Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period ended March 31, 2015

 

or

 

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

 

For transition period from               to          

 

Commission File Number  1-34403

 

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

 

Maryland

 

26-4674701

(State or Other Jurisdiction of Incorporation)

 

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

 

1132 Bishop Street, Suite 2200, Honolulu, Hawaii

 

96813

(Address of Principal Executive Offices)

 

(Zip Code)

 

(808) 946-1400

Registrant’s telephone number, including area code

 

Not Applicable

(Former name or former address, if changed since last report)

 

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

 

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  x    No o.

 

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

 

Large accelerated filer o

Accelerated filer  x

Non-accelerated filer  o

Smaller reporting company   o

 

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

 

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

 

9,719,600 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of April 30, 2015.

 

 

 



Table of Contents

 

TERRITORIAL BANCORP INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

39

ITEM 4.

CONTROLS AND PROCEDURES

40

 

 

 

PART II

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

41

ITEM 1A.

RISK FACTORS

41

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

41

ITEM 4.

MINE SAFETY DISCLOSURES

42

ITEM 5.

OTHER INFORMATION

42

ITEM 6.

EXHIBITS

42

 

 

SIGNATURES

43

 



Table of Contents

 

PART I

 

ITEM 1.          FINANCIAL STATEMENTS

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

45,774

 

$

75,060

 

Investment securities held to maturity, at amortized cost (fair value of $569,832 and $586,710 at March 31, 2015 and December 31, 2014, respectively)

 

552,461

 

572,922

 

Federal Home Loan Bank stock, at cost

 

11,112

 

11,234

 

Federal Reserve Bank stock, at cost

 

2,949

 

2,925

 

Loans held for sale

 

2,910

 

1,048

 

Loans receivable, net

 

1,038,922

 

968,212

 

Accrued interest receivable

 

4,583

 

4,436

 

Premises and equipment, net

 

5,445

 

5,629

 

Bank-owned life insurance

 

41,558

 

41,303

 

Deferred income taxes receivable

 

7,486

 

7,254

 

Prepaid expenses and other assets

 

2,190

 

1,874

 

 

 

 

 

 

 

Total assets

 

$

1,715,390

 

$

1,691,897

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,381,461

 

$

1,359,679

 

Advances from the Federal Home Loan Bank

 

27,000

 

15,000

 

Securities sold under agreements to repurchase

 

60,000

 

72,000

 

Accounts payable and accrued expenses

 

26,857

 

24,098

 

Investment purchases pending settlement

 

1,166

 

 

Current income taxes payable

 

1,051

 

826

 

Advance payments by borrowers for taxes and insurance

 

2,710

 

3,916

 

 

 

 

 

 

 

Total liabilities

 

1,500,245

 

1,475,519

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value; authorized 50,000,000 shares, no shares issued or outstanding

 

 

 

Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 9,720,959 and 9,919,064 shares at March 31, 2015 and December 31, 2014, respectively

 

97

 

99

 

Additional paid-in capital

 

71,806

 

75,229

 

Unearned ESOP shares

 

(6,728

)

(6,851

)

Retained earnings

 

155,318

 

153,289

 

Accumulated other comprehensive loss

 

(5,348

)

(5,388

)

 

 

 

 

 

 

Total stockholders’ equity

 

215,145

 

216,378

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,715,390

 

$

1,691,897

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)

 

 

 

Three Months Ended
March 31,

 

 

 

2015

 

2014

 

Interest and dividend income:

 

 

 

 

 

Investment securities

 

$

4,523

 

$

5,074

 

Loans

 

10,686

 

9,540

 

Dividends on FHLB stock

 

3

 

3

 

Other investments

 

76

 

40

 

Total interest and dividend income

 

15,288

 

14,657

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

1,134

 

1,091

 

Advances from the Federal Home Loan Bank

 

70

 

66

 

Securities sold under agreements to repurchase

 

312

 

343

 

Total interest expense

 

1,516

 

1,500

 

 

 

 

 

 

 

Net interest income

 

13,772

 

13,157

 

Provision for loan losses

 

194

 

9

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

13,578

 

13,148

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Service fees on loan and deposit accounts

 

460

 

499

 

Income on bank-owned life insurance

 

