weaknesses that may result in a loss. As a loan becomes more delinquent, the likelihood of the borrower repaying the loan decreases and the loan becomes more collateral-dependent. A mortgage loan becomes collateral-dependent when the proceeds for repayment can be expected to come only from the sale or operation of the collateral and not from borrower repayments. Generally, appraisals are obtained after a loan becomes collateral-dependent or is four months delinquent. The carrying value of collateral-dependent loans is adjusted to the fair value of the collateral less selling costs. Any commercial real estate, commercial, construction or equity loan that has a loan balance in excess of a specified amount is also periodically reviewed to determine whether the loan exhibits any weaknesses and is performing in accordance with its contractual terms.
The Company had 22 nonaccrual loans with a book value of $5.2 million at March 31, 2016 and 23 nonaccrual loans with a book value of $5.4 million as of December 31, 2015. The Company collected interest on nonaccrual loans of $57,000 and $50,000 during the three months ended March 31, 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 $69,000 and $66,000 during the three months ended March 31, 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 March 31, 2016 and December 31, 2015.
There were no loans modified in a troubled debt restructuring during the three months ended March 31, 2016 or 2015. There were no new troubled debt restructurings within the past 12 months that subsequently defaulted.
The Company had 15 troubled debt restructurings totaling $3.4 million as of March 31, 2016 that were considered to be impaired. This total included 14 one- to four-family residential mortgage loans totaling $3.2 million and one home equity loan for $118,000. Five of the loans, totaling $1.2 million, are performing in accordance with their restructured terms and accruing interest at March 31, 2016. Nine of the loans, totaling $2.0 million, are performing in accordance with their restructured terms but not accruing interest at March 31, 2016. One of the loans, for $149,000, was more than 149 days delinquent and not accruing interest as of March 31, 2016. The Company had 15 troubled debt restructurings totaling $3.4 million as of December 31, 2015 that were considered to be impaired. This total included 14 one- to four-family residential mortgage loans totaling $3.3 million and one home equity loan for $120,000. Four of the loans, totaling $885,000, were performing in accordance with their restructured terms and accruing interest at December 31, 2015. Nine of the loans, totaling $2.0 million, were performing in accordance with their restructured terms but not accruing interest at December 31, 2015. One of the loans, for $318,000, was 59 days delinquent and accruing interest at December 31, 2015. One of the loans, for $149,000, was more than 149 days delinquent and not accruing interest as of December 31, 2015. 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 March 31, 2016, we had no commitments to lend any additional funds to these borrowers.
The Company had no real estate owned as of March 31, 2016 and 2015. There were three one- to four-family residential mortgage loans totaling $648,000 in the process of foreclosure as of March 31, 2016, and three one- to four-family residential mortgage loans totaling $691,000 in the process of foreclosure as of March 31, 2015.
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, 2016 and 2015, the Company sold $10.9 million and $13.3 million, respectively, of mortgage loans held for sale and recognized gains of $61,000 and $129,000, respectively. The Company had two loans held for sale totaling $603,000 at March 31, 2016 and six loans held for sale totaling $2.1 million at December 31, 2015.
The Company serviced loans for others of $49.1 million at March 31, 2016 and $51.8 million at December 31, 2015. Of these amounts, $2.8 million relate to securitizations for which the Company continues to hold the related mortgage-backed securities at March 31, 2016 and December 31, 2015. The amount of contractually specified servicing fees earned for the three-month periods ended March 31, 2016 and 2015 was $34,000 and $41,000, respectively. The fees are reported in service fees on loan and deposit accounts in the consolidated statements of income.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSI
S OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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·
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estimates of our risks and future costs and benefits.
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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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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general economic conditions, either internationally, nationally or in our market areas, that are worse than expected;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
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adverse changes in the securities markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate acquired entities, if any;
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changes in consumer spending, borrowing and savings habits;
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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;
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changes in our organization, compensation and benefit plans;
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changes in our financial condition or results of operations that reduce capital available to pay dividends; and
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changes in the financial condition or future prospects of issuers of securities that we own.
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Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Overview
We have historically operated as a traditional thrift institution. The significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit accounts, securities sold under agreements to repurchase and Federal Home Loan Bank advances. This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.
