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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-34403

TERRITORIAL BANCORP INC.

(Exact Name of Registrant as Specified in Charter)

Maryland		26-4674701
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

1003 Bishop Street, Pauahi Tower Suite 500, Honolulu, Hawaii		96813
(Address of Principal Executive Offices)		(Zip Code)

(808) 946-1400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and formal fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	TBNK	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 8,832,210 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of October 31, 2024.

Table of Contents

TERRITORIAL BANCORP INC.

Form 10-Q Quarterly Report

Table of Contents

PART I

ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 4.	CONTROLS AND PROCEDURES	44

PART II

ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	MINE SAFETY DISCLOSURES	45
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45

SIGNATURES		47

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)


	September 30,		December 31,
	2024		2023
ASSETS
Cash and cash equivalents	$	143,128	$	126,659
Investment securities available for sale, at fair value		19,920		20,171
Investment securities held to maturity, at amortized cost (fair value of $552,222 and $568,128 at September 30, 2024 and December 31, 2023, respectively)		654,349		685,728
Loans receivable		1,287,688		1,308,552
Allowance for credit losses		(5,055)		(5,121)
Loans receivable, net of allowance for credit losses		1,282,633		1,303,431
Federal Home Loan Bank stock, at cost		9,307		12,192
Federal Reserve Bank stock, at cost		3,187		3,180
Accrued interest receivable		6,056		6,105
Premises and equipment, net		7,257		7,185
Right-of-use asset, net		11,613		12,371
Bank-owned life insurance		49,388		48,638
Income taxes receivable		1,832		344
Deferred income tax assets, net		2,465		2,457
Prepaid expenses and other assets		7,297		8,211
Total assets	$	2,198,432	$	2,236,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,670,281	$	1,636,604
Advances from the Federal Home Loan Bank		177,000		242,000
Advances from the Federal Reserve Bank		50,000		50,000
Securities sold under agreements to repurchase		10,000		10,000
Accounts payable and accrued expenses		22,176		23,334
Lease liability		17,090		17,297
Advance payments by borrowers for taxes and insurance		3,148		6,351
Total liabilities		1,949,695		1,985,586

Commitments and contingencies: (Note 16)

Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 50,000,000 shares, no shares issued or outstanding		—		—
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 8,832,210 and 8,826,613 shares at September 30, 2024 and December 31, 2023		88		88
Additional paid-in capital		48,163		48,022
Unearned ESOP shares		(2,079)		(2,447)
Retained earnings		208,504		211,644
Accumulated other comprehensive loss		(5,939)		(6,221)
Total stockholders’ equity		248,737		251,086
Total liabilities and stockholders’ equity	$	2,198,432	$	2,236,672

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Interest income:
Loans	$	12,229	$	11,886	$	36,540	$	35,037
Investment securities		4,183		4,447		12,753		13,512
Other investments		1,901		1,051		5,104		2,848
Total interest income		18,313		17,384		54,397		51,397

Interest expense:
Deposits		8,469		5,408		22,658		13,261
Advances from the Federal Home Loan Bank		1,714		1,896		5,330		4,782
Advances from the Federal Reserve Bank		600		—		1,789		—
Securities sold under agreements to repurchase		46		46		137		137
Total interest expense		10,829		7,350		29,914		18,180

Net interest income		7,484		10,034		24,483		33,217
Provision (reversal of provision) for credit losses		29		(259)		22		(147)

Net interest income after provision (reversal of provision) for credit losses		7,455		10,293		24,461		33,364

Noninterest income:
Service and other fees		273		298		885		1,022
Income on bank-owned life insurance		255		218		750		628
Net gain on sale of loans		19		—		19		10
Other		69		73		215		208
Total noninterest income		616		589		1,869		1,868

Noninterest expense:
Salaries and employee benefits		4,899		5,176		14,606		15,723
Occupancy		1,813		1,819		5,319		5,201
Equipment		1,335		1,263		3,987		3,878
Federal deposit insurance premiums		392		246		1,281		737
Other general and administrative expenses		1,561		1,163		4,851		3,251
Total noninterest expense		10,000		9,667		30,044		28,790

