TERRITORIAL BANCORP INC. 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, 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
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
and
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· changes in our organization, compensation and benefit plans;
· the timing and amount of revenues that we may recognize;
· the value and marketability of collateral underlying our loan portfolios;
· our ability to retain key employees;
· 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
· the quality and composition of our investment portfolio;
· changes in market and other conditions that would affect our ability to
repurchase our common stock; and
· changes in our financial condition or results of operations that reduce capital
available to pay dividends.
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 theFederal Reserve Bank , loan and security repayments, advances from theFederal 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. TheState of Hawaii has been affected by COVID-19. Like other states,Hawaii has mandated many non-essential businesses to close temporarily and the public to self-quarantine to limit the spread of COVID-19. This mandate has resulted in the layoff and furlough of workers in the State and an increase in unemployment claims. As ofApril 15, 2020 , we have received forbearance inquiries totaling$195.3 million or 12.5% of total loans receivable.$189.3 million of these loan forbearance inquiries consist of one- to four-family residential mortgage loans and represent 12.1% of the total loans receivable. These loans are currently well secured as the ratio of the current loan balance to the current value of the property securing these mortgage loans averages 55.2%. One- to four-family residential mortgage loans represent 97.0% of our total loan portfolio balance. These one- to four-family residential mortgage loans are well-secured as the ratio of the current loan balance to the current value of the property securing these loans averages 46.3%. We have also received forbearance inquires on$4.4 million of commercial mortgage loans, which represent 0.3% of the total balance of loans receivable,$1.1 million of commercial loans, which represent 0.1% of the total balance of loans receivable and$553,000 of home equity lines of credit, which represent 0.0% of the total balance of loans receivable. Management is currently analyzing these forbearance inquiries and may allow borrowers who are experiencing financial difficulties due to COVID-19 to defer up to six loan payments. Since the beginning of the year, and throughApril 15, 2020 , we have not seen an increase in loan delinquencies, significant changes in deposits or significant drawdowns on any lines of credit. We do not have any commercial loans to hotels, businesses in the transportation industry, restaurants or retail establishments. 29 Table of Contents
Seven of our 29 branch offices have been closed temporarily because of the reduced demand for banking services that occurred with the quarantine. Many of our employees are working from home or in the branch offices that have been closed to maintain social-distancing.
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$708,000 , or 0.03% of total assets atMarch 31, 2020 compared to$736,000 , or 0.04% of total assets atDecember 31, 2019 . Our nonperforming loans and loss experience has enabled us to maintain a relatively low allowance for loan losses in relation to other peer institutions and correspondingly resulted in low levels of provisions for loan losses. Our provisions for loan losses were$217,000 and$5,000 for the three months endedMarch 31, 2020 and 2019, respectively. The increase in provisions in 2020 resulted from an increase in the qualitative factors used to calculate the allowance for loan losses. The qualitative factors were raised in consideration ofHawaii's rising unemployment rate due to the stay-at-home mandate from the government to minimize the spread of COVID-19. 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$2.7 million and$2.3 million of fixed-rate mortgage loans for the three months endedMarch 31, 2020 and 2019, respectively. We also securitized fixed-rate first mortgage loans with a book value of$9.4 million during the three months endedMarch 31, 2020 and received$9.8 million of mortgage-backed securities in return.Federal Home Loan Bank advances were$156.0 million atMarch 31, 2020 and$104.5 million atMarch 31, 2019 . Securities sold under agreements to repurchase were$10.0 million atMarch 31, 2020 and 2019. Our investments in mortgage-backed securities have been issued by Freddie Mac or Fannie Mae, which areU.S. government-sponsored enterprises, orGinnie Mae , which is aU.S. government agency. These entities guarantee the payment of principal and interest on our mortgage-backed securities. As ofMarch 31, 2020 andDecember 31, 2019 , we owned$366.9 million and$372.5 million , respectively, of mortgage-backed securities issued by Freddie Mac, Fannie Mae andGinnie Mae .
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
Comparison of Financial Condition at
Assets. Our total assets increased by$23.5 million , or 1.1%, to$2.1 billion during the three months endedMarch 31, 2020 . The increase in assets was primarily the result of a$50.9 million increase in cash and cash equivalents that was partially offset by a$23.0 million decrease in total loans receivable and a$5.6 million decrease in total investment securities.
