Territorial Bancorp 10Q 2021 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2021

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

For transition period from to

Commission File Number 001-34403

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

Maryland		26-4674701
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

1132 Bishop Street, Suite 2200, Honolulu, Hawaii		96813
(Address of Principal Executive Offices)		(Zip Code)

(808) 946-1400

(Registrant’s telephone number, including area code)

Not Applicable

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

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


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	TBNK	The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 9,370,944 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2021.

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TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

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PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)


	June 30,		December 31,
	2021		2020
ASSETS
Cash and cash equivalents	$	117,578	$	363,543
Investment securities available for sale, at fair value		—		3,562
Investment securities held to maturity, at amortized cost (fair value of $615,721 and $262,841 at June 30, 2021 and December 31, 2020, respectively)		609,074		247,642
Loans held for sale		540		2,195
Loans receivable, net		1,314,871		1,406,995
Federal Home Loan Bank stock, at cost		8,173		8,144
Federal Reserve Bank stock, at cost		3,152		3,145
Accrued interest receivable		6,345		6,515
Premises and equipment, net		4,454		4,855
Right-of-use asset, net		13,623		12,333
Bank-owned life insurance		46,022		45,644
Deferred income tax assets, net		3,145		3,382
Prepaid expenses and other assets		5,100		2,844
Total assets	$	2,132,077	$	2,110,799

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,678,694	$	1,659,800
Advances from the Federal Home Loan Bank		141,000		141,000
Securities sold under agreements to repurchase		10,000		10,000
Accounts payable and accrued expenses		28,219		29,221
Lease liability		14,433		13,119
Income taxes payable		2,354		2,161
Advance payments by borrowers for taxes and insurance		6,132		6,790
Total liabilities		1,880,832		1,862,091

Commitments and contingencies

Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 50,000,000 shares, 0 shares issued or outstanding		—		—
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 9,421,560 and 9,513,867 shares at June 30, 2021 and December 31, 2020, respectively		94		95
Additional paid-in capital		58,860		61,153
Unearned ESOP shares		(3,670)		(3,915)
Retained earnings		204,928		200,066
Accumulated other comprehensive loss		(8,967)		(8,691)
Total stockholders’ equity		251,245		248,708
Total liabilities and stockholders’ equity	$	2,132,077	$	2,110,799

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest income:
Loans	$	12,134	$	15,225	$	25,183	$	30,682
Investment securities		2,394		2,610		4,219		5,390
Other investments		228		170		459		514
Total interest income		14,756		18,005		29,861		36,586

Interest expense:
Deposits		1,090		2,364		2,407		5,488
Advances from the Federal Home Loan Bank		537		829		1,073		1,724
Securities sold under agreements to repurchase		45		46		91		91
Total interest expense		1,672		3,239		3,571		7,303

Net interest income		13,084		14,766		26,290		29,283
(Reversal of provision) provision for loan losses		(372)		1,395		(1,285)		1,612

Net interest income after (reversal of provision) provision for loan losses		13,456		13,371		27,575		27,671

Noninterest income:
Service and other fees		530		535		1,525		988
Income on bank-owned life insurance		190		201		378		403
Gain on sale of investment securities		911		419		1,437		597
Gain on sale of loans		26		259		446		666
Other		70		47		180		108
Total noninterest income		1,727		1,461		3,966		2,762

Noninterest expense:
Salaries and employee benefits		5,560		5,264		11,083		10,948
Occupancy		1,572		1,626		3,219		3,271
Equipment		1,064		1,164		2,194		2,284
Federal deposit insurance premiums		142		74		283		74
Other general and administrative expenses		1,274		843		2,387		1,932
Total noninterest expense		9,612		8,971		19,166		18,509

Income before income taxes		5,571		5,861		12,375		11,924
Income taxes		1,513		1,570		3,304		3,160
Net income	$	4,058	$	4,291	$	9,071	$	8,764

Basic earnings per share	$	0.44	$	0.47	$	0.99	$	0.95
Diluted earnings per share	$	0.44	$	0.47	$	0.99	$	0.94
Cash dividends declared per common share	$	0.23	$	0.23	$	0.46	$	0.46
Basic weighted-average shares outstanding		9,117,467		9,092,287		9,124,086		9,164,877
Diluted weighted-average shares outstanding		9,162,348		9,139,135		9,166,003		9,228,421

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net income	$	4,058	$	4,291	$	9,071	$	8,764

Unrealized gain (loss) on securities, net of tax		—		19		(3)		26
Amount reclassified from other comprehensive income, net of tax		(190)		(112)		(273)		(221)
Other comprehensive loss, net of tax		(190)		(93)		(276)		(195)
Comprehensive income	$	3,868	$	4,198	$	8,795	$	8,569

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


										Accumulated
	Common			Additional		Unearned				Other		Total
	Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity
Balance at March 31, 2020	9,593,332	$	96	$	62,715	$	(4,282)	$	193,160	$	(7,770)	$	243,919

Net income	—		—		—		—		4,291		—		4,291
Other comprehensive loss	—		—		—		—		—		(93)		(93)
Cash dividends declared ($0.23 per share)	—		—		—		—		(2,103)		—		(2,103)
Share-based compensation	3,204		—		209		—		—		—		209
Allocation of 12,233 ESOP shares	—		—		179		123		—		—		302
Repurchase of shares of common stock	(141,949)		(2)		(3,526)		—		—		—		(3,528)
Exercise of options for common stock	59,280		1		1,029		—		—		—		1,030

Balances at June 30, 2020	9,513,867	$	95	$	60,606	$	(4,159)	$	195,348	$	(7,863)	$	244,027

Balances at December 31, 2019	9,681,493	$	97	$	65,057	$	(4,404)	$	190,808	$	(7,668)	$	243,890

Net income	—		—		—		—		8,764		—		8,764
Other comprehensive loss	—		—		—		—		—		(195)		(195)
Cash dividends declared ($0.46 per share)	—		—		—		—		(4,224)		—		(4,224)
Share-based compensation	18,875		—		366		—		—		—		366
Allocation of 24,466 ESOP shares	—		—		396		245		—		—		641
Repurchase of shares of common stock	(268,328)		(3)		(6,633)		—		—		—		(6,636)
Exercise of options for common stock	81,827		1		1,420		—		—		—		1,421

Balances at June 30, 2020	9,513,867	$	95	$	60,606	$	(4,159)	$	195,348	$	(7,863)	$	244,027

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


											Accumulated
	Common			Additional			Unearned				Other		Total
	Shares	Common		Paid-in			ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital			Shares		Earnings		Loss		Equity
Balance at March 31, 2021	9,522,833	$	95	$	61,141		$	(3,792)	$	202,985	$	(8,777)	$	251,652

Net income	—		—		—			—		4,058		—		4,058
Other comprehensive loss	—		—		—			—		—		(190)		(190)
Cash dividends declared ($0.23 per share)	—		—		—			—		(2,115)		—		(2,115)
Share-based compensation	—		—		92			—		—		—		92
Allocation of 12,233 ESOP shares	—		—		193			122		—		—		315
Repurchase of shares of common stock	(101,273)		(1)		(2,566)			—		—		—		(2,567)

Balances at June 30, 2021	9,421,560	$	94	$	58,860		$	(3,670)	$	204,928	$	(8,967)	$	251,245

Balances at December 31, 2020	9,513,867	$	95	$	61,153		$	(3,915)	$	200,066	$	(8,691)	$	248,708

Net income	—		—		—			—		9,071		—		9,071
Other comprehensive loss	—		—		—			—		—		(276)		(276)
Cash dividends declared ($0.46 per share)	—		—		—			—		(4,209)		—		(4,209)
Share-based compensation	20,437		—		205			—		—		—		205
Allocation of 24,467 ESOP shares	—		—		387	��		245		—		—		632
Repurchase of shares of common stock	(112,744)		(1)		(2,885)			—		—		—		(2,886)

Balances at June 30, 2021	9,421,560	$	94	$	58,860		$	(3,670)	$	204,928	$	(8,967)	$	251,245

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net income	$	9,071	$	8,764
Adjustments to reconcile net income to net cash from operating activities:
(Reversal of provision) provision for loan losses		(1,285)		1,612
Depreciation and amortization		587		589
Deferred income tax expense (benefit)		338		(175)
Accretion of fees, discounts, and premiums, net		(253)		(169)
Amortization of right-of-use asset		1,551		1,454
Origination of loans held for sale		(12,761)		(14,603)
Proceeds from sales of loans held for sale		14,862		12,493
Gain on sale of loans, net		(446)		(666)
Gain on sale of investment securities available for sale		(339)		(290)
Gain on sale of investment securities held to maturity		(1,098)		(307)
ESOP expense		632		641
Share-based compensation expense		205		366
Decrease (increase) in accrued interest receivable		170		(1,060)
Net increase in bank-owned life insurance		(378)		(403)
Net (increase) decrease in prepaid expenses and other assets		(2,256)		171
Net (decrease) increase in accounts payable and accrued expenses		(324)		747
Net decrease in lease liability		(1,527)		(1,427)
Net decrease in advance payments by borrowers for taxes and insurance		(658)		(74)
Net increase in income taxes payable		193		2,557

Net cash from operating activities		6,284		10,220

Cash flows from investing activities:
Purchases of investment securities held to maturity		(432,614)		—
Principal repayments on investment securities held to maturity		56,243		36,683
Principal repayments on investment securities available for sale		198		760
Proceeds from sale of investment securities held to maturity		16,031		4,692
Proceeds from sale of investment securities available for sale		3,330		3,668
Principal repayments on loans receivable, net of loan originations		93,664		36,396
Purchases of Federal Home Loan Bank stock		(29)		(21)
Proceeds from redemption of Federal Home Loan Bank stock		—		600
Purchases of Federal Reserve Bank stock		(7)		(6)
Purchases of premises and equipment		(186)		(715)

Net cash from investing activities		(263,370)		82,057

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from financing activities:
Net increase in deposits	$	18,894	$	13,379
Repayments of advances from the Federal Home Loan Bank		—		(15,000)
Proceeds from securities sold under agreements to repurchase		—		5,000
Repayments of securities sold under agreements to repurchase		—		(5,000)
Repurchases of common stock		(2,567)		(5,000)
Cash dividends paid		(5,206)		(4,270)

Net cash from financing activities		11,121		(10,891)

Net (decrease) increase in cash and cash equivalents		(245,965)		81,386

Cash and cash equivalents at beginning of the period		363,543		44,806

Cash and cash equivalents at end of the period	$	117,578	$	126,192

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	3,556	$	7,625
Income taxes		2,773		778

Supplemental disclosure of noncash investing and financing activities:
Company stock acquired through stock swap and net settlement transactions	$	—	$	1,421
Company stock repurchased through stock swap and net settlement transactions		319		1,636
Loans securitized into investment securities		—		9,431
Establishment of right-of-use asset, net of incentives		2,841		1,786
Establishment of lease liability		2,841		1,786

See accompanying notes to consolidated financial statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Organization

Territorial Bancorp Inc. is a Maryland corporation and is the holding company for Territorial Savings Bank. Territorial Savings Bank is a Hawaii state-chartered bank headquartered in Honolulu, Hawaii and is a member of the Federal Reserve System. Territorial Savings Bank has 2 inactive subsidiaries, Territorial Real Estate Co., Inc. and Territorial Financial Services, Inc.