(Loss) income before income taxes		(1,929)		1,215		(3,714)		6,442
Income tax (benefit) expense		(611)		335		(1,139)		1,749
Net (loss) income	$	(1,318)	$	880	$	(2,575)	$	4,693

Basic (loss) earnings per share	$	(0.15)	$	0.10	$	(0.30)	$	0.54
Diluted (loss) earnings per share	$	(0.15)	$	0.10	$	(0.30)	$	0.53
Cash dividends declared per common share	$	0.01	$	0.23	$	0.07	$	0.69
Basic weighted-average shares outstanding		8,618,155		8,577,632		8,604,082		8,656,915
Diluted weighted-average shares outstanding		8,618,155		8,610,289		8,604,082		8,705,784

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Net (loss) income	$	(1,318)	$	880	$	(2,575)	$	4,693

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities		793		(780)		282		(757)
Total other comprehensive income (loss), net of tax		793		(780)		282		(757)
Comprehensive (loss) income	$	(525)	$	100	$	(2,293)	$	3,936

See accompanying Notes to Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


										Accumulated
	Common			Additional		Unearned				Other		Total
	Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity
Balance at June 30, 2024	8,832,210	$	88	$	48,105	$	(2,203)	$	209,909	$	(6,732)	$	249,167

Net loss	—		—		—		—		(1,318)		—		(1,318)
Other comprehensive income	—		—		—		—		—		793		793
Cash dividends declared ($0.01 per share)	—		—		—		—		(87)		—		(87)
Share-based compensation	—		—		65		—		—		—		65
Allocation of 12,233 ESOP shares	—		—		(7)		124		—		—		117

Balances at September 30, 2024	8,832,210	$	88	$	48,163	$	(2,079)	$	208,504	$	(5,939)	$	248,737

Balances at December 31, 2023	8,826,613	$	88	$	48,022	$	(2,447)	$	211,644	$	(6,221)	$	251,086

Net loss	—		—		—		—		(2,575)		—		(2,575)
Other comprehensive income	—		—		—		—		—		282		282
Cash dividends declared ($0.07 per share)	—		—		—		—		(565)		—		(565)
Share-based compensation	12,178		—		231		—		—		—		231
Allocation of 36,700 ESOP shares	—		—		(39)		368		—		—		329
Repurchase of shares of common stock	(6,556)		—		(51)		—		—		—		(51)
Cancelled shares	(25)		—		—		—		—		—		—

Balances at September 30, 2024	8,832,210	$	88	$	48,163	$	(2,079)	$	208,504	$	(5,939)	$	248,737

See accompanying Notes to Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share data)


										Accumulated
	Common			Additional		Unearned				Other		Total
	Shares	Common		Paid-in		ESOP		Retained		Comprehensive		Stockholders’
	Outstanding	Stock		Capital		Shares		Earnings		Loss		Equity
Balance at June 30, 2023	8,848,511	$	88	$	48,110	$	(2,691)	$	212,848	$	(7,721)	$	250,634

Net income	—		—		—		—		880		—		880
Other comprehensive loss	—		—		—		—		—		(780)		(780)
Cash dividends declared ($0.23 per share)	—		—		—		—		(1,987)		—		(1,987)
Share-based compensation	—		—		88		—		—		—		88
Allocation of 12,233 ESOP shares	—		—		14		122		—		—		136
Repurchase of shares of common stock	(21,898)		—		(221)		—		—		—		(221)

Balances at September 30, 2023	8,826,613	$	88	$	47,991	$	(2,569)	$	211,741	$	(8,501)	$	248,750

Balances at December 31, 2022	9,071,076	$	91	$	51,825	$	(2,936)	$	215,314	$	(7,744)	$	256,550

Net income	—		—		—		—		4,693		—		4,693
Other comprehensive loss	—		—		—		—		—		(757)		(757)
Cumulative change in accounting principle (1)									(2,319)				(2,319)
Cash dividends declared ($0.69 per share)	—		—		—		—		(5,947)		—		(5,947)
Share-based compensation	12,729		—		90		—		—		—		90
Allocation of 36,700 ESOP shares	—		—		221		367		—		—		588
Repurchase of shares of common stock	(257,192)		(3)		(4,145)		—		—		—		(4,148)

Balances at September 30, 2023	8,826,613	$	88	$	47,991	$	(2,569)	$	211,741	$	(8,501)	$	248,750

(1)	Represents the impact of the adoption of Accounting Standard Update 2016-13.