255

 

268

 

Gain on sale of investment securities

 

236

 

346

 

Gain on sale of loans

 

129

 

79

 

Other

 

166

 

166

 

Total noninterest income

 

1,246

 

1,358

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

5,099

 

5,363

 

Occupancy

 

1,437

 

1,422

 

Equipment

 

945

 

914

 

Federal deposit insurance premiums

 

209

 

199

 

Other general and administrative expenses

 

1,214

 

966

 

Total noninterest expense

 

8,904

 

8,864

 

 

 

 

 

 

 

Income before income taxes

 

5,920

 

5,642

 

Income taxes

 

2,394

 

2,180

 

Net income

 

$

3,526

 

$

3,462

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.38

 

Diluted earnings per share

 

$

0.38

 

$

0.37

 

Cash dividends declared per common share

 

$

0.16

 

$

0.14

 

Basic weighted-average shares outstanding

 

9,120,720

 

9,187,540

 

Diluted weighted-average shares outstanding

 

9,319,814

 

9,380,160

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

3,526

 

$

3,462

 

 

 

 

 

 

 

Change in unrealized loss on securities

 

9

 

3

 

Noncredit related gains on securities not expected to be sold

 

31

 

72

 

Other comprehensive income, net of tax

 

40

 

75

 

 

 

 

 

 

 

Comprehensive income

 

$

3,566

 

$

3,537

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Unearned
ESOP
Shares

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss)/Income

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

$

101

 

$

77,340

 

$

(7,340

)

$

145,826

 

$

(3,787

)

$

212,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,462

 

 

3,462

 

Other comprehensive income

 

 

 

 

 

75

 

75

 

Cash dividends declared ($0.14 per share)

 

 

 

 

(1,329

)

 

(1,329

)

Share-based compensation

 

 

660

 

 

 

 

660

 

Allocation of 12,233 ESOP shares

 

 

151

 

122

 

 

 

273

 

Repurchase of 170,994 shares of company common stock

 

(2

)

(3,885

)

 

 

 

(3,887

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2014

 

$

99

 

$

74,266

 

$

(7,218

)

$

147,959

 

$

(3,712

)

$

211,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

$

99

 

$

75,229

 

$

(6,851

)

$

153,289

 

$

(5,388

)

$

216,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,526

 

 

3,526

 

Other comprehensive income

 

 

 

 

 

40

 

40

 

Cash dividends declared ($0.16 per share)

 

 

 

 

(1,497

)

 

(1,497

)

Share-based compensation

 

 

738

 

 

 

 

738

 

Allocation of 12,233 ESOP shares

 

 

145

 

123

 

 

 

268

 

Repurchase of 198,105 shares of company common stock

 

(2

)

(4,306

)

 

 

 

(4,308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2015

 

$

97

 

$

71,806

 

$

(6,728

)

$

155,318

 

$

(5,348

)

$

215,145

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,526

 

$

3,462

 

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

 

 

 

 

 

Provision for loan losses

 

194

 

9

 

Depreciation and amortization

 

339

 

328

 

Deferred income tax benefit

 

(258

)

(707

)

Amortization of fees, discounts, and premiums

 

(73

)

(106

)

Origination of loans held for sale

 

(15,324

)

(8,590

)

Proceeds from sales of loans held for sale

 

13,335

 

9,862

 

Gain on sale of loans, net

 

(129

)

(79

)

Purchases of investment securities held for trading

 

 

(5,041

)

Proceeds from sale of investment securities held for trading

 

 

5,071

 

Gain on sale of investment securities held for trading

 

 

(30

)

Gain on sale of investment securities held to maturity

 

(236

)

(316

)

ESOP expense

 

268

 

273

 

Share-based compensation expense

 

738

 

660

 

Increase in accrued interest receivable

 

(147

)

(109

)

Net increase in bank-owned life insurance

 

(255

)

(267

)

Net increase in prepaid expenses and other assets

 

(316

)

(325

)

Net increase (decrease) in accounts payable and accrued expenses

 

3,125

 

(2,326

)

Net decrease in advance payments by borrowers for taxes and insurance

 

(1,206

)

(1,291

)

Net increase (decrease) in income taxes payable

 

