxes and equity in undistributed earnings in
subsidiaries
Income taxes
37
989
1,026
40
745
785
34
829
863
15,223
6,749
13,166
(384)
(285)
(416)
Income before equity in undistributed earnings in subsidiaries
15,607
7,034
13,582
Equity in undistributed earnings of Territorial Savings Bank, net of dividends
(645)
9,313
1,166
Net income
$ 14,962 $ 16,347 $ 14,748
(Dollars in thousands)
Cash flows from operating activities:
Condensed Statement of Cash Flows
For the Year Ended December 31,
2015
2016
2017
Net income
Adjustments to reconcile net income to net cash provided by operating
$ 14,962 $
16,347 $ 14,748
activities:
Equity in undistributed earnings of Territorial Savings Bank, net of
dividends
ESOP expense
Net (increase) decrease in prepaid expenses and other assets
Net increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Investment in Territorial Savings Bank
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Repurchases of common stock
Cash dividends paid
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of the period
Cash at end of the period
645
1,529
(1,226)
27
15,937
(9,313)
1,353
659
(18)
9,028
(1,166)
1,210
1,170
(18)
15,944
—
—
—
—
—
—
—
(9)
(11,123)
(11,132)
4,805
15,288
$ 20,093 $
17
566
(9,326)
(1,674)
(7,013)
(8,409)
(16,322)
(9,517)
(378)
(489)
15,777
16,155
15,288 $ 15,777
105
(27) Unaudited Quarterly Financial Information
2017:
Interest income
Interest expense
Net interest income
Provision (reversal of 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
2016:
Interest 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
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
$ 16,781 $ 16,777 $ 17,177 $ 17,598 $ 68,333
9,589
58,744
52
58,692
3,846
36,474
26,064
11,102
14,962
1.61
1.57
1.20
2,697
14,901
50
14,851
856
10,252
5,455
3,288
2,167
0.23
0.23
0.50
2,253
14,524
(123)
14,647
1,059
8,754
6,952
2,651
4,301
0.46
0.45
0.20
2,518
14,659
54
14,605
909
8,761
6,753
2,580
4,173
0.45
0.44
0.30
2,121
14,660
71
14,589
1,022
8,707
6,904
2,583
4,321
0.47
0.46
0.20
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(Dollars in thousands, except per share data)
$ 16,380 $ 16,543 $ 16,669 $ 16,481 $ 66,073
7,844
58,229
310
57,919
4,094
34,879
27,134
10,787
16,347
1.78
1.74
0.92
2,053
14,428
91
14,337
1,071
8,187
7,221
2,859
4,362
0.48
0.46
0.38
1,964
14,705
107
14,598
1,003
8,645
6,956
2,792
4,164
0.45
0.44
0.18
1,944
14,599
84
14,515
1,134
8,988
6,661
2,624
4,037
0.44
0.43
0.18
1,883
14,497
28
14,469
886
9,059
6,296
2,512
3,784
0.41
0.40
0.18
On January 25, 2018, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of
$0.20 per share of common stock. The dividend was paid on February 22, 2018 to stockholders of record as of
February 8, 2018.
106
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, 2017. 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, 2017, 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, 2017. 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, 2017, 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, 2017, and it is included in Item 8, under Part II of this Annual Report on Form 10-K.
ITEM 9B. Other Information
None.
107
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 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 2018 Annual Meeting of
Stockholders under the caption “Executive Compensation” is incorporated herein by reference.
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 2018 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, 2017 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 Weighted-average
Be Issued Upon Exercise Exercise Price of
of Outstanding Options, Outstanding Options,
Warrants and Rights
Warrants and Rights reflected in first column)
Number of Securities
Remaining Available for
Future Issuance Under
Share-based
Compensation Plans
(excluding securities
Equity compensation plans approved by security
holders (1)
(1) Reflects stock options only
410,343 $
17.46
246,576
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information in Territorial Bancorp Inc.’s definitive Proxy Statement for the 2018 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 2018 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.
108
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, 2017 and 2016
(iii) Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
(iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
(v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
(vi) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
(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
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
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)
[Intentionally omitted]
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)
[Intentionally Omitted]
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)
109
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
10.42
10.43
23.1
31.1
31.2
32
101
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
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)
Territorial Bancorp Inc. 2010 Equity Incentive Plan, as amended and restated (9)
Territorial Bancorp Inc. Annual Incentive Plan, as amended (10)
Consent of Moss Adams 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, 2017, filed on March 15, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated
Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of
Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial
Statements.