See accompanying Notes to Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2024		2023
Cash flows from operating activities:
Net (loss) income	$	(2,575)	$	4,693
Adjustments to reconcile net (loss) income to net cash (used in) from operating activities:
Provision (reversal of provision) for credit losses		22		(147)
Depreciation and amortization		711		839
Deferred income tax benefit		(111)		(492)
Accretion of fees, discounts, and premiums, net		(312)		(267)
Amortization of right-of-use asset		2,120		2,124
Origination of loans held for sale		(861)		(813)
Proceeds from sales of loans held for sale		880		823
Gain on sale of loans, net		(19)		(10)
Net loss on disposal of premises and equipment		—		5
ESOP expense		329		588
Share-based compensation expense		231		90
Net increase in accrued interest receivable		(21)		(62)
Income on bank-owned life insurance		(750)		(629)
Net decrease (increase) in prepaid expenses and other assets		914		(103)
Net (decrease) increase in accounts payable and accrued expenses		(1,157)		137
Net (decrease) increase in lease liability		(1,569)		1,500
Net decrease in advance payments by borrowers for taxes and insurance		(3,203)		(2,326)
Net decrease in income taxes payable		(1,488)		(359)

Net cash (used in) from operating activities		(6,859)		5,591

Cash flows from investing activities:
Purchases of investment securities held to maturity		—		(6,693)
Principal repayments on investment securities held to maturity		31,456		28,900
Principal repayments on investment securities available for sale		674		686
Principal repayments on loans receivable, net of loan originations		21,043		(14,516)
Purchases of Federal Home Loan Bank stock		(40)		(5,887)
Proceeds from redemption of Federal Home Loan Bank stock		2,925		1,240
Purchases of Federal Reserve Bank stock		(7)		(8)
Proceeds from redemption of Federal Reserve Bank stock		—		1
Purchases of premises and equipment		(783)		(592)

Net cash from investing activities		55,268		3,131

(Continued)

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30,
	2024		2023
Cash flows from financing activities:
Net increase (decrease) in deposits	$	33,677	$	(65,139)
Proceeds from advances from the Federal Home Loan Bank		—		146,000
Repayments of advances from the Federal Home Loan Bank		(65,000)		(31,000)
Proceeds from advances from the Federal Reserve Bank		100,000		—
Repayments of advances from the Federal Reserve Bank		(100,000)		—
Purchase of Fed Funds		—		20
Sale of Fed Funds		—		(20)
Repurchases of common stock		—		(4,026)
Cash dividends paid		(617)		(5,988)

Net cash (used in) from financing activities		(31,940)		39,847

Net change in cash and cash equivalents		16,469		48,569

Cash and cash equivalents at beginning of the period		126,659		40,553

Cash and cash equivalents at end of the period	$	143,128	$	89,122

Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	28,654	$	17,405
Income taxes		459		2,600

Supplemental disclosure of noncash investing and financing activities:
Company stock repurchased through stock swap and net settlement transactions	$	51	$	122
Establishment of right-of-use asset, net of incentives and modifications		1,362		590
Establishment of lease liability, net of modifications		1,362		590

See accompanying Notes to Consolidated Financial Statements.

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TERRITORIAL BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Organization

Territorial Bancorp Inc. (the Company) is a Maryland corporation and is the holding company for Territorial Savings Bank (the Bank). Territorial Savings Bank is a Hawaii state-chartered bank headquartered in Honolulu, Hawaii and is a member of the Federal Reserve System. Territorial Savings Bank had one subsidiary, Territorial Financial Services, Inc., that was dissolved during the nine months ended September 30, 2024.

(2) Summary of Significant Accounting Policies

(a)

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Territorial Bancorp Inc. have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed as part of the Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, all adjustments necessary for a fair presentation have been made and consist only of normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the full year or for any other period.