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 totaled $5.2 million, or 0.28% of total assets at March 31, 2016, compared to $5.4 million, or 0.30% of total assets at December 31, 2015. As of March 31, 2016, nonperforming assets consisted primarily of 21 mortgage loans totaling $5.2 million. Our nonperforming loans and loss experience has enabled us to maintain a relatively low allowance for loan losses in relation to other peer institutions and correspondingly resulted in low levels of provisions for loan losses. Our provisions for loan losses were $28,000 and $194,000 for the three months ended March 31, 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. We sold $10.9 million and $13.3 million of fixed-rate mortgage loans for the three months ended March 31, 2016 and 2015, respectively. Long-term, fixed-rate borrowings remained constant for the three months ended March 31, 2016 and 2015.
Our 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 our mortgage-backed securities. We do not own any preferred stock issued by Fannie Mae or Freddie Mac. As of March 31, 2016, our borrowing capacity at the Federal Home Loan Bank was $568.4 million compared to $555.1 million at December 31, 2015.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in Territorial Bancorp Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.
Comparison of Financial Condition at March 31, 2016 and December 31, 2015
Assets.
At March 31, 2016, our assets were $1.850 billion, an increase of $28.9 million, or 1.6%, from $1.821 billion at December 31, 2015. The increase in assets was primarily the result of a $24.6 million increase in loans receivable and loans held for sale and a $16.1 million increase in cash, which were partially offset by a $12.8 million decrease in investment securities.
Cash and Cash Equivalents.
Cash and cash equivalents were $82.0 million at March 31, 2016, an increase of $16.1 million since December 31, 2015. The increase in cash and cash equivalents was primarily caused by a $29.8 million increase in deposits, $12.8 million of principal repayments on investment securities and $3.8 million of net income.
These increases in cash and cash equivalents were partially offset by funding a $24.6 million increase in total loans and the payment of $1.6 million of common stock dividends.
Loans.
Total loans, including $603,000 of loans held for sale, were $1.215 billion at March 31, 2016, or 65.7% of total assets. During the three months ended March 31, 2016, the loan portfolio, including loans held for sale, increased by $24.6 million, or 2.1%. The increase in the loan portfolio primarily occurred as the production of new one- to four-family residential loans exceeded principal repayments and loan sales.
Securities.
At March 31, 2016, our securities portfolio totaled $480.3 million, or 26.0% of total assets.
During the three months ended
March 31, 2016
, the securities portfolio decreased by $12.8 million, or 2.6%. The decrease in the securities portfolio occurred as repayments exceeded the amount of securities purchased.
At March 31, 2016, all of such securities were classified as held-to-maturity and
none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.
At March 31, 2016, we owned a trust preferred security with an amortized cost of $919,000. This security represents an investment in a pool of debt obligations primarily issued 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 51 months in the same tranche of securities that we own and no new issues of pooled trust preferred securities have occurred since 2007. We use 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%.
Based on the Company’s review, the Company’s investment in the trust preferred security did not incur additional impairment during the three months ended March 31, 2016.
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 continue to deteriorate and the liquidity of this security remains low. As a result, there is a risk that the Company’s remaining cost basis of $1.1 million on its trust preferred security could be credit-related other-than-temporarily impaired in the near term. The impairment, if any, could be material to the Company’s consolidated statements of income.
Deposits.
Deposits were $1.475 billion at March 31, 2016, an increase of $29.8 million, or 2.1%, since December 31, 2015. The growth in deposits was primarily due to an increase of $10.6 million in savings accounts and a $19.5 million increase in certificates of deposit during the three months ended March 31, 2016.
Borrowings.
O
ur borrowings consist of advances from the Federal Home Loan Bank and funds borrowed under securities sold under agreements to repurchase. During the three months ended
March 31, 2016
, total borrowings remained constant at $124.0 million. We have not required any other borrowings to fund our operations. Instead, we have primarily funded our operations with additional deposits, proceeds from loan sales and principal repayments on loans and mortgage-backed securities.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. 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.