(2) Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Territorial Bancorp Inc. have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

(3) Recently Issued Accounting Pronouncements

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

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. Eligible loan modifications under the CARES Act must be related to the COVID-19 pandemic and the borrower must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must be executed during the period from March 1, 2020 to the earlier of December 31, 2020 or 60 days after the end of the national emergency. On December 21, 2020, legislation extended the troubled debt restructuring relief provisions of the CARES Act to January

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1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 loan modification should not be considered a troubled debt restructuring if the borrower was not more than 30 days past due on payments at the time the loan modification program was implemented and the modification is considered short-term (not to exceed six months).

(4) Cash and Cash Equivalents

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


	June 30,		December 31,
(Dollars in thousands)	2021		2020
Cash and due from banks	$	12,441	$	14,355
Interest-earning deposits in other banks		105,137		349,188
Cash and cash equivalents	$	117,578	$	363,543

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

(5) Investment Securities

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


	Amortized		Gross Unrealized					Estimated
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2021:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	609,074	$	8,822	$	(2,175)	��	$	615,721
Total	$	609,074	$	8,822	$	(2,175)		$	615,721

December 31, 2020:
Available-for-sale:
U.S. government-sponsored mortgage-backed securities	$	3,185	$	377	$	—		$	3,562
Total	$	3,185	$	377	$	—		$	3,562

Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	247,642	$	15,200	$	(1)		$	262,841
Total	$	247,642	$	15,200	$	(1)		$	262,841

The amortized cost and estimated fair value of investment securities by maturity date at June 30, 2021 are shown below. Incorporated in the maturity schedule are mortgage-backed securities, which are allocated using the contractual maturity as a basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Held-to-maturity:
Due within 5 years	$	0	$	0
Due after 5 years through 10 years		51		50
Due after 10 years		609,023		615,671
Total	$	609,074	$	615,721

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Realized gains and losses and the proceeds from sales of held-to-maturity and available-for-sale securities are shown in the table below.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2021		2020		2021		2020
Proceeds from sales	$	13,064	$	5,710	$	19,361	$	8,360
Gross gains		911		419		1,437		597
Gross losses		—		—		—		—

During the six months ended June 30, 2021 and 2020, the Company sold $14.9 million and $4.4 million, respectively, of held-to-maturity mortgage-backed securities and recorded gains of $1.1 million and $307,000, respectively. The sale of the mortgage-backed securities, for which the Company had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity.

During the six months ended June 30, 2021 and 2020, the Company sold $3.0 million and $3.4 million, respectively, of available-for-sale mortgage-backed securities and recorded gains of $339,000 and $290,000, respectively.

Investment securities with amortized costs of $164.4 million and $192.7 million at June 30, 2021 and December 31, 2020, respectively, were pledged to secure deposits made by state and local governments, securities sold under agreements to repurchase and transaction clearing accounts.

Provided below is a summary of investment securities which were in an unrealized loss position at June 30, 2021 and December 31, 2020. The Company does not intend to sell held-to-maturity 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)
June 30, 2021:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	377,389	$	(2,174)	$	45	$	(1)	27	$	377,434	$	(2,175)

December 31, 2020:
Held-to-maturity:
U.S. government-sponsored mortgage-backed securities	$	678	$	(1)	$	4	$	—	6	$	682	$	(1)

Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates subsequent to purchase. All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. Since the decline in market value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell these investments until maturity and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2021 and December 31, 2020.

During the six months ended June 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million into Freddie Mac mortgage-backed securities to increase liquidity. The securitization transaction increased investment securities and lowered loans receivable. The securitization transaction was accounted for by

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recording the mortgage-backed securities at a fair value of $9.8 million. A net gain of $377,000 was recognized on the securitization transaction and recorded in gain on sale of loans in the Consolidated Statements of Income. There were 0 securitization transactions during the six months ended June 30, 2021.

(6) Loans Receivable and Allowance for Loan Losses

The components of loans receivable are as follows:


	June 30,		December 31,
(Dollars in thousands)	2021		2020
Real estate loans:
First mortgages:
One- to four-family residential	$	1,276,414	$	1,366,507
Multi-family residential		6,772		7,245
Construction, commercial and other		19,196		19,074
Home equity loans and lines of credit		7,727		9,376
Total real estate loans		1,310,109		1,402,202
Other loans:
Loans on deposit accounts		331		235
Consumer and other loans		8,762		10,086
Total other loans		9,093		10,321
Less:
Net unearned fees and discounts		(1,362)		(1,266)
Allowance for loan losses		(2,969)		(4,262)
Total unearned fees, discounts and allowance for loan losses		(4,331)		(5,528)
Loans receivable, net	$	1,314,871	$	1,406,995

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


			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
Three months ended June 30, 2021:
Balance, beginning of period	$	2,380	$	396	$	1	$	140	$	429	$	3,346
(Reversal of provision) provision for loan losses		(359)		38		—		(2)		(49)		(372)
		2,021		434		1		138		380		2,974
Charge-offs		—		—		—		(7)		—		(7)
Recoveries		—		—		—		2		—		2
Net charge-offs		—		—		—		(5)		—		(5)
Balance, end of period	$	2,021	$	434	$	1	$	133	$	380	$	2,969

Six months ended June 30, 2021:
Balance, beginning of period	$	3,102	$	406	$	1	$	146	$	607	$	4,262
(Reversal of provision) provision for loan losses		(1,081)		28		—		(5)		(227)		(1,285)
		2,021		434		1		141		380		2,977
Charge-offs		—		—		—		(10)		—		(10)
Recoveries		—		—		—		2		—		2
Net charge-offs		—		—		—		(8)		—		(8)
Balance, end of period	$	2,021	$	434	$	1	$	133	$	380	$	2,969

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			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
Three months ended June 30, 2020:
Balance, beginning of period	$	1,863	$	452	$	1	$	172	$	430	$	2,918
Provision (reversal of provision) for loan losses		1,157		7		(10)		92		149		1,395
		3,020		459		(9)		264		579		4,313
Charge-offs		—		—		—		(68)		—		(68)
Recoveries		—		—		10		1		—		11
Net recoveries (charge-offs)		—		—		10		(67)		—		(57)
Balance, end of period	$	3,020	$	459	$	1	$	197	$	579	$	4,256

Six months ended June 30, 2020:
Balance, beginning of period	$	1,741	$	511	$	1	$	54	$	405	$	2,712
Provision (reversal of provision) for loan losses		1,279		(52)		(10)		221		174		1,612
		3,020		459		(9)		275		579		4,324
Charge-offs		—		—		—		(80)		—		(80)
Recoveries		—		—		10		2		—		12
Net recoveries (charge-offs)		—		—		10		(78)		—		(68)
Balance, end of period	$	3,020	$	459	$	1	$	197	$	579	$	4,256

Management considers the allowance for loan losses at June 30, 2021 to be at an appropriate level to provide for probable losses that can be reasonably estimated based on general and specific conditions at that date. While the Company uses the best information it has available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. To the extent actual outcomes differ from the estimates, additional provisions for credit losses may be required that would reduce future earnings. In addition, as an integral part of their examination process, the bank regulators periodically review the allowance for loan losses and may require the Company to increase the allowance based on their analysis of information available at the time of their examination.

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The table below presents the balance in the allowance for loan losses and the recorded investment in loans, net of unearned fees and discounts, by portfolio segment and based on impairment method:


			Construction,		Home
			Commercial		Equity
			and Other		Loans and
	Residential		Mortgage		Lines of		Consumer
(Dollars in thousands)	Mortgage		Loans		Credit		and Other		Unallocated		Totals
June 30, 2021:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		2,021		434		1		133		380		2,969
Total ending allowance balance	$	2,021	$	434	$	1	$	133	$	380	$	2,969

Loans:
Ending loan balance:
Individually evaluated for impairment	$	4,728	$	—	$	20	$	—	$	—	$	4,748
Collectively evaluated for impairment		1,277,129		19,159		7,711		9,093		—		1,313,092
Total ending loan balance	$	1,281,857	$	19,159	$	7,731	$	9,093	$	—	$	1,317,840

December 31, 2020:
Allowance for loan losses:
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		3,102		406		1		146		607		4,262
Total ending allowance balance	$	3,102	$	406	$	1	$	146	$	607	$	4,262

Loans:
Ending loan balance:
Individually evaluated for impairment	$	4,947	$	—	$	23	$	—	$	—	$	4,970
Collectively evaluated for impairment		1,367,576		19,024		9,353		10,334		—		1,406,287
Total ending loan balance	$	1,372,523	$	19,024	$	9,376	$	10,334	$	—	$	1,411,257

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


			Unpaid
	Recorded		Principal
(Dollars in thousands)	Investment		Balance
June 30, 2021:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,728	$	5,266
Home equity loans and lines of credit		20		31
Total	$	4,748	$	5,297

December 31, 2020:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,947	$	5,425
Home equity loans and lines of credit		23		32
Total	$	4,970	$	5,457

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
2021:
With no related allowance recorded:
One- to four-family residential mortgages	$	4,746	$	7	$	4,777	$	20
Home equity loans and lines of credit		21		—		21		—
Total	$	4,767	$	7	$	4,798	$	20

2020:
With no related allowance recorded:
One- to four-family residential mortgages	$	1,321	$	9	$	1,334	$	17
Home equity loans and lines of credit		25		—		25		—
Total	$	1,346	$	9	$	1,359	$	17

There were 0 loans individually evaluated for impairment with a related allowance for loan loss as of June 30, 2021 or December 31, 2020. Loans individually evaluated for impairment do not have an allocated allowance for loan loss because they are written down to fair value at the time of impairment.