225

 

(608

)

Net cash from operating activities

 

3,806

 

(130

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities held to maturity

 

(1,204

)

(27,926

)

Principal repayments on investment securities held to maturity

 

20,510

 

14,419

 

Proceeds from sale of investment securities held to maturity

 

2,580

 

3,724

 

Loan originations, net of principal repayments on loans receivable

 

(70,532

)

(15,943

)

Proceeds from redemption of Federal Home Loan Bank stock

 

122

 

110

 

Purchases of Federal Reserve Bank stock

 

(24

)

 

Purchases of premises and equipment

 

(155

)

(330

)

Net cash from investing activities

 

(48,703

)

(25,946

)

 

(Continued)

 

5



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

$

21,782

 

$

28,599

 

Proceeds from advances from the Federal Home Loan Bank

 

22,000

 

 

Repayments of advances from the Federal Home Loan Bank

 

(10,000

)

 

Proceeds from securities sold under agreements to repurchase

 

25,000

 

 

Repayments of securities sold under agreements to repurchase

 

(37,000

)

 

Repurchases of common stock

 

(4,674

)

(4,412

)

Cash dividends paid

 

(1,497

)

(1,329

)

Net cash from financing activities

 

15,611

 

22,858

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(29,286

)

(3,218

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

75,060

 

75,365

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

45,774

 

$

72,147

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

1,532

 

$

1,467

 

Income taxes

 

2,350

 

3,495

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Investments purchased, not yet settled

 

$

1,166

 

 

Company stock repurchased, not yet settled

 

366

 

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                     Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Territorial Bancorp Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  These interim condensed consolidated financial statements and notes should be read in conjunction with Territorial Bancorp Inc.’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2014.  In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.

 

(2)                     Organization

 

On November 4, 2008, the Board of Directors of Territorial Mutual Holding Company (MHC) approved a plan of conversion and reorganization under which MHC would convert from a mutual holding company to a stock holding company.  The conversion to a stock holding company was approved by the depositors and borrowers of Territorial Savings Bank and the Office of Thrift Supervision (OTS) and included the filing of a registration statement with the U.S. Securities and Exchange Commission.  Upon the completion of the conversion and reorganization on July 10, 2009, Territorial Mutual Holding Company and Territorial Savings Group, Inc. ceased to exist as separate legal entities and Territorial Bancorp Inc. became the holding company for Territorial Savings Bank.

 

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, 2014 was $15.2 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.

 

(3)                     Recently Adopted Accounting Pronouncements

 

In January 2014, the Financial Accounting Standards Board (FASB) amended the Receivables topic of the FASB Accounting Standards Codification (ASC).  The amendment clarifies when an in substance repossession or foreclosure occurs and when a mortgage loan should be derecognized and the related real property recognized.  The amendment also requires disclosures about the amount of foreclosed residential real property held and the recorded investment in mortgage loans collateralized by residential real property in the process of foreclosure.  The amendment was effective for interim and annual periods beginning after December 15, 2014.  The Company adopted this amendment on January 1, 2015, and the adoption did not have a material effect on its consolidated financial statements.

 

7



Table of Contents

 

In May 2014, the FASB amended the Revenue Recognition topic of the FASB ASC.  The amendment seeks to clarify the principles for recognizing revenue as well as to develop common revenue standards for U.S. generally accepted accounting principles and International Financial Reporting Standards.  The amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

In June 2014, the FASB amended the Transfers and Servicing topic of the FASB ASC.  The amendment modifies the accounting for certain types of repurchase transactions as well as adds new disclosure requirements for repurchase transactions.  The amendment was effective for interim and annual periods beginning after December 15, 2014, with early adoption prohibited.  The Company adopted this amendment on January 1, 2015, and the adoption did not have a material effect on its consolidated financial statements.  See Footnote 8, Securities Sold Under Agreements to Repurchase.

 

In August 2014, the FASB amended the Receivables topic of the FASB ASC.  The amendment seeks to clarify the classification of foreclosed mortgage loans that are either fully or partially guaranteed under government programs, such as from the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).  The amendment was effective for interim and annual periods beginning after December 15, 2014.  The Company adopted this amendment on January 1, 2015, and the adoption did not have any effect on its consolidated financial statements.

