Business Overview and History
Territorial Bancorp Inc. (TBNK) is a Hawaii-based financial institution that has been serving the local community for over a century. As the holding company for Territorial Savings Bank, Territorial Bancorp has established itself as a trusted provider of banking services, catering to both individuals and businesses across the Hawaiian islands. However, the company's recent history has been marked by a significant merger proposal and a shareholder battle that has garnered significant attention.
Territorial Bancorp was founded in 1921 as Territorial Building and Loan Association, a small savings and loan institution headquartered in Honolulu. Initially serving the local Japanese-American community, the company has since expanded to serve customers across the state of Hawaii. Throughout its history, Territorial Bancorp has maintained a conservative lending approach, focusing on originating one- to four-family residential real estate loans. This strategy has resulted in consistently low levels of nonperforming assets over the years.
In 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) to provide eligible employees with an ownership stake in the company. The ESOP initially purchased 8% of the total shares issued by Territorial Bancorp in its initial public offering. The following year, in 2010, the company underwent a transformation, converting from a mutual savings and loan association to a stock-based holding company structure, becoming Territorial Bancorp Inc.
Territorial Bancorp has successfully weathered various economic challenges over the decades, including the 2008 financial crisis. During this period, the company was able to maintain strong capital ratios and avoid the need for government assistance. The company's conservative underwriting practices and focus on residential real estate loans, funded primarily with deposit inflows, cash balances, loan and security repayments, and borrowings, have allowed it to navigate various economic cycles while maintaining a stable asset base and balance sheet.
Today, Territorial Bancorp operates a network of 29 branch locations across the Hawaiian islands, offering a comprehensive suite of banking products and services. The company's loan portfolio is predominantly focused on one- to four-family residential mortgages, which accounted for 96.5% of total loans as of September 30, 2024. This concentration in the local real estate market has been a key driver of Territorial's success, as the company has capitalized on the strong demand for housing in Hawaii.
Financial Performance and Ratios
Territorial Bancorp's financial performance has been mixed in recent years. The company reported a net loss of $1.72 million, or $0.20 per diluted share, for the three months ended December 31, 2024, reflecting $1.53 million in pre-tax merger-related expenses. For the full year 2024, the company reported a net income of $4.3 million, or $0.50 per diluted share.
For the fiscal year 2023, Territorial Bancorp reported annual revenue of $45.10 million, annual net income of $5.03 million, annual operating cash flow of $8.26 million, and annual free cash flow of $7.57 million. In the most recent quarter (Q3 2024), the company reported revenue of $8.10 million and a net loss of $1.32 million. The decrease in net income compared to the prior year quarter was primarily due to a $2.60 million decrease in net interest income, which was partially offset by a $946,000 decrease in income taxes.
The company's balance sheet remains strong, with a tier one leverage capital ratio of 11.68% and a total risk-based capital ratio of 28.96% as of December 31, 2024, well above the regulatory requirements for a "well-capitalized" institution. Territorial Bancorp's ratio of non-performing assets to total assets stood at 0.09% at the end of 2024, indicating a relatively low-risk loan portfolio.
As of September 30, 2024, Territorial Bancorp's total loans receivable, net of allowance for credit losses, was $1.28 billion, representing 58.3% of the company's total assets. The yield on the loan portfolio was 3.78% and 3.74% for the three and nine months ended September 30, 2024, respectively. The investment securities portfolio totaled $674.3 million, or 30.7% of total assets, with a yield of 2.46% for both the three and nine months ended September 30, 2024.
Liquidity
Territorial Bancorp's liquidity position remains strong. As of September 30, 2024, the company had $143.13 million in cash and cash equivalents. The debt-to-equity ratio stood at 0.78, indicating a manageable level of leverage.
The company has access to additional liquidity sources, including the ability to borrow an additional $364.30 million from the Federal Home Loan Bank (FHLB) and $158.70 million from the Federal Reserve Bank (FRB). Furthermore, Territorial Bancorp has the capacity to borrow up to $61.10 million using its unpledged securities as collateral from the FRB or through securities sold under agreements to repurchase.
Deposits, which are the primary funding source for Territorial Bancorp, totaled $1.67 billion as of September 30, 2024, representing 76.1% of total liabilities. The average cost of interest-bearing deposits was 2.16% and 1.95% for the three and nine months ended September 30, 2024, respectively. To supplement its deposit funding, the company utilizes borrowings, including advances from the FHLB and FRB, as well as securities sold under agreements to repurchase. As of September 30, 2024, total borrowings were $237.0 million, or 10.8% of total liabilities, with an average cost of 3.51% and 3.34% for the three and nine months ended September 30, 2024, respectively.
Merger with Hope Bancorp
In April 2024, Territorial Bancorp announced that it had entered into an agreement to be acquired by Hope Bancorp, Inc. (HOPE), a Los Angeles-based regional bank holding company. Under the terms of the merger agreement, Territorial's shareholders would receive a fixed exchange ratio of 0.80 shares of Hope Bancorp common stock for each share of Territorial common stock they own, in a 100% stock-for-stock transaction valued at approximately $78.6 million.
The proposed merger with Hope Bancorp has been a contentious issue, with some Territorial shareholders, such as Yakira Capital Management, expressing concerns and pushing for a better deal. In October 2024, leading independent proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recommended that Territorial shareholders vote in favor of the Hope Bancorp merger, recognizing the value creation and additional upside it provides.
Shareholder Battle and Competing Offer
Amidst the pending merger with Hope Bancorp, Territorial Bancorp has faced a shareholder battle led by a consortium of investors, including former Hawaii banking executive Allan Landon and Blue Hill Advisors. This group has submitted a preliminary indication of interest to acquire Territorial Bancorp for $12.50 per share in cash, which they claim represents a superior offer to the Hope Bancorp merger.
Territorial's board of directors has repeatedly rejected the Blue Hill Advisors proposal, citing a lack of evidence regarding the group's ability to secure financing and obtain regulatory approval for the transaction. The board has maintained its recommendation that shareholders vote in favor of the Hope Bancorp merger, arguing that it provides more tangible value and a clear path to completion.
The shareholder battle has added significant uncertainty and complexity to Territorial's future. While the Blue Hill Advisors proposal may offer a higher upfront value, the lack of clarity around its feasibility has raised concerns among shareholders and proxy advisory firms. The ongoing dispute has the potential to further impact Territorial's financial and operational performance in the near term.
Conclusion
Territorial Bancorp's journey has been marked by both growth and challenges in recent years. The company's strong foothold in the Hawaiian banking market and its well-capitalized balance sheet have been key strengths. However, the proposed merger with Hope Bancorp and the shareholder battle surrounding it have created a significant level of uncertainty for the company and its investors.
As Territorial Bancorp navigates this transformative period, it will be crucial for the company to maintain its focus on serving its local customers, while also addressing the concerns of its shareholders and finding a path forward that maximizes long-term value. The outcome of the shareholder vote on the Hope Bancorp merger, as well as the resolution of the Blue Hill Advisors proposal, will have a significant impact on Territorial Bancorp's future direction and the potential opportunities that lie ahead.
The company's financial performance, particularly its net interest margin of 1.42% and 1.54% for the three and nine months ended September 30, 2024, respectively, reflects the challenges of the current interest rate environment. As Territorial Bancorp moves forward, it will need to navigate these challenges while maintaining its strong capital position and conservative lending practices that have been hallmarks of its long-standing success in the Hawaiian banking market.