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For the Three Months Ended March 31,
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2016
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2015
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Average
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Average
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Outstanding
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Yield/Rate
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Outstanding
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Yield/Rate
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Balance
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Interest
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(1)
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Balance
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Interest
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(1)
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(Dollars in thousands)
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Interest-earning assets:
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Loans:
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Real estate loans:
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First mortgage:
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One- to four-family residential (2)
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$
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1,155,225
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$
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11,780
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4.08
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%
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$
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952,157
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$
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10,100
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4.24
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%
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Multi-family residential
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9,788
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|
|
115
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4.70
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9,170
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|
112
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|
4.89
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Construction, commercial and other
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20,737
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242
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4.67
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19,351
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224
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|
4.63
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Home equity loans and lines of credit
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15,516
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164
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4.23
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15,910
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191
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|
4.80
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Other loans
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4,531
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60
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5.30
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4,399
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59
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5.36
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Total loans
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1,205,797
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12,361
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4.10
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1,000,987
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10,686
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4.27
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Investment securities:
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U.S. government sponsored mortgage-backed securities (2)
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486,328
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3,875
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3.19
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563,322
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4,523
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3.21
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Trust preferred securities
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916
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—
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—
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690
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—
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—
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Total securities
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487,244
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3,875
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3.18
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564,012
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4,523
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3.21
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Other
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73,212
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|
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144
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0.79
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74,328
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79
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0.43
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Total interest-earning assets
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1,766,253
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16,380
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3.71
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1,639,327
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15,288
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3.73
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Non-interest-earning assets
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68,508
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66,686
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Total assets
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$
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1,834,761
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$
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1,706,013
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Interest-bearing liabilities:
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Savings accounts
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$
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1,009,039
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|
|
1,024
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0.41
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%
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$
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953,528
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|
866
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|
0.36
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%
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Certificates of deposit
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230,440
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|
|
373
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|
0.65
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222,194
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|
|
260
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|
0.47
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Money market accounts
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1,748
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|
|
2
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|
0.46
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|
|
836
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|
|
—
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|
—
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Checking and Super NOW accounts
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166,925
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|
|
9
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|
0.02
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|
|
149,140
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|
|
8
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|
0.02
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Total interest-bearing deposits
|
|
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1,408,152
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|
|
1,408
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|
0.40
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|
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1,325,698
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|
|
1,134
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|
0.34
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|
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Federal Home Loan Bank advances
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|
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69,000
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|
|
257
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|
1.49
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|
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18,467
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|
|
70
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|
1.52
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Securities sold under agreements to repurchase
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55,000
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|
|
218
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|
1.59
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|
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69,944
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|
|
312
|
|
1.78
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Total interest-bearing liabilities
|
|
|
1,532,152
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|
|
1,883
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|
0.49
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|
|
1,414,109
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|
|
1,516
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|
0.43
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Non-interest-bearing liabilities
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|
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80,055
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|
|
|
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74,944
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|
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Total liabilities
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1,612,207
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|
|
|
|
1,489,053
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Stockholders’ equity
|
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222,554
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|
|
|
|
|
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|
216,960
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|
|
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Total liabilities and stockholders’ equity
|
|
$
|
1,834,761
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|
|
|
|
|
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$
|
1,706,013
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Net interest income
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|
|
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$
|
14,497
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|
|
|
|
|
|
$
|
13,772
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|
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Net interest rate spread (3)
|
|
|
|
|
|
|
|
3.22
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%
|
|
|
|
|
|
|
3.30
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%
|
|
Net interest-earning assets (4)
|
|
$
|
234,101
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|
|
|
|
|
|
$
|
225,218
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|
|
|
|
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|
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Net interest margin (5)
|
|
|
|
|
|
|
|
3.28
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%
|
|
|
|
|
|
|
3.36
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%
|
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Interest-earning assets to interest-bearing liabilities
|
|
|
115.28
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%
|
|
|
|
|
|
|
115.93
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%
|
|
|
|
|
|
|
|
(2)
|
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Average balance includes loans or investments available for sale, as applicable.
|
|
(3)
|
|
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
(4)
|
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Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
(5)
|
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Net interest margin represents net interest income divided by average total interest-earning assets.
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Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015
General.
Net income increased by $258,000, or 7.3%, from $3.5 million for the three months ended March 31, 2015 to $3.8 million for the three months ended March 31, 2016. The increase in net income was primarily due to a $1.1 million increase in interest and dividend income and a $166,000 decrease in loan loss provisions. These were partially offset by a $367,000 increase in interest expense, a $360,000 decrease in noninterest income, a $155,000 increase in noninterest expense and a $118,000 increase in income taxes.