 

In April 2015, the FASB amended the Intangibles — Goodwill and Other topic of the FASB ASC.  The amendment adds guidance to help entities evaluate the accounting for fees paid in cloud computing arrangements.  The amendment is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.

 

(4)                     Cash and Cash Equivalents

 

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

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Cash and due from banks

 

$

10,388

 

$

10,803

 

Interest-earning deposits in other banks

 

35,386

 

64,257

 

Cash and cash equivalents

 

$

45,774

 

$

75,060

 

 

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

 

8



Table of Contents

 

(5)                     Investment Securities

 

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

 

 

 

Amortized

 

Gross Unrealized

 

Estimated

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

551,720

 

$

19,718

 

$

(2,347

)

$

569,091

 

Trust preferred securities

 

741

 

 

 

741

 

Total

 

$

552,461

 

$

19,718

 

$

(2,347

)

$

569,832

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored mortgage-backed securities

 

$

572,232

 

$

18,078

 

$

(4,290

)

$

586,020

 

Trust preferred securities

 

690

 

 

 

690

 

Total

 

$

572,922

 

$

18,078

 

$

(4,290

)

$

586,710

 

 

The amortized cost and estimated fair value of investment securities at March 31, 2015 are shown below. Incorporated in the maturity schedule are mortgage-backed and trust preferred securities, which are allocated using the contractual maturity as a basis.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized

 

Estimated

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Held to maturity:

 

 

 

 

 

Due within 5 years

 

$

46

 

$

48

 

Due after 5 years through 10 years

 

9

 

10

 

Due after 10 years

 

552,406

 

569,774

 

Total

 

$

552,461

 

$

569,832

 

 

Realized gains and losses and the proceeds from sales of securities held to maturity and trading are shown in the table below.  All sales of securities were U.S. government-sponsored mortgage-backed securities.

 

 

 

For the Three Months Ended
March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Proceeds from sales

 

$

2,580

 

$

8,795

 

Gross gains

 

236

 

346

 

Gross losses

 

 

 

 

9



Table of Contents

 

During the three months ended March 31, 2015, the Company received proceeds of $2.6 million from the sale of $2.3 million of held-to-maturity debt securities, resulting in gross realized gains of $236,000.  During the three months ended March 31, 2014, the Company received proceeds of $3.7 million from the sale of $3.4 million of held-to-maturity debt securities, resulting in gross realized gains of $316,000.  The sale of these securities, for which the Company had already collected 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.

 

Investment securities with amortized costs of $264.0 million and $270.2 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and transaction clearing accounts.

 

Provided below is a summary of investment securities which were in an unrealized loss position at March 31, 2015 and December 31, 2014.  The Company does not intend to sell these securities until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

Number of

 

 

 

Unrealized

 

Description of Securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

120,990

 

$

1,030

 

$

57,955

 

$

1,317

 

33

 

$

178,945

 

$

2,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

12,717

 

$

65

 

$

183,349

 

$

4,225

 

37

 

$

196,066

 

$

4,290

 

 

Mortgage-Backed Securities.  The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates.  All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency.  Since the decline in market value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell these investments until maturity and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of March 31, 2015 and December 31, 2014.

 

In March 2015, the Company purchased a $1.2 million Ginnie Mae mortgage-backed security for settlement in April 2015.  This security purchase was recorded on the trade date at the expected settlement amount.

 

Trust Preferred Securities.  At March 31, 2015, the Company owns two trust preferred securities, PreTSL XXIII and XXIV. 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.  Both of these securities are classified in the Company’s held-to-maturity investment portfolio.

 

The trust preferred securities market is considered to be inactive as only five transactions have occurred over the past 39 months in the same tranche of securities owned by the Company.  The Company used a discounted cash flow model to determine whether these securities are

 

10



Table of Contents

 

other-than-temporarily impaired.  The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates, estimated deferral and default rates on collateral, and estimated cash flows.

 

Based on the Company’s review, the Company’s investment in trust preferred securities did not incur additional impairment during the quarter ending March 31, 2015.