Cash and Cash Equivalents. Cash and cash equivalents were
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Loans. Total loans, including $681,000 of loans held for sale, were $1.6
billion at March 31, 2020 , or 74.0% of total assets. During the three months
ended March 31, 2020 , the loan portfolio, including loans held for sale,
decreased by $23.0 million , or 1.5%. The decrease in the loan portfolio
primarily occurred as principal repayments, loan sales and loan securitizations
exceeded the originations of new loans. We securitized fixed-rate mortgage loans
with a book value of $9.4 million into Freddie Mac mortgage-backed securities
during the three months ended March 31, 2020 to increase our liquid assets. The
securitization transaction lowered the loan receivable balance and increased the
securities balance.
Securities. At March 31, 2020 , our securities portfolio totaled $366.9 million ,
or 17.4% of total assets. During the three months ended March 31, 2020 , the
securities portfolio decreased by $5.6 million , or 1.5%. $9.8 million of
securities were acquired in a loan securitization, where fixed-rate loans were
converted into Freddie Mac mortgage-backed securities. The mortgage-backed
securities in the loan securitization transaction were accounted for at fair
value in accordance with the FASB ASC. Also during this period, $2.5 million of
securities were sold.
At
Deposits. Deposits were$1.7 billion atMarch 31, 2020 , an increase of$25.1 million , or 1.5%, sinceDecember 31, 2019 . The growth in deposits was primarily due to increases of$24.3 million in certificates of deposit and$8.6 million in checking accounts. These increases were partially offset by a$6.3 million decrease in savings accounts during the three months endedMarch 31, 2020 . Borrowings. Our borrowings consist of advances from theFederal Home Loan Bank and funds borrowed under securities sold under agreements to repurchase. During the three months endingMarch 31, 2020 , total borrowings remained constant at$166.0 million . Stockholders' Equity. Total stockholders' equity was$243.9 million atMarch 31, 2020 andDecember 31, 2019 . Net income of$4.5 million and stock issuances of$730,000 were offset by the repurchase of$3.1 million of common stock and the declaration of$2.1 million of dividends. Average Balances and Yields The following tables set forth average balance sheets, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances and are included with accrual loans in the tables. However, no interest income was attributed to nonaccrual loans. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income. 31 Table of Contents For the Three Months Ended March 31, 2020 2019 Average Average Outstanding Yield/Rate Outstanding Yield/Rate Balance Interest (1) Balance Interest (1) (Dollars in thousands) Interest-earning assets: Loans: Real estate loans: First mortgage: One- to four-family residential (2)$ 1,525,022 $ 14,810 3.88 %$ 1,529,758 $ 14,993 3.92 % Multi-family residential 9,773 112 4.58 12,096 138 4.56 Construction, commercial and other 22,952 271 4.72 21,139 251 4.75 Home equity loans and lines of credit 10,151 143 5.63 11,250 153 5.44 Other loans 9,693 121 4.99 5,477 73 5.33 Total loans 1,577,591 15,457 3.92 1,579,720 15,608 3.95 Investment securities:U.S. government sponsored mortgage-backed securities (2) 366,678 2,780 3.03 373,116 2,871 3.08 Trust preferred securities - - - 12 - - Total securities 366,678 2,780 3.03 373,128 2,871 3.08 Other 81,194 344 1.69 32,562 226 2.78 Total interest-earning assets 2,025,463 18,581 3.67 1,985,410 18,705 3.77 Non-interest-earning assets 77,876 78,775 Total assets$ 2,103,339 $ 2,064,185 Interest-bearing liabilities: Savings accounts$ 906,603 977 0.43 %$ 975,724 1,171 0.48 % Certificates of deposit 477,095 2,131 1.79 424,597 2,037 1.92 Money market accounts 4,758 5 0.42 5,416 6 0.44 Checking and Super NOW accounts 200,908 11 0.02 188,202 10 0.02 Total interest-bearing deposits 1,589,364 3,124 0.79 1,593,939 3,224 0.81Federal Home Loan Bank advances 156,000 895 2.29 107,791 555 2.06 Securities sold under agreements to repurchase 10,000 45 1.80 21,389 90 1.68 Total interest-bearing liabilities 1,755,364 4,064 0.93 1,723,119 3,869 0.90 Non-interest-bearing liabilities 101,583 101,511 Total liabilities 1,856,947 1,824,630 Stockholders' equity 246,392 239,555 Total liabilities and stockholders' equity$ 2,103,339 $ 2,064,185 Net interest income$ 14,517 $ 14,836 Net interest rate spread (3) 2.74 % 2.87 % Net interest-earning assets (4)$ 270,099 $ 262,291 Net interest margin (5) 2.87 % 2.99 % Interest-earning assets to interest-bearing liabilities 115.39 %
115.22 %
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(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 onaverage 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