Net Interest Income
. Net interest income increased by $725,000, or 5.3%, to $14.5 million for the three months ended March 31, 2016 compared to $13.8 million for the three months ended March 31, 2015. Interest and dividend income increased by $1.1 million, or 7.1%, due to a $126.9 million increase in the average balance of interest-earning assets. This was offset by a two basis point decrease in the average yield on interest-earning assets. Interest expense increased by $367,000, or 24.2%, due to a $118.0 million increase in the average balance of 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 3.22% and 3.28%, respectively, for the three months ended March 31, 2016, compared to 3.30% and 3.36%, respectively, for the three months ended March 31, 2015. The decrease in the interest rate spread and in the net interest margin can be attributed to a two basis point decrease in the yield on interest-earning assets and a six basis point increase in the cost of interest-bearing liabilities. The decrease in the yield on interest-earning assets is primarily due to the payoff of higher yielding mortgage loans and the addition of new loans with lower interest rates to the loan portfolio. The increase in the cost of interest-bearing liabilities is primarily due to a five basis point increase in the cost of savings accounts which occurred as the bank acquired new savings accounts with higher interest rates.
Interest and Dividend Income.
Interest and dividend income increased by $1.1 million, or 7.1%, to $16.4 million for the three months ended March 31, 2016 from $15.3 million for the three months ended March 31, 2015. Interest income on loans increased by $1.7 million, or 15.7%, to $12.4 million for the three months ended March 31, 2016 from $10.7 million for the three months ended March 31, 2015. The increase in interest income on loans occurred because the average balance of loans grew by $204.8 million, or 20.5%, 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 17 basis point decline in the average loan yield to 4.10% for the three months ended March 31, 2016. The decline in the average yield on loans occurred because of repayments on higher-yielding loans and additions of new loans with lower yields to the loan portfolio. Interest income on investment securities decreased by $648,000, or 14.3%, to $3.9 million for the three months ended March 31, 2016 from $4.5 million for the three months ended March 31, 2015. The decrease in interest income on securities occurred because of a $76.8 million decrease in the average securities balance and a three basis point decrease in the average securities yield. The decrease in the securities yield occurred as higher yielding securities were paid off.
Interest Expense.
Interest expense increased by $367,000, or 24.2%, to $1.9 million for the three months ended March 31, 2016. Interest expense on deposits increased by $274,000, or 24.2%, from $1.1 million for the three months ended March 31, 2015 to $1.4 million for the three months ended March 31, 2016. The increase in interest expense on deposits is due to an increase in the average outstanding balance and the average rate paid on deposits. The average outstanding balance of deposits increased by $82.5 million, or 6.2%, to $1.408 billion for the three months ended March 31, 2016 compared to $1.326 billion for the three months ended March 31, 2015. The average interest rate on deposits increased to 0.40% from 0.34% for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Interest expense on FHLB advances increased by $187,000, or 267.1%, during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase was primarily due to a $50.5 million, or 273.6%, increase in the average balance of FHLB advances. This was partially offset by a three basis point decrease in the average interest rate to 1.49% for the three months ended March 31, 2016 compared to 1.52% for the three months ended March 31, 2015. Additional advances were obtained to extend the maturity of liabilities and reduce interest rate risk. Interest expense on securities sold under agreements to repurchase decreased by $94,000, or 30.1%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease was caused by a $14.9 million, or 21.4%, decrease in the average outstanding balance of securities sold under agreements to repurchase. The decrease in the average balance was augmented by a 19 basis point decrease in the average interest rate to 1.59% for the three months ended March 31, 2016 from 1.78% for the three months ended March 31, 2015. The decline in the
average balance and interest rate of securities sold under agreements to repurchase occurred as the Company paid off matured borrowings with higher interest rates.
Provision for Loan Losses.