 

PreTSL XXIV has an amortized cost of $0 at March 31, 2015.  PreTSL XXIII has an amortized cost of $741,000 at March 31, 2015.  The difference between the amortized cost of $741,000 and the remaining cost basis of $1.1 million is reported as other comprehensive loss and is related to noncredit factors.

 

It is reasonably possible that the fair values of the trust preferred securities could decline in the near term if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low.  As a result, there is a risk that the Company’s remaining cost basis of $1.1 million on its trust preferred securities could be credit-related other-than-temporarily impaired in the near term.  The impairment could be material to the Company’s consolidated statements of income.

 

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)

 

2015

 

2014

 

Balance at January 1,

 

$

5,885

 

$

5,885

 

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

 

 

Balance at March 31,

 

$

5,885

 

$

5,885

 

 

The table below shows the components of comprehensive loss, net of taxes, resulting from other-than-temporarily impaired securities:

 

 

 

March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Noncredit losses on other-than-temporarily impaired securities, net of taxes

 

$

253

 

$

304

 

 

11



Table of Contents

 

(6)                     Loans Receivable and Allowance for Loan Losses

 

The components of loans receivable are as follows:

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Real estate loans:

 

 

 

 

 

First mortgages:

 

 

 

 

 

One- to four-family residential

 

$

995,241

 

$

926,074

 

Multi-family residential

 

9,826

 

8,920

 

Construction, commercial, and other

 

19,092

 

18,415

 

Home equity loans and lines of credit

 

16,225

 

15,992

 

Total real estate loans

 

1,040,384

 

969,401

 

Other loans:

 

 

 

 

 

Loans on deposit accounts

 

245

 

441

 

Consumer and other loans

 

4,166

 

4,173

 

Total other loans

 

4,411

 

4,614

 

Less:

 

 

 

 

 

Net unearned fees and discounts

 

(4,001

)

(4,112

)

Allowance for loan losses

 

(1,872

)

(1,691

)

Total unearned fees, discounts and allowance for loan losses

 

(5,873

)

(5,803

)

Loans receivable, net

 

$

1,038,922

 

$

968,212

 

 

12



Table of Contents

 

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

 

(Dollars in thousands)

 

Residential

Mortgage

 

Construction,
Commercial
and Other
Mortgage
Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

Three months ended March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

413

 

$

977

 

$

5

 

$

263

 

$

33

 

$

1,691

 

Provision (reversal of allowance) for loan losses

 

698

 

(435

)

(2

)

(99

)

32

 

194

 

 

 

1,111

 

542

 

3

 

164

 

65

 

1,885

 

Charge-offs

 

 

 

 

(19

)

 

(19

)

Recoveries

 

 

1

 

1

 

4

 

 

6

 

Net charge-offs

 

 

1

 

1

 

(15

)

 

(13

)

Balance, end of period

 

$

1,111

 

$

543

 

$

4

 

$

149

 

$

65

 

$

1,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

376

 

$

799

 

$

10

 

$

229

 

$

72

 

$

1,486

 

Provision (reversal of allowance) for loan losses

 

58

 

24

 

(4

)

(65

)

(4

)

9

 

 

 

434

 

823

 

6

 

164

 

68

 

1,495

 

Charge-offs

 

 

 

 

(17

)

 

(17

)

Recoveries

 

 

 

1

 

6

 

 

7

 

Net charge-offs

 

 

 

1

 

(11

)

 

(10

)

Balance, end of period

 

$

434

 

$

823

 

$

7

 

$

153

 

$

68

 

$

1,485

 

 

During the three months ended March 31, 2015, the Company increased the loan loss provisions for residential mortgage loans based on the growth of this segment of the loan portfolio and the concentration of loans in Hawaii.  The Company also reduced the loan loss provisions on construction, commercial and other mortgage loans and consumer and other loans based on a continued limited loss experience.  The allocation of a portion of the allowance from one category of loans does not preclude its availability to absorb losses in other loan categories.

 

Management considers the allowance for loan losses at March 31, 2015 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date.  While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings.  In addition, as an integral part of their examination process, the bank regulators and the Hawaii Department of Financial Institutions 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.