The Company had 11 nonaccrual loans with a book value of $4.2 million as of June 30, 2021 and 12 nonaccrual loans with a book value of $4.4 million as of December 31, 2020. The Company collected interest on nonaccrual loans of $64,000 and $26,000 during the six months ended June 30, 2021 and 2020, respectively, but due to accounting and regulatory requirements, the Company recorded the interest as a reduction of principal. The Company would have recognized additional interest income of $129,000 and $27,000 during the six months ended June 30, 2021 and 2020, respectively, had the loans been accruing interest. The Company did 0t have any loans 90 days or more past due and still accruing interest as of June 30, 2021 and December 31, 2020.

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The table below presents the aging of loans and accrual status by class of loans, net of unearned fees and discounts. Loans with a formal loan payment deferral plan in place are not considered contractually past due or delinquent if the borrower is in compliance with the loan payment deferral plan.


															Loans
															90 Days
															or More
	30 - 59		60 - 89		90 Days or										Past Due
	Days Past		Days Past		More		Total Past		Loans Not		Total		Nonaccrual		and Still
(Dollars in thousands)	Due		Due		Past Due		Due		Past Due		Loans		Loans		Accruing
June 30, 2021:
One- to four-family residential mortgages	$	690	$	121	$	99	$	910	$	1,274,187	$	1,275,097	$	4,170	$	0
Multi-family residential mortgages		—		—		—		—		6,760		6,760		—		0
Construction, commercial and other mortgages		—		—		—		—		19,159		19,159		—		0
Home equity loans and lines of credit		—		—		—		—		7,731		7,731		20		0
Loans on deposit accounts		—		—		—		—		331		331		—		0
Consumer and other		1		—		—		1		8,761		8,762		—		0

Total	$	691	$	121	$	99	$	911	$	1,316,929	$	1,317,840	$	4,190	$	0

December 31, 2020:
One- to four-family residential mortgages	$	376	$	152	$	240	$	768	$	1,364,527	$	1,365,295	$	4,382	$	0
Multi-family residential mortgages		—		—		—		—		7,228		7,228		—		0
Construction, commercial and other mortgages		—		—		—		—		19,024		19,024		—		0
Home equity loans and lines of credit		—		23		—		23		9,353		9,376		23		0
Loans on deposit accounts		—		—		—		—		235		235		—		0
Consumer and other		1		—		—		1		10,098		10,099		—		0

Total	$	377	$	175	$	240	$	792	$	1,410,465	$	1,411,257	$	4,405	$	0

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

There were 0 loans modified in a troubled debt restructuring during the six months ended June 30, 2021 or 2020. There were 0 new troubled debt restructurings within the six months ended June 30, 2021 or 2020 that subsequently defaulted. Loan modifications under the CARES Act and the Interagency Statements issued by bank regulators in 2020 are discussed below.

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


	Number of		Accrual		Number of		Nonaccrual
(Dollars in thousands)	Loans		Status		Loans		Status		Total
June 30, 2021:
One- to four-family residential mortgages		3	$	558		2	$	439	$	997
Total		3	$	558		2	$	439	$	997

December 31, 2020:
One- to four-family residential mortgages		3	$	565		2	$	467	$	1,032
Total		3	$	565		2	$	467	$	1,032

There were 0 delinquent troubled debt restructurings as of June 30, 2021 or December 31, 2020. 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 June 30, 2021, we had 0 commitments to lend any additional funds to these borrowers.

The CARES Act provides relief to financial institutions from categorizing eligible loan modifications as troubled debt restructurings over the remaining life of the modified loan. Eligible loan modifications under the CARES Act must be related to the COVID-19 pandemic and the borrower must not have been more than 30 days past due as of December 31, 2019. Loan modifications under the CARES Act must be executed during the period from March 1, 2020 to the earlier of 60 days after the end of the national emergency or January 1, 2022. Banking regulators issued similar guidance, which also clarified that a COVID-19 related loan modification should not be considered a troubled debt restructuring if the borrower was not more than 30 days past due on payments at the time the loan modification program was implemented and the modification is considered short-term (not to exceed six months). The Company uses the provisions of the CARES Act and the Interagency Statements to account for the eligible loans receiving modifications.

The Company has granted loan payment deferrals to borrowers who have been affected by the COVID-19 pandemic. At June 30, 2021, the Company had outstanding loan payment deferrals on $104.7 million of loans, which represented 8.0% of total loans receivable. Of these loans with payment deferrals, $100.3 million were one- to four-family residential mortgage loans and $4.4 million were non-residential mortgage loans, which represented 7.6% and 0.3% of total loans receivable, respectively. The loans on which the Company has granted loan payment deferrals are included in the ALLL calculation. However, loans performing under a loan payment deferral agreement are not considered contractually past due and are excluded from the past due statistics above.

The ratio of the current loan balance to the current tax-assessed value of the property securing the mortgage loans in the payment deferral program averaged 56.2% at June 30, 2021. At June 30, 2021, one- to four-family residential mortgage loans represented 97.1% of the Company’s total loan portfolio balance with a ratio of the current loan balance to the current tax assessed value of the property securing these loans averaging 45.7%. All of the Company’s residential mortgage loans are secured by real estate in Hawaii.

As of June 30, 2021, of the $100.3 million total one- to four-family mortgage loans in the loan payment deferral program, $74.7 million, or 74.5%, had resumed making full principal and interest payments. The interest on these loans that accrued during the deferral period will be repaid over subsequent years. $23.0 million, or 22.9%, of the total mortgage loans in the loan payment deferral program were making interest-only payments. $2.1 million, or 2.1%, of the total mortgage loans in the loan payment deferral program continued to make escrow-only payments. $536,000, or 0.5%, of the total loans which have had their deferral period end and not resumed their loan payments.

As of June 30, 2021, $3.9 million of the $4.4 million commercial mortgage, commercial and industrial and home equity lines of credit in the loan payment deferral program had resumed making full principal and interest payments. A $478,000 home equity line of credit was making interest-only payments.

Since the beginning of the year, we have not seen a significant increase in loan delinquencies, significant changes in deposits or significant drawdowns on any lines of credit. Loan delinquencies do not include loans requesting

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payment deferral because of the COVID-19 pandemic. We do not have any commercial loans to hotels, businesses in the transportation industry, restaurants or retail establishments.

The Company had 0 real estate owned as of June 30, 2021 or December 31, 2020. There was a 1- to four-family residential mortgage loan for $99,000 in the process of foreclosure at June 30, 2021. There were 2 one- to four-family residential mortgage loans totaling $251,000 in the process of foreclosure at December 31, 2020.

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 six months ended June 30, 2021 and 2020, the Company sold mortgage loans held for sale with principal balances of $14.5 million and $12.3 million, respectively, and recognized gains of $446,000 and $289,000, respectively. The Company had 2 loans held for sale for $540,000 at June 30, 2021 and 5 loans held for sale totaling $2.2 million at December 31, 2020.

During the six months ended June 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. The Company retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000. A net gain of $377,000 was recognized on the transaction. There were no securitization transactions in the six months ended June 30, 2021.

The Company serviced loans for others with principal balances of $48.8 million at June 30, 2021 and $56.7 million at December 31, 2020. Of these amounts, $29.7 million and $35.5 million of loan balances relate to securitizations for which the Company continues to hold the related mortgage-backed securities at June 30, 2021 and December 31, 2020, respectively. The amount of contractually specified servicing fees earned for the six months ended June 30, 2021 and 2020 was $69,000 and $90,000, respectively. The amount of contractually specified servicing fees earned for the three months ended June 30, 2021 and 2020 was $33,000 and $46,000, respectively. The fees are reported in service and other fees in the Consolidated Statements of Income.

(7) Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the securities collateralizing the agreements classified as an asset. Securities sold under agreements to repurchase are summarized as follows:


	June 30, 2021				December 31, 2020
			Weighted				Weighted
	Repurchase		Average		Repurchase		Average
(Dollars in thousands)	Liability		Rate		Liability		Rate
Maturing:
Over 3 year to 4 years	$	10,000	1.81	%	$	5,000	1.88	%
Over 4 year to 5 years		—	—			5,000	1.73	%
Total	$	10,000	1.81	%	$	10,000	1.81	%

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 June 30, 2021. The amount at risk is the greater of the carrying value or fair value over the repurchase liability and refers to the potential loss to the Company if the secured lender fails to return the security at the maturity date of the agreement. All the agreements to repurchase are with JP Morgan Securities and the securities pledged are mortgage-backed securities issued and guaranteed by U.S. government-sponsored enterprises. The repurchase liability cannot exceed 90% of the fair value of securities pledged. In the event

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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

Repurchase

Amount

Months to

(Dollars in thousands)

Securities

Liability

at Risk

Maturity

Maturing:

Over 90 days

10,697

11,290

10,000

1,290

(8) Offsetting of Financial Liabilities

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


					Net Amount of		Gross Amount Not Offset in the
	Gross Amount		Gross Amount		Liabilities		Balance Sheet
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
June 30, 2021:
Securities sold under agreements to repurchase	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—

December 31, 2020:
Securities sold under agreements to repurchase	$	10,000	$	—	$	10,000	$	10,000	$	—	$	—

(9) Employee Benefit Plans

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

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

The components of net periodic benefit cost were as follows:


	SERP				SERP
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2021		2020		2021		2020
Net periodic benefit cost for the period:
Service cost	$	3	$	22	$	5	$	44
Interest cost		45		44		90		87
Expected return on plan assets		—		—		—		—
Amortization of prior service cost		—		—		—		—
Recognized actuarial loss		—		—		—		—
Recognized curtailment loss		—		—		—		—
Net periodic benefit cost	$	48	$	66	$	95	$	131

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

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(10) Employee Stock Ownership Plan

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

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 June 30, 2021 and 2020 amounted to $315,000 and $302,000, respectively. Compensation expense recognized for the six months ended June 30, 2021 and 2020 amounted to $632,000 and $641,000, respectively.

