Territorial Bancorp (TBNK) - 2022 Q4 - Annual Report

Part I Item 1. Business Territorial Bancorp Inc. is a Hawaii-based bank holding company focused on residential mortgage lending - Territorial Bancorp Inc. is the holding company for Territorial Savings Bank, which provides financial services through 29 offices in Hawaii[13][15] - The Bank's main activities are accepting deposits and originating one- to four-family residential mortgage loans and investing in securities[20] - The company is regulated by the Hawaii Division of Financial Institutions and the Federal Reserve Board[75][77] Consolidated Financial Position as of December 31, 2022 | Metric | Value (in billions) | | :--- | :--- | | Consolidated Assets | $2.2 | | Consolidated Deposits | $1.7 | | Consolidated Stockholders' Equity | $0.257 | Market Area and Competition The company operates exclusively in Hawaii, facing intense competition in a tourism-dependent economy - The company conducts business from 29 full-service branch offices throughout the State of Hawaii[21] - Hawaii's economy is primarily driven by the visitor industry and federal spending, with visitor spending in 2022 of $19.3 billion, up 8.9% from 2019[23] - The company faces intense competition and ranked fifth in FDIC-insured deposit market share in Hawaii with a 2.9% market share as of June 30, 2022[29][30] Lending Activities The company's lending is dominated by one- to four-family residential mortgages, comprising 96.5% of the portfolio Loan Portfolio Composition (December 31, 2022) | Loan Type | Amount (billions) | Percentage of Total | | :--- | :--- | :--- | | One- to Four-Family Residential | $1.3 | 96.5% | | Nonresidential Real Estate | $0.0239 | 1.8% | - The company sold $5.4 million in residential mortgage loans in 2022, a significant decrease from the $36.2 million sold in 2021[43] - Loan approval authority is delegated to designated officers for amounts up to $5.0 million, with larger relationships requiring Loan Committee approval[46] Investments and Sources of Funds The company primarily invests in government-backed securities, funded mainly by customer deposits - The investment portfolio consists mainly of mortgage-backed securities issued by Fannie Mae, Freddie Mac, or Ginnie Mae, with a carrying value of $738.6 million at year-end 2022[53] - Deposits are the primary source of funds, totaling $1.7 billion (89.7% of total liabilities) at December 31, 2022[57] - Borrowings at year-end 2022 included $141.0 million in FHLB advances and $10.0 million in securities sold under agreements to repurchase[59] Item 1A. Risk Factors The company faces significant risks from interest rates, economic dependency, regulatory changes, and cybersecurity - The company is vulnerable to rising interest rates, as a 200 basis point rate increase is estimated to decrease the economic value of equity by $96.5 million[115][120] - Economic risks are significant due to reliance on Hawaii's local economy, which is heavily dependent on the tourism industry[123][128] - The adoption of the Current Expected Credit Loss (CECL) accounting standard is expected to require an increase in the allowance for loan losses[140] - Operational risks include system failures, cybersecurity threats like ransomware, and potential breaches of network security[159] - Long-term environmental risks for Hawaii, such as rising sea levels and severe weather, could negatively impact collateral values and loan originations[170][171] Item 2. Properties The company operates a corporate office and 29 branches in Hawaii with a net book value of $7.6 million - The company has 29 full-service branches in Hawaii, with 23 on the island of Oahu[187] - The net book value of premises, land, and equipment was $7.6 million at December 31, 2022[187] Item 3. Legal Proceedings The company reports no material legal proceedings as of year-end 2022 - The company reports no material legal proceedings as of December 31, 2022[188] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, and a new $5 million share repurchase program was authorized - The company's common stock is traded on the NASDAQ under the symbol 'TBNK', with 1,005 holders of record as of February 28, 2023[192] - On December 5, 2022, a new share repurchase program was authorized, allowing for the repurchase of up to $5.0 million of outstanding shares[193] Stock Repurchases for Q4 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | — | — | | Nov 2022 | — | — | | Dec 2022 | 42,592 | $22.87 | | Total | 42,592 | $22.87 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased to $16.2 million in 2022 due to lower noninterest income despite asset growth - The decrease in net income was primarily due to a $2.3 million decrease in noninterest income, a $1.0 million smaller reversal of loan loss provisions, and a $500,000 increase in noninterest expense[250] - Total assets increased by $39.0 million (1.8%) to $2.2 billion, mainly from a $102.2 million increase in investment securities, offset by a $59.3 million decrease in cash[217] Key Performance Metrics (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $16.2 million | $17.4 million | | Diluted EPS | $1.80 | $1.91 | | Net Interest Income | $55.5 million | $54.0 million | | Nonperforming Assets to Total Assets | 0.11% | 0.15% | Financial Condition Analysis Total assets grew to $2.2 billion, driven by deposit growth and an increased investment portfolio - The growth