General. Net income decreased by$2.1 million , or 31.4%, to$4.5 million for the three months endedMarch 31, 2020 from$6.5 million for the three months endedMarch 31, 2019 . The decrease in net income was due to a$2.1 million decrease in noninterest income, a$212,000 increase in provision for loan losses, a$195,000 increase in interest expense and a$124,000 decrease in interest income. These decreases were partially offset by a$383,000 decrease in income taxes and a$236,000 decrease in noninterest expense. Net Interest Income. Net interest income decreased by$319,000 , or 2.2%, to$14.5 million for the three months endedMarch 31, 2020 from$14.8 million for the three months endedMarch 31, 2019 . Interest income decreased by$124,000 , or 0.7%, primarily due to a 10 basis point decrease in the yield on average interest-earning assets, which was partially offset by$40.1 million of growth in average interest-earning assets. Interest expense increased by$195,000 , or 5.0%, due to a$32.2 million increase in the average balance of interest-bearing liabilities and a three basis point increase in the cost of average interest-bearing liabilities. The interest rate spread and net interest margin were 2.74% and 2.87%, respectively, for the three months endedMarch 31, 2020 , compared to 2.87% and 2.99%, respectively, for the three months endedMarch 31, 2019 . The decreases in the interest rate spread and in the net interest margin are attributable to the 10 basis point decrease in the yield on average interest-earning assets, which was augmented by the three basis point increase in the cost of average interest-bearing liabilities. Interest Income. Interest income decreased by$124,000 , or 0.7%, to$18.6 million for the three months endedMarch 31, 2020 from$18.7 million for the three months endedMarch 31, 2019 . Interest income on loans decreased by$151,000 , or 1.0%, to$15.5 million for the three months endedMarch 31, 2020 from$15.6 million for the three months endedMarch 31, 2019 . The decrease in interest income on loans occurred because of a$2.1 million , or 0.1%, decrease in the average loan balances and a three basis point decrease in the average loan yield. The decrease in the average loan balances occurred as loan repayments, loan sales and securitizations exceeded new loan originations. Interest income on securities decreased by$91,000 , or 3.2%, to$2.8 million for the three months endedMarch 31, 2020 from$2.9 million for the three months endedMarch 31, 2019 . The decrease in interest income on securities occurred because the average balance of securities decreased by$6.5 million , or 1.7%, and because of a five basis point decline in the average securities yield. The decrease in the average security balance occurred as security repayments and sales exceeded security purchases and loan securitizations. Interest Expense. Interest expense increased by$195,000 , or 5.0%, to$4.1 million for the three months endedMarch 31, 2020 from$3.9 million for the three months endedMarch 31, 2019 . The increase in interest expense occurred because interest expense onFederal Home Loan Bank advances rose to$895,000 for the three months endedMarch 31, 2020 compared to$555,000 for the three months endedMarch 31, 2019 . The increase in interest expense on advances occurred because of a$48.2 million increase in the average balance and a 23 basis point increase in the cost of advances. The increase in the average balance and cost of advances occurred as we obtained additional long-termFederal Home Loan Bank advances to control our interest rate risk by lengthening the maturity of our liabilities. The increase in interest expense on advances was partially offset by a decrease in interest expense on deposits. Interest expense on deposits decreased by$100,000 , or 3.1%, to$3.1 million for the three months endedMarch 31, 2020 from$3.2 million for the three months endedMarch 31, 2019 . The decrease in interest expense on deposits was due to a$4.6 million , or 0.3%, decrease in the average deposit balance and a two basis point decrease in the average rate on deposits. The average rate on deposits decreased to 0.79% for the three months endedMarch 31, 2020 compared to 0.81% for the three months endedMarch 31, 2019 . The decrease in the average rate on deposits is primarily due to a decrease in the average cost of certificates of deposit, which decreased to 1.79% for the three months endedMarch 31, 2020 from 1.92% for the three months endedMarch 31, 2019 . The decrease in the average deposit balance was primarily due to a$69.1 million decrease in the average balance of savings accounts, which was partially offset by a$52.5 million increase in the average balance of certificates of deposit and a$12.7 million increase in the average balance of checking and NOW accounts. Interest expense on securities sold under agreements to repurchase declined to$45,000 for the three months endedMarch 31, 2020 compared to$90,000 for the three months endedMarch 31, 2019 . The decrease in interest expense on securities sold under agreements to repurchase occurred primarily because of an$11.4 million decrease in the average balance, which occurred as matured borrowings were paid off. 33 Table of Contents Provision for Loan Losses. We recorded provisions for loan losses of$217,000 and$5,000 for the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. The increase in provisions in 2020 resulted from an increase in the qualitative factors used to calculate the allowance for loan losses. The qualitative factors were raised in consideration ofHawaii's rising unemployment rate due to the stay-at-home mandate from the government to minimize the spread of COVID-19. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.19% atMarch 31, 2020 and 0.17% atMarch 31, 2019 . Nonaccrual loans totaled$708,000 atMarch 31, 2020 , or 0.05% of total loans at that date, compared to$2.2 million of nonaccrual loans atMarch 31, 2019 , or 0.14% of total loans at that date. Nonaccrual loans as ofMarch 31, 2020 and 2019 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 atMarch 31, 2020 and 2019. 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
Three Months Ended
March 31, Change
2020 2019 $ Change % Change
(Dollars in thousands)
Service fees on loan and deposit accounts
15 3.4 %
Income on bank-owned life insurance 202 207 (5) (2.4) %
Gain on sale of investment securities 178 2,717 (2,539) (93.4) %
Gain on sale of loans 407 6 401 6,683.3 %
Other 61 72 (11) (15.3) %
Total $ 1,301 $ 3,440 $ (2,139) (62.2) %
Noninterest income decreased by $2.1 million for the three months ended March
31, 2020 compared to the three months ended March 31, 2019 . During the three
months ended March 31, 2020 , we sold $729,000 of held-to-maturity
mortgage-backed securities and recorded a gain of $28,000 and sold $1.7 million
of available-for-sale mortgage-backed securities and recorded a gain of
$150,000 . During the three months ended March 31, 2019 , we sold our investment
in a trust preferred security, PreTSL XXIII, which resulted in a gain of $2.7
million . The sale of this trust preferred security, which had a significant
deterioration in the issuer's credit rating, and the sale of the
held-to-maturity mortgage-backed security in 2020, are in accordance with the
Investments - Debt and Equity Securities topic of the FASB ASC and do not taint
management's assertion of intent to hold remaining securities in the
held-to-maturity portfolio to maturity. During the three months ended March
31, 2020, we 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 . We 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. During the three months ended March 31, 2020 and
2019, we also sold mortgage loans held for sale with principal balances of $2.7
million and $2.3 million , respectively, and recognized gains of $30,000 and
$6,000 , respectively.
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Noninterest Expense. The following table summarizes changes in noninterest
expense between the three months ended
Three Months Ended
March 31, Change
2020 2019 $ Change % Change
(Dollars in thousands)
Salaries and employee
benefits $ 5,684 $ 5,686 $ (2) (0.0) %
Occupancy 1,645 1,592 53 3.3 %
Equipment 1,120 1,093 27 2.5 %
Federal deposit insurance
premiums - 144 (144) (100.0) %
Other general and
administrative expenses 1,089 1,259 (170) (13.5) %
Total $ 9,538 $ 9,774 $ (236) (2.4) %
Noninterest expense decreased by $236,000 for the three months ended March 31,
2020 compared to the three months ended March 31, 2019 . The decrease in other
general and administrative expenses was primarily due to decreases in charitable
contributions, in provisions for losses on undrawn lines of credit and
accounting and auditing expenses. The reduction in federal deposit insurance
premiums occurred when we received a credit because the FDIC insurance fund was
over-capitalized.
Income Tax Expense. Income taxes were $1.6 million for the three months ended
March 31, 2020 , reflecting an effective tax rate of 26.2%, compared to $2.0
million for the three months ended March 31, 2019 , reflecting an effective tax
rate of 23.2%. Income tax expense for the three months ended March 31, 2020 and
2019 included tax benefits of $31,000 and $88,000 , respectively, related to the
exercise of stock options.
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 theFederal Reserve Bank , loan and security repayments, advances from theFederal 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 Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as ofMarch 31, 2020 .
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand;
(ii) purchases and sales of investment securities;
(iii) expected deposit flows and borrowing maturities;
(iv) yields available on interest-earning deposits and securities; and
(v) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits or securities and may also be used to pay off short-term borrowings.
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Our most liquid asset is cash. The amount of this asset is dependent on our
operating, financing, lending and investing activities during any given
period. At March 31, 2020 , our cash and cash equivalents totaled $95.7 million .
