Business Overview and History
Territorial Bancorp Inc. (TBNK) is a community bank headquartered in Honolulu, Hawaii, serving customers throughout the Hawaiian islands. The company has a rich history dating back to its founding in 1921 as Territorial Building and Loan Association. Over the decades, Territorial has evolved and adapted to the changing financial landscape, positioning itself as a reliable partner for its local communities.
Territorial Bancorp Inc. operates as the holding company for Territorial Savings Bank, a state-chartered savings bank. The bank provides a range of banking services to individual and commercial customers, with a strong focus on residential mortgage lending. As of September 30, 2024, Territorial Bancorp had total assets of $2.20 billion, making it one of the larger community banks in Hawaii.
Historically, Territorial Bancorp's assets have primarily consisted of long-term, fixed-rate residential mortgage loans and mortgage-backed securities. This asset composition has been funded mainly through deposit inflows, cash balances, loan and security repayments, advances from the Federal Home Loan Bank and Federal Reserve Bank, proceeds from securities sold under agreements to repurchase, and proceeds from loan and security sales.
The company's funding structure has made it particularly vulnerable to increases in interest rates, as its interest-bearing liabilities have typically matured or repriced more quickly than its interest-earning assets. Despite this challenge, Territorial has maintained a consistent focus on originating one- to four-family residential real estate loans and has continued to emphasize conservative loan underwriting practices.
This prudent approach to lending has resulted in relatively low levels of nonperforming assets over the years. As of September 30, 2024, the company's nonperforming assets, including nonaccrual loans, totaled $2.3 million, or 0.11% of total assets, demonstrating the bank's strong asset quality.
In response to the evolving interest rate environment, Territorial Bancorp has taken steps to adjust its funding sources. During the nine months ended September 30, 2024, the company reduced its Federal Home Loan Bank advances by $65 million while maintaining Federal Reserve Bank advances at $50 million. Additionally, Territorial has focused on growing its deposit base, which increased by $33.7 million, or 2.1%, during the same period. These strategic actions have helped the bank manage its exposure to interest rate risk, although its net interest margin has still experienced some decline in recent years.
Financial Performance and Ratios
Territorial Bancorp's financial performance has been relatively stable, with the company reporting consistent profitability over the years. However, the most recent quarter ended September 30, 2024, saw a net loss of $1.32 million, or $0.15 per diluted share. This compares to net income of $880,000, or $0.10 per diluted share, in the same period of the prior year, representing a year-over-year net income growth of -250% for 2024 Q3 compared to 2023 Q3.
The decrease in net income 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. For the full fiscal year 2023, Territorial Bancorp reported revenue of $45.10 million and net income of $5.03 million.
The company's net interest margin, a key metric for community banks, stood at 1.42% in the third quarter of 2024, down from 1.90% in the same period of 2023. This decline was primarily driven by a rise in interest expenses, as the company's interest-bearing liabilities repriced more quickly than its interest-earning assets.
Territorial Bancorp's asset quality remains strong, with a ratio of non-performing assets to total assets of just 0.11% as of September 30, 2024. The company's capital ratios also continue to exceed regulatory well-capitalized thresholds, with a Tier 1 leverage ratio of 11.57% and a Total risk-based capital ratio of 29.07% at the end of the third quarter.
In terms of cash flow, Territorial Bancorp reported operating cash flow (OCF) of $8.26 million and free cash flow (FCF) of $7.57 million for the fiscal year 2023. However, for the most recent quarter (2024 Q3), the company reported negative OCF of $4.94 million and negative FCF of $4.51 million, reflecting the challenging interest rate environment.
Liquidity and Solvency
Territorial Bancorp maintains a solid liquidity position, with cash and cash equivalents totaling $143.13 million as of September 30, 2024. The company also has access to additional sources of liquidity, including borrowing capacity from the Federal Home Loan Bank and the Federal Reserve Bank. As of September 30, 2024, Territorial Bancorp had the ability to borrow an additional $364.30 million from the FHLB and $158.70 million from the FRB.
In terms of solvency, Territorial Bancorp's debt-to-equity ratio stood at 0.95 as of the most recent quarter, indicating a moderate level of leverage. The company's interest coverage ratio, which measures its ability to service its debt obligations, was 1.86 in the third quarter of 2024. The current ratio and quick ratio both stood at 145.17, indicating strong short-term liquidity.
Proposed Merger with Hope Bancorp
As previously mentioned, Territorial Bancorp announced in April 2024 that it had entered into an agreement to merge with Hope Bancorp, Inc. Under the terms of the deal, Territorial shareholders will receive 0.80 shares of Hope Bancorp common stock for each share of Territorial they own, in a 100% stock-for-stock transaction.