(b)

Allowance of Credit Losses (ACL) on Loans and Securities

The current expected credit losses (CECL) accounting standard requires an estimate of the credit losses expected over the life of the financial instrument. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL during the period when management deems the loan to be uncollectible and all interest previously accrued but not collected is reversed against the current period ACL.

The estimate of expected credit losses is based on information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of financial instruments. Historical loss experience is generally the starting point for estimating expected credit losses. The Company considers whether the historical loss experience should be adjusted for asset specific risk characteristics or current conditions at the reporting date that did not exist over the historical reporting period. These qualitative adjustments can include changes in the economy, loan underwriting standards, and delinquency trends. The Company then considers future economic conditions as part of the one year reasonable and supportable forecast period.

Our loan portfolio is segmented into three pools for estimating our allowance for credit losses on loans: real estate, commercial, and consumer loans. They were established upon the adoption of Accounting Standards Update (ASU) 2016-13. Only three pools are used to segment our loan portfolio because loans within the pools share similar risk characteristics and were originated using similar underwriting standards. Loans that do not share similar risk characteristics would be evaluated on an individual basis and excluded from the collective evaluation. Historically, we have disclosed information about our loans and allowance based on class of financing receivable. The portfolio segments align with the class of financing receivables as follows:

●

Real estate: One- to four-family residential, multi-family residential, and commercial mortgage

●

Commercial: Commercial loans other than mortgage loans

●

Consumer: Home equity loans, loans on deposit accounts, and all other consumer loans

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Collateral dependent loans are not considered to share the same risk characteristics with the three pools discussed above. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For loans which are considered to be collateral dependent, the Company has elected to estimate the expected credit loss based on the fair value of the collateral less selling costs. If the fair value of the collateral less selling costs is less than the loan’s amortized cost basis, the Company records a partial charge-off to reduce the loan’s amortized cost basis for the difference between the collateral fair value less selling costs and the amortized cost basis.

The ACL on loans and accrued interest is calculated on a loan by loan basis. If the loan’s amortized cost basis is less than the total present value of cash flows calculated using a discounted cash flow approach, the ACL is equal to the amortized cost basis minus the total present value of cash flows on the loan discounted by the loan’s effective interest rate. The expected cash flows include estimates of loan charge-offs, recoveries, and prepayments. Economic variables which have a strong correlation with our historical loan charge-offs, recoveries, and prepayments are utilized in forecasting loan charge-offs, recoveries, and prepayments during the one year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the historical reversion rate is used to calculate loan charge-offs, recoveries, and prepayments for the remaining expected life of the loan. The reversion rate is based on historical averages and applied on a straight-line basis. Qualitative adjustments may be made to account for current conditions and forward looking events not captured in the quantitative calculation. The forecast and reversion rate utilize historical behavior during select periods of time. Our real estate and consumer loan pools utilize a vintage approach where historical losses, recoveries, and prepayment experience is determined using loans that have originated within a specified period. Our commercial loans utilize a reporting period approach where historical losses, recoveries, and prepayment experience is considered during a selected historical period of time. Off-balance sheet forecasts utilize a reporting period approach.

Loans receivable are stated at amortized cost which includes the principal amount outstanding, less the allowance for credit losses, deferred loan origination fees and costs, commitment fees, and cumulative net charge-offs. Interest income on loans receivable is accrued as earned. Accrued interest receivable on loans was $4.4 million and $4.6 million as of September 30, 2024 and December 31, 2023, respectively, and is included in accrued interest receivable on the Consolidated Balance Sheet.

The Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The Company has a policy of placing loans on a nonaccrual basis when 90 days or more contractually delinquent or when, in the opinion of management, collection of all or part of the principal balance appears doubtful, unless the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued and not collected is reversed against current period provision for credit losses. For nonaccrual loans, the Company records payments received as a reduction in principal. A nonaccrual loan may be restored to an accrual basis when principal and interest payments are current and full payment of principal and interest is expected.