 

13



Table of Contents

 

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)

 

Residential
Mortgage

 

Construction,
Commercial
and Other

Mortgage

Loans

 

Home
Equity
Loans and
Lines of
Credit

 

Consumer
and Other

 

Unallocated

 

Totals

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,111

 

543

 

4

 

149

 

65

 

1,872

 

Total ending allowance balance

 

$

1,111

 

$

543

 

$

4

 

$

149

 

$

65

 

$

1,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,179

 

$

 

$

132

 

$

 

$

 

$

6,311

 

Collectively evaluated for impairment

 

994,906

 

19,063

 

16,099

 

4,415

 

 

1,034,483

 

Total ending loan balance

 

$

1,001,085

 

$

19,063

 

$

16,231

 

$

4,415

 

$

 

$

1,040,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

413

 

977

 

5

 

263

 

33

 

1,691

 

Total ending allowance balance

 

$

413

 

$

977

 

$

5

 

$

263

 

$

33

 

$

1,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,158

 

$

 

$

296

 

$

4

 

$

 

$

6,458

 

Collectively evaluated for impairment

 

924,732

 

18,399

 

15,702

 

4,612

 

 

963,445

 

Total ending loan balance

 

$

930,890

 

$

18,399

 

$

15,998

 

$

4,616

 

$

 

$

969,903

 

 

14



Table of Contents

 

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

 

(Dollars in thousands)

 

Recorded
Investment

 

Unpaid
Principal

Balance

 

March 31, 2015:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,179

 

$

6,845

 

Home equity loans and lines of credit

 

132

 

162

 

Total

 

$

6,311

 

$

7,007

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,158

 

$

6,775

 

Home equity loans and lines of credit

 

296

 

324

 

Consumer and other

 

4

 

4

 

Total

 

$

6,458

 

$

7,103

 

 

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

 

 

 

For the Three Months Ended
March 31,

 

(Dollars in thousands)

 

Average
Recorded

Investment

 

Interest

Income
Recognized

 

2015:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

6,216

 

$

30

 

Home equity loans and lines of credit

 

134

 

 

Total

 

$

6,350

 

$

30

 

 

 

 

 

 

 

2014:

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

One- to four-family residential mortgages

 

$

7,248

 

$

32

 

Home equity loans and lines of credit

 

158

 

 

Total

 

$

7,406

 

$

32

 

 

There were no loans individually evaluated for impairment with a related allowance for loan loss as of March 31, 2015 or December 31, 2014.  Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value.

 

15



Table of Contents

 

The table below presents the aging of loans and accrual status by class of loans:

 

(Dollars in thousands)

 

30 — 59
Days Past
Due

 

60 — 89
Days Past
Due

 

90 Days or
Greater
Past Due

 

Total Past
Due

 

Loans Not
Past Due

 

Total
Loans

 

Nonaccrual
Loans

 

Loans
More
Than 90
Days Past
Due and
Still
Accruing

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

894

 

$

580

 

$

842

 

$

2,316

 

$

988,974

 

$

991,290

 

$

4,183

 

$

 

Multi-family residential mortgages

 

 

 

 

 

9,795

 

9,795

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

19,063

 

19,063

 

 

 

Home equity loans and lines of credit

 

83

 

 

 

83

 

16,148

 

16,231

 

132

 

 

Loans on deposit accounts

 

 

 

 

 

245

 

245

 

 

 

Consumer and other

 

2

 

 

 

2

 

4,168

 

4,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

979

 

$

580

 

$

842

 

$

2,401

 

$

1,038,393

 

$

1,040,794

 

$

4,315

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgages

 

$

1,040

 

$

736

 

$

593

 

$

2,369

 

$

919,624

 

$

921,993

 

$

4,153

 

$

 

Multi-family residential mortgages

 

 

 

 

 

8,897

 

8,897

 

 

 

Construction, commercial and other mortgages

 

 

 

 

 

18,399

 

18,399

 

 

 

Home equity loans and lines of credit

 

 

 

161

 

161

 

15,837

 

15,998

 

296

 

 

Loans on deposit accounts

 

 

 

 

 

440

 

440

 

 

 

Consumer and other

 

7

 

1

 

4

 

12

 

4,164

 

4,176

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,047

 

$

737

 

$

758

 

$

2,542

 

$

967,361

 

$

969,903

 

$

4,453

 

$

 

 

The Company primarily uses the aging of loans and accrual status to monitor the credit quality of its loan portfolio.  When a mortgage loan becomes seriously delinquent (90 days or more contractually past due), it displays weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent.  A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments.  Generally, appraisals are obtained after a loan becomes collateral-dependent or is five months delinquent.  The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs.  Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.