Shares held by the ESOP trust were as follows:


	June 30,		December 31,
	2021		2020
Allocated shares		516,403		507,304
Unearned shares		366,997		391,464
Total ESOP shares		883,400		898,768
Fair value of unearned shares, in thousands	$	9,531	$	9,407

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits. For the three months ended June 30, 2021 and 2020 we accrued $35,000 and reversed $10,000, respectively, for the ESOP restoration plan. For the six months ended June 30, 2021 and 2020, we accrued $53,000 and $75,000, respectively, for the ESOP restoration plan.

(11) Share-Based Compensation

The shareholders of Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan on August 19, 2010 and the 2019 Equity Incentive Plan on May 16, 2019. These plans provide for the award of stock options and restricted stock to key officers and directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the equity incentive plans is based on the fair value of the awards on the grant date. The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term. These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision. The cost of the awards will be recognized on a straight-line basis over the three, five- or six-year vesting period during which participants are required to provide services in exchange for the awards.

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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 Consolidated Statements of Income as a component of salaries and employee benefits with a corresponding increase in stockholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2021		2020		2021		2020
Compensation expense	$	92	$	209	$	205	$	366
Income tax benefit		25		57		56		100

Shares of our common stock issued under the 2010 and 2019 Equity Incentive Plans shall be authorized shares. The maximum number of shares that will be awarded under the plans will be 1,862,637 shares.

Stock Options

The table below presents the stock option activity for the six months ended June 30, 2021 and 2020:


		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2020	3,085	$	23.62	1.67	$	1
Granted	—		—	—		—
Exercised	—		—	—		—
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at June 30, 2021	3,085	$	23.62	1.17	$	7

Options outstanding at December 31, 2019	116,409	$	17.53	0.72	$	1,562
Granted	—		—	—		—
Exercised	81,827		17.36	—		725
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at June 30, 2020	34,582	$	17.92	0.35	$	203

Options vested and exercisable at June 30, 2021	3,085	$	23.62	1.17	$	7

The following summarizes certain stock option activity of the Company:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands)	2021		2020		2021		2020
Intrinsic value of stock options exercised	$	—	$	437	$	—	$	725
Proceeds received from stock options exercised		—		1,029		—		1,421
Tax benefits realized from stock options exercised		—		105		—		158
Total fair value of stock options that vested		—		—		—		—

As of June 30, 2021, the Company had 0 unrecognized compensation costs related to the stock option plans.

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Restricted Stock

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock may not be disposed of or transferred during the vesting period. Restricted stock carries the right to receive dividends, although dividends attributable to restricted stock are retained by the Company until the shares vest, at which time they are paid to the award recipient. Unvested restricted stock that is time-based contain nonforfeitable dividend rights. Accrued dividends on restricted stock that do not vest based on performance or market conditions are forfeited.

The table below presents the time-based restricted stock activity:


		Weighted
	Time-Based	Average Grant
	Restricted	Date Fair
	Stock	Value
Unvested at December 31, 2020	23,695	$	24.24
Granted	10,849		26.67
Vested	11,336		25.81
Forfeited	—		—
Unvested at June 30, 2021	23,208	$	24.61

Unvested at December 31, 2019	20,249	$	28.78
Granted	13,444		21.05
Vested	9,998		29.16
Forfeited	—		—
Unvested at June 30, 2020	23,695	$	24.24

During the six months ended June 30, 2021, the Company issued 10,849 shares of restricted stock to certain members of executive management under the 2019 Equity Incentive Plan. The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant. Restricted stock will vest over three years from the date of the grant.

As of June 30, 2021, the Company had $490,000 of unrecognized compensation costs related to restricted stock.

The table below presents the performance-based restricted stock units (PRSUs) that will vest on a performance condition:


	Performance-
	Based Restricted
	Stock Units	Weighted
	Based on a	Average Grant
	Performance	Date Fair
	Condition	Value
Unvested at December 31, 2020	40,585	$	25.83
Granted	13,016		26.67
Vested	7,473		30.73
Forfeited	4,545		30.73
Unvested at June 30, 2021	41,583	$	24.68

Unvested at December 31, 2019	35,976	$	29.16
Granted	16,129		21.05
Vested	7,680		29.53
Forfeited	3,840		29.53
Unvested at June 30, 2020	40,585	$	25.83

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During the six months ended June 30, 2021, the Company issued 13,016 PRSUs to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest three years after they are granted after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved. Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award. For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of June 30, 2021, the Company had $391,000 of unrecognized compensation costs related to these PRSUs. Performance will be measured over a three-year performance period and will be cliff vested.

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


	Performance-
	Based Restricted	Monte Carlo
	Stock Units	Valuation of
	Based on a	the Company's
	Market Condition	Stock
Unvested at December 31, 2020	10,147	$	24.69
Granted	3,254		25.94
Vested	1,628		28.32
Forfeited	1,377		28.32
Unvested at June 30, 2021	10,396	$	24.03

Unvested at December 31, 2019	8,994	$	25.74
Granted	4,032		22.16
Vested	1,197		24.44
Forfeited	1,682		22.44
Unvested at June 30, 2020	10,147	$	24.69

During the six months ended June 30, 2021, the Company also issued 3,254 PRSUs to certain members of executive management under the 2019 Equity Incentive Plan. These PRSUs will vest three years after they are granted after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved. The number of shares that will be expensed will not be adjusted for performance. The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

Grant date: April 5, 2021

Performance period: January 1, 2021 to December 31, 2023

2.74 year risk-free rate on grant date: 0.32%

December 31, 2020 closing price: $24.03

Closing stock price on the date of grant: $26.77

Annualized volatility (based on 2.74 year historical volatility as of the grant date): 38.5%

As of June 30, 2021, the Company had $99,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. Performance will be measured over a three-year performance period and will be cliff vested.

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(12) Earnings Per Share

Holders of unvested restricted stock accrue dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Unvested restricted stock awards that are time-based contain nonforfeitable rights to dividends or dividend equivalents and are considered to be participating securities in the earnings per share computation using the two-class method. Under the two-class method, earnings are allocated to common shareholders and participating securities according to their respective rights to earnings. Unvested restricted stock awards that vest based on performance or market conditions are not considered to be participating securities in the earnings per share calculation because accrued dividends on shares that do not vest are forfeited.

The table below presents the information used to compute basic and diluted earnings per share:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020
Net income	$	4,058	$	4,291	$	9,071	$	8,764
Income allocated to participating securities		(21)		(37)		(24)		(48)
Net income available to common shareholders	$	4,037	$	4,254	$	9,047	$	8,716

Weighted-average number of shares used in:
Basic earnings per share		9,117,467		9,092,287		9,124,086		9,164,877
Dilutive common stock equivalents:
Stock options and restricted stock units		44,881		46,848		41,917		63,544
Diluted earnings per share		9,162,348		9,139,135		9,166,003		9,228,421

Net income per common share, basic	$	0.44	$	0.47	$	0.99	$	0.95
Net income per common share, diluted	$	0.44	$	0.47	$	0.99	$	0.94

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(13) Other Comprehensive Income and Loss

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


	Unfunded		Unrealized
	Pension		(Gain)/Loss on
(Dollars in thousands)	Liability		Securities		Total
Three months ended June 30, 2021
Balances at beginning of period	$	8,967	$	(190)	$	8,777
Amounts reclassified from other comprehensive income, net of taxes		—		190		190
Net current period other comprehensive loss		—		190		190
Balances at end of period	$	8,967	$	—	$	8,967

Three months ended June 30, 2020
Balances at beginning of period	$	8,178	$	(408)	$	7,770
Other comprehensive income, net of taxes		—		(19)		(19)
Amounts reclassified from other comprehensive income, net of taxes		—		112		112
Net current period other comprehensive loss		—		93		93
Balances at end of period	$	8,178	$	(315)	$	7,863

Six months ended June 30, 2021
Balances at beginning of period	$	8,967	$	(276)	$	8,691
Other comprehensive loss, net of taxes		—		3		3
Amounts reclassified from other comprehensive income, net of taxes		—		273		273
Net current period other comprehensive loss		—		276		276
Balances at end of period	$	8,967	$	—	$	8,967

Six months ended June 30, 2020
Balances at beginning of period	$	8,178	$	(510)	$	7,668
Other comprehensive income, net of taxes		—		(26)		(26)
Amounts reclassified from other comprehensive income, net of taxes		—		221		221
Net current period other comprehensive loss		—		195		195
Balances at end of period	$	8,178	$	(315)	$	7,863

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


	Three Months Ended June 30,
	2021						2020
	Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount
Unrealized (gain) loss on securities	$	—	$	—	$	—	$	(26)	$	7	$	(19)
Amount reclassified from other comprehensive income		260		(70)		190		153		(41)		112
Total	$	260	$	(70)	$	190	$	127	$	(34)	$	93


	Six Months Ended June 30,
	2021						2020
	Pretax				After Tax		Pretax				After Tax
(Dollars in thousands)	Amount		Tax		Amount		Amount		Tax		Amount
Unrealized loss (gain) on securities	$	4	$	(1)	$	3	$	(35)	$	9	$	(26)
Amount reclassified from other comprehensive income		373		(100)		273		301		(80)		221
Total	$	377	$	(101)	$	276	$	266	$	(71)	$	195

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(14) Revenue Recognition

The Company’s contracts with customers are generally short-term in nature, with cycles of one year or less. These can range from an immediate term for services such as wire transfers, foreign currency exchanges and cashier’s check purchases, to several days for services such as processing annuity and mutual fund sales. Some contracts may be of an ongoing nature, such as providing deposit account services, including ATM access, check processing, account analysis and check ordering. However, provision of an assessable service and payment for such service is usually concurrent or closely timed. Contracts related to financial instruments, such as loans, investments and debt, are excluded from the scope of this reporting requirement.