in deposits was driven by a $204.6 million increase in certificates of deposit, partially offset by a $174.6 million decrease in savings accounts[235] Balance Sheet Highlights (December 31, 2022 vs 2021) | Account | 2022 (in millions) | 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $2,169.6 | $2,130.6 | +1.8% | | Loans Receivable, net | $1,294.8 | $1,302.8 | -0.6% | | Total Investment Securities | $738.6 | $636.4 | +16.1% | | Deposits | $1,716.2 | $1,681.8 | +2.0% | | Total Stockholders' Equity | $256.6 | $256.3 | +0.1% | Results of Operations Analysis Net income fell 7.3% as a sharp drop in noninterest income offset a rise in net interest income - Net interest income increased by $1.5 million (2.7%) due to a $2.4 million increase in interest income, partially offset by a $0.9 million increase in interest expense[251] - Noninterest income decreased by $2.3 million, mainly due to the absence of a $1.8 million gain on sale of investment securities that was present in 2021[258] - Noninterest expense rose by $512,000 (1.3%), driven by higher equipment and occupancy costs[260] - A reversal of the provision for loan losses of $576,000 was recorded, smaller than the $1.6 million reversal in 2021[255] Asset Quality Asset quality improved significantly, with nonperforming assets declining to 0.11% of total assets - The allowance for loan losses decreased to $2.0 million at year-end 2022 from $2.7 million at year-end 2021[285] - Loans in the COVID-19 related payment deferral program decreased to $63.2 million (4.9% of total loans) from $78.6 million (6.0% of total loans) in 2021[421] Nonperforming Assets (December 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Nonaccrual loans | $2,301,000 | $3,280,000 | | Real estate owned | $0 | $0 | | Total Nonperforming Assets | $2,301,000 | $3,280,000 | | Nonperforming assets to total assets | 0.11% | 0.15% | | Nonperforming loans to total loans | 0.18% | 0.25% | Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements with an unqualified opinion from Moss Adams LLP - The independent auditor, Moss Adams LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[315] - The auditor identified the allowance for loan losses as a critical audit matter due to the significant management judgment involved[319][322] Consolidated Financial Statements The financial statements detail assets of $2.17 billion and net income of $16.16 million for 2022 Consolidated Statement of Income Highlights (Year Ended Dec 31) | Line Item | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $55,487 | $54,025 | | Reversal of Provision for Loan Losses | $(576) | $(1,592) | | Noninterest Income | $4,209 | $6,472 | | Noninterest Expense | $38,798 | $38,286 | | Net Income | $16,156 | $17,430 | Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $2,169,592 | $2,130,602 | | Loans Receivable, net | $1,294,764 | $1,302,824 | | Total Deposits | $1,716,152 | $1,681,828 | | Total Stockholders' Equity | $256,550 | $256,322 | Notes to Consolidated Financial Statements Key notes detail the upcoming CECL adoption, portfolio compositions, and strong regulatory capital levels - The company will adopt the new CECL credit loss standard on January 1, 2023, and expects it to increase the allowance for credit losses by $4.0 million to $6.0 million[390] - At Dec 31, 2022, held-to-maturity securities had an amortized cost of $717.8 million but a fair value of only $591.1 million, with the $126.7 million unrealized loss attributed to interest rate changes[395][401] - The bank is subject to regulatory capital requirements and exceeded all minimums to be considered 'well capitalized' as of December 31, 2022[490][492] - The company's defined benefit pension plan was overfunded with a funded status of $2.5 million at year-end 2022[457] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[523] - Based on the COSO 2013 framework, management assessed the company's internal control over financial reporting to be effective as of December 31, 2022[528] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors and governance is incorporated by reference from the 2023 Proxy Statement - This section incorporates information by reference from the 2023 Proxy Statement[533] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - This section incorporates information by reference from the 2023 Proxy Statement[534] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details are incorporated by reference, with 146,347 securities available for issuance - This section incorporates information by reference from the 2023 Proxy Statement[535] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to Be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | — | $ — | 146,347 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions is incorporated by reference from the 2023 Proxy Statement - This section incorporates information by reference from the 2023 Proxy Statement[539] Item 14. Principal Accountant Fees and Services Details on accountant fees are incorporated by reference from the 2023 Proxy Statement - This section incorporates information by reference from the 2023 Proxy Statement[540] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report - Lists all financial statements, schedules, and exhibits filed with the Form 10-K[543] - Exhibits include key corporate documents, executive employment agreements, equity incentive plans, and required CEO/CFO certifications[544][545][546]