We recorded provisions for loan losses of $28,000 and $194,000 for the three months ended March 31, 2016 and 2015, respectively. The provisions for loan losses included net charge-offs of $11,000 for the three months ended March 31, 2016 and net charge-offs of $13,000 for the three months ended March 31, 2015. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.18% at March 31, 2016 and 2015. Nonaccrual loans totaled $5.2 million at March 31, 2016, or 0.42% of total loans at that date, compared to $4.3 million of nonaccrual loans at March 31, 2015, or 0.41% of total loans at that date. Nonaccrual loans as of March 31, 2016 and 2015 consisted primarily of one- to four-family residential real estate loans. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at March 31, 2016 and 2015. For additional information see note (6), “Loans Receivable and Allowance for Loan Losses” in our Notes to Consolidated Financial Statements.
Noninterest Income.
The following table summarizes changes in noninterest income between the three months ended March 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees on loan and deposit accounts
|
|
$
|
456
|
|
$
|
460
|
|
$
|
(4)
|
|
(0.9)
|
%
|
|
Income on bank-owned life insurance
|
|
|
247
|
|
|
255
|
|
|
(8)
|
|
(3.1)
|
%
|
|
Gain on sale of investment securities
|
|
|
—
|
|
|
236
|
|
|
(236)
|
|
(100.0)
|
%
|
|
Gain on sale of loans
|
|
|
61
|
|
|
129
|
|
|
(68)
|
|
(52.7)
|
%
|
|
Other
|
|
|
122
|
|
|
166
|
|
|
(44)
|
|
(26.5)
|
%
|
|
Total
|
|
$
|
886
|
|
$
|
1,246
|
|
$
|
(360)
|
|
(28.9)
|
%
|
|
Noninterest income decreased by $360,000 for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. During the three months ended March 31, 2016, the Company did not sell any securities. 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 mortgage-backed securities, resulting in gross realized gains of $236,000. The sale of these mortgage-backed securities, for which the Company had already collected a substantial portion of the original 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. During the three months ended March 31, 2016 and 2015, the Company sold $10.9 million and $13.3 million, respectively, of mortgage loans held for sale and recognized gains of $61,000 and $129,000, respectively. Other noninterest income decreased by $44,000 during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to a decrease in insurance commission income.
Noninterest Expense.
The following table summarizes changes in noninterest expense between the three months ended March 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Change
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
5,426
|
|
$
|
5,099
|
|
$
|
327
|
|
6.4
|
%
|
|
Occupancy
|
|
|
1,420
|
|
|
1,437
|
|
|
(17)
|
|
(1.2)
|
%
|
|
Equipment
|
|
|
906
|
|
|
945
|
|
|
(39)
|
|
(4.1)
|
%
|
|
Federal deposit insurance premiums
|
|
|
225
|
|
|
209
|
|
|
16
|
|
7.7
|
%
|
|
Other general and administrative expenses
|
|
|
1,082
|
|
|
1,214
|
|
|
(132)
|
|
(10.9)
|
%
|
|
Total
|
|
$
|
9,059
|
|
$
|
8,904
|
|
$
|
155
|
|
1.7
|
%
|
|
Noninterest expense rose by $155,000 for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Salaries and employee benefits expense increased by $327,000 to $5.4 million for the three months ended March 31, 2016 from $5.1 million for the three months ended March 31, 2015. The increase in salaries and employee benefits was primarily due to a bank-wide budgeted salary increase of approximately 3.0%, which was effective July 1, 2015, the hiring of additional staff to handle the additional workload associated with an increase in regulatory requirements and a decrease in the credit to compensation expense as new loan originations decreased. The Receivables topic of FASB ASC allows financial institutions to take a credit against compensation expense for the direct cost of originating new loans. These increases were partially offset by a decrease in loan officer compensation, primarily because of the decrease in new loan originations. The decrease in other general and administrative expenses is primarily due to a reduction in accounting and auditing expenses.
Income Tax Expense.
Income taxes were $2.5 million for the three months ended March 31, 2016, reflecting an effective tax rate of 39.9%, compared to $2.4 million for the three months ended March 31, 2015, reflecting an effective tax rate of 40.4%.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, cash balances at the Federal Reserve Bank, loan repayments, advances from the Federal Home Loan Bank, securities sold under agreements to repurchase, proceeds from loan 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 March 31, 2016.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
|
(i)
|
|
expected loan demand;
|
|
(ii)
|
|
purchases and sales of investment securities;
|
|
(iii)
|
|
expected deposit flows and borrowing maturities;
|
|
(iv)
|
|
yields available on interest-earning deposits and securities; and
|
|
(v)
|
|
the objectives of our asset/liability management program.
|
Excess liquid assets are invested generally in interest-earning deposits or securities and may also be used to pay off short-term borrowings.