After analyzing the Company’s revenue sources, including the amount of revenue received, the timing of services rendered and the timing of payment for these services, the Company has determined that the rendering of services and the payment for such services are generally closely matched. Any differences are not material to the Company’s consolidated financial statements. Accordingly, the Company generally records income when payment for services is received.

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Revenue from contracts with customers is reported in service and other fees in other noninterest income in the consolidated statements of income. The table below reconciles the revenue from contracts with customers and other revenue reported in those line items:


	Service and
(Dollars in thousands)	Other Fees		Other		Total
Three months ended June 30, 2021
Revenue from contracts with customers	$	499	$	42	$	541
Other revenue		31		28		59
Total	$	530	$	70	$	600

Three months ended June 30, 2020
Revenue from contracts with customers	$	519	$	20	$	539
Other revenue		16		27		43
Total	$	535	$	47	$	582

Six months ended June 30, 2021
Revenue from contracts with customers	$	1,456	$	124	$	1,580
Other revenue		69		56		125
Total	$	1,525	$	180	$	1,705

Six months ended June 30, 2020
Revenue from contracts with customers	$	924	$	53	$	977
Other revenue		64		55		119
Total	$	988	$	108	$	1,096

(15) Leases

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2021		2020		2021		2020
Lease Costs:
Operating lease costs	$	853	$	816	$	1,709	$	1,631
Short-term lease costs		11		6		17		12
Variable lease costs		39		36		82		77
Total lease costs	$	903	$	858	$	1,808	$	1,720

Cash paid for amounts included in measurement of lease liabilities	$	839	$	804	$	1,684	$	1,606
ROU assets obtained in exchange for new operating lease liabilities	$	403	$	18	$	2,841	$	1,786

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At June 30, 2021, future minimum rental commitments under noncancellable operating leases are as follows:


(Dollars in thousands)
2021	$	1,562
2022		2,951
2023		2,600
2024		2,349
2025		1,661
Thereafter		4,224
Total		15,347
Less present value discount		914
Present value of leases	$	14,433

The table below presents other lease related information:


	June 30,			June 30,
	2021			2020
Weighted-average remaining lease term (years)		6.15			5.64
Weighted-average discount rate		2.16	%		2.75	%

(16) Fair Value

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its financial assets and liabilities measured or disclosed at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

●Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

●Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

●Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures. Investment securities held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Investment Securities Available for Sale. The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

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Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. The fair value inputs are considered Level 2 inputs. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the Consolidated Balance Sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

The estimated fair values of the Company’s financial instruments are as follows:


	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
June 30, 2021
Assets
Cash and cash equivalents	$	117,578	$	117,578	$	117,578	$	—	$	—
Investment securities held to maturity		609,074		615,721		—		615,721		—
Loans held for sale		540		543		—		543		—
Loans receivable, net		1,314,871		1,353,738		—		—		1,353,738
FHLB stock		8,173		8,173		—		8,173		—
FRB stock		3,152		3,152		—		3,152		—
Accrued interest receivable		6,345		6,345		22		1,118		5,205
Interest rate contracts		20		20		—		20		—

Liabilities
Deposits		1,678,694		1,680,425		—		1,411,296		269,129
Advances from the Federal Home Loan Bank		141,000		143,878		—		143,878		—
Securities sold under agreements to repurchase		10,000		10,314		—		10,314		—
Accrued interest payable		50		50		—		45		5
Interest rate contracts		20		20		—		20		—

December 31, 2020
Assets
Cash and cash equivalents	$	363,543	$	363,543	$	363,543	$	—	$	—
Investment securities available for sale		3,562		3,562		—		3,562		—
Investment securities held to maturity		247,642		262,841		—		262,841		—
Loans held for sale		2,195		2,274		—		2,274		—
Loans receivable, net		1,406,995		1,433,489		—		—		1,433,489
FHLB stock		8,144		8,144		—		8,144		—
FRB stock		3,145		3,145		—		3,145		—
Accrued interest receivable		6,515		6,515		16		627		5,872
Interest rate contracts		38		38		—		38		—

Liabilities
Deposits		1,659,800		1,663,226		—		1,338,022		325,204
Advances from the Federal Home Loan Bank		141,000		145,441		—		145,441		—
Securities sold under agreements to repurchase		10,000		10,466		—		10,466		—
Accrued interest payable		35		35		—		33		2
Interest rate contracts		38		38		—		38		—

At June 30, 2021 and December 31, 2020, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

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The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2021
Interest rate contracts — assets	$	—	$	20	$	—	$	20
Interest rate contracts — liabilities		—		(20)		—		(20)

December 31, 2020
Interest rate contracts — assets	$	—	$	38	$	—	$	38
Interest rate contracts — liabilities		—		(38)		—		(38)
Investment securities available for sale		—		3,562		—		3,562

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of December 31, 2020 and the related losses for the year ended December 31, 2020. There were 0 assets measured at fair value on a nonrecurring basis as of June 30, 2021. There were 0 liabilities measured at fair value on a nonrecurring basis as of June 30, 2021 and December 31, 2020.


	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Losses

December 31, 2020
Mortgage servicing assets	12/31/2020	$	—	$	—	$	407	$	407	$	(73)

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

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


				Unobservable		Range
(Dollars in thousands)	Fair Value		Valuation Technique	Input	(Weighted Average)
December 31, 2020:
Mortgage servicing assets	$	407	Discounted cash flow	Discount rate		9.25% - 11.25% (10.25%)
				Prepayment speed (CPR)		10.42 - 19.61 (13.57)
				Annual cost to service (per loan, in dollars)	$	75

(17) Subsequent Events

On July 29, 2021, the Board of Directors of Territorial Bancorp Inc. declared a quarterly cash dividend of $0.23 per share of common stock. The dividend is expected to be paid on August 26, 2021 to stockholders of record as of August 12, 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “continue” and words of similar meaning. These forward-looking statements include, but are not limited to:

●

statements of our goals, intentions and expectations;

●

statements regarding our business plans, prospects, growth and operating strategies;

●

statements regarding the asset quality of our loan and investment portfolios; and

●

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. You should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

●

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

●

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

●

competition among depository and other financial institutions;

●

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

●

adverse changes in the securities markets;

●

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

●

changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

●

our ability to enter new markets successfully and capitalize on growth opportunities;

●

our ability to successfully integrate acquired entities, if any;

●

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

●

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

●

changes in our organization, compensation and benefit plans;

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●

the timing and amount of revenues that we may recognize;

●

the value and marketability of collateral underlying our loan portfolios;

●

our ability to retain key employees;

●

cyberattacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems;

●

technological change that may be more difficult or expensive than expected;

●

the ability of third-party providers to perform their obligations to us;

●

the ability of the U.S. Government to manage federal debt limits;

●

the effects of any federal government shutdown;

●

the quality and composition of our investment portfolio;

●

changes in market and other conditions that would affect our ability to repurchase our common stock;

●

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

●

changes in the financial condition or future prospects of issuers of securities that we own.

In addition, given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and how the economy will continue to be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

●

demand for our products and services may decline, making it difficult to grow assets and income;

●

if the economy is unable to remain open, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

●

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

●

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond loan deferral periods, which will adversely affect our net income;

●

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

●

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

●

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on us;

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●

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; and

●

employees may have difficulty performing work if COVID-19 infections occur.

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 inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, our capital, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. As a result, we may be vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets.

We have continued our focus on originating one- to four-family residential real estate loans. Our emphasis on conservative loan underwriting has resulted in continued low levels of nonperforming assets. Our nonperforming assets, which can include nonaccrual loans and real estate owned, totaled $4.2 million or 0.20% of total assets at June 30, 2021 compared to $4.4 million, or 0.21% of total assets at December 31, 2020. We recorded a $1.3 million reversal of loan loss provisions for the six months ended June 30, 2021 and $1.6 million of loan loss provisions for the six months ended June 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic.

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 only 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.

We sold fixed-rate mortgage loans held for sale with principal balances of $14.5 million and $12.3 million during the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2020, we also securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. Federal Home Loan Bank advances remained constant at $141.0 million for the six months ended June 30, 2021 and decreased by $15.0 million for the six months ended June 30, 2020. Securities sold under agreements to repurchase remained constant at $10.0 million for the six months ended June 30, 2021 and 2020.

Our investments in mortgage-backed securities 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 entities guarantee the payment of principal and interest on our mortgage-backed securities. As of June 30, 2021 and December 31, 2020, we owned $609.1 million and $251.2 million, respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae.

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, 2020.

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Comparison of Financial Condition at June 30, 2021 and December 31, 2020

Assets. Our total assets increased by $21.3 million, or 1.0%, to $2.1 billion at June 30, 2021. The increase in assets was primarily due to a $357.9 million increase in investment securities, which was partially offset by a $246.0 million decrease in cash and cash equivalents and a $93.8 million decrease in total loans.

Cash and Cash Equivalents. Cash and cash equivalents were $117.6 million at June 30, 2021, a decrease of $246.0 million since December 31, 2020. The decrease in cash and cash equivalents was primarily caused by a $357.9 million increase in investment securities, which was partially offset by a $93.8 million decrease in total loans and an $18.9 million increase in deposits.

Loans. Total loans, including $540,000 of loans held for sale, were $1.3 billion at June 30, 2021, or 61.7% of total assets. During the six months ended June 30, 2021, the loan portfolio, including loans held for sale, decreased by $93.8 million, or 6.7%. The decrease in the loan portfolio primarily occurred as principal repayments and loan sales exceeded the origination of new loans.