The merger is expected to create a larger, more diversified regional banking institution with a stronger presence in both Hawaii and the mainland United States. The combined entity is anticipated to benefit from enhanced scale, improved technological capabilities, and a broader array of products and services for Territorial's customers.
The transaction is currently awaiting regulatory approvals and is subject to the satisfaction of customary closing conditions. Territorial's shareholders approved the merger at a special meeting held on November 6, 2024.
Product Segments and Business Operations
Territorial Bancorp Inc. operates primarily in the following product segments:
Loans: TBNK's loan portfolio consists primarily of real estate loans, including first mortgages on one- to four-family residential properties, multi-family residential properties, construction, commercial, and other real estate loans, as well as home equity loans and lines of credit. Other loans include loans on deposit accounts and consumer and other loans. As of September 30, 2024, the loan portfolio totaled $1.29 billion, or 58.3% of total assets. During the nine months ended September 30, 2024, the loan portfolio decreased by $20.8 million, or 1.6%, as principal repayments exceeded new loan originations.
Investment Securities: TBNK's investment securities portfolio, which includes both held-to-maturity and available-for-sale securities, totaled $674.3 million as of September 30, 2024, or 30.7% of total assets. The investment securities portfolio is primarily comprised of mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. During the nine months ended September 30, 2024, the investment securities portfolio decreased by $31.6 million, or 4.5%, primarily due to principal repayments.
Deposits: TBNK's deposit base totaled $1.67 billion as of September 30, 2024, an increase of $33.7 million, or 2.1%, since December 31, 2023. The deposit base consists of savings accounts, certificates of deposit, money market accounts, and checking/Super NOW accounts. The growth in deposits was primarily driven by an increase in certificates of deposit, which was partially offset by decreases in passbook savings and checking accounts.
Borrowings: TBNK utilizes borrowings to supplement its deposit funding, including advances from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB), as well as securities sold under agreements to repurchase. As of September 30, 2024, total borrowings were $237.0 million, a decrease of $65.0 million, or 21.5%, since December 31, 2023.
Risks and Challenges
Like any financial institution, Territorial Bancorp faces a variety of risks and challenges that could impact its future performance. These include:
1. Interest Rate Risk: As a community bank heavily invested in long-term, fixed-rate residential mortgages, Territorial is particularly vulnerable to increases in interest rates, as its interest-bearing liabilities may reprice more quickly than its interest-earning assets.
2. Regulatory Environment: The banking industry is subject to a complex and evolving regulatory landscape, and Territorial must navigate these changes to maintain compliance and avoid potential penalties or restrictions.
3. Competitive Landscape: Territorial operates in a highly competitive market, facing competition from larger regional and national banks, as well as fintech disruptors, for both deposits and loan originations.
4. Geographical Concentration: With its operations primarily centered in Hawaii, Territorial is exposed to economic conditions and natural disasters specific to the Hawaiian islands, which could adversely affect its performance.
5. Execution Risks of the Merger: The successful integration of Territorial and Hope Bancorp will be crucial to realizing the anticipated benefits of the merger. Any delays or complications in the integration process could impact the combined entity's financial and operational performance.
Outlook and Conclusion
Territorial Bancorp's future prospects appear to be shaped by a mix of both challenges and opportunities. The company's proposed merger with Hope Bancorp presents a chance to expand its geographic footprint and enhance its product and service offerings, potentially unlocking new avenues for growth. However, the bank must also navigate the evolving interest rate environment, regulatory changes, and competitive pressures that are common in the community banking sector.
Despite these challenges, Territorial Bancorp has demonstrated a history of resilience and adaptability, successfully navigating various economic and industry cycles. The company's strong capital position, prudent risk management practices, and deep community ties provide a solid foundation for weathering the changes ahead.
As Territorial Bancorp continues to execute its strategic initiatives, including the pending merger with Hope Bancorp, investors will closely monitor the company's ability to maintain its financial stability, expand its customer base, and capitalize on emerging opportunities in the dynamic Hawaiian and regional banking markets. The company's focus on conservative loan underwriting and its traditional thrift institution model, with a significant portion of assets in long-term, fixed-rate residential mortgage loans and mortgage-backed securities, may provide stability but also presents challenges in a rising interest rate environment.
The recent financial performance, including the net loss in the third quarter of 2024, highlights the ongoing challenges faced by the bank. However, the company's strong liquidity position, access to additional borrowing capacity, and solid asset quality provide a buffer against short-term headwinds. As Territorial Bancorp navigates this transitional period, its ability to adapt to changing market conditions while maintaining its core strengths will be crucial in determining its long-term success and value creation for shareholders.