 

The Company had 17 nonaccrual loans with a book value of $4.3 million at March 31, 2015 and 18 nonaccrual loans with a book value of $4.5 million as of December 31, 2014.  The Company collected interest on nonaccrual loans of $50,000 and $52,000 during the three months ended March 31, 2015 and 2014, respectively, but due to regulatory requirements, the Company recorded the interest as a reduction

 

16



Table of Contents

 

of principal.  The Company would have recognized additional interest income of $66,000 and $70,000 during the three months ended March 31, 2015 and 2014, 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 March 31, 2015 or December 31, 2014.

 

There were no loans modified in a troubled debt restructuring during the three months ended March 31, 2015 or 2014. There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.

 

The Company had 17 troubled debt restructurings totaling $4.5 million as of March 31, 2015 that were considered to be impaired.  This total included 16 one- to four-family residential mortgage loans totaling $4.4 million and one home equity loan for $132,000.  Six of the loans, totaling $2.0 million, were performing in accordance with their restructured terms and accruing interest at March 31, 2015.  Nine of the loans, totaling $2.2 million, were performing in accordance with their restructured terms but not accruing interest at March 31, 2015.  Two of the loans, totaling $342,000, are delinquent and not accruing interest at March 31, 2015.  The Company had 17 troubled debt restructurings totaling $4.6 million as of December 31, 2014 that were considered to be impaired.  This total included 16 one- to four-family residential mortgage loans totaling $4.4 million and one home equity loan for $135,000.  Six of the loans, totaling $2.0 million, were performing in accordance with their restructured terms and accruing interest at December 31, 2014.  Nine of the loans, totaling $2.2 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2014.  Two of the loans, totaling $343,000, are delinquent and not accruing interest at December 31, 2014.  Restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to the financial difficulties of the borrowers.  We have no commitments to lend any additional funds to these borrowers.

 

The Company had no real estate owned as of March 31, 2015 and 2014.  There were three one- to four-family residential mortgage loans totaling $691,000 in process of foreclosure as of March 31, 2015, and three one- to four-family residential mortgage loans totaling $1.0 million in process of foreclosure as of March 31, 2014.

 

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

 

During the three months ended March 31, 2015 and 2014, the Company sold $13.3 million and $9.9 million, respectively, of mortgage loans held for sale and recognized gains of $129,000 and $79,000, respectively.  The Company had nine loans held for sale totaling $2.9 million at March 31, 2015 and six loans held for sale totaling $1.0 million at December 31, 2014.

 

The Company serviced loans for others of $59.0 million at March 31, 2015 and $60.5 million at December 31, 2014. Of these amounts, $2.9 million and $3.0 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at March 31, 2015 and December 31, 2014, respectively.  The amount of contractually specified servicing fees earned for the three-month periods ended March 31, 2015 and 2014 was $41,000 and $47,000, respectively.  The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.

 

17



Table of Contents

 

(7)                     Advances from the Federal Home Loan Bank

 

The FHLB advances are secured by a blanket pledge on the Bank’s assets not otherwise pledged. At March 31, 2015 and 2014, the Company had available additional unused FHLB advances of approximately $396.0 million and $389.2 million, respectively.

 

Advances outstanding consisted of the following:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

(Dollars in thousands)

 

Amount

 

Rate

 

Amount

 

Rate

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

 

—%

 

$

10,000

 

2.06%

 

Due over 3 years to 4 years

 

27,000

 

1.57

 

5,000

 

1.20

 

Total

 

$

27,000

 

1.57%

 

$

15,000

 

1.77%

 

 

(8)                                 Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the dollar amount of securities underlying the agreements remaining in the asset accounts.  Securities sold under agreements to repurchase are summarized as follows:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Repurchase

 

Average

 

Repurchase

 

Average

 

(Dollars in thousands)

 

Liability

 

Rate

 