The Company’s off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate loans that are not conditionally cancellable by the Company. Under the CECL accounting standard, expected credit losses on these amounts are calculated using a forecasted estimate of the likelihood that funding of the unfunded amount/commitment will occur and the historical reversion rate. Changes to the reserve for off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the Consolidated Statements of Operations. The Company had $900 in reserves for off-balance sheet credit exposures at September 30, 2024 and no reserves for off-balance sheet credit exposures at December 31, 2023.

While management utilizes its best judgment and information available, the adequacy of the ACL and the reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates and loan prepayments, and the view of the regulatory authorities toward classification of assets, the level of ACL, and the reserve for off-balance sheet credit exposures. Additionally, the level of ACL and the reserve for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio, changes in loan prepayments

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and off-balance sheet credit exposures, changes in charge-off rates, and changes in forecasted economic conditions. If actual results differ significantly from our assumptions, our ACL and the reserve for off-balance sheet credit exposures may not be sufficient to cover losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.

The Company is required to utilize the CECL methodology to estimate expected credit losses with respect to held-to-maturity (HTM) investment securities. Since all of the Company’s HTM investment securities were issued by U.S. government agencies or U.S. government-sponsored enterprises, which include the explicit and/or implicit guarantee of the U.S. government and have a long history of no credit losses, the Company has not recorded a credit loss on these securities. The unrealized losses on these securities were due to changes in interest rates, relative to when the securities were purchased, and are not due to decreases in the credit quality of the securities.

Available for sale (AFS) investment securities in an unrealized loss position are evaluated for impairment. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the investment securities amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the investment security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. The Company has not recorded an ACL related to our AFS investment securities.

Changes in the ACL are recorded as a provision (or reversal of provision) for credit losses. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

(3) Recently Issued and Adopted Accounting Pronouncements

In June 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to clarify that contractual sale restrictions should not be considered in the measurement of the fair value of an equity security. The Company owns stock in the Federal Reserve Bank (FRB) and in the Federal Home Loan Bank (FHLB), which is valued at historical cost, which also approximates fair value. Ownership of stock is a condition for services the Company receives from the FRB and FHLB. The stock is not publicly traded and can only be issued, exchanged, redeemed or repurchased by the FRB and the FHLB. ASU 2022-03 was effective for fiscal years beginning after December 15, 2023. The Company adopted the standard on January 1, 2024, and it did not have a material effect on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the U.S. Securities and Exchange Commission’s (SEC) Disclosure Update and Simplification Initiative. The ASU is intended to clarify or improve disclosure and presentation requirements of a variety of topics. Many of the amendments will allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements and align the requirements in the FASB Accounting Standard Codification with the SEC’s regulations. The Company is currently evaluating the effects that ASU 2023-06 will have on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU is intended to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis to enable investors to develop more decision-useful financial analyses. This ASU will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect the

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adoption of this ASU to have a material effect on its consolidated financial statements, though certain incremental disclosures will be required.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. This ASU will be effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the effects that ASU 2023-09 will have on its consolidated financial statements.

(4) Cash and Cash Equivalents

The table below presents the balances of cash and cash equivalents:


	September 30,		December 31,
(Dollars in thousands)	2024		2023
Cash and due from banks	$	7,635	$	10,471
Interest-earning deposits in other banks		135,493		116,188
Cash and cash equivalents	$	143,128	$	126,659

Interest-earning deposits in other banks consist primarily of deposits at the Federal Reserve Bank of San Francisco.

(5) Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and related ACL of investment securities are as follows:


	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value			ACL
September 30, 2024:
Available-for-sale:
Mortgage-backed securities issued by U.S. government-sponsored enterprises	$	21,927	$	—	$	(2,007)	$	19,920	$	—
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises		654,349		102		(102,229)		552,222		—

Total	$	676,276	$	102	$	(104,236)	$	572,142	$	—

December 31, 2023:
Available-for-sale:
Mortgage-backed securities issued by U.S. government-sponsored enterprises	$	22,563	$	—	$	(2,392)	$	20,171	$	—
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises		685,728		68		(117,668)		568,128		—