Securities. At June 30, 2021, our securities portfolio totaled $609.1 million, or 28.6% of total assets. During the six months ended June 30, 2021, the securities portfolio increased by $357.9 million. The increase in the securities balance occurred as purchases exceeded the principal repayments and sales of securities. Mortgage-backed securities were purchased during the year to offset the decrease in interest income that occurred because of the decrease in our loan portfolio.

At June 30, 2021, none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as nonconforming loans having less than full documentation) loans.

Deposits. Deposits were $1.7 billion at June 30, 2021, an increase of $18.9 million, or 1.1%, since December 31, 2020. The growth in deposits was primarily due to increases of $52.9 million in savings accounts and $21.2 million in checking accounts. These increases were partially offset by a $54.4 million decrease in certificates of deposit during the six months ended June 30, 2021.

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank and funds borrowed under securities sold under agreements to repurchase. During the six months ending June 30, 2021 total borrowings remained constant at $151.0 million.

Stockholders’ Equity. Total stockholders’ equity was $251.2 million at June 30, 2021, an increase of $2.5 million, or 1.0%, since December 31, 2020. The increase in stockholders’ equity occurred primarily due to net income of $9.1 million, which was partially offset by the declaration of $4.2 million of dividends and the repurchase of $2.9 million of common stock.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as we did not hold any tax-free investments. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances and are included with accrual loans in the tables. However, no interest income was attributed to nonaccrual loans. 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 June 30,
	2021							2020
	Average							Average
	Outstanding					Yield/Rate		Outstanding					Yield/Rate
	Balance			Interest		(1)		Balance			Interest		(1)

	(Dollars in thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (2)	$	1,285,523		$	11,663	3.63	%	$	1,505,018		$	14,549	3.87	%
Multi-family residential		6,569			76	4.63			9,179			105	4.58
Construction, commercial and other		18,478			207	4.48			21,916			249	4.54
Home equity loans and lines of credit		8,191			101	4.93			10,147			199	7.84
Other loans		9,342			87	3.73			10,685			123	4.60
Total loans		1,328,103			12,134	3.65			1,556,945			15,225	3.91
Investment securities:
U.S. government sponsored mortgage-backed securities (2)		409,098			2,394	2.34			353,756			2,610	2.95
Total securities		409,098			2,394	2.34			353,756			2,610	2.95
Other		322,111			228	0.28			98,118			170	0.69
Total interest-earning assets		2,059,312			14,756	2.87			2,008,819			18,005	3.59
Non-interest-earning assets		86,203							79,414
Total assets	$	2,145,515						$	2,088,233

Interest-bearing liabilities:
Savings accounts	$	1,059,267			284	0.11	%	$	921,981			535	0.23	%
Certificates of deposit		283,556			790	1.11			437,301			1,811	1.66
Money market accounts		5,118			2	0.16			4,820			6	0.50
Checking and Super NOW accounts		272,516			14	0.02			219,458			12	0.02
Total interest-bearing deposits		1,620,457			1,090	0.27			1,583,560			2,364	0.60
Federal Home Loan Bank advances		141,000			537	1.52			143,198			829	2.32
Securities sold under agreements to repurchase		10,000			45	1.80			10,000			46	1.84
Total interest-bearing liabilities		1,771,457			1,672	0.38			1,736,758			3,239	0.75
Non-interest-bearing liabilities		120,798							106,549
Total liabilities		1,892,255							1,843,307
Stockholders’ equity		253,260							244,926
Total liabilities and stockholders’ equity	$	2,145,515						$	2,088,233

Net interest income				$	13,084						$	14,766
Net interest rate spread (3)						2.49	%						2.84	%
Net interest-earning assets (4)	$	287,855						$	272,061
Net interest margin (5)						2.54	%						2.94	%
Interest-earning assets to interest-bearing liabilities		116.25	%						115.66	%

(1)	Annualized.

(2)	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)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)	Net interest margin represents net interest income divided by average total interest-earning assets.

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	For the Six Months Ended June 30,
	2021							2020
	Average							Average
	Outstanding					Yield/Rate		Outstanding					Yield/Rate
	Balance			Interest		(1)		Balance			Interest		(1)

	(Dollars in thousands)
Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (2)	$	1,311,098		$	24,229	3.70	%	$	1,515,020		$	29,359	3.88	%
Multi-family residential		6,747			156	4.62			9,476			217	4.58
Construction, commercial and other		18,279			406	4.44			22,434			520	4.64
Home equity loans and lines of credit		8,469			208	4.91			10,149			342	6.74
Other loans		9,480			184	3.88			10,189			244	4.79
Total loans		1,354,073			25,183	3.72			1,567,268			30,682	3.92
Investment securities:
U.S. government sponsored mortgage-backed securities (2)		342,637			4,219	2.46			360,217			5,390	2.99
Total securities		342,637			4,219	2.46			360,217			5,390	2.99
Other		346,156			459	0.27			89,656			514	1.15
Total interest-earning assets		2,042,866			29,861	2.92			2,017,141			36,586	3.63
Non-interest-earning assets		85,327							78,645
Total assets	$	2,128,193						$	2,095,786

Interest-bearing liabilities:
Savings accounts	$	1,044,220			638	0.12	%	$	914,292			1,512	0.33	%
Certificates of deposit		291,941			1,736	1.19			457,198			3,942	1.72
Money market accounts		6,448			6	0.19			4,789			11	0.46
Checking and Super NOW accounts		262,478			27	0.02			210,183			23	0.02
Total interest-bearing deposits		1,605,087			2,407	0.30			1,586,462			5,488	0.69
Federal Home Loan Bank advances		141,000			1,073	1.52			149,599			1,724	2.30
Securities sold under agreements to repurchase		10,000			91	1.82			10,000			91	1.82
Total interest-bearing liabilities		1,756,087			3,571	0.41			1,746,061			7,303	0.84
Non-interest-bearing liabilities		119,636							104,066
Total liabilities		1,875,723							1,850,127
Stockholders’ equity		252,470							245,659
Total liabilities and stockholders’ equity	$	2,128,193						$	2,095,786

Net interest income				$	26,290						$	29,283
Net interest rate spread (3)						2.51	%						2.79	%
Net interest-earning assets (4)	$	286,779						$	271,080
Net interest margin (5)						2.57	%						2.90	%
Interest-earning assets to interest-bearing liabilities		116.33	%						115.53	%

(1)	Annualized.

(2)	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)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)	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 June 30, 2021 and 2020

General. Net income decreased by $233,000 or 5.4%, to $4.1 million for the three months ended June 30, 2021 from $4.3 million for the three months ended June 30, 2020. The decrease in net income was primarily due to a $1.7 million decrease in net interest income and a $641,000 increase in non-interest expense. These decreases to net income was partially offset by a $1.8 million decrease in loan loss provisions and a $266,000 increase in non-interest income.

Net Interest Income. Net interest income decreased by $1.7 million, or 11.4%, to $13.1 million for the three months ended June 30, 2021 from $14.8 million for the three months ended June 30, 2020. Interest income decreased by $3.2 million, or 18.0%, primarily due to a 72 basis point decrease in the average yield on average interest-earning assets, which was partially offset by a $50.5 million increase in the average balance of interest-earning assets. Interest expense decreased by $1.6 million, or 48.4%, due to a 37 basis point decrease in the cost of average interest-bearing liabilities, which was partially offset by a $34.7 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 2.49% and 2.54%, respectively, for the three months ended June 30, 2021, compared to 2.84% and 2.94%, respectively, for the three months ended June 30, 2020. The decrease in the interest rate spread and in the net interest margin are attributable to a 72 basis point decrease in the yield of average interest-bearing assets that was partially offset by a 37 basis point decrease in the cost of average interest-earning liabilities.

Interest Income. Interest income decreased by $3.2 million, or 18.0%, to $14.8 million for the three months ended June 30, 2021 from $18.0 million for the three months ended June 30, 2020. Interest income on loans decreased by $3.1 million, or 20.3%, to $12.1 million for the three months ended June 30, 2021 from $15.2 million for the three months ended June 30, 2020. The decrease in interest income on loans occurred because of a $228.8 million, or 14.7%, decrease in the average balance of loans and a 26 basis point decrease in the average loan yield. The decrease in the average balance of loans occurred as loan repayments and loan sales exceeded new loan originations. The decrease in the average loan yield occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the loan portfolio. Interest income on securities decreased by $216,000, or 8.3%, to $2.4 million for the three months ended June 30, 2021 from $2.6 million for the three months ended June 30, 2020. The decrease in interest income on securities occurred because of a 61 basis point decline in the average securities yield, which occurred as higher yielding securities were paid off or sold and securities with lower interest rates were purchased. The average balance of securities increased by $55.3 million, or 15.6%, to $409.1 million for the three months ended June 30, 2021 from $353.8 million for the three months ended June 30, 2020. The increase in the average balance of securities occurred as purchases exceeded the principal repayments and sales of securities.

Interest Expense. Interest expense decreased by $1.6 million, or 48.4%, to $1.7 million for the three months ended June 30, 2021 from $3.2 million for the three months ended June 30, 2020. The decrease in interest expense occurred because interest expense on interest-bearing deposits decreased by $1.3 million, or 53.9%, to $1.1 million for the three months ended June 30, 2021 from $2.4 million for the three months ended June 30, 2020. The decrease in interest expense on interest-bearing deposits was due to a 33 basis point decrease in the average rate on interest-bearing deposits, which was partially offset by a $36.9 million, or 2.3%, increase in the average interest-bearing deposit balance. The average rate paid on interest-bearing deposits decreased to 0.27% for the three months ended June 30, 2021 compared to 0.60% for the three months ended June 30, 2020. The decrease in the average rate paid on interest-bearing deposits was primarily due to lower interest rates offered on savings accounts and certificates of deposit. The average rate paid on savings accounts decreased to 0.11% for the three months ended June 30, 2021 from 0.23% for the three months ended June 30, 2020. The average rate paid on certificates of deposit decreased to 1.11% for the three months ended June 30, 2021 from 1.66% for the three months ended June 30, 2020. Interest expense on FHLB advances decreased by $292,000 or 35.2% to $537,000 for the three months ended June 30, 2021 from $829,000 for the three months ended June 30, 2020. The decrease in interest expense on FHLB advances occurred because of an 80 basis point decrease in the average cost of advances, which was augmented by a $2.2 million decrease in the average FHLB advance balance. The decrease in the average cost of advances occurred as we restructured $102.0 million of FHLB advances at lower interest rates. The decrease in FHLB advance balance occurred as maturing advances were paid off.