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) Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-155388), initially filed November 14, 2008.
(2) Incorporated by reference to the Current Report on Form 8-K (file no. 001-34403), filed November 18, 2009.
(3) Incorporated by reference to the Proxy Statement for the 2010 Annual Meeting of Stockholders (file no. 001-34403), filed
July 12, 2010.
(4) Incorporated by reference to the Annual Report on Form 10-K/A (file no. 001-34403), filed March 29, 2011.
(5) Incorporated by reference to the Annual Report on Form 10-Q (file no. 001-34403), filed May 14, 2011.
(6) Incorporated by reference to the Annual Report on Form 10-K (file no. 001-34403), filed March 14, 2012.
(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.
(9) Incorporated by reference to Appendix A to the proxy statement for the Annual Meeting of Shareholders (file No. 001-34403),
filed April 24, 2017.
110
(10) Incorporated by reference to Appendix B to the proxy statement for the Annual Meeting of Stockholders (file No. 001-34403),
filed April 24, 2017.
(c)
Financial Statement Schedules
Not applicable.
ITEM 16.
Form 10-K Summary
Not applicable.
111
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.
SIGNATURES
Date: March 15, 2018
TERRITORIAL BANCORP INC.
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
Date
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
/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
Director
Director
112
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333- 168839, No. 333-170579, and No.
333-218723 on Form S-8 of Territorial Bancorp Inc. of our reports dated March 15, 2018, 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, 2017.
Exhibit 23
/s/ Moss Adams LLP
Portland, Oregon
March 15, 2018
113
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
a)
designed 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;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting
to be 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
c)
our 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
d)
during the 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):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b)
in the registrant’s internal control over financial reporting.
any fraud, whether or not material, that involves management or other employees who have a significant role
Date: March 15, 2018
/s/ Allan S. Kitagawa
Allan S. Kitagawa
Chairman of the Board, President and
Chief Executive Officer
114
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
a)
designed 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;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting
to be 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
c)
our 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
d)
during the 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):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b)
in the registrant’s internal control over financial reporting.
any fraud, whether or not material, that involves management or other employees who have a significant role
Date: March 15, 2018
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer
115
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, 2017 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
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
Senior Vice President and Chief Financial Officer
Date: March 15, 2018
Date: March 15, 2018
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.
116
Kauai Branch
CORPORATE OFFICE
1132 Bishop Street, Suite 2200
Honolulu, Hawaii 96813
Aina Haina Branch
820 W. Hind Drive, Suite 118
Honolulu, Hawaii 96821
Ala Moana Center Branch
Street Level, Mauka
1450 Ala Moana Boulevard, Suite 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, Suite 102
Hilo, Hawaii 96720
Kahala Branch
4819 Kilauea Avenue, Suite 4
Honolulu, Hawaii 96816
Kahului Branch
Kaahumanu Center
275 Kaahumanu Avenue, Suite 1045A
Kahului, Maui, Hawaii 96732
Kailua Branch
19 Oneawa Street
Kailua, Hawaii 96734
Kaimuki Branch
1108 12th Avenue, Suite C
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
46-005 Kawa Street, Suite 102
Kaneohe, Hawaii 96744
Kapahulu Branch
Kilohana Square
1016 Kapahulu Avenue, Suite 130
Honolulu, Hawaii 96816
Kapolei Branch
Ace Center at Kapolei
480 Kamokila Boulevard, Suite 105
Kapolei, Hawaii 96709
Kauai Branch
Kukui Grove Shopping Center
4393 Kukui Grove Street, Suite 103
Lihue, Kauai, Hawaii 96766
Keeaumoku Branch
735 Keeaumoku Street, Suite 108
Honolulu, Hawaii 96814
Kihei Branch
Azeka Shopping Center Mauka
1279 South Kihei Road, Suite 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, Suite 168
Mililani, Hawaii 96789
Nuuanu Branch
Nuuanu Shopping Center
1613 Nuuanu Avenue, Suite A15
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, Suite 107
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
Keeaumoku Branch
Kapahulu Branch
Kahala Branch
H1
Hawaii Kai Branch
Diamond
Head
2017 ANNUAL REPORT