Territorial Bancorp Inc. (NASDAQ:TBNK) is a holding company that operates Territorial Savings Bank, a Hawaii-based community bank. The company has faced headwinds in recent quarters as it navigates the challenges posed by a rising interest rate environment. This in-depth analysis examines Territorial Bancorp's financial performance, liquidity position, and strategic initiatives to better understand the company's outlook.

Business Overview

Territorial Bancorp Inc. has operated as a traditional thrift institution, with the significant majority of its assets consisting of long-term, fixed-rate residential mortgage loans and mortgage-backed securities. The company has funded these assets primarily through deposit inflows, cash balances at the Federal Reserve Bank, loan and security repayments, advances from the Federal Home Loan Bank and the Federal Reserve Bank, proceeds from securities sold under agreements to repurchase, and proceeds from loan and security sales. This funding strategy has made Territorial Bancorp vulnerable to increases in interest rates, as its interest-bearing liabilities mature or reprice more quickly than its interest-earning assets.

Financials

For the fiscal year ended December 31, 2023, Territorial Bancorp reported annual net income of $5,027,000 and annual revenue of $71,559,000. The company's annual operating cash flow was $8,247,000, and its annual free cash flow was $7,562,000.

In the latest quarter ended March 31, 2024, the company reported a net loss of $482,000, compared to net income of $2,316,000 in the same quarter of the prior year. Revenue for the quarter was $17,991,000, an increase from $16,721,000 in the prior-year quarter. The decrease in earnings was primarily due to a $3.3 million decrease in net interest income, a $447,000 increase in non-interest expense, and a $119,000 increase in credit loss provisions.

The company's net interest margin decreased from 2.30% in the first quarter of 2023 to 1.65% in the first quarter of 2024, primarily due to a 98 basis point increase in the cost of average interest-bearing liabilities, which was only partially offset by a 20 basis point increase in the yield on average interest-earning assets.

Liquidity

As of March 31, 2024, Territorial Bancorp had cash and cash equivalents of $90,059,000, a decrease from $126,659,000 at the end of 2023. The decrease in cash and cash equivalents was primarily due to a $36.5 million decrease in deposits, as customers sought higher interest rates elsewhere.

The company had the ability to borrow an additional $613.1 million and $163.5 million from the Federal Home Loan Bank and Federal Reserve Bank, respectively, as of March 31, 2024. Territorial Bancorp also had the ability to borrow up to $125.1 million using its unpledged securities as collateral from the Federal Reserve Bank or through securities sold under agreements to repurchase.

At March 31, 2024, Territorial Savings Bank, the company's subsidiary, exceeded all of the fully phased-in regulatory capital requirements and was considered to be "well-capitalized" under regulatory guidelines.

Risks and Challenges

Territorial Bancorp's primary risk is its vulnerability to increases in interest rates, as the majority of its assets are long-term, fixed-rate loans and securities, while its liabilities reprice more quickly. The company's reliance on deposit funding also exposes it to the risk of deposit outflows, as customers seek higher-yielding alternatives.

Additionally, the company operates in a highly competitive market, with intense competition for loans and deposits from other financial institutions in Hawaii. Territorial Bancorp must also navigate the evolving regulatory landscape, which could impact its operations and profitability.

Outlook

In response to the rising interest rate environment, Territorial Bancorp has taken steps to enhance its liquidity and manage its interest rate risk. During 2023, the company obtained $105.0 million of three- to six-year Federal Home Loan Bank advances and sold $360,000 of fixed-rate mortgage loans to reduce its interest rate risk. However, the company did not obtain any additional advances or sell any fixed-rate mortgage loans in the first quarter of 2024.

Going forward, Territorial Bancorp's management team will need to continue to closely monitor the company's asset-liability management and explore additional strategies to mitigate the impact of rising interest rates on its net interest margin and profitability. This may include further adjustments to its funding mix, the origination of more adjustable-rate loans, and the sale of additional fixed-rate mortgage loans.

Conclusion

Territorial Bancorp Inc. has faced significant challenges in the current rising interest rate environment, as evidenced by the decrease in its net interest margin and the net loss reported in the first quarter of 2024. The company's reliance on fixed-rate, long-term assets and deposit funding has made it particularly vulnerable to these market conditions.

To navigate these challenges, Territorial Bancorp will need to continue to focus on enhancing its liquidity, managing its interest rate risk, and exploring strategic initiatives to improve its profitability. Investors should closely monitor the company's progress in these areas, as well as its ability to adapt to the evolving competitive and regulatory landscape in the Hawaii banking market.