Our most liquid asset is cash. The amount of this asset is dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2016, our cash and cash equivalents totaled $82.0 million. On that date, we had $55.0 million in securities sold under agreements to repurchase outstanding and $69.0 million of Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $568.4 million under Federal Home Loan Bank advances.
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 March 31, 2016, we had $34.7 million in loan commitments outstanding, most of which were for fixed-rate loans, and had $27.3 million in unused lines of credit to borrowers. Certificates of deposit due within one year at March 31, 2016 totaled $177.3 million, or 12.0% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2017. 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 three months ended March 31, 2016 and 2015, we originated $66.0 million and $120.3 million of loans, respectively, and purchased $1.2 million and $2.4 million of securities, respectively.
Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, securities sold under agreements to repurchase, stock repurchases and dividend payments. We experienced net increases in deposits of $29.8 million and $21.8 million for the three months ended March 31, 2016 and 2015, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank, which provide an additional source of funds. Federal Home Loan Bank advances remained constant at $69.0 million during the three months ended March 31, 2016. We had the ability to borrow up to an additional $568.4 million and $555.1 million from the Federal Home Loan Bank as of March 31, 2016 and December 31, 2015, respectively. We also utilize securities sold under agreements to repurchase as another borrowing source. Securities sold under agreements to repurchase remained constant at $55.0 million for the three months ended March 31, 2016.
Territorial Bancorp Inc. is a separate legal entity from Territorial Savings Bank and must provide for its own liquidity to pay dividends, repurchase shares of its common stock and for other corporate purposes. Territorial Bancorp Inc.’s primary source of liquidity is dividend payments from Territorial Savings Bank. The ability of Territorial Savings Bank to pay dividends to Territorial Bancorp Inc. is subject to regulatory requirements. At March 31, 2016, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of $15.3 million.
Territorial Savings Bank and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. On July 10, 2014, Territorial Savings Bank became a member of the Federal Reserve System. The Federal Reserve requires that Territorial Savings Bank maintain a Tier 1 Leverage Capital ratio of 9.0% for three years as a condition of membership. Effective January 1, 2015, the well capitalized threshold for Tier 1 risk-based capital was increased from 6.0% to 8.0% and a new capital standard, common equity tier 1 risk-based capital, was implemented with a 6.5% ratio requirement for a financial institution to be considered well capitalized. Additionally, effective January 1, 2015, consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions became applicable to savings and loan holding companies over $1.0 billion in assets, such as the Company. The capital requirements become fully-phased in on January 1, 2019. At March 31, 2016, 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. The tables 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 March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Required Ratio
|
|
Actual Amount
|
|
Actual Ratio
|
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
Territorial Savings Bank (1)
|
|
9.00
|
%
|
$
|
212,587
|
|
11.61
|
%
|
Territorial Bancorp Inc.
|
|
5.00
|
%
|
$
|
228,279
|
|
12.47
|
%
|
Common Equity Tier 1 Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
9.00
|
%
|
$
|
212,587
|
|
26.00
|
%
|
Territorial Bancorp Inc.
|
|
9.00
|
%
|
$
|
228,279
|
|
27.91
|
%
|
Tier 1 Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
10.50
|
%
|
$
|
212,587
|
|
26.00
|
%
|
Territorial Bancorp Inc.
|
|
10.50
|
%
|
$
|
228,279
|
|
27.91
|
%
|
Total Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
12.50
|
%
|
$
|
214,877
|
|
26.28
|
%
|
Territorial Bancorp Inc.
|
|
12.50
|
%
|
$
|
230,569
|
|
28.19
|
%
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
|
|
|
|
|
|
|
Territorial Savings Bank (1)
|
|
9.00
|
%
|
$
|
208,009
|
|
11.49
|
%
|
Territorial Bancorp Inc.
|
|
5.00
|
%
|
$
|
224,877
|
|
12.42
|
%
|
Common Equity Tier 1 Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
9.00
|
%
|
$
|
208,009
|
|
25.79
|
%
|
Territorial Bancorp Inc.