On that date, we had $10.0 million in securities sold under agreements to
repurchase outstanding and $156.0 million of Federal Home Loan Bank advances
outstanding with the ability to borrow an additional $782.8 million under
Federal Home Loan Bank advances. There has been no change in our borrowing
capacity since March 31, 2020 .
Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our Consolidated Statements of Cash Flows
included in our Consolidated Financial Statements.
At March 31, 2020 , we had $11.4 million in loan commitments outstanding, most of
which were for fixed-rate loans, and had $23.8 million in unused lines of credit
to borrowers. Certificates of deposit due within one year at March 31, 2020
totaled $323.0 million , or 19.5% 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 March 31,
2021 . We believe, however, based on past experience that a significant portion
of such deposits will remain with us. We have the ability to attract and retain
deposits by adjusting the interest rates offered.
Our primary investing activities are originating loans and purchasing
mortgage-backed securities. During the three months ended March 31, 2020 and
2019 we originated $41.3 million and $47.5 million of loans, respectively.
During the three months ended March 31, 2020 , we did not purchase any investment
securities. We purchased $3.0 million of securities in the three months ended
March 31, 2019 .
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
$25.1 million and $38.2 million for the three months ended March 31, 2020 and
2019, respectively. Deposit flows are affected by the overall level of interest
rates, the interest rates and products offered by us and our local competitors,
and by other factors.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank , which provide an
additional source of funds. Federal Home Loan Bank advances were $156.0 million
at March 31, 2020 and December 31, 2019 . We had the ability to borrow up to an
additional $782.8 million and $727.5 million from the Federal Home Loan Bank as
of March 31, 2020 and December 31, 2019 , 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
March 31, 2020 and December 31, 2019 .
At
Territorial Bancorp Inc. is a separate legal entity fromTerritorial 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 fromTerritorial Savings Bank . The ability ofTerritorial Savings Bank to pay dividends toTerritorial Bancorp Inc. is subject to regulatory requirements. AtMarch 31, 2020 ,Territorial Bancorp Inc. (on an unconsolidated, stand-alone basis) had liquid assets of$19.3 million .Territorial Savings Bank and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. The Company is not subject to regulatory capital requirements because its total assets are less than$3.0 billion . AtMarch 31, 2020 ,Territorial Savings Bank exceeded all of its regulatory capital requirements and is considered to be "well capitalized" under regulatory guidelines. 36 Table of Contents The tables below present the fully-phased in capital required to be considered "well-capitalized" and meet the regulatory capital conservation buffer requirement as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained forTerritorial Savings Bank and the Company atMarch 31, 2020 andDecember 31, 2019 : (Dollars in thousands) Required Ratio Actual Amount Actual Ratio March 31, 2020: Tier 1Leverage Capital Territorial Savings Bank 5.00 %$ 224,516 11.06 % Territorial Bancorp Inc.$ 243,919 11.98 % Common Equity Tier 1Risk-Based Capital (1) Territorial Savings Bank 9.00 %$ 224,516 24.07 % Territorial Bancorp Inc.$ 243,919 26.08 % Tier 1Risk-Based Capital (1) Territorial Savings Bank 10.50 %$ 224,516 24.07 % Territorial Bancorp Inc.$ 243,919 26.08 %Total Risk-Based Capital (1) Territorial Savings Bank 12.50 %$ 232,286 24.38 % Territorial Bancorp Inc.$ 251,689 26.39 % December 31, 2019: Tier 1Leverage Capital Territorial Savings Bank 5.00 %$ 227,507 10.92 % Territorial Bancorp Inc.$ 251,558 12.06 % Common Equity Tier 1Risk-Based Capital (1) Territorial Savings Bank 9.00 %$ 227,507 23.31 % Territorial Bancorp Inc.$ 251,558 25.77 % Tier 1Risk-Based Capital (1) Territorial Savings Bank 10.50 %$ 227,507 23.31 % Territorial Bancorp Inc.$ 251,558 25.77 %Total Risk-Based Capital (1) Territorial Savings Bank 12.50 %$ 230,304 23.59 % Territorial Bancorp Inc.$ 254,355 26.06 %
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(1) The required Common Equity Tier 1
Capital and
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."
At March 31, 2020 and December 31, 2019 , 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.
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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% in response to
COVID-19. We are not planning to adopt the alternative framework, with the
applicable regulatory requirements.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. Except for an increase of$24.3 million in certificates of deposit and an increase of$2.6 million in loan commitments betweenDecember 31, 2019 andMarch 31, 2020 , there have not been any material changes in our contractual obligations and funding needs sinceDecember 31, 2019 .
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