Total	$	708,291	$	68	$	(120,060)	$	588,299	$	—

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The amortized cost and estimated fair value of investment securities by maturity date at September 30, 2024 are shown below. Incorporated in the maturity schedule are mortgage-backed securities, which are allocated using the contractual maturity as a basis. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Available-for-sale:
Due after 10 years	$	21,927	$	19,920
Total	$	21,927	$	19,920

Held-to-maturity:
Due within 5 years	$	10	$	10
Due after 5 years through 10 years		8		8
Due after 10 years		654,331		552,204
Total	$	654,349	$	552,222

The Company did not sell any held-to-maturity or available-for-sale securities during the nine months ended September 30, 2024 and 2023.

Investment securities with amortized costs of $597.4 million and $555.8 million at September 30, 2024 and December 31, 2023, respectively, were pledged to secure deposits made by state and local governments, securities sold under agreements to repurchase, transaction clearing accounts, and Federal Reserve Bank borrowings. Included in these amounts were $187.4 million and $74.0 million pledged to the Federal Reserve Bank’s discount window at September 30, 2024 and December 31, 2023, respectively, and $51.1 million and $202.1 million pledged to the Federal Reserve Bank’s Bank Term Funding Program at September 30, 2024 and December 31, 2023, respectively.

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Provided below is a summary of investment securities which were in an unrealized loss position at September 30, 2024 and December 31, 2023. The Company does not intend to sell securities until such time as the value recovers or the securities mature and it is not more likely than not that the Company will be required to sell the securities prior to recovery of value or the securities mature.


	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized		Number of			Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Securities	Fair Value		Losses
(Dollars in thousands)
September 30, 2024:
Available-for-sale:
Mortgage-backed securities issued by U.S. government-sponsored enterprises	$	—	$	—	$	19,920	$	(2,007)	4	$	19,920	$	(2,007)
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises		368		(2)		541,078		(102,227)	147		541,446		(102,229)

Total	$	368	$	(2)	$	560,998	$	(104,234)	151	$	561,366	$	(104,236)

December 31, 2023:
Available-for-sale:
Mortgage-backed securities issued by U.S. government sponsored enterprises	$	—	$	—	$	20,171	$	(2,392)	4	$	20,171	$	(2,392)
Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises		10,326		(107)		554,514		(117,561)	152		564,840		(117,668)

Total	$	10,326	$	(107)	$	574,685	$	(119,953)	156	$	585,011	$	(120,060)

Mortgage-Backed Securities. The unrealized losses on the Company’s investment in mortgage-backed securities were caused by increases in market interest rates subsequent to purchase. All of the mortgage-backed securities are guaranteed by Freddie Mac or Fannie Mae, which are U.S. government-sponsored enterprises, or Ginnie Mae, which is a U.S. government agency. Since the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell these investments until maturity, and it is not more likely than not that the Company will be required to sell such investments prior to recovery of its cost basis, no allowance for credit losses was recorded for these securities as of September 30, 2024 or December 31, 2023.

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(6) Loans Receivable and Allowance for Credit Losses

The components of loans receivable, net of ACL as of September 30, 2024 and December 31, 2023 are as follows:


	September 30,		December 31,
(Dollars in thousands)	2024		2023
Real estate loans:
First mortgages:
One- to four-family residential	$	1,250,405	$	1,277,544
Multi-family residential		5,375		5,855
Construction, commercial, and other		12,668		11,631
Home equity loans and lines of credit		12,469		7,058
Total real estate loans		1,280,917		1,302,088
Other loans:
Loans on deposit accounts		377		196
Consumer and other loans		8,304		8,257
Total other loans		8,681		8,453

Total loans		1,289,598		1,310,541

Net unearned fees and discounts		(1,910)		(1,989)
Total loans, net of unearned fees and discounts		1,287,688		1,308,552

Allowance for credit losses		(5,055)		(5,121)
Loans receivable, net of allowance for credit losses	$	1,282,633	$	1,303,431

The table below presents the activity in the ACL by portfolio segment:


	Real Estate		Commercial		Consumer
(Dollars in thousands)	Loans		Loans		Loans		Totals
Three months ended September 30, 2024:
Balance, beginning of period	$	4,430	$	529	$	159	$	5,118
Provision (reversal of provision) for credit losses		51		(48)		26		29
		4,481		481		185		5,147
Charge-offs		(98)		—		(5)		(103)
Recoveries		10		—		1		11
Net charge-offs		(88)		—		(4)		(92)
Balance, end of period	$	4,393	$	481	$	181	$	5,055

Nine months ended September 30, 2024:
Balance, beginning of period	$	4,502	$	514	$	105	$	5,121
(Reversal of provision) provision for credit losses		(38)		(33)		93		22
		4,464		481		198		5,143
Charge-offs		(103)		—		(25)		(128)
Recoveries		32		—		8		40
Net charge-offs		(71)		—		(17)		(88)
Balance, end of period	$	4,393	$	481	$	181	$	5,055

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	Real Estate		Commercial		Consumer
(Dollars in thousands)	Loans		Loans		Loans		Unallocated		Totals
Three months ended September 30, 2023:
Balance, beginning of period	$	4,734	$	426	$	102	$	—	$	5,262
(Reversal of provision) provision for credit losses		(291)		14		18		—		(259)
		4,443		440		120		—		5,003
Charge-offs		(5)		—		(22)		—		(27)
Recoveries		25		—		2		—		27
Net recoveries (charge-offs)		20		—		(20)		—		—
Balance, end of period	$	4,463	$	440	$	100	$	—	$	5,003

Nine months ended September 30, 2023:
Balance, beginning of period	$	1,263	$	434	$	76	$	259	$	2,032
Adoption of ASU No. 2016-13		3,393		71		4		(259)		3,209
(Reversal of provision) provision for credit losses		(146)		(65)		64		—		(147)
		4,510		440		144		—		5,094
Charge-offs		(72)		—		(52)		—		(124)
Recoveries		25		—		8		—		33
Net charge-offs		(47)		—		(44)		—		(91)
Balance, end of period	$	4,463	$	440	$	100	$	—	$	5,003

The provision for credit losses in the three and nine months ended September 30, 2024 was primarily due to an increase in loans in the consumer loan portfolio and a decrease in its forecasted prepayments. This increase to the provision was partially offset by a decrease in the forecasted charge-offs in the real estate portfolio and an increase in the forecasted prepayments in the real estate and commercial portfolios. The reversal of provision for credit losses in the three and nine months ended September 30, 2023 was primarily due to a decrease in our real estate portfolio’s forecasted charge-offs that was partially offset by a decrease in its forecasted prepayments.

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The Company primarily uses the aging of loans to monitor the credit quality of its loan portfolio. The table below presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans as of September 30, 2024.


														Revolving Loans
	Amortized Cost of Term Loans by Origination Year													Amortized
(Dollars in thousands)		2024		2023		2022		2021		2020		Prior		Cost Basis		Total
September 30, 2024:
Commercial
30 - 59 days past due		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
60 - 89 days past due			—		—		—		—		—		—		—		—
90 days or more past due			—		—		—		—		—		—		—		—
Loans not past due			322		564		302		4,718		—		901		1,158		7,965
Total Commercial			322		564		302		4,718		—		901		1,158		7,965

Consumer
30 - 59 days past due			11		—		—		—		—		—		—		11
60 - 89 days past due			—		—		—		—		—		—		—		—
90 days or more past due			—		—		—		—		—		—		—		—
Loans not past due			432		25		58		10		1		41		11,621		12,188
Total Consumer			443		25		58		10		1		41		11,621		12,199

Real Estate
30 - 59 days past due			—		1,064		—		—		—		391		—		1,455
60 - 89 days past due			—		—		—		—		—		1,219		—		1,219
90 days or more past due			—		—		—		—		—		—		—		—
Loans not past due			36,251		88,094		125,988		271,572		176,052		566,893		—		1,264,850
Total Real Estate			36,251		89,158		125,988		271,572		176,052		568,503		—		1,267,524

Total		$	37,016	$	89,747	$	126,348	$	276,300	$	176,053	$	569,445

Territorial Bancorp Inc. 10-Q