|
|
9.00
|
%
|
$
|
224,877
|
|
27.88
|
%
|
Tier 1 Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
10.50
|
%
|
$
|
208,009
|
|
25.79
|
%
|
Territorial Bancorp Inc.
|
|
10.50
|
%
|
$
|
224,877
|
|
27.88
|
%
|
Total Risk-Based Capital (2)
|
|
|
|
|
|
|
|
|
Territorial Savings Bank
|
|
12.50
|
%
|
$
|
210,287
|
|
26.07
|
%
|
Territorial Bancorp Inc.
|
|
12.50
|
%
|
$
|
227,155
|
|
28.16
|
%
|
|
(1)
|
|
As a condition of membership in the Federal Reserve System, Territorial Savings Bank is required to maintain a Tier 1 Leverage Capital ratio of 9.00% for three years beginning on July 10, 2014.
|
|
(2)
|
|
The required Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios are based on the fully-phased in capital ratios in the Basel III capital regulations plus the 2.50% capital conservation buffer that becomes effective on January 1, 2019.
|
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans.
Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. Except for an increase of $19.5 million in certificates of deposit and an increase of $8.2 million in loan commitments between December 31, 2015 and March 31, 2016, there have not been any material changes in contractual obligations and funding needs since December 31, 2015.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
S ABOUT MARKET RISK
General
. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest
rates. Our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Because we have historically operated as a traditional thrift institution, the significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit accounts, securities sold under agreements to repurchase and Federal Home Loan Bank advances. 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.
Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Economic Value of Equity.
We use an interest rate sensitivity analysis that computes changes in the economic value of equity (EVE) of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE represents the market value of portfolio equity and is equal to the present value of assets minus the present value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market-risk-sensitive instruments in the event of an instantaneous and sustained 100 to 400 basis point increase or a 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.
The following table presents our internal calculations of the estimated changes in our EVE as of December 31, 2015 that would result from the designated instantaneous changes in the interest rate yield curve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
EVE Ratio as a
|
|
EVE Ratio as a
|
|
|
Change in
|
|
|
|
|
Increase
|
|
|
|
Percent of
|
|
Percent of
|
|
|
Interest Rates
|
|
Estimated EVE
|
|
(Decrease) in
|
|
Percentage
|
|
Present Value
|
|
Present Value of
|
|
|
(bp) (1)
|
|
(2)
|
|
EVE
|
|
Change in EVE
|
|
of Assets (3)(4)
|
|
Assets (3)(4)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+400
|
|
$
|
189,762
|
|
$
|
(55,792)
|
|
(22.72)
|
%
|
10.61
|
%
|
(2.56)
|
%
|
|
+300
|
|
$
|
213,175
|
|
$
|
(32,378)
|
|
(13.19)
|
%
|
11.73
|
%
|
(1.44)
|
%
|
|
+200
|
|
$
|
235,831
|
|
$
|
(9,723)
|
|
(3.96)
|
%
|
12.79
|
%
|
(0.38)
|
%
|
|
+100
|
|
$
|
250,952
|
|
$
|
5,399
|
|
2.20
|
%
|
13.46
|
%
|
0.29
|
%
|
|
0
|
|
$
|
245,554
|
|
$
|
—
|
|
—
|
%
|
13.17
|
%
|
—
|
%
|
|
-100
|
|
$
|
211,131
|
|
$
|
(34,423)
|
|
(14.02)
|
%
|
11.51
|
%
|
(1.66)
|
%
|
|
|
(1)
|
|
Assumes an instantaneous uniform change in interest rates at all maturities.
|
|
(2)
|
|
EVE is the difference between the present value of an institution’s assets and liabilities.
|
|
(3)
|
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
|
(4)
|
|
EVE Ratio represents EVE divided by the present value of assets.
|
Interest rates on Freddie Mac mortgage-backed securities declined by approximately 44 basis points between December 31, 2015 and March 31, 2016. The decrease in interest rates has likely increased our EVE. However, we do not believe that the increase in EVE is material.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE. Modeling changes in EVE requires making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and net interest income and will differ from actual results.
ITEM 4.
CONTROLS AND PROCEDURE
S
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 March 31, 2016. 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 March 31, 2016, 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.