Provision for Loan Losses. We recorded a $372,000 reversal of loan loss provisions for the three months ended June 30, 2021 and $1.4 million of loan loss provisions for the three months ended June 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program,

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Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.23% at June 30, 2021 and 0.28% at June 30, 2020. Nonaccrual loans totaled $4.2 million at June 30, 2021, or 0.32% of total loans at that date, compared to $763,000 of nonaccrual loans at June 30, 2020, or 0.05% of total loans at that date. Nonaccrual loans as of June 30, 2021 and 2020 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 June 30, 2021 and 2020. 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 June 30, 2021 and 2020.


	Three Months Ended
	June 30,				Change
	2021		2020		$ Change		% Change

				(Dollars in thousands)
Service and other fees	$	530	$	535	$	(5)	(0.9)	%
Income on bank-owned life insurance		190		201		(11)	(5.5)	%
Gain on sale of investment securities		911		419		492	117.4	%
Gain on sale of loans		26		259		(233)	(90.0)	%
Other		70		47		23	48.9	%
Total	$	1,727	$	1,461	$	266	18.2	%

Noninterest income increased by $266,000 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. During the three months ended June 30, 2021, we sold $10.1 million of held-to-maturity mortgage-backed securities and $2.0 million of available-for-sale mortgage-backed securities and recorded gains of $678,000 and $233,000, respectively. During the three months ended June 30, 2020, we sold $3.6 million of held-to-maturity mortgage-backed securities and $1.6 million of available-for-sale mortgage-backed securities and recorded gains of $279,000 and $140,000, respectively. During the three months ended June 30, 2021 and 2020, we sold $2.3 million and $9.6 million of mortgage loans held for sale and recognized gains of $26,000 and $259,000, respectively.

Noninterest Expense. The following table summarizes changes in noninterest expense between the three months ended June 30, 2021 and 2020.


	Three Months Ended
	June 30,					Change
	2021		2020		$ Change		% Change

				(Dollars in thousands)
Salaries and employee benefits	$	5,560	$	5,264	$	296	5.6	%
Occupancy		1,572		1,626		(54)	(3.3)	%
Equipment		1,064		1,164		(100)	(8.6)	%
Federal deposit insurance premiums		142		74		68	91.9	%
Other general and administrative expenses		1,274		843		431	51.1	%
Total	$	9,612	$	8,971	$	641	7.1	%

Noninterest expense increased by $641,000 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase in other general and administrative expenses was primarily due to increases in accounting and auditing expenses and legal expenses. The increase in salaries and employee benefits was primarily due to an increase in compensation expense, health insurance, commissions and payroll taxes and a decrease in the deferred salary expense for originating new loans. As new loans are originated, salary expense is reduced due to the capitalization of the cost of new loans. The deferred salary expense for originating new loans decreased due to a decrease in the cost deferred for each loan originated that was partially offset by an increase in the number of loans closed. These increases to salaries and employee benefits was partially offset by a decrease in the expense for our equity incentive plan and a decrease in loan agent commissions. The decrease in equipment expense was primarily due to a decrease in service bureau expense.

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Income Tax Expense. Income taxes were $1.5 million for the three months ended June 30, 2021, reflecting an effective tax rate of 27.2%, compared to $1.6 million for the three months ended June 30, 2020, reflecting an effective tax rate of 26.8%.

Comparison of Operating Results for the Six Months Ended June 30, 2021 and 2020

General. Net income increased by $307,000, or 3.5%, from $8.8 million for the six months ended June 30, 2020 to $9.1 million for the six months ended June 30, 2021. The increase in net income was due to a $2.9 million decrease in loan loss provisions and a $1.2 million increase in non-interest income. These increases to net income were partially offset by a $3.0 million decrease in net interest income, a $657,000 increase to non-interest expense and a $144,000 increase in income tax expense.

Net Interest Income. Net interest income decreased by $3.0 million, or 10.2%, to $26.3 million for the six months ended June 30, 2021 from $29.3 million for the six months ended June 30, 2020. Interest income decreased by $6.7 million, or 18.4%, due to a 71 basis point decrease in the average yield of interest-earning assets, which was partially offset by a $25.7 million increase in the average balance of interest-earning assets. Interest expense decreased by $3.7 million, or 51.1%, due to a 43 basis point decrease in the cost of average interest-bearing liabilities, which was partially offset by a $10.0 million increase in the average balance of interest-bearing liabilities. The interest rate spread and net interest margin were 2.51% and 2.57% respectively, for the six months ended June 30, 2021, compared to 2.79% and 2.90%, respectively, for the six months ended June 30, 2020. The decreases in the interest rate spread and in the net interest margin are attributable to the 71 basis point decrease in the yield on average interest-bearing assets that was partially offset by the 43 basis point decrease in the cost of average interest-earning liabilities.

Interest Income. Interest income decreased by $6.7 million, or 18.4%, to $29.9 million for the six months ended June 30, 2021 from $36.6 million for the six months ended June 30, 2020. Interest income on loans decreased by $5.5 million, or 17.9%, to $25.2 million for the six months ended June 30, 2021 from $30.7 million for the six months ended June 30, 2020. The decrease in interest income on loans occurred because the average balance of loans decreased by $213.2 million, or 13.6%, and the average loan yield decreased by 20 basis points. The decrease in the average balance of loans occurred as loan repayments and loan sales exceeded new loan originations. The decrease in the average loan yield occurred as higher yielding loans were paid off and new loans with lower interest rates were added to the loan portfolio. Interest income on securities decreased by $1.2 million, or 21.7%, to $4.2 million for the six months ended June 30, 2021 from $5.4 million for the six months ended June 30, 2020. The decrease in interest income on securities occurred primarily because the average balance of securities decreased by $17.6 million, or 4.9%, as security repayments and sales exceeded security purchases. The decrease in interest income on securities was augmented by a 53 basis point decrease in the average yield on securities, which occurred as higher yielding securities were paid off or sold and securities with lower interest rates were purchased.

Interest Expense. Interest expense decreased by $3.7 million, or 51.1%, to $3.6 million for the six months ended June 30, 2021 from $7.3 million for the six months ended June 30, 2020. Interest expense on interest-bearing deposits decreased by $3.1 million, or 56.1%, from $5.5 million for the six months ended June 30, 2020 to $2.4 million for the six months ended June 30, 2021. The decrease in interest expense on interest-bearing deposits was primarily due to a 39 basis point decrease in the average rate paid on interest-bearing deposits. The decrease in the average rate paid on interest bearing deposits was primarily due to lower interest rates offered on certificates of deposit and savings accounts. During the six months ended June 30, 2021, the average rate paid on certificates of deposit decreased by 53 basis points as average rates dropped from 1.72% to 1.19% as higher rate certificates of deposit matured. The average rate paid on savings accounts decreased by 21 basis points as average rates dropped from 0.33% to 0.12%. The decrease in the average rates on certificates of deposit and savings accounts occurred because of a decline in market interest rates. Interest expense on FHLB advances decreased by $651,000, or 37.8%, from $1.7 million for the six months ended June 30, 2020 to $1.1 million for the six months ended June 30, 2021. The decrease in interest expense on FHLB advances was primarily due to a 78 basis point decrease in the average rate paid and an $8.6 million decrease in the average balance on FHLB advances. The decrease in the average rate paid on FHLB advances was primarily due to restructuring $102.0 million of FHLB advances at lower interest rates.

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Provision for Loan Losses. We recorded a $1.3 million reversal of loan loss provisions for the six months ended June 30, 2021 and $1.6 million of loan loss provisions for the six months ended June 30, 2020. The reversal of loan loss provisions occurred primarily due to decreases in the amount of loans in our loan payment deferral program, Hawaii’s unemployment rate and the size of our loan portfolio. The loan payment deferral program was created to assist borrowers who were experiencing financial hardship due to the COVID-19 pandemic. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.23% and 0.28% at June 30, 2021 and 2020, respectively. Nonaccrual loans totaled $4.2 million at June 30, 2021, or 0.32% of total loans at that date, compared to $763,000 of nonaccrual loans at June 30, 2020, or 0.05% of total loans at that date. Nonaccrual loans as of June 30, 2021 and 2020 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 June 30, 2021 and 2020. 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 six months ended June 30, 2021 and 2020.


	Six Months Ended
	June 30,				Change
	2021		2020		$ Change		% Change

				(Dollars in thousands)
Service and other fees	$	1,525	$	988	$	537	54.4	%
Income on bank-owned life insurance		378		403		(25)	(6.2)	%
Gain on sale of investment securities		1,437		597		840	140.7	%
Gain on sale of loans		446		666		(220)	(33.0)	%
Other		180		108		72	66.7	%
Total	$	3,966	$	2,762	$	1,204	43.6	%

Noninterest income increased by $1.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. During the six months ended June 30, 2021, we sold $14.9 million of held-to-maturity mortgage-backed securities and $3.0 million of available-for-sale mortgage-backed securities and recognized gains of $1.1 million and $339,000, respectively. During the six months ended June 30, 2020, we sold $4.4 million of held-to-maturity mortgage-backed securities and $3.4 million of available-for-sale mortgage-backed securities and recorded gains of $307,000 and $290,000, respectively. The sale of the held-to-maturity mortgage-backed securities, for which we had already collected a substantial portion of the outstanding purchased principal (at least 85%), were in accordance with the Investments – Debt and Equity Securities topic of the FASB ASC and do not taint management’s assertion of its intent to hold the remaining securities in the held-to-maturity portfolio to maturity. Service and other fees increased due to an increase in fees earned for referring mortgage loans to other financial institutions and mortgage brokers. During the six months ended June 30, 2021 and 2020, the Company sold mortgage loans held for sale with principal balances of $14.5 million and $12.3 million, respectively, and recognized gains of $446,000 and $289,000, respectively. During the six months ended June 30, 2020, the Company securitized fixed-rate first mortgage loans with a book value of $9.4 million and received mortgage-backed securities with a fair market value of $9.8 million. The Company retained the servicing of these loans and recorded mortgage servicing assets with a fair market value of $78,000. A net gain of $377,000 was recognized on the transaction. There were no securitization transactions during the six months ended June 30, 2021.