Liability

 

Rate

 

Maturing:

 

 

 

 

 

 

 

 

 

1 year or less

 

$

10,000

 

1.94%

 

$

47,000

 

2.11%

 

Over 2 years to 3 years

 

25,000

 

1.46

 

25,000

 

1.46

 

Over 3 years to 4 years

 

20,000

 

1.66

 

 

 

Over 4 years to 5 years

 

5,000

 

1.65

 

 

 

Total

 

$

60,000

 

1.62%

 

$

72,000

 

1.88%

 

 

18



Table of Contents

 

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 March 31, 2015.  The amount at risk is the greater of the carrying value or fair value over the repurchase liability.  All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government-sponsored enterprises.  The repurchase liability cannot exceed 90% of the fair value of securities pledged.  In the event of a decline in the fair value of securities pledged to less than the required amount due to market conditions or principal repayments, the Company is obligated to pledge additional securities or other suitable collateral to cure the deficiency.

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Carrying

 

Fair

 

 

 

 

 

Average

 

 

 

Value of

 

Value of

 

Repurchase

 

Amount

 

Months to

 

(Dollars in thousands)

 

Securities

 

Securities

 

Liability

 

at Risk

 

Maturity

 

Maturing:

 

 

 

 

 

 

 

 

 

 

 

Over 90 days

 

$

76,542

 

$

78,232

 

$

60,000

 

$

18,232

 

34

 

 

(9)                                 Offsetting of Financial Liabilities

 

Securities sold under agreements to repurchase are subject to a conditional right of offset in the event of default.  See Footnote 8, Securities Sold Under Agreements to Repurchase, for additional information.

 

 

 

Gross Amount

 

Gross Amount

 

Net Amount of
Liabilities

 

Gross Amount Not Offset in the
Balance Sheet

 

 

 

(Dollars in thousands)

 

of Recognized
Liabilities

 

Offset in the
Balance Sheet

 

Presented in the
Balance Sheet

 

Financial
Instruments

 

Cash Collateral
Pledged

 

Net Amount

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

60,000

 

$

 

$

60,000

 

$

60,000

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

72,000

 

$

 

$

72,000

 

$

72,000

 

$

 

$

 

 

(10)                          Employee Benefit Plans

 

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

 

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

 

19



Table of Contents

 

The components of net periodic benefit cost were as follows:

 

 

 

SERP

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2015

 

2014

 

Net periodic benefit cost for the period

 

 

 

 

 

Service cost

 

$

21

 

$

25

 

Interest cost

 

31

 

30

 

Expected return on plan assets

 

 

 

Amortization of prior service cost

 

 

 

Recognized actuarial loss

 

 

 

Recognized curtailment loss

 

 

 

Net periodic benefit cost

 

$

52

 

$

55

 

 

(11)                          Employee Stock Ownership Plan

 

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

 

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

 

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company.  The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants.  As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity.  The shares committed to be released are considered outstanding for earnings per share computations.  Compensation expense recognized for the three months ended March 31, 2015 and 2014 amounted to $222,000 and $240,000, respectively.

 

Shares held by the ESOP trust were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Allocated shares

 

295,614

 

283,381

 

Unearned shares

 

672,824

 

685,057

 

Total ESOP shares

 

968,438

 

968,438

 

Fair value of unearned shares, in thousands

 

$

15,986

 

$

14,763

 

 

20



Table of Contents

 

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the employee stock ownership plan’s benefit formula.  The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans.  We accrue for these benefits over the period during which employees provide services to earn these benefits.  For the three months ended March 31, 2015 and 2014, we accrued $64,000 and $74,000, respectively, for the ESOP restoration plan.

 

(12)                          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 is being recognized on a straight-line basis over the 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 shareholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:

 

 

 

For the Three Months Ended
March 31,

 

(In thousands)

 

2015

 

2014

 

Compensation expense

 

$

660

 

$

660

 

Income tax benefit

 

265

 

313

 

 

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized but unissued shares. The maximum number of shares that will be awarded under the plan will be 1,712,637 shares.

 

21



Table of Contents

 

Stock Options

 

The table below presents the stock option activity for the three months ended March 31, 2015 and 2014:

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Remaining<