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Noninterest Expense. The following table summarizes changes in noninterest expense between the six months ended June 30, 2021 and 2020.


	Six Months Ended
	June 30,				Change
	2021		2020		$ Change		% Change

				(Dollars in thousands)
Salaries and employee benefits	$	11,083	$	10,948	$	135	1.2	%
Occupancy		3,219		3,271		(52)	(1.6)	%
Equipment		2,194		2,284		(90)	(3.9)	%
Federal deposit insurance premiums		283		74		209	282.4	%
Other general and administrative expenses		2,387		1,932		455	23.6	%
Total	$	19,166	$	18,509	$	657	3.5	%

Noninterest expense increased by $657,000 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase in other general and administrative expenses was primarily due to increases in accounting and auditing expenses and legal expenses. The increase in federal deposit insurance premiums occurred as we received credits in the six months ended June 30, 2020 because the FDIC insurance fund was overcapitalized. The increase in salaries and employee benefits was primarily due to an increases in compensation expense, health insurance and payroll taxes. These increases to salaries and employee benefits was partially offset by a decrease in the expense for our equity incentive plan and an increase in the deferred salary expense for originating new loans. As new loans are originated, salary expense is reduced due to the capitalization of the cost of new loans. The deferred salary expense for originating new loans increased due to an increase in the number of loans closed that was partially offset by a decrease in the cost deferred for each loan originated. The decrease in equipment expense was primarily due to a decrease in service bureau expense.

Income Tax Expense. Income taxes were $3.3 million for the six months ended June 30, 2021, reflecting an effective tax rate of 26.7%, compared to $3.2 million for the six months ended June 30, 2020, reflecting an effective tax rate of 26.5%.

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 and security repayments, advances from the Federal Home Loan Bank, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and mortgage-backed security 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 Senior Treasury Analyst, 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 June 30, 2021.

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

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(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 June 30, 2021, our cash and cash equivalents totaled $117.6 million. On that date, we had $10.0 million in securities sold under agreements to repurchase outstanding and $141.0 million of Federal Home Loan Bank advances outstanding with the ability to borrow an additional $821.8 million under Federal Home Loan Bank advances. We have securities with a market value of $9.2 million pledged to the Federal Reserve Bank and have the ability to borrow up to $8.6 million using these securities as collateral.

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 June 30, 2021, we had $17.8 million in loan commitments outstanding for fixed-rate loans and had $17.5 million in unused lines of credit to borrowers. Certificates of deposit due within one year at June 30, 2021 totaled $205.5 million, or 12.2% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and security 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 June 30, 2022. 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 six months ended June 30, 2021 and 2020 we originated $176.7 million and $118.2 million of loans, respectively. During the six months ended June 30, 2021 we purchased securities with a principal balance totaling $431.7 million. In the six months ended June 30, 2020 we did not purchase any investment securities.

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 a net increase in deposits of $18.9 million and $13.4 million for the six months ended June 30, 2021 and 2020, 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. FHLB advances were $141.0 million at June 30, 2021 and December 31, 2020. We had the ability to borrow up to an additional $821.8 million and $807.2 million from the FHLB as of June 30, 2021 and December 31, 2020, respectively. We also utilize securities sold under agreements to repurchase as another borrowing source. Securities sold under agreements to repurchase were $10.0 million at June 30, 2021 and December 31, 2020.

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 June 30, 2021, Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of $10.2 million.

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Territorial Savings Bank is 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. Territorial Bancorp Inc. is not subject to regulatory capital requirements because its total assets are less than $3.0 billion. At June 30, 2021, Territorial Savings Bank exceeded all of its regulatory capital requirements and is considered to be “well capitalized” under regulatory guidelines.

The tables below present the fully-phased in capital required to be considered “well-capitalized” and meet the regulatory capital conservation buffer requirement 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 June 30, 2021 and December 31, 2020:


(Dollars in thousands)	Required Ratio			Actual Amount	Actual Ratio
June 30, 2021:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	249,084	11.63	%
Territorial Bancorp Inc.			$	260,212	12.15	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	249,084	27.83	%
Territorial Bancorp Inc.			$	260,212	29.06	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	249,084	27.83	%
Territorial Bancorp Inc.			$	260,212	29.06	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	252,116	28.17	%
Territorial Bancorp Inc.			$	263,244	29.40	%

December 31, 2020:
Tier 1 Leverage Capital
Territorial Savings Bank	5.00	%	$	239,256	11.38	%
Territorial Bancorp Inc.			$	257,399	12.24	%
Common Equity Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	9.00	%	$	239,256	27.49	%
Territorial Bancorp Inc.			$	257,399	29.57	%
Tier 1 Risk-Based Capital (1)
Territorial Savings Bank	10.50	%	$	239,256	27.49	%
Territorial Bancorp Inc.			$	257,399	29.57	%
Total Risk-Based Capital (1)
Territorial Savings Bank	12.50	%	$	243,608	27.99	%
Territorial Bancorp Inc.			$	261,751	30.07	%

(1)	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 became effective on January 1, 2019.

Prompt Corrective Action provisions define specific capital categories based on an institution’s capital ratios. However, the regulators may impose higher minimum capital standards on individual institutions or may downgrade an institution from one capital category to a lower category because of safety and soundness concerns. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements.

Prompt Corrective Action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “undercapitalized” to “critically undercapitalized.”

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At June 30, 2021 and December 31, 2020, the Bank’s capital ratios exceeded the minimum capital thresholds for a “well-capitalized” institution. There are no conditions or events that have changed the institution’s category under the capital guidelines.

Depending on the amount of dividends to be paid, the Bank is required to either notify or make application to the Federal Reserve Bank before dividends are paid to the Company.

Legislation enacted in 2018 requires the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” between 8% to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk based requirements. The federal regulators have adopted 9% as the applicable ratio, effective March 31, 2020, and reduced the ratio to 8% as a result of the CARES Act. We have not elected to follow the alternative framework.

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 a decrease of $54.4 million in certificates of deposit and a decrease of $3.5 million in loan commitments between December 31, 2020 and June 30, 2021, there have not been any material changes in our contractual obligations and funding needs since December 31, 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank, our capital, proceeds from securities sold under agreements to repurchase and proceeds from loan and security sales. In addition, there is little demand for adjustable-rate mortgage loans in the Hawaii market area. This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. We sold $14.5 million and $12.3 million of fixed-rate mortgage loans during the six months ended June 30, 2021 and 2020, respectively, to reduce our interest rate risk.

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

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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 March 31, 2021 (the latest date for which we have available information) 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	$	319,844	$	(39,406)	(10.97)	%	17.38	%	1.04	%
+300	$	340,748	$	(18,502)	(5.15)	%	17.65	%	1.31	%
+200	$	363,590	$	4,340	1.21	%	17.92	%	1.58	%
+100	$	374,360	$	15,110	4.21	%	17.64	%	1.30	%
0	$	359,250	$	—	—	%	16.34	%	—	%
-100	$	292,933	$	(66,317)	(18.46)	%	13.15	%	(3.19)	%

(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 have decreased by 27 basis points between March 31, 2021 and June 30, 2021. The decrease in mortgage interest rates is not expected to have a significant effect on estimated EVE.

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 PROCEDURES

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 June 30, 2021. 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.

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During the quarter ended June 30, 2021, 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.

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PART II

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions that are considered ordinary, routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the period ended December 31, 2020 filed with the Securities and Exchange Commission.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

(c) Stock Repurchases. The following table sets forth information in connection with repurchases of our shares of common stock during the three months ended June 30, 2021:


				Total Number of	Maximum Approximate
				Shares Purchased as	Dollar Value of Shares
	Total Number	Average Price		Part of Publicly	That May Yet be
	of Shares	Paid per		Announced Plans or	Purchased Under the
Period	Purchased (1)	Share		Programs	Plans or Programs (2)
April 1, 2021 through April 30, 2021	—	$	—	—	$	—
May 1, 2021 through May 31, 2021	52,636		25.70	52,636		3,647,310
June 1, 2021 through June 30, 2021	48,637	$	24.96	48,637	$	2,433,493

Total	101,273	$	25.34	101,273	$	2,433,493

______________________________________

(1)

Includes shares acquired by the Company to settle the payment of taxes in connection with restricted stock vesting.

(2)

On May 5, 2021, the Company announced its tenth repurchase program. Under this stock repurchase program, the Company is authorized to repurchase up to $5,000,000 of our common stock based on certain price assumptions. We have entered into a Rule 10b5-1 plan with respect to our stock repurchase program. The stock repurchase program expires on November 5, 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Quarterly Report on Form 10-Q and are listed below.

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INDEX TO EXHIBITS


Exhibit
Number		Description
31.1		Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

31.2		Certification of Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32		Certification of Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer, and Melvin M. Miyamoto, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Territorial Bancorp Inc.’s Form 10-Q report for the quarter ended June 30, 2021, formatted in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL document and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TERRITORIAL BANCORP INC.
	(Registrant)


Date: August 13, 2021	/s/ Allan S. Kitagawa
	Allan S. Kitagawa
	Chairman of the Board, President and
	Chief Executive Officer


Date: August 13, 2021	/s/ Melvin M. Miyamoto
	Melvin M. Miyamoto
	Senior Vice President and Chief Financial Officer

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Territorial Bancorp (TBNK) 10-Q2021 Q2 Quarterly report

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